-----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, Gvz9QKnTe+p+fnna5TOeV/86NtX6KIcTTtEeByoNMS95mEtcua6NAWr9HMO2GL76 EfRBBc6cZQJpuczLCoAyAA== 0000950152-01-500867.txt : 20010418 0000950152-01-500867.hdr.sgml : 20010418 ACCESSION NUMBER: 0000950152-01-500867 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 223265462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22717 FILM NUMBER: 1604433 BUSINESS ADDRESS: STREET 1: 390 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43215-1930 BUSINESS PHONE: 6142224400 MAIL ADDRESS: STREET 1: 390 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43215-1930 10-K 1 l87746ae10-k.txt ACORN PRODUSCTS, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission file number 0-22717 ACORN PRODUCTS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 22-3265462 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 390 W. NATIONWIDE BLVD., COLUMBUS, OHIO 43215 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (614) 222-4400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common stock, par value $.001 per share Nasdaq SmallCap Market Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 15, 2001, the aggregate market value of our shares of common stock (based on the last sale price of the common stock on the Nasdaq SmallCap Market on that date) held by non-affiliates of the registrant was approximately $1,287,347. As of March 15, 2001, 6,062,159 shares of our common stock, par value $.001 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of our Proxy Statement for the 2001 Annual Meeting of Stockholders are incorporated by reference in Part III. 2 TABLE OF CONTENTS
DESCRIPTION PAGE Table of Contents.................................................................................... 2 Part I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 9 Item 3. Legal Proceedings.................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders.................................. 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10 Item 6. Selected Financial Data ............................................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 24 Item 8. Financial Statements and Supplementary Data ......................................... 24 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................................................. 24 Part III Item 10. Directors and Executive Officers of the Registrant................................... 25 Item 11. Executive Compensation............................................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 25 Item 13. Certain Relationships and Related Transactions....................................... 25 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 26 Signatures ..................................................................................... 29 Financial Statements................................................................................. F-1 Schedules to Financial Statements.................................................................... S-1
2 3 PART I ITEM 1. BUSINESS As used in this Annual Report on Form 10-K and except as the context otherwise may require, "Company", "we", "us", and "our" refers to Acorn Products, Inc. and its subsidiaries UnionTools, Inc. ("UnionTools"), Hawthorne Tools, Inc. (formerly H.B. Sherman Manufacturing Company, Inc.), and Pinetree Tools, Inc. (formerly UnionTools Watering Products, Inc.). References to fiscal years 1996, 1997, 1998, and 1999 reflect the fiscal year ended on the Friday closest to July 31 of the applicable year (e.g., "fiscal 1999" reflects the fiscal year ended July 30, 1999). References to transition year 1999 reflect the five-month period ended December 31, 1999 ("transition 1999"). References to calendar year 1999 reflect the calendar year period ended December 31, 1999 ("calendar 1999"). References to fiscal year 2000 reflect the calendar year period ended December 31, 2000 ("fiscal 2000"). As used in this Annual Report on Form 10-K, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot" refers to The Home Depot, Inc., "Lowe's" refers to Lowes Companies, Inc., "Mid-States" refers to Mid-States Distributing Company, Inc., "Oklahoma Rig" refers to Oklahoma Rig & Supply Company, Inc., "Orgill" refers to Orgill, Inc., "Sears" refers to Sears, Roebuck & Company, "Tractor Supply" refers to Tractor Supply Company, Inc., "Wal-Mart" refers to Wal-Mart Stores, Inc., and "White Cap" refers to White Cap Pro-Contractor Supplier. Our primary registered trademarks include: Lady Gardener(R), Perfect Cut(R), Pro Force(R), Razor-Back(R), Union(R), UnionPro(R), and Yard `n Garden(R). Craftsman(R)and Sears(R)are registered trademarks of Sears. Scotts(R)is a registered trademark of The Scotts Company. FORWARD-LOOKING INFORMATION This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify such forward-looking statements by the words "expects", "intends", "plans", "projects", "believes", "estimates", and similar expressions. In the normal course of business, we, in an effort to help keep our stockholders and the public informed about our operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. We base the forward-looking statements on our current expectations, estimates, and projections. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in the forward-looking statements in this Annual Report on Form 10-K or elsewhere, could differ materially from those stated in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 1997, as amended on October 28, 1998, and on November 12, 1999, and as the same may be amended from time to time. GENERAL Our primary business is associated with our UnionTools, Inc. subsidiary. UnionTools was founded in 1890, and is a leading designer, manufacturer, and marketer of branded non-powered lawn and garden products. Our primary business is the manufacturing, marketing, and distribution of garden tools through mass market and other distribution channels in the United States. We also sell our products to professional and commercial end-users through distributors and industrial supply outlets. Our principal products include long handle tools (such as shovels, forks, rakes, and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand tools, and repair handles. In order to focus on our core tool business, in fiscal 2000, we sold assets related to the manufacturing and sale of watering products. Our products bear well known brand names, including Razor-Back(R), Union(R), Yard `n Garden(R), Perfect Cut(R), and, pursuant to a license agreement, Scotts(R). In addition, we manufacture and supply private label products for a variety of customers, including products sold to Sears under the Craftsman(R) brand name and Ace Hardware under the Ace(R) brand name. 3 4 PRODUCTS We sell non-powered lawn and garden tools, with our primary products being long handle tools. We design, manufacture, source, and market tools in the following product categories: - Shovels, including round point and square point shovels; garden/nursery shovels; roof rippers; irrigation and trenching shovels; metal and plastic head snow shovels and pushers; garden, nursery, and transplanting spades; drain and post spades; - Posthole Diggers and Augers; - Scoops, including aluminum, plastic, and steel scoops; general and special purpose scoop shovels; - Rakes, including steel and plastic/steel lawn, leaf and shrub rakes; plastic lawn, leaf and shrub rakes; bow head and level head rakes; specialty rakes and brooms; - Garden Tools, including garden and special purpose hoes; weeders and scrapers; rotary and half-moon edgers; fruit harvesters; bulb planters; small hand tools like trowels, weeders, and cultivators; - Cultivators and Forks, including forged cultivators and hooks in different sizes and spread; spading forks, manure forks, and special purpose forks; - Striking Tools, including sledges and heavy hammers; axes, mauls, and wedges; picks and mattocks; tampers; heavy bars; bars, pullers, and rippers; - Cutting Tools, including bypass and anvil hand pruners; hedge and grass shears; bypass and anvil loppers and mini loppers; tree pruners and saws; - Wheeled Goods, including wheelbarrows and hand trucks; and - Miscellaneous Products, including garden tool organizers, repair handles, and edging tools. We continue to develop new products and enhance existing products in order to maintain and improve our position in the market. Our marketing and engineering departments develop new products with assistance from independent consultants. Shovels and other steel head implements are primarily manufactured at our Frankfort, New York facility. Forks, cutting tools, and other implements are sourced worldwide. We process North American ash wood logs at our seven wood mills and purchase fiberglass handles. Our Hebron, Ohio injection molding facility manufactures some of the plastic components used in our products, such as plastic snow shovel heads. In addition, this facility manufactures proprietary custom molded products and component parts for other manufacturers and distributors. SALES AND MARKETING The non-powered lawn and garden industry is mature and, due in part to the low-cost nature of non-powered equipment, generally is non-cyclical. Demand for non-powered lawn and garden tools generally is driven by the desire of do-it-yourself, or "DIY", consumers to maintain and landscape residential properties and by the need of industrial and farm professionals to acquire and utilize high-quality tools that will aid them in efficiently completing their jobs. We promote our products primarily through co-operative advertising and where applicable, provide customers with merchandising plan-o-grams and custom designed product displays complete with informative signs to assist at the retail level. We market our products primarily within the United States. Sales within the United States comprised 98% of total sales in fiscal 1999, transition 1999, and fiscal 2000. Our products are sold primarily through mass merchants, home centers, buying groups, and distributors. We market our products through our own sales staff with significant support from manufacturers' representative organizations. 4 5 Our sales force is comprised of regional managers and direct sales professionals who regularly call on customers and manage manufacturers' representatives who provide store level support to customers. These manufacturers' representatives also sell lawn and garden products for other manufacturers, but not products that compete with ours. We also have an Internet web site at www.uniontools.com which provides consumers with product information, dealer locator, and customer service contacts. In addition, customers can download Company information, catalogs, and line art and photographs for use in advertisements. The reference to our web site address does not constitute incorporation by reference of the information contained on our web site, so you should not consider any information on our web site to be a part of this Annual Report on Form 10-K. LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS Under a licensing agreement, we pay royalties to The Scotts Company ("Scotts") and therefore have the right to produce and market a line of garden tools bearing the Scotts(R) trademark. We also have other licensing agreements that are not material to our business. We apply for patents and trademarks as applicable. Patents presently owned by us are considered, in the aggregate, to be important to the conduct of our business. Patent protection does not, however, deter competitors from attempting to develop similar products. We are licensed under a number of patents, none of which individually is considered material to our business. We own a number of patents and trademarks registered in the United States Patent and Trademark Office as well as the patent and trademark offices of certain other countries. These include the trademarks: - Lady Gardener(R); - Perfect Cut(R); - Razor-Back(R); - Union(R); - UnionTools(R); - Union Pro(R); and - Yard `n Garden(R). Such registrations will continue as new patents and trademarks are developed or acquired. We aggressively monitor and protect our brands against infringement and other violations. ACQUISITIONS AND DIVESTITURES In fiscal 1998, we acquired the assets of H.B. Sherman Manufacturing Company and Thompson Manufacturing. The intent of these acquisitions was to leverage our expansive sales contacts in the lawn and garden industry and to expand our product offerings by adding watering products. During fiscal 2000, we discontinued the manufacture and sale of watering products, and subsequently sold the related assets. These actions represent the desire to dedicate our attention to core products: long handle tools, cutting tools, striking tools, and wheeled goods. Effective December 31, 1999, our wheelbarrow joint venture was dissolved. We feel that the wheelbarrow business is significant and intend to pursue this venture on our own by focusing on worldwide sourcing and manufacturing in an effort to improve our position in the wheelbarrow category. COMPETITION The markets for non-powered lawn and garden tools are highly competitive, especially with respect to product pricing, product quality, innovation in the design of new products, availability, customer service and support, although the degree and nature of such competition vary by location and product line. We are generally perceived by our customers to be the highest quality provider and to have the best service levels in our industry. 5 6 We also enjoy strong brand name recognition. We believe that our commitment to customer service, product innovation, and distribution systems position us well to compete in the markets for non-powered lawn and garden tools. We compete with various manufacturers and distributors. These competitors also possess widely recognized brand names. With the merger of Ames(R) and True Temper(R) in February 1999, the long handle tool market is now primarily supplied by two domestic competitors - Ames(R) True Temper(R) and us. Primary competitors in the cutting tools market are Fiskars(R) and Corona(R). Our other product lines primarily compete with those of numerous small manufacturers and distributors. In addition, we compete with various other international manufacturers that export parts and finished goods to the United States. Our strategy requires that we continue to focus on customer service and end-user needs, partly through the development and marketing of innovative new products at competitive prices. We are also facing pricing pressures which, if not mitigated by cost and expense reductions, may result in lower profitability and could jeopardize our ability to grow or maintain market share. We believe that our future success will depend upon our ability to produce and procure low cost quality products and satisfy consumer tastes with respect to function and design, and our ability to market such products in each applicable category at competitive prices. No assurance can be given that we will be able to successfully compete on the basis of these factors in the future. CUSTOMERS We sell our products through a variety of distribution channels including: - mass merchants such as Sears and Wal-Mart; - home centers such as Home Depot and Lowe's; - buying co-ops such as Ace Hardware; - distributors and retailers such as Mid-States, Orgill, and Tractor Supply; and - industrial distributors such as Oklahoma Rig and White Cap. Our largest customer is Sears, which includes Sears' Orchard Supply division. We have been a continuous supplier to Sears for more than eighty years and the primary supplier of long handle tools to Sears for more than fifty years. Home Depot is another major customer and we have been a supplier to them since 1997. Both Sears and Home Depot each account for over 10% of gross sales. Our ten largest customers accounted for approximately 51.5% of gross sales during fiscal 1998, 52.9% of gross sales during calendar 1999, and 52.6% of gross sales during fiscal 2000. Most of our major customers are on electronic data interchange (EDI) systems. There can be no assurance that our sales to Sears, Home Depot, or other major customers will continue at existing levels. A substantial reduction or cessation of sales to Sears, Home Depot, or other major customers could have a material adverse effect on our business, financial conditions, and results of operations. In addition, we continue to face increasing pressures from retailers with respect to pricing, co-operative advertising, and other rebates as the market power of large retailers continues to grow. There can be no assurance that such pressures will not have an adverse impact on our business, financial condition, and results of operations. DISTRIBUTION AND LOGISTICS Customer orders are placed and processed centrally at our headquarters in Columbus, Ohio and then allocated from our current stock of finished goods in our distribution center in Columbus, Ohio. We use common carriers to ship finished products from our facilities to customer delivery points. We continue to reassess the structure and processes of our logistics program for opportunities to reduce costs and improve customer service. In fiscal 2000, we exited our western distribution facility in conjunction with the sale of assets related to the manufacture and sale of watering products. We have consolidated our distribution operations at the Columbus Distribution Center. We utilize an information system that allows us to determine the status of customer orders, process orders quickly, respond to customer inquiries, and adjust shipping schedules to meet customer requirements. We 6 7 believe that these systems enable efficient order processing, expedite shipments, and improve customer service. Prioritizing our efforts in distribution and logistics has resulted in an improvement in service levels, and we consistently strive to achieve On Time, In Full, Error Free ("OTIFEF") shipments. MANUFACTURING AND SOURCING We continue to strengthen our expertise and infrastructure. During fiscal 2000, we hired Gary Zimmerman as the Senior Vice President of Operations to provide leadership and oversight to manufacturing, logistics, purchasing, customer service, and engineering. Our ongoing efforts continued to improve both manufacturing and sourcing capabilities in order to achieve the "world's low cost production" on all products and components. The production of non-powered lawn and garden tools is an extensive manufacturing and assembly process that involves several different technologies, including sawmill operations, wood finishing, heavy gauge forging, stamping, grinding, metal painting, machining, and injection molding. Over the last 100 years, we have developed unique processes that enable us to perform these complex tasks in an efficient manner. In addition, we use our own injection molding facility to manufacture proprietary custom molded products and component parts for other manufacturers and distributors, as well as to manufacture certain plastic components used in our own products. Since many products and components are more competitively manufactured outside our facilities, we began strategic sourcing of some product components in China in 1999. During fiscal 2000, we expanded our component sourcing to include manufacturers in Europe, Asia, and Mexico, and dedicated resources to manage these relationships. INFORMATION TECHNOLOGY In fiscal 2000, we announced our decision to outsource our information technology function to Acxiom Corporation. Acxiom is a global leader in real-time Customer Data Integration offering innovative database marketing services, infrastructure management, premier data content, and integration technologies. Founded in 1969, Acxiom is currently headquartered in Little Rock, Arkansas, with operations in the United States, the United Kingdom, France, Spain, and Australia. This move will allow us to tap into the substantial resources and expertise of Acxiom that would be unavailable to us on a standalone basis. Acxiom will provide all information technology services support for us, including server management, data network services, local area and wide area networks, desktop support, help desk services, and all of our application software support needs. We expect technology to provide significant efficiencies and capabilities to us in servicing our customers in the 21st century. RAW MATERIALS The primary raw materials used to produce our products are steel, fiberglass, and ash wood. - Steel. We purchase our steel requirements from several domestic suppliers. The primary considerations in specialty steel sourcing are metallurgy, price, and width. We have strong and long-established relationships with our steel suppliers and have never experienced sourcing problems. We do not enter into long-term contracts for steel purchases. We purchased more than 75% of our steel requirements from Liberty Steel Products, Inc. in fiscal 2000. - Fiberglass. We purchase our fiberglass requirements from two suppliers. The primary considerations for sourcing fiberglass are production capacities, quality, and cost. Fiberglass is used primarily in the production of high-end tools. We purchased the majority of our fiberglass requirements from Strongwell in fiscal 2000. 7 8 - Ash Wood. Ash is the ideal hardwood for handles because it is lightweight, flexible, and splinters less than most hardwoods. We employ wood specialists who maintain relationships with numerous log suppliers and are responsible for sourcing our ash needs. We believe that sufficient quantities of ash will continue to be available. Each of our sawmills typically maintains a five to eight week inventory of ash to cover occasional short-term fluctuations in supply. We import wood handles for some of our promotionally priced products, such as rakes and hoes. Imported wood is less expensive than ash and is of sufficient quality for tools (other than shovels) designed for opening-price-point levels. We expect our sawmills to be "Green" certified in the first half of 2001. "Green Certification" is to ensure that the forests are managed in an ecologically sound, socially responsible, and economically viable manner. We have several suppliers for most of our raw materials. There can be no assurance, however, that we will not experience shortages of raw materials or of components essential to our production processes or be forced to seek alternative sources of supply. In addition, there can be no assurance that prices for such materials will remain stable. Any shortages of raw materials may result in production delays and increased costs, which could have a material adverse effect on our business, financial condition, and results of operations. ASSOCIATES As of December 31, 2000, we employed approximately 650 people (including seasonal associates), approximately 500 of whom were paid on an hourly basis. Our staffing requirements fluctuate during the year due to the seasonal nature of sales in the lawn and garden industry, and approximately 100 to 150 additional seasonal associates are utilized during our busy season. The average tenure of our hourly associates is about 10 years. Hourly associates at the Columbus, Ohio distribution center and Delaware, Ohio sawmill are represented by the International Association of Machinists ("IAM"). Our contract with the IAM expires in April 2002. The International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers ("IBB") represents the hourly associates in Frankfort, New York. Our contract with the IBB expires in June 2001. The International Brotherhood of Teamsters ("IBT") represents hourly associates at the Portville, New York sawmill. Our contract with the IBT expires in August 2002. The Glass, Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO ("AGM") represents hourly associates at our Hebron, Ohio injection molding facility. Our contract with the AGM expires in March 2002. No other associates are represented by unions. We have not been subject to a strike or work stoppage in over 20 years, and management believes that our relationships with associates, the IAM, the IBB, the IBT, and the AGM are good. There can be no assurance, however, that future labor contract negotiations will be successful or occur without work stoppages or strikes. A prolonged work stoppage or strike at any of our facilities could have a material adverse effect on our business, financial condition, and results of operations. ENVIRONMENTAL MATTERS We are subject to various federal, state, and local environmental laws, ordinances, and regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment, and disposal of hazardous substances and wastes. We have made, and will continue to make, expenditures to comply with these environmental requirements and regularly review our procedures and policies for compliance with environmental laws. We also have been involved in remediation actions with respect to certain facilities. The amounts thus far expended for such compliance and remediation activities have been minimal. Current conditions and future events such as changes in existing laws and regulations may, however, give rise to additional compliance or remediation costs that could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from any of our properties or associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. At December 31, 2000, we had a reserve for environmental remediation of approximately $157,000 to address claims not covered by insurance. The actual cost of remediating environmental conditions may be different than that accrued due to the difficulty in estimating such costs and due to potential changes in the status of legislation. 8 9 ITEM 2. PROPERTIES Our headquarters and executive offices, located in Columbus, Ohio, occupy approximately 33,000 square feet in a facility that we lease. As of December 31, 2000, we owned or leased the following other principal properties for use in our business as set forth below: Location Owned or Leased Square Feet -------- --------------- ----------- DISTRIBUTION FACILITIES: Columbus, Ohio Leased 179,200 Columbus, Ohio Leased 105,000 MANUFACTURING FACILITIES: Frankfort, New York(1) Owned 263,710 Hebron, Ohio Owned 107,200 SAWMILLS: Frankfort, New York(1) Owned 59,490 Delaware, Ohio Owned 51,100 Shippensburg, Pennsylvania Owned 15,000 Lebanon, Kentucky Owned 13,500 Cookeville, Tennessee Owned 12,100 Portville, New York Owned 9,000 Huntington, Indiana Owned 7,600 (1) Our 351,000 square foot Frankfort, New York facility is comprised of a manufacturing facility, a sawmill, and approximately 27,800 square feet of office space. We believe that our existing manufacturing facilities, distribution centers, and sawmills are adequate for the current level of operations. We believe that our manufacturing facilities have sufficient excess capacity to accommodate a 35% to 50% increase in the current level of output. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in routine litigation incidental to the conduct of business. We believe that no currently pending litigation to which we are a party will have a material adverse effect on our financial position or results of operations. In April 1999, our subsidiary, V.H.G. Tools, Inc. ("VHG") and predecessor companies, were joined by Midwest Products, Inc., the defendant, in a product liability lawsuit filed in New Jersey Superior Court, Burlington County, New Jersey. The case is in its early stages, at least as to VHG. Plaintiff's and Midwest's allegations do not appear to be supported by evidence, but if plaintiff's and Midwest's allegations against VHG are proven, liability could be substantial. We believe that any compensatory damages, if awarded, would be covered by insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on the Nasdaq National Market in June 1997 under the symbol "ACRN". On December 17, 1999, our common stock began trading under the same symbol on the Nasdaq SmallCap Market. The following table sets forth the high and low sales prices of the common stock on the Nasdaq SmallCap Market during the periods indicated: Market Price ------------ Fiscal (Calendar) Period High Low ------------------------ ---- --- 1999: First Quarter $7.75 $5.00 Second Quarter 7.25 4.31 Third Quarter 5.88 2.38 Fourth Quarter 3.50 1.25 2000: First Quarter $2.75 $0.94 Second Quarter 1.69 1.00 Third Quarter 1.50 0.94 Fourth Quarter 1.13 0.25 2001: First Quarter $1.00 $0.38 As of February 28, 2001, the approximate number of record holders of the common stock was 23. The closing sales price of our common stock on February 28, 2001 was $0.8125 per share. We have never paid, and currently do not intend to pay, any cash dividends on our common stock. We are a holding company with no business operations of our own. Therefore, we are dependent upon payments, dividends, and distributions from UnionTools for funds to pay dividends to our stockholders. UnionTools currently intends to retain any earnings for support of its working capital, repayment of indebtedness, capital expenditures, and other general corporate purposes. UnionTools has no current intention of paying dividends or making other distributions to us in excess of amounts necessary to pay our operating expenses and taxes. Our revolving credit facility contains restrictions on UnionTools' ability to pay dividends or make payments or other distributions to us. The credit facility provides that, unless UnionTools meets certain financial tests, it may not declare any dividends or make any other payments or distributions to us except for amounts necessary to pay our operating expenses up to $250,000 per month and to pay our federal and state income taxes. On July 1, 1999, we issued 10,000 unregistered shares of our common stock to A. Corydon Meyer. The shares are subject to forfeiture and vest one year from the date of grant. Mr. Meyer's continued employment with us and his performance of services for us are the considerations for the grant of restricted stock. The grant of the restricted stock is exempt from registration under the Securities Act of 1933 by virtue of the exemption listed in Section 4(1) of that Act. From March 1999 to May 1999, we repurchased a total of 442,400 shares of common stock in open market transactions for approximately $2.5 million. On March 6, 2001, we received a Nasdaq Staff Determination indicating that we failed to comply with the net tangible assets, minimum bid price, and minimum float requirements for continued listing as set forth in Marketplace Rule 4310, and that our common stock, therefore, is subject to delisting from The Nasdaq SmallCap Market. We have requested a hearing before a Nasdaq Listing Qualifications Panel to review the Nasdaq Staff Determination. There can be no assurance the panel will grant our request for continued listing. ITEM 6. SELECTED FINANCIAL DATA We have derived the selected consolidated financial data for fiscal 1996, fiscal 1997, fiscal 1998, fiscal 1999, calendar 1999, and fiscal 2000 from our audited consolidated financial statements. Certain amounts from prior years have been reclassified to conform to the fiscal 2000 presentation. The selected consolidated financial 10 11 data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the consolidated financial statements and notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K.
Fiscal Year Ended (except calendar year ended 12/31/1999) (In thousands, except per share data) --------------------------------------------------------------------------------- 8/2/96 8/1/97 7/31/98 7/30/99 12/31/99 12/31/00 ------------ ------------ ------------- ------------ ------------- ------------- (Unaudited) STATEMENT OF OPERATIONS DATA: Net sales $95,672 $105,303 $112,667 $117,431 $118,413 $116,591 Cost of goods sold 70,516 78,274 87,389 97,166 102,376 94,464 ------------ ------------ ------------- ------------ ------------- ------------- Gross profit 25,156 27,029 25,278 20,265 16,037 22,127 Selling, general and 16,815 18,293 20,033 22,651 23,448 22,052 administrative expenses Interest expense 6,732 7,176 2,560 3,401 4,097 6,947 Amortization of intangibles 1,173 837 917 1,087 1,091 974 Asset impairment 0 0 0 0 2,800 4,402 Other expenses, net(1) 1,522 1,548 259 3,321 5,080 1,640 ------------ ------------ ------------- ------------ ------------- ------------- Income (loss) from continuing (1,086) (825) 1,509 (10,195) (20,479) (13,888) operations before income taxes and cumulative effect adjustment Income taxes 582 134 230 145 755 80 ------------ ------------ ------------- ------------ ------------- ------------- Income (loss) from continuing (1,668) (959) 1,279 (10,340) (21,234) (13,968) operations before cumulative effect adjustment Loss from discontinued (6,480) (9,920) 0 (936) (921) 0 operations(2) Cumulative effect of change in 869 0 0 0 0 0 accounting for post-retirement benefits ------------ ------------ ------------- ------------ ------------- ------------- Net income (loss) ($7,279) ($10,879) $1,279 ($11,276) ($22,155) ($13,968) ============ ============ ============= ============ ============= ============= Income (loss) from continuing ($1.10) ($0.48) $0.20 ($1.64) ($3.45) ($2.31) operations per share (basic and diluted) Weighted average number of 1,520,066 1,985,758 6,464,105 6,313,527 6,146,617 6,057,360 shares outstanding OTHER DATA: Gross margin 26.3% 25.7% 22.4% 17.3% 13.5% 19.0% EBITDA(3)(4) $9,238 $9,840 $7,939 ($1,189) ($7,464) $2,720 BALANCE SHEET DATA: Working capital from $8,543 $26,909 $30,645 $15,118 $10,702 $5,690 continuing operations(5) Total assets 98,895 98,890 112,633 108,867 105,073 81,881 Total debt 61,891 18,935 32,317 38,363 49,387 41,942 Stockholders' equity 18,530 63,224 64,351 50,190 36,964 22,310
In July 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. In accordance with the provisions of this EITF, we have reclassified freight expenses from sales to cost of goods sold for all reporting periods. 11 12 (1) In fiscal 1996, we recognized other expenses of $563,000 in connection with the resignation of our prior Chairman of the Board and other expense of $750,000 in connection with self-insured life insurance accruals related to the death of a former director. In fiscal 1997, we recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with our previous bank credit facility. In fiscal 1999, we recognized expenses related to strategic transactions of $994,000, consolidation of manufacturing facilities of $993,000, and consolidation of watering products operations of $355,000. In calendar 1999, we recognized expenses related to management restructuring charges, including severance and relocation expenses, of $668,000. In fiscal 2000, we recognized a $1.2 million loss in connection with the sale of certain assets related to the manufacturing and sale of the watering products and other expenses of $407,821 in connection with management restructuring charges, including severance and relocation expenses. (2) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a loss in fiscal 1996 of $6.5 million incurred upon the sale of substantially all of the assets of VSI and (ii) a loss of $8.4 million in fiscal 1997 incurred in connection with the sale of substantially all of the assets of McGuire-Nicholas. In fiscal and calendar 1999, we incurred a loss from discontinued operations primarily due to a workers' compensation adjustment of $758,000 related to divested operations and sales tax obligation of $128,000 related to the sale of McGuire-Nicholas. (3) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, and amortization. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to income from continuing operations as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. (4) In fiscal 1999, EBITDA would have been approximately $6.5 million excluding the effect of the following unusual charges: manufacturing consolidation ($1.3 million), strategic transaction costs ($1.0 million), management restructuring charges ($0.7 million), bad debts ($0.7 million), inventory obsolescence ($2.2 million), workers' compensation ($0.4 million), and expenses related to the temporary loss of logistical control ($1.2 million). In fiscal 2000, EBITDA would have been approximately $7.3 million excluding the effect of the following unusual charges: operating inefficiencies resulting from delays in the manufacturing consolidation ($3.0 million), loss on the sale of assets related to the manufacturing and sale of watering products ($1.2 million), and management restructuring charges ($0.4 million). (5) Represents current assets less current liabilities (excluding the Acquisition Facility and the Junior Participation Term Loan Note). We have derived the selected consolidated financial data for transition year 1999 and for the comparable period of 1998 from our audited consolidated financial statements. We included these references because we changed from a fiscal year end (the Friday closest to July 31 of the applicable year) to a calendar year end after we filed our Annual Report on Form 10-K for fiscal 1999. The 1999 transition year is the five-month period from July 31, 1999 to December 31, 1999. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the consolidated financial statements and notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K. 12 13
Five-Month Period Ended (In thousands, except per share data) ------------------------------------ 1/3/99 12/31/99 ----------------- ----------------- (Unaudited) STATEMENT OF OPERATIONS DATA: Net sales $36,729 $37,711 Cost of goods sold 28,517 33,727 ----------------- ----------------- Gross profit 8,212 3,984 Selling, general and 8,173 8,970 administrative expenses Interest expense 1,209 1,905 Amortization of intangibles 444 448 Asset impairment 0 2,800 Other expenses, net 1,010 2,769 ----------------- ----------------- Loss from continuing operations (2,624) (12,908) before income taxes and cumulative effect adjustment Income taxes (benefit) (527) 83 ----------------- ----------------- Loss from continuing operations (2,097) (12,991) before cumulative effect adjustment Loss from discontinued operations (165) (150) ----------------- ----------------- Net loss ($2,262) ($13,141) ================= ================= Loss from continuing operations ($0.32) ($2.16) per share (basic and diluted) Weighted average number of 6,464,105 6,023,174 shares outstanding OTHER DATA: Gross margin 22.4% 10.6% EBITDA $311 ($5,969) BALANCE SHEET DATA: Working capital from $28,067 $10,702 continuing operations Total assets 114,893 105,073 Total debt 37,046 49,387 Stockholders' equity 62,090 36,964
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected consolidated financial data, our consolidated financial statements and the notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K, as well as the factors set forth under the caption "Forward-Looking Statements" below. OVERVIEW We are a leading manufacturer and distributor of non-powered lawn and garden tools. We are a holding company with no business operations of our own. Our only material asset is all of the outstanding capital stock of 13 14 UnionTools, Inc. Founded in 1890, we completed an initial public offering in 1997. We used a portion of the proceeds of such offering to repay debt associated with a 1988 leveraged buyout. Since 1991, we have implemented a business strategy designed to transform us from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of our approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. In fiscal 2000, we focused on strategically rationalizing our business model to restore profitability. This included discontinuing the manufacture and sale of watering products and an emphasis on profitable products and relationships with customers. During fiscal 2000, improvements in our forecasting and planning processes, we believe, have allowed us to consistently provide the highest service levels in the industry. We experienced manufacturing inefficiencies during the first half of fiscal 2000, primarily due to the effects of consolidating manufacturing facilities in the second half of calendar 1999. Those issues have now been addressed and resolved and we have turned our focus to cost savings opportunities, driven by a new Senior Vice President of Operations and a new Vice President and General Manager of our Frankfort, New York manufacturing facility. We have also decreased the cost of our logistical processes, reducing the number of distribution locations, from three to one location in Columbus, Ohio. These reductions were accomplished during fiscal 2000 with minimal effect on service level performance. The net result as it relates to manufacturing and distribution is that we believe that we have been able to correct the problems that arose in calendar 1999 and contributed to the operating losses during that time period. The discontinuation of watering products and cost management on sales support and other overhead expenses has allowed us to lower our selling, general and administrative costs. We continue to challenge and re-evaluate our overhead costs of doing business. Interest costs have become a greater burden to us in fiscal 2000 due to higher market rates plus the incremental costs associated with executing the sixth amendment to our Credit Facility in October 1999. This has been tempered by our ongoing efforts to reduce working capital, including an $8.7 million reduction in inventory requirements. We are currently in negotiations to extend our existing Credit Facility through April 30, 2002. We believe an extension will provide sufficient liquidity for us as we move through our operating cycle. We continue to evaluate opportunities to reduce borrowing costs, including the potential to refinance, as our financial performance improves. To strengthen our technology platform and resources, all information system functions and support were outsourced to Acxiom Corporation in November 2000. The transition has been essentially completed, with no disruption to our business. RESULTS OF OPERATIONS The following table sets forth certain components of our consolidated statement of operations data expressed as a percentage of net sales: 14 15
Fiscal (Calendar) Year Ended (12 months) ------------------------------------------------------------ 7/31/98 7/30/99 12/31/99 12/31/00 -------------- ------------- ------------- ------------- (Unaudited) Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 77.6% 82.7% 86.5% 81.0% -------------- ------------- ------------- ------------- Gross profit 22.4% 17.3% 13.5% 19.0% Selling, general and 17.8% 19.3% 19.8% 18.9% administrative expenses Interest expense 2.3% 2.9% 3.4% 6.0% Amortization of intangibles 0.8% 0.9% 0.9% 0.8% Asset impairment 0.0% 0.0% 2.4% 3.8% Other expenses, net 0.2% 2.8% 4.3% 1.4% -------------- ------------- ------------- ------------- Income (loss) from continuing 1.3% -8.7% -17.3% -11.9% operations before income taxes Income taxes 0.2% 0.1% 0.6% 0.1% -------------- ------------- ------------- ------------- Income (loss) from continuing 1.1% -8.8% -17.9% -12.0% operations Loss from discontinued operations 0.0% -0.8% -0.8% 0.0% -------------- ------------- ------------- ------------- Net income (loss) 1.1% -9.6% -18.7% -12.0% ============== ============= ============= =============
Five-Month Period Ended ------------------------------------- 1/3/99 12/31/99 ---------------- ---------------- (Unaudited) Net sales 100.0% 100.0% Cost of goods sold 77.6% 89.4% ---------------- ---------------- Gross profit 22.4% 10.6% Selling, general and 22.3% 23.8% administrative expenses Interest expense 3.3% 5.1% Amortization of intangibles 1.2% 1.2% Asset impairment 0.0% 7.4% Other expenses, net 2.7% 7.3% ---------------- ---------------- Loss from continuing operations -7.1% -34.2% before income taxes Income taxes (benefit) -1.4% 0.2% ---------------- ---------------- Loss from continuing operations -5.7% -34.4% Loss from discontinued operations -0.5% -0.4% ---------------- ---------------- Net loss -6.2% -34.8% ================ ================ FISCAL 2000 COMPARED TO CALENDAR 1999 Net Sales. Net sales decreased 1.5%, or $1.8 million, to $116.6 million for fiscal 2000 compared to $118.4 million in calendar 1999. The decline in net sales was caused primarily by lower watering product sales. In the third quarter of fiscal 2000, we sold assets related to the manufacturing and sale of watering products. The sales of long handled tools were slightly lower than a year ago due to the rationalization of unprofitable customers 15 16 and products. Gross Profit. Gross profit increased 38.0%, or $6.1 million, to $22.1 million for fiscal 2000 compared to $16.0 million in calendar 1999. Gross margin increased to 19.0% for fiscal 2000 compared to 13.5% for calendar 1999. The increase in gross profit and margin were driven by several factors: improved customer service levels; shipment fulfillment processes; and consolidation of distribution centers. In addition, we have continued to focus on cost reductions and improvements in logistical and manufacturing process controls to drive year to year gains in fiscal 2000. An emphasis on profitable products and relationships with customers has also favorably influenced margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.3 million, or 6.0%, to $22.1 million for fiscal 2000 versus $23.4 million in calendar 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 18.9% for fiscal 2000 as compared to 19.8% in calendar 1999. The improvement reflects the elimination of sales and administrative support for the sale of watering products, as well as, productivity gains and cost reductions, including lower sales expenses and a reduction in personnel. Operating Income (Loss). Operating income (gross profit less selling, general and administrative expenses) improved $7.5 million, to a profit of $0.1 million for fiscal 2000 compared to a loss of $7.4 million in calendar 1999. The improvement in operating income was primarily due to the items discussed above. Interest Expense. Interest expense increased $2.8 million, or 69.6%, to $6.9 million for fiscal 2000 compared to $4.1 million in calendar 1999. The increase in interest expense was primarily due to higher market rates (LIBOR) and borrowing costs, as a result of the most current amendment to our loan agreement, and higher borrowing levels during the year. Amortization of Goodwill. Amortization of goodwill decreased 10.7% to $1.0 million for fiscal 2000 compared to $1.1 million in calendar 1999. The reduction in amortization is due to the lower amount of goodwill to be amortized, resulting from the asset impairment charges recognized during these time periods. Asset Impairment. An asset impairment charge of $4.4 million was recognized in fiscal 2000 and a similar charge of $2.8 million was recorded in calendar 1999. We recognized these charges based on our review of the net realizable value on certain long-lived assets related to the manufacture and sale of watering products. Other Expenses, Net. Other expenses decreased $3.5 million, or 67.7%, to $1.6 million for fiscal 2000 compared to $5.1 million in calendar 1999. The improvement is primarily due to the absence of costs associated with the manufacturing consolidation program that we executed in calendar 1999 and lower management restructuring costs. In fiscal 2000, the improvements were partially offset by a loss incurred on the sale of certain assets related to the manufacturing and sale of watering products. For purposes of comparison, all costs associated with management restructuring have been classified in other expenses. Loss from Continuing Operations Before Income Taxes. Loss from continuing operations before income taxes decreased $6.6 million to a loss of $13.9 million in fiscal 2000 compared to a loss of $20.5 million in calendar 1999. The decreased loss was primarily due to the items discussed above. Net Loss. Net loss decreased $8.2 million, or 37.0%, to $14.0 million for fiscal 2000 compared to $22.2 million in calendar 1999. Net loss per share (basic and diluted) was $2.31 for fiscal 2000, based on a weighted average number of shares outstanding of approximately 6.1 million, compared to net loss per share of $3.60 (basic and diluted) for calendar 1999, based on a weighted average number of shares outstanding of approximately 6.1 million. TRANSITION 1999 COMPARED TO THE COMPARABLE PERIOD IN 1998 Net Sales. Net sales increased $1.0 million, or 2.7%, to $37.7 million in transition 1999 compared to $36.7 million in the comparable period of 1998. The increase in net sales was caused by higher gross sales of long handled tools, partially offset by lower gross sales of molded products and an increase in allowances and deductions. Strong customer demand, including gains from reduction of order backlog, drove the increase in sales 16 17 of long handled tools. The decrease in gross sales of molded products was primarily due to the loss of one significant customer. The increase in allowances and deductions was primarily a result of continued difficulties in manufacturing and logistical control. Gross Profit. Gross profit decreased 51.5%, or $4.2 million, to $4.0 million in transition 1999 compared to $8.2 million in the comparable period of 1998. Gross margin decreased to 10.6% in transition 1999 from 22.4% in the comparable period of 1998. The declines in gross profit and margin were driven primarily by several factors. Logistical and manufacturing control issues identified in fiscal 1999 continued to negatively affect customer service levels and related costs and higher distribution and freight expenses. Unfavorable absorption variances were incurred due to lower production levels resulting from difficulties related to the manufacturing consolidation and due to the timing of expense recognition resulting from changing our fiscal year to a calendar year. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.8 million to $9.0 million for transition 1999 compared to $8.2 million in the comparable period of 1998. As a percentage of net sales, selling, general and administrative expenses increased to 23.8% in transition 1999 from 22.3% in the comparable period of 1998. The increase was due to investments in marketing related activities and information system infrastructure and associate related expenses, including workers' compensation and group benefit costs. Operating Income (Loss). Operating income (gross profit less selling, general and administrative expenses) decreased $5.0 million, to a loss of $5.0 million for transition 1999 from breakeven for the comparable period of 1998. The decrease in operating income was primarily due to the items discussed above. Interest Expense. Interest expense increased 57.6%, or $0.7 million, to $1.9 million for transition 1999 compared to $1.2 million in the comparable period of 1998. The increase in interest expense was due to higher debt levels and interest rates, consistent with the change in terms resulting from the amendment of our credit agreement, effective October 28, 1999. Amortization of Goodwill. Amortization of goodwill remained flat at $0.4 million in transition 1999 and in the comparable period of 1998. Asset Impairment. An asset impairment charge of $2.8 million was recognized in transition 1999 based on our review of the net realizable value on certain long-lived assets. There was no asset impairment charge taken in the comparable period of 1998. Other Expenses, Net. Other net expenses including special charges increased to $2.8 million in transition 1999 from $1.0 million in the comparable period of 1998. The increase was due primarily to costs associated with our manufacturing consolidation program and management restructuring costs offset by the absence of acquisition related costs incurred in the comparable period of 1998. The cost of our manufacturing consolidation was higher than anticipated due to inefficiencies in initial production, including training, scrap, and machine repair costs. Loss from Continuing Operations Before Income Taxes. Loss from continuing operations before income taxes declined $10.3 million to a loss of $12.9 million in transition 1999 compared to a loss of $2.6 million in the comparable period of 1998. The increased loss was primarily due to the items discussed above. Net Loss. Net loss was $13.1 million in transition 1999 compared to a loss of $2.3 million in the comparable period of 1998. Net loss per share (basic and diluted) was $2.18 in transition 1999, based on a weighted average number of shares outstanding of approximately 6.0 million, compared to net loss per share of $0.35 (basic and diluted) in the comparable period of 1998, based on a weighted average number of shares outstanding of approximately 6.5 million. FISCAL 1999 COMPARED TO FISCAL 1998 Net Sales. Net sales increased $4.7 million, or 4.2% to $117.4 million in fiscal 1999 compared to $112.7 million in fiscal 1998. The increase in net sales for fiscal 1999 reflected an aggregate $4.8 million of net sales arising from a full year of offering watering products, partially offset by operational inefficiencies in our core business. 17 18 Gross Profit. Gross profit declined $5.0 million to $20.3 million in fiscal 1999 compared to $25.3 million in fiscal 1998. Gross profit as a percentage of net sales decreased to 17.3% in fiscal 1999 compared to 22.4% in fiscal 1998. The decline in gross profit was driven primarily by several factors. Logistical and manufacturing control issues during 1999 negatively affected customer service levels and drove higher customer deductions, distribution and freight costs associated with the revenue for that period. Control issues also contributed to an inventory loss that was discovered by taking a physical inventory count. At year end, workers' compensation reserves were reviewed for all plan years as a result of an estimated settlement of certain open years with our insurance carrier and adjusted to proper levels. We wrote off product tooling and obsolete inventory related to a discontinued product offering. Excess and obsolete inventory was evaluated and reserves were provided to reflect anticipated value recovery below cost. Accounts receivable in bankruptcy and other aged accounts were reserved. The decrease in gross profit was partially offset by benefits from our cost reduction program. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 13.1%, or $2.6 million, to $22.6 million in fiscal 1999 compared to $20.0 million in fiscal 1998. As a percentage of net sales, selling, general and administrative expenses increased to 19.3% in fiscal 1999 from 17.8% in fiscal 1998. The increase in selling, general and administrative expenses is primarily due to having a full year of costs related to watering products and the write off of uncollectible accounts. Operating Income (Loss). Operating income (gross profit less selling, general and administrative expenses) decreased $7.6 million, or 145.5%, to a loss of $2.4 million in fiscal 1999 compared to a profit of $5.2 million in fiscal 1998. The decrease in operating income was primarily due to the items discussed above. Interest Expense. Interest expense increased $0.8 million, or 32.9%, to $3.4 million in fiscal 1999 compared to $2.6 million in fiscal 1998. The increase in interest expense was due to higher market rates (LIBOR) and borrowing costs. Amortization of Goodwill. Amortization of goodwill increased $0.2 million, or 18.5%, to $1.1 million in fiscal 1999 compared to $0.9 million in fiscal 1998. The increase in amortization is due to the higher amount of goodwill to be amortized during fiscal 1999. Other Expenses, Net. Other expenses increased $3.0 million to $3.3 million in fiscal 1999 from $0.3 million in fiscal 1998. Approximately $1.4 million of the increase related to plant consolidation costs incurred in connection with (1) the consolidation of our Columbus, Ohio manufacturing facility into our primary facility located in Frankfort, New York, and (2) consolidation of the manufacturing operations of our watering products. We incurred approximately $0.6 million in fiscal 1999 related to management restructuring costs. We also incurred approximately $1.0 million in fiscal 1999 related to accounting, legal, consulting, and other expenses related to the exploration of strategic transactions. Income (Loss) from Continuing Operations Before Income Taxes. Income from continuing operations before income taxes decreased $11.7 million to a loss of $10.2 million in fiscal 1999 compared to a profit of $1.5 million in fiscal 1998. The decrease was primarily due to the items discussed above. Net Income (Loss). We incurred a net loss of $11.3 million in fiscal 1999, a $12.6 million deterioration compared to a profit of $1.3 million in fiscal 1998. The loss from discontinued operations of $0.9 million in fiscal 1999 primarily reflects a workers' compensation accrual adjustment of $0.8 million for businesses previously sold. Net loss per share (basic and diluted) was $1.79 for fiscal 1999, based on a weighted average number of shares outstanding of approximately 6.3 million, compared to net income per share of $0.20 (basic and diluted) for fiscal 1998, based on a weighted average number of shares outstanding of approximately 6.5 million. SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, our sales tend to be greater during those months. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the last six 18 19 months of the calendar year. These factors increase variations in our quarterly results of operations and potentially expose us to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for our products may vary substantially from the anticipated demand, leaving us with excess inventory or insufficient inventory to satisfy customer orders. Weather is the single most important factor in determining market demand for our products and also is the least predictable. For example, springtime flooding unfavorably affects the sale of most types of lawn and garden equipment, while moderate to heavy snowfall during winters usually results in a surge in demand for snow shovels. Bad weather during the spring gardening season can adversely affect overall annual sales, but if the weather is favorable during construction projects, such as new housing starts and government spending on highways, this usually represents an increase in demand for long handled tools. The following table sets forth certain unaudited data for each of the quarters in calendar 1999 and fiscal 2000. The financial data for each of these quarters is unaudited but includes all adjustments which we believe to be necessary for a fair presentation. All quarters include normal recurring adjustments except for the second quarter of 1999 which includes certain adjustments of $7.4 million related to the write-off of obsolete inventory, write-off of tooling associated with a discontinued product, increases in the reserve for uncollectible accounts receivable, increases in the reserve for workers' compensation, and other miscellaneous adjustments. These operating results, however, are not necessarily indicative of results for any future period. 19 20
Calendar 1999 Quarter Ended (unaudited - in thousands) ------------------------------------------------------------------ 4/4/99 7/4/99 10/3/99 12/31/99 --------------- --------------- --------------- --------------- Net sales $38,489 $37,100 $21,088 $21,736 Cost of goods sold 28,776 34,383 19,895 19,322 --------------- --------------- --------------- --------------- Gross profit 9,713 2,717 1,193 2,414 Selling, general and administrative 5,675 6,251 6,236 5,286 --------------- --------------- --------------- --------------- expenses (SG&A) Gross profit less SG&A(1)(2) $4,038 ($3,534) ($5,043) ($2,872) =============== =============== =============== =============== Net sales as a percentage of 32.5% 31.3% 17.8% 18.4% full year net sales Gross profit as a percentage of 60.6% 16.9% 7.4% 15.1% full year gross profit Fiscal 2000 Quarter Ended (unaudited - in thousands) ------------------------------------------------------------------ 4/2/00 7/2/00 10/1/00 12/31/00 --------------- --------------- --------------- --------------- Net sales $40,737 $35,170 $22,098 $18,586 Cost of goods sold 31,876 27,621 18,803 16,164 --------------- --------------- --------------- --------------- Gross profit 8,861 7,549 3,295 2,422 Selling, general and administrative 5,986 5,784 5,688 4,594 --------------- --------------- --------------- --------------- expenses (SG&A) Gross profit less SG&A(1) $2,875 $1,765 ($2,393) ($2,172) =============== =============== =============== =============== Net sales as a percentage of 34.9% 30.2% 19.0% 15.9% full year net sales Gross profit as a percentage of 40.0% 34.1% 14.9% 11.0% full year gross profit
(1) Does not include amortization of intangibles and other expenses, each of which generally are non-seasonal in nature. (2) Second quarter 1999 gross profit less SG&A would have been a $1.2 million loss if you exclude the $7.4 million effect of the unusual year-end charges described above. LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for working capital, capital expenditures, and debt service. We have financed our working capital, capital expenditures, and debt service through internally generated cash flow and funds borrowed under our revolving credit facility (the "Credit Facility"). Net cash provided by continuing operations was $4.1 million in fiscal 2000 compared to net cash used in continuing operations of $4.0 million in calendar 1999. The $8.1 million improvement in net cash provided by continuing operations was due to a $7.3 million gain in net income, improved further by higher non-cash charges taken in fiscal 2000. Improvements in accounts receivable and inventory offset net unfavorable changes in pay- 20 21 ables and other liabilities. Lower accounts receivable and inventory levels were the result of the discontinuation of the manufacture and sale of watering products, as well as, the liquidation of excess and obsolete inventory. The results were also favorably influenced by stronger collection efforts in accounts receivable and by more effective forecasting and planning processes in determining inventory needs. Net cash used in continuing operations was $7.6 million in transition 1999 compared to net cash used in continuing operations of $2.1 million in the comparable period of 1998. The $5.5 million increase in net cash used in continuing operations was driven by a $10.9 million deterioration in net income, partially offset by a $2.8 million non-cash asset impairment charge. The results were also favorably impacted by relative improvements in working capital, primarily due to a lower inventory build in transition 1999 compared to the comparable period of 1998. We fell behind on production and customer requirements due to the time and cost inefficiencies experienced as a result of the manufacturing consolidation occurring during the transition 1999 time period. We made capital expenditures of approximately $1.5 million in fiscal 2000, $3.4 million in transition 1999, $4.9 million during fiscal 1999, and $2.9 million in fiscal 1998. The capital expenditures relate primarily to ongoing improvements of property, plant and equipment, manufacturing process improvements, and increased manufacturing capacity. Capital requirements were lower during fiscal 2000 due to the activity level and expenditures made during transition 1999 related to the manufacturing consolidation. In addition, the discontinuation of the manufacture of watering products lowered investment levels in fiscal 2000. In fiscal 2000, expenditures were made primarily at our Frankfort, New York manufacturing facility and in strengthening our technology platform. In transition 1999, the capital expenditures were focused on the consolidation of our Columbus, Ohio manufacturing facility into the primary facility in Frankfort. The $4.0 million in proceeds from the sale of assets is the result of the sale of inventory, trademarks, and property and equipment related to the manufacture and sale of watering products. We utilize our Credit Facility to finance capital expenditures, fund working capital, and other general business purposes. As of December 31, 2000, approximately $3.4 million was available under the revolving portion of the Credit Facility. Indebtedness outstanding bears interest at variable rates based on LIBOR plus 3.5%. We recognized that the restructuring of our operations and the restoration to profitability, while significant, was not sufficient to support a refinancing of the Credit Facility. To provide the time and resources necessary to drive us forward, we are currently in negotiations to extend our existing Credit Facility through April 30, 2002. We continue to evaluate all non-strategic assets for purposes of sales, particularly excess or obsolete inventory. Payment terms with both customers and vendors have been impacted favorably, reducing our overall working capital needs. It is our belief that these actions, combined with the profit improvements already made to the business and the expected extension of the Credit Facility, will provide us with sufficient liquidity to allow us to move through our operating cycle and to continue strengthening the profitability of the business. However, if future financial results do not meet our expectations, we will activate contingency plans, further reducing expenditures, and take other actions to operate within the resources available. EFFECTS OF INFLATION We are adversely affected by inflation primarily through the purchase of raw materials, increased operating costs and expenses, and higher interest rates. We believe that the effects of inflation on our operations have not been material in recent years. FORWARD-LOOKING STATEMENTS Statements in the foregoing discussion that indicate our intentions, hopes, beliefs, expectations, or predictions of the future are forward-looking statements. It is important to note that our actual results could differ 21 22 materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in our business, the following important factors: - Weather is the most significant factor in determining market demand for our products and is inherently unpredictable. Inclement weather during the spring gardening season and lack of snow during the winter may have a material adverse effect on our business, financial condition, and results of operations. - The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, our sales tend to be greater during those months. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the last six months of the year. These factors increase variations in our quarterly results of operations and potentially expose us to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for our products may vary substantially from the anticipated demand, leaving us with either excess inventory or insufficient inventory to satisfy customer orders. - Our ten largest customers in the aggregate accounted for approximately 52.6% of gross sales in fiscal 2000. A substantial reduction or cessation of sales to these or other major customers could have a material adverse effect on our business, financial condition, and results of operations. - Certain retail distribution channels in the lawn and garden industry, such as mass merchants and home centers, are experiencing consolidation. There can be no assurance that such consolidation will not have an adverse impact on certain customers or result in a substantial reduction or cessation of purchases of our products by certain customers. In addition, we are facing increasing pressure from retailers with respect to pricing, co-operative advertising, and other rebates as the market power of large retailers continues to grow. There can be no assurance that such pressures will not have an adverse impact on our business, financial condition, and results of operations. - A key element of our growth strategy is to increase sales in certain distribution channels that we believe are growing more rapidly than the overall industry, such as home centers and mass merchants through retailers such as Sears and Home Depot. There can be no assurance that retailers in such distribution channels will continue to open a significant number of new stores or, if opened, that we will be chosen to supply our products to all or a significant portion of such stores. In addition, there can be no assurance that such stores will generate significant additional sales for us or that such stores will not result in a reduction of sales to our other customers, whether through consolidation or otherwise. - Our future growth and development is largely dependent upon the services of A. Corydon Meyer, our President and Chief Executive Officer, as well as our other executive officers. The loss of Mr. Meyer's services, or the services of one or more of our other executive officers, could have a material adverse effect on us. - Our products require the supply of raw materials consisting primarily of steel, plastics, and ash wood. Although we have several suppliers for most of our raw materials, there can be no assurance that we will not experience shortages of raw materials or components essential to our production processes or be forced to seek alternative sources of supply. In addition, there can be no assurance that prices for such materials will remain stable. Any shortages of raw materials may result in production delays and increased costs which could have a material adverse effect on our business, financial condition, and results of operations. 22 23 - All aspects of the lawn and garden industry, including attracting and retaining customers and pricing, are highly competitive. We compete for customers with large consumer product manufacturers and numerous other companies that produce specialty home and garden products, as well as with foreign manufacturers that export their products to the United States. Many of these competitors are larger and have significantly greater financial resources than us. There can be no assurance that increased competition in the lawn and garden industry, whether from existing competitors, new domestic manufacturers, or additional foreign manufacturers entering the United States market, will not have a material adverse effect on our business, financial condition, and results of operations. - Most of our hourly associates are covered by collective bargaining or similar labor agreements. We currently are a party to four such agreements, one of which expires in 2001 and three of which expire in 2002. There can be no assurance that we will be successful in negotiating new labor contracts on terms satisfactory to us or without work stoppages or strikes. A prolonged work stoppage or strike at any of our facilities could have a material adverse effect on our business, financial condition, and results of operations. - We are subject to various federal, state, and local environmental laws, ordinances, and regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment, and disposal of hazardous substances and wastes. We have made, and will continue to make, expenditures to comply with these environmental requirements and regularly review our procedures and policies for compliance with environmental laws. We also have been involved in remediation actions with respect to certain facilities. Amounts expended by us in such compliance and remediation activities have not been material to us. Current conditions and future events, such as changes in existing laws and regulations, may, however, give rise to additional compliance or remediation costs that could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. - New housing starts often represent an addition to the overall number of consumers in the lawn and garden tool market and, accordingly, an increase in demand. Similarly, government spending on highways, bridges, and other construction projects often represents an increase in demand for long handled tools. A decline in housing starts or government spending on construction projects could result in a decrease in demand for our products and, accordingly, could have a material adverse effect on our business, financial condition, and results of operations. - Adverse changes in general economic conditions in the United States, including the level and availability of consumer debt, the level of interest rates, and consumer sentiment regarding the economy in general, could result in a decrease in demand for our products and, accordingly, could have a material adverse effect on our business, financial condition, and results of operations. - We have been notified by Nasdaq that we do not currently meet the Nasdaq SmallCap Market's continued listing requirements and that our common stock will be delisted. We have appealed this decision. There can be no assurance, however, that we will be successful with such appeal. - Our inability to successfully extend our Credit Facility ongoing, or to extend the Credit Facility on terms and conditions favorable to us, could have a material adverse effect on our business, financial condition, and results of operations. The factors set forth above are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we will not undertake, and specifically decline, any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events 23 24 or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or un-anticipated events. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INFLATION AND INTEREST RATES We have not been significantly affected by inflation in recent years and anticipate that we will not be significantly affected by inflation in the near term. A material change in interest rates could have an impact on our financial results as we are presently paying a variable interest rate on our outstanding debt. In October 1999, we entered into an amendment of our existing Credit Facility (the "Amended Facility"). The Amended Facility provides for a $40 million revolving Credit Facility from January 1 through July 30 of each year; $35 million from July 31 through October 31; and $35 million from November 1 through December 31. In connection with the Amended Facility, the interest rate charges on outstanding borrowings was increased from LIBOR plus 1.5% to LIBOR plus 3.5%. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements, together with the report thereon of Ernst & Young LLP, are set forth on pages F-1 through F-21 hereof (see Item 14 of this Annual Report on Form 10-K for the index). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included under the captions "ELECTION OF DIRECTORS", "INFORMATION CONCERNING THE BOARD OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS" and "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in our Proxy Statement relating to our 2001 Annual Meeting of Stockholders to be held on May 30, 2001 (the "2001 Annual Meeting"), and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the "INFORMATION CONCERNING THE BOARD OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS" and "EXECUTIVE COMPENSATION" in our Proxy Statement relating to our 2001 Annual Meeting and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the captions "OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS" in our Proxy Statement relating to our 2001 Annual Meeting and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the captions "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in our Proxy Statement relating to our 2001 Annual Meeting and is incorporated herein by reference. 25 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are filed with this Annual Report on Form 10-K pursuant to Item 8: - Report of Independent Auditors - Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000 - Consolidated Statements of Operations for fiscal 1998, fiscal 1999, five-month period ended January 3, 1999 (unaudited), transition 1999, calendar 1999 (unaudited), and fiscal 2000 - Consolidated Statements of Stockholders' Equity for fiscal 1998, fiscal 1999, transition 1999, and fiscal 2000 - Consolidated Statements of Cash Flows for fiscal 1998, fiscal 1999, five-month period ended January 3, 1999 (unaudited), transition 1999, calendar 1999 (unaudited), and fiscal 2000 - Notes to Consolidated Financial Statements (a)(2) The following financial statement schedules are filed with this Annual Report on Form 10-K pursuant to Item 14(d) and appear immediately preceding the exhibit index: I. Condensed Financial Information of Registrant II. Valuation and Qualifying Accounts Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes thereto. (a)(3) The following items are filed as exhibits to this Annual Report on Form 10-K: EXHIBIT NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc.*** 3.2 Amended and Restated Bylaws of Acorn Products, Inc.*** 4.1 Specimen Stock Certificate for common stock*** 10.1.1* Employment Severance Agreement, dated as of August 31, 1999, among the Company, UnionTools, Inc., and J. Mitchell Dolloff (reference is made to Exhibit 10.1.1 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.1.2* Employment Severance Agreement, dated as of August 31, 1999, among the Company, UnionTools, Inc., and A. Corydon Meyer (reference is made to Exhibit 10.1.2 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.1.3* Employment Severance Agreement, dated as of August 31, 1999 among the Company, UnionTools, Inc., and John G. Jacob (reference is made to Exhibit 10.2.3 to Form 10-K 26 27 for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.2* Compensation Agreement, dated as of October 28, 1999, between the Company and William W. Abbott (reference is made to Exhibit 10.2 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.3* Acorn Products, Inc. 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, dated as of May 20, 1997, between UnionTools, Inc. and Heller Financial, Inc.*** 10.10 License Agreement, dated as of December 14, 2000, between UnionTools, Inc. and The Scotts Company** 10.11 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits*** 10.12 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc. and OCM Principal Opportunities Fund, L.P.*** 10.13 Master Lease Agreement, dated as of June 4, 1998, between BancBoston Leasing, Inc. and UnionTools, Inc. (reference is made to Exhibit 10.13 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998) 10.14 Rider No. 1 to Master Lease Agreement, dated as of June 4, 1998, between BancBoston Leasing, Inc. and UnionTools, Inc. (reference is made to Exhibit 10.14 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998) 10.15 Amendment No.1 to Credit Agreement, dated as of November 24, 1997, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10 to Form 10-Q for the quarter ended October 31, 1997, filed with the Securities and Exchange Commission on December 15, 1997) 10.16 Amendment No. 2 to Credit Agreement, dated as of May 22, 1998, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.16 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998) 10.17 Amendment No. 3 to Credit Agreement, dated as of October 29, 1998, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended October 30, 1998, filed with the Securities and Exchange Commission on December 8, 1998) 10.18 Amendment No. 4 to Credit Agreement, dated as of February 26, 1999, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended January 29, 1999, filed with the Securities and Exchange Commission on March 15, 27 28 1999) 10.19 Amendment No. 5 to Credit Agreement, dated as of June 10, 1999, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended April 30, 1999, filed with the Securities and Exchange Commission on June 14, 1999) 10.20 Amendment No. 6 to Credit Agreement, dated as of October 28, 1999, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 99.2 to the Current Report on Form 8-K dated October 27, 1999, and filed with the Securities and Exchange Commission on October 29, 1999) 10.21* Acorn Products, Inc. 1997 Nonemployee Director Stock Incentive Plan (reference is made to Exhibit 4(a) on a Registration Statement on Form S-8 (Registration Number 333-58807) filed with the Securities and Exchange Commission on July 9, 1998) 21.1 Subsidiaries of the Company** 23.1 Consent of Ernst & Young LLP** 24.1 Power of Attorney** - -------------- * Management contracts and compensatory plans. ** Filed herewith. *** Previously filed with the same exhibit number on a Registration Statement on Form S-1 (Registration Number 333-25325) filed with the Securities and Exchange Commission on April 17, 1997, as amended. Copies of exhibits may be obtained by writing to Investor Relations, Acorn Products, Inc., P.O. Box 1930, Columbus, Ohio 43216-1930. Persons requesting copies will be charged a reasonable fee to cover reproduction and mailing expenses. (b) Reports on Form 8-K: - We filed the following Current Reports on Form 8-K since September 30, 2000: Current Report on Form 8-K, dated March 13, 2001, filed with the Securities Exchange Commission on March 14, 2001 (Items 5 and 7) (c) Exhibits: - The exhibits to this report follow the signature page (d) Financial Statement Schedules: - The response to this portion of Item 14 is submitted as a separate section of this report (see Item 14(a)(2) above) 28 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACORN PRODUCTS, INC. By: /s/ John G. Jacob ---------------------------------------------- Name: John G. Jacob Title: Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer: By: * A. Corydon Meyer ---------------------------------------------- Name: A. Corydon Meyer Title: President, Chief Executive Officer, and Director Principal Financial Officer: By: /s/ John G. Jacob ---------------------------------------------- Name: John G. Jacob Title: Vice President and Chief Financial Officer Principal Accounting Officer: By: * Ted O'Flaherty ---------------------------------------------- Name: Ted O'Flaherty Title: Chief Accounting Officer Directors: By: * William W. Abbott ---------------------------------------------- William W. Abbott, Chairman By: * Matthew S. Barrett ---------------------------------------------- Matthew S. Barrett, Director By: * John J. Kahl, Jr. ---------------------------------------------- John J. Kahl, Jr., Director By: * Stephen A. Kaplan ---------------------------------------------- Stephen A. Kaplan, Director By: * John L. Mariotti ---------------------------------------------- John L. Mariotti, Director * By: /s/ John G. Jacob ---------------------------------------------- John G. Jacob, Attorney-in-fact Dated: April 17, 2001 29 30 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS ACORN PRODUCTS, INC. We have audited the accompanying consolidated balance sheets of Acorn Products, Inc. and Subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years ended July 31, 1998, July 30, 1999, December 31, 2000, and for the five-month period ended December 31, 1999. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acorn Products, Inc. and Subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the fiscal years ended July 31, 1998, July 30, 1999, December 31, 2000, and for the five-month period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Acorn Products, Inc. and Subsidiaries will continue as a going concern. As more fully described in Note 12, the Company has incurred recurring operating losses, its revolving credit facility expires on April 30, 2001, its acquisition term loan matures on April 30, 2001, and its junior participation term loan note matures on August 1, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 12. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Columbus, Ohio February 23, 2001 F-1 31 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 1999 2000 ----------- ------------ ASSETS (In thousands) Current assets: Cash $ 1,326 $ 596 Accounts receivable, less reserves for doubtful accounts, sales 18,021 14,541 discounts, and other allowances ($2,140 and $2,125, respectively) Inventories, less reserves for excess and obsolete inventory 33,168 24,488 ($2,305 and $1,523, respectively) Prepaids and other current assets 1,012 616 --------- --------- Total current assets 53,527 40,241 Property, plant and equipment, net of accumulated depreciation 17,571 14,096 Goodwill, net of accumulated amortization 32,544 26,813 Other intangible assets 1,431 731 --------- --------- Total assets $ 105,073 $ 81,881 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility (average interest rate of 9.08% and 10.31%, $ 27,228 $ 19,787 respectively) (see Note 4) Acquisition facility (average interest rate of 8.91% and 10.31%, 16,009 15,342 respectively) (see Note 4) Junior participation term loan note (average interest rate of 12%) 6,000 6,707 (see Note 4) Accounts payable 9,004 7,196 Accrued expenses 5,544 7,307 Income taxes payable 206 50 Other current liabilities 843 211 --------- --------- Total current liabilities 64,834 56,600 Other long-term liabilities 3,275 2,971 --------- --------- Total liabilities 68,109 59,571 Contingency (see Note 8) STOCKHOLDERS' EQUITY Common stock, par value of $.001 per share, 20,000,000 shares 78,262 78,262 authorized; 6,464,105 shares issued; and 6,046,680 and 6,062,159 shares outstanding at December 31, 1999 and December 31, 2000, respectively Contributed capital stock options 460 460 Accumulated other comprehensive loss (778) (1,551) Retained earnings (deficit) (38,632) (52,600) --------- --------- 39,312 24,571 Common stock in treasury, 417,425 and 401,946 shares at (2,348) (2,261) --------- --------- December 31, 1999 and December 31, 2000, respectively Total stockholders' equity 36,964 22,310 --------- --------- Total liabilities and stockholders' equity $ 105,073 $ 81,881 ========= =========
See accompanying notes. F-2 32 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended Five Months Ended Calendar (Fiscal) Year Ended --------------------------- ---------------------------- ----------------------------- 7/31/98 7/30/99 1/3/99 12/31/99 12/31/99 12/31/00 ------------- ------------- ------------- ------------- ------------- -------------- (Unaudited) (Unaudited) (In thousands, except share data) Net sales $ 112,667 $ 117,431 $ 36,729 $ 37,711 $ 118,413 $ 116,591 Cost of goods sold 87,389 97,166 28,517 33,727 102,376 94,464 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit 25,278 20,265 8,212 3,984 16,037 22,127 Selling, general and administrative 20,033 22,651 8,173 8,970 23,448 22,052 expenses Interest expense 2,560 3,401 1,209 1,905 4,097 6,947 Amortization of intangibles 917 1,087 444 448 1,091 974 Asset impairment 0 0 0 2,800 2,800 4,402 Other expenses, net: Watering products consolidation 0 355 0 0 355 0 Plant consolidation and 0 1,661 0 2,025 3,686 408 management restructuring Strategic transactions 0 994 768 0 226 0 Loss on sale of assets 0 0 0 0 0 1,238 Miscellaneous 259 311 242 744 813 (6) ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing 1,509 (10,195) (2,624) (12,908) (20,479) (13,888) operations before income taxes Income taxes (benefit) 230 145 (527) 83 755 80 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing 1,279 (10,340) (2,097) (12,991) (21,234) (13,968) operations Discontinued operations: Loss from disposal 0 (936) (165) (150) (921) 0 ----------- ----------- ----------- ----------- ----------- ----------- Loss from discontinued operations 0 (936) (165) (150) (921) 0 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 1,279 ($11,276) ($2,262) ($13,141) ($22,155) ($13,968) =========== =========== =========== =========== =========== =========== Basic and Diluted Earnings per Share Data: Income (loss) from continuing $ 0.20 ($1.64) ($0.32) ($2.16) ($3.45) ($2.31) operations Loss from discontinued operations 0.00 (0.15) (0.03) (0.02) (0.15) 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) per share $ 0.20 ($1.79) ($0.35) ($2.18) ($3.60) ($2.31) =========== =========== =========== =========== =========== =========== Weighted average number of shares 6,464,105 6,313,527 6,464,105 6,023,174 6,146,617 6,057,360 outstanding (basic and diluted)
See accompanying notes. F-3 33 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Contributed Accumulated ------------------------ Capital Other Retained Number of Stock Comprehensive Earnings Treasury Shares Amount Options Loss (Deficit) Stock Total ------------- ---------- -------------- ---------------- ------------ --------- ---------- (in thousands) Balances at August 1, 1997 6,464,105 $ 78,391 $ 460 ($133) ($15,494) $ 0 $ 63,224 Net loss for the period August 2, 0 0 0 0 1,279 0 1,279 1997 through July 31, 1998 Adjustment to minimum 0 0 0 (152) 0 0 (152) pension liability Comprehensive income 0 0 0 0 0 0 1,127 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at July 31, 1998 6,464,105 78,391 460 (285) (14,215) 0 64,351 Net loss for the period August 1, 0 0 0 0 (11,276) 0 (11,276) 1998 through July 30, 1999 Adjustment to minimum 0 0 0 (397) 0 0 (397) pension liability Comprehensive loss 0 0 0 0 0 0 (11,673) Purchase of treasury stock (442,400) 0 0 0 0 (2,488) (2,488) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at July 30, 1999 6,021,705 78,391 460 (682) (25,491) (2,488) 50,190 Net loss for the period July 31, 0 0 0 0 (13,141) 0 (13,141) 1999 through December 31, 1999 Adjustment to minimum 0 0 0 (96) 0 0 (96) pension liability Comprehensive loss 0 0 0 0 0 0 (13,237) Issuance of treasury stock 24,975 (129) 0 0 0 140 11 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1999 6,046,680 78,262 460 (778) (38,632) (2,348) 36,964 Net loss for the period January 1, 0 0 0 0 (13,968) 0 (13,968) 2000 through December 31, 2000 Adjustment to minimum 0 0 0 (773) 0 0 (773) pension liability Comprehensive loss 0 0 0 0 0 0 (14,741) Issuance of treasury stock 15,479 0 0 0 0 87 87 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 2000 6,062,159 $ 78,262 $ 460 ($1,551) ($52,600) ($2,261) $ 22,310 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes. F-4 34 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended Five Months Ended Calendar (Fiscal) Year Ended ----------------------- ------------------------ ----------------------------- 7/31/98 7/30/99 1/3/99 12/31/99 12/31/99 12/31/00 ----------- ---------- ------------ ---------- -------------- -------------- (Unaudited) (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,279 ($11,276) ($ 2,262) ($13,141) ($22,155) ($13,968) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Loss from discontinued operations 0 936 165 150 920 0 Loss on sale of assets 0 0 0 0 0 1,238 Depreciation and amortization 3,870 5,605 1,714 4,906 8,798 9,655 Reserves for doubtful accounts, sales discounts, and other allowances 181 1,350 (97) (104) 1,343 (15) Changes in operating assets and liabilities: Accounts receivable (4,572) 2,991 5,987 2,295 (701) 3,327 Inventories 151 (768) (7,849) (2,277) 4,804 5,441 Other assets 682 (495) 449 1,684 740 1,096 Accounts payable and accrued expenses (445) 4,449 224 (1,683) 2,708 (853) Income taxes payable (307) 80 (43) 83 206 (156) Other liabilities (1,072) (1,471) (388) 447 (636) (1,709) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) continuing operations (233) 1,401 (2,100) (7,640) (3,973) 4,056 Net cash used in discontinued operations 0 (42) (166) (728) (770) 0 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (233) 1,359 (2,266) (8,368) (4,743) 4,056 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of net assets from acquisition, (9,911) 0 0 0 0 0 net of cash acquired Purchases of property, plant and equipment, net (2,882) (4,935) (2,155) (3,391) (6,171) (1,504) Proceeds from sale of assets 0 0 0 828 828 4,032 Proceeds from disposal of discontinued operations (625) 0 0 0 0 0 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (13,418) (4,935) (2,155) (2,563) (5,343) 2,528 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) on acquisition line 9,911 0 0 6,150 6,150 (667) Borrowings on term loan 0 0 0 0 0 707 Net activity on revolving loan 3,471 6,046 4,729 4,874 6,191 (7,441) Proceeds from issuance of treasury stock 0 0 0 11 11 87 Purchase of treasury stock 0 (2,488) 0 0 (2,488) 0 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 13,382 3,558 4,729 11,035 9,864 (7,314) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash (269) (18) 308 104 (222) (730) Cash at beginning of period 1,509 1,240 1,240 1,222 1,548 1,326 -------- -------- -------- -------- -------- -------- Cash at end of period $ 1,240 $ 1,222 $ 1,548 $ 1,326 $ 1,326 $ 596 ======== ======== ======== ======== ======== ======== Interest paid $ 2,338 $ 3,292 $ 1,207 $ 1,554 $ 3,180 $ 4,904 ======== ======== ======== ======== ======== ========
See accompanying notes. F-5 35 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS Founded in 1890, Acorn Products, Inc. ("Acorn"), through its wholly-owned subsidiary UnionTools, Inc. ("UnionTools" and together with Acorn collectively "we", "us", "our", "Company") is a leading designer, manufacturer, and marketer of branded non-powered lawn and garden tools in the United States. Our principal products include long handle tools (such as shovels, forks, rakes and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand tools, and repair handles. We sell our products under a variety of well-known brand names and through a variety of distribution channels. In addition, we manufacture private label products for a variety of retailers. Acorn is a holding company with no business operations of its own. The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the fall and winter. Weather is the most significant factor in determining market demand for our products and is inherently unpredictable. Fluctuations in weather can be favorable or unfavorable for the sale of lawn and garden equipment. Our top two customers are Sears and Home Depot. Each of these customers accounted for over 10% of gross sales during fiscal 1998, fiscal 1999, transition 1999, and fiscal 2000. Our ten largest customers accounted for approximately 52.9% of gross sales during calendar 1999 and 52.6% of gross sales during fiscal 2000. Our products require the supply of raw materials consisting primarily of steel, plastics, and ash wood. We have several suppliers for most of our raw materials. 2. SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR On October 29, 1999, the Board of Directors of Acorn approved a change in the fiscal year end to December 31 and a change in the interim quarterly reporting periods to the period ending on the Sunday closest to the last day of each calendar quarter. Prior to the change, our fiscal year was comprised of the 52 or 53 weeks ending on the Friday closest to July 31 of each year and interim quarterly reporting periods ended on the Friday closest to the last day of each fiscal quarter. Unless otherwise stated, references to fiscal 1998 relates to the fiscal year ended July 31, 1998, fiscal 1999 relates to the fiscal year ended July 30, 1999, and fiscal 2000 relates to the fiscal year ended December 31, 2000. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Acorn and its subsidiaries, McGuire-Nicholas Company, Inc. ("McGuire-Nicholas") and UnionTools, Inc. (and its subsidiaries Hawthorne Tools, Inc. and Pinetree Tools, Inc.). All inter-company accounts and transactions have been eliminated. See Note 3 - Discontinued Operations regarding the disposal of McGuire-Nicholas and Note 11 - Other Expenses regarding the disposal of certain assets related to Hawthorne Tools, Inc. and Pinetree Tools, Inc. REVENUES We recognize revenue from product sales when title passes to the customer. SHIPPING AND HANDLING COSTS F-6 36 Late in 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". The EITF requires that amounts for shipping and handling billed to customers be reported as a component of sales while the related costs be reported as an expense. Prior to the issuance of the EITF, we offset freight charged to customers against freight paid to third-party shippers in computing net sales. We complied with the classification guidelines of the EITF in 2000. The Consolidated Statements of Operations for all periods presented have been adjusted to reclassify freight paid to third-party shippers from net sales to cost of goods sold. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following:
12/31/99 12/31/00 ------------- ------------- (In thousands) Finished goods $15,967 $11,349 Work in process 8,250 6,652 Raw materials and supplies 8,951 6,487 ------------ ------------ Total inventories $33,168 $24,488 ============ ============
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: Machinery and equipment 3 to 7 years Buildings and improvements 7 to 40 years Furniture and fixtures 3 to 7 years Property, plant and equipment consists of the following:
12/31/99 12/31/00 ------------- ------------- (In thousands) Land $1,306 $1,280 Buildings and improvements 4,693 6,498 Machinery and equipment 24,291 21,244 Furniture and fixtures 3,095 3,509 ------------ ------------ 33,385 32,531 Accumulated depreciation and amortization (16,533) (19,652) ------------ ------------ Property, plant and equipment, net 16,852 12,879 Construction in process 719 1,217 ------------ ------------ $17,571 $14,096 ============ ============
Depreciation expense was approximately $4.3 million in fiscal 2000, $1.7 million in transition 1999, $4.5 million in fiscal 1999, and $2.9 million in fiscal 1998. In fiscal 1999, we recorded approximately $1.2 million in additional depreciation related to the write-down of equipment and tooling associated with a discontinued product. GOODWILL F-7 37 Goodwill, resulting from the cost of assets acquired exceeding the underlying net asset value, is amortized on the straight-line method over a forty-year period. Accumulated amortization was approximately $14.0 million at December 31, 2000 and $8.3 million at December 31, 1999. Periodically, we assess the recoverability of our goodwill and other long-lived assets based upon an evaluation of factors such as a significant adverse event or a change in the environment in which the business operates. For goodwill identified with impaired assets, we evaluate whether the expected undiscounted future cash flows are less than the carrying value of the asset. We use a market value approach for assessing the recoverability of enterprise level goodwill. An impairment loss is recorded in the period such determination is made. We recorded approximately $4.4 million in fiscal 2000 and $2.8 million in transition 1999 in additional expense related to the impairment write-down of goodwill associated with our watering products. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during each period plus dilutive common stock equivalents using the treasury stock method. See Note 9 for the computation of basic and diluted earnings per share. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the fiscal 2000 presentation. SEGMENT REPORTING In 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that companies report information about operating segments, geographic areas, and major customers. In accordance with SFAS No. 131, we operate in one reportable segment. EFFECT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended, which is required to be adopted in years beginning after June 15, 2000. Because we did not have any derivatives at December 31, 2000, we do not anticipate that the adoption of the new Statement will have any effect on our earnings or our financial position. 3. DISCONTINUED OPERATIONS In January 1997, we adopted a formal plan to sell McGuire-Nicholas. Accordingly, McGuire-Nicholas is accounted for as a discontinued operation and classified as such in the accompanying consolidated financial statements. During fiscal 1997, we provided for an estimated loss on the disposal of McGuire-Nicholas of $9.9 million. We recognized additional charges of approximately $0.2 in transition 1999 and $0.9 million in fiscal 1999 relating to tax and workers' compensation claims which have been classified as loss from discontinued operations. F-8 38 4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY UnionTools entered into a credit facility (the "Credit Facility") in December 1996 which, as amended and restated in May 1997, November 1997, October 1998, February 1999, and June 1999 provided for a $40 million revolving credit facility (the "Revolving Facility") from January 1 through June 30 ($30 million from July 1 through December 31) and a $35 million acquisition facility (the "Acquisition Facility"). Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. On October 28, 1999, UnionTools entered into a sixth amendment to the amended and restated Credit Facility (the "Amended Facility") to support operational, capital expenditure, and working capital needs through April 30, 2001, the revised term of the facility. The Amended Facility provides for a $40 million revolving credit facility from January 1 through July 30 of each year, $30 million from July 31 through October 31, and $35 million from November 1 through December 31. In addition, the Amended Facility limits the Acquisition Facility to the existing outstanding balance of approximately $16 million and extends the repayment terms as follows: Date Payment ------------------- ------------------------------- September 30, 2000 2.083% of outstanding balance December 31, 2000 2.083% of outstanding balance March 31, 2001 2.083% of outstanding balance April 30, 2001 93.751% of outstanding balance Borrowings under the Amended Facility bear interest at either the bank prime rate plus a margin of 1.5% (prime rate at December 31, 2000 was 9.5%) or, at UnionTools' option, the LIBOR rate plus a margin of 3.5% (LIBOR rate at December 31, 2000 was 6.81%). In addition, UnionTools is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The Amended Facility also includes a "success fee" that is established based upon the date of repayment of the facility. The "success fee" increases from a minimum of 0.5% of the outstanding facility commitment (if repayment occurred on or before April 30, 2000) to a maximum of 3.0% (if repayment occurs after January 31, 2001). At December 31, 2000, the facility had not been repaid. Borrowings under the Amended Facility are secured by substantially all of the assets of UnionTools and are guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all the capital stock of UnionTools. In addition, UnionTools is required to make certain mandatory prepayments under the Amended Facility based upon cash flow and certain other events described in the Amended Facility. UnionTools may elect to prepay all or a portion of the Amended Facility at any time. At December 31, 2000, UnionTools had $3.4 million in available borrowings under the Amended Facility. On October 28, 1999, in connection with the Amended Facility, UnionTools also issued a $6.0 million junior participation term loan note (the "Note") bearing interest at 12% per annum. Interest is payable quarterly in arrears on each February 1, May 1, August 1, and November 1 through the issuance of additional term notes or, following repayment of all borrowings under the Amended Facility other than the Note through the payment of cash. Under the provisions of the Note, the lender has the right, at any time during which any unpaid principal amount remains, to exchange the Note for shares of common stock. The number of shares received will be equal to the sum of the unpaid principal and unpaid interest through the date of exchange divided by $3.50. If not previously exchanged for common stock, the Note matures on the latter of August 1, 2001 or ninety-one days after the Expiry Date, as defined in the Amended Facility. The proceeds of the Note were funded through a subordinated participation agreement between the lender and our majority stockholder. The Note is by its terms incorporated into the Amended Facility and is secured by the collateral in accordance with the terms of the Amended Facility. The Credit Facility contains certain covenants, which, among other things, requires UnionTools to maintain specified financial ratios and places limits on future capital expenditures by UnionTools. The Credit Facility also F-9 39 includes negative covenants including limitations on indebtedness, liens, guarantees, obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances, optional payments and modifications and other debt instruments, transactions with affiliates, changes in fiscal year, negative pledge clauses, and changes in line of business. At December 31, 2000, we were in compliance with these covenants. The fair value of our long-term debt approximates the carrying amount at December 31, 2000. 5. STOCKHOLDERS' EQUITY TREASURY STOCK During fiscal 1999, we repurchased 442,400 shares of common stock at a cost of $2,488,000. STOCK OPTIONS During fiscal 1997, we adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, we have elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for our employee and nonemployee director stock options and, accordingly, do not recognize compensation costs when the exercise price of such stock options is equal to or greater than the fair market value of the stock at the grant date. Pursuant to employment agreements, certain executive officers were granted options to purchase shares of common stock. Vesting of the options and the related exercise price were contingent upon the attainment of certain profitability targets, and portions of the options that failed to vest expired. Vested options to purchase 21,690 shares of common stock (with an exercise price of $0.01 per share relating to 15,906 and $12.10 per share relating to 5,784 shares) were outstanding at December 31, 1999 and 2000. These vested options expire in December 2003. In April 1997, we adopted the 1997 Stock Incentive Plan (the "Incentive Plan") for executives and certain other associates of the Company. The purpose of the Incentive Plan is to provide incentives to associates by granting awards tied to the performance of the common stock. Awards to associates may take the form of options, stock appreciation rights, or sales or grants of restricted stock. We have reserved an aggregate of 1,000,000 shares of common stock for issuance under the Incentive Plan. At December 31, 2000, we granted options to purchase an aggregate of 729,450 shares under the Incentive Plan, at a weighted average exercise price of $2.63 per share. In January 1998, we adopted the 1997 Nonemployee Director Stock Incentive Plan (the "Nonemployee Director Incentive Plan") for nonemployee directors of Acorn. The purpose of the Nonemployee Director Incentive Plan is to enable us to attract and retain nonemployee directors by granting awards tied to the performance of the common stock. Awards to directors may take the form of options, stock appreciation rights, or sales or grants of restricted stock. We have reserved an aggregate of 500,000 shares of common stock for issuance under the Nonemployee Director Incentive Plan. At December 31, 2000, we granted options to purchase an aggregate of 147,432 shares of stock under the Nonemployee Director Incentive Plan, at a weighted average exercise price of $3.62 per share. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if we have accounted for our incentive stock options granted subsequent to December 31, 1994 under the fair value method of SFAS No. 123. The weighted average fair value of options granted during 2000 is $1.00. The valuation of the options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2000: (i) a risk-free interest rate of 6.2%; (ii) no dividend yield; (iii) a volatility factor of the expected market price of our common stock of 0.803; and (iv) a weighted average expected life of each option of 10 years. If we had elected to recognize compensation expense based upon the fair value of options at the grant date as F-10 40 prescribed by SFAS No. 123, reported net income (loss) applicable to common stock and per share amounts would have been as follows:
Fiscal Year ---------------------------------------- Five Months Ended 1998 1999 2000 December 31, 1999 ------------ ------------ ------------ ----------------- Net income (loss) applicable to common stock $43 ($11,974) ($14,442) ($12,109) (in thousands) Net income (loss) applicable to common stock per share $0.01 ($1.90) ($2.38) ($2.01)
The pro forma financial effects of applying SFAS No. 123 may not be representative of the pro forma effects on reported results of operations for future years. F-11 41 The following table summarizes the stock option activity:
Number Weighted Average of Shares Exercise Price --------- ---------------- 1997 STOCK INCENTIVE PLAN Outstanding at August 1, 1997 329,100 $ 14.00 Granted 0 Exercised 0 Expired/terminated 0 -------- Outstanding at July 31, 1998 329,100 14.00 Granted 62,795 5.75 Exercised 0 Expired/terminated (20,300) 14.00 -------- Outstanding at July 30, 1999 371,595 12.61 Granted 264,612 3.61 Exercised 0 Expired/terminated (286,905) 12.64 -------- Outstanding at December 31, 1999 349,302 5.76 Granted 642,189 1.57 Exercised 0 Expired/terminated (262,041) 4.19 -------- Outstanding at December 31, 2000 729,450 $ 2.63 ======== 1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN Outstanding at August 1, 1997 0 Granted 18,630 $ 10.25 Exercised 0 Expired/terminated 0 -------- Outstanding at July 31, 1998 18,630 10.25 Granted 28,800 6.70 Exercised 0 Expired/terminated 0 -------- Outstanding at July 30, 1999 47,430 8.09 Granted 0 Exercised 0 Expired/terminated 0 -------- Outstanding at December 31, 1999 47,430 8.09 Granted 100,002 1.50 Exercised 0 Expired/terminated 0 -------- Outstanding at December 31, 2000 147,432 $ 3.62 ========
F-12 42
Number Weighted Average of Shares Exercise Price --------- ---------------- OTHER STOCK OPTIONS Outstanding at August 1, 1997 39,042 $ 1.79 Granted 0 Exercised 0 Expired/terminated 0 ------- Outstanding at July 31, 1998 39,042 1.79 Granted 0 Exercised 0 Expired/terminated 0 ------- Outstanding at July 30, 1999 39,042 1.79 Granted 0 Exercised (17,352) 0.01 Expired/terminated 0 ------- Outstanding at December 31, 1999 21,690 3.23 Granted 0 Exercised 0 Expired/terminated 0 ------- Outstanding at December 31, 2000 21,690 $ 3.23 =======
The following table summarizes information regarding stock options outstanding at December 31, 2000.
Options Outstanding Options Exercisable --------------------------------------------------- ------------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price - -------------------- ------------- ----------------- -------------- ------------- -------------- $0.01 to $3.00 773,247 9.47 $1.55 679,309 $1.53 $3.01 to $6.00 15,211 8.67 $4.81 15,211 $4.81 $6.01 to $9.00 28,800 8.08 $6.70 28,800 $6.70 $9.01 to $12.00 18,630 7.08 $10.25 18,630 $10.25 $12.01 to $14.00 62,684 6.18 $13.82 62,684 $13.82
In fiscal 2000, we changed the exercise price of certain options issued under the 1997 Stock Incentive Plan as follows: 16,901 options repriced from $4.81 to $2.25 per share; 83,099 options repriced from $3.88 to $2.25 per share; and 100,000 options repriced from $3.00 to $1.25 per share. DIRECTOR STOCK PLAN In April 1997, we adopted the Deferred Equity Compensation Plan for Directors (the "Director Stock Plan"). The purpose of the Director Stock Plan is to increase the proprietary interest of nonemployee members of the Board of Directors of Acorn, thereby increasing their incentive to contribute to our success. Only nonemployee directors are eligible to participate in the Director Stock Plan. The number of shares of common stock reserved for issuance pursuant to the Director Stock Plan is 73,000. The Board of Directors approved an amendment to the Director Stock Plan on March 26, 2001, to increase the number of shares available for issuance under the Director Stock Plan to 200,000. The amendment will be voted upon by the stockholders at the Annual Meeting of Stockholders to be held on F-13 43 May 30, 2001. In lieu of cash, directors can elect to receive all or one-half of their fees in the form of shares of common stock. The number of shares of common stock issued is determined by dividing (i) an amount equal to the dollar amount of the fees to be received in the form of shares of common stock by (ii) the average of the high and low sale prices of the common stock on the Nasdaq SmallCap Market on the last business day preceding the date of payment. Any cash or stock dividends payable on shares of common stock accrue for the benefit of the directors in the form of additional shares of common stock. Shares of common stock are distributed in the form of common stock following the director's resignation from the Board of Directors. In addition, shares of common stock are distributed to directors in the form of common stock following the death of the director or a change in control of Acorn as defined in the Director Stock Plan. 26,684 shares of common stock had been awarded as of December 31, 1999 and 73,688 shares of common stock had been awarded as of December 31, 2000, under the Director Stock Plan representing an equal number of shares of common stock to be issued in the future. 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 deferred tax assets and liabilities are as follows:
12/31/99 12/31/00 -------- --------- (in thousands) Deferred tax assets: Inventory $ 893 $ 610 Accrued expenses and other 3,117 3,324 Net operating loss carryforwards 23,202 29,344 Capital loss carryforward 2,584 2,584 -------- -------- Total deferred tax assets 29,796 35,862 Valuation allowance for deferred tax assets (25,533) (31,342) -------- -------- Deferred tax assets 4,263 4,520 Deferred tax liabilities: Goodwill 3,223 3,271 Depreciation and other 1,040 1,249 -------- -------- Total deferred tax liabilities 4,263 4,520 -------- -------- Net deferred tax assets $ 0 $ 0 ======== ========
Based on our history of operating losses and in accordance with SFAS No. 109, we recorded a 100% valuation allowance resulting in no deferred tax assets being recognized. At December 31, 2000, we had a net operating loss carryforward of $70.4 million for income tax purposes that expire in the years 2009 through 2020 and capital loss carryforward of $6.2 million for income tax purposes that expire in 2002 through 2003. The provision for income taxes is comprised of the following:
Fiscal Year -------------------------------------------------- Five Months Ended 1998 1999 2000 December 31, 1999 -------------- -------------- -------------- ----------------- Current - Federal $ 40 $ 0 $ 0 $ 0 Current - State 190 145 80 83 ---- ---- ---- ---- $230 $145 $ 80 $ 83 ==== ==== ==== ====
For financial reporting purposes, the federal tax provision for fiscal 1998 represents tax due under the Alternative Minimum Tax ("AMT") system as fully reserved operating loss carryforward eliminate book taxable F-14 44 income. However, in fiscal 1998 we generated a loss for federal income tax purposes. Therefore, the federal income tax provision for fiscal 1998 was recorded based on the AMT system. AMT is calculated separately from the regular United States federal income tax and is based on a flat rate applied to a broader tax base. The higher of the two taxes is paid. The excess of the AMT paid over regular tax can be carried forward indefinitely to reduce regular tax liabilities in future years. 7. PENSION AND POST-RETIREMENT BENEFIT PLANS DEFINED BENEFIT PENSION PLANS UnionTools maintains multiple defined benefit pension plans that cover substantially all associates. Benefits paid under the defined benefit plans are generally based either on years of service and the associate's compensation in recent years of employment or years of service multiplied by contractual amounts. Our funding policy for all plans is to fund at least the minimum amount required by ERISA. Activity related to the pension plans is as follows: F-15 45
Five Months Fiscal Year Ended ------------------------------------- December 1998 1999 2000 31, 1999 ----------- ---------- ----------- ------------ (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $ 14,045 $ 15,798 $ 16,873 $ 16,688 Service cost 662 689 311 265 Interest cost 1,149 1,200 1,323 523 Actuarial losses/(gains) 1,156 3 1,330 (67) Plan amendments 0 63 (192) 29 Benefits paid (1,214) (1,065) (1,261) (565) -------- -------- -------- -------- Benefit obligations at end of period $ 15,798 $ 16,688 $ 18,384 $ 16,873 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $ 13,471 $ 14,624 $ 17,482 $ 17,102 Actual return on plan assets 1,254 1,345 1,859 218 Company contributions 1,113 2,198 1,860 727 Benefits paid (1,214) (1,065) (1,261) (565) -------- -------- -------- -------- Fair value of plan assets at end of period $ 14,624 $ 17,102 $ 19,940 $ 17,482 ======== ======== ======== ======== Funded status of the plans (under-funded) ($ 1,174) $ 414 $ 1,549 $ 609 Unrecognized net actuarial losses/(gains) 1,884 1,817 2,867 2,136 Minimum pension liability (1,202) (1,614) (2,386) (1,665) Unamortized prior service cost 577 618 523 568 -------- -------- -------- -------- Prepaid (accrued) benefit cost $ 85 $ 1,235 $ 2,553 $ 1,648 ======== ======== ======== ======== WEIGHTED AVERAGE ASSUMPTIONS Discount rate 8.00% 8.00% 7.50% 8.00% Expected return on plan assets 8.75% 8.75% 8.75% 8.75% Rate of compensation increase 4.00% 4.00% 4.00% 4.00% COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 662 $ 689 $ 311 $ 265 Interest cost 1,149 1,200 1,323 523 Actual return on plan assets (1,254) (1,345) (1,859) (218) Amortization of prior service cost 16 21 44 21 Recognized net actuarial losses/(gains) 77 71 367 (387) Effects of changes in assumption 0 0 0 58 -------- -------- -------- -------- Net periodic benefit cost $ 650 $ 636 $ 186 $ 262 ======== ======== ======== ========
The following is a summary of aggregate prepaid benefit costs and aggregate accrued benefit costs: 12/31/1999 12/31/2000 ---------- ---------- (In thousands) Aggregate prepaid benefit cost $ 2,787 $ 3,442 Aggregate accrued benefit cost (1,139) (889) ------- ------- Net prepaid benefit cost $ 1,648 $ 2,553 ======= ======= F-16 46 We have individual defined benefit pension plans that have accumulated benefit obligations that are in excess of plan assets. These same plans have projected benefit obligations that are in excess of plan assets. The aggregate accumulated benefit obligations, projected benefit obligations, and fair value of plan assets of these plans are as follows:
12/31/1999 12/31/2000 ---------- ---------- (In thousands) Aggregate accumulated benefit obligations $7,021 $8,214 Aggregate projected benefit obligations 7,021 8,214 Aggregate fair value of plan assets 5,872 7,323
POST-RETIREMENT BENEFIT PLANS We also sponsor an unfunded defined benefit health care plan that provides post-retirement medical and life insurance benefits to associates who had attained age 50 and 10 years of service by August 1, 1996 and to current participants receiving benefits. Lifetime benefits under the plan are capped at $25,000 per participant. Activity related to the plan is as follows: F-17 47
Five Months Fiscal Year Ended ---------------------------------- December 1998 1999 2000 31, 1999 ---------- -------- ---------- --------------- (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $ 3,783 $ 2,902 $ 2,292 $ 2,404 Service cost 17 19 2 8 Interest cost 197 185 188 85 Participant contributions 0 85 230 35 Actuarial losses/(gains) (406) 0 815 0 Benefits paid (689) (787) (815) (240) ------- ------- ------- ------- Benefit obligations at end of period $ 2,902 $ 2,404 $ 2,712 $ 2,292 ======= ======= ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $ 0 $ 0 $ 0 $ 0 Company contributions 689 702 585 205 Participant contributions 0 85 230 35 Benefits paid (689) (787) (815) (240) ------- ------- ------- ------- Fair value of plan assets at end of period $ 0 $ 0 $ 0 $ 0 ======= ======= ======= ======= Funded status of the plans (under-funded) ($2,902) ($2,404) ($2,712) ($2,292) Unrecognized net actuarial losses/(gains) (940) (864) 4 (833) ------- ------- ------- ------- Prepaid (accrued) benefit cost ($3,842) ($3,268) ($2,708) ($3,125) ======= ======= ======= ======= WEIGHTED AVERAGE ASSUMPTIONS Discount rate 7.50% 6.75% 7.50% 6.75% Expected return on plan assets N/A N/A N/A N/A COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 17 $ 19 $ 2 $ 19 Interest cost 197 185 188 185 Actual return on plan assets 0 0 0 0 Amortization of prior service cost 0 0 0 0 Recognized net actuarial losses/(gains) (178) (76) (22) (76) Effects of changes in assumption 0 0 0 0 ------- ------- ------- ------- Net periodic benefit cost $ 36 $ 128 $ 168 $ 128 ======= ======= ======= =======
The weighted average health care cost trend rate for fiscal 2001 is 6.0% and is assumed to remain at that level thereafter. The weighted average health care cost trend rate for fiscal 2000 was 5.5%. A one percentage point change in the assumed health care cost trend rate would have the following effects on post retirement benefit obligations:
One Percentage One Percentage Point Increase Point Decrease ------------------ ----------------- (In thousands) Effect on total of service and interest cost components in fiscal 2000 $ 2 ($2) Effect on total of post-retirement benefit obligation in fiscal 2000 $27 ($33)
F-18 48 In February 2001, UnionTools, acting in its capacity as the plan sponsor and policy holder, notified certain of its associates, retirees, and collective bargaining units (IBB, IBT, and IAM) of its intention or desire to eliminate retiree medical and life benefits. The amended change in the post-retirement benefit plans is anticipated to be effective in the second quarter of 2001. We have not assessed the impact of this amendment on our financial position. While this action may be disputed, UnionTools has reserved the right to modify or terminate these benefits within the context of each plan document. DEFINED CONTRIBUTION 401(K) PLAN We sponsor defined contribution 401(k) plans covering all associates. Our matching contribution varies by plan and amounted to approximately $362,000 in fiscal 2000, $154,000 in transition 1999, $310,000 in fiscal 1999, and $293,000 in fiscal 1998. 8. COMMITMENTS AND CONTINGENCIES ROYALTY AGREEMENT AND OPERATING LEASES UnionTools entered into a royalty agreement with The Scotts Company, pursuant to which UnionTools obtained the exclusive right to manufacture, distribute, and market in the United States and Canada an extensive line of lawn and garden tools under the Scotts(R) brand name. Under the agreement, UnionTools must pay certain minimum royalty amounts annually. Rent expense under operating leases was $2.3 million in fiscal 2000, $1.2 million in transition 1999, $2.0 million in fiscal 1999, and $1.6 million in fiscal 1998. The minimum annual payments under non-cancelable operating leases and the Scotts license agreement at December 31, 2000 are as follows: Year Amount ------------ ----------------- 2001 $2,071,000 2002 609,000 2003 349,000 2004 226,000 2005 55,000 Thereafter 22,000 LITIGATION From time to time, we are a party to personal injury litigation arising out of incidents involving the use of our products purchased by consumers from retailers to whom we distribute. We are generally covered by insurance for these product liability claims. In April 1999, an inactive subsidiary, V.H.G. Tools, Inc. ("VHG") and predecessor companies, were joined by Midwest Products, Inc., the defendant, in a product liability lawsuit filed in New Jersey Superior Court, Burlington County, New Jersey. The case is in its early stages, at least as to VHG. Plaintiff's and Midwest allegations do not appear to be supported by evidence, but if plaintiff's and Midwest allegations against VHG are proven, liability could be substantial. Plaintiffs' initial settlement demand to Midwest is $26 million. We have contacted our insurance carriers with respect to this matter and have obtained acknowledgment of coverage under a primary policy which provides limits of $1 million per occurrence subject to an aggregate limit of $2 million. We have also obtained acknowledgement of coverage with respect to an umbrella policy with a limit of liability of $25 million excess of the primary policy. We have not yet received acknowledgment of coverage with respect to a secondary policy with limit of liability of $5 million excess of the umbrella policy. We believe that any compensatory damages, if awarded, will be covered by insurance. F-19 49 COLLECTIVE BARGAINING AGREEMENTS The majority of our hourly associates are covered by collective bargaining agreements, including those at the primary manufacturing facility in Frankfort, New York, as well as those at the Columbus, Ohio distribution center. The collective bargaining agreement covering the Frankfort hourly associates expires in 2001, while the collective bargaining agreement covering the Columbus hourly associates expires in 2002. We have not been subject to a strike or work stoppage in over 20 years and believe that our relationships with our associates and applicable unions are good. However, there can be no assurance that we will be successful in negotiating new labor contracts on terms satisfactory to us or without work stoppages or strikes. A prolonged work stoppage or strike at any of our facilities could have a material adverse effect on our business, financial condition, and results of operations. AGREEMENTS WITH KEY EXECUTIVES We entered into agreements with certain of our executive officers providing for, under certain circumstances, payments from us following the termination of such executives' employment with us or following a change in control of the Company (as defined therein). 9. EARNINGS PER SHARE The following table sets forth the computation of basic and dilutive earnings per share:
Five Months Fiscal Year Ended -------------------------------------------- December 1998 1999 2000 31, 1999 ------------- ------------- ------------- ------------- NUMERATOR Net income (loss) $ 1,279,000 ($11,276,000) ($13,968,000) ($13,141,000) ============ ============ ============ ============ DENOMINATOR Denominator for basic earnings per share 6,464,105 6,313,527 6,057,360 6,023,174 - weighted average shares Effect of dilutive securities: 1997 Stock Incentive Plan 0 0 0 0 1997 Nonemployee Director Stock 1,132 0 0 0 Incentive Plan Deferred Equity Compensation 12,263 0 0 0 Plan for Directors Other stock options 33,258 0 0 0 ------------ ------------ ------------ ------------ Dilutive potential common shares 46,653 0 0 0 ------------ ------------ ------------ ------------ Denominator for diluted earnings per share 6,510,758 6,313,527 6,057,360 6,023,174 ============ ============ ============ ============ - weighted average shares and assumed conversions Basic earnings (loss) per share $ 0.20 ($1.79) ($2.31) ($2.18) ============ ============ ============ ============ Diluted earnings (loss) per share $ 0.20 ($1.79) ($2.31) ($2.18) ============ ============ ============ ============
For additional disclosure regarding outstanding stock options and the Deferred Equity Compensation Plan for Directors, see Note 5 - Stockholders' Equity and Derivative Securities. At July 31, 1998, options to purchase 329,100 shares of common stock at $14.00 per share and options to purchase 5,784 shares of common stock at $12.10 per share F-20 50 were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common stock and, therefore, the effect would be anti-dilutive. 10. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data for each quarter of calendar 1999 and fiscal 2000. The financial data for each of these quarters is unaudited but includes all adjustments which we believe to be necessary for a fair presentation. All quarters include normal recurring adjustments except for the third quarter of fiscal 1999 which includes certain adjustments of $8.2 million related to the write-off of obsolete inventory, the write-off of tooling and inventory associated with a discontinued product, increases in the reserve for uncollectible accounts receivable, and increases in the reserve for workers' compensation and other miscellaneous adjustments. These operating results, however, are not necessarily indicative of results for any future period.
Income (Loss) Income from Income (Loss) Continuing (Loss) from Operations from Net Net Gross Continuing Per Share Discontinued Income Sales Profit Operations (Diluted) Operations (Loss) ----------- ---------- ------------- ---------------- -------------- ----------- (In thousands, except for per share data) 1999 First quarter $ 38,489 $ 9,713 $ 1,846 $ 0.29 $ 0 $ 1,846 Second quarter 37,100 2,717 (5,591) (0.92) (758) (6,349) Third quarter 21,088 1,193 (8,585) (1.42) (12) (8,597) Fourth quarter 21,736 2,414 (8,904) (1.40) (151) (9,055) ---------- --------- ------------ ------------ ----------- --------- $ 118,413 $ 16,037 $ (21,234) $ (3.45) $ (921) $ (22,155) ========== ========= ============ ============ =========== ========= 2000 First quarter $ 40,737 $ 8,861 $653 $0.11 $0 $653 Second quarter 35,170 7,549 (4,978) (0.82) 0 (4,978) Third quarter 22,098 3,295 (5,692) (0.94) 0 (5,692) Fourth quarter 18,586 2,422 (3,951) (0.66) 0 (3,951) ---------- --------- ------------ ------------ ----------- --------- $ 116,591 $ 22,127 ($13,968) ($2.31) $0 ($13,968) ========== ========= ============ ============ =========== =========
11. OTHER EXPENSES In January 1999, we incurred expenses of $355,000 in consolidating our watering products business into a single facility. We incurred expenses for legal, accounting, consulting, and other expenses of $994,000 in fiscal 1999 related to certain strategic transactions. In March 1999, we announced that we would consolidate our Columbus, Ohio manufacturing facility into our primary manufacturing facility in Frankfort, New York. The Columbus manufacturing facility continued to operate through August 1999, at which time operations ceased. Costs incurred as it related to this consolidation totaled $787,000 in transition 1999 and $993,000 in fiscal 1999. During fiscal 1999, we commenced a restructuring of our executive management team, whereby certain key executives were replaced. Costs incurred as it related to this initiative totaled $408,000 in fiscal 2000, $1,238,000 in transition 1999, and $668,000 in fiscal 1999. In fiscal 2000, we sold certain assets related to our watering products. Total proceeds received in connection with the sale of these assets were approximately $4 million and we recognized a loss on disposal of approximately $1.2 million. F-21 51 12. COMPANY OPERATIONS Our consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred net losses for the last three reporting periods, our revolving Credit Facility expires on April 30, 2001, our Acquisition Facility matures on April 30, 2001, and our Junior Participation Term Loan Note matures on August 1, 2001. We have been substantially dependent upon borrowings under our credit arrangements. We believe the operating losses have been largely due to operational control issues related to the consolidation of our manufacturing facilities, unfavorable customer and vendor terms, and large non-recurring adjustments. Our primary cash needs are for working capital, capital expenditures, and debt service. We continue to finance these needs through internally generated cash flow and funds borrowed under the Credit Facility. We are currently in negotiations to extend our existing Credit Facility through April 30, 2002. In addition, in fiscal 2000, we sold substantially all the assets related to our watering products. Total proceeds received in connection with the sale of these assets were approximately $4 million. During fiscal 2000, we focused substantial effort on identifying opportunities to reduce operating costs, including outsourcing certain manufacturing and administrative functions, consolidating distribution facilities, and re-negotiating customer and vendor terms. We will take actions to generate cash from sources other than operations and the potential extension of our Credit Facility. We continue to evaluate opportunities to reduce borrowing costs, including the potential to refinance if financial performance improves. We will also continue to evaluate all non-strategic assets for purposes of sale, particularly the liquidation of excess or obsolete inventory. 13. RELATED PARTY TRANSACTIONS We received certain professional services from the firm in which Acorn's former Chairman of the Board of Directors is a Partner. We paid approximately $221,000 in transition 1999 and $762,000 in fiscal 1999 for these services. At December 31, 1999, we had a payable of approximately $22,000 related to these services. We had no related party transactions in fiscal 2000. F-22 52 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS
December 31, ---------------------------------- 1999 2000 --------------- -------------- (In thousands) ASSETS Cash $0 $102 Accounts receivable 0 0 Prepaid and other assets 414 150 --------------- -------------- Total current assets 414 252 Property, plant and equipment, net 0 0 Goodwill 6,186 6,003 Other assets (principally investment in and 32,407 17,273 --------------- -------------- amounts due from wholly-owned subsidiaries) Total assets $39,007 $23,528 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $1,148 $1,168 Income taxes payable 60 0 Other current liabilities 685 50 --------------- -------------- Total current liabilities 1,893 1,218 Long-term debt 150 0 --------------- -------------- Total liabilities 2,043 1,218 Stockholders' equity: Common stock 78,262 78,262 Contributed capital - stock options 460 460 Minimum pension liability (778) (1,551) Retained earnings (deficit) (38,632) (52,600) --------------- -------------- 39,312 24,571 Common stock in treasury (2,348) (2,261) --------------- -------------- Total stockholders' equity 36,964 22,310 --------------- -------------- Total liabilities and stockholders' equity $39,007 $23,528 =============== ==============
See accompanying notes. S-1 53 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year --------------------------------------------- Five Months Ended 1998 1999 2000 December 31, 1999 ------------ ----------- ------------ --------------------- (In thousands) Selling and administrative expenses $2,625 $3,973 $2,756 $759 Interest expense 83 16 194 0 Amortization of goodwill 183 183 175 76 Other expenses (54) 1,075 80 1,844 ------------ ----------- ------------ --------------------- Loss before equity in earnings and (2,837) (5,247) (3,205) (2,679) losses of subsidiaries Equity in earnings (loss) of wholly- 4,346 (6,029) (10,763) (10,462) owned subsidiaries Income taxes (230) 0 0 0 ------------ ----------- ------------ --------------------- Net income (loss) $1,279 ($11,276) ($13,968) ($13,141) ============ =========== ============ =====================
See accompanying notes. S-2 54 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year ------------------------------------------ Five Months Ended 1998 1999 2000 December 31, 1999 ------------ ------------ ------------ --------------------- (In thousands) Net cash from operating activities $390 $2,488 $15 ($87) INVESTING ACTIVITIES: Property and equipment 0 0 0 0 FINANCING ACTIVITIES: Net activity on revolving loan 0 0 0 0 Redemption of subordinated debt 0 0 0 0 Issuance of common stock 0 0 0 0 Issuance (purchase) of treasury stock 0 (2,488) 87 11 Retirement of preferred stock 0 0 0 0 ------------ ------------ ------------ --------------------- 0 (2,488) 87 11 ------------ ------------ ------------ --------------------- Increase (decrease) in cash $390 $0 $102 ($76) ============ ============ ============ =====================
See accompanying notes. S-3 55 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the parent company-only financial statements, Acorn's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. Acorn's share of net income (loss) of its unconsolidated subsidiaries is included in consolidated income using the equity method. Parent company-only financial statements should be read in conjunction with the Company's consolidated financial statements. 2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Acorn is a guarantor of the Credit Facility of UnionTools, Inc., a wholly-owned subsidiary. Cash utilized by Acorn is provided through inter-company borrowings and is subject to certain restrictions. See Note 4 to the Company's Consolidated Financial Statements. S-4 56 UNIONTOOLS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2000
Additions ------------------------------ Balance at Charged to Charged Balance Beginning Costs and to Other at End Description of Period Expenses Accounts Deductions of Period - ---------------------------------------- --------------- --------------- ------------- --------------- --------------- PERIOD ENDED DECEMBER 31, 2000: Deducted from asset accounts: Allowance for doubtful accounts $642,000 $1,192,332 $0 $1,013,872 $820,460 Reserve for sales, discounts and 1,498,446 3,495,906 0 3,690,757 1,303,595 other allowances --------------- --------------- ------------- --------------- --------------- Total $2,140,446 $4,688,238 $0 $4,704,629 $2,124,055 PERIOD ENDED DECEMBER 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts $940,764 $272,029 $0 $570,793 $642,000 Reserve for sales, discounts and 1,303,245 985,471 0 790,270 1,498,446 other allowances --------------- --------------- ------------- --------------- --------------- Total $2,244,009 $1,257,500 $0 $1,361,063 $2,140,446 PERIOD ENDED JULY 30, 1999: Deducted from asset accounts: Allowance for doubtful accounts $259,378 $701,103 $0 $19,717 $940,764 Reserve for sales, discounts and 634,401 668,844 0 0 1,303,245 other allowances --------------- --------------- ------------- --------------- --------------- Total $893,779 $1,369,947 $0 $19,717 $2,244,009 PERIOD ENDED JULY 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts $175,391 $198,649 $0 $114,662 $259,378 Reserve for sales, discounts and 537,949 96,452 0 0 634,401 other allowances --------------- --------------- ------------- --------------- --------------- Total $713,340 $295,101 $0 $114,662 $893,779
S-5 EX-10.10 2 l87746aex10-10.txt EXHIBIT 10.10 1 Exhibit 10.10 LICENSE AGREEMENT ----------------- This License Agreement ("Agreement"), is made and entered into as of the 14th day of December, 2000, by and between OMS INVESTMENTS, INC., a Delaware corporation ("Licensor") and UNIONTOOLS, INC., a Delaware corporation ("Licensee"). WITNESSETH: WHEREAS, Licensor's predecessor in interest, The O.M. Scott & Sons Company, and Licensee entered into that certain License Agreement as of August 1, 1992 (the "Original License"); and WHEREAS, Licensor is the owner of the U.S. registered trademarks "Scotts" and "Scotts and Oval Design" for lawn, turf and garden tools and equipment, a copy of which is depicted in the Exhibit A attached hereto and incorporated herein ("the Marks"); and WHEREAS, Licensee and Licensor mutually desire to terminate the Original License as of December 31, 2000, and to enter into this Agreement to license the Marks; and NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements of the parties hereto, the sufficiency of which is hereby acknowledged, each party does agree with the other as follows: 1. LICENSE GRANT ------------- 1.1 Products. Upon the terms and conditions hereinafter set forth, Scotts hereby grants to Licensee and Licensee hereby accepts the exclusive right, license and privilege, as of the Commencement Date and except as noted herein, of utilizing the Marks solely in connection with the manufacture, sale and distribution of a line of high quality (non-power) knee - level gardening tools, hand-pruning tools, wheelbarrows and a line of long-handled gardening tools designed to be sold in the middle to high end price range of the consumer product market as specified in Exhibit B attached hereto and incorporated herein (the "Licensed Products"). 1.2 Territory. The license hereby granted is for the United States of America (the "Territory"). 1.3 Channels of Distribution. Licensed Products may be sold to mass merchandisers, groceries/drug stores department stores, home centers, warehouse or club retailers, wholesalers, co-ops, hardware stores, lawn and garden retailers and landscape/contractor suppliers or other channels as specifically and reasonably agreed to by the parties ("Channels of Distribution") within the Territory who intend to offer this line for sale in a manner consistent with the marketing positioning and strategy established by the Licensee marketing plans further defined in Article 5.1. 2 1.4 Goodwill. Licensee recognizes the great value of the goodwill associated with the Marks and hereby acknowledges that the Marks and all of the rights therein and the goodwill pertaining thereto belong exclusively to Licensor, and that the Marks have acquired secondary meaning in the minds of the consuming public. 1.5 Sublicenses. Licensee may sublicense the rights granted hereunder to any affiliated or related entity but only with the prior written approval of Licensor which approval is at Licensor's sole discretion and on the condition precedent that each sublicensee agrees in writing to adhere to all of the terms and conditions of this License Agreement. Nothing herein shall preclude Licensee from subcontracting the manufacturing, advertisement or promotion of the Licensed Products to a third party. In the event of such sublicense or subcontract, the Licensee shall remain fully liable for the fulfillment of all of the terms and conditions of this Agreement. 1.6 Limitation of Licensee. Licensee may engage in the manufacture and sale of products that perform similar functions to the Licensed Products, only if such other products do not have both the same color combinations and readily visible features as the Licensed Products listed on Exhibit B (attached hereto and incorporated herein). Specifically, Licensee may not use the same color combinations and readily visible features on products bearing the Marks that Licensee uses on similar products that do not bear the Marks. Without limiting the above and by way of examples only: 1) if Licensee produces a shovel bearing the Marks with a green head and yellow handle, then Licensee will not produce a similar product that does not bear the Marks with both a green head and yellow handle. In such a case, Licensee may use the color green for the head of a shovel not bearing the Marks, but will not use the color yellow (or a similar color such as gold) on the handle of such a product; or 2) alternatively, if Licensee produces a product (such as a rake) not bearing the Marks that has a black head and yellow handle, and also produces a rake bearing the Marks that also has a black head and yellow handle, then in such case the product bearing the Marks will have an "additional" readily visible feature that clearly distinguishes it from the rake not bearing the Marks, such as a handle grip on the product bearing the Marks that is not present on the product that does not bear the Marks. Both parties understand and agree that the intent herein is that Licensee will not produce a product or line of products bearing similar color combinations and features to the Licensed Products bearing the Marks. In addition Licensee shall not enter into any other license agreement or business arrangement that conflicts with this Agreement. 1.7 Limitation of Licensor. During the term of this Agreement, Licensor agrees not to license Marks to any other long handle or garden tool manufacturer, distributor or marketer for the manufacture of the Licensed Products listed on Exhibit B, except for continuing and renewing those license agreements currently in effect for Licensed Products. The parties acknowledge and agree that Licensor currently manufactures or has manufactured for it spreaders which it sells and/or distributes and Licensor may in the future license a third party to manufacture, sell and/or distribute spreaders bearing the Marks. 1.8 Special Promotions. Licensee will supply Licensor on such terms and conditions as agreed to by the parties from time to time certain Licensed Products which Licensor will sell 2 3 (directly or indirectly) to the professional landscape, turf management or other commercial customers. 2. TERM AND TERMINATION -------------------- 2.1 Term. This Agreement shall commence on January 1, 2001 (the "Commencement Date") and shall have a term of one (1) year, unless otherwise terminated as provided herein. 2.2 Termination of Existing License. Licensor and Licensee hereby agree that the License Agreement entered into as of August 1, 1992 by and between Licensee and The O.M. Scott & Sons Company, Licensor's predecessor in interest, shall terminate, effective December 31, 2000 and that this Agreement shall govern all aspects of the licensing and use of the Marks after December 31, 2000. 2.3 Material Breach: Opportunity to Cure. Either party may immediately terminate this Agreement by written notice and without judicial intervention, and without waiving any remedies or claims resulting from such termination, if the other party shall: 1) fail to comply with or breach any of its material monetary obligations and covenants hereunder and shall not and make good such breach or failure within ten (10) business days from the receipt of a written notice to cure a monetary related breach; or 2) fail to comply with or breach any of its material non-monetary obligations and covenants hereunder and shall not remedy and cure such breach or failure, or has failed to take steps to cure the same, within twenty (20) business days from the receipt of a written notice of breach. In the case of an alleged breach for non-payment, there shall be no termination of this Agreement if the claim is based on payments, the amount of which is being disputed in good faith by the parties, until the parties resolve the dispute in good faith or until an action to resolve the dispute has been adjudicated in accordance with Section 15.1 below. 2.4 Termination For Insolvency. If: (i) a party shall file a petition in bankruptcy for liquidation of its business; (ii) a petition in bankruptcy is filed against a party and is not dismissed within a ninety (90) day period; (iii) a party makes an assignment for the benefit of its creditors or an arrangement pursuant to any bankruptcy law; (iv) a party discontinues its business with intention that it be permanent; or (v) a receiver is appointed for a party or its business and such appointment is not dismissed within a ninety (90) day period, this Agreement shall, at the option of the other party, be terminable immediately upon written notice. In the event this Agreement is so terminated by Licensor, Licensee, its receivers, representatives, trustees, agents, administrators, successors and/or assigns shall have no right to sell, exploit or in any way deal with or in the Licensed Products bearing the Marks, or any carton, container, packing material, wrapping material, advertisement, promotional material or display material pertaining thereto, except as indicated in Section 2.9. 2.5 Termination in Case of Infringement. Either Licensor or Licensee shall have the right to terminate this Agreement immediately if there is a bona fide third party claim or a final adjudication that the use of the Marks on the Licensed Products infringes the proprietary rights of any third party. In the event of a bona fide third party claim, before exercising any 3 4 termination rights, Licensor, in consultation with Licensee, shall seek to negotiate in good faith to obtain the rights of use from the third party for Licensee to use the Marks on the Licensed Products. 2.6 Termination for Damage to Reputation, Business or Goodwill. In the event either Licensor or Licensee reasonably determines, in good faith, that continuation of this Agreement would materially damage its reputation, business (not including the fact that Licensor could derive more revenue from selling the Licensed Products itself or through a different Licensee), or goodwill collectively ("the Goodwill"), Licensor or Licensee, as the case may be, may terminate this Agreement after giving ninety (90) days written notice of termination to the other where the other party fails to cure the Goodwill of the terminating party within such ninety (90) day period. To exercise its rights hereunder, the party must demonstrate substantial evidence of damage to its Goodwill as follows: (a) For Licensor: documented material or a pattern of customer and/or retailer complaints, regarding the quality of the Licensed Products, Licensee's service practices with respect to the Licensed Products, or its reputation as a result of adjudications or other findings of improper business conduct by Licensee. (b) For Licensee: documented material or a pattern of customer and/or retailer complaints regarding the quality of Licensor's products, or its service practices, or Licensor's reputation as a result of adjudications or other findings of improper business conduct by Licensor. 2.7 Payment Due Upon Termination. In the event of termination of this Agreement, except that if termination is pursuant to Section 2.3, in the event that Licensor is the defaulting party, or 2.4, Licensee is still obligated to pay Minimum Guaranteed Royalty for the Term or other Royalties earned, whichever is greater. 2.8 Sale of Inventory Upon Termination. Upon the date of termination, Licensee shall cease manufacturing Licensed Products. For a period of nine months after termination, Licensee may continue to distribute by sale, lease or otherwise Licensed Products manufactured prior to such date, provided that the Royalty as set forth in Section 3 is paid on sale or disposal of such Licensed Products. Notwithstanding the above, a sale or disposal of Licensed Products shall not be allowed if termination resulted from contract breach based upon: (1) failure to properly utilize the Marks on Licensed Products or on related communications or packaging materials pursuant to the terms of this Agreement; (2) failure to substantially adhere to quality standards, design, or Annual Marketing Plan as outlined in Section 5 Marketing Plan and Section 7, Performance and Product Quality; or (3) failure to comply with laws regarding manufacture or sale of Licensed Products. 2.9 Effect of Termination or Expiration. Sixty (60) days before the expiration of the term of this Agreement, or of any extensions thereof, and, in the event of its termination ten (10) days after receipt of notice of termination or the happening of the event which terminates this Agreement where no notice is required, a statement showing the number and description of units of the Licensed Products covered by this Agreement on hand or in work in 4 5 process shall be furnished by Licensee to Licensor. Licensor shall have the right, upon reasonable notice, to take a physical inventory to ascertain or verify such inventory and statement, and refusal by Licensee to submit to such physical inventory by Licensor shall forfeit Licensee's right to dispose of such inventory pursuant to Section 2.9 of this Agreement. 3. PAYMENTS BY LICENSEE -------------------- 3.1 Royalty. During the term of this Agreement, Licensee shall pay to Licensor a royalty which is the greater of (i) five percent (5%) of the gross amount invoiced by Licensee for the sale or other disposition for value (directly or through affiliated or related entities) of all Licensed Products to third parties, less all applicable sales and use-type taxes, customer discounts, credits for returned or rejected articles, allowances, shipping charges, and insurance, provided gross to net sales calculation is consistent with Licensee's historical past business practices and GAAP standards or (ii) $400,000 (the "Minimum Guaranteed Royalty") (collectively, the "Royalty"). 3.2 Manner of Royalty Payment. All Royalty payments with respect to each Licensed Product shall be made by check or wire transfer, in U.S. Dollars. Royalty payments shall be at Licensor's office as set forth below. Each Royalty payment shall be accompanied by documentation of how the Royalty was calculated, which shall be certified by an officer of Licensee. The first Royalty payment shall be equal to one-fourth of Minimum Guaranteed Royalty due and payable on January 1, 2001. The balance shall be paid quarterly until the annual Minimum Guaranteed Royalty is exceeded. Thereafter, the Royalty shall be paid monthly within thirty (30) days of month end. 3.3 Periodic Statements. Within thirty (30) days after the initial shipment by Licensee of the Licensed Products and on a monthly basis thereafter, Licensee shall furnish to Licensor complete and accurate statements showing the number of units of the Licensed Products bearing the Marks shipped by Licensee during the prior month, along with a statement of earned Royalty owed Licensor. Such statement shall be furnished to Licensor whether or not any units of the Licensed Products bearing the Marks have been sold during the preceding calendar month. 3.4 Licensing Records. For as long as a Royalty is due under this Agreement, Licensee will keep true and accurate records adequate to permit Royalties due to Licensor to be computed and verified, which records shall be made available upon prior written request, during business hours (but not more than three times in any twelve month period), for inspection at Licensee's premises, by an independent accountant who is reasonably acceptable to Licensee and who shall be bound by a confidentiality agreement with the Licensee, to the extent necessary for the determination of the accuracy of the reports made hereunder. 4. ADVERTISING AND LABELING ------------------------ 4.1 Licensee agrees that it will cause to appear on or within each of the Licensed Products sold by it under this License, and on or within all advertising, promotional or display material bearing the Marks, appropriate statutory notice of trademark registration or 5 6 notice of common law trademark rights thereto as indicated on Exhibit A of this Agreement. Guidelines are set forth in Exhibit C attached hereto and incorporated herein. In the event that any of the Licensed Products are marketed in a carton, container and/or packing material or wrapping material bearing the Marks, such notice shall also appear upon said carton, container and/or packing material or wrapping material. A sample of each and every tag, label, imprint or other device containing any such notice and all advertising, promotional material or display material bearing the Marks shall be submitted by Licensee to Licensor and shall be subject to Licensor's written approval prior to any use of the Marks by Licensee, such approval shall not be unreasonably withheld or delayed. Any item submitted to Licensor shall not be deemed approved unless and until the same shall have been approved by Licensor in writing. Licensee shall direct all specimens for approval to each of the person(s) at Licensor indicated in paragraph 16 (below), as they may be changed by Licensor upon written notice. After advertising, promotional materials or display materials have been approved pursuant to this Section 4, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent which shall not be unreasonably withheld or delayed. From time to time after Licensee has commenced advertising or promoting the sale of the Licensed Products, and upon Licensor's written request, Licensee shall furnish to Licensor, without cost to Licensor, a reasonable number of samples of each advertisement, promotional material or display material bearing the Marks utilized by Licensee in connection with the sale of the Licensed Products for purposes of reviewing compliance with this Agreement. Licensee reserves all copyright to any designs or works created by it in connection with the Licensed Products. 5. MARKETING PLAN -------------- 5.1 Within thirty (30) days following the execution of this Agreement by Licensee, Licensee shall present Licensor with a copy of its preliminary marketing plan for Licensed Products for the Term in sufficient time to allow for review and input before a final annual marketing plan is developed. Licensee agrees to promote the Licensed Products substantially as outlined in the Annual Marketing Plan (to be attached as Exhibit G to this Agreement), to the channels of distribution in the Territory covered in this Agreement. Such marketing plan shall include the following matters based on the previous season and future market outlook: the pertinent market overview; external factors affecting the market; the product line, including specifications and performance standards, product positioning, features/benefits, price/value versus competitive products; consumer research; sales strategy and target customers; merchandising programs and advertising programs; and a one (1) year sales forecast in units and dollars. The final marketing plan shall not be implemented by Licensee until the Licensor has had the opportunity to review the plan and identify any areas of concern. Licensor and Licensee will work in good faith to resolve any reasonable concerns of Licensor regarding the marketing plan or its execution. 5.2 In the event Licensor becomes aware of a use of the Marks or execution of the Annual Marketing Plan by Licensee which the Licensor believes in good faith violates the terms of this Agreement, Licensor shall have the right to request copies of the Licensee's then-current promotional literature, trade programs, advertising, labeling and other public materials bearing the Marks. Licensee shall endeavor in good faith to cure any improper use of the Marks of which it is notified by Licensor within thirty (30) days of the notice. 6 7 6. REPRESENTATIONS AND WARRANTIES ------------------------------ 6.1 Licensor represents and warrants to the Licensee as follows: (a) Licensor owns all the necessary rights to the Marks and has all necessary power and authority to enter into this Agreement, perform its obligations hereunder, and license the Marks pursuant to the terms hereof. Licensor's performance under this Agreement does not conflict with any contract to which Licensor is bound, its certificate of incorporation or its by-laws. (b) To the best of the Licensor's knowledge (1) the use by the Licensor and by the Licensee of the Marks in connection with the design, manufacture, marketing and distribution of the Licensed Products will not infringe upon any trademark rights of any third parties; and (2) no other person or entity is infringing on the Licensor's or Licensee's rights to the Marks in connection with the Licensed Products. (c) The Licensor will use its best efforts to maintain the validity of the Marks and its ownership thereof. It will actively police infringing uses of the Marks by others and will not permit any other entity to use the Marks in connection with the Licensed Products except for Wolf. Any assignment by Licensor of the Marks to any third party for the same Licensed Products shall be subject to the License granted herein. 6.2 Licensee represents and warrants to the Licensor as follows: (a) Licensee will exercise best efforts to design, manufacture, market, sell, and distribute the Licensed Products. (b) Licensor shall not be responsible, in any manner whatsoever, for the repair, replacement or refund of the purchase price of the Licensed Products, or for any damage or loss suffered by any third party as a result of the use of the Licensed Product or any cost associated therewith regardless of whether claims or such repair, replacement, refund, damage or loss arise under Licensee's warranties to the purchaser and/or user of the Licensed Product or product liability claims. Licensee will ensure that finished Licensed Products manufactured, marketed, sold and distributed under this Agreement shall conform to the specification(s) and requirements included in this Agreement, that the Licensed Product are merchantable and fit for their intended purpose in accordance with labeling and printed directions for use and/or maintenance included with the Licensed Product. Licensee shall assume all responsibility, without charge to Licensor, for the repair or replacement obligations it undertakes with respect to the Licensed Products as well as all damages, costs, litigation, expenses, attorney's fees and the like for any claims for personal injury including death relating to the manufacture, sale and use of Licensed Products by its customers and the ultimate users. (c) The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of Licensee and will be binding on Licensee. 7 8 (d) Licensee will advise Licensor of any apparent infringement of the Marks in connection with Licensed Products of which it becomes aware and will reasonably cooperate with Licensor in the prosecution of any action in that regard brought by Licensor at Licensor's cost. Licensee shall not take any action with respect to any alleged infringement of the Marks unless so directed by Licensor. (e) Licensee has no rights to the Marks except those set forth herein and will not challenge or cause a third party to challenge the validity of the Marks or Licensor's ownership thereof, but that in the event of a finding of actual infringement and a lawful order to discontinue use of Marks, Licensee shall immediately cease all uses of the Marks. (f) The Licensed Products will comply with all applicable laws and regulations, and Licensee shall employ such controls and inspections as are necessary to protect the environment from exposure to and injury from the raw materials, in-process materials, off-test product or finished Licensed Products handled pursuant to this Agreement with Licensor having no liability whatsoever therefor; and, Licensee warrants and agrees that it is solely responsible for complying with all federal, state and local laws, rules, and regulations with respect to the Licensed Products and the obligations under this Agreement including without limitation the treatment, storage or disposal of all wastes generated. 7. PERFORMANCE AND PRODUCT QUALITY ------------------------------- 7.1 Licensee agrees that the Licensed Products shall be of such superior and consistent quality as to protect and enhance the goodwill embodied in the Marks, and that all marketing and promotion of said goods shall be conducted in a dignified manner in keeping with the high standards and integrity of the Licensor and Licensee. Prior to execution of this Agreement, Licensor has become familiar with the Licensed Products and reviewed materials regarding Licensee's advertising and promotion of same. Licensee hereby covenants to maintain the same or higher level of quality throughout the term of this Agreement, not to use the Marks in connection with goods that are inferior to the high standards established by Licensee for its other products, and to ensure that Licensed Products conform to the specifications set forth in Exhibit E hereto. Licensee agrees to maintain quality control, to provide adequate testing of materials, to provide quality workmanship, and to do such other things as are necessary to assure high quality production and servicing of the Licensed Products, it being understood that Licensee shall be solely responsible for any failure of Licensed Products as manufactured herewith to meet the specifications on Exhibit H hereto. Licensee will assign all necessary employees to implement and oversee these quality assurance procedures. 7.2 Licensee shall not provide, sell or offer to sell under the Marks any goods the provision, sale or offer for sale of which violates any applicable federal, state or local law or regulation. 7.3 Subject to compliance with the quality assurance provisions above, during the term of this Agreement, Licensee may, in its discretion, modify and improve any of the Licensed Products and their containers, marketing literature, and related materials after 8 9 consultation and written agreement from Licensor (unless the change is not material under Section 4.1 above), which agreement shall not be reasonably withheld or delayed. 7.4 If Licensor receives notice of a customer complaint or issue regarding the quality or characteristics of the Licensed Products, Licensor shall provide notice of such matter to Licensee. In such instance or where Licensee receives notice of customer issues or complaints, Licensee shall promptly respond to the customer or inquiring party and shall use its best efforts to resolve the issue with the customer. In addition, Licensee shall provide Licensor with a written monthly report which identifies the number and nature of complaints or customer inquiries received by Licensee, and the response taken by Licensee to resolve such complaints or inquiries. In the event that Licensor determines that Licensee has experienced an inordinately high number of complaints or Licensee has not resolved the complaints with the customer in a prompt manner, then Licensor may request a meeting with Licensee, at which meeting the parties will agree on steps to ensure that such complaints are appropriately and timely handled. 8. LITIGATION ---------- 8.1 Each party hereby agrees to give the other prompt written notice of any claim or legal proceeding which is threatened or actually instituted against either party by any third party and involving the Marks or this Agreement. 9. ASSIGNMENT ---------- 9.1 This Agreement and the rights granted hereunder shall not be assignable, in whole or in part, by Licensee or Licensor, without the prior written consent of the other, which shall not be unreasonably withheld or delayed. Any such attempted assignment is null and void. 9.2 This Agreement shall be binding upon and inure to the benefit of the parties hereto, their permitted assigns and representatives, and their successors. 10. LIMITATION OF RELATIONSHIP BETWEEN PARTIES ------------------------------------------ 10.1 Neither party shall have power to bind the other by any guarantee or representation that either party may give, or in any other respect whatsoever, or to incur any debts or liabilities in the name of or on behalf of the other party, and for purposes of this Agreement, the parties hereto shall not be deemed partners, joint venturers, or to have created the relationship of agency or of employer and employee between the parties. 11. LIMITATION OF LIABILITIES ------------------------- 11.1 WITH RESPECT TO CLAIMS ARISING UNDER THIS AGREEMENT AS BETWEEN THE PARTIES REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR IN TORT, INCLUDING NEGLIGENCE, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OF PROFIT OR REVENUE BY THE OTHER OR FOR CONSEQUENTIAL DAMAGES INCURRED OR SUFFERED BY THE OTHER, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS 9 10 OR DAMAGES. THIS PROVISION SHALL SURVIVE EXPIRATION OR TERMINATION OF THIS AGREEMENT. 11.2 The limitations in Section 11.1 shall not apply to losses or damage attributed to claims arising out of either party's gross negligence or willful misconduct. 12. INDEMNITY --------- 12.1 The provisions of Section 11.1 notwithstanding, with regards to claims made against Licensee by third parties and/or claims based on such third party claims, Licensor agrees to indemnify, protect, defend and hold harmless Licensee, its affiliates, servants, employees, direct or indirect customers, ultimate users, subcontractors, sublicensees and other agents and related or affiliated companies against any and all expenses (including reasonable attorneys' fees), claims, losses, damages or liabilities arising out of (1) any breach of this Agreement by Licensor and/or Licensor's representations and warranties contained herein, or (2) with respect to any action brought against Licensee, or its affiliates and related companies, by any third party related to a claim that the Marks, when applied to the Licensed Products, infringe any copyright or trademark of any third party or constitute an unlawful trade practice provided Licensee gave Licensor timely notice as set forth in Section 6, or (3) the products of Licensor. Subsection (2) above does not apply to any such claim of infringement that results from Licensee's manufacture of the Licensed Products or from any other action or omission not envisioned by or performed pursuant to the terms of this Agreement. 12.2 The provisions of Section 11.1 notwithstanding, with regards to claims made against Licensor by third parties and/or claims based on such third party claims, Licensee agrees to indemnify, protect, defend and hold harmless Licensor, its affiliates, servants, employees, direct or indirect customers, ultimate users, subcontractors, sublicensees and other agents against any and all expenses (including reasonable attorneys fees), claims, losses, damages or liabilities arising out of (1) any breach of this Agreement by Licensee and/or Licensee's representations and warranties contained herein or (2) with respect to any claim that the Licensed Products manufactured for, by or under the direction of Licensee are defective or otherwise do not comply with any applicable law or regulation and/or claims for injury to or death of any person (including without limitation, such person's agents, servants, employees, independent contractors, direct and indirect customers and ultimate users) relating to the Licensed Product or Licensee's acts or omission. 12.3 Sections 12.1 and 12.2 shall survive expiration or termination of this Agreement. 13. INSURANCE --------- 13.1 Licensee shall, at its own expense, carry and maintain the following insurance with an insurance company with at least an A plus rating as follows: (a) Comprehensive General Liability (Bodily Injury and Property Damage) Insurance, including Broad Form Property Damage Liability Insurance, Contractor 10 11 Liability Insurance, and Product Liability. The limits of liability of such insurance shall be not less than Five Hundred Thousand Dollars ($500,000) per person and not less than One Million Dollars ($1,000,000) per occurrence. (b) All insurance shall be expressly endorsed to name Licensor as an additional insured and shall include the requirement that the insurer provide Licensor with not less that thirty (30) days advance written notice prior to the effective date of any cancellation or material change and a copy of this endorsement shall be delivered to Licensor with the execution of this Agreement. Licensor shall be continued to be listed as an additional insured on this insurance for a period of fifteen (15) years from the date of the last sale by Licensee of the Licensed Products. This provision shall survive expiration or termination of this Agreement. 14. EXCUSED PERFORMANCE ------------------- 14.1 Neither Licensor nor Licensee will be liable to the other for failure to provide services, non-performance, incomplete performance, delay or error under this Agreement if the cause of the same is beyond its reasonable control or caused by acts of other persons not under control of either party, governmental rules or orders, court orders, any labor or civil disturbance embargoes, strike, boycott, riot, floods, shortages of materials, insurrection; war, or act of God. Any of these events will delay the required performance for a period equal to the length of the event plus a reasonable time thereafter to implement performance. The parties shall notify each other of an event of excused performance and cooperate in good faith to ascertain a possible solution of the situation. 15. MISCELLANEOUS ------------- 15.1 This Agreement shall be construed and the respective rights of the parties shall be determined, under and pursuant to the laws of the State of Ohio. The parties agree that prior to initiating any litigation that they will submit the matter in good faith to negotiation through the Columbus Bar Mediation Program with each party sharing half the cost. 15.2 The invalidity or unenforceability of any particular provision(s) of this Agreement will not affect the other provision(s) of it, and this Agreement will be construed in all aspects as if such invalid or unenforceable provision had been omitted. 15.3 This Agreement may be modified only by a written instrument executed by both parties. A waiver of a breach or default under this agreement shall not be a waiver of any subsequent default. 16. NOTICES ------- 16.1 Notices required under this Agreement shall be in writing and be sent by registered mail or by facsimile transmission with telephonic confirmation of receipt or hand delivery to the respective parties at the following addresses: 11 12 Notice to Licensor: OMS Investments, Inc. 1105 North Market Street Wilmington, Delaware 19899 Telecopy: 302-651-8423 Attn: Attention: Susan Dubb With two copies to: OMS Investments, Inc. 14111 Scottslawn Road Marysville, OH 43041 Telecopy: 937-644-7685 and 937-644-7695 Attn: David Aronowitz and Gordon Hecker Notice to Licensee: Uniontools, Inc. 390 W. Nationwide Blvd. Columbus, Oh 43215 Telecopy: 614-222-4437 Attn: A. Corydon Meyer With a copy to: Porter Wright Morris & Arthur LP 41 South High Street Columbus, OH 43215 Telecopy: 614-227-2100 Attn: Robert J. Tannous, Esq. or to such other address as either party may designate by a notice given in compliance with this paragraph, and shall be deemed effective when received. 17. ENTIRE AGREEMENT ---------------- 17.1 This Agreement, including the Exhibits hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first written above. LICENSEE LICENSOR UNIONTOOLS, INC. OMS INVESTMENTS, INC. By: /s/ A. Corydon Meyer By: Gordon Hecker -------------------------------- ----------------------------- Title: President and CEO Title: Senior Vice President ----------------------------- -------------------------- 12 13 EXHIBIT A --------- 13 14 EXHIBIT B --------- SCHEDULE OF LICENSED PRODUCTS ----------------------------- LICENSED PRODUCTS - ----------------- D and Long Handle, both Round Point and Square Point Shovels, including, garden and nursery, drain, roofing, irrigation and trenching; D and Long handle forks; D and Long handle cultivators D and Long handle weed cutters; Garden & Nursery Spades; Lawn & Leaf Rakes, including both D and Long handle rakes for gardening and weeding; Garden Hoes; Hand pruning tools of all types; Hand shears of all types; Wheelbarrows; and Post-hole diggers, scoops and bulb planters. 14 15 EXHIBIT C --------- UPON REGISTRATION: - ------------------ TRADEMARK USAGE OF SCOTTS(R) Scotts(R) And notation someplace on package and printed materials as follows: "Scotts(R)" Or is the registered trademark of OMS Investments, Inc. Scotts(R) 15 16 EXHIBIT D --------- MARKETING PLAN -------------- To be attached within thirty (30) days of Agreement execution. 16 17 EXHIBIT E --------- LICENSED PRODUCTS - SPECIFICATIONS ---------------------------------- Specifications on product materials content for key or exclusive components used will be provided by Union within fourteen (14) business days after the signing of this Agreement. A color standards guide will be prepared by Scotts within fourteen (14) business days after the signing of this Agreement. 17 EX-21.1 3 l87746aex21-1.txt EXHIBIT 21.1 1 Exhibit 21.1 Subsidiaries of the Company: UnionTools, Inc., a Delaware corporation; Hawthorne Tools, Inc., a Missouri corporation; Pinetree Tools, Inc., a Delaware corporation; VSI Fasteners, Inc., a California corporation; McGuire-Nicholas Company, Inc., a California corporation; and VHG Tools, Inc., a Missouri corporation. EX-23.1 4 l87746aex23-1.txt EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-43812, No. 333-90889 and No. 333-58807) pertaining to the Acorn Products, Inc. Amended and Restated 1997 Nonemployee Director Stock Incentive Plan, the Registration Statements (Forms S-8 No. 333-43810 and No. 333-32087) pertaining to the Acorn Products, Inc. Amended and Restated 1997 Stock Incentive Plan, and the Registration Statement (Form S-8 No. 333-32809) pertaining to the Acorn Products, Inc. Deferred Equity Compensation Plan for Directors of our report dated February 23, 2001 with respect to the consolidated financial statements and financial statement schedules of Acorn Products, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP ERNST & YOUNG LLP Columbus, Ohio April 17, 2001 EX-24.1 5 l87746aex24-1.txt EXHIBIT 24.1 1 Exhibit 24.1 POWER OF ATTORNEY ----------------- Each director and/or officer of Acorn Products, Inc. (the "Corporation") whose signature appears below hereby appoints John G. Jacob and Robert J. Tannous as the undersigned's attorneys or either of them individually as the undersigned's attorney, to sign, in the undersigned's name and behalf and in any and all capacities stated below, and to cause to be filed with the Securities and Exchange Commission (the "Commission"), the Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year ended December 31, 2000, and likewise to sign and file with the Commission any and all amendments to the Form 10-K, and the Corporation hereby also appoints such persons as its attorneys-in-fact and each of them as its attorney-in-fact with like authority to sign and file the Form 10-K and any amendments thereto granting to each such attorney-in-fact full power of substitution and revocation, and hereby ratifying all that any such attorney-in-fact or the undersigned's substitute may do by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 13th day of April, 2001. SIGNATURE TITLE --------- ----- /s/A. Corydon Meyer President, Chief Executive Officer, - ----------------------------- and Director A. Corydon Meyer /s/John G. Jacob Vice President and Chief Financial - ----------------------------- Officer John G. Jacob /s/Ted O'Flaherty Chief Accounting Officer - ----------------------------- Ted O'Flaherty /s/William W. Abbott Director - ----------------------------- William W. Abbott /s/Matthew S. Barrett Director - ----------------------------- Matthew S. Barrett /s/John J. Kahl Director - ----------------------------- John J. Kahl /s/Stephen A. Kaplan Director - ----------------------------- Stephen A. Kaplan /s/John L. Mariotti Director - ----------------------------- John L. Mariotti -----END PRIVACY-ENHANCED MESSAGE-----