10-Q 1 l88188ae10-q.txt ACORN PRODUCTS, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 1, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number: 0-22717 ACORN PRODUCTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3265462 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 390 WEST NATIONWIDE BOULEVARD, COLUMBUS, OHIO 43215 (Address of principal executive offices, including zip code) (614) 222-4400 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 the filing requirements for at least the past 90 days. YES X NO ---- ---- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 6,062,159 shares of Common Stock, $.001 par value, were outstanding at May 1, 2001. 2 FORM 10-Q ACORN PRODUCTS, INC. Table of Contents -----------------
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 December 31, 2000 and April 1, 2001 Consolidated Statements of Operations for the Three Months 4 Ended April 2, 2000 and April 1, 2001 Consolidated Statements of Cash Flows for the Three Months 5 Ended April 2, 2000 and April 1, 2001 Interim Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 Signatures 10
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, 2000 April 1, 2001 --------------------- ----------------- ASSETS (unaudited) Current assets: Cash $596 $866 Accounts receivable, less allowance for doubtful accounts and sales allowances ($2,125 and $2,759, respectively) 14,541 23,595 Inventories, less reserves for excess and obsolete inventory 24,488 27,416 ($1,523 and $1,254, respectively) Prepaids and other current assets 616 282 --------------------- ----------------- Total current assets 40,241 52,159 Property, plant and equipment, net of accumulated depreciation 14,096 13,398 Goodwill, net of accumulated amortization 26,813 26,595 Other intangible assets 731 618 --------------------- ----------------- Total assets $81,881 $92,770 ===================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility $19,787 $28,732 Acquisition facility 15,342 15,009 Junior participation term loan note 6,707 6,913 Accounts payable 7,196 8,883 Accrued expenses 7,307 6,803 Income taxes payable 50 49 Other current liabilities 211 208 --------------------- ----------------- Total current liabilities 56,600 66,597 Other long-term liabilities 2,971 2,504 --------------------- ----------------- Total liabilities 59,571 69,101 Stockholders' equity: Common stock, par value of $.001 per share, 20,000,000 shares authorized, 6,464,105 shares issued, and 6,062,159 shares outstanding at December 31, 2000 and April 1, 2001 78,262 78,262 Contributed capital-stock options 460 460 Accumulated other comprehensive loss (1,551) (1,551) Retained earnings (deficit) (52,600) (51,241) --------------------- ----------------- 24,571 25,930 Common stock in treasury, 401,946 shares at December 31, 2000 and April 1, 2001 (2,261) (2,261) --------------------- ----------------- Total stockholders' equity 22,310 23,669 --------------------- ----------------- Total liabilities and stockholders' equity $81,881 $92,770 ===================== =================
See accompanying notes. 3 4 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended ---------------------------------------- April 2, 2000 April 1, 2001 ----------------- ----------------- (unaudited) (unaudited) Net sales $40,737 $28,317 Cost of goods sold 31,876 20,626 ----------------- ----------------- Gross profit 8,861 7,691 Selling, general and administrative expenses 5,986 4,211 Interest expense 1,827 1,838 Amortization of goodwill 269 219 Other expenses, net 106 44 ----------------- ----------------- Income before income taxes 673 1,379 Income taxes 20 21 ----------------- ----------------- Net income $653 $1,358 ================= ================= Comprehensive income $653 $1,358 ================= ================= PER SHARE DATA (BASIC AND DILUTED): Net income $0.11 $0.22 ================= ================= Weighted average shares outstanding - basic 6,046,680 6,062,159 ================= ================= Weighted average shares outstanding - diluted 6,062,586 6,078,065 ================= =================
See accompanying notes. 4 5 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Three Months Ended ---------------------------------------- April 2, 2000 April 1, 2001 ------------------ ----------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities ($9,479) ($8,378) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (361) (170) Net proceeds from sale of assets 66 0 ------------------ ----------------- Net cash provided by (used in) investing activities (295) (170) CASH FLOWS FROM FINANCING ACTIVITIES: Net activity on revolving loan 8,996 8,945 Proceeds from subordinated debt 0 206 Principal payment on long-term debt 0 (333) ------------------ ----------------- Net cash provided by (used in) financing activities 8,996 8,818 ------------------ ----------------- Net increase (decrease) in cash (778) 270 Cash at beginning of period 1,326 596 ------------------ ----------------- Cash at end of period $548 $866 ================== ================= Interest paid $1,516 $1,366 ================== =================
See accompanying notes. 5 6 ACORN PRODUCTS, INC. AND SUBSIDIARIES INTERIM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Footnote disclosure which would substantially duplicate the disclosure contained in the Annual Report to Stockholders for the year ended December 31, 2000 has not been included. The unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments), that in the opinion of management, are necessary to a fair statement of results for the periods presented and to present fairly the consolidated financial position of Acorn Products, Inc. (the "Company") as of April 1, 2001. 2. Inventories of the Company 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:
December 31, 2000 April 1, 2001 -------------------- ----------------- (in thousands) Finished goods $11,349 $13,378 Work in process 6,652 8,198 Raw materials and supplies 6,487 5,840 -------------------- ----------------- Total inventories $24,488 $27,416 ==================== =================
3. 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, the Company has reclassified freight expenses from sales to cost of goods sold for the first quarter of fiscal 2000. 4. In February 2001, the Company, acting in its capacity as plan sponsor and policy holder, notified certain of its retirees of its decision to eliminate retiree medical and life benefits. The amended change in the post-retirement benefit plans is effective in the second quarter of fiscal 2001. Subsequently, certain of the Company's retirees challenging its actions have taken legal action. While the Company's actions have been disputed, the Company has reserved the rights to modify or terminate the benefits within the context of each plan document. The Company has recognized a gain of approximately $500,000 related to the termination of these benefits. 5. The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is substantially dependent upon borrowing under its credit facility. The Company continues to negotiate with its bank group to finalize an extension of its existing credit facility. Temporary extensions have been executed beyond the April 30, 2001 expiration date. It is the Company's belief that it will be able to extend the existing credit facility by the end of the second quarter of fiscal 2001. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and the other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as the factors set forth under the caption "Forward-Looking Information" below. FORWARD-LOOKING INFORMATION Statements in the following discussion that indicate the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those suggested in the forward-looking statements is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 as well as in the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 1997, as amended on October 29, 1998 and November 12, 1999, and as the same may be amended from time to time. THREE MONTHS ENDED APRIL 1, 2001 COMPARED TO THREE MONTHS ENDED APRIL 2, 2000 Net Sales. Net sales decreased 30.5%, or $12.4 million, to $28.3 million in the first quarter of fiscal 2001 compared to $40.7 million in the comparable period of fiscal 2000. The decline in net sales was driven by a 20% drop in the sale of long handled tools, caused by soft demand and the credit condition of a few key customers, limiting our ability to ship their full demand in the first quarter of fiscal 2001. We believe the soft demand has been industry wide and resulted from customer actions to manage to lower retail inventories, as well as, a longer winter weather pattern across the country that negatively affected spring season purchases. The discontinuation of the sale and manufacture of watering products and the ongoing rationalization of customers and products within our custom injection molding product line also contributed to the decline in net sales in the first quarter of fiscal 2001. Gross Profit. Gross profit decreased 13.2%, or $1.2 million, to $7.7 million for the first quarter of fiscal 2001 compared to $8.9 million in the comparable period of fiscal 2000. Gross margin increased to 27.2% for the first quarter of fiscal 2001 from 21.8% for the comparable period of fiscal 2000. The decrease in gross profit was due to lower sales volume partially offset by cost improvements. The improvement in gross margin is due to actions taken to lower costs and generate efficiencies, primarily in the manufacturing and logistical processes of the Company. The cost improvements also include the effect of rationalizing products and customers, as well as, the reduction of certain employee benefit programs, including post-retirement medical benefits. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.8 million, or 29.7%, to $4.2 million for the first quarter of fiscal 2001 versus $6.0 million in the comparable period of 2000. As a percentage of net sales, selling, general and administrative expenses increased to 14.9% in the first quarter of fiscal 2001 as compared to 14.7% in the comparable period of fiscal 2000. The decrease in selling, general and administrative expenses is due to cost reductions in overhead personnel and expenses, including the affect of the discontinuation of watering products. Operating Profit. Operating profit improved $0.6 million, or 21.0%, to a profit of $3.5 million for the first quarter of fiscal 2001 compared to a profit of $2.9 million in the comparable period of fiscal 2000. The improvement in operating profit for the first quarter was primarily due to the items discussed above. Interest Expense. Interest expense remained flat at $1.8 million for the first quarter of fiscal 2001 and the comparable period of fiscal 2000. The benefit of lower debt levels was offset by higher financing and related costs. Other Expenses, Net, and Amortization of Goodwill. Other expenses, net, including amortization of intangibles decreased $0.1 million, or 29.9%, to $0.3 million in the first quarter of fiscal 2001 compared to $0.4 million in the comparable period of fiscal 2000. This was driven primarily by lower amortization cost as a result of the reduction in goodwill in the second quarter of fiscal 2000. 7 8 Income Before Income Taxes. Income before income taxes improved $0.7 million, or 104.9%, to a profit of $1.4 million for the first quarter of fiscal 2001 compared to $0.7 million in the comparable period of fiscal 2000. The improvement in profit was attributed primarily to the items discussed above. Net Income. Net income was $1.4 million for the first quarter of fiscal 2001 compared to $0.7 million in the comparable period of fiscal 2000. Net income per share (basic and diluted) was $0.22 for the first quarter of fiscal 2001 based on a weighted average number of shares outstanding of approximately 6.1 million, compared to net income per share of $0.11 (basic and diluted) for the comparable period of fiscal 2000, based on a weighted average number of shares outstanding of approximately 6.0 million. SEASONAL AND QUARTERLY FLUCTUATIONS The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through June. Accordingly, the Company's sales tend to be greater during those months. As a result, operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, inventory levels tend to be at their highest, relative to sales, during the last six months of the year. The seasonality of sales also causes variability in selling, general and administrative expenses as a percentage of net sales, with the fixed component of these expenses driving a lower percentage relationship to net sales in the first half of the year and a higher percentage relationship to net sales in the second half of the year. These factors increase variations in quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for products may vary substantially from the anticipated demand, leaving the Company with excess inventory or insufficient inventory to satisfy customer orders. LIQUIDITY AND CAPITAL RESOURCES There have been no significant changes in the Company's liquidity and capital resources as of April 1, 2001 from those discussed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2000. The Company continues to negotiate with its bank group to finalize an extension of its existing credit facility. Temporary extensions have been executed beyond the April 30, 2001 expiration date. It is the Company's belief that it will be able to extend the existing credit facility by the end of the second quarter of fiscal 2001. The Company continues to take actions to generate cash from sources other than operations, including the evaluation of all non-strategic assets for purposes of sale, particularly the liquidation of excess or obsolete inventory. EFFECTS OF INFLATION The Company is adversely affected by inflation primarily through the purchase of raw materials, increased operating costs and expenses and higher interest rates. The Company believes that the effects of inflation on operations have not been material between the first quarter of fiscal 2001 and the comparable period of 2000. 8 9 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. None. (b) REPORTS ON FORM 8-K. On March 14, 2001, the Company filed with the SEC a report on Form 8-K dated March 13, 2001 (Items 5 and 7). 9 10 SIGNATURES Pursuant to the requirements 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. Date: May 16, 2001 By: /s/ A. Corydon Meyer ---------------------- A. Corydon Meyer, President and Chief Executive Officer (Principal Executive Officer) Date: May 16, 2001 By: /s/ John G. Jacob ------------------- John G. Jacob, Vice President and Chief Financial Officer (Principal Financial Officer) 10