10-K/A 1 l96197ae10vkza.txt ACORN PRODUCTS, INC. * FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A No. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 April 5, 2002, the aggregate market value of our shares of common stock (based on the last sale price of the common stock on the Nasdaq SmallCap Market on that date) held by non-affiliates of the registrant was approximately $990,669.60. As of April 5, 2002, 6,078,265 shares of our common stock, par value $.001 per share, were outstanding.
TABLE OF CONTENTS DESCRIPTION PAGE ----------- ---- Part I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 9 Item 3. Legal Proceedings.................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders.................................. 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10 Item 6. Selected Financial Data ............................................................. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 28 Item 8. Financial Statements and Supplementary Data ......................................... 28 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................................................. 28 Part III Item 10. Directors and Executive Officers of the Registrant................................... 29 Item 11. Executive Compensation............................................................... 31 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 35 Item 13. Certain Relationships and Related Transactions....................................... 37 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 39 Signatures ..................................................................................... 43 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer.................................. 44 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer.................................. 45 Financial Statements................................................................................. F-1 Schedules to Financial Statements.................................................................... S-1
2 PART I ITEM 1. BUSINESS As used in this Annual Report on Form 10-K/A 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 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 years 2000 and 2001 reflect the fiscal year period ended on December 31 of the applicable year. As used in this Annual Report on Form 10-K/A, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot" refers to The Home Depot, Inc., "Lowe's" refers to Lowe's Companies, Inc., "Mid-States" refers to Mid-States Distributing Company, Inc., "Oklahoma Rig" refers to Oklahoma Rig & Supply Company, Inc., "Orgill" refers to Orgill, Inc., "Sears" refers to Sears, Roebuck & Company, "Tractor Supply" refers to Tractor Supply Company, Inc., "Wal-Mart" refers to Wal-Mart Stores, Inc., and "White Cap" refers to White Cap Pro-Contractor Supplier. Our primary registered trademarks include: Landscape Gardener(R), Perfect Cut(R), Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R), UnionTools(R), and Yard `n Garden(R). Craftsman(R)and Sears(R)are registered trademarks of Sears. 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 statement on our current expectations, estimates, and projections. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in the forward-looking statements in this Annual Report on Form 10-K/A 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 handled 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 Landscape Gardener(R), Perfect Cut(R), Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R), UnionTools(R), Yard `n Garden(R), and, pursuant to a license agreement, Scotts(R). In addition, we manufacture and supply private label products for a variety of customers, including products sold to Sears under the Craftsman(R) brand name and Ace Hardware under the Ace(R) brand name. 3 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 cooperative advertising and where applicable, provide customers with merchandising plan-o-grams and custom designed product displays complete with informative signs to assist at the retail level. We market our products primarily within the United States. Sales within the United States comprised 98% of total sales in fiscal 2000 and fiscal 2001. 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 Our sales force is comprised of regional managers and direct sales professionals who regularly call on customers and manage manufacturers' representatives who provide store level support to customers. These manufacturers' representatives also sell lawn and garden products for other manufacturers, but not products that compete with ours. We also have an Internet web site at www.uniontools.com which provides consumers with product information, dealer locations, and customer service contacts. In addition, customers can download Company information, catalogs, and line art and photographs for use in advertisements. The reference to our web site address does not constitute incorporation by reference of the information contained on our web site, so you should not consider any information on our web site to be a part of this Annual Report on Form 10-K/A. LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS Under a licensing agreement, we pay royalties to The Scotts Company and therefore have the right to produce and market a line of garden tools bearing the Scotts(R) trademark. We 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: - Landscape Gardener(R); - Perfect Cut(R); - Razor-Back(R); - SNOFORCE(R); - Union(R); - Union Pro(R); - UnionTools(R); and - Yard `n Garden(R). Such registrations will continue as new patents and trademarks are developed or acquired. We aggressively monitor and protect our brands against infringement and other violations. ACQUISITIONS AND DIVESTITURES Effective December 31, 1999, our wheelbarrow joint venture was dissolved. We feel that the wheelbarrow business is significant and have pursued this venture on our own by focusing on worldwide sourcing and manufacturing to improve our position in the wheelbarrow category. During fiscal 2000, we discontinued the manufacture and sale of watering products, and subsequently sold the related assets. These actions represent the desire to dedicate our attention to core products: long handle tools, cutting tools, striking tools, and wheeled goods. COMPETITION The markets for non-powered lawn and garden tools are highly competitive, especially with respect to product pricing, product quality, innovation in the design of new products, availability, customer service and support, although the degree and nature of such competition vary by location and product line. We are generally perceived by our customers to be the highest quality provider and to have the best service levels in our industry. We also enjoy strong brand name recognition. We believe that our commitment to customer service, product innovation, and distribution systems position us well to compete in the markets for non-powered lawn and garden tools. 5 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. Sears and Home Depot together account for 33% of gross sales. Our ten largest customers accounted for approximately 53% of gross sales during calendar 1999, 53% of gross sales during fiscal 2000, and 57% of gross sales during fiscal 2001. 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, cooperative advertising, and other rebates as the market power of large retailers continues to grow. There can be no assurance that such pressures will not have an adverse impact on our business, financial condition, and results of operations. 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. In fiscal 2001, in order to increase efficiency and verify accuracy of shipments, we added a product scanning software enhancement that utilizes RF technology at our 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 believe 6 that these systems enable efficient order processing, expedite shipments, and improve customer service. Prioritizing our efforts in distribution and logistics has resulted in an improvement in service levels, and we consistently strive to achieve On Time, In Full, Error Free ("OTIFEF") shipments. MANUFACTURING AND SOURCING We continue to strengthen our expertise and infrastructure. Our ongoing efforts continued to improve both manufacturing and sourcing capabilities in order to pursue the "world's low cost production" on all products and components. The production of non-powered lawn and garden tools is an extensive manufacturing and assembly process that involves several different technologies, including sawmill operations, wood finishing, heavy gauge forging, stamping, grinding, metal painting, machining, and injection molding. Over the last 100 years, we have developed unique processes that enable us to perform these complex tasks in an efficient manner. In addition, we use our own injection molding facility to manufacture proprietary custom molded products and component parts for other manufacturers and distributors, as well as to manufacture certain plastic components used in our own products. Since many products and components are more competitively manufactured outside our facilities, we began strategic sourcing of some product components in China in 1999. During fiscal 2001, we continued to expand our sourcing capabilities to include manufacturers in Europe, Asia, Mexico, and South America, and dedicated resources to manage these relationships. INFORMATION TECHNOLOGY In fiscal 2000, we outsourced our information technology function to Acxiom Corporation. Acxiom is a global leader in real-time customer data integration offering innovative database marketing services, infrastructure management, premier data content, and integration technologies. Founded in 1969, Acxiom is currently headquartered in Little Rock, Arkansas, with operations in the United States, the United Kingdom, France, Spain, and Australia. This relationship has allowed us to tap into the substantial resources and expertise of Acxiom that were unavailable to us on a standalone basis. Acxiom has provided all information technology services support for us, including server management, data network services, local area and wide area networks, desktop support, help desk services, and all of our application software support needs. We expect technology to provide significant efficiencies and capabilities to us in servicing our customers in the future. RAW MATERIALS The primary raw materials used to produce our products are steel, fiberglass, and ash wood. - Steel. We purchase our steel requirements from several domestic suppliers. The primary considerations in specialty steel sourcing are metallurgy, price, and width. We have strong and long-established relationships with our steel suppliers and have never experienced sourcing problems. We do not enter into long-term contracts for steel purchases. We purchased the majority of our steel requirements from Liberty Steel Products, Inc. and Shiloh Industries, Inc. in fiscal 2001. - Fiberglass. The primary considerations for sourcing fiberglass are production capacities, quality, and cost. Fiberglass is used primarily in the production of high-end tools. We purchased the majority of our fiberglass requirements from Strongwell in fiscal 2001. - 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 7 of ash to cover occasional short-term fluctuations in supply. We import wood handles for some of our promotionally priced products, such as rakes and hoes. Imported wood is less expensive than ash and is of sufficient quality for tools (other than shovels) designed for opening-price-point levels. Our sawmills were "Green" certified in fiscal 2001. "Green Certification" is to ensure that forests are managed in an ecologically sound, socially responsible, and economically viable manner. We have several suppliers for most of our raw materials. There can be no assurance, however, that we will not experience shortages of raw materials or of components essential to our production processes or be forced to seek alternative sources of supply. In addition, there can be no assurance that prices for such materials will remain stable. Any shortages of raw materials may result in production delays and increased costs, which could have a material adverse effect on our business, financial condition, and results of operations. ASSOCIATES As of December 31, 2001, we employed approximately 500 people (including seasonal associates), approximately 400 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 75 to 100 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 2003. The International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers ("IBB") represents the hourly associates in Frankfort, New York. During fiscal 2001, we successfully reached an agreement and extended our contract with the IBB, which now expires in June 2004. 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 2003. 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, 2001, we believe that we have no significant outstanding environmental issues. 8 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, 2001, 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 82,000 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 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. 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 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 ------------------------ ---- --- 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 Second Quarter 1.45 0.41 Third Quarter 0.82 0.36 Fourth Quarter 0.58 0.33 2002: First Quarter $0.80 $0.35 Second Quarter 0.61 0.60 (through April 9, 2002)
As of April 5, 2002, the approximate number of record holders of the common stock was 23. The closing sales price of our common stock on April 5, 2002 was $0.60 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. 10 ITEM 6. SELECTED FINANCIAL DATA We have derived the selected consolidated financial data for fiscal 1997, fiscal 1998, fiscal 1999, fiscal 2000, and fiscal 2001 from our audited consolidated financial statements. We have derived the selected consolidated financial data for calendar 1999 from our unaudited consolidated financial statements. Certain amounts from prior years have been reclassified to conform to the fiscal 2001 presentation. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the consolidated financial statements and notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K/A.
Fiscal Year Ended (except calendar year ended 12/31/1999) (In thousands, except per share data) --------------------------------------------------------------------------------- 08/01/1997 07/31/1998 07/30/1999 12/31/1999 12/31/2000 12/31/2001 ------------ ------------ ------------- -------------------------- ------------- (Unaudited) STATEMENT OF OPERATIONS DATA: Net sales $105,303 $112,667 $117,431 $118,413 $116,591 $93,482 Cost of goods sold 78,274 87,389 97,166 102,376 94,464 70,404 ------------ ------------ ------------- ------------- ------------ ------------- Gross profit 27,029 25,278 20,265 16,037 22,127 23,078 Selling, general and 18,293 20,033 22,651 23,448 22,052 17,329 administrative expenses Interest expense 7,176 2,560 3,401 4,097 6,947 5,895 Amortization of intangibles 837 917 1,087 1,091 974 876 Asset impairment(6) 0 0 0 2,800 4,402 14,130 Other expenses, net(1) 1,548 259 3,321 5,080 1,640 443 ------------ ------------ ------------- ------------- ------------ ------------- Income (loss) from continuing (825) 1,509 (10,195) (20,479) (13,888) (15,595) operations before income taxes Income taxes 134 230 145 755 80 84 ------------ ------------ ------------- ------------- ------------ ------------- Income (loss) from continuing (959) 1,279 (10,340) (21,234) (13,968) (15,679) operations Loss from discontinued operations(2) (9,920) 0 (936) (921) 0 0 ------------ ------------ ------------- ------------- ------------ ------------- Net income (loss) ($10,879) $1,279 ($11,276) ($22,155) ($13,968) ($15,679) ============ ============ ============= ============= ============ ============= Income (loss) from continuing ($0.48) $0.20 ($1.64) ($3.45) ($2.31) ($2.59) operations per share (basic and diluted) Weighted average number of 1,985,758 6,464,105 6,313,527 6,146,617 6,057,360 6,062,224 shares outstanding OTHER DATA: Gross margin 25.7% 22.4% 17.3% 13.5% 19.0% 24.7% Adjusted EBITDA(3)(4) $9,840 $7,939 ($1,189) ($7,584) $2,714 $9,045 Interest expense 7,176 2,560 3,401 4,097 6,947 5,895 Asset impairment 0 0 0 2,800 4,402 14,130 Depreciation and amortization 3,489 3,870 5,605 5,998 5,253 4,615 Income taxes 134 230 145 755 80 84 Loss from discontinued operations (9,920) 0 (936) (921) 0 0 ------------ ------------ ------------- ------------- ------------ ------------- Net income (loss) ($10,879) $1,279 ($11,276) ($22,155) ($13,968) ($15,679) ============ ============ ============= ============= ============ ============= Net cash provided by (used in) operating activities ($5,120) ($233) $1,359 ($4,743) $4,056 $3,362 Net cash provided by (used in) investing activities ($2,592) ($13,418) ($4,935) ($5,343) $2,528 ($1,211) Net cash provided by (used in) financing activities $8,719 $13,382 $3,558 $9,864 ($7,314) ($1,356) BALANCE SHEET DATA: Working capital from $26,909 $30,645 $15,118 $10,702 $5,690 $5,156 continuing operations(5) Total assets 98,890 112,633 108,867 105,073 81,881 61,152 Total debt 18,935 32,317 38,363 49,387 41,942 40,565 Stockholders' equity 63,224 64,351 50,190 36,964 22,310 6,062
11 (1) 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. In fiscal 2001, expenses of $545,000 were recognized related to evaluating strategic alternatives and transactions. (2) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, including 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) Adjusted EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, asset impairment, and amortization. Adjusted 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. Specifically, adjusted EBITDA is a basis for setting and calculating covenant compliance with our credit facility and influences other relevant calculations, including a fairness opinion supporting the recapitalization of the Company and management incentives. Adjusted 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 accounting principles generally accepted in the United States. Adjusted EBITDA may not be comparable to other similarly titled data of other companies. (4) In fiscal 1999, adjusted 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, adjusted 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). In fiscal 2001, adjusted EBITDA would have been approximately $8.6 million excluding the effect of the following unusual charges: $2.0 million favorable effect of the termination of the post-retirement medical plan offset by the liquidation of a key customer ($0.6 million), strategic transaction costs ($0.5 million), and workers' compensation ($0.5 million). (5) Represents current assets less current liabilities (excluding the Acquisition Facility and the Junior Participation Term Loan Note). (6) An asset impairment charge of $14.1 million was recognized in fiscal 2001 based on management review of the recoverability of goodwill given the completion of our evaluation of strategic alternatives and our agreement to enter into a transaction which valued the common stock of the Company at $1 per share. There were asset impairment charges of $4.4 million in fiscal 2000 and $2.8 million in transition 1999 based on our review of the net realizable value on certain long-lived assets (primarily goodwill) related to the manufacture and sale of watering products. 12 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/A.
Five-Month Period Ended (In thousands, except per share data) ------------------------------------- 1/3/1999 12/31/1999 ----------------- ------------------ (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 Income taxes (benefit) (527) 83 ----------- ----------- Loss from continuing operations (2,097) (12,991) Loss from discontinued operations (165) (150) ----------- ----------- Net loss ($ 2,262) ($ 13,141) =========== =========== Loss from continuing operations ($ 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% Adjusted EBITDA $ 299 ($ 6,097) Interest expense 1,209 1,905 Asset impairment 0 2,800 Depreciation and amortization 1,714 2,106 Income taxes (527) 83 Loss from discontinued operations 165 150 ----------- ----------- Net loss ($ 2,262) ($ 13,141) =========== =========== Net cash used in operating activities ($ 2,266) ($ 8,368) Net cash used in investing activities ($ 2,155) ($ 2,563) Net cash provided by financing activities $ 4,729 $ 11,035 BALANCE SHEET DATA: Working capital from $ 28,067 $ 10,702 continuing operations Total assets 114,893 105,073 Total debt 37,046 49,387 Stockholders' equity 62,090 36,964
13 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/A, as well as the factors set forth under the caption "Forward-Looking Statements" below. OVERVIEW We are a leading manufacturer and distributor of non-powered lawn and garden tools. We are a holding company with no business operations of our own. Our only material asset is all of the outstanding capital stock of UnionTools, 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 and service company. The central elements of our approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. We have structured the organization toward and have maintained sufficient inventory levels such that we deliver on time and in full to our customers on over 95% of our shipments. In fiscal 2000, we focused on strategically rationalizing our business model to restore profitability. This included discontinuing the manufacture and sale of watering products and an emphasis on profitable products and relationships with customers. Since fiscal 2000, improvements in our forecasting and planning processes, we believe, have allowed us to consistently provide the highest service levels in the industry. We experienced manufacturing inefficiencies during the first half of fiscal 2000, primarily due to the effects of consolidating manufacturing facilities in the second half of calendar 1999. Those issues have now been addressed and resolved, with the focus in fiscal 2001 on cost savings opportunities. We have also decreased the cost of our logistical processes, reducing the number of distribution locations from three to one in Columbus, Ohio. These reductions were accomplished during fiscal 2000 with minimal effect on service level performance. The net result is that we believe that we have been able to correct the problems that arose in calendar 1999 and contributed to the operating losses during that time period. The discontinuation of watering products and cost management on sales support and other overhead expenses allowed us to lower our selling, general and administrative costs in fiscal 2000. This was partially offset late in the year by our decision to outsource all information system functions and support to Acxiom Corporation. The transition was completed in fiscal 2001, with no disruption to our business and resulting in a strengthened technology platform and resources available to us. In fiscal 2001, we were able to see the results of our cost savings efforts across all areas of the business. Margins were up and overhead costs were down versus the prior year. We were able to make favorable changes in the employee benefit programs, including the termination of certain retiree medical and life benefits. During fiscal 2001, we were able to leverage our strong relationship with employees to negotiate one-year extensions of our current agreements at our injection molding and distribution center operations, in addition to a three-year contract with the union representing the workers at our primary manufacturing facility in Frankfort, New York. While we made significant progress in fiscal 2001 in terms of improved operating profitability primarily through cost reductions, this was dampened due to the effect of the ongoing retail consolidation within our industry. We had several top customers file for bankruptcy or liquidation during fiscal 2001, with the resulting loss of business and bad debt negatively affecting our financial performance. During fiscal 2001, we were able to extend our credit facility through April 2002. The extension was expensive in terms of both fees and the requirement that we explore strategic alternatives for the sale or disposition of the Company or its assets. During the second half of fiscal 2001, we evaluated many strategic alternatives, including the possibility of an outright sale of the Company. However, at the end of the process, we chose to pursue the alternative that clearly provided the highest return to stockholders. In February 2002, we announced our 14 intention to pursue a recapitalization transaction with our majority stockholders. In essence, the recapitalization provides that the majority stockholders would invest up to $10 million in cash and convert $8 million of debt into an equity interest in the Company. Additionally, upon completion of the recapitalization, the holders of our common stock, other than the principal holders and their affiliates, would receive rights (at the rate of 350 rights per 100 shares of our common stock held as of a record date to be established) to purchase one share of our common stock at $1.00 per share for each right received. In addition to the reduction of our debt obligations to our majority stockholders, we believe this transaction will also provide us with the ability to execute a new credit facility on terms more favorable to us in the timeframe required under our existing credit agreement. As of April 15, 2002, we have been unable to obtain a financing commitment to support the recapitalization transaction or to execute a definitive purchase agreement. As a result, we are currently in default of our existing credit facility. While we are working diligently to complete the recapitalization and the subsequent new credit facility, though possibly in a form different than that outlined in our February 2002 announcement, and thereby cure the default, we believe our existing bank group will continue to fund our operations. However, there can be no assurance as to when and if an agreement will be reached. If we are unable to reach an agreement, it will impact our principal sources of liquidity and our ability to meet future cash requirements. This shortfall could force us to consider alternatives that may include negotiating further amendments to our existing credit facility, attempting to obtain loans from third party sources, asset sales, a sale of the Company, or other remedies appropriate to the circumstances. 15 RESULTS OF OPERATIONS The following table sets forth certain components of our consolidated statement of operations data expressed as a percentage of net sales:
Fiscal (Calendar) Year Ended (12 months) ----------------------------------------------------------- 07/30/1999 12/31/1999 12/31/2000 12/31/2001 ------------- ------------- ------------- ------------- (Unaudited) Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 82.7% 86.5% 81.0% 75.3% ------------- ------------- ------------- ------------- Gross profit 17.3% 13.5% 19.0% 24.7% Selling, general and 19.3% 19.8% 18.9% 18.6% administrative expenses Interest expense 2.9% 3.4% 6.0% 6.3% Amortization of intangibles 0.9% 0.9% 0.8% 0.9% Asset impairment 0.0% 2.4% 3.8% 15.1% Other expenses, net 2.8% 4.3% 1.4% 0.5% ------------- ------------- ------------- ------------- Loss from continuing operations -8.7% -17.3% -11.9% -16.7% before income taxes Income taxes 0.1% 0.6% 0.1% 0.1% ------------- ------------- ------------- ------------- Loss from continuing operations -8.8% -17.9% -12.0% -16.8% Loss from discontinued -0.8% -0.8% 0.0% 0.0% ------------- ------------- ------------- ------------- operations Net loss -9.6% -18.7% -12.0% -16.8% ============= ============= ============= =============
Five-Month Period Ended ------------------------------------- 1/3/1999 12/31/1999 ---------------- ---------------- (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% ================ ================
16 FISCAL 2001 COMPARED TO FISCAL 2000 Net Sales. Net sales decreased 19.8%, or $23.1 million, to $93.5 million for fiscal 2001 compared to $116.6 million in fiscal 2000. The decline in net sales was driven by a drop in the sale of long handled tools, caused by soft demand during the spring season and the credit condition of a few key customers, limiting our ability to ship their full demand in fiscal 2001. We believe the soft demand has been industry wide and resulted from customer actions to manage to lower retail inventories, as well as, a longer winter weather pattern across the country that negatively effected spring season purchases. The discontinuation of the sale and manufacture of watering products and the ongoing rationalization of customers and products within our custom injection molding product line also contributed to the decline in net sales in fiscal 2001. These unfavorable factors were partially offset by favorable gains in allowances and deductions, driven by the continued improvement in our logistical and manufacturing operations. Gross Profit. Gross profit increased 4.3%, or $1.0 million, to $23.1 million for fiscal 2001 compared to $22.1 million in fiscal 2000. Gross margin increased to 24.7% for fiscal 2001 from 19.0% for fiscal 2000. The increase in gross profit was due to cost improvements partially offset by lower sales volume and the related loss of overhead absorption from lower production levels. Included in the cost improvements are the net favorable effect of changes in certain employee benefit plans, including the termination of certain retiree medical and life benefits, which resulted in a one-time gain of $2.0 million less related expenses. Also included are the favorable gains from allowances and deductions, driven by the continued improvement in our logistical and manufacturing operations. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.7 million, or 21.4%, to $17.3 million for fiscal 2001 versus $22.1 million in fiscal 2000. As a percentage of net sales, selling, general and administrative expenses decreased to 18.6% in fiscal 2001 as compared to 18.9% in fiscal 2000. The decrease in selling, general and administrative expenses is due to cost reductions in sales support costs and administrative overhead in response to lower sales volume, including the effect of the discontinuation of watering products. Operating Profit. Operating profit (gross profit less selling, general and administrative expenses) increased $5.6 million, to a profit of $5.7 million for fiscal 2001 compared to a profit of $0.1 million in fiscal 2000. The increase in operating profit was primarily due to the items discussed above. Interest Expense. Interest expense decreased $1.0 million, to $5.9 million for fiscal 2001 compared to $6.9 million in the comparable period of fiscal 2000. The decrease was primarily due to lower interest rates and debt levels partially offset by costs incurred to extend our credit facility. Amortization of Goodwill. Amortization of goodwill decreased $0.1 million, or 10.1%, to $0.9 million for fiscal 2001 compared to $1.0 million in fiscal 2000. The decrease in amortization is due to the lower amount of goodwill to be amortized, as a result of asset impairment charges recognized in fiscal 2000. Asset Impairment Charge. An asset impairment charge of $14.1 million was recognized in fiscal 2001 based on management review of the recoverability of goodwill given the completion of our evaluation of strategic alternatives and our agreement to enter into a transaction which valued the common stock of the Company at $1 per share. There was an asset impairment charge of $4.4 million in fiscal 2000 based on our review of the net realizable value on certain long-lived assets (primarily goodwill) related to the manufacture and sale of watering products. Other Expenses, Net. Other expenses decreased $1.2 million, or 73.0%, to $0.4 million for fiscal 2001 compared to $1.6 million in fiscal 2000. The improvement is primarily due to the absence of costs associated with the sale of certain assets related to the manufacturing and sale of watering products. In fiscal 2001, we spent $0.5 million, primarily in financial consulting and legal fees, to pursue and evaluate strategic alternatives leading up to the recapitalization transaction. Loss Before Income Taxes. Loss before income taxes deteriorated to a loss of $15.6 million for fiscal 2001 compared to a loss of $13.9 million in fiscal 2000. The deterioration was due primarily to the goodwill writedown discussed above. Net Loss. Net loss was $15.7 million for fiscal 2001 compared to a net loss of $14.0 million in fiscal 2000. Net loss per share was $2.59 (basic and diluted) for fiscal 2001 based on a weighted average number of 17 shares outstanding of approximately 6.1 million, compared to net loss per share of $2.31 (basic and diluted) for fiscal 2000, based on a weighted average number of shares outstanding of approximately 6.1 million. 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 partially offset by an improvement in allowances and deductions. 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 and products. The improvement in allowances and deductions was due to the progress made in restoring and enhancing logistical and manufacturing controls. 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 continued to focus on cost reductions and improvements in logistical and manufacturing process controls, resulting in lower allowances and deductions, 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 18 $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 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 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 increased $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 19 $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. SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, our sales tend to be greater during those months. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the fourth quarter of the fiscal year. These factors increase variations in our quarterly results of operations and potentially expose us to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for our products may vary substantially from the anticipated demand, leaving us with excess inventory or insufficient inventory to satisfy customer orders. Weather is the single most important factor in determining market demand for our products and also is the least predictable. For example, springtime flooding unfavorably affects the sale of most types of lawn and garden equipment, while moderate to heavy snowfall during winters usually results in a surge in demand for snow shovels. Bad weather during the spring gardening season can adversely affect overall annual sales, but if the weather is favorable during construction projects, such as new housing starts and government spending on highways, this usually represents an increase in demand for long handled tools. 20 The following table sets forth certain unaudited data for each of the quarters in fiscal 2000 and fiscal 2001. The financial data for each of these quarters is unaudited but includes all adjustments which we believe to be necessary for a fair presentation. All quarters include normal recurring adjustments. These operating results, however, are not necessarily indicative of results for any future period.
Fiscal 2000 Quarter Ended (unaudited - in thousands) ------------------------------------------------------------------ 04/02/2000 07/02/2000 10/01/2000 12/31/2000 -------------- --------------- --------------- --------------- 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 expenses (SG&A) 5,986 5,784 5,688 4,594 -------------- --------------- --------------- --------------- 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
Fiscal 2001 Quarter Ended (unaudited - in thousands) ------------------------------------------------------------------ 04/01/2001 07/01/2001 09/30/2001 12/31/2001 -------------- --------------- --------------- --------------- Net sales $28,317 $29,428 $18,097 $17,640 Cost of goods sold 20,626 23,099 13,079 13,600 -------------- --------------- --------------- --------------- Gross profit 7,691 6,329 5,018 4,040 Selling, general and administrative expenses (SG&A) 4,211 4,665 4,476 3,977 -------------- --------------- --------------- --------------- Gross profit less SG&A(1) $3,480 $1,664 $542 $63 ============== =============== =============== =============== Net sales as a percentage of 30.3% 31.5% 19.4% 18.9% full year net sales Gross profit as a percentage of 33.3% 27.4% 21.7% 17.5% full year gross profit
(1) Does not include amortization of intangibles and other expenses, each of which generally are non-seasonal in nature. LIQUIDITY AND CAPITAL RESOURCES We are substantially dependent upon borrowings under our credit facility. Our primary cash needs are for working capital, capital expenditures and debt service. We have financed our working capital, capital expenditures and debt service through internally generated cash flow and funds borrowed under our revolving credit facility. As of December 31, 2001, approximately $1.9 million was available under the revolving portion of the credit facility. Indebtedness outstanding bears interest at either the bank prime rate plus a margin of 3% or, at our option, the LIBOR rate plus a margin of 4%. Net cash provided by operations was $3.4 million in fiscal 2001 compared to net cash provided by operations of $4.1 million in fiscal 2000. The net loss increased by $1.7 million in fiscal 2001, but the non-cash 21 addbacks, including the asset impairment charge and the loss on sale of assets, improved $7.9 million versus the prior year. Inventory levels remained relatively flat in fiscal 2001. In fiscal 2000, the liquidation of excess and obsolete inventory plus the sale of watering product inventory created a $5.4 million source of cash. Continued improvement in inventory levels in fiscal 2001 were offset late in the year by an increase needed to support new business commitments for the first quarter of fiscal 2002. Other liabilities was a stronger use of cash in fiscal 2001, primarily due to the reduction in the post- retirement medical accrual resulting from the termination of certain benefits. We made capital expenditures of approximately $1.2 million in fiscal 2001, $1.5 million in fiscal 2000, $3.4 million in transition 1999 and $4.9 million during fiscal 1999. The capital expenditures relate primarily to ongoing improvements of property, plant and equipment, manufacturing process improvements, increased manufacturing capacity and system/technology infrastructure upgrades or enhancements. Capital requirements were lower in fiscal 2001 and fiscal 2000 due to the activity levels and expenditures made during transition 1999 and fiscal 1999. The focus on the core business the last two years combined with a stronger emphasis on sourcing products or components has also lessened capital requirements. On July 13, 2001, the Company entered into a sixteenth amendment to its amended and restated credit facility (the "sixteenth amendment"), the terms of which it believes will be sufficient to fund operations through April 30, 2002, the revised term of the facility. The sixteenth amendment provides for a $35 million revolving credit facility (the "Revolving Facility") from January 1 through July 30 ($25 million from July 31 through October 31; $30 million from November 1 through December 31). Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. In addition, the sixteenth amendment provides for scheduled loan payments to be applied on a pro rata basis to the outstanding balances under our acquisition loans and Revolving Facility. The scheduled loan payments are as follows: Date Payment -------------------- ---------------------------------- July 23, 2001 $350,000 September 30, 2001 $350,000 December 31, 2001 $350,000 March 31, 2002 $350,000 April 30, 2002 Entire remaining principal balance of the acquisition loans, together with all accrued but unpaid interest thereon, and all other obligations, shall be due and payable in full. The sixteenth amendment contains certain covenants, which, among other things, require us to maintain specified financial ratios and satisfy certain tests, including maintaining cumulative EBITDA (as defined in this amendment) above specified levels ($7.0 million at December 31, 2001), and places limits on future capital expenditures. The sixteenth amendment also maintains the negative covenants that existed under the previous credit facility. In addition, in compliance with the requirements of the sixteenth amendment, we engaged investment bankers to identify strategic alternatives, including the sale of the Company. Borrowings under the sixteenth amendment bear interest at either the bank prime rate plus a margin of 3% or, at our option, the LIBOR rate plus a margin of 4%. Interest is due and payable monthly in arrears. In addition, we are required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The sixteenth amendment also includes a "success fee" of approximately $3,250,000. The success fee can be reduced to a minimum of $1,700,000 based upon satisfaction of certain provisions within the sixteenth amendment. On October 4, 2001, we entered into a seventeenth amendment to the amended and restated credit facility (the "seventeenth amendment"), the terms of which extended certain of the covenants covered in the sixteenth amendment through the term of the credit facility. In December 2001, the credit facility was also amended to allow us to keep the manufacturing facility and assets that produce and sell custom injection molding products. We believe these assets are more valuable supporting our core business than if sold separately. 22 We have evaluated the various strategic alternatives presented to us and have concluded that the optimal choice was to agree to and exercise the letter of intent put forth on February 1, 2002, to recapitalize the debt and equity of the Company. Under this arrangement, the majority stockholders, TCW Funds and OCM Principal Opportunities Funds, have agreed to invest up to $10 million in cash and convert approximately $8 million in subordinated debt into equity at a value of $1.00 per share. Additionally, upon completion of the recapitalization, the holders of our common stock, other than the principal holders and their affiliates, would receive rights (at the rate of 350 rights per 100 shares of our common stock held as of a record date to be established) to purchase one share of our common stock at $1.00 per share for each right received. This represents the highest value for the equity of any of the strategic alternatives considered. The proposed recapitalization is contingent upon, among other things, obtaining new financing for the Company's operations. At December 31, 2001, we were in compliance with the covenants of our credit facility. However, subsequent to that date we fell in default of the credit facility because we have been unable to obtain a financing commitment to support the letter of intent transaction or to execute a definitive purchase agreement. While we are working diligently to complete the transaction, though possibly in a form different than that outlined in the original letter of intent, and thereby cure the default, we believe our existing bank group will continue to fund our operations. Given the critical nature and timeframe of these issues, we believe significant progress and clarification can be made prior to the expiration of our credit facility on April 30, 2002. However, there can be no assurance as to when and if an agreement will be reached. If we are unable to reach an agreement or remain in compliance with the covenants of our credit facility, it will adversely impact our principal sources of liquidity and our ability to meet future cash requirements. This shortfall could force us to consider alternatives that may include negotiating further amendments to our existing credit facility, attempting to obtain loans from third party sources, asset sales, a sale of the entire Company, or other remedies appropriate to the circumstances. If we are successful in consummating the letter of intent and obtaining new financing, then we believe we will have sufficient liquidity to operate over the term of the new facility. In addition, we believe that our improved profitability in tandem with lower interest costs as a result of a less leveraged capital structure will also provide us sufficient liquidity to move through our operating cycle. This would include all lease and debt principal payments, as well as, any rollover or incremental letter of credit requirements (as further described in the footnotes to the financial statements). However, if future financial results do not meet our expectations or the recapitalization transaction is not completed, we will activate contingency plans, further reducing expenditures, and take other actions to operate within the resources and alternatives available. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, customer programs, allowance for doubtful accounts, inventories, pensions and post-employment benefits. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. 23 With regard to criterion (2), we recognize revenue when our customer takes title to the goods. If the customer relationship is such that we arrange and pay for the shipping and delivery (FOB-destination), the revenue is not recognized until the customer takes title and physical possession of the goods at their location. If the responsibility for shipping and delivery rests with the customer, revenue is recognized when the goods and title are transferred to their carrier. Customer Programs. To promote our business within a competitive industry, we selectively offer programs to customers such as cooperative advertising or volume rebates. We accrue for these programs monthly, based on the amount earned at that point in time, typically as it relates to year to date sales volume. In addition, customers will take deductions unexpectedly for operational errors such as shortages, pricing, and defectives. We recognize these costs immediately in the month that the customer takes a deduction from payment. In addition, we set up a reserve against accounts receivable for deductions that we can reasonably estimate will occur when the outstanding receivables are paid, i.e., an incurred but not reported reserve based on current run rate of operational deductions. If market conditions were to decline, we may take actions to increase customer incentives, possibly resulting in an incremental reduction of revenue or increase in costs at the time the incentive is offered. In addition, if actual customer deductions exceed the amounts projected by us, additional reserves would be necessary. Allowance for Doubtful Accounts. We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit scores), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time the receivables are past due ranging from 10% for amounts one to thirty days past due to 100% for amounts more than 180 days past due based on our historical experience. If circumstances change (i.e. higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations to us), our estimations of the recoverability of amounts due us could be reduced by a material amount. Inventory. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Every month we update our sales forecast and production plan on a rolling twelve month basis. We evaluate our inventory against that forecast. Items that are inactive or active with on-hand quantities exceeding twelve months usage in the sales forecast or production plan are reviewed for value deterioration and an appropriate obsolescence reserve is recognized. This review is of particular importance due to the inventory builds required during an operating cycle to deal with the seasonality of the business. If actual demand or market conditions are less favorable than projected by us, additional inventory write-downs may be required. 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 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 24 throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the fourth quarter of the fiscal year. These factors increase variations in our quarterly results of operations and potentially expose us to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for our products may vary substantially from the anticipated demand, leaving us with either excess inventory or insufficient inventory to satisfy customer orders. - Our ten largest customers in the aggregate accounted for approximately 57% of gross sales in fiscal 2001. A substantial reduction or cessation of sales to these or other major customers could have a material adverse effect on our business, financial condition, and results of operations. - Certain retail distribution channels in the lawn and garden industry, such as mass merchants and home centers, are experiencing consolidation. There can be no assurance that such consolidation will not have an adverse impact on certain customers or result in a substantial reduction or cessation of purchases of our products by certain customers. In addition, we are facing increasing pressure from retailers with respect to pricing, cooperative advertising, and other rebates as the market power of large retailers continues to grow. There can be no assurance that such pressures will not have an adverse impact on our business, financial condition, and results of operations. - A key element of our growth strategy is to increase sales in certain distribution channels that we believe are growing more rapidly than the overall industry, such as home centers and mass merchants through retailers such as 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. - 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 2002, two expire in 2003, and one expires in 2004. 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. 25 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. - 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. - Our inability to complete the recapitalization could have a material adverse effect on our business, financial condition, and results of operations. The factors set forth above are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we will not undertake, and specifically decline, any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or un-anticipated events. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results. 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 July 2001, we entered into the sixteenth amendment of our existing credit facility (the "Amended Facility"). The Amended Facility provides for a $35 million revolving credit facility from January 1 through July 30 of each year; $25 26 million from July 31 through October 31; and $30 million from November 1 through December 31. In connection with the Amended Facility, the interest rate charged on outstanding borrowings was increased from LIBOR plus 3.5% to LIBOR plus 4.0%. 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/A for the index). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The following table sets forth for each of our directors, such person's name, age, and his position with us:
NAME AGE POSITION ---- --- -------- William W. Abbott 70 Chairman of the Board Matthew S. Barrett 42 Director Vincent J. Cebula 38 Director John J. Kahl, Jr. 61 Director John L. Mariotti 60 Director A. Corydon Meyer 47 President, Chief Executive Officer and Director
William W. Abbott became a director in January 1997 and Chairman in October 1999. Mr. Abbott currently is self-employed as a business consultant. From August 1989 to January 1995, Mr. Abbott served as Senior Advisor to the United Nations Development Programme. In 1989, Mr. Abbott retired from 35 years of service at Procter & Gamble as a Senior Vice President in charge of worldwide sales, marketing and other operations. He currently serves as a member of the Boards of Directors of Horace Mann Educators Corporation, Fifth Third Bank of Naples, Florida and Millenium Bank of Edwards, Colorado, a member of the Advisory Board of Manco, Inc., a member of the Board of Overseers of the Duke Cancer Center, and an Executive Professor at Florida Gulf Coast University. Matthew S. Barrett became a director in December 1993. Mr. Barrett is a Managing Director of Oaktree Capital Management, LLC ("Oaktree"). Prior to joining Oaktree, from 1991 to April 1995, Mr. Barrett was Senior Vice President of TCW Asset Management Company. Vincent J. Cebula became a director in June 2001. Mr. Cebula is a Managing Director of Oaktree Capital Management, LLC, where he has worked since June 1995. From April 1994 until May 1995, Mr. Cebula was a Senior Vice President of TCW Asset Management Company. John J. Kahl, Jr. became a director in December 1999. Mr. Kahl is currently President and CEO of Jack Kahl & Associates, LLC. From 1963 to 2000, Mr. Kahl served as Chief Executive Officer of Manco, Inc., a subsidiary of Henkel Corporation, the North American operating company of the Henkel Group. Mr. Kahl currently serves on the Boards of Directors of Royal Appliance Mfg. Co. and American Greetings Corporation. John L. Mariotti became a director in December 1999. Mr. Mariotti currently serves as President of The Enterprise Group, a coalition of time-shared business advisors. From 1992 to 1994, Mr. Mariotti served as President of Rubbermaid's Office Products Group. From 1983 to 1992, Mr. Mariotti served as President of Huffy Bicycles. Mr. Mariotti is currently a Director of Home Care Industries, Amrep, Inc. of Marietta, Georgia and a member of the Advisory Board of Manco, Inc. A. Corydon Meyer became a director and the President and Chief Executive Officer of the Company and UnionTools in September 1999. Mr. Meyer joined the Company and UnionTools in June 1999 as Senior Vice President of Sales and Marketing. Mr. Meyer served as Vice President and Chief Operating Officer of Reiker Enterprises, Inc. from 1998 to 1999. Mr. Meyer served as Vice President and Business Unit Manager of Lamson & Sessions Co. from 1990 to 1998. Mr. Meyer served in various finance, manufacturing, sales, and marketing positions with White Consolidated Industries from 1977 to 1990. 28 MEETINGS, COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company had a total of four meetings during the fiscal year ended December 31, 2001 ("fiscal 2001"). During fiscal 2001, each of the directors attended 75% or more of the total number of meetings of (i) the Board and (ii) the committees of the Board on which such director served. Directors who are employed by the Company receive no compensation for serving as directors. Non-employee directors receive the following annual compensation: (i) $20,000 paid, at the director's election, either in shares of our common stock pursuant to the Company's Deferred Equity Compensation Plan for Directors (the "Director Stock Plan") or one-half in cash and one-half in shares of our common stock pursuant to the Director Stock Plan; (ii) stock options with an exercise price equal to the fair market value of our common stock on the date of grant, a Black-Scholes valuation of $25,000 and a ten year term issued under the Director Option Plan; and (iii) reimbursement of reasonable out-of-pocket expenses. In March 1997, the Company created a Management Development and Compensation Committee (the "Compensation Committee") and an Audit Committee (the "Audit Committee"). The Compensation Committee has the authority to (i) administer the Company's 1997 Stock Incentive Plan, including the selection of optionees and the timing of option grants, (ii) review and monitor key associate compensation policies and administer the Company's management compensation plans and (iii) monitor the performance of the Company's executive officers and develop succession and career planning related thereto. Currently, Messrs. Abbott (Chairman), Barrett, Cebula, Kahl, and Mariotti serve on the Compensation Committee. During fiscal 2001, the Compensation Committee met one time. The Audit Committee recommends the annual appointment of the Company's independent public accountants with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, the accounting principles used by the Company in financial reporting, internal financial auditing procedures and the adequacy of the Company's internal control procedures. Currently, Messrs. Mariotti (Chairman), Abbott, Barrett and Kahl serve on the Audit Committee. During fiscal 2001, the Audit Committee met one time. On November 16, 2001, the Board of Directors resolved to grant Messrs. Kahl and Mariotti be paid a one-time extraordinary director fee of $50,000 in recognition of the additional time commitment expected from such individuals, payable when 2001 bonuses are paid in January 2002. On March 1, 2002, the Board of the Directors resolved to grant Mr. Abbott be paid a one-time extraordinary director fee of $150,000 in recognition of the additional time commitment expected from such individual, payable in March 2002. EXECUTIVE OFFICERS In addition to Mr. Meyer, the following persons are our executive officers: John G. Jacob, age 42, was named Vice President and Chief Financial Officer of the Company in June 1999. From 1998 to June 1999, Mr. Jacob served as Vice President of Finance for Sun Apparel Company/Polo Jeans Company. Prior to that, Mr. Jacob served as Vice President of Finance and Treasurer of Maidenform Worldwide, Inc. from 1996 to 1998. From 1991 to 1996, Mr. Jacob served in various positions at Kayser-Roth Corporation, most recently as Vice President and Treasurer. Gary W. Zimmerman, age 44, was named Senior Vice President of Operations in September 2000. Prior to that, Mr. Zimmerman served as General Manager of U.S. Operations for Lexmark International, Inc. from July 1998 to September 2000. From January 1979 to July 1998, Mr. Zimmerman served in various positions at Huffy Corporation, most recently as Vice President, Plant Operations and Logistics, for Huffy Bicycles. Carol B. LaScala, age 42, was named Vice President of Human Resources of the Company in December 2000. Ms. LaScala joined UnionTools in November 1999 as Director of Human Resources. From June 1999 to November 1999, Ms. LaScala served as Director of Human Resources for the Longaberger Company. Prior to that, Ms. LaScala served as Manager, Human Resources, for Rubbermaid Incorporated from September 1995 to June 1999. From February 1984 to September 1995, Ms. LaScala served in various positions with The Stanley Works, most recently as Division Human Resources Manager for the Hand Tools Division. 29 Officers are elected annually by the Board of Directors and serve at its discretion. There are no family relationships among our directors and executive officers. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and greater than 10% stockholders to file reports of ownership and changes in ownership of the Company's securities with the Securities and Exchange Commission ("SEC"). Copies of the reports are required by SEC regulation to be furnished to the Company. Based on its review of such reports, the Company believes that all reporting persons complied with all filing requirements during the fiscal year ended December 31, 2001, except for a late Form 3 for Mr. Zimmerman, Form 4 for Mr. Mariotti, Form 4 and Form 5 for Mr. Abbott and Mr. Meyer. ITEM 11. EXECUTIVE COMPENSATION The following summary compensation table sets forth information concerning the annual and long-term compensation earned by our chief executive officer and each of our other most highly compensated executive officers (the "Named Executive Officers"). Messrs. Meyer's, and Jacob's cash compensation was paid by Acorn. Non-cash compensation, other than options to purchase common stock, was paid by UnionTools.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION -------------------- ALL OTHER ------------------------------------ SECURITIES UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR(1) SALARY ($) BONUS ($) OPTIONS (#) ($) (2)(3)(4)(5) --------------------------- ------- ---------- --------- ----------- ---------------- A. Corydon Meyer(6) 2001 $277,404 $138,700 -- $9,648 President and Chief 2000 257,192 40,000 119,047 22,481 Executive Officer of the 1999T 101,923 -- 300,000 65,807 Company and UnionTools 1999 19,231 -- -- -- John G. Jacob(7) 2001 $206,539 $84,000 -- $8,821 Chief Financial Officer and 2000 192,785 22,000 76,190 9,091 Vice President of the 1999T 76,154 -- 31,461 133,211 Company and UnionTools 1999 17,307 -- -- -- Gary W. Zimmerman(8) 2001 $203,077 $84,000 -- $17,732 Senior Vice President, 2000 57,335 40,000 100,000 66,483 Operations of the Company 1999T -- -- -- -- and UnionTools 1999 -- -- -- -- Carol LaScala(9) 2001 $110,000 $44,000 35,200 $5,774 Vice President, Human 2000 95,809 15,000 5,000 2,535 Resources of the Company 1999T 9,135 5,000 -- -- and UnionTools 1999 -- -- -- -- John Mackin(10) 2001 $124,039 -- -- $41,483 Former Vice President, Sales 2000 148,446 -- 70,952 26,774 and Marketing of UnionTools 1999T 36,441 $10,000 -- 61 1999 62,115 -- -- --
----------------------- (1) 1999T represents the 5-month transition period ended December 31, 1999. (2) Amounts shown include matching benefits paid under our defined contribution 401(k) plan and other miscellaneous cash benefits, but do not include retirement benefits under our Salaried Employee Pension Plan (see "Pension Plans"). 30 (3) Amounts shown for transition 1999 include the following: $65,564 and $133,101 paid by the Company with respect to relocation expenses for Messrs. Meyer and Jacob, respectively; and $61 paid with respect to supplementary life insurance for Mr. Mackin. (4) Amounts shown for fiscal 2000 include the following: $596, $291, $358, $114, and $208 paid by the Company with respect to supplementary life insurance for Messrs. Meyer, Jacob, Zimmerman, Ms. LaScala, and Mr. Mackin, respectively; $12,500 paid by the Company with respect to restricted stock grant for Mr. Meyer; $9,385, $8,800, and $2,421 of matching benefits paid under the Company's defined contribution 401(k) plan for Messrs. Meyer, Jacob, and Ms. LaScala, respectively; $66,125 and $26,566 paid by the Company with respect to relocation expenses for Messrs. Zimmerman and Mackin, respectively. (5) Amounts shown for fiscal 2001 include the following: $859, $321, $303, $46, and $233 paid by the Company with respect to supplementary life insurance for Messrs. Meyer, Jacob, Zimmerman, Ms. LaScala, and Mr. Mackin, respectively; $8,500, $8,500, $7,462, and $5,500 of matching benefits paid under the Company's defined contribution 401(k) plan for Messrs. Meyer, Jacob, Zimmerman, and Ms. LaScala, respectively; $9,678 paid by the Company with respect to relocation expenses for Mr. Zimmerman; and $41,250 paid by the Company with respect to the severance agreement with Mr. Mackin. (6) Mr. Meyer's employment with the Company and UnionTools, Inc. began on June 21, 1999. (7) Mr. Jacob's employment with the Company and UnionTools, Inc. began on June 21, 1999. (8) Mr. Zimmerman's employment with the Company and UnionTools, Inc. began on September 11, 2000. (9) Ms. LaScala's employment with the Company and UnionTools, Inc. began on November 22, 1999. (10) Mr. Mackin's employment with the Company and UnionTools, Inc. began on February 15, 1999. Mr. Mackin's employment with the Company and UnionTools, Inc. ended upon his resignation on September 28, 2001. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the grant of stock options to our Named Executive Officers under our stock option plan during the fiscal year ended December 31, 2001. INDIVIDUAL GRANTS
Potential Realized Value at Number of % of Total Assumed Annual Rates of Stock Securities Options Price Appreciation for Underlying Granted to Exercise Option Terms(2)(3) Options Granted Associates in Price Expiration ------------------------------------ Name (#) Fiscal Year(1) ($/Share) Date 5% ($) 10% ($) ----------------------- ------------------ -------------- --------- ---------- -------------- --------------- A. Corydon Meyer 100,000 67.2% $0.58 2011 $36,476 $92,437 John G. Jacob 0 - - - - - Gary W. Zimmerman 25,000 16.8% $0.58 2011 $9,119 $23,109 Carol LaScala 17,600 11.8% $1.25 2011 $13,836 $35,062 1,250 0.8% $3.00 2011 $2,358 $5,977 John Mackin(4) 0 - - - - -
----------------------- (1) Percentage is based upon 148,850 options granted to associates in fiscal 2001. 31 (2) The dollar amounts in these columns are the product of (a) the difference between (1) the product of the per share market price at the date of grant and the sum of 1 plus the assumed rate of appreciation (5% and 10%) compounded over the term of the option (ten years) and (2) the per share exercise price and (b) the number of shares underlying the grant. (3) The appreciation rates stated are arbitrarily assumed, and may or may not reflect actual appreciation in the stock price over the life of the option. Regardless of any theoretical value that may be placed on a stock option, no increase in its value will occur without an increase in the value of the underlying shares. Whether an increase will be realized will depend not only on the efforts of the recipient of the option, but also upon conditions in our industry and market area, competition, and economic conditions, over which the optionee may have little or no control. (4) Mr. Mackin's employment with the Company and UnionTools ended upon his resignation on September 28, 2001. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table provides certain information regarding the number and value of stock options held by our Named Executive Officers at December 31, 2001.
SHARES ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS EXERCISE REALIZED OPTIONS AT YEAR-END (#) AT YEAR-END ($) (2) ------------------------------ ---------------------------- NAME (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --- ------- ----------- ------------- ----------- ------------- A. Corydon Meyer 0 0 319,047 100,000 0 0 John G. Jacob 0 0 107,651 0 0 0 Gary W. Zimmerman 0 0 50,000 50,000 0 0 Carol LaScala 0 0 21,350 18,850 0 0 John Mackin(3) 0 0 0 0 0 0
----------------------- (1) Value realized represents the difference between the exercise price of the option shares and the market price of the option shares on the date the option was exercised. The value realized was determined without consideration for any taxes or brokerage expenses that may have been owed. (2) Represents the total gain which would be realized if all in-the-money options held at year-end were exercised, determined by multiplying the number of shares underlying the options by the difference between the per share option exercise price and the per share fair market value at year-end ($0.33 based on the average of the high and low sale prices on December 31, 2001). An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option. (3) Mr. Mackin's employment with the Company and UnionTools ended upon his resignation on September 28, 2001. 32 PENSION PLANS UnionTools, Inc. maintains six noncontributory defined benefit pension plans covering most of our hourly associates. UnionTools, Inc. also maintains a noncontributory defined benefit pension plan covering our salaried, administrative and supervisory associates (the "Salaried Employee Pension Plan"). In 2000, the plan was amended to exclude further plan participants. In 2001, the plan was frozen for all plan participants. The following table sets forth the estimated annual benefits payable upon retirement under the Salaried Employee Pension Plan based on retirement at age 65 and fiscal 2001 covered compensation.
YEARS OF SERVICE ------------------------------------------------------------------------ REMUNERATION(1) 15 20 25 30 35 --------------- --------- --------- --------- -------- --------- $125,000 $42,187 $56,250 $70,313 $70,313 $70,313 $170,000 and above 54,000 72,000 90,000 90,000 90,000
----------------------------- (1) Based on final earnings. Compensation under the Salaried Employee Pension Plan is limited to $170,000 as required by the Employee Retirement Income Security Act of 1974 and is based on years of credited service and final earnings (the highest average monthly earnings over any 60 consecutive calendar month period in the 120 calendar months preceding retirement or termination of employment). Monthly compensation is paid under the Salaried Employee Pension Plan in an amount equal to 2.25% of the associates' final earnings multiplied by the lesser of 25 years or the total number of years of credited service. Compensation under the Salaried Employee Pension Plan is not subject to any offset. AGREEMENTS WITH KEY EXECUTIVES In June 1999, the Company entered into agreements with Messrs. Meyer and Jacob which provide that following termination of such executives' employment with the Company, the Company will pay to such executive an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includable in gross income paid to such executive during any one of the three taxable years preceding the date of his termination. If such termination occurs within two years following a change in control (as defined in such agreement), the Company also is required to pay to such executive an amount equal to two times the amount described in the preceding sentence. On November 22, 1999, the Company entered into a change of control agreement with Ms. LaScala which provides that following termination for other than "just cause" within eighteen months of a change of control event (as defined in such agreement), the Company will pay Ms. LaScala an amount equal to one year's annual salary. On August 1, 2000, the Company entered into a change of control agreement with Mr. Mackin which provides that following termination for other than "just cause" within eighteen months of a change of control event 33 (as defined in such agreement), the Company will pay Mr. Mackin an amount equal to one year's annual salary. On September 28, 2001, Mr. Mackin resigned from his employment with the Company. On September 11, 2000, the Company entered into a change in control agreement with Mr. Zimmerman which provides that following termination for other than "just cause" within eighteen months of a change of control event (as defined in such agreement), the Company will pay Mr. Zimmerman an amount equal to one year's annual salary. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding beneficial ownership of our common stock by each person known by us to beneficially own more than 5% of the outstanding shares of our common stock, each of our directors individually, each of our Named Executive Officers individually, and all of our directors and executive officers as a group as of April 5, 2002:
SHARES BENEFICIALLY OWNED(1)(2) ------------------------------- NUMBER PERCENT ------ ------- The TCW Group, Inc.(3) 4,327,863 59.7% OCM Principal Opportunities Fund, L.P.(4) 1,740,891 26.1% William W. Abbott(5) 227,920 3.7% Matthew S. Barrett(6) 1,740,891 26.1% Vincent J. Cebula(7) 1,740,891 26.1% John J. Kahl(8) 33,334 * John L. Mariotti(9) 40,034 * A. Corydon Meyer(10) 340,547 5.3% John G. Jacob(11) 107,651 1.7% Gary W. Zimmerman(12) 52,300 * Carol B. LaScala(13) 21,350 * John Mackin(14) 0 * --------- ---- All directors and executive officers as a group (10 persons)(15) 2,564,027 34.8%
------------------ * Represents beneficial ownership of less than 1% of our outstanding common stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those shares. (2) The address for the TCW Group, Inc. is 865 South Figueroa St., Los Angeles, California 90017. The address for OCM Principal Opportunities Fund, L.P. (the "Oaktree Fund") and Mr. Barrett is 333 South Grand Ave., 28th Floor, Los Angeles, California 90071. The address for Mr. Abbott is 6923 Greentree Dr., Naples, Florida 34108. The address for Mr. Cebula is 1301 Avenue of the Americas, 34th Floor, New York, New York 10019. The address for Mr. Kahl is c/o Jack Kahl & Associates, LLC, Logos Communications Bldg., 26100 First St., Westlake, Ohio 44145-1438. The address for Mr. Mariotti is 717 Brixworth Blvd., Knoxville, Tennessee 37922-4775. The address for Messrs. Meyer, Jacob, Zimmerman, and Ms. LaScala is c/o Acorn Products, Inc., 390 W. Nationwide Blvd., Columbus, Ohio 43215. (3) The TCW Group, Inc. is the parent corporation of TCW Asset Management Company ("TAMCO"). TAMCO is the managing general partner of TCW Special Credits, a general partnership among TAMCO and certain individual general partners (the "Individual Partners"). TCW Special Credits is (i) the general partner of four limited partnerships that hold shares of common stock (the "TCW Limited Partnerships") and (ii) the investment advisor for three third party accounts that hold shares of common stock (the "TCW Accounts"). The TCW Limited Partnerships and the TCW Accounts in the aggregate hold 2,148,583 shares of common stock and have the right to receive 688,671 shares of common stock upon conversion of their interests in a convertible term note (the "Note") issued by UnionTools, Inc., our operating subsidiary. The TCW Group, Inc. also is the parent corporation of Trust Company of the West, which is the trustee of four trusts that hold shares of common stock (the "TCW Trusts"). The TCW Trusts in the aggregate hold 1,013,466 shares of common stock and have the right to receive 477,143 shares of common stock upon conversion of their interests in the Note. The share numbers regarding the conversion of the Note do not include the right to receive additional shares of our common stock pursuant to the conversion of accrued 34 but unpaid interest due under the Note. The following TCW Limited Partnerships and TCW Trusts individually beneficially own more than 5% of the outstanding shares of common stock: TCW Special Credits Fund III (660,003 shares or 10.9%); TCW Special Credits Fund IIIb (626,039 shares plus the right to receive 297,143 pursuant to conversion of the Note, or 14.5%); TCW Special Credits Plus Fund (227,807 shares plus the right to receive 108,571 shares upon conversion of the Note, or 5.5%); TCW Special Credits Trust (315,668 shares plus the right to receive 148,571 shares upon conversion of the Note, or 7.5%); Gryphon Domestic VI, LLC (227,781 shares plus the right to receive 108,571 shares upon conversion of the Note, or 5.5%); and TCW Special Credits Trust IIIb (447,152 shares plus the right to receive 211,429 shares upon conversion of the Note, or 10.5%). Certain of the Individual Partners also are principals of Oaktree Capital Management, LLC. The Individual Partners, in their capacity as general partners of TCW Special Credits, have been designated to manage the TCW Limited Partnerships, the TCW Accounts and the TCW Trusts. Although Oaktree provides consulting, research and other investment management support to the Individual Partners, Oaktree does not have voting or dispositive power with respect to the TCW Limited Partnerships, the TCW Accounts or the TCW Trusts. (4) Includes the right to receive 548,571 shares of our common stock pursuant to conversion of the Note. In addition, includes 42,820 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002, held by Stephen A. Kaplan, a former director, for the benefit of the Oaktree Fund. Does not include (i) 41,230 shares of common stock issuable pursuant to the Director Deferred Compensation Plan held by Stephen A. Kaplan for the benefit of the Oaktree Fund, and (ii) the right to receive additional shares of our common stock pursuant to the conversion of accrued but unpaid interest due under the Note. Oaktree Capital Management, LLC, as the general partner of the Oaktree Fund, has voting and dispositive power over the shares held by the Oaktree Fund and may be deemed a beneficial owner of such shares. (5) Includes 142,820 shares of common stock issuable pursuant to stock options exercisable within 60 days of April 5, 2002. Does not include 7,624 shares of common stock issuable pursuant to the Director Deferred Compensation Plan. (6) Reflects shares of common stock owned by the Oaktree Fund. To the extent that Mr. Barrett, as a managing director of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of common stock. Mr. Barrett disclaims beneficial ownership of such shares of common stock. Does not include 42,820 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002, and 72,664 shares of common stock issuable pursuant to the Director Deferred Compensation Plan. All such compensation paid to Mr. Barrett is donated to charity. (7) Reflects shares of common stock owned by the Oaktree Fund. To the extent that Mr. Cebula, as a managing director of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of common stock. Mr. Cebula disclaims beneficial ownership of such shares of common stock. Does not include 9,723 shares of common stock issuable pursuant to stock options exercisable within 60 days of April 5, 2002, and 32,950 shares of common stock issuable pursuant to the Director Deferred Compensation Plan. (8) Includes 33,334 shares of common stock issuable pursuant to stock options exercisable within 60 days of April 5, 2002. Does not include 32,520 shares of common stock issuable pursuant to the Director Deferred Compensation Plan. (9) Includes 33,334 shares of common stock issuable pursuant to stock options exercisable within 60 days of April 5, 2002. Does not include 32,520 shares of common stock issuable pursuant to the Director Deferred Compensation Plan. (10) Includes 319,047 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002. (11) Includes 107,651 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002. 35 (12) Includes 50,000 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002. (13) Includes 21,350 shares of common stock issuable pursuant to options exercisable within 60 days of April 5, 2002. (14) Mr. Mackin's employment with the Company and UnionTools ended upon his resignation on September 28, 2001. (15) See notes (5) through (14) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Abbott, Barrett, Cebula, Kahl, and Mariotti, who are not employees, are members of the Management Development and Compensation Committee. TRANSACTIONS BETWEEN DIRECTORS, EXECUTIVE OFFICERS AND THE COMPANY In September 1999, the Company entered into a Separation Agreement with Mr. Gabe Mihaly. Mr. Mihaly was the Company's former President and Chief Executive Officer and his employment with the Company and UnionTools ended upon his resignation on September 2, 1999. Mr. Mihaly's agreement included severance payments made by the Company in 2001 of $81,465. On October 3, 2000, the Company revised the strike price of Mr. Abbott's options to acquire 100,000 shares of our common stock issued on October 28, 1999, to $1.25 per share from the original price per share of $3.00. Additionally, during fiscal 2000, the Company paid Mr. Abbott $60,000 in the aggregate in director fees and for his services as Chairman of the Board of Directors. In October 1999, UnionTools entered into a Sixth Amendment to the existing Credit Agreement with Heller Financial, Inc. Pursuant to the amendment, the Oaktree Fund and certain of the TCW Funds, which collectively own a majority of our outstanding common stock, made a capital infusion of $6.0 million into UnionTools. The loan bears interest at an annual rate of 12% and is payable quarterly in additional promissory notes or, following repayment of all borrowing under the Credit Agreement other than the $6.0 million note, in cash. The principal balance of the $6.0 million loan, together with all accrued but unpaid interest thereon, is due and payable in full on the date which is ninety-one days after the Expiry Date, as defined in the Credit Agreement. The principal balance, together with all accrued but unpaid interest thereon, can be exchanged for our common stock prior to repayment at the election of the TCW Funds and Oaktree Funds. On August 9, 2001, the Company entered into a sixteenth amendment to the amended and restated credit facility (the "sixteenth amendment"), the terms of which it believes will be sufficient to fund operations through April 30, 2002, the revised term of the facility. The sixteenth amendment provides for a $35 million revolving credit facility (the "Revolving Facility") from January 1 through June 30 ($25 million from July 1 through October 31; $30 million from November 1 through December 31). Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. In addition, the sixteenth amendment provides 36 for scheduled loan payments to be applied on a pro rata basis to the outstanding balances under our acquisition loans and Revolving Facility. On October 4, 2001, we entered into a seventeenth amendment to the amended and restated credit facility (the "seventeenth amendment"), the terms of which extended to certain of the covenants covered in the sixteenth amendment. On December 31, 2001, we entered into an eighteenth amendment to the amended and restated credit facility (the "eighteenth amendment"), the terms of which allowed us to keep the manufacturing facility and assets that produce and sell custom injection molding products. We believe these assets are more valuable supporting our core business than if sold off separately. 37 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/A pursuant to Item 8: - Report of Independent Auditors - Consolidated Balance Sheets as of December 31, 2000 and December 31, 2001 - Consolidated Statements of Operations for fiscal 1999, five-month period ended January 3, 1999 (unaudited), transition 1999, calendar 1999 (unaudited), fiscal 2000, and fiscal 2001 - Consolidated Statements of Stockholders' Equity for fiscal 1999, transition 1999, fiscal 2000, and fiscal 2001 - Consolidated Statements of Cash Flows for fiscal 1999, five-month period ended January 3, 1999 (unaudited), transition 1999, calendar 1999 (unaudited), fiscal 2000, and fiscal 2001 - Notes to Consolidated Financial Statements (a)(2) The following financial statement schedules are filed with this Annual Report on Form 10-K/A 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/A: EXHIBIT NUMBER DESCRIPTION -------------- ----------- 2.1 Letter of Intent, dated as of February 1, 2002, by and between Acorn Products, Inc. as issuer and TCW Special Credits and Oaktree Capital Management, LLC as purchasers (reference is made to Exhibit 10.1 to Form 8-K, dated February 1, 2002, filed with the Securities and Exchange Commission on February 5, 2002) 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 A. Corydon Meyer (reference is made to Exhibit 10.1.2 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.1.2* Employment Severance Agreement, dated as of August 31, 1999, among the Company, UnionTools, Inc., and John G. Jacob (reference is made to Exhibit 10.2.3 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 38 10.2* Compensation Agreement, dated as of October 28, 1999, between the Company and William W. Abbott (reference is made to Exhibit 10.2 to Form 10-K for the year ended July 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999) 10.3* Acorn Products, Inc. Amended and Restated Deferred Equity Compensation Plan for Directors (reference is made to Appendix B to the Proxy dated April 30, 2001, filed with the Securities and Exchange Commission on April 30, 2001) 10.4* Acorn Products, Inc. 1997 Stock Incentive Plan*** 10.5* Standard Form of Acorn Products, Inc. Stock Option Agreement*** 10.6* UnionTools, Inc. Retirement Plan for Salaried Employees*** 10.7* Amendment No. 1 to UnionTools, Inc. Retirement Plan for Salaried Employees*** 10.8* Acorn Products, Inc. Supplemental Pension Plan for Executive Employees*** 10.9 Amended and Restated Credit Agreement, dated as of May 20, 1997, between UnionTools, Inc. and Heller Financial, Inc.*** 10.10 Amendment Number 1 to License Agreement, dated as of December 12, 2001, 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, 1999) 39 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 Form 8-K, dated October 27, 1999, filed with the Securities and Exchange Commission on October 29, 1999) 10.21 Amendment No. 16 to Credit Agreement, dated as of July 13, 2001, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2001, filed with the Securities and Exchange Commission on November 13, 2001) 10.22 Amendment No. 17 to Credit Agreement, dated as of October 4, 2001, between UnionTools, Inc. and Heller Financial, Inc. (reference is made to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2001, filed with the Securities and Exchange Commission on November 13, 2001) 10.23 Amendment No. 18 to Credit Agreement, dated as of December 31, 2001, between UnionTools, Inc. and Heller Financial, Inc.** 10.24* Acorn Products, Inc. 1997 Nonemployee Director Stock Incentive Plan (reference is made to Exhibit 4(a) on a Registration Statement on Form S-8 (Registration Number 333-58807) filed with the Securities and Exchange Commission on July 9, 1998) 21.1 Subsidiaries of the Company** 23.1 Consent of Ernst & Young LLP** 24.1 Power of Attorney** 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer** 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer** ----------------------- * Management contracts and compensatory plans. ** Filed herewith. *** Previously filed with the same exhibit number on a Registration Statement on Form S-1 (Registration Number 333-25325) filed with the Securities and Exchange Commission on April 17, 1997, as amended. Copies of exhibits may be obtained by writing to Investor Relations, Acorn Products, Inc., P.O. Box 1930, Columbus, Ohio 43216-1930. (b) Reports on Form 8-K: - We filed the following Current Reports on Form 8-K since September 30, 2001: Current Report on Form 8-K, dated February 1, 2002, filed with the Securities Exchange Commission on February 5, 2002 (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) 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended 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 amended 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 and Accounting Officer: By: /s/ John G. Jacob ------------------------------------------ Name: John G. Jacob Title: Vice President and Chief Financial Officer Directors: By: * William W. Abbott ------------------------------------------ William W. Abbott, Chairman By: * Matthew S. Barrett ------------------------------------------ Matthew S. Barrett, Director By: * Vincent J. Cebula ------------------------------------------ Vincent J. Cebula, Director By: * John J. Kahl, Jr. ------------------------------------------ John J. Kahl, Jr., Director By: * John L. Mariotti ------------------------------------------ John L. Mariotti, Director * By: /s/ John G. Jacob ------------------------------------- John G. Jacob, attorney-in-fact Dated: October 17, 2002 41 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, A. Corydon Meyer, certify that: 1. I have reviewed this annual report on Form 10-K/A No. 1 of Acorn Products, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 17, 2002 /s/ A. Corydon Meyer ------------------------------- A. Corydon Meyer Chief Executive Officer of Acorn Products, Inc. 42 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John G. Jacob, certify that: 1. I have reviewed this annual report on Form 10-K/A No. 1 of Acorn Products, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 17, 2002 /s/ John G. Jacob ------------------------------------------ John G. Jacob Chief Financial Officer of Acorn Products, Inc. 43 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS ACORN PRODUCTS, INC. We have audited the accompanying consolidated balance sheets of Acorn Products, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years ended July 30, 1999, December 31, 2000, December 31, 2001, 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, 2000 and 2001, and the consolidated results of their operations and their cash flows for each of the fiscal years ended July 30, 1999, December 31, 2000, December 31, 2001, 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, 2002, and its acquisition term loan and junior participation term loan note both mature on April 30, 2002. In addition, subsequent to December 31, 2001, the Company is in default of the loan agreements governing borrowings on its revolving credit facility and acquisition term loan. 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 22, 2002, except for Note 12 as to which the date is April 2, 2002 F-1 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------- 2000 2001 -------- -------- ASSETS (In thousands) Current assets: Cash $ 596 $ 1,391 Accounts receivable, less reserves for doubtful accounts, sales 14,541 10,831 discounts, and other allowances ($2,125 and $1,290, respectively) Inventories, less reserves for excess and obsolete inventory 24,488 24,642 ($1,523 and $1,042, respectively) Prepaids and other current assets 616 358 -------- -------- Total current assets 40,241 37,222 Property, plant and equipment, net of accumulated depreciation 14,096 11,568 Goodwill, net of accumulated amortization (see Note 2) 26,813 11,808 Other intangible assets 731 554 -------- -------- Total assets $ 81,881 $ 61,152 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility (average interest rate of 10.31% and 8.56%, $ 19,787 $ 18,132 respectively) (see Note 4) Acquisition facility (average interest rate of 10.31% and 8.30%, 15,342 14,630 respectively) (see Note 4) Junior participation term loan note (average interest rate of 12%) 6,707 7,718 (see Note 4) Accounts payable 7,196 5,890 Accrued expenses 7,307 7,923 Income taxes payable 50 45 Other current liabilities 211 76 -------- -------- Total current liabilities 56,600 54,414 Other long-term liabilities 2,971 676 -------- -------- Total liabilities 59,571 55,090 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 6,062,159 and 6,062,359 shares outstanding at December 31, 2000 and December 31, 2001, respectively Contributed capital stock options 460 460 Accumulated other comprehensive loss (1,551) (2,121) Retained earnings (deficit) (52,600) (68,278) -------- -------- 24,571 8,323 Common stock in treasury, 401,946 and 401,746 shares at December 31, 2000 and December 31, 2001, respectively (2,261) (2,261) -------- -------- Total stockholders' equity 22,310 6,062 -------- -------- Total liabilities and stockholders' equity $ 81,881 $ 61,152 ======== ========
See accompanying notes. F-2 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended Five Months Ended Calendar (Fiscal) Year Ended ----------------- ---------------------------- ------------------------------------------- 07/30/1999 01/03/1999 12/31/1999 12/31/1999 12/31/2000 12/31/2001 ----------------- ----------- ----------- ------------ ---------- ---------- (Unaudited) (Unaudited) (In thousands) Net sales $ 117,431 $ 36,729 $ 37,711 $ 118,413 $ 116,591 $ 93,482 Cost of goods sold 97,166 28,517 33,727 102,376 94,464 70,404 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit 20,265 8,212 3,984 16,037 22,127 23,078 Selling, general and administrative 22,651 8,173 8,970 23,448 22,052 17,329 expenses Interest expense 3,401 1,209 1,905 4,097 6,947 5,895 Amortization of intangibles 1,087 444 448 1,091 974 876 Asset impairment 0 0 2,800 2,800 4,402 14,130 Other expenses, net: Watering products consolidation 355 0 0 355 0 0 Plant consolidation and 1,661 0 2,025 3,686 408 0 management restructuring Strategic transactions 994 768 0 226 0 545 Loss on sale of assets 0 0 0 0 1,238 0 Miscellaneous 311 242 744 813 (6) (102) ----------- ----------- ----------- ----------- ----------- ----------- Loss from continuing operations (10,195) (2,624) (12,908) (20,479) (13,888) (15,595) before income taxes Income taxes (benefit) 145 (527) 83 755 80 84 ----------- ----------- ----------- ----------- ----------- ----------- Loss from continuing operations (10,340) (2,097) (12,991) (21,234) (13,968) (15,679) Discontinued operations: Loss from disposal (936) (165) (150) (921) 0 0 ----------- ----------- ----------- ----------- ----------- ----------- Loss from discontinued operations (936) (165) (150) (921) 0 0 ----------- ----------- ----------- ----------- ----------- ----------- Net loss ($ 11,276) ($ 2,262) ($ 13,141) ($ 22,155) ($ 13,968) ($ 15,679) =========== =========== =========== =========== =========== =========== Basic and Diluted Earnings per Share Data: Loss from continuing operations ($ 1.64) ($ 0.32) ($ 2.16) ($ 3.45) ($ 2.31) ($ 2.59) Loss from discontinued operations (0.15) (0.03) (0.02) (0.15) 0.00 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Net loss per share ($ 1.79) ($ 0.35) ($ 2.18) ($ 3.60) ($ 2.31) ($ 2.59) =========== =========== =========== =========== =========== =========== Weighted average number of shares 6,313,527 6,464,105 6,023,174 6,146,617 6,057,360 6,062,224 outstanding (basic and diluted)
See accompanying notes. F-3 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Contributed Accumulated ------------------------ Capital Other Retained Number of Stock Comprehensive Earnings Treasury Shares Amount Options Loss (Deficit) Stock Total ------------ ---------- ------------- ----------------- ------------- ---------- ---------- (In thousands) Balances at 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 Net loss for the period January 1, 0 0 0 0 (15,679) 0 (15,679) 2001 through December 31, 2001 Adjustment to minimum 0 0 0 (569) 0 0 (569) pension liability Comprehensive loss 0 0 0 0 0 0 (16,248) Issuance of treasury stock 200 0 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 2001 6,062,359 $ 78,262 $ 460 ($ 2,120) ($ 68,279) ($ 2,261) $ 6,062 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes. F-4 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Calendar (Fiscal) Ended Five Months Ended Year Ended ------------ -------------------------- -------------------------------------- 07/30/1999 01/03/1999 12/31/1999 12/31/1999 12/31/2000 12/31/2001 ------------ ----------- ------------ ---------- ---------- ----------- (Unaudited) (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($11,276) ($ 2,262) ($13,141) ($22,155) ($13,968) ($15,679) Adjustments to reconcile net loss to net cash provided by (used in) continuing operations: Loss from discontinued operations 936 165 150 920 0 0 Loss on sale of assets 0 0 0 0 1,238 0 Depreciation and amortization 5,605 1,714 2,106 5,998 5,253 4,614 Asset impairment 0 0 2,800 2,800 4,402 14,130 Reserves for doubtful accounts, sales discounts, and other allowances 1,350 (97) (104) 1,343 (15) (835) Changes in operating assets and liabilities: Accounts receivable 2,991 5,987 2,295 (701) 3,327 4,545 Inventories (768) (7,849) (2,277) 4,804 5,441 (154) Other assets (495) 449 1,684 740 1,096 435 Accounts payable and accrued expenses 4,449 224 (1,683) 2,708 (853) (690) Income taxes payable 80 (43) 83 206 (156) (5) Other liabilities (1,471) (388) 447 (636) (1,709) (2,999) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) continuing operations 1,401 (2,100) (7,640) (3,973) 4,056 3,362 Net cash used in discontinued operations (42) (166) (728) (770) 0 0 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 1,359 (2,266) (8,368) (4,743) 4,056 3,362 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (4,935) (2,155) (3,391) (6,171) (1,504) (1,246) Proceeds from sale of assets 0 0 828 828 4,032 35 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (4,935) (2,155) (2,563) (5,343) 2,528 (1,211) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) on acquisition line 0 0 6,150 6,150 (667) (712) Borrowings on term loan 0 0 0 0 707 1,011 Net activity on revolving loan 6,046 4,729 4,874 6,191 (7,441) (1,655) Proceeds from issuance of treasury stock 0 0 11 11 87 0 Purchase of treasury stock (2,488) 0 0 (2,488) 0 0 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 3,558 4,729 11,035 9,864 (7,314) (1,356) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash (18) 308 104 (222) (730) 795 Cash at beginning of period 1,240 1,240 1,222 1,548 1,326 596 -------- -------- -------- -------- -------- -------- Cash at end of period $ 1,222 $ 1,548 $ 1,326 $ 1,326 $ 596 $ 1,391 ======== ======== ======== ======== ======== ======== Interest paid $ 3,292 $ 1,207 $ 1,554 $ 3,180 $ 4,904 $ 3,917 ======== ======== ======== ======== ======== ========
See accompanying notes. F-5 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS Founded in 1890, Acorn Products, Inc. ("Acorn"), through its wholly-owned subsidiary UnionTools, Inc. ("UnionTools" and together with Acorn collectively "we", "us", "our", "Company") is a leading designer, manufacturer, and marketer of branded non-powered lawn and garden tools in the United States. Our principal products include long handle tools (such as shovels, forks, rakes and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand tools, and repair handles. We sell our products under a variety of well-known brand names and through a variety of distribution channels. In addition, we manufacture private label products for a variety of retailers. Acorn is a holding company with no business operations of its own. The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the fall and winter. Weather is the most significant factor in determining market demand for our products and is inherently unpredictable. Fluctuations in weather can be favorable or unfavorable for the sale of lawn and garden equipment. Our top two customers are Sears and Home Depot. Together both of these customers accounted for 33% of gross sales during fiscal 2001. In addition, together these customers accounted for over 20% of gross sales during fiscal 1999, transition 1999, fiscal 2000, and fiscal 2001. There were no other customers that individually accounted for more than 10% of gross sales during fiscal 1999, transition 1999, fiscal 2000, and fiscal 2001. Our ten largest customers accounted for approximately 53% of gross sales during calendar 1999, 53% of gross sales during fiscal 2000, and 57% of gross sales during fiscal 2001. 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 1999 relate to the fiscal year ended July 30, 1999, fiscal 2000 relates to the fiscal year ended December 31, 2000, and fiscal 2001 relates to the fiscal year ended December 31, 2001. References to transition 1999 relate to the five-month period ended December 31, 1999. 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 Revenue Recognition: We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. With regard to criterion (2), we recognize revenue when our customer takes title to the goods. If the customer relationship is such that we arrange and pay for the shipping and delivery (FOB-destination), the revenue is not recognized until the customer takes title and physical possession of the goods at their location. If the responsibility for shipping and delivery rests with the customer, revenue is recognized when the goods and title are transferred to their carrier. F-6 SHIPPING AND HANDLING COSTS Amounts for shipping and handling billed to customers are reported as a component of sales while the related costs are reported as cost of goods sold. 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: 12/31/2000 12/31/2001 ---------- ---------- (In thousands) Finished goods $11,349 $14,401 Work in process 6,652 5,653 Raw materials and supplies 6,487 4,588 ------------- ------------ Total inventories $24,488 $24,642 ============= ============ PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: Machinery and equipment 3 to 12 years Buildings and improvements 5 to 40 years Furniture and fixtures 3 to 10 years Property, plant and equipment consists of the following: 12/31/2000 12/31/2001 ---------- ---------- (In thousands) Land $ 1,280 $ 1,412 Buildings and improvements 6,498 6,563 Machinery and equipment 21,244 22,209 Furniture and fixtures 3,509 3,784 -------- -------- 32,531 33,968 Accumulated depreciation and amortization (19,652) (23,213) -------- -------- Property, plant and equipment, net 12,879 10,755 Construction in process 1,217 813 -------- -------- $ 14,096 $ 11,568 ======== ======== Depreciation expense was approximately $3.7 million in fiscal 2001, $4.3 million in fiscal 2000, $1.7 million in transition 1999, and $4.5 million in fiscal 1999. 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 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 $5.1 million at December 31, 2001 and $14.0 million at December 31, 2000. Periodically, we assess the recoverability of our goodwill and other long-lived assets based upon an evaluation of a number of factors such as a significant adverse event or a change in which this business operates. 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. During 2001, we completed F-7 an evaluation of strategic alternatives, which included solicitations of offers to buy the Company. In early 2002, we agreed to enter into a transaction that valued the Company at $1.00 per share. Based on this market valuation, we recognized a $14.1 million write-down of enterprise level goodwill in fiscal 2001. We recorded approximately $4.4 million in fiscal 2000 and $2.8 million in transition 1999 in additional expense related to an 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 2001 presentation. DERIVATIVES We have no derivative financial instruments as defined by Statement of Financial Accounting Standards No. 133. SEGMENT REPORTING In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", we operate in one reportable segment. EFFECT OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. We will apply Statement 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of Statement 142 is expected to result in an increase in net income of $371,000 ($0.06 per share) in 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as F-8 the cumulative effect of a change in accounting principle in the first quarter of 2002. We have not yet determined what the effect of these tests will be on our earnings and financial position. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. Statement 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We will adopt the provisions of Statement 144 beginning in the first quarter of 2002. We do not expect that the adoption of the Statement will have a significant impact on our financial position and results of operations. The FASB's Emerging Issues Task Force (EITF) has issued EITF 00-14, "Accounting for Certain Sales Incentives", effective for years beginning after December 15, 2001. We will adopt the provisions of the EITF beginning in the first quarter of 2002. We do not expect that the adoption of the EITF will have a significant impact on our financial position and results of operations. 3. DISCONTINUED OPERATIONS We recognized additional charges related to the 1997 discontinuance and sale of McGuire-Nicholas of approximately $0.2 million in transition 1999 and $0.9 million in fiscal 1999, relating to tax and workers' compensation claims for the discontinued operation. 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 were 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 provided 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 limited the Acquisition Facility to the existing outstanding balance of approximately $16 million and extended the repayment terms. 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 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 stockholders. 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. On July 13, 2001, we entered into a sixteenth amendment to the amended and restated Credit Facility (the "sixteenth amendment"), the terms of which we believe will be sufficient to fund operations through April 30, 2002, the revised term of the facility. The sixteenth amendment provides for a $35 million revolving credit facility from January 1 through July 30 ($25 million from July 31 through October 31; $30 million from November 1 through December 31). Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. In addition, the sixteenth amendment provides for scheduled loan payments to be applied on a pro rata basis to the outstanding balances under our acquisition loans and Revolving Facility. The scheduled loan payments are as follows: DATE PAYMENT -------------------- ---------------------------------- July 23, 2001 $350,000 September 30, 2001 $350,000 December 31, 2001 $350,000 March 31, 2002 $350,000 April 30, 2002 Entire remaining principal balance of the acquisition loans, together with all accrued but unpaid interest thereon, and all other obligations, shall be due and payable in full. F-9 The sixteenth amendment contains certain covenants, which, among other things, require us to maintain specified financial ratios and satisfy certain tests, including maintaining cumulative EBITDA above specified levels, and places limits on future capital expenditures. The sixteenth amendment also maintains the negative covenants that existed under the previous Credit Facility, which include 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. In compliance with the requirements of the sixteenth amendment, we engaged investment bankers to identify strategic alternatives for the Company, including the potential sale of the company. See Note 12. Borrowings under the sixteenth amendment bear interest at either the bank prime rate plus a margin of 3% or, at our option, the LIBOR rate plus a margin of 4%. Interest is due and payable monthly in arrears. In addition, we are required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The sixteenth amendment also includes a "success fee" of $3,250,000. The success fee can be reduced to a minimum of $1,700,000 based upon satisfaction of certain provisions within the sixteenth amendment. In October and December, 2001, we entered into the seventeenth and eighteenth amendments to the amended and restated Credit Facility, the terms of which extended to certain of the covenants covered in the sixteenth amendment, and allowed us to retain the manufacturing facility and assets that produce and sell custom injection molding products. Borrowings under the Credit 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 based upon cash flow and certain other events. UnionTools may elect to prepay all or a portion of the Credit Facility at any time. At December 31, 2001, UnionTools had $1.9 million in available borrowings under the Credit Facility. 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 In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("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 shares and $12.10 per share relating to 5,784 shares) were outstanding at December 31, 2000 and 2001. 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, 2001, we have granted options to purchase an aggregate of 726,298 shares under the Incentive Plan, at a weighted average exercise price of $2.02 per share. F-10 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, 2001, we have granted options to purchase an aggregate of 240,490 shares of stock under the Nonemployee Director Incentive Plan, at a weighted average exercise price of $2.80 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 2001 is $0.70 for options whose stock price equals the exercise price of the option, $0.57 for options whose stock price is greater than the exercise price and $0.47 for options whose stock price is less than the exercise price. The value 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 2001: (i) a risk-free interest rate of 5.02%; (ii) no dividend yield; (iii) a volatility factor of the expected market price of our common stock of 0.977; 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 prescribed by SFAS No. 123, reported net loss applicable to common stock and per share amounts would have been as follows:
Fiscal Year ----------------------------------------- Five Months Ended 1999 2000 2001 December 31, 1999 ----------- ----------- ------------- --------------------- Net loss applicable to ($11,974) ($14,442) ($15,867) ($12,109) common stock (in thousands) Net loss applicable to common stock per share ($1.90) ($2.38) ($2.62) ($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 The following table summarizes the stock option activity:
Number Weighted Average of Shares Exercise Price ------------ ------------------ 1997 STOCK INCENTIVE PLAN 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 Granted 240,200 0.89 Exercised 0 Expired/terminated (243,352) 2.75 --------- Outstanding at December 31, 2001 726,298 $ 2.02 ========= 1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN 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 Granted 93,058 1.50 Exercised 0 Expired/terminated 0 --------- Outstanding at December 31, 2001 240,490 $ 2.80 =========
F-12
Number Weighted Average of Shares Exercise Price ------------ ------------------ OTHER STOCK OPTIONS 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 Granted 0 Exercised 0 Expired/terminated 0 -------- Outstanding at December 31, 2001 21,690 $ 3.23
The following table summarizes information regarding stock options outstanding at December 31, 2001.
Options Outstanding Options Exercisable ----------------------------------------------------- -------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/2001 Contractual Life Exercise Price at 12/31/2001 Exercise Price -------------------- -------------- ----------------- --------------- -------------- -------------- $0.01 to $3.00 887,553 8.70 $1.38 808,228 $1.38 $3.01 to $6.00 15,211 7.67 $4.81 15,211 $4.81 $6.01 to $9.00 28,800 7.08 $6.70 28,800 $6.70 $9.01 to $12.00 18,630 6.08 $10.25 18,630 $10.25 $12.01 to $14.00 38,284 4.97 $13.71 38,284 $13.71
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. In fiscal 2001, we changed the exercise price of certain options issued under the 1997 Stock Incentive Plan as follows: 25,000 options repriced from $1.25 to $0.58 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 200,000. 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 F-13 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. As of December 31, 2000, 73,688 shares of common stock had been awarded and as of December 31, 2001, 176,650 shares of common stock had been awarded under the Director Stock Plan representing an equal number of shares of common stock to be issued in the future. 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:
12/31/2000 12/31/2001 --------------- --------------- Deferred tax assets: (in thousands) Inventory $610 $540 Accrued expenses and other 3,324 2,108 Goodwill 0 1,087 Net operating loss carryforwards 29,344 32,055 Capital loss carryforward 2,584 2,584 -------------- -------------- Total deferred tax assets 35,862 38,374 Valuation allowance for deferred tax assets (31,342) (37,801) -------------- -------------- Deferred tax assets 4,520 573 Deferred tax liabilities: Goodwill 3,271 0 Depreciation and other 1,249 573 -------------- -------------- Total deferred tax liabilities 4,520 573 ------------- -------------- Net deferred tax assets $0 $0 ============= ==============
Based on our history of operating losses and in accordance with SFAS No. 109, we record a 100% valuation allowance resulting in no deferred tax assets being recognized. At December 31, 2001, we had net operating loss carryforwards of approximately $76.8 million for income tax purposes that expire in varying amounts in the years 2009 through 2021. Of this amount, approximately $28.6 million of net operating losses that originated prior to our initial public offering (IPO) on June 27, 1997 are subject to limitation under Internal Revenue Code Section 382. There are no Section 382 limitations on the remaining $48.2 million of net operating loss carryforwards. In accordance with the provisions of Section 382, utilization of the pre-IPO net operating losses is limited to approximately $1.2 million annually unless the Section 382 limitation exceeds the taxable income for a given year, in which case the excess amount carries over to and increases the annual Code Section 382 limitation for the succeeding year. Due to the carryover of excess Code Section 382 limited net operating losses, at December 31, 2001, we have approximately $6.1 million of Code Section 382 limited net operating losses that are available to offset taxable income in 2002 (in addition to the $48.2 million of net operating loss carryforwards that are not limited). We also have capital loss carryforwards of approximately $6.2 million for income tax purposes that expire in 2002 and 2003. A table of available net operating loss carryforwards is as follows:
NOL Generated Period During the Year Expiration Year ------------------------------------- ------------------- ------------------ (in thousands) NOLS LIMITED BY CODE SECTION 382 FYE July 1994 $2,369 2008 FYE July 1995 5,579 2009 FYE July 1996 9,765 2010 Short period ended 6/27/97 10,864 2011 ----------------- 28,577 Pre-IPO NOLs ----------------- NOLS NOT LIMITED BY CODE SECTION 382 Period 6/28/97 through 8/1/97 1,152 2011 FYE July 1998 7,284 2012 FYE July 1999 6,645 2018 FYE December 1999 12,022 2019 FYE December 2000 14,593 2020 FYE December 2001 6,513 2021 ----------------- 48,209 Post-IPO NOLs ----------------- $76,786 Total NOLs at December 31, 2001 =================
The provision for income taxes is comprised of the following:
Fiscal Year -------------------------------------------------- Five Months Ended 1999 2000 2001 December 31, 1999 -------------- -------------- -------------- --------------------- Current - Federal $0 $0 $0 $0 Current - State 145 80 84 83 ------------- ------------- ------------- -------------------- $145 $80 $84 $83 ============= ============= ============= ====================
F-14 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:
Five Months Fiscal Year Ended ---------------------------------- December 1999 2000 2001 31, 1999 ---------- -------- ----------- -------------- (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $15,798 $16,873 $18,384 $16,688 Service cost 689 311 143 265 Interest cost 1,200 1,323 1,315 523 Actuarial losses / (gains) 3 1,330 219 (67) Plan amendments 63 (192) 101 29 Benefits paid (1,065) (1,261) (1,149) (565) ----------- ---------- ----------- -------------- Benefit obligations at end of period $16,688 $18,384 $19,013 $16,873 =========== ========== =========== ============== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $14,624 $17,482 $19,940 $17,102 Actual return on plan assets 1,345 1,859 1,189 218 Company contributions 2,198 1,860 465 727 Benefits paid (1,065) (1,261) (1,149) (565) ----------- ---------- ----------- -------------- Fair value of plan assets at end of period $17,102 $19,940 $20,445 $17,482 =========== ========== =========== ============== Funded status of the plans $414 $1,549 $1,432 $609 Unrecognized net actuarial losses / (gains) 1,817 2,867 3,556 2,136 Minimum pension liability (1,614) (2,386) (2,927) (1,665) Unamortized prior service cost 618 523 571 568 ----------- ---------- ----------- -------------- Prepaid benefit cost $1,235 $2,553 $2,632 $1,648 =========== ========== =========== ============== WEIGHTED AVERAGE ASSUMPTIONS Discount rate 8.00% 7.50% 7.25% 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 $689 $311 $142 $265 Interest cost 1,200 1,323 1,316 523 Actual return on plan assets (1,345) (1,859) (1,189) (218) Amortization of prior service cost 21 44 50 21 Recognized net actuarial losses / (gains) 71 367 (472) (387) Effects of changes in assumption 0 0 0 58 ----------- ---------- ----------- -------------- Net periodic benefit cost (income) $636 $186 ($153) $262 =========== ========== =========== ==============
F-15 The following is a summary of aggregate prepaid benefit costs and aggregate accrued benefit costs:
12/31/2000 12/31/2001 -------------- --------------- (In thousands) Aggregate prepaid benefit cost $3,442 $3,888 Aggregate accrued benefit cost (889) (1,256) -------------- --------------- Net prepaid benefit cost $2,553 $2,632 ============== ===============
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:
12/31/2000 12/31/2001 -------------- --------------- (In thousands) Aggregate accumulated benefit obligations $8,214 $8,393 Aggregate projected benefit obligations 8,214 8,396 Aggregate fair value of plan assets 7,323 7,137
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-16
Five Months Fiscal Year Ended ------------------------------------- December 1999 2000 2001 31, 1999 ----------- ---------- ----------- -------------- (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $2,902 $2,292 $2,712 $2,404 Service cost 19 2 8 8 Interest cost 185 188 109 85 Participant contributions 85 230 188 35 Curtailment 0 0 (2,082) 0 Actuarial losses 0 815 38 0 Benefits paid (787) (815) (345) (240) ----------- ---------- ----------- -------------- Benefit obligations at end of period $2,404 $2,712 $628 $2,292 =========== ========== =========== ============== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $0 $0 $0 $0 Company contributions 702 585 157 205 Participant contributions 85 230 188 35 Benefits paid (787) (815) (345) (240) ----------- ---------- ----------- -------------- Fair value of plan assets at end of period $0 $0 $0 $0 =========== ========== =========== ============== Funded status of the plans (under-funded) ($2,404) ($2,712) ($628) ($2,292) Unrecognized net actuarial losses / (gains) (864) 4 38 (833) ----------- ---------- ----------- -------------- Prepaid benefit cost ($3,268) ($2,708) ($590) ($3,125) =========== ========== =========== ============== WEIGHTED AVERAGE ASSUMPTIONS Discount rate 6.75% 7.50% 7.38% 6.75% Expected return on plan assets N/A N/A N/A N/A COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $19 $2 $8 $19 Interest cost 185 188 109 185 Actual return on plan assets 0 0 0 0 Amortization of prior service cost 0 0 0 0 Recognized net actuarial gains (76) (22) 0 (76) Recognized settlement gains 0 0 (2,077) 0 Effects of changes in assumption 0 0 0 0 ----------- ---------- ----------- -------------- Net periodic benefit cost $128 $168 ($1,960) $128 =========== ========== =========== ==============
The weighted average health care cost trend rate for fiscal 2002 is 5.0% and is assumed to remain at that level thereafter. The weighted average health care cost trend rate for fiscal 2001 was 6.0%. 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 2001 $ 4 ($6) Effect on total of post-retirement benefit obligation in fiscal 2001 $80 ($105)
F-17 In February 2001, UnionTools, acting in its capacity as the plan sponsor and policy holder, notified certain of its associates, retirees, and collective bargaining units of its intention to eliminate retiree medical and life benefits. The elimination of these benefits resulted in a settlement gain of $2,077,000 which is reflected as a component of net periodic pension benefit cost. DEFINED CONTRIBUTION 401(K) PLAN We sponsor defined contribution 401(k) plans covering all associates. Our matching contribution varies by plan and amounted to approximately $309,000 in fiscal 2001, $362,000 in fiscal 2000, $154,000 in transition 1999, and $310,000 in fiscal 1999. 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 $1.6 million in fiscal 2001, $2.3 million in fiscal 2000, $1.2 million in transition 1999, and $2.0 million in fiscal 1999. The minimum annual payments under non-cancelable operating leases and the Scotts license agreement at December 31, 2001 are as follows: Year Amount ------------ ----------------- 2002 $1,524,000 2003 936,000 2004 256,000 2005 96,000 2006 15,000 Thereafter 86,000 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. 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. Plaintiffs' initial settlement demand to Midwest is $26 million. We have obtained acknowledgment of coverage from our insurance carriers 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-18 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 2004, while the collective bargaining agreement covering the Columbus hourly associates expires in 2003. We have not been subject to a strike or work stoppage in over 20 years and believe that our relationships with our associates and applicable unions are good. However, there can be no assurance that we will be successful in negotiating new labor contracts on terms satisfactory to us or without work stoppages or strikes. A prolonged work stoppage or strike at any of our facilities could have a material adverse effect on our business, financial condition, and results of operations. AGREEMENTS WITH KEY EXECUTIVES We have entered into agreements with certain of our executive officers providing for, under certain circumstances, payments from us following the termination of such executives' employment with us or following a change in control of the Company (as defined therein). 9. EARNINGS PER SHARE The following table sets forth the computation of basic and dilutive earnings per share:
Five Months Fiscal Year Ended ---------------------------------------------------- December 1999 2000 2001 31, 1999 ---------------- ---------------- ---------------- --------------- NUMERATOR Net loss ($11,276,000) ($13,968,000) ($15,679,000) ($13,141,000) ================ ================ ================ =============== DENOMINATOR Denominator for basic earnings per share 6,313,527 6,057,360 6,062,224 6,023,174 - weighted average shares Effect of dilutive securities: 1997 Stock Incentive Plan 0 0 0 0 1997 Nonemployee Director Stock 0 0 0 0 Incentive Plan Deferred Equity Compensation 0 0 0 0 Plan for Directors Other stock options 0 0 0 0 ---------------- ---------------- ---------------- --------------- Dilutive potential common shares 0 0 0 0 ---------------- ---------------- ---------------- --------------- Denominator for diluted earnings per share 6,313,527 6,057,360 6,062,224 6,023,174 ================ ================ ================ =============== - weighted average shares and assumed conversions Basic loss per share ($1.79) ($2.31) ($2.59) ($2.18) ================ ================ ================ =============== Diluted loss per share ($1.79) ($2.31) ($2.59) ($2.18) ================ ================ ================ ===============
For additional disclosure regarding outstanding stock options and the Deferred Equity Compensation Plan for Directors, see Note 5 - Stockholders' Equity. F-19 10. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data for each quarter of fiscal 2000 and 2001. The financial data for each of these quarters is unaudited but includes all adjustments which we believe to be necessary for a fair presentation. All quarters include normal recurring adjustments. These operating results, however, are not necessarily indicative of results for any future period.
Net Income Net (Loss) Net Gross Income Per Share Sales Profit (Loss) (Diluted) ------------ ---------- ------------- ------------ (In thousands, except for per share data) 2000 First quarter $ 40,737 $ 8,861 $ 653 $0.11 Second quarter 35,170 7,549 (4,978) (0.82) Third quarter 22,098 3,295 (5,692) (0.94) Fourth quarter 18,586 2,422 (3,951) (0.66) ------------ ---------- ------------- ------------ $116,591 $22,127 ($13,968) ($2.31) ============ ========== ============= ============ 2001 First quarter $ 28,317 $ 7,691 $ 1,358 $0.22 Second quarter 29,428 6,329 (479) (0.08) Third quarter 18,097 5,018 (1,278) (0.21) Fourth quarter 17,640 4,040 (15,280) (2.52) ------------ ---------- ------------- ------------ $ 93,482 $23,078 ($15,679) ($2.59) ============ ========== ============= ============
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. In fiscal 2001, we incurred $0.5 million primarily in financial consulting and legal fees to pursue and evaluate strategic alternatives as required by the sixteenth amendment to our amended and restated credit facility (See Note 4). 12. COMPANY OPERATIONS AND SUBSEQUENT EVENTS 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, 2002, our Acquisition F-20 Facility matures on April 30, 2002, and our Junior Participation Term Loan Note matures on April 30, 2002. 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 and unfavorable customer and vendor terms. During fiscal 2000 and 2001, 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. 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. We have evaluated the various strategic alternatives presented to us and have concluded that the optimal choice was to agree to and exercise a letter of intent put forth on February 1, 2002, to recapitalize the debt and equity of the Company. Under the proposed transaction, the Company's majority stockholders, TCW Funds and OCM Principal Funds, have agreed to invest up to $10 million cash and convert approximately $8 million in subordinated debt into equity at a value of $1.00 per share. The proposed transaction is contingent upon, among other things, obtaining new financing for the Company's operations. At December 31, 2001, we were in compliance with the covenants of our Credit Facility. However, subsequent to that date we fell in default of the Credit Facility because we have been unable to obtain a financing commitment to support the letter of intent transaction or to execute a definitive purchase agreement. While we are working diligently to complete the transaction, though possibly in a form different than that outlined in the original letter of intent, and thereby cure the default, we believe our existing bank group will continue to fund our operations. Given the critical nature and timeframe of these issues, we believe significant progress and clarification can be made prior to the expiration of our Credit Facility on April 30, 2002. However, there can be no assurance as to when and if an agreement will be reached. If we are unable to reach an agreement, it will adversely impact our principal sources of liquidity and our ability to meet future cash requirements. This shortfall could force us to consider alternatives that may include negotiating further amendments to our existing Credit Facility, attempting to obtain loans from third party sources, asset sales, a sale of the entire Company, or other remedies appropriate to the circumstances. If we are successful in consummating the letter of intent and obtaining new financing, then we believe we would have sufficient liquidity to operate over the term of the new facility. In addition, we believe that our improved profitability in tandem with lower interest costs as a result of a less leveraged capital structure, will also provide us sufficient liquidity to move through our operating cycle. This includes satisfaction of all lease and debt principal payments, as well as, any rollover or incremental letter of credit requirements. However, if future financial results do not meet our expectations or the recapitalization transaction is not completed, we will activate contingency plans, further reducing expenditures, and take other actions to operate within the resources and alternatives available. 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 or 2001. F-21 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS
December 31, ------------------------ 2000 2001 -------- -------- (In thousands) ASSETS Cash $ 102 $ 664 Accounts receivable 0 0 Prepaid and other assets 150 0 -------- -------- Total current assets 252 664 Property, plant and equipment, net 0 0 Goodwill 6,003 0 Other assets (principally investment in and amounts due from wholly-owned subsidiaries) 17,273 6,455 -------- -------- Total assets $ 23,528 $ 7,119 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 1,168 $ 1,007 Income taxes payable 0 0 Other current liabilities 50 50 -------- -------- Total current liabilities 1,218 1,057 Long-term debt 0 0 -------- -------- Total liabilities 1,218 1,057 Stockholders' equity: Common stock 78,262 78,262 Contributed capital - stock options 460 460 Minimum pension liability (1,551) (2,121) Retained earnings (deficit) (52,600) (68,278) -------- -------- 24,571 8,323 Common stock in treasury (2,261) (2,261) -------- -------- Total stockholders' equity 22,310 6,062 -------- -------- Total liabilities and stockholders' equity $ 23,528 $ 7,119 ======== ========
See accompanying notes. S-1 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year --------------------------------------------- Five Months Ended 1999 2000 2001 December 31, 1999 ----------- ------------ ------------ --------------------- (In thousands) Selling and administrative expenses $3,973 $2,756 $1,532 $759 Interest expense 16 194 410 0 Amortization of goodwill 183 175 183 76 Asset impairment 0 0 5,820 0 Other expenses 1,075 80 629 1,844 ----------- ------------ ------------ ----------- Loss before equity in losses (5,247) (3,205) (8,574) (2,679) of subsidiaries Equity in losses of subsidiaries (6,029) (10,763) (7,105) (10,462) Income taxes 0 0 0 0 ----------- ------------ ------------ ----------- Net loss ($11,276) ($13,968) ($15,679) ($13,141) =========== ============ ============ ===========
See accompanying notes. S-2 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year ------------------------------------------ Five Months Ended 1999 2000 2001 December 31, 1999 ------------ ------------ ------------ --------------------- (In thousands) Net cash from operating activities $2,488 $15 $562 ($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 (2,488) 87 0 11 Retirement of preferred stock 0 0 0 0 ------------ ------------ ------------ ------ (2,488) 87 0 11 ------------ ------------ ------------ ------ Increase (decrease) in cash $0 $102 $562 ($76) ============ ============ ============ ======
See accompanying notes. S-3 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the parent company-only financial statements, Acorn's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. Acorn's share of net income (loss) of its unconsolidated subsidiaries is included in consolidated income using the equity method. Parent company-only financial statements should be read in conjunction with 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 UNIONTOOLS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2001
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, 2001: Deducted from asset accounts: Allowance for doubtful accounts $ 820,460 $ 474,393 ($ 50,272) $ 581,397 $ 663,184 Reserve for sales, discounts and other allowances 1,303,595 1,714,147 0 2,390,685 627,057 ---------- ---------- ---------- ---------- ---------- Total $2,124,055 $2,188,540 ($ 50,272) $2,972,082 $1,290,241 PERIOD ENDED DECEMBER 31, 2000: Deducted from asset accounts: Allowance for doubtful accounts $ 642,000 $1,192,332 $ 0 $1,013,872 $ 820,460 Reserve for sales, discounts and other allowances 1,498,446 3,495,906 0 3,690,757 1,303,595 ---------- ---------- ---------- ---------- ---------- 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 other allowances 1,303,245 985,471 0 790,270 1,498,446 ---------- ---------- ---------- ---------- ---------- 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 other allowances 634,401 668,844 0 0 1,303,245 ---------- ---------- ---------- ---------- ---------- Total $ 893,779 $1,369,947 $ 0 $ 19,717 $2,244,009
S-5