10-K 1 l99852ae10vk.txt ACORN PRODUCTS | 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 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 ------------------- Common stock, par value $.01 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 21, 2003, the aggregate market value of our shares of common stock (based on the last sale price of the common stock on the Nasdaq SmallCap Market on that date) held by non-affiliates of the registrant was approximately $1,845,267. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- --- As of June 28, 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 $825,664. As of March 21, 2003, 5,010,321 shares of our common stock, par value $.01 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 ............... 11 Item 6. Selected Financial Data ............................................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 26 Item 8. Financial Statements and Supplementary Data ......................................... 26 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................................................. 26 Part III Item 10. Directors and Executive Officers of the Registrant................................... 27 Item 11. Executive Compensation............................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 35 Item 13. Certain Relationships and Related Transactions....................................... 37 Item 14. Controls and Procedures.............................................................. 37 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 38 Signatures........................................................................................... 41 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer.............................................................. 42 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer.............................................................. 43 Financial Statements................................................................................. F-1 Schedules to Financial Statements.................................................................... S-1
2 PART I ITEM 1. BUSINESS As used in this Annual Report on Form 10-K and except as the context otherwise may require, "Company", "we", "us", and "our" refers to Acorn Products, Inc. and its subsidiary UnionTools, Inc. ("UnionTools"). References to fiscal years 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, 2001, and 2002 reflect the fiscal year period ended on December 31 of the applicable year. As used in this Annual Report on Form 10-K, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot" refers to The Home Depot, Inc., "Lowe's" refers to 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: Garden Craft(R), Gardener's Value(R), 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. 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 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". GENERAL Our primary business is associated with our UnionTools subsidiary. UnionTools was founded in 1890, and is a leading designer, manufacturer, and marketer of branded non-powered lawn and garden products. Our primary business is the manufacturing, marketing, and distribution of garden tools through mass market and other distribution channels in the United States. We also sell our products to professional and commercial end-users through distributors and industrial supply outlets. Our principal products include long handle tools (such as shovels, forks, rakes, and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand tools, and repair handles. Our products bear well known brand names, including Garden Craft(R), Gardener's Value(R), 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 GOING PRIVATE TRANSACTION In February 2003, Acorn Merger Corporation ("AMC"), The TCW Group, Inc., Trust Company of the West, TCW Asset Management Company, TCW Special Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund, L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala (collectively, the "Filing Persons"), who collectively own approximately 92.5% of our common stock, filed a Schedule 13E-3 with the Securities and Exchange Commission ("Commission") stating that they intend to merge AMC with and into our Company. Upon consummation of the merger and filing of a Form 15 with the Commission, we will no longer be subject to the reporting requirements of the Securities Exchange Act of 1934 and cease to be a "public" company. In the merger, each share of our common stock not owned by AMC will be converted into the right to receive $3.50. For more information about the merger, see the Schedule 13E-3 filed by the Filing Persons. 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. 4 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 2001 and 96% of total sales in fiscal 2002. 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. 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. 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 anticipate the licensing agreement with The Scotts Company will expire on December 31, 2003. 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: - Garden Craft(R); - Gardener's Value(R); - 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. 5 ACQUISITIONS AND DIVESTITURES 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. 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 Home Depot and we have been a supplier to them since 1997. Sears, which includes Sears' Orchard Supply division, is another major customer. 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 and Sears together account for 32% of gross sales. Our ten largest customers accounted for approximately 53% of gross sales during fiscal 2000, 57% of gross sales during fiscal 2001, and 65% of gross sales during fiscal 2002. Most of our major customers are on electronic data interchange (EDI) systems. There can be no assurance that our sales to Home Depot, Sears, or other major customers will continue at existing levels. A substantial reduction or cessation of sales to Home Depot, Sears, or other major customers could have a material adverse effect on our business, financial condition, 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. 6 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 facility in Louisville, Kentucky. 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. 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 distribution facility. In fiscal 2002, we relocated our sole distribution facility from Columbus, Ohio into a newly built customized facility in Louisville, Kentucky. 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 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 and 2002, 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 provides 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. 7 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 Steel Technologies and Shiloh Industries, Inc. in fiscal 2002. - 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 2002. - Ash Wood. Ash is the ideal hardwood for handles because it is lightweight, flexible, and splinters less than most hardwoods. We employ wood specialists who maintain relationships with numerous log suppliers and are responsible for sourcing our ash needs. We believe that sufficient quantities of ash will continue to be available. Each of our sawmills typically maintains a five to eight week inventory of ash to cover occasional short-term fluctuations in supply. We import wood handles for some of our promotionally priced products, such as rakes and hoes. Imported wood is less expensive than ash and is of sufficient quality for tools (other than shovels) designed for opening-price-point levels. 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, 2002, we employed approximately 450 people (including seasonal associates), approximately 350 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 50 additional seasonal associates are utilized during our busy season. The average tenure of our hourly associates is over 10 years. Hourly associates at the Delaware, Ohio sawmill are represented by the International Association of Machinists ("IAM"). Our contract with the IAM expires in April 2003. During 2002, we negotiated a Closure Agreement with the IAM for our Columbus, Ohio distribution facility. The International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers ("IBB") represents the hourly associates in Frankfort, New York. Our contract with the IBB expires in June 2004. During 2002, we negotiated a Closure Agreement with the International Brotherhood of Teamsters ("IBT") for our Portville, New York sawmill. 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 2005. 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, 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 8 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, 2002, we believe that we have no significant outstanding environmental issues. ITEM 2. PROPERTIES Our headquarters and executive offices, located in Columbus, Ohio, occupy approximately 40,000 square feet in a facility that we lease. As of December 31, 2002, 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 FACILITY: Louisville, Kentucky Leased 250,000 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 facility, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our 2002 Annual Meeting of Stockholders on November 20, 2002. Holders of 6,251,816 shares of our common stock were present representing 92.1% of our common shares issued and outstanding and entitled to vote at the meeting. 9 The following persons were elected as members of our Board of Directors to serve until the annual meeting following their election or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated below.
Name Voted For Votes Withheld ---- --------- -------------- William W. Abbott 5,951,585 300,231 Vincent J. Cebula 5,951,585 300,231 John J. Kahl, Jr. 5,941,750 310,066 James R. Lind 5,976,437 275,379 John L. Mariotti 5,951,437 300,379 A. Corydon Meyer 5,944,937 306,879
The proposal to approve Ernst & Young LLP as our independent certified public accountants passed with 6,135,602 shares voting in favor, 84,279 shares voting against, and 31,935 shares abstaining. The proposal to approve the amendment to our 1997 Non-Employee Director Stock Option Plan to increase the number of shares available for issuance from 500,000 to 3,000,000 shares passed with 4,586,928 shares voting in favor, 349,654 shares voting against, and 1,372 shares abstaining. The proposal to approve the amendment to our 1997 Stock Incentive Plan to increase the number of shares available for issuance from 1,000,000 to 2,500,000 shares passed with 4,588,228 shares voting in favor, 348,354 shares voting against, and 1,372 shares abstaining. The proposal to approve our Long-Term Incentive Plan passed with 4,739,740 shares voting in favor, 195,579 shares voting against, and 2,635 shares abstaining. The proposal to approve the amendment to our Certificate of Incorporation increasing the number of shares of preferred stock available for issuance from 1,000 to 1,000,000 shares passed with 4,598,928 shares voting in favor, 331,494 shares voting against, and 7,532 shares abstaining. The proposal to approve the amendment to our Certificate of Incorporation that would establish restrictions on transfers of our common stock passed with 5,946,090 shares voting in favor, 303,354 shares voting against, and 2,372 shares abstaining. The proposal to approve the grant of stock options and restricted stock to our key employees and non-employee directors passed with 4,574,700 shares voting in favor, 362,454 shares voting against, and 800 shares abstaining. The proposal to approve the issuance of shares of our common stock upon conversion of our 12% convertible notes passed with 5,935,962 shares voting in favor, 314,929 shares voting against, and 925 shares abstaining. The proposal to approve the issuance of shares of our common stock upon conversion of our preferred stock passed with 4,620,000 shares voting in favor, 317,029 shares voting against, and 925 shares abstaining. The proposal to approve the amendment of our Certification of Incorporation increasing the number of shares of common stock available for issuance from 20,000,000 to 200,000,000 shares passed with 5,933,197 shares voting in favor, 317,494 shares voting against, and 1,125 shares abstaining. The proposal to approve the issuance of shares of our common stock pursuant to our rights offering passed with 4,602,060 shares voting in favor, 334,769 shares voting against, and 1,125 shares abstaining. The proposal to approve the 1-for-10 reverse stock split passed with 6,027,565 shares voting in favor, 222,779 shares voting against, and 1,472 shares abstaining. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on the Nasdaq National Market in June 1997 under the symbol "ACRN". On December 17, 1999, our common stock began trading under the same symbol on the Nasdaq SmallCap Market. The following table sets forth the closing sales prices of the common stock on the Nasdaq SmallCap Market during the periods indicated:
Market Price ------------------------ Fiscal (Calendar) Period High Low ------------------------ ----- ----- 2001: First Quarter $9.06 $5.00 Second Quarter 13.30 5.00 Third Quarter 7.40 3.60 Fourth Quarter 5.80 3.30 2002: First Quarter $7.65 $3.50 Second Quarter 6.80 4.00 Third Quarter 4.50 3.00 Fourth Quarter 4.13 1.10 2003: First Quarter $3.51 $2.50 (through March 21, 2003)
As of March 21, 2003, the approximate number of record holders of our common stock was 28. The closing sales price of our common stock on March 21, 2003 was $3.45 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 $300,000 per year and to pay our federal and state income taxes. In connection with the Recapitalization Transaction (see Item 7), we received stockholder approval for a 1-for-10 reverse stock split. Our common stock began trading on a reverse-split basis on November 21, 2002. As a result of the reverse stock split, every 10 shares of our common stock issued and outstanding as of November 21, 2002, was combined into one share of our common stock. In lieu of fractional shares, we paid cash to our stockholders. The reverse stock split also affected options, warrants, and other securities convertible into or exchangeable for shares of our common stock that were issued and outstanding immediately prior to November 21, 2002. ITEM 6. SELECTED FINANCIAL DATA We have derived the selected consolidated financial data for fiscal 1998, fiscal 1999, fiscal 2000, fiscal 2001, and fiscal 2002 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 2002 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. 11 Fiscal Year Ended (except calendar year ended 12/31/1999) (In thousands, except per share data)
------------ ------------ ------------- ------------- ------------ ------------- 07/31/1998 07/30/1999 12/31/1999 12/31/2000 12/31/2001 12/31/2002 ------------ ------------ ------------- ------------- ------------ ------------- (Unaudited) STATEMENT OF OPERATIONS DATA: Net sales $109,538 $114,025 $115,215 $112,946 $91,304 $91,203 Cost of goods sold 87,389 97,166 102,376 94,464 70,404 70,088 ------------ ------------ ------------- ------------- ------------ ------------- Gross profit 22,149 16,859 12,839 18,482 20,900 21,115 Selling, general and 16,904 19,245 20,250 18,407 15,151 15,566 administrative expenses Interest expense 2,560 3,401 4,097 6,947 5,895 4,068 Amortization of intangibles 917 1,087 1,091 974 876 0 Asset impairment(1) 0 0 2,800 4,402 14,130 4,241 Other expenses, net(2) 259 3,321 5,080 1,640 443 3,004 ------------ ------------ ------------- ------------- ------------ ------------- Income (loss) from continuing 1,509 (10,195) (20,479) (13,888) (15,595) (5,764) operations before income taxes Income taxes (benefit) 230 145 755 80 84 (51) Preferred stock dividends 0 0 0 0 0 480 ------------ ------------ ------------- ------------- ------------ ------------- Income (loss) from continuing 1,279 (10,340) (21,234) (13,968) (15,679) (6,193) operations Loss from discontinued 0 (936) (921) 0 0 0 ------------ ------------ ------------- ------------- ------------ ------------- operations(3) Net income (loss) $1,279 ($11,276) ($22,155) ($13,968) ($15,679) ($6,193) ============ ============ ============= ============= ============ ============= Income (loss) from continuing $1.98 ($16.38) ($34.55) ($23.06) ($25.86) ($8.61) operations per share (basic and diluted) Weighted average number of 646,411 631,353 614,662 605,736 606,222 718,987 shares outstanding OTHER DATA: Gross margin 20.2% 14.8% 11.1% 16.4% 22.9% 23.2% Net cash provided by (used in) ($233) $1,359 ($4,743) $4,056 $3,362 $2,685 operating activities Net cash provided by (used in) ($13,418) ($4,935) ($5,343) $2,528 ($1,211) ($2,272) investing activities Net cash provided by (used in) $13,382 $3,558 $9,864 ($7,314) ($1,356) ($623) financing activities BALANCE SHEET DATA: Working capital from $30,645 $15,118 $10,702 $5,690 $5,156 $9,833 continuing operations(4) Total assets 112,633 108,867 105,073 81,881 61,152 55,467 Total debt 32,317 38,363 49,387 41,942 40,565 21,842 Stockholders' equity 64,351 50,190 36,964 22,310 6,062 14,000
12 (1) A goodwill impairment charge of $4.2 million was recognized in fiscal 2002 based on management review of the recoverability of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets. A goodwill impairment charge of $14.1 million was recognized in fiscal 2001 based on management review of the recoverability of goodwill. There were asset impairment charges of $4.4 million in fiscal 2000 and $2.8 million in calendar 1999 based on our review of the net realizable value of certain long-lived assets (primarily goodwill) related to the manufacture and sale of watering products. (2) 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 our watering products operations and other expenses of $408,000 in connection with management restructuring charges, including severance and relocation expenses. In fiscal 2001, expenses of $545,000 were recognized for financial advisory, consulting and legal fees incurred to evaluate strategic alternatives. In fiscal 2002, we incurred $1.0 million of expense for financial advisory, consulting and legal fees associated with our recapitalization and refinancing. We also incurred $2.0 million of expense related to the relocation of our distribution facility from Columbus, Ohio to Louisville, Kentucky. (3) 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 a subsidiary. (4) Represents current assets less current liabilities (excluding the Acquisition Facility and the Junior Participation Term Loan Note). 13 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 include this reference 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.
Five-Month Period Ended (In thousands, except per share data) ------------------------------------- 1/3/1999 12/31/1999 ----------------- ----------------- (Unaudited) STATEMENT OF OPERATIONS DATA: Net sales $35,178 $36,366 Cost of goods sold 28,517 33,727 ----------------- ----------------- Gross profit 6,661 2,639 Selling, general and administrative expenses 6,622 7,625 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 before income taxes (2,624) (12,908) 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 per share ($3.24) ($21.57) (basic and diluted) Weighted average number of shares outstanding 646,410 602,317 OTHER DATA: Gross margin 18.9% 7.3% 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 continuing operations $28,067 $10,702 Total assets 114,893 105,073 Total debt 37,046 49,387 Stockholders' equity 62,090 36,964
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected consolidated financial data, our consolidated financial statements and the notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K, as well as the factors set forth under the caption "Forward-Looking Statements" below. OVERVIEW We are a leading manufacturer and distributor of non-powered lawn and garden tools. We are a holding company with no business operations of our own. Our only material asset is all of the outstanding capital stock of UnionTools. In February 2003, Acorn Merger Corporation ("AMC"), The TCW Group, Inc., Trust Company of the West, TCW Asset Management Company, TCW Special Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund, L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala (collectively, the "Filing Persons"), who collectively own 92.5% of our common stock, filed a Schedule 13E-3 with the Securities and Exchange Commission ("Commission") stating that they intend to merge AMC with and into our Company. Upon consummation of the merger and filing of a Form 15 with the Commission, we will no longer be subject to the reporting requirements of the Securities Exchange Act of 1934 and cease to be a "public" company. In the merger, each share of our common stock not owned by AMC will be converted into the right to receive $3.50. For more information about the merger, see the Schedule 13E-3 filed by the Filing Persons. 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. 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 were addressed and resolved in fiscal 2001, with the focus on cost savings opportunities. During fiscal 2000, we also decreased the cost of our logistical processes, reducing the number of distribution facilities from three to one. These reductions were accomplished 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 fiscal 2000 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 2002 and 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 prior years. During fiscal 2001, 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 a one-year extension of our current agreement at our injection molding facility, in addition to a three-year contract with the union representing the workers at our primary manufacturing facility in Frankfort, New York. During 15 fiscal 2002, we were successful in relocating our primary distribution facility from Columbus, Ohio to Louisville, Kentucky. The Louisville distribution center should provide cost savings estimated to be $1.0 million per annum. 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 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 2002, we entered into a Recapitalization Transaction, resulting in a new $10.0 million equity investment and a conversion of $8.3 million of subordinated debt into equity from our majority stockholders representing funds and accounts managed by TCW Special Credits and Oaktree Capital Management, LLC (the "Principal Holders"). We also entered into a new $45.0 million credit facility, agented by CapitalSource Finance, LLC (the "Lender"), consisting of a $12.5 million term loan and a $32.5 million revolving credit component. The term loan bears interest at prime plus 5.0% and the revolving credit component bears interest at prime plus 3.0%. The facility expires in June 2007. 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 Year Ended (12 months) -------------------------------------------- 12/31/2000 12/31/2001 12/31/2002 ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 83.6% 77.1% 76.8% ------------- ------------- ------------- Gross profit 16.4% 22.9% 23.2% Selling, general and administrative expenses 16.3% 16.6% 17.1% Interest expense 6.2% 6.4% 4.5% Amortization of intangibles 0.9% 1.0% 0.0% Asset impairment 3.9% 15.5% 4.7% Other expenses, net 1.4% 0.5% 3.3% ------------- ------------- ------------- Loss before income taxes -12.3% -17.1% -6.4% Income taxes 0.1% 0.1% -0.1% ------------- ------------- ------------- Net loss -12.4% -17.2% -6.3% Preferred stock dividends 0.0% 0.0% 0.5% ------------- ------------- ------------- Net loss attributable to common stockholders -12.4% -17.2% -6.8% ============= ============= =============
FISCAL 2002 COMPARED TO FISCAL 2001 Net Sales. Net sales decreased 0.1%, or $0.1 million, to $91.2 million in fiscal 2002 compared to $91.3 million in fiscal 2001. The decline in net sales was due to the absence of certain customers in fiscal 2002, who had purchased approximately $2.0 million in fiscal 2001, but subsequently filed for bankruptcy or liquidation. In addition, we experienced softer demand for our products due to general economic conditions and cold spring weather in the second quarter of fiscal 2002. This effect was partially offset by gains in our custom injection molded products and an improvement in customer deductions, a result of ongoing programs to drive operational efficiencies and service levels. Gross Profit. Gross profit increased 1.0%, or $0.2 million, to $21.1 million for fiscal 2002 compared to $20.9 million in fiscal 2001. Gross margin increased to 23.2% for fiscal 2002 from 22.9% for fiscal 2001. The increase is primarily due to continued cost improvements and efficiencies in our manufacturing and logistical processes, lowering our product cost and generating fewer customer deductions. These gains were partially offset 16 by the absence in fiscal 2002 of a gain of $2.0 million less related expenses recognized in fiscal 2001, related primarily to the net favorable effect of the termination of certain retiree medical and life benefits. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.4 million, or 2.7%, to $15.6 million for fiscal 2002 versus $15.2 million in fiscal 2001. As a percentage of net sales, selling, general and administrative expenses increased to 17.1% in fiscal 2002 as compared to 16.6% in fiscal 2001. During fiscal 2002, we incurred $1.2 million with respect to restricted stock and director bonuses for the success of the strategic alternative process and our performance. In the fourth quarter of fiscal 2002, we recognized $1.1 million in expense related to a long-term cash incentive program approved and implemented during the quarter. It replaces a stock option driven long-term management incentive program. The increase in selling, general and administrative expenses is primarily due to the long-term cash incentive program in addition to restricted stock agreements and directors' bonuses, offset by lower sales support costs, in part due to lower sales volume, an increase in information technology costs as a component of product cost, and reductions in employee related costs and other discretionary expenses. Operating Profit. Operating profit (gross profit less selling, general and administrative expenses) decreased 3.5%, or $0.2 million, to $5.5 million for fiscal 2002 compared to $5.7 million in the comparable period of fiscal 2001. The decrease in operating profit is attributable primarily to the items discussed above. Interest Expense. Interest expense decreased $1.8 million, or 31.0%, to $4.1 million in fiscal 2002 compared to $5.9 million in fiscal 2001. We have benefited from lower debt levels, lower interest rates and the absence of fees associated with the extension of our credit facility in fiscal 2001. Goodwill. Amortization of goodwill decreased $0.9 million, or 100.0%, in fiscal 2002 compared to $0.9 million in the comparable period of fiscal 2001 due to the adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets". Goodwill is no longer amortized under the new accounting rule. Asset Impairment. We performed the required transitional impairment tests of goodwill as of January 1, 2002 and concluded that goodwill at that date was not impaired. However, market conditions arising during fiscal 2002 indicated that goodwill impairment may have occurred during fiscal 2002. Accordingly, pursuant to Statement No. 142, we performed the next phase of the impairment evaluation and concluded that goodwill was impaired which resulted in a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002. The outcome of the evaluation was influenced by the valuation of individual assets and liabilities as required under Statement No. 142, particularly with regard to deferred financing fees, fixed assets, pension obligations, trademarks, and employment agreements. In addition, the enterprise fair value used for purposes of determining the implied fair value of goodwill was derived from the value ascribed to us under the Recapitalization Transaction discussed in Note 3 to our consolidated financial statements. We recognized a $14.1 million goodwill impairment charge in fiscal 2001 based on management evaluation of the recoverability of goodwill at that time. Other Expenses, Net. Other expenses, net, of $3.0 million were incurred in fiscal 2002 compared to $0.4 million in fiscal 2001. In the second quarter of fiscal 2002, we incurred $1.0 million of financial advisory, consulting and legal fees associated with our recapitalization and refinancing. During fiscal 2002, we also incurred $2.0 million related to the relocation of our primary distribution facility from Columbus, Ohio to Louisville, Kentucky. The Louisville distribution facility, now fully functioning as our primary distribution facility, should provide cost savings estimated to be $1.0 million per annum. In fiscal 2001, we spent $0.5 million, primarily in financial advisory, consulting and legal fees, to pursue and evaluate strategic alternatives leading up to the Recapitalization Transaction. Loss Before Income Taxes. Loss before income taxes improved $9.8 million, to a loss of $5.8 million for fiscal 2002 compared to a loss of $15.6 million in fiscal 2001. The decline in losses is attributable primarily to the items discussed above, in particular the goodwill impairment charge. Net Loss. Net loss improved $10.0 million, to a loss of $5.7 million for fiscal 2002 compared to a loss of $15.7 million in fiscal 2001 due to the items described above. Preferred Stock Dividends. As part of our Recapitalization Transaction discussed under "Liquidity and Capital Resources" below, we issued $8.2 million of 12% preferred stock that was outstanding during the second 17 half of fiscal 2002. As a result, we incurred a preferred stock dividend of $0.5 million in fiscal 2002. The preferred stock, including accrued dividends, was converted to common stock upon closing of the Rights Offering, also discussed under "Liquidity and Capital Resources." Net Loss Attributable to Common Stockholders. Net loss attributable to common stockholders improved $9.5 million, to a loss of $6.2 million for fiscal 2002 compared to a loss of $15.7 million in fiscal 2001. Net loss attributable to common stockholders per common share (basic and diluted) was $8.61 for fiscal 2002 based on a weighted average number of common shares outstanding of approximately 718,987, compared to net loss per common share of $25.86 (basic and diluted) for fiscal 2001, based on a weighted average number of common shares outstanding of approximately 606,222. FISCAL 2001 COMPARED TO FISCAL 2000 Net Sales. Net sales decreased 19.2%, or $21.6 million, to $91.3 million for fiscal 2001 compared to $112.9 million in fiscal 2000. The decline in net sales was driven by a drop in the sale of long handle 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 13.1%, or $2.4 million, to $20.9 million for fiscal 2001 compared to $18.5 million in fiscal 2000. Gross margin increased to 22.9% for fiscal 2001 from 16.4% 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 $3.2 million, or 17.7%, to $15.2 million for fiscal 2001 versus $18.4 million in fiscal 2000. As a percentage of net sales, selling, general and administrative expenses increased to 16.6% in fiscal 2001 as compared to 16.3% 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. 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. 18 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 advisory, 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 $25.86 (basic and diluted) for fiscal 2001 based on a weighted average number of shares outstanding of approximately 606,222, compared to net loss per share of $23.06 (basic and diluted) for fiscal 2000, based on a weighted average number of shares outstanding of approximately 605,736. 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 handle tools. 19 The following table sets forth certain unaudited data for each of the quarters in fiscal 2001 and fiscal 2002. 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 2001 Quarter Ended (Unaudited - in thousands) ------------------------------------------------------------------ 04/01/2001 07/01/2001 09/30/2001 12/31/2001 -------------- --------------- --------------- --------------- Net sales $27,842 $28,752 $17,414 $17,296 Cost of goods sold 20,626 23,291 13,108 13,379 -------------- --------------- --------------- --------------- Gross profit 7,216 5,461 4,306 3,917 Selling, general and administrative 3,775 3,971 3,793 3,612 -------------- --------------- --------------- --------------- expenses (SG&A) Gross profit less SG&A(1) $3,441 $1,490 $513 $305 ============== =============== =============== =============== Net sales as a percentage of 30.5% 31.5% 19.1% 18.9% full year net sales Gross profit as a percentage of 34.5% 26.1% 20.6% 18.8% full year gross profit
Fiscal 2002 Quarter Ended (Unaudited - in thousands) ------------------------------------------------------------------ 03/31/2002 06/30/2002 09/29/2002 12/31/2002 -------------- --------------- --------------- --------------- Net sales $26,835 $26,655 $19,306 $18,407 Cost of goods sold 20,083 20,236 14,682 15,087 -------------- --------------- --------------- --------------- Gross profit 6,752 6,419 4,624 3,320 Selling, general and administrative 3,303 3,418 3,097 5,748 -------------- --------------- --------------- --------------- expenses (SG&A) Gross profit less SG&A(1) $3,449 $3,001 $1,527 ($2,428) ============== =============== =============== =============== Net sales as a percentage of 29.4% 29.2% 21.2% 20.2% full year net sales Gross profit as a percentage of 32.0% 30.4% 21.9% 15.7% 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 borrowing 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, 2002, approximately $7.5 million was available under the revolving portion of the credit facility. Indebtedness outstanding bears interest at prime plus 5.0% for the term loan portion and prime plus 3.0% for the revolving portion of the credit facility. Net cash provided by operations was $2.7 million in fiscal 2002 compared to net cash provided by operations of $3.4 million in fiscal 2001. Changes in operating assets and liabilities contributed $0.4 million to net cash provided by operations in fiscal 2002 compared to a $1.1 million contribution in fiscal 2001. The decrease 20 was due to many factors, in particular an increase in deferred financing fees of $1.2 million. We have made significant progress in reducing inventory levels to support the business in the past year, generating $3.6 million in cash flow in fiscal 2002. Sales were relatively flat in fiscal 2002 compared to fiscal 2001, generating only a slight improvement in cash flow from receivables. Accounts payable and accrued expenses were a use of cash of $2.1 million in fiscal 2002, due to a payment of accrued success fees of $2.0 million during fiscal 2002. We made capital expenditures of approximately $2.4 million in fiscal 2002, $1.2 million in fiscal 2001, and $1.5 million in fiscal 2000. The capital expenditures relate to ongoing improvements of property, plant and equipment, manufacturing process improvements, increased manufacturing capacity, and system/technology infrastructure upgrades or enhancements. Capital expenditures were higher in fiscal 2002 primarily due to the investments made at our new distribution facility in Louisville, Kentucky. On June 28, 2002, we entered into a Recapitalization Transaction, resulting in a new $10.0 million equity investment and a conversion of $8.2 million of subordinated debt into equity from our majority stockholders representing funds and accounts managed by TCW Special Credits and Oaktree Capital Management, LLC (the "Principal Holders"). We also entered into a new $45.0 million credit facility, agented by CapitalSource Finance, LLC (the "Lender"), consisting of a $12.5 million term loan and a $32.5 million revolving credit component. The term loan bears interest at prime plus 5.0% and the revolving credit component bears interest at prime plus 3.0%. The facility expires in June 2007. The majority of the proceeds from this transaction were applied to our previous credit facility ($33.7 million was borrowed as of June 27, 2002), that otherwise expired on June 30, 2002. At December 31, 2002, we had $7.5 million available to borrow under our new credit facility and were in compliance with the covenants of our credit facility. 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 believe that the liquidity provided by the Recapitalization Transaction and new credit facility will be sufficient to move through our operating cycle. Rights Offering In connection with the Recapitalization Transaction, holders of common stock received rights (at the rate of 1,000 rights per 100 shares of common stock) to purchase one share of newly-issued common stock at $5.00 per share (post-split) for each right received (the "Rights Offering"). Participation in the Rights Offering resulted in the issuance of two hundred shares of common stock. New Credit Facility In conjunction with the new facility, we issued to the Lender 233,355 shares of our common stock during 2002, the value of which has been included in deferred financing fees and redeemable common stock in the balance sheet. In connection with a future termination in full of this new credit facility, the Lender has the right to require us to repurchase all the shares issued to such Lender at a price per share that is dependent on certain measures of cash flow, debt and cash at a future date. As of December 31, 2002, our potential repurchase obligation does not exceed the carrying value of the redeemable common stock. Sale of Convertible Notes The Principal Holders purchased for cash from us $10.0 million principal amount of 12% Convertible Notes due June 15, 2005 (the "Convertible Notes"). Upon the closing of the Rights Offering, the Convertible Notes (together with accrued interest thereon) were converted into shares of our common stock at the Rights Offering price of $5.00 per share. Note Exchange and Preferred Stock The Principal Holders received 822.6696 shares of newly-issued Series A Preferred Stock, $10,000 per share liquidation preference (the "Preferred Stock"), in exchange for all of their previously existing and outstanding interests in the 12% Junior Participation Notes (the "Junior Participation Notes") of UnionTools, our subsidiary, which represented the total amount of principal and accrued interest on the Junior Participation Notes. 21 The Preferred Stock had an initial aggregate liquidation preference equal to $8.2 million and accrued dividends at a 12% annual rate. The Preferred Stock was converted into common stock at the Rights Offering price upon the closing of the Rights Offering based on the liquidation preference and accrued dividends owing thereon as of the closing date of the Rights Offering. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our 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. 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. 22 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. Goodwill. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". 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. In accordance with SFAS 142, we performed the required transitional impairment tests of goodwill as of January 1, 2002 and concluded that goodwill at that date was not impaired. However, market conditions arising during fiscal 2002 indicated that goodwill impairment may have occurred during fiscal 2002. Accordingly, pursuant to Statement No. 142, we performed the next phase of the impairment evaluation and concluded that goodwill was impaired which resulted in a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002. The outcome of the evaluation was influenced by the valuation of individual assets and liabilities as required under Statement No. 142, particularly with regard to deferred financing fees, fixed assets, pension obligations, trademarks, and employment agreements. In addition, the enterprise fair value used for purposes of determining the implied fair value of goodwill was derived from the value ascribed to us under the Recapitalization Transaction. As required by Statement No. 142, we will perform an annual evaluation of goodwill impairment and, on an ongoing basis, assess whether there are indicators of impairment that will require additional testing for impairment. Income Taxes. We account for income taxes under the liability method pursuant to Statement of Financial Accounting Standards No. 109, 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. Based on our history of operating losses and in accordance with SFAS No. 109, we record a 100% valuation allowance resulting in no net deferred tax asset being recognized. Stock-Based Compensation. We maintain several stock-based compensation plans. We account for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income for options that are granted with an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the vesting period for options granted with an exercise price less than the market value of the underlying common stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and has been determined as if we had accounted for our employee stock options under the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation. The fair value of these options is estimated at the date of grant using the Black-Scholes option pricing model. 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 23 materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in our business, the following important factors: - The Filing Persons have filed a Schedule 13E-3 with the Commission indicating their intention to take our Company private. There can be no assurance that the merger with AMC will be completed. - Weather is the most significant factor in determining market demand for our products and is inherently unpredictable. Inclement weather during the spring gardening season and lack of snow during the winter may have a material adverse effect on our business, financial condition, and results of operations. - The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, our sales tend to be greater during those months. As a result, our operating results depend significantly on the spring selling season. To support this sales peak, we must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, our levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the 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 65% of gross sales in fiscal 2002. 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 Home Depot, Wal-Mart, and Lowe's. 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 Chairman, 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. 24 - 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 three such agreements: one expires in 2003, one expires in 2004, and one expires in 2005. There can be no assurance that we will be successful in negotiating new labor contracts on terms satisfactory to us or without work stoppages or strikes. A prolonged work stoppage or strike at any of our facilities could have a material adverse effect on our business, financial condition, and results of operations. - We are subject to various federal, state, and local environmental laws, ordinances, and regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment, and disposal of hazardous substances and wastes. We have made, and will continue to make, expenditures to comply with these environmental requirements and regularly review our procedures and policies for compliance with environmental laws. We also have been involved in remediation actions with respect to certain facilities. Amounts expended by us in such compliance and remediation activities have not been material to us. Current conditions and future events, such as changes in existing laws and regulations, may, however, give rise to additional compliance or remediation costs that could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. - New housing starts often represent an addition to the overall number of consumers in the lawn and garden tool market and, accordingly, an increase in demand. Similarly, government spending on highways, bridges, and other construction projects often represents an increase in demand for long handle tools. A decline in housing starts or government spending on construction projects could result in a decrease in demand for our products and, accordingly, could have a material adverse effect on our business, financial condition, and results of operations. - Adverse changes in general economic conditions in the United States, including the level and availability of consumer debt, the level of interest rates, and consumer sentiment regarding the economy in general, could result in a decrease in demand for our products and, accordingly, could have a material adverse effect on our business, financial condition, and results of operations. The factors set forth above are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we will not undertake, and specifically decline, any obligation to publicly 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. 25 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. On June 28, 2002, we entered into a five-year, $45.0 million credit facility. In connection with the facility, the interest rate charged on outstanding borrowings is prime plus 5.0% for the term loan and prime plus 3.0% for the revolving line of credit. 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-24 hereof (see Item 15 of this Annual Report on Form 10-K for the index). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 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 71 Director Vincent J. Cebula 39 Director John J. Kahl, Jr. 62 Director John L. Mariotti 61 Director A. Corydon Meyer 48 Chairman, President, and Chief Executive Officer
William W. Abbott became a director in January 1997, Chairman in October 1999, and resigned his position as Chairman in December 2002. 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 Chairman and Director of Rotech Healthcare, Inc., a member of the Boards of Directors of Horace Mann Educators Corporation 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. Vincent J. Cebula became a director in June 2001. Mr. Cebula is a Managing Director of Oaktree Capital Management, LLC ("Oaktree"), 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 Chief Executive Officer 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 and Chief Executive Officer 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 the Chairman of the Board of WKI Holding Company, Inc. of Reston, Virginia, a Director of Home Care Industries, Amrep, Inc. of Marietta, Georgia, a Director of Doskocil Manufacturing of Arlington, Texas, and a member of the Advisory Board of Manco, Inc. A. Corydon Meyer became a director, the President, and Chief Executive Officer of the Company and UnionTools in September 1999. Mr. Meyer was elected Chairman in December 2002. Mr. Meyer joined the Company in June 1999 as Senior Vice President of Sales and Marketing. From 1998 to 1999, Mr. Meyer served as Vice President and Chief Operating Officer of Reiker Enterprises, Inc. From 1990 to 1998, Mr. Meyer served as Vice President and Business Unit Manager of Lamson & Sessions Co. From 1977 to 1990, Mr. Meyer served in various finance, manufacturing, sales, and marketing positions with White Consolidated Industries, most recently as Vice President, Sales and Marketing, of Cooking Products. MEETINGS, COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS Our Board of Directors had a total of twelve meetings during the fiscal year ended December 31, 2002 ("fiscal 2002"). During fiscal 2002, 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. Messrs. Abbott, Kahl, and 27 Mariotti receive the following annual compensation: (i) $5,000 per calendar quarter and (ii) reimbursement of reasonable out-of-pocket expenses. We pay $5,000 per calendar quarter to Oaktree Capital Management for Mr. Cebula's services as a director and reimburse Mr. Cebula's reasonable out-of-pocket expenses. Additionally, in fiscal 2002, Mr. Abbott, our former Chairman of the Board, received additional compensation of $40,000 for his services and Mr. Mariotti, Chairman of our Audit Committee received additional compensation of $3,500 for his services. Compensation under our Deferred Equity Compensation Plan for Directors (the "Director Stock Plan") ceased in the second quarter of fiscal 2002. In December 2002, Mr. Abbott resigned as Chairman of the Board and Mr. Meyer was elected as Chairman. James R. Lind resigned from the Board of Directors in March 2003. In December 2002 and upon completion of the Rights Offering, we entered into agreements with Messrs. Abbott, Mariotti and Kahl which provide for restricted stock grants in the amounts of 30,000 shares, 12,500 shares, and 12,500 shares, respectively. In consideration of these grants, all previously-issued stock options were terminated. These shares vest as follows: 1/3 during fiscal 2002, 1/3 vesting during fiscal 2003, and 1/3 during fiscal 2004, subject to continued service as a director. These grants were approved by our stockholders in November 2002. In December 2002 and upon completion of the Rights Offering, we granted each of Messrs. Abbott, Mariotti and Kahl options to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share. In connection with an amendment to the restricted stock agreements of Messrs. Abbott, Mariotti and Kahl, all of these options were terminated on December 31, 2002. In January 2002, we created a Special Committee (the "Special Committee") consisting of Messrs. Abbott, Kahl, and Mariotti, each of whom is an independent director, to review the terms of the Recapitalization Transaction with the Principal Holders that was completed during fiscal 2002. During fiscal 2002, our Special Committee met six times. In March 1997, we 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 our 1997 Stock Incentive Plan, including the selection of optionees and the timing of option grants and restricted stock grants, (ii) administer our 1997 Non-Employee Director Stock Option Plan, (iii) review and monitor key associate compensation policies and administer our management compensation plans, and (iv) monitor the performance of our executive officers and develop succession and career planning related thereto. Currently, Messrs. Abbott (Chairman), Cebula, Kahl, and Mariotti serve on our Compensation Committee. During fiscal 2002, our Compensation Committee met one time. Our Audit Committee recommends the annual appointment of our independent public accountants with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, the accounting principles used by us in financial reporting, internal financial auditing procedures, and the adequacy of our internal control procedures. Currently, Messrs. Mariotti (Chairman), Abbott, and Kahl serve on our Audit Committee. During fiscal 2002, our Audit Committee met two times. In November 2001, our Board of Directors agreed to pay a one-time extraordinary director fee of $50,000 to each of Messrs. Kahl and Mariotti in recognition of the additional time commitment expected from such individuals, payable in January 2002. In March 2002, our Board of the Directors paid a one-time extraordinary director fee of $150,000 to Mr. Abbott in recognition of the additional time commitment expected from him. 28 EXECUTIVE OFFICERS In addition to Mr. Meyer, the following persons are our executive officers: John G. Jacob, age 43, was named Vice President and Chief Financial Officer in June 1999. From 1998 to June 1999, Mr. Jacob served as Vice President of Finance for Sun Apparel Company/Polo Jeans Company. Prior to that, Mr. Jacob served as Vice President of Finance and Treasurer of Maidenform Worldwide, Inc. from 1996 to 1998. From 1991 to 1996, Mr. Jacob served in various positions at Kayser-Roth Corporation, most recently as Vice President and Treasurer. Gary W. Zimmerman, age 45, 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 43, was named Vice President of Human Resources in December 2000. Ms. LaScala joined the Company 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. Hubert (Hugh) B. Martin III, age 46, was named Senior Vice President, Sales and Marketing, in December 2002. From February 2001 to December 2002, Mr. Martin served as Executive Vice President, Sales and Marketing, for Manco Power Sports. Prior to that, from June 1988 to December 2000, Mr. Martin served in various positions with Ames True Temper, most recently as Senior Vice President, Sales. From May 1984 to May 1988, Mr. Martin served in various positions with Atlas Copco Industrial Compressors, Inc., most recently as Manager of Marketing and Sales for Lubricated Products. Officers are elected annually by the Board of Directors and serve at its discretion. There are no family relationships among our directors and executive officers. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and greater than 10% stockholders to file reports of ownership and changes in ownership of our securities with the Securities and Exchange Commission ("SEC"). Copies of the reports are required by SEC regulation to be furnished to us. Based on our review of such reports, we believe that all reporting persons complied with all filing requirements during the fiscal year ended December 31, 2002, except for a late Form 4 filings for Oaktree Capital Management, LLC, OCM Principal Opportunities Fund, L.P., The TCW Group, Trust Company of the West, TCW Asset Management Company, and TCW Special Credits. 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"). Non-cash compensation, other than options to purchase common stock, was paid by UnionTools. 29 SUMMARY COMPENSATION TABLE
Long-Term Compensation ---------------------------------------- Restricted Securities LTIP All Other Name and Stock Underlying Payouts Compensation Principal Position Year Salary ($) Bonus ($) Awards ($) Options (#)(1) ($) ($) (2)(3)(4)(5) ------------------------- ------ ------------ ------------ ------------ --------------- --------- --------------- A. Corydon Meyer 2002 $303,343 $140,931 $292,250 -- -- $11,071 President and Chief 2001 277,404 138,700 -- -- -- 9,648 Executive Officer 2000 257,192 40,000 -- 11,905 -- 22,481 John G. Jacob 2002 $219,808 $96,716 $75,250 -- -- $9,568 Chief Financial Officer 2001 206,539 84,000 -- -- -- 8,821 and Vice President 2000 192,785 22,000 -- 7,619 -- 9,091 Gary W. Zimmerman(6) 2002 $214,871 $92,285 $70,000 -- -- $10,488 Senior Vice President, 2001 203,077 84,000 -- -- -- 17,732 Operations 2000 57,355 40,000 -- 10,000 -- 66,483 Carol B. LaScala 2002 $121,632 $44,101 $28,000 -- -- $6,122 Vice President, 2001 110,000 44,000 -- 3,520 -- 5,774 Human Resources 2000 95,809 15,000 -- 500 -- 2,535
-------------------- (1) All options that were granted in previous years were cancelled in fiscal 2002. Shares of restricted stock were granted in exchange for the cancellation of options as follows: 83,500, 21,500, 20,000, and 8,000 for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively. (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"). (3) Amounts shown for fiscal 2000 include the following: $596, $291, $358, and $114 paid by us with respect to supplementary life insurance for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $9,385, $8,800, and $2,421 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Meyer and Jacob, and Ms. LaScala, respectively; and $66,125 paid by us with respect to relocation expenses for Mr. Zimmerman. (4) Amounts shown for fiscal 2001 include the following: $859, $321, $303, and $46 paid by us with respect to supplementary life insurance for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $8,500, $8,500, $7,462, and $5,500 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; and $9,678 paid by us with respect to relocation expenses for Mr. Zimmerman. (5) Amounts shown for fiscal 2002 include the following: $1,071, $333, $488, and $51 paid by us with respect to supplementary life insurance for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $10,000, $9,235, $10,000, and $6,071 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively. (6) Mr. Zimmerman's employment with us and UnionTools began on September 11, 2000. 30 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the grant of stock options to our Named Executive Officers during the fiscal year ended December 31, 2002. INDIVIDUAL GRANTS
Potential Realized Value at Number of % of Total Assumed Annual Rates of Stock Securities Options Price Appreciation for Underlying Granted to Exercise Option Terms(2)(3) Options Granted Associates in Price Expiration ---------------------------------- Name (#) Fiscal Year(1) ($/Share) Date 5% ($) 10% ($) ----------------------- ------------------ -------------- --------- ---------- -------------- --------------- A. Corydon Meyer 0 -- -- -- -- -- John G. Jacob 0 -- -- -- -- -- Gary W. Zimmerman 0 -- -- -- -- -- Carol B. LaScala 0 -- -- -- -- --
(1) Percentage is based upon 250 options granted to associates in fiscal 2002. (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. 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, 2002.
Shares Number of Securities Value of Unexercised Acquired Underlying Unexercised In-the-Money Options On Value Options at Year-End (#) at Year-End ($) (2) Exercise Realized ------------------------------ ---------------------------- Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable ---- --- ------- ----------- ------------- ----------- ------------- A. Corydon Meyer 0 0 0 0 0 0 John G. Jacob 0 0 0 0 0 0 Gary W. Zimmerman 0 0 0 0 0 0 Carol B. LaScala 0 0 0 0 0 0
31 --------------- (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. An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option. EQUITY COMPENSATION PLAN TABLE The following table sets forth additional information as of December 31, 2002, about shares of common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements not submitted to the stockholders for approval. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and other rights and the number of shares remaining available for future grants excluding the shares to be issued upon exercise of outstanding options, warrants, and other rights. EQUITY COMPENSATION PLAN INFORMATION
Number of securities Number of Securities remaining available to be issued upon for issuance under exercise of Weighted-average equity compensation outstanding options, exercise price of plans (excluding warrants and rights outstanding options, securities reflected Plan Category warrants and rights in column (a)) ------------------------------------- ---------------------- ------------------------- ---------------------- Equity compensation plans approved 196,654(2) $78.95(2) 353,346 by security holders(1) Equity compensation plans not 578 $121.00 0 approved by security holders(3) Total 197,232 $81.58 353,346
(1) Equity compensation plans approved by stockholders include the 1997 Stock Incentive Plan, as amended; the Amended and Restated Deferred Equity Compensation Plan for Directors; and the 1997 Non-Employee Director Stock Incentive Plan, as amended. (2) Includes 188,000 shares of restricted stock and options to purchase 8,654 shares of our common stock. For purposes of calculating the weighted average exercise price, the shares of restricted stock are excluded from the calculation. (3) Represents options issued under the VHG Option Plan which was not approved by the stockholders. We became the successor issuer to the VHG Option Plan upon our acquisition of VHG Tools, Inc. All outstanding options granted under the VHG Option Plan terminate in 2003. Pursuant to the terms of the VHG Option Plan, we can not issue any additional options under that Plan. TEN YEAR OPTION REPRICING In December 2002, as part of our Recapitalization Transaction, the following executive officers agreed to cancel all outstanding options to purchase shares of our common stock. In exchange for the cancellation of all options, each executive officer was granted shares of restricted stock. The table below presents the required disclosure with respect to any repricing of options held by any executive officer during the last ten completed years. 32
Length of Number of Original Securities Market Price Option Term Underlying of the Stock Exercise Price Remaining Options at the Time of at Time of New at Date of Repriced or Repricing or Repricing or Exercise Repricing or Name/Title Date Amended (#) Amendment ($) Amendment ($) Price ($) Amendment ---------- ---- ----------- ------------- ------------- --------- --------- A. Corydon Meyer 10/3/00 1,690 $9.70 $48.10 $22.25 8.8 years Chairman, President 10/3/00 8,309 $9.70 $38.80 $22.25 8.9 years and CEO 12/24/02 41,904 $2.53 $5.80 - $22.50 N/A(1) N/A(1) John G. Jacob 12/24/02 10,765 $2.53 $12.50 - $48.10 N/A(1) N/A(1) Vice President and Chief Financial Officer Gary W. Zimmerman 9/17/01 25,000 $4.50 $12.50 $5.80 8.0 years Senior VP, Operations 12/24/02 10,000 $2.53 $5.80 - $12.50 N/A(1) N/A(1) Carol B. LaScala 12/24/02 4,020 $2.53 $12.50 - $30.00 N/A(1) N/A(1) Vice President, Human Resources
-------------- (1) Each of the named executives in the table agreed to terminate all options that they currently own in exchange for the issuance of restricted stock. Our Management Development and Compensation Committee and our stockholders approved the exchange of options for shares of restricted common stock. The termination of options to our executives and grant of restricted stock in lieu thereof was done to incentivize our executive officers and was done as part of our Recapitalization Transaction. Our Management Development and Compensation Committee believes that the issue of the restricted stock will more closely align the interests of our executives with our interests. MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE William W. Abbott (Chairman) Vincent J. Cebula John J. Kahl, Jr. John L. Mariotti PENSION PLANS UnionTools maintains six noncontributory defined benefit pension plans covering most of our hourly associates. UnionTools 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 2002 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. 33 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 November 2002 and upon completion of the Rights Offering, we entered into agreements with Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala which provides for restricted stock grants in the amounts of 83,500 shares, 21,500 shares, 20,000 shares, and 8,000 shares, respectively. In consideration of these restricted stock grants, all previously-issued stock options were terminated. The restricted shares vest as follows: 1/3 during fiscal 2002, 1/3 during fiscal 2003, and 1/3 during fiscal 2004. Mr. Meyer, pursuant to the terms of this restricted stock agreement, has no beneficial ownership of the restricted shares granted to him until all of his shares have vested or until his employment with us is terminated. In June 2002, we entered into an employment agreement with Mr. Meyer with a term expiring on June 30, 2005. The agreement provides for a base salary of $300,000, subject to increases approved by our Board. Mr. Meyer is eligible to receive an annual targeted bonus of 60% of his base salary upon the achievement of performance goals set by our Board. If Mr. Meyer is terminated by us for any reason other than for cause (as defined in the agreement) or by Mr. Meyer for good reason (as defined in the agreement), we will pay Mr. Meyer: (i) in a lump sum, an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) included in gross income paid to Mr. Meyer during any one of the three taxable years proceeding the date of termination; (ii) continue to pay Mr. Meyer's life insurance and medical benefit premiums for the lesser of one year from date of termination or until Mr. Meyer accepts subsequent employment; and (iii) outplacement services expenses of up to $25,000 for up to one year from termination. If Mr. Meyer's employment with us is terminated by either Mr. Meyer for good reason (as defined in the agreement) or by us for any reason other than for cause (as defined in the agreement), within either (i) 90 days prior to a change of control or (ii) two years after a change of control, in addition to the severance payments outlined above, we will pay Mr. Meyer, in a lump sum, on the fifth day following the date of Mr. Meyer's termination, an amount equal to two times the highest aggregate annual compensation (which shall include salary, bonuses and cash incentive payments only) included in gross income paid to Mr. Meyer during any one of the three taxable years proceeding the date of Mr. Meyer's termination. In June 2002, we entered into an employment agreement with Mr. Jacob with a term expiring on June 30, 2005. The agreement provides for a base salary of $225,000, subject to increases approved by our Board. Mr. Jacob is eligible to receive an annual targeted bonus of 50% of his base salary upon the achievement of performance goals set by our Board. If Mr. Jacob is terminated by us for any reason other than for cause (as defined in the agreement) or by Mr. Jacob for good reason (as defined in the agreement), we will pay Mr. Jacob: (i) in a lump sum, an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) included in gross income paid to Mr. Jacob during any one of the three taxable years proceeding the date of termination; (ii) continue to pay Mr. Jacob's life insurance and medical benefit premiums for the lesser of one year from date of termination or until Mr. Jacob accepts subsequent employment; and (iii) outplacement services expenses of up to $25,000 for up to one year from termination. If Mr. Jacob's employment with us is terminated by either Mr. Jacob for good reason (as defined in the agreement) or by us for any reason other than for cause (as defined in the agreement), within either (i) 90 days prior to a change of control or (ii) two years after a change of control, in addition to the severance payments outlined above, we will pay Mr. Jacob, in a lump sum, on the fifth day following the date of Mr. Jacob's termination, an amount equal to two times the highest aggregate annual compensation (which shall include salary, bonuses and cash incentive payments only) included in gross income paid to Mr. Jacob during any one of the three taxable years proceeding the date of Mr. Jacob's termination. In September 2000, we entered into a change in control agreement with Mr. Zimmerman which provides that following termination for any reason other than "just cause" within eighteen months of a change of control event (as defined in such agreement), we will pay Mr. Zimmerman an amount equal to one year's annual salary. This agreement was amended in June 2002 to provide that if Mr. Zimmerman is terminated for any reason other 34 than "just cause" within eighteen months after a change of control event (as defined in such agreement), we will pay Mr. Zimmerman an amount equal to three year's annual salary. In November 1999, we entered into a change of control agreement with Ms. LaScala which provides that following termination for any reason other than "just cause" within eighteen months of a change of control event (as defined in such agreement), we will pay Ms. LaScala 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 March 21, 2003:
Shares Beneficially Owned(1)(2) ---------------------------------- Number Percent --------------- ------------- The TCW Group, Inc.(3) 2,478,366 49.5% OCM Principal Opportunities Fund, L.P.(4) 1,890,441 37.7% William W. Abbott(5) 58,510 1.2% Vincent J. Cebula 0 * John J. Kahl(6) 32,500 * John L. Mariotti(7) 33,170 * A. Corydon Meyer(8) 2,150 * John G. Jacob(9) 21,500 * Gary W. Zimmerman(10) 20,230 * Carol B. LaScala(11) 8,000 * --------------- ------------- All directors and executive officers as a group (8 persons)(12) 176,060 3.5%
-------------- * 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") 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, and 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 two third party accounts that hold shares of common stock (the "TCW Accounts"). The TCW Limited Partnerships and the TCW Accounts in the aggregate hold 1,648,295 shares of common stock. The TCW Group, Inc. also is the parent corporation of Trust Company of the 35 West, which is the trustee of four trusts that hold shares of common stock (the "TCW Trusts"). The TCW Trusts in the aggregate hold 830,071 shares of common stock. The following TCW Limited Partnerships and TCW Trusts individually beneficially own more than 5% of the outstanding shares of common stock:
Shares Percent Beneficially Beneficially Name Owned Owned ----------------------------------------------------- --------------- -------------- TCW Special Credits Fund IIIb 364,425 7.3% TCW Special Credits Fund IV 321,370 6.4% TCW Special Credits Plus Fund 344,723 6.9% Weyerhaeuser Company Master Retirement Trust 358,448 7.2% TCW Special Credits Trust IIIb 259,471 5.2% TCW Special Credits Trust IV 283,547 5.7%
Certain of the Individual Partners also are principals of Oaktree Capital Management, LLC ("Oaktree"). The Individual Partners, in their capacity as general partners of TCW Special Credits, have been designated to manage the TCW Limited Partnerships, the TCW Accounts and the TCW Trusts. Although Oaktree provides consulting, research and other investment management support to the Individual Partners, Oaktree does not have voting or dispositive power with respect to the TCW Limited Partnerships, the TCW Accounts or the TCW Trusts. Based upon information contained in a Schedule 13D/A filed on February 24, 2003. (4) Oaktree, as the general partner of OCM Principal Opportunities Fund, L.P., has voting and dispositive power over the shares held by OCM Principal Opportunities Fund, L.P. and may be deemed a beneficial owner of such shares. Based upon information contained in a Schedule 13D/A filed on February 24, 2003. (5) Includes 30,000 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of service with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. Does not include 762 shares of common stock issuable pursuant to the Director Stock Plan. (6) Includes 12,500 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of service with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. Does not include 3,252 shares of common stock issuable pursuant to the Director Stock Plan. (7) Includes 12,500 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of service with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. Does not include 3,252 shares of common stock issuable pursuant to the Director Stock Plan. (8) Does not include 83,500 restricted shares of common stock which were granted to Mr. Meyer pursuant to a restricted stock agreement. Mr. Meyer has no beneficial ownership in these shares until either they are 100% vested or his employment with us is terminated. (9) Includes 21,500 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of employment with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. (10) Includes 20,000 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of employment with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. (11) Includes 8,000 restricted shares of common stock which are owned subject to a risk of forfeiture on termination of employment with vesting over a period of three years pursuant to the terms of a restricted stock agreement with the Company. (12) See notes (5) through (11) above. 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Abbott, 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 June 2002, the Principal Holders purchased for cash from us $10,000,000 principal amount of the Convertible Notes. Upon the closing of the Rights Offering, the Convertible Notes (together with accrued interest thereon) were converted into shares of our common stock at the Rights Offering price of $5.00 per share. In June 2002, the Principal Holders received 822.6696 shares of newly-issued Preferred Stock in exchange for all of their previously existing and outstanding interests in the Junior Participation Notes of UnionTools, our subsidiary, which represented the total amount of principal and accrued interest on the Junior Participation Notes. The Preferred Stock had an initial aggregate liquidation preference equal to $8,226,696 and accrued dividends at a 12% annual rate. The Preferred Stock was converted into common stock at the Rights Offering price upon the closing of the Rights Offering based on the liquidation preference and accrued dividends owing thereon as of the closing date of the Rights Offering. In December 2002 and upon completion of the Rights Offering, we issued to the Principal Holders an aggregate of 3,937,657 shares of common stock and paid to the Principal Holders an aggregate of $54.93 for fractional shares. Included in the issuance of the shares of common stock were 79,684 shares issued to Oaktree Capital Management in exchange for the termination of all previously-issued stock options and deferred equity compensation owing to current and past directors of our Company employed by the Principal Holders. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. CHANGES IN INTERNAL CONTROLS Since the date of our evaluation to the filing date of this Annual Report, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 37 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are filed with this Annual Report on Form 10-K pursuant to Item 8: - Report of Independent Auditors - Consolidated Balance Sheets as of December 31, 2001 and December 31, 2002 - Consolidated Statements of Operations for fiscal 2000, fiscal 2001, and fiscal 2002 - Consolidated Statements of Stockholders' Equity for fiscal 2000, fiscal 2001, and fiscal 2002 - Consolidated Statements of Cash Flows for fiscal 2000, fiscal 2001, and fiscal 2002 - Notes to Consolidated Financial Statements (a)(2) The following financial statement schedules are filed with this Annual Report on Form 10-K pursuant to Item 15(d) and appear immediately preceding the exhibit index: I. Condensed Financial Information of Registrant II. Valuation and Qualifying Accounts Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes thereto. (a)(3) The following items are filed as exhibits to this Annual Report on Form 10-K:
Exhibit Number Description -------------- ----------- 2.1 Purchase Agreement, dated as of June 26, 2002, by and among Acorn Products, Inc. and UnionTools, Inc. as issuers and TCW Special Credits and OCM Principal Opportunities Fund, L.P. as purchasers (reference is made to Exhibit 10.2 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 3.1 Third Amended and Restated Certificate of Incorporation of Acorn Products, Inc. (reference is made to Exhibit 3.1 to Form 8-K, dated November 21, 2002, filed with the Securities and Exchange Commission on November 22, 2002) 3.2 Amended and Restated Bylaws of Acorn Products, Inc.*** 3.3 Certificate of Designation of, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of Series A Convertible Preferred Stock of Acorn Products, Inc. (reference is made to Exhibit 3.1 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 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 Agreement, dated as of June 11, 2002, among the Company, UnionTools, Inc., and A. Corydon Meyer**
38 10.1.3* Employment Agreement, dated as of June 11, 2002, among the Company, UnionTools, Inc., and John G. Jacob** 10.1.4* 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) 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 Amendment Number 1 to License Agreement, dated as of December 12, 2001, between UnionTools, Inc. and The Scotts Company (reference is made to Exhibit 10.10 to Form 10-K/A for the year ended December 31, 2001, filed with the Securities and Exchange Commission on October 17, 2002) 10.10 Revolving Credit, Term Loan and Security Agreement among Acorn Products, Inc. and UnionTools, Inc. as borrower, CapitalSource Finance LLC, as agent and lender and other lenders thereto, dated as of June 28, 2002 (reference is made to Exhibit 10.1 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 10.11 Stockholders' Rights Agreement by and among Acorn Products, Inc. and OCM Principal Opportunities Fund, L.P., Houlihan Lokey Howard & Zukin Capital, LLC and CapitalSource Holdings LLC, dated as of June 28, 2002 (reference is made to Exhibit 10.3 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 10.12 Registration Rights Agreement by and among Acorn Products, Inc. and OCM Principal Opportunities Fund, L.P., Houlihan Lokey Howard & Zukin Capital, LLC and CapitalSource Holdings LLC, dated as of June 28, 2002 (reference is made to Exhibit 10.4 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 10.13 Registration Rights Agreement by and among Acorn Products, Inc. and TCW Special Credits, dated as of June 28, 2002 (reference is made to Exhibit 10.5 to Form 8-K, dated June 28, 2002, filed with the Securities and Exchange Commission on July 2, 2002) 10.14* Acorn Products, Inc. Third Amended and Restated 1997 Nonemployee Director Stock Option Plan (reference is made to Exhibit 4(c) on a Registration Statement on Form S-8 (Registration Number 333-101403), filed with the Securities and Exchange Commission on November 22, 2002) 10.15* Acorn Products, Inc. Second Amended and Restated 1997 Stock Incentive Plan (reference is made to Exhibit 4(c) on a Registration Statement on Form S-8 (Registration Number 333-101402), filed with the Securities and Exchange Commission on November 22, 2002)
39 10.16* Acorn Products, Inc. Long-Term Incentive Plan (reference is made to Appendix C to the Proxy dated October 21, 2002, filed with the Securities and Exchange Commission on October 21, 2002) 10.17* 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 29, 2002: Current Report on Form 8-K, dated October 11, 2002, filed with the Securities Exchange Commission on October 16, 2002 (Items 5 and 7) Current Report on Form 8-K, dated November 21, 2002, filed with the Securities Exchange Commission on November 22, 2002 (Items 5 and 7) Current Report on Form 8-K, dated November 29, 2002, filed with the Securities Exchange Commission on December 6, 2002 (Items 5 and 7) Current Report on Form 8-K, dated January 7, 2003, filed with the Securities Exchange Commission on January 13, 2003 (Items 5 and 7) Current Report on Form 8-K, dated February 21, 2003, filed with the Securities Exchange Commission on February 21, 2003 (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 15 is submitted as a separate section of this report (see Item 15(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 report to be signed on its behalf by the undersigned, thereunto duly authorized. ACORN PRODUCTS, INC. By: /s/ John G. Jacob ----------------------------------- Name: John G. Jacob Title: Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer: By: * A. Corydon Meyer ----------------------------------- Name: A. Corydon Meyer Title: Chairman, President, and Chief Executive Officer 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, Director By: * Vincent J. Cebula ----------------------------------- Vincent J. Cebula, Director By: ----------------------------------- 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: March 27, 2003 41 CERTIFICATION 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 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; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ A. Corydon Meyer ----------------------------------------- A. Corydon Meyer, Chairman, President, and Chief Executive Officer 42 CERTIFICATION 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 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; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ John G. Jacob -------------------------------------------- John G. Jacob, Vice President and Chief Financial Officer 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, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the index at Item 15(a)(2). 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, 2001 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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. As discussed in Note 2, in 2002 the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/ ERNST & YOUNG LLP Columbus, Ohio February 21, 2003 F-1 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 2001 2002 ----------- ------------ ASSETS (In thousands) Current assets: Cash $ 1,391 $ 1,181 Accounts receivable, less reserves for doubtful accounts, sales discounts, 10,831 11,155 and other allowances ($1,290 and $673, respectively) Inventories, less reserves for excess and obsolete inventory 24,642 21,034 ($1,042 and $1,219, respectively) Prepaids and other current assets 358 597 ----------- ------------ Total current assets 37,222 33,967 Property, plant and equipment, net of accumulated depreciation 11,568 11,159 Goodwill, net of accumulated amortization (see Note 2) 11,808 7,567 Deferred financing fees 0 2,370 Prepaid pension asset 3,889 0 Other intangible assets 554 404 ----------- ------------ Total assets $ 65,041 $ 55,467 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility (average interest rate of 8.56% and 7.88%, respectively) $ 18,132 $ 9,342 (See Note 3) Acquisition facility (average interest rate of 8.30%) (See Note 3) 14,630 0 Junior participation term loan note (average interest rate of 12.00%) (See Note 3) 7,718 0 Term loan (short-term portion) (average interest rate of 10.00%) (See Note 3) 0 625 Accounts payable 5,890 5,109 Accrued expenses 10,424 9,058 ----------- ------------ Total current liabilities 56,794 24,134 Term loan (long-term portion) (average interest rate of 10.00%) (See Note 3) 0 11,875 Accrued pension liability 1,509 3,212 Other long-term liabilities 676 1,079 ----------- ------------ Total liabilities 58,979 40,300 Contingency (see Note 7) Redeemable common stock, 233,355 shares issued and outstanding at 0 1,167 December 31, 2002 STOCKHOLDERS' EQUITY Common stock, par value of $0.01 per share, 20,000,000 shares authorized; 78,262 98,404 646,411 and 4,815,363 shares issued at December 31, 2001 and December 31, 2002, respectively; and 606,236 and 4,776,779 shares outstanding at December 31, 2001 and December 31, 2002, respectively Contributed capital stock options 460 452 Accumulated other comprehensive loss - minimum pension liability (2,120) (8,211) Retained earnings (deficit) (68,279) (74,474) ----------- ------------ 8,323 16,171 Common stock in treasury, 40,175 and 38,584 shares at (2,261) (2,171) ----------- ------------ December 31, 2001 and December 31, 2002, respectively Total stockholders' equity 6,062 14,000 ----------- ------------ Total liabilities, redeemable common stock, and stockholders' equity $ 65,041 $ 55,467 =========== ============
See accompanying notes. F-2 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended --------------------------------------------------------------- 12/31/2000 12/31/2001 12/31/2002 ----------------- ----------------- ----------------- (In thousands, except per share data) Net sales $112,946 $ 91,304 $91,203 Cost of goods sold 94,464 70,404 70,088 ----------------- ----------------- ----------------- Gross profit 18,482 20,900 21,115 Selling, general and administrative expenses 18,407 15,151 15,566 Interest expense 6,947 5,895 4,068 Amortization of intangibles 974 876 0 Asset impairment 4,402 14,130 4,241 Other expenses, net: Plant consolidation and 408 0 1,987 management restructuring Strategic transactions 0 545 1,004 Loss on sale of assets 1,238 0 32 Miscellaneous (6) (102) (19) ----------------- ----------------- ----------------- Loss before income taxes (13,888) (15,595) (5,764) Income tax expense (benefit) 80 84 (51) ----------------- ----------------- ----------------- Net loss (13,968) (15,679) (5,713) Preferred stock dividends 0 0 480 ----------------- ----------------- ----------------- Net loss attributable to common stockholders $(13,968) $(15,679) $(6,193) ================= ================= ================= Net loss attributable to common stockholders $ (23.06) $ (25.86) $ (8.61) per share (basic and diluted) ================= ================= ================= Weighted average number of shares outstanding 605,736 606,222 718,987 (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 December 31, 1999 604,668 $78,262 $460 $ (778) $(38,632) $(2,348) $ 36,964 Net loss 0 0 0 0 (13,968) 0 (13,968) 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 1,548 0 0 0 0 87 87 ------------- ---------- ---------- -------------- ------------- ----------- ----------- Balances at December 31, 2000 606,216 78,262 460 (1,551) (52,600) (2,261) 22,310 Net loss 0 0 0 0 (15,679) 0 (15,679) 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 20 0 0 0 0 0 0 ------------- ---------- ---------- -------------- ------------- ----------- ----------- Balances at December 31, 2001 606,236 78,262 460 (2,120) (68,279) (2,261) 6,062 Net loss 0 0 0 0 (5,713) 0 (5,713) Preferred stock dividends 0 0 0 0 (480) 0 (480) ----------- Net loss attributable to common 0 0 0 0 0 0 (6,193) stockholders Adjustment to minimum 0 0 0 (6,091) 0 0 (6,091) pension liability ----------- Comprehensive loss 0 0 0 0 0 0 (12,284) ----------- Issuance of common stock 4,168,952 20,142 0 0 0 0 20,142 Issuance of treasury stock 1,591 0 (8) 0 (2) 90 80 ------------- ---------- ---------- -------------- ------------- ----------- ----------- Balances at December 31, 2002 4,776,779 $98,404 $452 $(8,211) $(74,474) $(2,171) $ 14,000 ============= ========== ========== ============== ============= =========== ===========
See accompanying notes. F-4 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------------------- 12/31/2000 12/31/2001 12/31/2002 ------------- ------------- ------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,968) $(15,679) $(5,713) Adjustments to reconcile net loss to net cash provided by operating activities: Loss on sale of assets 1,238 0 32 Depreciation and amortization 5,253 4,614 2,649 Asset impairment 4,402 14,130 4,241 Reserves for doubtful accounts, sales discounts, (15) (835) (617) and other allowances Interest expense paid through issuance of 0 0 1,127 common stock Financial advisory fees paid through issuance of 0 0 600 common stock Changes in operating assets and liabilities: Accounts receivable 3,327 4,545 293 Inventories 5,441 (154) 3,608 Prepaids and other current assets 1,096 435 (239) Deferred financing fees, excluding fees paid through 0 0 (1,203) issuance of redeemable common stock Accounts payable and accrued expenses (1,009) (695) (2,147) Other liabilities (1,709) (2,999) 54 ------------- ------------- ------------- Net cash provided by operating activities 4,056 3,362 2,685 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (1,504) (1,246) (2,372) Proceeds from sale of assets 4,032 35 100 ------------- ------------- ------------- Net cash provided by (used in) investing activities 2,528 (1,211) (2,272) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on acquisition facility (667) (712) (14,630) Borrowings on term loan 707 1,011 12,500 Proceeds from issuance of 12% convertible notes 0 0 10,000 Net activity on revolving loan (7,441) (1,655) (8,790) Proceeds from issuance of treasury stock 87 0 80 Proceeds from issuance of common stock 0 0 217 ------------- ------------- ------------- Net cash used in financing activities (7,314) (1,356) (623) ------------- ------------- ------------- Net increase (decrease) in cash (730) 795 (210) Cash at beginning of period 1,326 596 1,391 ------------- ------------- ------------- Cash at end of period $ 596 $ 1,391 $ 1,181 ============= ============= ============= Interest paid $ 4,904 $ 3,917 $ 4,629 ============= ============= =============
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 Home Depot and Sears. Together both of these customers accounted for 32% of gross sales during fiscal 2002. In addition, together these customers accounted for over 20% of gross sales during fiscal 2000 and fiscal 2001. There were no other customers that individually accounted for more than 10% of gross sales during fiscal 2000, fiscal 2001, and fiscal 2002. Our ten largest customers accounted for approximately 53% of gross sales during fiscal 2000, 57% of gross sales during fiscal 2001, and 65% of gross sales during fiscal 2002. 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 PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Acorn and its subsidiaries. All inter-company accounts and transactions have been eliminated. 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. ACCOUNTS RECEIVABLE We perform periodic credit evaluations of our customers' financial condition and generally do not require collateral. We establish an allowance for doubtful accounts based upon factors surrounding the credit risks of specific customers, historical trends and other information. 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:
12/31/2001 12/31/2002 -------------- ------------- (In thousands) Finished goods $14,401 $13,361 Work in process 5,653 3,901 Raw materials and supplies 4,588 3,772 -------------- ------------- Total inventories $24,642 $21,034 ============== =============
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:
12/31/2001 12/31/2002 ------------- ------------- (In thousands) Land $ 1,412 $ 1,436 Buildings and improvements 6,563 6,780 Machinery and equipment 22,209 23,364 Furniture and fixtures 3,784 4,380 ------------- ------------- 33,968 35,960 Accumulated depreciation and amortization (23,213) (25,736) ------------- ------------- Property, plant and equipment, net 10,755 10,224 Construction in process 813 935 ------------- ------------- $ 11,568 $ 11,159 ============= =============
Depreciation expense was approximately $4.3 million in fiscal 2000, $3.7 million in fiscal 2001, and $2.6 million in fiscal 2002. F-7 GOODWILL In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". 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 adopted the new rules on accounting for goodwill in the first quarter of fiscal 2002. Prior to the adoption of SFAS 142, our goodwill was amortized by the straight-line method over 40 years. Since goodwill is no longer amortized, our reported results for 2002 are not comparable with previous years. The following table presents pro forma information assuming that we adopted SFAS 142 as of January 1, 2000:
Fiscal Year Ended ---------------------------------------------------------------- 12/31/2000 12/31/2001 12/31/2002 ----------------- ----------------- ----------------- (In thousands, except per share data) Reported net loss attributable $(13,968) $(15,679) $(6,193) to common stockholders Goodwill amortization 974 876 0 ----------------- ----------------- ----------------- Adjusted net loss attributable $(12,994) $(14,803) $(6,193) ================= ================= ================= to common stockholders Basic and diluted earnings per share: Reported net loss attributable $ (23.06) $ (25.86) $ (8.61) to common stockholders Goodwill amortization 1.61 1.44 0.00 ----------------- ----------------- ----------------- Adjusted net loss attributable $ (21.45) $ (24.42) $ (8.61) ================= ================= ================= to common stockholders
In accordance with SFAS 142, we performed the required transitional impairment tests of goodwill as of January 1, 2002 and concluded that goodwill at that date was not impaired. However, market conditions arising during fiscal 2002 indicated that goodwill impairment may have occurred during fiscal 2002. Accordingly, pursuant to Statement No. 142, we performed the next phase of the impairment evaluation and concluded that goodwill was impaired which resulted in a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002. The outcome of the evaluation was influenced by the valuation of individual assets and liabilities as required under Statement No. 142, particularly with regard to deferred financing fees, fixed assets, pension obligations, trademarks, and employment agreements. In addition, the enterprise value used for purposes of determining the implied fair value of goodwill was derived from the value ascribed to us under the Recapitalization Transaction discussed in Note 3. Following is a progression of goodwill for the year ended December 31, 2002 (in thousands): Balance at January 1, 2002 $11,808 Goodwill acquired 0 Impairment losses (4,241) ---------------- Balance at December 31, 2002 $ 7,567 ================
F-8 Prior to the adoption of SFAS 142, we periodically assessed 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 the business operates. We used a market value approach for assessing the recoverability of enterprise level goodwill. During 2001 and 2000, we recognized goodwill impairment charges of approximately $14.1 million and $4.4 million, respectively. INCOME TAXES We account for income taxes under the liability method pursuant to Statement of Financial Accounting Standards No. 109, 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. FINANCIAL INSTRUMENTS The fair value of our financial instruments approximated their carrying value at December 31, 2002 and 2001. STOCK-BASED COMPENSATION We maintain several stock-based compensation plans, which are described more fully in Note 4. We account for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income for options that are granted with an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the vesting period for options granted with an exercise price less than the market value of the underlying common stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and has been determined as if we had accounted for our employee stock options under the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Year Ended December 31 ---------------------------------------------- 2000 2001 2002 --------------- -------------- ------------- Risk free interest rate 6.20% 5.02% 4.61% Volatility factor of expected market price 0.803 0.977 1.067 of our common shares Weighted average expected life 10 10 10 of options (years) Dividend yield None None None
The weighted average fair value of options granted during 2002 ranged in value from $0.32 to $0.61 based on date of grant, exercise price, and current market price. The following table illustrates the effect on net loss applicable to common stock and the related per share amounts if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands except per share amounts). F-9
Year Ended December 31 ----------------------------------------- 2000 2001 2002 ---- ---- ---- (In thousands, except per share data) Net loss applicable to common stockholders, as $(13,968) $(15,679) $(6,193) reported Deduct: Total stock-based employee compensation (474) (188) (34) expense determined under fair value based method for ----- -------- ------- all awards, net of related tax effects Pro forma net loss applicable to common stockholders $(14,442) $(15,867) $(6,227) ========= ========= ======== Net loss applicable to common stockholders per common share - basic and diluted: As reported $ (23.06) $ (25.86) $ (8.61) ========= ========= ======== Pro forma $ (23.84) $ (26.17) $ (8.66) ========= ========= ========
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 8 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 2002 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 August 2001, the FASB 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 supersedes 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 adopted the provisions of Statement 144 beginning in the first quarter of fiscal 2002. The adoption of the Statement did not have a significant impact on our financial position and results of operations. F-10 The FASB's Emerging Issues Task Force (EITF) issued EITF 00-14, "Accounting for Certain Sales Incentives", which was subsequently codified in EITF 01-09, "Accounting for Consideration given by a Vendor to a Customer", effective for years beginning after December 15, 2001. We adopted the provisions of the EITF beginning in the first quarter of fiscal 2002. The adoption of the EITF did not have a significant impact on our financial position and results of operations. The FASB's EITF issued EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", which was subsequently codified in EITF 01-09, "Accounting for Consideration given by a Vendor to a Customer", effective for years beginning after December 15, 2001. We adopted the EITF in the first quarter of fiscal 2002. In accordance with the provisions of this EITF, we have reclassified co-op advertising expenses from selling, general and administrative expenses to net sales for all reporting periods. 3. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY We are substantially dependent upon borrowings under our credit facility. UnionTools entered into a credit facility (the "Credit Facility") with Heller Financial, Inc. in December 1996 which, as amended and restated through July 2001, provided for a $40 million revolving credit facility and $16 million of term loans that collectively had an expiry date of April 30, 2002. On July 13, 2001, we entered into an amendment (the "Amendment") to the Credit Facility, that provided for a $25 million revolving credit facility from July 31 through October 31, 2001 ($30 million from November 1 through December 31, 2001; $25 million from January 1, 2002 through April 30, 2002). During May 2002, the expiration date of the Credit Facility was extended to June 30, 2002. Borrowings under the Credit Facility were secured by substantially all of the assets of UnionTools and were guaranteed by Acorn. The Acorn guarantee was secured by a pledge of all the capital stock of UnionTools. In connection with an amendment to the Credit Facility in October 1999, UnionTools issued a $6.0 million junior participation term loan note (the "Junior Participation Note") bearing interest at 12% per annum. Interest thereon was paid quarterly in arrears on each February 1, May 1, August 1, and November 1 through the issuance of additional term notes. The proceeds of the Junior Participation Note were funded through a subordinated participation agreement between the lender and our majority stockholders. The Junior Participation Note was by its terms incorporated into the Credit Facility and was secured by the collateral in accordance with the terms of such facility. Pursuant to the terms of the Amendment, borrowings under the Credit Facility bore 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 was due and payable monthly in arrears. In addition, we were required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. On June 28, 2002, we entered into a Recapitalization Transaction ("Recapitalization Transaction"), obtaining a new $10.0 million investment from our majority stockholders representing funds and accounts managed by TCW Special Credits and Oaktree Capital Management, LLC (the "Principal Holders"). We also entered into a new $45.0 million credit facility, agented by CapitalSource Finance, LLC (the "Lender"), consisting of a $12.5 million term loan and a $32.5 million revolving credit component. The term loan bears interest at prime plus 5.0% and the revolving credit component bears interest at prime plus 3.0%. The term loan has a $250,000 commitment fee and the revolver has a $650,000 commitment fee. In addition, there is a 1.0% annual unused line fee and a 0.5% annual collateral management fee. The facility expires in June 2007. The majority of the proceeds from this transaction were applied to our previous credit facility ($33.7 million was borrowed as of June 27, 2002), that otherwise expired on June 30, 2002. Relative to the extension and termination of our previous credit facility, we paid $2.0 million in success fees during the second quarter of fiscal 2002. Draws on the revolving credit facility are limited to amounts computed as a percentage of eligible accounts receivable and inventory. At December 31, 2002, we had $7.5 million available to borrow under our new credit facility. F-11 The term loan requires quarterly payments as follows:
Quarterly Payment: Beginning: $625,000 October 2003 $750,000 October 2004 $812,000 October 2005 $938,000 October 2006
4. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION In connection with the Recapitalization Transaction, holders of common stock received rights (at the rate of 1,000 rights per 100 shares of common stock) to purchase one share of newly-issued common stock at $5.00 per share (post-split) for each right received (the "Rights Offering"). Participation in the Rights Offering resulted in the issuance of two hundred shares of common stock. In conjunction with the new credit facility, we issued to the Lender 233,355 shares of our common stock during 2002, the value of which has been included in deferred financing fees and redeemable common stock on the balance sheet. In connection with a future termination in full of this new credit facility, the Lender has the right to require us to repurchase all the shares issued to the Lender at a price per share that is dependent on certain measures of cash flow, debt, and cash at a future date. As of December 31, 2002, our potential repurchase obligation does not exceed the carrying value of the redeemable common stock. As part of the Recapitalization Transaction, the Principal Holders purchased for cash from us $10.0 million principal amount of 12% Convertible Notes due June 15, 2005 (the "Convertible Notes"). Upon the closing of the Rights Offering, the Convertible Notes (together with accrued interest thereon) were converted into 2,116,661 shares of our common stock at the Rights Offering price of $5.00 per share. The Recapitalization Transaction also caused the Principal Holders to receive 822.6696 shares of newly-issued Series A Preferred Stock, $10,000 per share liquidation preference (the "Preferred Stock"), in exchange for all of their previously existing and outstanding interests in the Junior Participation Notes, which represented the total amount of principal and accrued interest owing thereon. The Preferred Stock had an initial aggregate liquidation preference equal to $8.2 million and accrued dividends at a 12% annual rate. The Preferred Stock and related accrued dividends were converted into 1,741,312 shares of our common stock at the Rights Offering price of $5.00 per share. The Rights Offering, the conversion of the Preferred Stock, and the conversion of the Convertible Notes were conditioned on the receipt of stockholder approval of the transactions which were approved at our Annual Meeting of Stockholders on November 20, 2002. Upon receipt of stockholder approval and before consummation of the Rights Offering, we effected a 1-for-10 reverse stock split. Prior year share and per share balances included in the accompanying financial statements have been adjusted to reflect the impact of the reverse stock split. Additionally in December 2002 and upon completion of the Rights Offering, we issued to Houlihan Lokey Howard & Zukin ("HLHZ") Investments LLC (a subsidiary of HLHZ Capital, Inc.) 126,800 shares of common stock and paid $1,000 representing payment in full of a promissory note issued in June 2002 on account of financial advisory services that HLHZ rendered to us. In connection therewith, HLHZ delivered a written opinion that the Recapitalization Transaction was fair from a financial point of view to us and our stockholders. In December 2002 and upon completion of the Rights Offering, we issued to the Principal Holders an aggregate of 3,937,657 shares of common stock and paid to the Principal Holders an aggregate of $54.93 for fractional shares. Included in the issuance of the shares of common stock were 79,684 shares issued to one of the Principal Holders in exchange for deferred equity compensation owing to our current and past directors employed by an affiliate of the Principal Holders. F-12 In April 1997, we adopted the 1997 Stock Incentive Plan (the "Incentive Plan") for our executives and certain other associates. The purpose of the Incentive Plan is to provide incentives to associates by granting awards tied to the performance of our 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 250,000 shares of common stock for issuance under the Incentive Plan. At December 31, 2002, there were options outstanding to purchase 5,090 shares of common stock at a weighted average exercise price of $99.14 per share. We have also issued 49,500 shares of restricted stock under the Incentive Plan. In addition, 83,500 shares of restricted stock have been granted but had not been issued as of December 31, 2002. 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 300,000 shares of common stock for issuance under the Nonemployee Director Incentive Plan. At December 31, 2002, there were options outstanding to purchase 3,564 shares of common stock at a weighted average exercise price of $50.10 per share. We have also issued 55,000 shares of restricted stock under the Nonemployee Director Incentive Plan. In December 2002 and upon completion of the Rights Offering, we granted to each of the non-employee directors (other than the directors affiliated with the Principal Holders) options to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share. In connection with an amendment to the restricted stock agreements of these non-employee directors, all of these options were terminated on December 31, 2002. F-13 The following table summarizes the stock option activity:
Number Weighted Average of Shares Exercise Price ------------ ------------------- 1997 STOCK INCENTIVE PLAN Outstanding at December 31, 1999 34,930 $57.62 Granted 64,219 15.67 Exercised 0 Expired/terminated (26,204) 41.88 ------------ Outstanding at December 31, 2000 72,945 26.34 Granted 24,020 8.91 Exercised 0 Expired/terminated (24,335) 27.53 ------------ Outstanding at December 31, 2001 72,630 20.18 Granted 10,250 3.50 Exercised 0 Expired/terminated (77,790) 12.82 ------------ Outstanding at December 31, 2002 5,090 $99.14 ============ 1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN Outstanding at December 31, 1999 4,743 $80.94 Granted 10,000 15.00 Exercised 0 Expired/terminated 0 ------------ Outstanding at December 31, 2000 14,743 36.21 Granted 9,306 15.00 Exercised 0 Expired/terminated 0 ------------ Outstanding at December 31, 2001 24,049 28.01 Granted 80,000 5.00 Exercised 0 Expired/terminated (100,485) 8.91 ------------ Outstanding at December 31, 2002 3,564 $50.10 ============
F-14
Number Weighted Average of Shares Exercise Price ---------- ----------------- OTHER STOCK OPTIONS Outstanding at December 31, 1999 2,169 $32.34 Granted 0 Exercised 0 Expired/terminated 0 ---------- Outstanding at December 31, 2000 2,169 32.34 Granted 0 Exercised 0 Expired/terminated 0 ---------- Outstanding at December 31, 2001 2,169 32.34 Granted 0 Exercised (1,591) 0.10 Expired/terminated 0 ---------- Outstanding at December 31, 2002 578 $121.00 ==========
The following table summarizes information regarding stock options outstanding at December 31, 2002.
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/2002 Contractual Life Exercise Price at 12/31/2002 Exercise Price -------------------- ------------- ---------------- -------------- ------------- -------------- $0.01 to $59.99 3,507 6.83 $ 21.28 3,507 $ 21.28 $60.00 to $89.99 1,152 6.08 $ 67.00 1,152 $ 67.00 $90.00 to $120.99 745 5.08 $102.50 745 $102.50 $121.00 to $140.00 3,828 3.97 $137.13 3,828 $137.13
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 our Board of Directors, 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 could 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 was determined by dividing (i) an amount equal to the dollar amount of the fees to be received in the form of shares of common stock by (ii) the average of the high and low sale prices of the common stock on the Nasdaq SmallCap Market on the last business day preceding the date of payment. Any cash or stock dividends payable on shares of common stock accrue for the benefit of the directors in the form of additional shares of common stock. Shares of common stock are distributed in the form of common stock following the director's resignation from the Board of Directors. In addition, shares of common stock are distributed to directors in the form of common stock following the death of the director or a change in control of Acorn as defined in the Director Stock Plan. In July 2002, the Director Stock Plan was frozen and director compensation was revised to a cash payment of $20,000 annually. As of December 31, 2001, 17,665 shares of common stock had been awarded and as of December 31, 2002, 7,266 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. F-15 5. 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:
12/31/2001 12/31/2002 --------------- --------------- (In thousands) Deferred tax assets: Inventory $ 540 $ 870 Accrued expenses and other 2,108 2,301 Goodwill 1,087 1,943 Net operating loss carryforwards 32,055 31,462 Capital loss carryforward 2,584 1,710 --------------- --------------- Total deferred tax assets 38,374 38,286 Valuation allowance for deferred tax assets (37,801) (37,853) --------------- --------------- Deferred tax assets 573 433 Deferred tax liabilities: Depreciation and other 573 433 --------------- --------------- Total deferred tax liabilities 573 433 --------------- --------------- 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 net deferred tax asset being recognized. At December 31, 2002, we had net operating loss (NOL) carryforwards of approximately $78.7 million for income tax purposes that expire in varying amounts in the years 2008 through 2022. 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 $50.1 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, 2002, we have approximately $7.3 million of Code Section 382 limited net operating losses that are available to offset taxable income in 2003 (in addition to the $50.1 million of net operating loss carryforwards that are not limited). We also have capital loss carryforwards of approximately $4.3 million for income tax purposes that expire in 2003. A table of available net operating loss carryforwards is as follows: F-16
NOL Generated Period During the Year Expiration Year ------------------------------------------------ ------------------- ------------------ (In thousands) NOLs Limited by Code Section 382 Fiscal year ended July 1994 $ 2,369 2008 Fiscal year ended July 1995 5,579 2009 Fiscal year ended 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 Fiscal year ended July 1998 7,284 2012 Fiscal year ended July 1999 6,645 2018 Fiscal year ended December 1999 12,022 2019 Fiscal year ended December 2000 14,593 2020 Fiscal year ended December 2001 6,369 2021 Fiscal year ended December 2002 2,012 2022 ------------------- 50,077 Post-IPO NOLs ------------------- $78,654 Total NOLs at December 31, 2002 ===================
The provision for income taxes (benefit) is comprised of the following:
Year Ended December 31, -------------------------------------------------- 2000 2001 2002 -------------- -------------- -------------- (In thousands) Current - Federal $ 0 $ 0 $ 0 Current - State 80 84 (51) -------------- -------------- -------------- $80 $84 $(51) ============== ============== ==============
6. PENSION AND POST-RETIREMENT BENEFIT PLANS DEFINED BENEFIT PENSION PLANS UnionTools maintains multiple defined benefit pension plans that cover substantially all associates. Benefits paid under the defined benefit plans are generally based either on years of service and the associate's compensation in recent years of employment or years of service multiplied by contractual amounts. Our funding policy for all plans is to fund at least the minimum amount required by ERISA. Activity related to the pension plans is as follows: F-17
Fiscal Year -------------------------------------------- 2000 2001 2002 ------------ ------------ ------------ (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $17,109 $18,620 $19,548 Service cost 311 142 172 Interest cost 1,323 1,332 1,458 Actuarial losses / (gains) 1,330 650 1,929 Plan amendments (192) 101 0 Curtailment loss / (gain) 0 0 (14) Benefits paid (1,261) (1,297) (1,417) ------------ ------------ ------------ Benefit obligations at end of period $18,620 $19,548 $21,676 ============ ============ ============ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $17,482 $19,940 $19,614 Actual return on plan assets 1,859 507 (581) Company contributions 1,860 464 847 Benefits paid (1,261) (1,297) (1,417) ------------ ------------ ------------ Fair value of plan assets at end of period $19,940 $19,614 $18,463 ============ ============ ============ Funded status of the plans $1,549 $67 $(3,212) Unrecognized net actuarial losses / (gains) 2,867 4,706 8,530 Minimum pension liability (2,386) (2,966) (8,934) Unamortized prior service cost 523 573 404 ------------ ------------ ------------ Prepaid (accrued) benefit cost $2,553 $2,380 $(3,212) ============ ============ ============ WEIGHTED AVERAGE ASSUMPTIONS Discount rate 7.50% 7.25% 7.00% Expected return on plan assets 8.75% 8.75% 8.75% Rate of compensation increase 4.00% 4.00% 4.00% COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $311 $142 $172 Interest cost 1,323 1,332 1,458 Expected return on plan assets (1,859) (507) (1,686) Amortization of prior service cost 44 51 51 Recognized net actuarial losses / (gains) 367 (1,152) 358 Effects of changes in assumption 0 0 0 ------------ ------------ ------------ Net periodic benefit cost (income) $186 $(134) $353 ============ ============ ============
F-18 The following is a summary of aggregate prepaid benefit costs and aggregate accrued benefit costs:
12/31/2001 12/31/2002 -------------- -------------- (In thousands) Aggregate prepaid benefit cost $ 3,889 $0 Aggregate accrued benefit cost (1,509) (3,212) -------------- -------------- Net prepaid (accrued) benefit cost $ 2,380 $(3,212) ============== ==============
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:
12/31/2001 12/31/2002 --------------- --------------- (In thousands) Aggregate accumulated benefit obligations $8,641 $21,676 Aggregate projected benefit obligations 8,644 21,676 Aggregate fair value of plan assets 7,137 18,463
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-19
Fiscal Year ---------------------------------------------- 2000 2001 2002 ------------ ----------- ----------- (In thousands) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $ 2,292 $ 2,712 $ 629 Service cost 2 8 12 Interest cost 188 109 46 Participant contributions 230 188 8 Curtailment 0 (2,082) (191) Actuarial losses 815 38 80 Benefits paid (815) (344) (40) ------------ ----------- ----------- Benefit obligations at end of period $ 2,712 $ 629 $ 544 ============ =========== =========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period $0 $0 $0 Company contributions 585 156 32 Participant contributions 230 188 8 Benefits paid (815) (344) (40) ------------ ----------- ----------- Fair value of plan assets at end of period $0 $0 $0 ============ =========== =========== Funded status of the plans (under-funded) $(2,712) $ (628) $(544) Unrecognized net actuarial losses / (gains) 4 38 (73) ------------ ----------- ----------- Accrued benefit cost $(2,708) $ (590) $(617) ============ =========== =========== WEIGHTED AVERAGE ASSUMPTIONS Discount rate 7.50% 7.38% 6.75% Expected return on plan assets N/A N/A N/A COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $2 $8 $ 12 Interest cost 188 109 46 Expected return on plan assets 0 0 0 Amortization of prior service cost 0 0 0 Recognized net actuarial gains (22) 0 0 Recognized settlement gains 0 (2,077) 0 Effects of changes in assumption 0 0 0 ------------ ----------- ----------- Net periodic benefit cost $ 168 $(1,960) $ 58 ============ =========== ===========
The weighted average health care cost trend rate for fiscal 2003 is 10.0% and is trending toward 5.0% in 2008. The weighted average health care cost trend rate for fiscal 2002 was 5.0%. A one percentage point change in the assumed health care cost trend rate would have the following effects on post-retirement benefit obligations: F-20
One Percentage One Percentage Point Increase Point Decrease ----------------- ------------------ (In thousands) Effect on total of service and interest cost components in fiscal 2002 $ 7 $ (6) Effect on total of post-retirement benefit obligation in fiscal 2002 $51 $(44)
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 approximately $2.1 million 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 $320,000 in fiscal 2002, $309,000 in fiscal 2001, and $362,000 in fiscal 2000. 7. 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 $1.5 million in fiscal 2002, $1.6 million in fiscal 2001, and $2.3 million in fiscal 2000. The minimum annual payments under non-cancelable operating leases and the Scotts license agreement at December 31, 2002 are as follows:
Year Amount ------------- ---------------- 2003 $1,839,000 2004 1,148,000 2005 961,000 2006 1,062,000 2007 1,057,000 Thereafter 1,929,000
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. F-21 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. The collective bargaining agreement covering the Frankfort hourly associates expires in 2004. 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). 8. EARNINGS PER SHARE The following table sets forth the computation of basic and dilutive earnings per share:
Fiscal Year ---------------------------------------------------- 2000 2001 2002 ---------------- ---------------- ---------------- NUMERATOR Net loss attributable to common stockholders $(13,968,000) $(15,679,000) $(6,193,000) ================ ================ ================ DENOMINATOR Denominator for basic earnings per share 605,736 606,222 718,987 - weighted average shares Effect of dilutive securities: 1997 Stock Incentive Plan 0 0 0 1997 Nonemployee Director Stock 0 0 0 Incentive Plan Deferred Equity Compensation 0 0 0 Plan for Directors Other stock options 0 0 0 ---------------- ---------------- ---------------- Dilutive potential common shares 0 0 0 ---------------- ---------------- ---------------- Denominator for diluted earnings per share 605,736 606,222 718,987 ================ ================ ================ - weighted average shares and assumed conversions Basic loss attributable to common $(23.06) $(25.86) $(8.61) ================ ================ ================ stockholders per share Diluted loss attributable to common $(23.06) $(25.86) $(8.61) stockholders per share ================ ================ ================
For additional disclosure regarding outstanding stock options and the Deferred Equity Compensation Plan for Directors, see Note 4 - Stockholders' Equity. F-22 9. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data for each quarter of fiscal 2001 and 2002. 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) Income Attributable (Loss) Net Gross to Common Per Share Sales Profit Stockholders (Diluted) ------------ ----------- ------------- ------------ (In thousands, except for per share data) 2001 First quarter $27,842 $ 7,216 $ 1,358 $ 2.24 Second quarter 28,752 5,461 (479) (0.79) Third quarter 17,414 4,306 (1,278) (2.11) Fourth quarter 17,296 3,917 (15,280) (25.20) ------------ ----------- ------------ ------------ $91,304 $20,900 $(15,679) $ (25.86) ============ =========== ============ ============ 2002 First quarter $26,835 $ 6,752 $ 1,980 $ 3.26 Second quarter 26,655 6,419 427 0.70 Third quarter 19,306 4,624 (4,822) (7.54) Fourth quarter 18,407 3,320 (3,778) (5.03) ------------ ----------- ------------ ------------ $91,203 $21,115 $ (6,193) $ (8.61) ============ =========== ============ ============
10. OTHER EXPENSES In fiscal 2000, we sold certain assets related to our watering products operations. 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 advisory, consulting and legal fees to evaluate strategic alternatives. In fiscal 2002, we incurred approximately $1.0 million of expense for financial advisory, consulting and legal fees associated with our recapitalization and refinancing. In fiscal 2002, we also incurred approximately $2.0 million of expense related to the relocation of our distribution facility from Columbus, Ohio to Louisville, Kentucky. 11. RESTRUCTURING PLAN During the second quarter of fiscal 2002, we implemented a restructuring plan to relocate our primary distribution facility from Columbus, Ohio to Louisville, Kentucky. As a result, in fiscal 2002 we incurred $1.987 million of costs related to this relocation, of which $533,000 was accrued in the second quarter of fiscal 2002 as a restructuring charge. In connection with the project, we incurred approximately $437,000 of employee separation F-23 costs. In addition, exit costs of approximately $197,000 were incurred related to duplicative leases. The remaining $1.355 million of costs related to the transition and start-up phases of the move to the Louisville location, including professional services, freight and handling, and employee and hiring costs. We expect payments associated with employee separation costs and lease termination and other costs to be substantially paid by the end of the first quarter of fiscal 2003. The amounts charged against the restructuring reserve during the period ended December 31, 2002 are as follows (in thousands):
Balance at Balance at 1/01/2002 Additions (1) Payments 12/31/2002 --------- ------------- -------- ---------- Employee separation costs $ - $ 437 $ (371) $ 66 Other exit costs - 1,550 (1,444) 106 ------ --------- ---------- ------ $ - $ 1,987 $ (1,815) $ 172 ====== ======== ========== ======
(1) Amounts represent items that have been either expensed as incurred or accrued. 12. SUBSEQUENT EVENTS On February 21, 2003, Acorn Merger Corporation ("AMC"), The TCW Group, Inc., Trust Company of the West, TCW Asset Management Company, TCW Special Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund, L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala (collectively, the "Filing Persons") filed with the Securities and Exchange Commission a Schedule 13E-3 that announced that Acorn Merger Corporation ("AMC"), a newly formed affiliate of investment funds controlled by Oaktree Capital Management, LLC ("OCM"), has entered into agreements with parties owning 92.5% of our common stock providing for the "short form" merger of AMC into the Company. Under the terms of the proposed merger, our stockholders who are not stockholders of AMC will receive $3.50 per share in cash after delivering their shares to a designated paying agent. F-24 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS
December 31, ----------------------------------- 2001 2002 --------------- -------------- (In thousands) ASSETS Cash $ 664 $ 0 Prepaid and other assets 0 24 --------------- -------------- Total current assets 664 24 Other assets (principally investment in and 6,455 17,338 --------------- -------------- amounts due from wholly-owned subsidiaries) Total assets $ 7,119 $ 17,362 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,007 $ 2,195 Other current liabilities 50 0 --------------- -------------- Total current liabilities 1,057 2,195 Redeemable common stock 0 1,167 Stockholders' equity: Common stock 78,262 98,404 Contributed capital - stock options 460 452 Minimum pension liability (2,121) (8,211) Retained earnings (deficit) (68,278) (74,474) --------------- -------------- 8,323 16,171 Common stock in treasury (2,261) (2,171) --------------- -------------- Total stockholders' equity 6,062 14,000 --------------- -------------- Total liabilities, redeemable common stock, $ 7,119 $ 17,362 and stockholders' equity =============== ==============
See accompanying notes. S-1 ACORN PRODUCTS, INC. (PARENT COMPANY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year ----------------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (In thousands) Selling and administrative expenses $ 2,756 $ 1,532 $ 3,836 Interest expense 194 410 0 Amortization of goodwill 175 183 0 Asset impairment 0 5,820 0 Other expenses 80 629 2,953 ----------- ----------- ----------- Loss before equity in losses of subsidiaries (3,205) (8,574) (6,789) and preferred stock dividends Equity in income (losses) of subsidiaries (10,763) (7,105) 116 Preferred stock dividends 0 0 480 ----------- ----------- ----------- Net loss attributable to common stockholders $(13,968) $(15,679) $(6,193) =========== =========== ===========
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 ------------------------------------------------ 2000 2001 2002 ------------ ------------ ----------- (In thousands) OPERATING ACTIVITIES: Net cash from operating activities $ 15 $562 $ 0 INVESTING ACTIVITIES: Property and equipment 0 0 0 FINANCING ACTIVITIES: Net activity on revolving loan 0 0 (664) Issuance of treasury stock 87 0 0 ------------ ------------ ----------- 87 0 (664) ------------ ------------ ----------- Increase (decrease) in cash $102 $562 $(664) ============ ============ ===========
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 our consolidated financial statements. 2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Acorn is a guarantor of the credit facility of UnionTools, a wholly-owned subsidiary. Cash utilized by Acorn is provided through inter-company borrowings and is subject to certain restrictions. See Note 3 to our consolidated financial statements. S-4 UNIONTOOLS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2002
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, 2002: Deducted from asset accounts: Allowance for doubtful accounts $ 663,184 $ 99,713 $(175,952) $ 289,362 $ 297,583 Reserve for sales, discounts, and 627,057 720,629 0 971,962 375,724 --------------- -------------- ------------- --------------- -------------- other allowances Total $1,290,241 $ 820,342 $(175,952) $1,261,324 $ 673,307 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 1,303,595 1,714,147 0 2,390,685 627,057 --------------- -------------- ------------- --------------- -------------- other allowances 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 1,498,446 3,495,906 0 3,690,757 1,303,595 --------------- -------------- ------------- --------------- -------------- other allowances Total $2,140,446 $4,688,238 $ 0 $4,704,629 $2,124,055
S-5