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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 1, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22717
ACORN PRODUCTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3265462
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
500 Dublin Avenue, Columbus, Ohio 43215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 222-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.001 per share Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of October 20, 1997, the aggregate market value of the shares of
Common Stock (based on the last sale price of the Common Stock on the Nasdaq
National Market on that date) held by non-affiliates of the registrant was
approximately $36,405,632.
As of October 20, 1997, 6,464,105 shares of Common Stock, par value
$.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual
Meeting of Stockholders to be held on December 9, 1997 are incorporated by
reference in Part III.
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TABLE OF CONTENTS
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DESCRIPTION PAGE
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Table of Contents 2
Part I 3
Item. 1 Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 16
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 41
Disclosure
Part III 43
Item 10. Directors and Executive Officers of the Registrant 43
Item 11 Executive Compensation 43
Item 12 Security Ownership and Certain Beneficial Owners and Management 43
Item 13. Certain Relationships and Related Transactions 43
Part IV 43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
Signatures 46
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PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, the "Company" means Acorn Products, Inc. ("Acorn") and
its subsidiary UnionTools, Inc. ("UnionTools"). References to the Company's
fiscal year mean the fiscal year ended on the Friday closest to July 31 of the
applicable year (e.g., fiscal 1997 means the fiscal year ended August 1, 1997.
As used in this Annual Report on Form 10-K, "Ace Hardware" refers to Ace
Hardware Corp., "Agway" refers to Agway, Inc., "Cotter & Company" refers to
Cotter & Company, "Fred Meyer" refers to Fred Meyer, Inc., "Frank's Nursery"
refers to Frank's Nursery & Crafts Inc., "HomeBase" refers to HomeBase, Inc.,
"Kmart" refers to Kmart Corporation, "Payless Cashways" refers to Payless
Cashways, Inc., "Sears" refers to Sears, Roebuck & Company and "Home Depot"
refers to The Home Depot, Inc. Lady Gardener(R), Perfect Cut(R), Pro Force(R),
Razor-Back(R), Union(R), UnionPro(R) and Yard `n Garden(R) are registered
trademarks of the Company. Agway(R) is a registered trademark of Agway. Green
Thumb(R) and True Value(R) are registered trademarks of Cotter & Company.
Frank's(R) is a registered trademark of Frank's Nursery. Craftsman(R) and
Sears(R) are registered trademarks of Sears. Scotts(R) is a registered
trademark of The Scotts Company.
FORWARD-LOOKING INFORMATION
The Company's actual results could differ materially from those
projected in forward-looking statements. Additional information concerning
factors that could cause actual results to differ materially from those in the
forward-looking statements is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as in the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 18, 1997, as the same may be amended from
time to time.
GENERAL
Founded in 1890, the Company is a leading manufacturer and marketer of
non-powered lawn and garden tools in the U.S. The Company's principal products
include long handle tools (such as forks, hoes, rakes and shovels), snow tools,
posthole diggers, wheelbarrows, striking tools, cutting tools and hose reels.
The Company sells its products under a variety of well-known brand names,
including Razor-Back, Union, Yard `n Garden, Perfect Cut and, pursuant to a
license agreement, Scotts. In addition, the Company manufactures private label
products for a variety of retailers, including products sold under Sears'
Craftsman and Cotter & Company's True Value brand names. The Company's
customers include mass merchants such as Sears, Kmart and Fred Meyer, home
centers such as Home Depot, HomeBase, and Payless Cashways, buying groups such
as Cotter & Company and Ace Hardware and farm and industrial distributors.
BUSINESS STRATEGY
Over the past six years the Company has implemented a business
strategy designed to transform it from a manufacturing-oriented industrial
company into a marketing-oriented consumer products company. The central
elements of the Company's approach include a market segmentation strategy based
primarily on brand management and a merchandising strategy based on attractive
and informative product displays and labeling.
* Market Segmentation Strategy. The Company has developed a family of
brands, each targeted to one or more specific consumer segments and
price-points. The Company's products and brands are differentiated by
price, features and warranty, as well as by the materials and
production processes used.
* Merchandising Strategy. The Company was the first in the long handle
tool segment of the non-powered lawn and garden industry to
successfully implement sophisticated merchandising and
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marketing programs. The Company's merchandising programs are designed
to (i) create brand identification among goods historically treated as
commodities and (ii) increase retail sales while reducing the amount of
sales support needed from the retailer's employees. The Company uses
innovative product labeling and point-of-sale signage and racking to
highlight the comparative value and quality of products within and
among the Company's brands. Products within the Company's Union, Scotts
and Perfect Cut lines are merchandised using the Company's trademarked
"Good/Better/Best" format. Where adequate shelf-space is available, the
Company also merchandises its brands together, from the Company's
opening price-point Yard `n Garden brand to its best-quality Razor-Back
brand, using a similar value positioning technique. The Company
believes that its merchandising strategy facilitates comparison
shopping and encourages consumers to purchase higher price-point
products.
GROWTH STRATEGY
The Company believes that it can leverage the success of its business
strategy through the implementation of the following growth strategies:
* Increase Penetration in High Growth Distribution Channels. The
Company believes that certain distribution channels, such as home
centers and mass merchants, are growing more rapidly than the overall
industry. The Company believes that it can continue to increase its
sales in these high growth distribution channels through its unique
combination of brand names, innovative merchandising techniques and
high quality products. For example, in August 1996, after the Company
demonstrated the effectiveness of its market segmentation and
merchandising strategies in a select number of Home Depot stores, Home
Depot selected the Company as the supplier of long handle tools for
all new Home Depot stores in new markets and for 50 existing Home
Depot stores. As of the end of fiscal 1997, the Company supplied long
handle tools to 91 Home Depot stores. Home Depot has indicated that it
expects to open over 450 additional stores over the next five years,
primarily in new markets. In addition, the Company has been a
continuous supplier to Sears for over 80 years and the primary
supplier of long handle tools to Sears for over 50 years. In five of
the last six years, the Company has received the prestigious "Partners
in Progress" trophy awarded to approximately 80 of Sears' 10,000
suppliers. Sears has indicated that it expects to open or acquire over
500 additional non-mall hardware stores over the next five years.
There can be no assurance that either Home Depot or Sears will open
such additional stores or, if opened, that the Company will be chosen
to supply its products to all or a significant portion of such stores.
In addition, there can be no assurance that such stores will generate
significant additional sales for the Company or that such stores will
not result in a reduction of sales to the Company's other customers,
whether through consolidation or otherwise.
* Develop Product Line Extensions. The Company believes that product
line extensions allow the Company to increase sales with minimal
incremental expenditures. The Company expanded its cutting tool and
striking tool product lines with the introduction in August 1995 of
Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks,
axes, hammers and bars. In August 1996, the Company introduced the
Lady Gardener line of tools, which are ergonomically designed for
female gardeners. In August 1997, the Company introduced a unique
hose-reel line designed and manufactured by the Company, as well as a
line of wheelbarrows manufactured in conjunction with the Company's
Mexican joint-venture partner.
* Complete Strategic Acquisitions. The Company intends to increase its
presence in certain segments of the lawn and garden industry through
selective acquisitions and to increase operating efficiencies through
vertical integration. Consistent with this strategy, in February 1997,
the Company acquired an injection molding facility from one of the
Company's largest suppliers of plastics parts. The Company's Credit
Facility contains a $35 million acquisition facility, approximately
$29 million of which was available at August 1, 1997. There can be no
assurance that the Company will be able to identify attractive
acquisition opportunities, obtain sufficient financing for
acquisitions on satisfactory terms or successfully acquire identified
targets. In addition, there can be no assurance that the Company will
be successful in integrating
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acquired businesses into its existing operations or that such
integration will not result in unforeseen operational difficulties or
require a disproportionate amount of management's attention. Such
acquisitions may result in the incurrence of additional indebtedness by
the Company or the issuance of preferred stock or additional Common
Stock. Furthermore, there can be no assurance that competition for
acquisition opportunities in the industry will not escalate, thereby
increasing the cost to the Company of making acquisitions or causing
the Company to refrain from making further acquisitions.
DISPOSITION OF NON-LAWN AND GARDEN BUSINESS
In December 1996, the Company sold substantially all of the assets of
VSI Fasteners, Inc. ("VSI"), a distributor of packaged fasteners, for
approximately $6.9 million, plus the assumption of approximately $2.3 million
of related liabilities. In August 1997, the Company sold substantially all of
the assets of McGuire-Nicholas Company, Inc. ("McGuire-Nicholas"), a
manufacturer and distributor of leather, canvas and synthetic fabric tool
holders and work aprons, for approximately $4.7 million, plus the assumption of
approximately $4 million of related liabilities. Final determination of Acorn's
proceeds from the disposition of McGuire-Nicholas remains subject to certain
closing balance sheet adjustments. VSI's and McGuire-Nicholas' results of
operations are shown as "Loss from Discontinued Operations" in the Selected
Consolidated Financial Data and the Consolidated Financial Statements appearing
elsewhere in this Annual Report on Form 10-K. As a result of the disposition of
VSI and McGuire-Nicholas, UnionTools is the Company's only remaining operating
subsidiary.
INDUSTRY
The non-powered lawn and garden tool industry is mature and, due in
part to the low-cost nature of non-powered equipment, generally is
non-cyclical. The Company believes that demand for non-powered lawn and garden
tools generally is driven by the desire of do-it-yourself ("DIY") consumers to
maintain and landscape residential properties and the need of industrial and
farm professionals to acquire and utilize high-quality tools that will aid them
in efficiently completing their jobs. Industry sources estimate that the
consumer market for lawn and garden tools (which excludes the professional and
industrial markets) generated approximately $550 million in revenues in 1994,
an increase of approximately 5% over 1993 estimates. The non-powered lawn and
garden tool market is comprised of the following product categories: long
handle tools, garden hose, hose attachments, cutting tools, hose reels,
sprayers, wheelbarrows and spreaders. The Company believes that long handle
tools comprise the largest segment of the non-powered lawn and garden tool
market.
The Company believes that the lawn and garden industry is the
beneficiary of several trends suggesting a growing demand for lawn and garden
tools, including the following:
* Demographic Trends. According to industry sources, consumers age 45
to 54 represent the largest age group of lawn and garden enthusiasts.
Industry sources estimate that this group will increase by
approximately 54% from 1988 to 2000 as "baby boomers" age.
* Lifestyle Trends. Industry sources estimate that approximately 80
million households in the U.S. purchased lawn and garden equipment in
1994. The Company believes that increased environmental awareness,
greater interest in healthy lifestyles and heightened concerns
regarding the maintenance of property values will continue to increase
the popularity of lawn and garden activities, particularly among young
adults. In addition, the success of several new gardening publications
has contributed to the increased popularity of gardening and the
greater sophistication of lawn and garden consumers.
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* Housing Starts and Sales of Existing Homes. New housing starts often
represent an addition to the overall number of consumers in the lawn
and garden tool market and, accordingly, an increase in demand.
Consumers moving into new homes often spend substantially on
landscaping, including the purchase of lawn and garden equipment.
PRODUCTS AND BRANDS
Product Lines
The Company sells over 1,000 SKUs of non-powered lawn and garden
tools. The Company designs, manufactures and markets tools in the following
product lines: (i) shovels and scoops; (ii) other steel products, such as hoes,
forks, scrapers and rakes; (iii) garden hand tools and posthole diggers; (iv)
snow tools, such as shovels and pushers; and (v) other products such as hose
reels, repair handles, weeders, edging tools and brooms. In addition, the
Company sells wheelbarrows manufactured in conjunction with its Mexican
joint-venture partner and cutting and striking tools purchased from outside
equipment manufacturers. The Company also manufactures proprietary custom
molded products and component parts for other manufacturers and distributors,
as well as plastic components used in the Company's products.
Brand Positioning
Pursuant to its market segmentation strategy, the Company has
developed a family of brands, each targeted to one or more specific consumer
segments and price-points. The Company's products and brands are differentiated
by price, features and warranty (up to a lifetime warranty). Product grades
also differ with respect to the materials and production processes used. For
example, the steel components of the Company's Razor-Back line are heavy-gauge
and forged in order to maximize the product's strength and durability, while
the Company's Yard `n Garden products are made with lighter gauge components.
The Company carefully monitors its products and searches for growth
opportunities that result from changes in market segments. For example, the
Company repositioned the Razor-Back brand to cater to the growing population of
serious DIY consumers by updating the brand image, introducing product line
extensions and developing new promotional campaigns. The Company's major brands
are described below.
Razor-Back. The Company sells a full line of best-quality, industrial
duty tools for farm, industrial and professional users under the Razor-Back
name. The brand enjoys a strong franchise with agricultural and industrial
professionals and is widely acknowledged as the quality and performance
standard for the long handle tool industry. In 1995, the Company expanded the
brand with a high quality line of cutting and striking tools. The Razor-Back
line is sold primarily through home center, hardware store, industrial
distributor and farm sector distribution channels.
Union Pro. The Company sells a limited line of high quality,
industrial duty tools for farm, industrial and professional users under the
Union Pro name. The Union Pro line is sold primarily through industrial
distributor and farm sector distribution channels.
Union. The Union line generates the largest sales volume for the
Company. Under the Union name, the Company sells a full line of medium-quality,
professional duty tools with a wide range of features, quality points and
performance levels designed to match the needs of tradesmen and serious DIY
consumers. The Union line is sold through all distribution channels except
warehouse clubs and is merchandised in a trademarked Good/Better/Best quality
configuration.
Perfect Cut. The Perfect Cut line was introduced in August 1995. The
Company sells a limited line of consumer and professional duty cutting tools
for tradesmen and serious DIY consumers under the Perfect Cut name. The Perfect
Cut line is sold primarily through home centers, mass merchants and hardware
store distribution channels and is merchandised in a trademarked
Good/Better/Best quality configuration.
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Scotts. In July 1992, the Company obtained from The Scotts Company the
exclusive right to manufacture, distribute and market in the U.S. and Canada an
extensive line of lawn and garden tools under the Scotts name. The Company has
sought to benefit from The Scotts Company's national prime time advertising
campaigns, to develop joint promotional programs with The Scotts Company and to
leverage the Scotts brand reputation and recognition among retailers that
support The Scotts Company bagged-goods program. Under the Scotts name, the
Company sells a full line of high quality, consumer-oriented tools for home
gardeners who associate the Scotts name with value and quality. The Scotts line
is sold primarily through mass merchant and home center distribution channels
and is merchandised in a trademarked Good/Better/Best quality configuration.
ProForce. The ProForce line was introduced in August 1993 and is
comprised of a limited line of medium-quality, consumer-oriented tools for DIY
consumers. The ProForce line is sold exclusively through the warehouse club
distribution channel.
Yard `n Garden. Under the Yard `n Garden name, the Company sells a
limited line of standard quality, promotional tools designed for occasional DIY
consumers who demand value in basic tools for home use. The Yard `n Garden line
is sold through all distribution channels.
Lady Gardener. The Lady Gardener line was introduced in August 1996.
Under the Lady Gardener name, the Company sells a limited line of high-quality,
consumer oriented tools ergonomically designed for female gardeners. The Lady
Gardener line is sold primarily through mass merchant, home center and hardware
store distribution channels.
Private Label Products
In addition to its own brands, the Company also manufactures private
label products for a variety of customers including Sears, Cotter & Company,
Frank's Nursery and Agway, which are sold under the Craftsman and Sears, Green
Thumb and True Value, Frank's and Agway brand names, respectively. The Company
has been a continuous supplier to Sears for over 80 years and the primary
supplier of long handle tools to Sears for over 50 years. Private label
products generated approximately $14.5 million, or 13.2%, of the Company's
gross sales in fiscal 1997.
The Company also manufactures proprietary custom molded products and
component parts for other manufacturers and distributors, as well as plastic
components used in the Company's products.
New Product Development
The Company believes that product line extensions allow the Company to
increase sales with minimal incremental expenditures. The Company expanded its
cutting tool and striking tool product lines with the introduction in August
1995 of Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks,
axes, hammers and bars. The striking and cutting tools are made for the Company
by outside manufacturers. In August 1996, the Company introduced the Lady
Gardener line of tools, which are ergonomically designed for female gardeners.
In August 1997, the Company introduced a unique hose-reel line designed and
manufactured by the Company, as well as wheel-barrows manufactured in
conjunction with the Company's Mexican joint-venture partner.
CUSTOMERS
The Company's largest customer, Sears, accounted for 7.6%, 12.5% and
10.9% of gross sales in fiscal 1995, fiscal 1996 and fiscal 1997, respectively.
The Company's ten largest customers accounted for approximately 43.7%, 50.5%
and 50.1% of gross sales during each such period. The Company sells its
products through a variety of distribution channels, including (i) mass
merchants such as Sears, Kmart and Fred Meyer, (ii) home centers such as Home
Depot, HomeBase and Payless Cashways, (iii) buying groups such as Cotter &
Company and Ace Hardware, (iv) farm distributors and stores such as Mid-States
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Distributing Co., Agway, Wheatbelt, Inc. and Tractor Supply Company, Inc. and
(v) industrial distributors such as Oklahoma Rig & Supply Company, Texas Mill
Supply & Manufacturing Inc., Hughes Supply, Inc. and McMaster-Carr Supply
Company.
There can be no assurance that the Company's sales to Sears or other
major customers will continue at existing levels. A substantial reduction or
cessation of sales to Sears or other major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 of Company's customers or result in a substantial
reduction or cessation of purchases of the Company's products by certain
customers. In addition, the Company is facing increasing pressures from
retailers with respect to pricing, co-operative advertising and other rebates
as the market power of large retailers continues to grow. There can be no
assurance that such pressures will not have an adverse impact on the Company's
business, financial condition and results of operations.
MERCHANDISING AND MARKETING
The Company was the first in the long handle tool segment of the
non-powered lawn and garden industry to successfully implement sophisticated
merchandising and marketing programs. The Company's merchandising programs are
designed to (i) create brand identification among goods historically treated as
commodities and (ii) increase retail sales while reducing the amount of sales
support needed from the retailer's employees. The Company uses innovative
product labeling and point-of-sale signage and racking to highlight the
comparative value and quality of products within and among the Company's
brands. Products within the Company's Union, Scotts and Perfect Cut lines are
merchandised using the Company's trademarked "Good/Better/Best" format. Where
adequate shelf-space is available, the Company also merchandises its brands
together, from the Company's opening price-point Yard `n Garden brand to its
best-quality Razor-Back brand, using a similar value positioning technique. The
Company believes that its merchandising strategy facilitates comparison
shopping and encourages consumers to purchase higher price-point products.
Where applicable, the Company provides its customers with
merchandising plan-o-grams. The Company also provides its customers with custom
designed product displays complete with informative signs and other
"wall-talkers" to answer consumer questions without the help of the retailer's
sales staff. The Company primarily uses cooperative advertising to promote its
products to consumers.
SALES
The Company's sales force is divided into five regions, each led by a
regional manager. The regional manager supervises a sales force consisting of
14 direct sales professionals who are employed by the Company. In addition, the
Company utilizes 23 manufacturers' representative agencies who also report to
the regional managers. The manufacturers' representatives also sell lawn and
garden products for other manufacturers, but not products that compete with the
Company's products. Company management and senior sales professionals regularly
call on the Company's significant customers, while the manufacturing
representatives provide store level support. The Company's sales professionals
are compensated with a base salary and bonuses based upon a formula that
rewards them for individual performance against an established quota, as well
as Company wide sales and earnings targets.
DISTRIBUTION AND LOGISTICS
Customer orders arrive at the Company's headquarters in Columbus, Ohio
and are processed centrally. If the Company can fill the order from the current
stock of finished goods, the order is forwarded to one of the Company's three
distribution centers for shipment based on proximity and availability. The
Company maintains distribution centers in La Mirada, California, Columbus, Ohio
and Frankfort, New York. As of August 1, 1997, the Company owned or leased a
fleet of four tractors and 27 trailers for transporting products between its
manufacturing and distribution facilities. Common carriers are used for
shipping finished products from warehouses to customer delivery points.
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The Company uses a computerized management information and control
system which allows the Company to determine the status of customer orders and
enables the Company to process orders quickly, respond to customer inquiries
and adjust shipping schedules to meet customer requirements. Within this
system, the Company uses an electronic data interchange system that enables
customers, through computerized telephone communications, to place orders
directly with the Company. The Company believes that these systems enable
efficient order processing, expedite shipments and improve customer service.
The Company also provides its customers with the service of
pre-ticketing and bar-coding its products in accordance with customer
specifications.
MANUFACTURING
The production of non-powered lawn and garden tools is an extensive
manufacturing and assembly process that involves several different
technologies, including sawmill operations, wood finishing, heavy gauge
forging, stamping, grinding and metal painting. The complexity of certain tasks
and the coordination of the various steps of the manufacturing process have
been developed by the Company over the last 100 years.
At the Company's Columbus, Ohio and Frankfort, New York manufacturing
facilities, steel components undergo hot and cold stamping and hot forging or
welding, depending on the type of tool head being produced. The metal is then
cleaned by grinding and polishing the shaped steel heads. The steel components
then are painted using various techniques depending on product type and product
material. The Company operates its own water based paint manufacturing process
which is used for all steel tool components. Some steel components undergo
additional finishing steps such as anodization or immersion in special chemical
baths.
At the Company's eight saw mills, ash logs are cut into flitches, then
into squares and finally into rounds. The rounds, which have diameters of one
to two inches depending on the finished product requirements, then are
inspected to remove defects. The end product of this process is a green ash
dowel that is then shipped to either the Company's Frankfort, New York or
Delaware, Ohio sawmill to be kiln dried, cut to length, shaped and turned into
a handle. The kiln drying process takes approximately six days and removes
enough moisture from the wood to reduce the weight of the original green dowel
by approximately 35%. Wood handles undergo chucking, boring, sanding and a
finishing process at the Company's Columbus and Frankfort facilities. The
inventory of handles maintained at these facilities is a function of both price
and seasonal considerations. The assembly of the steel tool head to the handle
and packaging take place in the final manufacturing stage.
The Company has implemented a seasonally adjusted production schedule
in order to maximize its inventories of finished goods. Production is increased
during December through March, the Company's busiest season, and lowered during
the summer and fall seasons.
RAW MATERIALS
The primary raw materials used to produce the Company's products are
steel, plastics and ash wood.
Steel. The Company purchases its steel requirements from several
domestic suppliers. The primary considerations in specialty steel sourcing are
metallurgy, price and width. The Company has strong and long established
relationships with its steel suppliers and has never experienced sourcing
problems. The Company does not enter into long-term contracts with regard to
any of its steel purchases. The Company purchased approximately 75% and 17% of
its steel requirements from Worthington Steel and Acme Steel Corporation,
respectively, in fiscal 1996 and approximately 69% and 16%, respectively, from
such suppliers in fiscal 1997. The Company has had relationships with these
suppliers in excess of 15 and 7 years, respectively.
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Plastics. The Company has selected specially formulated plastics and
resins for use in its tools. Plastic tool heads historically have been produced
by six outside injection molders, utilizing molds developed and owned by the
Company. The Company now uses its 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
the Company's products. The Company does not enter into any long-term contracts
with regard to its plastics purchases.
Ash Wood. Ash is the ideal hardwood for handles because it is
lightweight, flexible and splinters less than most hardwoods. The Company has
wood specialists who maintain relationships with numerous log suppliers and are
responsible for sourcing the Company's ash needs. The Company believes that it
will continue to be able to obtain sufficient quantities of ash. The Company
typically maintains a five to eight week inventory of ash at each of its
sawmills to cover occasional short-term fluctuations in supply. The Company
imports ramin wood handles for some of its promotionally-priced Yard `n Garden
brand products, such as rakes and hoes. Ramin wood is less expensive than ash
and is of sufficient quality for tools (other than shovels) designed for
opening-price-point levels.
The Company has several suppliers for most of its raw materials. There
can be no assurance, however, that the Company will not experience shortages of
raw materials or components essential to its production processes or be forced
to seek alternative sources of supply. In addition, there can be no assurance
that prices for such materials will remain stable. Any shortages of raw
materials may result in production delays and increased costs which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of August 1, 1997, the Company employed approximately 615 people
(including seasonal employees), approximately 430 of whom were paid on an
hourly basis. The Company's staffing requirements fluctuate during the year as
a result of the seasonality of the lawn and garden industry, adding
approximately 100 to 200 additional seasonal employees in the third quarter.
The average tenure of the Company's hourly employees is in excess of 10 years.
Hourly employees at the Company's Columbus, Ohio manufacturing facility and
distribution center and Delaware, Ohio sawmill are represented by the
International Association of Machinists (the "IAM"). Hourly employees at the
Company's Frankfort, New York facilities are represented by the International
Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and
Helpers (the "IBB"). Hourly employees at the Company's Portville, New York
sawmill are represented by the International Brotherhood of Teamsters (the
"IBT"). Hourly employees at the Company's Hebron, Ohio injection molding
facility are represented by the Glass, Molders, Pottery, Plastics & Allied
Workers International Union AFL-CIO (the "AGM"). The Company's contracts with
the IAM, the IBB, the IBT and the AGM expire in May 1999, June 1998, August
1999 and March 1999, respectively. No other employees of the Company are
represented by unions.
The Company has not been subject to a strike or work stoppage in over
20 years and believes that its relationships with its employees, the IAM, the
IBB, the IBT and the AGM are good. However, there can be no assurance that the
Company will be successful in negotiating new labor contracts on terms
satisfactory to the Company or without work stoppages or strikes. A prolonged
work stoppage or strike at any of the Company's facilities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS AND TRADEMARKS
The Company's success and ability to compete are dependent to a
significant degree on its patents and trademarks. The Company registers its
patents and trademarks in the United States Patent and Trademark Office and the
patent and trademark offices of certain other countries and intends to continue
to do so as new patents and trademarks are developed or acquired. The Company's
trademarks include the Lady Gardener, Perfect Cut, Pro Force, Razor-Back,
Union, Union Pro and Yard `n Garden brand names. In addition, the Company holds
trademarks on various configurations of its Good/Better/Best product labels and
signage. In July 1992, the Company obtained the exclusive right to
10
<PAGE> 11
manufacture, distribute and market in the U.S. and Canada an extensive line of
lawn and garden tools under the Scotts brand name. The Company pays certain
royalties to The Scotts Company, the owner of the Scotts trademark, pursuant to
a license agreement. The current term of the license agreement expires in August
1998 and, subject to certain conditions, is automatically renewed for successive
three year periods.
COMPETITION
All aspects of the lawn and garden industry, including attracting and
retaining customers and pricing, are highly competitive. The Company competes
for customers in this industry with large consumer product manufacturers and
numerous other companies that produce specialty home and garden products, as
well as with foreign manufacturers that export their products to the U.S. Many
of these competitors are larger and have significantly greater financial
resources than the Company. 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
U.S. market, will not have a material adverse effect on the Company's business,
financial condition and results of operation.
In the long handle tool segment of the industry, the Company competes
primarily with Ames Company, Inc. ("Ames") and True Temper Hardware Company,
Inc. ("True Temper"). The Company believes that it currently has the second
largest market share in the long handle tools segment of the industry. The
Company believes that Ames currently has the largest market share in the long
handle tools segment of the industry and that True Temper currently has the
third largest market share in this segment of the industry.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local
environmental laws, ordinances and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes. The
Company has made, and will continue to make, expenditures to comply with these
environmental requirements and regularly reviews its procedures and policies
for compliance with environmental laws. The Company also has been involved in
remediation actions with respect to certain of its facilities. Amounts expended
by the Company in such compliance and remediation activities have not been
material to the Company. However, current conditions and future events, such as
changes in existing laws and regulations, may give rise to additional
compliance or remediation costs that could have a material adverse effect on
the Company's business, financial condition or results of operations.
Furthermore, as is the case with manufacturers in general, if a release of
hazardous substances occurs on or from the Company's properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of the Company's properties, the Company may be held
liable and the amount of such liability could be material.
At August 1, 1997, the Company had a reserve for environmental
remediation of approximately $450,000. The actual cost of remediating
environmental conditions may be different than that accrued by the Company due
to the difficulty in estimating such costs and due to potential changes in the
status of legislation. The Company does not maintain an insurance policy for
environmental matters.
ITEM 2. PROPERTIES
The Company's headquarters and executive offices, located in Columbus,
Ohio, occupy approximately 31,000 square feet in a facility owned by the
Company. As of August 1, 1997, the other principal properties owned or leased
by the Company for use in its business are set forth below.
11
<PAGE> 12
DISTRIBUTION FACILITIES
<TABLE>
<CAPTION>
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ------
<S> <C> <C>
Columbus, Ohio................................................ Leased 179,200
Frankfort, New York(1)........................................ Owned 31,500
La Mirada, California......................................... Leased 19,100
</TABLE>
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ------
<S> <C> <C>
Columbus, Ohio(2) ............................................ Owned 160,900
Frankfort, New York(1)........................................ Owned 360,500
Hebron, Ohio.................................................. Owned 107,200
</TABLE>
SAWMILLS
<TABLE>
<CAPTION>
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ------
<S> <C> <C>
Beverly, West Virginia........................................ Owned 10,000
Cookeville, Tennessee......................................... Owned 12,100
Delaware, Ohio................................................ Owned 51,100
Frankfort, New York(1)........................................ Owned 18,900
Huntington, Indiana........................................... Owned 7,600
Lebanon, Kentucky............................................. Owned 13,500
Portville, New York........................................... Owned 9,000
Shippenburg, Pennsylvania..................................... Owned 15,000
</TABLE>
- ------------------
(1) The Company's 399,500 square foot Frankfort, New York facility is
comprised of a distribution center, a manufacturing facility and a
sawmill. The Company also maintains approximately 20,000 square feet
of office space in this facility.
(2) The Company's 191,900 square foot Columbus, Ohio headquarters consists
of the Company's executive offices and a manufacturing facility.
The Company believes that its existing manufacturing facilities,
distribution centers and sawmills are adequate for the current level of the
Company's operations. The Company believes that its manufacturing facilities
have sufficient excess capacity to accommodate a 35% to 50% increase in the
current level of output. The Company believes that its current sawmill capacity
is sufficient to accommodate up to a 30% increase in the current level of
output.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation
incidental to the conduct of its business. Management believes that no
currently pending litigation to which the Company is a party will have a
material adverse effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Acorn's Common Stock began trading on the Nasdaq National Market in
June 1997 under the symbol "ACRN" at a price of $14.00 per share. The following
table sets forth the high and low sales prices of the Common Stock on the
Nasdaq National Market during the periods indicated:
<TABLE>
<CAPTION>
MARKET PRICE
------------
FISCAL PERIOD HIGH LOW
- ------------- ---- ---
<S> <C> <C>
1997:
Fourth Quarter (June 24 through
August 1, 1997)............................... 14-1/2 11-5/8
</TABLE>
As of October 20, 1997, the approximate number of record holders of
the Common Stock was 19.
Acorn has never paid, and currently does not intend to pay, any cash
dividends on the Common Stock. Acorn is a holding company with no business
operations of its own. Acorn therefore is dependent upon payments, dividends
and distributions from UnionTools for funds to pay dividends to stockholders of
Acorn. UnionTools currently intends to retain any earnings for support of its
working capital, repayment of indebtedness, capital expenditures and other
general corporate purposes. UnionTools has no current intention of paying
dividends or making other distributions to Acorn in excess of amounts necessary
to pay Acorn's operating expenses and taxes. The Company's senior credit
facility (the "Credit Facility") contains restrictions on UnionTools' ability
to pay dividends or make payments or other distributions to Acorn. The Credit
Facility provides that, unless UnionTools meet certain financial tests, it may
not declare any dividends or make any other payments or distributions to Acorn
except for amounts necessary to pay Acorn's operating expenses up to $125,000
per month and to pay Acorn's federal and state income taxes.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for fiscal 1993, the four
months ended December 2, 1993, the eight months ended July 29, 1994, fiscal
1995, fiscal 1996 and fiscal 1997 have been derived from the audited
consolidated financial statements of the Company. 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.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY | SUCCESSOR COMPANY
----------------------------|-------------------------------------------------------------
| EIGHT
FOUR MONTHS | MONTHS
YEAR ENDED ENDED | ENDED YEAR ENDED
----------------------------|-------------------------------------------------------------
JULY 31, DECEMBER 2, | JULY 29, JULY 28, AUGUST 2, AUGUST 1,
1993 1993 (1) | 1994 1995 1996 1997
----------------------------|-------------------------------------------------------------
<S> <C> <C> | <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: |
Net sales............................ $ 70,051 $ 20,331 | $ 72,370 $ 86,543 $ 92,652 $ 101,011
Cost of goods sold................... 50,548 14,185 | 52,271 63,411 67,496 73,982
--------- --------- | -------- -------- -------- ---------
Gross profit......................... 19,503 6,146 | 20,099 23,132 25,156 27,029
Selling, general and |
administrative....................... 12,648 5,482 | 9,955 15,531 16,815 18,293
Interest expense..................... 4,939 2,773 | 3,525 6,485 6,732 7,176
Amortization of intangibles.......... 2,520 124 | 601 1,061 1,173 837
Other expenses, net.................. 34,409(2) - | 11 694 1,522(3) 1,548(4)
--------- --------- | -------- -------- -------- ---------
Income (loss) from continuing |
operations before income taxes |
and cumulative effect adjustment.. (35,013) (2,233) | 6,007 (639) (1,086) (825)
Income taxes......................... - - | 290 - 582 134
--------- -------- | -------- -------- -------- ---------
Income (loss) from continuing |
operations before cumulative |
effect adjustment................. (35,013) (2,233) | 5,717 (639) (1,668) (959)
Loss from discontinued operations(5). (33,560)(2) (8,373) | (614) (1,800) (6,480) (9,920)
Cumulative effect of change in |
accounting for post-retirement |
benefits.......................... - - | - - 869 -
-------- -------- | -------- -------- -------- ---------
Net income (loss).................... $(68,573) $(10,606) | $ 5,103 $ (2,439) $ (7,279) $ (10,879)
-------- -------- | -------- -------- -------- ---------
Net income (loss) applicable to |
common stock...................... $(68,573) $(10,606) | $ 5,103 $ (2,439) $ (7,279) $ (11,897)
-------- -------- | -------- -------- --------- ---------
Loss from continuing operations per |
share............................. | $ (1.10) $ (.48)
Weighted average number of shares |
outstanding....................... | 1,520,066 1,985,758
|
OTHER DATA: |
Gross margin......................... 27.8% 30.2% | 27.8% 26.7% 27.2% 26.8%
EBITDA(6)............................ $ 8,343 $ 1,168 | $ 11,148 $ 9,570 $ 10,760 $ 1,067
EBIT(7).............................. 4,335 540 | 9,543 6,540 7,168 7,790
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
PREDECESSOR COMPANY | SUCCESSOR COMPANY
-----------------------------|-----------------------------------------------------------
JULY 31, DECEMBER 2, | JULY 29, JULY 28, AUGUST 2, AUGUST 1,
1993 1993 (1) | 1994 1995 1996 1997
-----------------------------|-----------------------------------------------------------
<S> <C> <C> | <C> <C> <C> <C>
BALANCE SHEET DATA: |
Working Capital from continuing |
operations.................... $ (17,255) $ (17,902) | $ 21,081 $ 5,989 $ 8,543 $ 26,909
Total assets..................... 68,154 79,439 | 101,833 112,280 98,895 98,295
Total debt....................... 127,458 137,437 | 58,854 72,104 61,891 18,935
Stockholders' equity............. (68,304) (78,910) | 19,422 17,323 18,530 63,224
- ---------------
</TABLE>
(1) Pursuant to the acquisition of the Company by several investment funds and
accounts (the "TCW Funds") managed by affiliates of The TCW Group, Inc.,
the Company made certain purchase accounting adjustments on December 3,
1993. The following purchase accounting adjustments impacted the Company's
income (loss) from continuing operations: (i) the basis of certain
manufacturing equipment was increased by an aggregate of approximately
$4.5 million; and (ii) goodwill was restated to approximately $40.0
million. The increased basis of the equipment resulted in an annual
increase in depreciation expense of approximately $747,000, which is
reflected in cost of goods sold. The restatement of goodwill resulted in
an annual increase in amortization of intangibles of approximately
$430,000. On a pro forma basis, giving effect to the purchase accounting
adjustments described above, cost of goods sold and amortization of
intangibles for the four months ended December 2, 1993 would have
increased by approximately $249,000 and $77,000, respectively.
(2) In fiscal 1993, the Company reduced goodwill from continuing operations
by $35.8 million and goodwill from discontinued operations by $29.7
million.
(3) In fiscal 1996, the Company recognized other expense of $563,000 in
connection with the resignation of Acorn's previous Chairman of the Board
and other expense of $750,000 in connection with self-insured life
insurance accruals related to the death of a former director of the
Company.
(4) In fiscal 1997, the Company recognized other expense of $950,000 from the
write-off of certain capitalized bank fees incurred in connection with the
Company's previous bank credit facility.
(5) Represents the loss from the discontinued VSI and McGuire-Nicholas
operations, as well as (i) a loss in fiscal 1996 of $665,000 incurred upon
the sale of substantially all of the assets of VSI and (ii) a loss of $8.4
million in fiscal 1997 incurred in connection with the sale of
substantially all of the assets of McGuire-Nicholas.
(6) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation, amortization and other expenses.
EBITDA is presented because it is a widely accepted financial indicator
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance. EBITDA is not intended to represent
cash flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
(7) EBIT represents earnings from continuing operations before interest
expense, income taxes and other expenses. EBIT is presented because it is
a financial indicator used by certain investors and analysts to analyze
and compare companies on the basis of operating performance. EBIT is not
intended to represent cash flows for the period, nor has it been presented
as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
15
<PAGE> 16
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, the consolidated financial statements of
the Company 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 Information" below.
OVERVIEW
The Company is a leading manufacturer and distributor of non-powered
lawn and garden tools. Acorn is a holding company with no business operations
of its own. Acorn's only material asset is all of the outstanding capital stock
of UnionTools.
Founded in 1890, the Company was operated as a family owned business
until its sale in 1986 pursuant to a leveraged buyout transaction. The Company
was sold in a second highly leveraged transaction in 1988. Primarily as a
result of these transactions, the Company had approximately $132.4 million and
$127.5 million of total indebtedness at July 31, 1992 and July 31, 1993,
respectively, with approximately $60.7 million and $70.l million of net sales
in fiscal 1992 and fiscal 1993, respectively. The Company's results of
operations from 1989 through December 1993 were adversely affected by a high
degree of financial leverage and a lack of liquidity, despite the
implementation of successful operating strategies by new senior management
recruited in 1991. In December 1993, the Company restructured certain of its
debt obligations in connection with the acquisition of the Company by several
investment funds and accounts managed by affiliates of The TCW Group, Inc.,
thereby significantly reducing the Company's debt burden. Following the
acquisition, the Company revalued certain assets, reduced goodwill and
recognized a gain on the forgiveness of certain indebtedness.
Over the past six years, the Company has implemented a business
strategy designed to transform it from a manufacturing-oriented industrial
company into a marketing-oriented consumer products company. The central
elements of the Company's approach include a market segmentation strategy based
primarily on brand management and a merchandising strategy based on attractive
and informative product displays and labeling. Over the same period the Company
also has expanded its infrastructure to support future growth by recruiting an
experienced management team, increasing manufacturing capacity and enhancing
management information systems.
The price of raw materials used in the Company's products remained
relatively stable during each of the periods discussed below.
Implementation of the Company's market segmentation and merchandising
strategies has resulted in increased selling, general and administrative
expenses as the Company has increased its marketing focus through the
development of merchandising displays, point-of-sale signage and product
labeling, as well as additional cooperative advertising. The Company also
incurred an increase in selling, general and administrative expenses due to
increased staffing and upgrades of management information systems. The Company
believes that its current level of selling, general and administrative expenses
as a percentage of net sales is now consistent with its marketing-oriented
focus. However, an increase in competitive pressures could result in additional
increases in selling, general and administrative expenses.
DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS
In December 1996, the Company sold substantially all of the assets of
VSI, a distributor of packaged fasteners, for approximately $6.9 million, plus
the assumption of approximately $2.3 million of related liabilities. In August
1997, the Company sold substantially all of the assets of McGuire-Nicholas, a
manufacturer and distributor of leather, canvas and synthetic fabric tool
holders and work aprons, for approximately $4.7 million, plus the assumption of
approximately $4 million of related liabilities. Final determination of Acorn's
proceeds from the disposition of McGuire-Nicholas remains subject to certain
closing balance sheet adjustments. VSI's and McGuire-Nicholas' results of
operations are shown as "Loss from Discontinued Operations" in the Selected
Consolidated Financial Data and the Consolidated
16
<PAGE> 17
Financial Statements appearing elsewhere in this Annual Report on Form 10-K. As
a result of the disposition of VSI and McGuire-Nicholas, UnionTools is the
Company's only remaining operating subsidiary. Net assets and net liabilities of
the discontinued VSI and McGuire-Nicholas operations are shown as "Net Assets of
Discontinued Operations" and "Net Liabilities of Discontinued Operations" in the
Consolidated Financial Statements appearing elsewhere in this Annual Report on
Form 10-K. See Note 3 to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain components of the Company's
consolidated statement of operations data expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JULY 28, AUGUST 2, AUGUST 1,
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0%
Cost of goods sold.................. 73.3 72.8 73.2
----- ----- -----
Gross profit........................ 26.7 27.2 26.8
Selling, general and administrative
expenses......................... 17.9 18.1 18.1
Interest expense.................... 7.5 7.3 7.1
Amortization of intangibles......... 1.2 1.3 0.8
Other expenses, net................. 0.8 1.6 1.6
----- ----- -----
Income (loss) from continuing
operations before income taxes
and cumulative effect
adjustment....................... (0.7) (1.1) (0.8)
Income taxes........................ -- 0.6 0.1
----- ----- -----
Income (loss) from continuing
operations before cumulative
effect adjustment................ (0.7) (1.7) (0.9)
Loss from discontinued
operations...................... (2.1) (7.0) (9.9)
Cumulative effect of change in
accounting for post-retirement
benefits......................... -- .9 --
----- ---- ----
Net loss............................ (2.8)% (7.8)% (10.8)%
----- ---- -----
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 9.0%, or $8.3 million, to $101.0 million in
fiscal 1997 compared to $92.7 million in fiscal 1996. The increase in net sales
principally reflected increased market penetration and a higher percentage of
sales of the Company's better- and best-quality products, which are sold at
higher wholesale prices than the Company's opening-price-point products. Net
sales in the third and fourth quarters were negatively impacted by unfavorable
spring weather conditions, which more than offset strong net sales in the first
and second quarter resulting from favorable fall weather conditions.
Gross Profit. Gross profit increased 7.1%, or $1.8 million, to $27.0 million in
fiscal 1997 compared to $25.2 million in fiscal 1996. Gross margin decreased to
26.8% in fiscal 1997 from 27.2% in fiscal 1996. The decrease in gross margin
primarily was due to the impact of certain opening store discounts and lower
gross margins on sales by the Company's injection molding division (which was
acquired in February 1997), partially offset by improved product mix due to
increased sales of the Company's higher-margin, better- and best- quality
products. In addition, gross margin was adversely impacted by lower overhead
absorption as a result of lower production in the fourth quarter.
17
<PAGE> 18
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.9%, or $1.5 million, to $18.3 million in
fiscal 1997 compared to $16.8 million in fiscal 1996. As a percentage of net
sales, selling, general and administrative expenses remained constant at 18.1%
in fiscal 1997 and fiscal 1996. Selling, general and administrative expenses
were negatively impacted by increased merchandising costs related to the
conversion of customer stores previously serviced by the Company's competitors,
as well as merchandising costs associated with new customer stores.
Other Expenses, Net. Other expenses remained at $1.5 million in fiscal
1997. Other expense in fiscal 1997 includes the write-off of $950,000 of
capitalized bank fees incurred in connection with the Company's previous bank
credit facility.
Loss from Continuing Operations Before Income Taxes. Loss from
continuing operations before income taxes decreased $261,000 to a loss of
$825,000 in fiscal 1997 compared to a loss from continuing operations before
income taxes of $1.1 million in fiscal 1996. Interest expense increased to $7.2
million in fiscal 1997 from $6.7 million in fiscal 1996. Interest expense was
partially reduced by the retirement in July 1997 of approximately $51.4 million
aggregate principal amount of indebtedness in connection with the Company's
initial public offering.
Net Loss. Net loss increased to $10.9 million in fiscal 1997 compared
to $7.3 million in fiscal 1996, primarily as a result of a loss of $9.9 million
from discontinued operations. The loss from discontinued operations reflects a
charge of $8.4 million incurred in connection with the disposition of
McGuire-Nicholas, as well as a provision for operating losses for fiscal 1997
and anticipated operating losses through the date of closing from
McGuire-Nicholas of $1.5 million. Net loss in fiscal 1996 was partially offset
by income of $869,000 realized in connection with the cumulative effect of a
change in accounting for post-retirement benefits.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased 7.1%, or $6.1 million, to $92.7 million
in fiscal 1996 compared to $86.5 million in fiscal 1995. The increase in net
sales principally reflected increased unit sales across all product lines in
fiscal 1996 due to the addition of new customers and favorable weather
conditions, as well as lower net sales in fiscal 1995 due to inventory
reduction efforts by key mass merchant customers and poor spring weather
conditions.
Gross Profit. Gross profit increased 8.7%, or $2.0 million, to $25.2
million in fiscal 1996 compared to $23.1 million in fiscal 1995. Gross margin
increased to 27.2% in fiscal 1996 from 26.7% in fiscal 1995. The increase in
gross margin primarily resulted from increased manufacturing efficiencies
related to higher production levels, as well as improved product mix due to
increased sales of the Company's higher-margin, better- and best-quality
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.3%, or $1.3 million, to $16.8 million in
fiscal 1996 compared to $15.5 million in fiscal 1995. As a percentage of net
sales, selling, general and administrative expenses increased to 18.1% in
fiscal 1996 from 17.9% in fiscal 1995. The increase primarily results from an
increase in cooperative advertising expenditures and staffing costs.
Other Expenses, Net. Other expenses increased $828,000 to $1.5 million
in fiscal 1996 compared to $694,000 in fiscal 1995. In fiscal 1996, the Company
recognized other expense of $563,000 in connection with the resignation of
Acorn's previous Chairman of the Board and other expense of $750,000 in
connection with self-insured life insurance accruals related to the death of a
former director of the Company.
Loss From Continuing Operations Before Income Taxes. Loss from
continuing operations before income taxes increased 70.0%, or $447,000, to $1.1
million in fiscal 1996 compared to $639,000 in fiscal 1995.
18
<PAGE> 19
Net Loss. Net loss increased $4.8 million to $7.3 million in fiscal
1996 compared to $2.4 million in fiscal 1995, primarily as a result of increased
losses from discontinued operations in 1996.
SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May.
Accordingly, the Company's sales tend to be greater during its third and fourth
fiscal quarters. As a result, the Company's operating results depend
significantly on the spring selling season. To support this sales peak, the
Company must anticipate demand and build inventories of finished goods
throughout the fall and winter. Accordingly, the Company's levels of raw
materials and finished goods inventories tend to be at their highest, relative
to sales, during the Company's first and second fiscal quarters. These factors
increase variations in the Company's quarterly results of operations and
potentially expose the Company to greater adverse effects of changes in
economic and industry trends. Moreover, actual demand for the Company's
products may vary substantially from the anticipated demand, leaving the
Company with excess inventory or insufficient inventory to satisfy customer
orders.
The following table sets forth certain unaudited data related to net
sales for the fiscal quarters in fiscal 1995, fiscal 1996 and fiscal 1997. The
unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in the opinion of management of the Company,
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information for the quarters presented.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------------------------------------- -------------------------------------------
QUARTER ENDED
---------------------------------------------------------------------------------------
OCTOBER JANUARY APRIL AUGUST NOVEMBER JANUARY MAY 2, AUGUST
27, 1995 26, 1996 26, 1996 2, 1996 1, 1996 31, 1997 1997 1, 1997
-------- -------- -------- ------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $16,486 $19,357 $33,564 $23,245 $19,679 $21,018 $37,270 $23,044
Cost of goods sold........ 12,544 14,731 23,738 16,483 14,507 15,635 26,935 16,905
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 3,942 4,626 9,826 6,762 5,172 5,383 10,335 6,139
Selling, general and
administrative
expenses (SG&A)......... 3,635 3,721 4,464 4,995 4,403 4,236 4,809 4,845
------- ------- ------- ------- ------- ------- ------- -------
Gross profit less
SG&A (1)................ $ 307 $ 905 $ 5,362 $ 1,767 $ 769 $ 1,147 $ 5,526 $ 1,294
======= ======= ======= ======= ======= ======= ======= =======
Net sales as a
percentage of full
year net sales.......... 17.8% 20.9% 36.2% 25.1% 19.5% 20.8% 36.9% 22.8%
Gross profit as a
percentage of full
year gross profit....... 15.7 18.4 39.1 26.9 19.1 19.9 38.2 22.7
Gross profit less SG&A (1)
as a percentage of full
year operating profit... 3.7 10.9 64.3 21.2 8.8 13.1 63.3 14.8
</TABLE>
- -------------------
(1) Does not include amortization of intangibles and other expenses, each of
which generally are non-seasonal in nature.
Weather is the single most important factor in determining market
demand for the Company's products and also is the least predictable. For
example, while floods in the Midwest adversely affected the sale of most types
of lawn and garden equipment in 1992, the severe winter of 1994 resulted in a
surge in demand for snow shovels. In addition, bad weather during the spring
gardening season, such as that experienced throughout most of the U.S. in the
spring of 1995, can adversely affect overall annual sales.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, capital
expenditures and debt service. The Company has financed its working capital,
capital expenditures and debt service requirements primarily through internally
generated cash flow and funds borrowed under the Company's senior credit
facility (the "Credit Facility") and certain subordinated notes (the
"Subordinated Notes").
Net cash used in continuing operations was $7.6 million in fiscal 1997
compared to net cash provided by continuing operations of $14.0 million in
fiscal 1996. The increased use of cash principally reflects higher inventories
of $3.1 million related to the impact of unfavorable spring weather conditions,
increased accounts receivables of $6.4 million due to a higher volume of sales
late in the fourth quarter and a decrease in accounts payable and accrued
expenses of $773,000 related to decreased production levels in the fourth
quarter. In addition, the Company made non-recurring cash payments of
approximately $1.2 million for financing fees related to the Company's credit
facility, approximately $750,000 for self-insurance payments and approximately
$750,000 for tax related settlements. Net cash provided by continuing
operations was $14.0 million in fiscal 1996 compared to net cash used in
continuing operations of $504,000 in fiscal 1995. This increase resulted from a
reduction of inventory levels from July 28, 1995, which were unusually high as
a result of poor spring weather conditions in 1995, as well as inventory
reduction efforts by key mass merchant customers.
The Company made capital expenditures of approximately $2.9 million,
$1.5 million and $2.4 million during fiscal 1995, fiscal 1996 and fiscal 1997,
respectively. The capital expenditures relate primarily to ongoing improvements
of property, plant and equipment, manufacturing process improvements and
increased manufacturing capacity. The Company intends to make capital
expenditures of approximately $3.5 million in fiscal 1998 primarily related to
the purchase of new equipment and equipment and facility maintenance.
In December 1993 and May 1994, Acorn issued the Subordinated Notes in
the aggregate principal amount of approximately $31.4 million. In August 1996,
Acorn issued 100 shares of Series A Preferred Stock as payment in full of
accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. In
July 1997, the Company used approximately $9.6 million of the net proceeds from
its initial public offering to redeem the Series A Preferred Stock and pay
accumulated dividends thereon and approximately $11.0 million of the net
proceeds from its initial public offering to repay a portion of the
Subordinated Notes and accrued interest thereon. The remaining $24.0 million
aggregate principal amount of the Subordinated Notes was exchanged for
1,716,049 shares of Common Stock.
The Company entered into the Credit Facility to finance capital
expenditures, including future acquisitions, if any, and to fund working
capital and other general business purposes. In July 1997, the Company used
approximately $20.6 million of the net proceeds from its initial public
offering to repay a portion of the debt outstanding under the Credit Facility
and accrued interest thereon. As of August 1, 1997, approximately $16.2 million
was available under the revolving portion of the Credit Facility and
approximately $28.9 million was available under the acquisition line of the
Credit Facility. Indebtedness outstanding under the Credit Facility bears
interest at variable rates (8.6% per year at August 1, 1997).
The Company believes that cash generated from operations, together
with amounts available under the Credit Facility, will be adequate to meet its
debt service requirements, capital expenditures and working capital needs for
the foreseeable future, although no assurance can be given in this regard. In
addition, actual capital requirements may change, particularly as a result of
acquisitions, if any, that the Company may make in the future. Depending on the
nature, size and timing of future acquisitions, the Company may be required to
raise additional financing. There can be no assurance that such additional
financing will be available to the Company on acceptable terms.
20
<PAGE> 21
EFFECTS OF INFLATION
The Company is affected by inflation primarily through the purchase of
raw materials, increased operating costs and expenses and higher interest
rates. The Company believes that the effects of inflation on the Company's
operations have not been material in recent years.
FORWARD LOOKING STATEMENTS
Statements in the foregoing discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements due to, among other risks and uncertainties inherent
in the Company's business, the following important factors:
* Weather is the most significant factor in determining market demand
for the Company's products and is inherently unpredictable. Inclement
weather during the spring gardening season and lack of snow during the
winter may have a material adverse effect on the Company's business,
financial condition and results of operations.
* The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through
May. Accordingly, the Company's sales tend to be greater during its
third and fourth fiscal quarters. As a result, the Company's operating
results depend significantly on the spring selling season. To support
this sales peak, the Company must anticipate demand and build
inventories of finished goods throughout the fall and winter.
Accordingly, the Company's levels of raw materials and finished goods
inventories tend to be at their highest, relative to sales, during the
Company's first and second fiscal quarters. These factors increase
variations in the Company's quarterly results of operations and
potentially expose the Company to greater adverse effects of changes
in economic and industry trends. Moreover, actual demand for the
Company's products may vary substantially from the anticipated demand,
leaving the Company with either excess inventory or insufficient
inventory to satisfy customer orders.
* The Company's five largest customers in the aggregate accounted for
approximately 36.7% of gross sales in fiscal 1997. A substantial
reduction or cessation of sales to these or other major customers
could have a material adverse effect on the Company's 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 of Company's customers or result
in a substantial reduction or cessation of purchases of the Company's
products by certain customers. In addition, the Company is facing
increasing pressures from retailers with respect to pricing,
co-operative advertising and other rebates as the market power of
large retailers continues to grow. There can be no assurance that such
pressures will not have an adverse impact on the Company's business,
financial condition and results of operations.
* A key element of the Company's growth strategy is to increase sales
in certain distribution channels, such as home centers and mass
merchants through retailers such as Home Depot and Sears. Although
Home Depot has indicated that it expects to open over 450 additional
stores over the next five years and Sears has indicated that it
expects to open or acquire over 500 additional non-mall hardware
stores over the next five years, there can be no assurance that such
stores will be opened or, if opened, that the Company will be chosen
to supply its products to all or a significant portion of such stores.
In addition, there can be no assurance that such stores will generate
significant additional sales for the Company or that such stores will
not result in a reduction of sales to the Company's other customers,
whether through consolidation or otherwise.
21
<PAGE> 22
* The recent growth and development of the Company largely has been
dependent upon the services of Gabe Mihaly, President and Chief
Executive Officer of the Company, as well as the other executive
officers of the Company. The loss of Mr. Mihaly's services, or the
services of one or more of the other executive officers of the
Company, could have a material adverse effect on the Company.
* A key element of the Company's strategy is the acquisition of
businesses and assets in the lawn and garden industry. There can be no
assurance, however, that the Company will be able to identify
attractive acquisition opportunities, obtain sufficient financing for
acquisitions on satisfactory terms or successfully acquire identified
targets. In addition, there can be no assurance that the Company will
be successful in integrating acquired businesses into its existing
operations or that such integration will not result in unforeseen
operational difficulties or require a disproportionate amount of
management's attention. Such acquisitions may result in the incurrence
of additional indebtedness by the Company or the issuance of preferred
stock or additional Common Stock by the Company. Furthermore, there
can be no assurance that competition for acquisition opportunities in
the industry will not escalate, thereby increasing the cost to the
Company of making acquisitions or causing the Company to refrain from
making further acquisitions.
* The Company's products require the supply of raw materials consisting
primarily of steel, plastics and ash wood. The Company has several
suppliers for most of its raw materials. There can be no assurance,
however, that the Company will not experience shortages of raw
materials or components essential to its production processes or be
forced to seek alternative sources of supply. In addition, there can
be no assurance that prices for such materials will remain stable. Any
shortages of raw materials may result in production delays and
increased costs which could have a material adverse effect on the
Company's business, financial condition and results of operations.
* All aspects of the lawn and garden industry, including attracting and
retaining customers and pricing, are highly competitive. The Company
competes for customers with large consumer product manufacturers and
numerous other companies that produce specialty home and garden
products, as well as with foreign manufacturers that export their
products to the U.S. Many of these competitors are larger and have
significantly greater financial resources than the Company. There can
be no assurance that increased competition in the lawn and garden
industry, whether from existing competitors, new domestic
manufacturers or additional foreign manufacturers entering the U.S.
market, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
* Most of the Company's hourly employees are covered by collective
bargaining or similar labor agreements. The Company currently is a
party to four such agreements, one of which expires in 1998 and three
of which expire in 1999. There can be no assurance that the Company
will be successful in negotiating new labor contracts on terms
satisfactory to the Company or without work stoppages or strikes. A
prolonged work stoppage or strike at any of the Company's facilities
could have a material adverse effect on the Company's business,
financial condition and results of operations.
* The Company is subject to various federal, state, and local
environmental laws, ordinances and regulations governing, among other
things, emissions to air, discharge to waters and the generation,
handling, storage, transportation, treatment and disposal of hazardous
substances and wastes. The Company has made, and will continue to
make, expenditures to comply with these environmental requirements and
regularly reviews its procedures and policies for compliance with
environmental laws. The Company also has been involved in remediation
actions with respect to certain of its facilities. Amounts expended by
the Company in such compliance and remediation activities have not
been material to the Company. However, current conditions and future
events, such as changes in existing laws and regulations, may give
rise to additional compliance or remediation costs that could have a
material adverse effect on the Company's business, financial condition
or results of operations. Furthermore, as is the case with
22
<PAGE> 23
manufacturers in general, if a release of hazardous substances occurs
on or from the Company's properties or any associated offsite disposal
location, or if contamination from prior activities is discovered at
any of the Company's properties, the Company may be held liable and
the amount of such liability could be material.
* New housing starts often represent an addition to the overall number
of consumers in the lawn and garden tool market and, accordingly, an
increase in demand. Similarly, government spending on highways,
bridges and other construction projects often represents an increase
in demand for long handled tools. A decline in housing starts or
government spending on construction projects could result in a
decrease in demand for the Company's products and, accordingly, could
have a material adverse effect on the Company's 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 the Company's
products and, accordingly, could have a material adverse effect on the
Company's 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 the Company will not undertake, and specifically declines, 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 unanticipated events. New factors emerge from time to time and
it is not possible for management to predict all of such factors, nor can it
assess the impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
23
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Acorn Products, Inc.
We have audited the accompanying consolidated balance sheets of Acorn Products,
Inc. (formerly Vision Hardware Group, Inc.) and Subsidiaries as of August 2,
1996 and August 1, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal years ended July 28,
1995, August 2, 1996 and August 1, 1997. Our audits also include the financial
statement schedules listed in the index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurances 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 August 2, 1996 and August 1, 1997, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended August 1, 1997, in conformity with
generally accepted accounting principles. 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 8 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions" in
1996.
ERNST & YOUNG LLP
Columbus, Ohio
September 12, 1997
24
<PAGE> 25
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................... $ 502 $ 1,509
Accounts receivable, less allowance for
doubtful accounts (1996-$557; 1997-$713)...................... 12,067 18,462
Inventories..................................................... 23,433 27,642
and other current assets........................................ 1,701 3,773
------- -------
Total current assets......................................... 37,703 51,386
Property, plant and equipment, net of accumulated
depreciation.................................................... 10,558 15,650
Goodwill, net of accumulated amortization.......................... 30,184 29,374
Other intangible assets............................................ 1,166 2,480
Net assets of discontinued operations.............................. 19,284 -
------- -------
Total assets................................................. $98,895 $98,890
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility....................................... $12,537 $12,837
Accounts payable................................................ 5,198 5,872
Accrued expenses................................................ 6,154 4,707
Current portion of long-term debt............................... 3,500 -
Income taxes payable ........................................... 1,100 350
Other current liabilities....................................... 671 711
------- -------
Total current liabilities................................. 29,160 24,477
Long-term debt..................................................... 45,854 6,098
Other long-term liabilities........................................ 5,351 4,495
Net liabilities of discontinued operations......................... - 595
------- -------
Total liabilities............................................ 80,365 35,665
Stockholders' equity:
Common stock, par value of $.001 per share, 20,000,000 shares
authorized, 1,490,826 and 6,464,105 shares issued and
outstanding in 1996 and 1997, respectively.................... 14,406 78,391
Preferred stock, par value of $.001 per share, 1,000 shares
authorized, 100 shares of Series A Preferred stock issued and
outstanding in 1996........................................... 8,596 -
Contributed capital-stock options .............................. 340 460
Minimum pension liability....................................... (197) (133)
Retained earnings (deficit)..................................... (4,615) (15,494)
------- -------
Total stockholders' equity................................... 18,530 63,224
------- -------
Total liabilities and stockholders' equity............... $98,895 $98,890
======= =======
</TABLE>
See accompanying notes.
25
<PAGE> 26
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996 FISCAL 1997
-----------------------------------------------------
<S> <C> <C> <C>
Net sales................................................ $ 86,543 $ 92,652 $ 101,011
Cost of goods sold....................................... 63,411 67,496 73,982
-------- ---------- ---------
Gross profit............................................. 23,132 25,156 27,029
Selling, general and administrative expenses............. 15,531 16,815 18,293
Interest expense......................................... 6,485 6,732 7,176
Amortization of intangibles.............................. 1,061 1,173 837
Other expenses, net...................................... 694 1,522 1,548
-------- ---------- ---------
Income (loss) from continuing operations before income
taxes and cumulative effect adjustment................ (639) (1,086) (825)
Income taxes............................................. - 582 134
-------- ---------- ---------
Income (loss) from continuing operations before cumulative
effect adjustment..................................... (639) (1,668) (959)
Discontinued operations:
Loss from operations.................................. (1,800) (5,815) (1,499)
Loss on disposal...................................... - (665) (8,421)
-------- ---------- ---------
Loss from discontinued operations..................... (1,800) (6,480) (9,920)
--------- ---------- ---------
Income (loss) before cumulative effect adjustment........ (2,439) (8,148) (10,879)
Cumulative effect of change in accounting for post-
retirement benefits.................................. - 869 -
--------- ---------- ---------
Net income (loss)........................................ $ (2,439) $ (7,279) $ (10,879)
--------- ---------- ---------
Net income (loss) applicable to common stock............. $ (2,439) $ 7,279) $ (11,897)
--------- ---------- ---------
Per Share Data:
Loss from continuing operations......................... $ (.43) $ (1.10) $ (.48)
Loss from discontinued operations........................ (1.21) (4.26) (5.00)
Cumulative effect of change in accounting for post-
retirement benefits.................................. - .57 -
Preferred stock dividend................................. - - (.51)
--------- ---------- ---------
Net loss applicable to common stock...................... $ (1.64) $ (4.79) $ (5.99)
--------- ---------- ---------
Weighted average shares outstanding...................... 1,483,596 1,520,066 1,985,758
========= ========== =========
</TABLE>
See accompanying notes.
26
<PAGE> 27
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON SHARES PREFERRED SHARES
-------------------------------------------------
CONTRIBUTED
CAPITAL MINIMUM RETAINED
NUMBER OF NUMBER OF STOCK PENSION EARNINGS
SHARES AMOUNT SHARES AMOUNT OPTIONS LIABILITY (DEFICIT) TOTAL
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
July 29, 1994......... 1,483,596 $14,319 - $ - $ - $ - $ 5,103 $ 19,422
Net loss for the period
July 30, 1994 through
July 28, 1995......... - - - - - - (2,439) (2,439)
Stock options issued.... - - - - 340 - - 340
--------- ------- ------- -------- -------- -------- ---------- ----------
Balances at
July 28, 1995......... 1,483,596 14,319 - - 340 - 2,664 17,323
Net loss for the period
July 29, 1995 through
August 2, 1996........ - - - - - - (7,279) (7,279)
Conversion of debt...... - - 100 8,596 8,596
Stock issued............ 7,230 87 - - 87
Adjustment to recognize
minimum pension
liability............. - - - - - (197) - (197)
--------- ------- ------- -------- -------- -------- ---------- ----------
Balances at
August 2, 1996....... 1,490,826 14,406 100 8,596 340 (197) (4,615) 18,530
Net loss for the period
August 3, 1996 through
August 1, 1997........ - - - - - - (10,879) (10,879)
Redemption of preferred
stock ................ - - (100) (8,596) - - - (8,596)
Preferred stock
dividend.............. - (1,018) - - - - - (1,018)
Conversion of debt to
equity................ 1,716,049 24,025 - - - - - 24,025
Stock issued in public
offering.............. 3,250,000 40,890 - - - - - 40,890
Adjustment to minimum
pension liability..... - - - - - 64 - 64
Stock options issued.... - - - - 120 - - 120
Stock issued............ 7,230 88 - - - - - 88
--------- ------- ------- -------- -------- -------- ---------- ----------
Balances at
August 1, 1997........ 6,465,105 $78,391 - $ - $ 460 $ (133) $ (15,494) $ 63,224
========= ======= ======= ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes.
27
<PAGE> 28
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
JULY 28, AUGUST 2, AUGUST 1,
1995 1996 1997
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................$ (2,439) $ (7,279) $(10,879)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Loss from discontinued operations............................. 1,800 6,480 9,920
Depreciation and amortization................................. 3,030 3,592 3,489
Deferred income taxes......................................... - 756 -
Conversion of accrued interest to preferred stock............ - 4,463 -
Conversion of accrued interest to common stock............... - - 3,714
Financing fees and other, net................................. (556) (365) (1,218)
Issuance of stock options..................................... 340 - 120
Cumulative effect of the change in accounting principal....... - 869 -
Changes in operating assets and liabilities:
Accounts receivable....................................... 6,815 (1,397) (6,395)
Inventories............................................... (8,051) 8,369 (3,141)
Other assets.............................................. (739) (190) (886)
Accounts payable and accrued expenses..................... 1,788 587 (773)
Income taxes payable...................................... 19 (656) (750)
Other liabilities......................................... (2,511) (1,243) (751)
-------- ---------- ----------
Net cash provided by (used in) continuing operations............. (504) 13,986 (7,550)
Net cash provided by (used in) continued operations.............. (9,894) (4,001) 2,430
-------- ---------- ---------
Net cash provided by (used in) operating activities.............. (10,398) 9,985 (5,120)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net assets from acquisition...................................... - - (6,499)
Investment in joint venture...................................... - - (520)
Purchases of property, plant and equipment, net.................. (2,870) (1,466) (2,436)
Proceeds from disposal of discontinued operation................. - - 6,863
-------- ---------- ---------
Net cash provided by (used in) investing activities............. (2,870) (1,466) (2,592)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debt retired........................................ - - (7,329)
Acquisition line draws........................................... - - 6,098
Net activity on term loan........................................ (3,500) (3,500) (18,000)
Net activity on revolving loan................................... 16,750 (6,713) 300
Redemption of preferred stock and accrued dividends.............. - - (9,614)
Net proceeds from................................................ - - 37,176
Issuance of stock................................................ - 87 88
-------- ---------- ----------
Net cash provided by (used in) financing activities.............. 13,250 (10,126) 8,719
-------- ---------- ----------
Net increase (decrease) in cash.................................. (18) (1,607) 1,007
Cash at beginning of period...................................... 2,127 2,109 502
-------- ---------- ----------
Cash at end of period............................................$ 2,109 $ 502 $ 1,509
-------- ---------- ----------
Interest paid....................................................$ 4,972 $ 3,584 $ 7,175
======== ========== ==========
</TABLE>
See accompanying notes.
28
<PAGE> 29
ACORN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITION AND DESCRIPTION OF THE BUSINESS
Founded in 1890, Acorn Products, Inc. (Acorn), through its wholly-owned
subsidiary Union Tools, Inc. ("Union Tools" and together with Acorn the
"Company") is a leading manufacturer and marketer of non-powered lawn and garden
tools in the U.S. The Company's principal products include long handle tools
(such as forks, hoes, rakes and shovels), snow tools, posthole diggers,
wheelbarrows, striking tools, cutting tools and hose reels. The Company sells
its products under a variety of well-known brand names. In addition, the Company
manufactures private label products for a variety of retailers. The Company
sells its products through a variety of distribution channels. Acorn is a
holding company with no business operations of its own. (See Note 3 for a
discussion of the Company's disposition of its non-lawn and garden operations.)
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May. As a
result, the Company's operating results depend significantly on the spring
selling season. To support this sales peak, the Company must build inventories
of finished goods throughout the fall and winter. Accordingly, the Company's
levels of raw materials and finished goods inventories tend to be at their
highest, relative to sales, during the Company's first and second fiscal
quarters. (See Note 12).
Weather is the most significant factor in determining market demand
for the Company's products and is inherently unpredictable. Fluctuations in
weather can be favorable or unfavorable for the sale of lawn and garden
equipment.
The Company's largest customer, Sears, accounted for 7.6%, 12.5% and
10.9% of gross sales in fiscal 1995, fiscal 1996 and fiscal 1997, respectively.
No other customer accounted for 10% or more of the Company's gross sales in
fiscal 1995, fiscal 1996 or fiscal 1997.
The Company's products require the supply of raw materials consisting
primarily of steel, plastics and ash wood. The Company has several suppliers
for most of its raw materials.
In July 1997, Acorn completed an initial public offering of 3,250,000
shares of Common Stock at a price to the public of $14.00 per share. The net
proceeds from the offering were approximately $41.3 million.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Acorn and its subsidiaries, UnionTools, McGuire-Nicholas Company, Inc.
("McGuire-Nicholas") and VSI Fasteners, Inc. ("VSI"). All intercompany accounts
and transactions have been eliminated. (See Note 3 -- Discontinued Operations).
Inventories
lnventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FlFO) method. Inventories consist of
the following:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods......................................... $12,473 $14,460
Work in process........................................ 5,703 7,041
Raw materials and supplies............................. 5,932 6,741
------- -------
24,108 28,242
Valuation reserves..................................... (675) (600)
------- -------
Total inventories...................................... $23,433 $27,642
------- -------
</TABLE>
29
<PAGE> 30
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:
<TABLE>
<S> <C>
Machinery and equipment...................................... 3 to 15 years
Buildings and improvements................................... 3 to 40 years
Furniture and fixtures....................................... 3 to 15 years
</TABLE>
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 1,207 $1,626
Buildings and improvements.............................. 2,553 4,909
Machinery and equipment................................. 10,840 15,011
Furniture and fixtures.................................. 1,355 1,815
------- -------
15,955 23,361
Accumulated depreciation and amortization............... (5,397) (7,711)
------- -------
Property, plant and equipment, net...................... $10,558 $15,650
======= =======
</TABLE>
Goodwill
Goodwill, resulting from the cost of assets acquired exceeding the
underlying net asset value, is amortized on the straight-line method over a
forty-year period. Accumulated amortization was $2.2 million at August 2, 1996
and $3.0 million at August 1, 1997. The Company assesses the recoverability of
its goodwill whenever adverse events or changes in circumstances or business
climate indicate that expected future cash flows (undiscounted) for individual
business units may not be sufficient to support recorded goodwill. If
undiscounted cash flows are not sufficient to support the recorded asset, an
impairment is recognized to reduce the carrying value of the goodwill based on
the expected discounted cash flows of the business unit.
Income Taxes
The Company files a consolidated federal income tax return. Federal
income taxes are apportioned among Acorn and its subsidiaries based on each
corporation's taxes as determined on a separate return basis. State tax returns
are filed on a separate-company basis.
The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earning Per Share
Earnings per share is computed using the weighted average number of
shares of Common Stock outstanding during each period plus dilutive Common
Stock equivalents (stock options) using the treasury stock method. Fully
diluted earnings per share have not been presented as the differences are
insignificant. In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earning Per Share" (SFAS 128). SFAS 128 is
effective for periods ending after December 15, 1997. Until that time, the
Company is required to continue calculating earnings per share in accordance
with Accounting Principles Board Opinion No. 15. The Company does not expect
the adoption of SFAS 128 to have a significant effect on earnings per share.
30
<PAGE> 31
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year is comprised of the 52 or 53 weeks ending on
the Friday closest to July 31 of each year. Unless otherwise stated, references
to fiscal 1995, fiscal 1996 and fiscal 1997 relate to the fiscal years ended
July 28, 1995, August 2, 1996 and August 1, 1997, respectively, and were
comprised of 52 weeks, 53 weeks and 52 weeks, respectively. The Company's
interim reporting periods for quarterly periods end on the Friday closest to
the last day of each fiscal quarter.
3. DISCONTINUED OPERATIONS
VSI
In March 1996, the Company adopted a formal plan to sell VSI.
Accordingly, VSI was accounted for as a discontinued operation in the financial
statements for fiscal 1996. Prior year financial statements were reclassified
to conform to the 1996 presentation. During fiscal 1996, the Company provided
for estimated losses of $665,000 on the disposal of VSI, which represented the
write-down of inventory and other assets to estimated net realizable value and
the estimated loss through the disposal date. The Company completed the sale of
substantially all of the assets of VSI on December 4, 1996 for approximately
$6.9 million, plus the assumption of approximately $2.3 million of related
liabilities. No additional gain or loss was incurred.
McGuire-Nicholas
In January 1997, the Company adopted a formal plan to sell
McGuire-Nicholas. Accordingly, McGuire-Nicholas is accounted for as a
discontinued operation and classified as such in the accompanying consolidated
financial statements. The prior year financial statements have been
reclassified to conform to the current year presentation. During fiscal 1997,
the Company provided for an estimated loss on the disposal of McGuire-Nicholas
of $9.9 million, consisting of an estimated loss on disposal of $8.4 million
and a provision of $1.5 million of operating losses for fiscal 1997 and
anticipated operating losses through the date of closing. The loss on disposal
represented the write-off of $7.3 million of goodwill relating to
McGuire-Nicholas and the write-down of inventory and other assets to estimated
net realizable value. On August 8, 1997, the Company sold substantially all of
the assets of McGuire-Nicholas for approximately $4.7 million, plus the
assumption of approximately $4 million of related liabilities. Final
determination of Acorn's proceeds from the disposition of McGuire-Nicholas
remains subject to certain closing balance sheet adjustments.
Results of Operations and Net Assets of Discontinued Operations
The following represents the combined results of operations of the
Company's discontinued operations:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996 FISCAL 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.............................. $53,050 $49,810 $29,643
Costs and expenses.................... 53,145 50,143 30,731
Interest expense...................... (1,422) (1,577) (411)
Loss from operations.................. (1,800) (5,815) (1,499)
</TABLE>
Interest expense has been allocated to discontinued operations for all
periods based on the ratio of net assets of discontinued operations to
consolidated net assets plus debt.
31
<PAGE> 32
The following table summarizes the net assets (liabilities) of the
Company's discontinued operations:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable................................... $ 6,109 $ 3,548
Inventories........................................... 10,321 3,658
Property and equipment................................ 2,470 1,686
Other assets (including goodwill of
$7,400 and $0, respectively)........................ 8,518 992
Liabilities........................................... (8,134) (10,479)
------- --------
Net assets (liabilities) of discontinued operations $19,284 $ (595)
======= ========
</TABLE>
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Term loan............................................. $18,000 $ --
Subordinated debt to shareholder...................... 31,354 --
Acquisition line of credit facility................... -- 6,098
------- -----
49,354 6,098
Less current portion of long-term debt................ 3,500 --
------- ------
$45,854 $6,098
======= ======
</TABLE>
Credit Facility
UnionTools entered in to a credit facility (the "Credit Facility") in
December 1996 which, as amended and restated in June 1997, provides for a $30
million revolving credit facility (the "Revolving Facility") and a $35 million
acquisition facility (the "Acquisition Line"). The Credit Facility originally
also provided for a $20 million term loan, which was repaid in June 1997 with a
portion of the proceeds from Acorn's initial public offering. The Credit
Facility is secured by substantially all of the assets of UnionTools and is
guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all the
capital stock of UnionTools.
Available borrowings under the Revolving Facility are based on
specified percentages of accounts receivable and inventory. As of August 1,
1997, there was $16.2 million available for future borrowing under the
Revolving Facility. The Revolving Facility has a letter of credit subcommitment
of $3 million and expires in June 2003.
Available borrowings under the Acquisition Line are subject to various
financial and non-financial requirements and are limited to $7.5 million per
acquisition and $15 million per year without the prior approval of the lenders.
The Acquisition Line will convert to a three year term loan in June 2000 and
will be payable according to a predetermined amortization schedule.
Borrowings under the Credit Facility bear interest at either the bank
prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 1,
1997 was 8.5%) or at UnionTools' option, the LIBOR rate plus a margin ranging
from 2.25% to 2.75% (LIBOR rate at August 1, 1997 was 5.75%). At August 1,
1997, UnionTools had $16.1 million of debt outstanding under the LIBOR option
and $2.8 million of debt outstanding under the bank prime rate option. The
interest rate margin fluctuates based on the ratio of total senior debt to
operating cash flow as set forth in a predetermined pricing table. In addition,
UnionTools is required to pay a fee of 0.5% per year on the unused portion of
the Revolving Facility and the Acquisition Line.
32
<PAGE> 33
The Credit Facility contains certain covenants, which, among other
things, require UnionTools to maintain specified financial ratios and satisfy
certain tests, including minimum interest coverage ratios, and places limits on
future capital expenditures by UnionTools. The Credit Facility also includes
negative covenants including limitations on indebtedness, liens, guarantees,
obligations, mergers, consolidations, liquidations and dissolutions, sales of
assets, leases, dividends and other payments in respect of capital stock,
capital expenditures, investments, loans and advances, optional payments and
modifications and other debt instruments, transactions with affiliates, changes
in fiscal year, negative pledge clauses and changes in line of business.
UnionTools was in compliance of all debt covenants at August 1, 1997.
UnionTools is required to make certain mandatory prepayments under the
Credit Facility based upon cash flow and certain other events described in the
Credit Facility. UnionTools may elect to prepay all or a portion of the Credit
Facility at any time. The fair value of the Company's long-term debt
approximates the carrying amount at August 1, 1997.
Subordinated Notes
In December 1993, Acorn issued a Subordinated Unsecured Promissory
Note in the amount of $25 million to several investment funds and accounts (the
"TCW Funds") managed by affiliates of The TCW Group, Inc. In May 1994, Acorn
issued a Temporary Subordinated Promissory Note in the amount of $6.4 million
to the TCW Funds. The Subordinated Unsecured Promissory Note and the Temporary
Subordinated Promissory Note collectively are referred to herein as the
"Subordinated Notes". The Subordinated Notes were due on July 31, 2003 and
accrued interest at 13% per year. On August 2, 1996, Acorn issued 100 shares of
Series A Preferred Stock (the "Series A Preferred Stock") with a par value of
$.001 per share and a stated value of $8.6 million as payment in full of
accrued interest on the Subordinated Notes of $4.1 million and $4.5 million for
fiscal 1995 and fiscal 1996, respectively. In June 1997, Acorn used $9.6
million of the proceeds from its initial public offering to redeem the Series A
Preferred Stock and pay accumulated dividends thereon and $11.0 million of the
proceeds from its initial public offering to repay a portion of the
Subordinated Notes and accrued interest thereon. The remaining $24.0 million
aggregate principal amount of the Subordinated Notes was exchanged for 1.7
million shares of Common Stock.
In December 1996, Acorn issued a subordinated promissory note to the
TCW Funds in the aggregate principal amount of $6 million and bearing interest
at a rate of 13% per year as bridge financing. In December 1996 Acorn paid $6.3
million to the TCW Funds in prepayment of the subordinated promissory note,
accrued interest thereon and a $180,000 facility fee.
5. STOCKHOLDERS' EQUITY AND DERIVATIVE SECURITIES
Increase in Authorized Capital Stock and Stock Split
In May 1997, Acorn increased the number of authorized shares of Common
Stock to 20 million and effected a 1,446-for-1 split of the Common Stock in the
form of a common stock dividend (the "Stock Split"). All share and per share
information has been restated to reflect the Stock Split.
Preferred Stock
At August 2, 1996, Acorn had 100 shares of non-voting,
non-convertible, Series A Preferred Stock issued and outstanding. Holders of
the Series A Preferred Stock were entitled to a cumulative 13% dividend,
payable quarterly in additional Series A Preferred Stock at a value of $85,962
per share. The Series A Preferred Stock was redeemable at the option of Acorn
at any time, in whole or in part, at a price of $85,962 per share, plus accrued
dividends. In July 1997, Acorn used $9.6 million of the proceeds from its
initial public offering to redeem the Series A Preferred Stock and pay
accumulated dividends thereon.
Stock Options
During fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In accordance with the provisions of SFAS
33
<PAGE> 34
123, the Company has elected to continue to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options and, accordingly,
does not recognize compensation costs when the exercise price of its employee
stock options is equal to the fair market value of the stock at the grant date.
Pursuant to employment agreements, certain executive officers of the
Company were granted options to purchase shares of Common Stock. Vesting of the
options and the related exercise price were contingent upon the attainment of
certain profitability targets, and portions of the options that failed to vest
expired. Of these options, 39,042 remain outstanding at August 1, 1997.
In April 1997, Acorn adopted the 1997 Stock Incentive Plan (the
"Incentive Plan") for members of senior management and certain other officers
and employees of the Company. The purpose of the Incentive Plan is to provide
incentives to employees of the Company by granting awards tied to the
performance of the Common Stock. Awards to employees may take the form of
options, stock appreciation rights or sales or grants of restricted stock. The
Company has reserved an aggregate of 730,000 shares of Common Stock for
issuance under the Incentive Plan. Acorn has granted an aggregate of 329,100
options under the Incentive Plan, an approximate fair value of $7.07 per share.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its incentive stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 1997: (i) a risk-free interest rate of 6.35%; (ii) no
dividend yield; (iii) a volatility factor of the expected market price of the
Company's Common Stock of .437; and (iv) a weighted-average expected life of
each option of 7 years. If the Company had elected to recognize compensation
expense based upon the fair value of options at the grant date as prescribed by
SFAS No. 123, reported net income (loss) applicable to common stock and per
share amounts would have been as follows:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------- -----------
<S> <C> <C>
Net income (loss) applicable to common stock........................ $ (7,309) $(12,219)
Net income (loss) applicable to common stock per share.............. (4.81) (6.15)
</TABLE>
The pro forma financial effects of applying SFAS No. 123 may not be
representative of the pro forma effects on reported results of operations for
future years.
34
<PAGE> 35
The following table summarizes the stock option activity:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
1997 STOCK INCENTIVE PLAN:
Outstanding at August 3, 1996...................... 0 $ 0
Granted............................................ 329,100 14.00
Exercised.......................................... 0 0
Expired/terminated................................. 0 0
Outstanding at August 1, 1997...................... 329,100 14.00
OTHER STOCK OPTIONS:
Outstanding at July 30, 1994....................... 111,342 8.49
Granted............................................ 15,906 12.10
Exercised.......................................... 0 0
Expired/terminated................................. 15,906 12.10
Outstanding at July 29, 1995....................... 111,342 8.49
Granted............................................ 14,460 12.10
Exercised.......................................... 7,230 12.10
Expired/terminated................................. 47,718 12.10
Outstanding at August 2, 1996...................... 70,854 6.42
Granted............................................ 0 0
Exercised.......................................... 7,230 12.10
Expired/terminated................................. 24,582 12.10
Outstanding at August 1, 1997...................... 39,042 1.79
</TABLE>
During fiscal 1997, options to purchase 5,784 shares of Common Stock
vested at an exercise price of $12.10 per share, options to purchase 5,784
shares of Common Stock vested at an exercise price of $0 per share and options
to purchase 82,275 shares of Common Stock vested at an exercise price of $14.00
per share. The Company recognized compensation expense of $120,000 in fiscal
1997 related to the vesting of these options. Options to purchase 7,230 shares
of Common Stock expired in fiscal 1997. Vested options to purchase 39,042
shares of Common Stock (with an exercise price of $0 and $12.10 per share
relating to 33,288 and 5,784 shares, respectively) and 82,275 shares of Common
Stock (with an exercise price of $14.00 per share) expire in December 2003 and
June 2004, respectively.
Director Stock Plan
In April 1997, Acorn adopted the Deferred Equity Compensation Plan for
Directors (the "Director Stock Plan"). The purpose of the Director Stock Plan
is to increase the proprietary interest in the Company of non-employee members
of the Board of Directors thereby increasing their incentive to contribute to
the success of the Company. Only non-employee directors are eligible to
participate in the Director Stock Plan. The number of shares of Common Stock
reserved for issuance pursuant to the Director Stock Plan is 73,000. In lieu of
cash, non-employee directors can elect to receive all or one-half of their fees
in the form of common stock units. The number of common stock units issued is
determined by dividing (i) an amount equal to the dollar amount of the fees to
be received in the form of common stock units by (ii) the average of the high
and low sale prices of the Common Stock on the National Market on the
last business day preceding the date of payment. Any cash or stock dividends
payable on shares of Common Stock accrue for the benefit of the directors in
the form of additional common stock units. Common stock units are distributed
to non-employee directors in the form of Common Stock following the director's
resignation from the Board of Directors. In addition, common
35
<PAGE> 36
stock units are distributed to directors in the form of Common Stock following
the death of the director or a change in control of Acorn as defined in the
Director Stock Plan. As of August 1, 1997, 2,379 common stock units had been
awarded under the Director Stock Plan representing an equal number of shares of
Common Stock to be issued in the future.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory........................................................ $ 1,752 $ 681
Accrued expenses and other....................................... 8,273 3,376
Net operating loss carryforwards................................. 5,910 15,181
Capital loss carryforward........................................ -- 410
--------- ----------
Total deferred tax assets..................................... 15,935 19,648
Valuation allowance for deferred tax assets........................... (14,897) (19,431)
---------- ----------
Deferred tax assets................................................... 1,038 217
Deferred tax liabilities:
Income taxes................................................... 209 --
Depreciation and other......................................... 829 217
--------- ----------
Total deferred tax liabilities................................ 1,038 217
--------- ----------
Net deferred tax assets.................................. $ -- $ --
========= ==========
</TABLE>
Based upon the Company's operating losses in the past two fiscal years
and the uncertainty of operating earnings in the future, management has
determined that it is not likely that the deferred tax assets will be fully
recognized. Accordingly, a valuation allowance has been recorded.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 28, 1995 AUGUST 2, 1996 AUGUST 1, 1997
------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current-- state....................... $ -- $ -- $134
Deferred-- state...................... -- 582 --
----- ==== ====
$ -- $582 $134
===== ==== ====
</TABLE>
At August 1, 1997, the Company has net operating loss carryforwards of
$37.1 million for income tax purposes that expire in the years 2009 through
2012 and capital loss carry forwards of $1.0 million for income tax purposes
that expire in 2002.
7. RETIREMENT PLANS
UnionTools maintains defined benefit pension plans which cover
substantially all employees. Benefits paid under the defined benefit plans are
based generally on either years of service and the employee's compensation in
recent years of employment or years of service multiplied by contractual
amounts. The Company's funding policy is to fund at least the minimum amount
required by ERISA.
36
<PAGE> 37
The following sets forth the funded status of the defined benefit
plans:
<TABLE>
<CAPTION>
PLANS WHOSE BENEFITS EXCEED ASSETS PLAN WHOSE ASSETS EXCEED BENEFITS
---------------------------------- ----------------------------------
AUGUST 2, 1996 AUGUST 1, 1997 AUGUST 2, 1996 AUGUST 1, 1997
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
(primarily vested)............... $8,291 $8,131 $ 5,064 $ 5,793
------ ------ ------- -------
Projected benefit obligation for
service rendered to date......... $8,451 8,252 $ 5,064 $5,793
Plan assets at fair value.......... 9,101 9,480 3,508 3,991
------ ------ ------- -------
Projected benefit obligation less.. 650 1,228 (1,556) (1,802)
than (in excess) of plan assets....
Unrecognized prior service cost.... (61) (40) 156 628
Unrecognized net losses (gains).... 621 364 327 445
Adjustment to recognize
minimum liability................ -- -- (552) (1,074)
------ ------ ------- -------
Prepaid (accrued) pension cost
included in the accompanying
balance sheet.................... $1,210 $1,552 $(1,625) $(1,803)
====== ====== ======= =======
</TABLE>
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
JULY 28, AUGUST 2, AUGUST 1,
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................... $ 371 $ 438 $ 619
Interest on projected benefit obligation.............. 965 981 1,045
Return on plan assets................................. (462) (411) (858)
Net amortization and deferral......................... (465) (582) (229)
----- ----- ------
Net periodic pension cost........................... $ 409 $ 426 $ 577
===== ===== ======
</TABLE>
Significant assumptions used in 1995, 1996 and 1997 in calculating
periodic pension cost are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------------------
<S> <C> <C> <C>
Discount rate................................................... 8% 8% 8%
Expected long-term rate of return............................... 8% 8% 8.75%
Rate of increase in future compensation......................... 4% 4% 4%
</TABLE>
Plan assets consist primarily of guaranteed interest contracts and
pooled investment debt securities.
8. POST-RETIREMENT BENEFITS
In addition to providing pension benefits, sponsors an
unfunded defined benefit health care plan that provides post-retirement medical
and life insurance benefits to employees who had attained age 50 and 10 years
of service by August 1, 1996 and to current participants receiving benefits.
37
<PAGE> 38
Effective August 1, 1995, the Company adopted No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions,"
pursuant to which the cost of retiree health care benefits is accrued during
the employees' active service period. The Company elected to immediately
recognize the difference between the accrued benefit obligation as calculated
under No. 106 and the amount recorded under the prior accounting method.
The cumulative effect of this accounting change as of August 1, 1995 was to
increase net income by $869,000.
Post-retirement benefit expense was $431,000 in fiscal 1995,
$425,242 in fiscal 1996 and $349,032 in fiscal 1997. The components of
expense in fiscal 1996 and fiscal 1997 follow:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
-------- ---------
<S> <C> <C>
Service cost benefits earned......................................... $ 80,131 $ 62,254
Interest cost on projected benefit obligations....................... 345,111 286,778
-------- --------
$425,242 $349,032
======== ========
</TABLE>
The following table presents supplemental information related to the
Company's post-retirement health care benefits:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1,
1996 1997
---------- ----------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees.......................................................... $2,773,644 $2,411,657
Active employees.................................................. 1,938,511 1,371,907
---------- ----------
4,712,155 3,783,564
Unrecognized net gain (loss)......................................... (111,046) 710,967
---------- ----------
Accrued post-retirement benefit cost................................. $4,601,109 $4,494,531
========== ==========
</TABLE>
As the benefits provided by the plan are fixed by the plan document,
no annual assumed rate of increase in per capita cost of covered benefits is
included in the obligation calculation. The discount rate used in determining
the accumulated post-retirement benefit obligation was 7.5%.
9. AGREEMENTS WITH KEY EMPLOYEES
In May 1997, the Company terminated existing employment agreements
with certain executive officers of the Company and entered into a new
employment agreement with the President and Chief Executive Officer of Acorn
and UnionTools. In addition, the Company entered into agreements with certain
of its executive officers providing for, under certain circumstances, payments
from the Company following the termination of such officers' employment with
the Company or following a change in control of the Company (as defined
therein).
10. COMMITMENTS AND CONTINGENCIES
UnionTools entered into a royalty agreement with The Scotts Company,
pursuant to which UnionTools obtained the exclusive right to manufacture,
distribute and market in the U.S. and Canada an extensive line of lawn and
garden tools under the Scotts(R) brand name. Under the agreement, UnionTools
must pay certain minimum royalty amounts annually.
38
<PAGE> 39
Rent expense under operating leases was $2.2 million in fiscal 1995,
$2 million in fiscal 1996 and $1.2 million in fiscal 1997. The minimum annual
payments for leases under noncancelable operating leases and the royalty
agreement at August 1, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.......................................................... $893,000
1999.......................................................... 784,000
2000.......................................................... 494,000
2001.......................................................... 76,000
2002.......................................................... 24,000
Thereafter.................................................... 0
</TABLE>
The Company is a party to personal injury litigation arising out of
incidents involving the use of Company products purchased by consumers from
retailers to whom the Company distributes. The Company generally is covered by
insurance for these product liability claims. Management believes that the
ultimate disposition of this litigation will not have a material effect on the
consolidated financial position or the results of future operations of the
Company.
Hourly employees at the Company's Columbus, Ohio manufacturing
facility and distribution center, Delaware, Ohio sawmill, Frankfort, New York
manufacturing facility and distribution center, Portville, New York sawmill and
Hebron, Ohio injection molding facility are covered by collective bargaining
agreements between the Company and four unions. The collective bargaining
agreements expire in May 1999, June 1998, August 1999 and March 1999,
respectively. No other employees of the Company are represented by unions. The
Company has not been subject to a strike or work stoppage in over 20 years and
believes that its relationships with its employees and applicable unions are
good. However, there can be no assurance that the Company will be successful in
negotiating new labor contracts on terms satisfactory to the Company or without
work stoppages or strikes. A prolonged work stoppage or strike at any of the
Company's facilities could have a material adverse effect on the Company's
business, financial condition and results of operations.
11. ACQUISITION OF BUSINESS
On February 19, 1997, the Company acquired for approximately $6.3
million in cash certain assets of an injection molding company. The Company
accounted for the acquisition as a purchase and the results of the injection
molding division's operations are included in the accompanying financial
statements beginning with the date of acquisition. The Company's allocation of
the purchase price and capitalized transaction costs, based upon an assessment
of the fair value of such assets at the date of acquisition, is as follows:
<TABLE>
<S> <C>
Inventories................................................... $1,068,000
Land and buildings............................................ 2,600,000
Equipment..................................................... 2,370,000
Non-compete agreement......................................... 461,000
----------
$6,499,000
==========
</TABLE>
The Company is amortizing the non-compete agreement over a two year
period.
39
<PAGE> 40
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data of the Company
for each quarter of fiscal 1996 and 1997. The financial data for each of these
quarters is unaudited but includes all adjustments, consisting of only normal
recurring adjustments, which the Company believes to be necessary for a fair
presentation. These operating results, however, are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
INCOME INCOME (LOSS)
(LOSS) BEFORE
BEFORE CUMULATIVE
CUMULATIVE EFFORT LOSS FROM
EFFECT ADJUSTMENT DISCONTINUED NET INCOME
NET SALES GROSS PROFIT ADJUSTMENT PER SHARE OPERATIONS (LOSS)
--------- ------------ ---------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
First quarter............. $16,486 $ 3,942 $(1,614) $ (1.06) $ (291) $ (1,036)
Second quarter............ 19,357 4,626 (1,061) (.70) (477) (1,538)
Third quarter............. 33,564 9,826 2,888 1.90 (355) 2,533
Fourth quarter............ 23,245 6,762 (1,881) (1.24) (5,357) (7,238)
------- ------- ------- ------- --------
$92,652 $25,156 $(1,668) $ (1.10) $(6,480) $ (7,279)
======= ======= ======= ======= ========
1997
First quarter............. $19,679 $ 5,172 $(1,290) $ (.87) $ (985) $ (2,275)
Second quarter............ 21,018 5,383 (1,527) (1.02) (126) (1,653)
Third quarter............. 37,270 10,335 2,638 1.76 (8,464) (5,826)
Fourth quarter............ 23,044 6,139 (780) (1.22) (345) (1,125)
-------- ------- ------- ------- --------
$101,011 $27,029 $ (959) $ (.48) $(9,920) $(10,879)
======== ======= ======= ======= ========
</TABLE>
The fourth quarter of fiscal 1996 reflects expense of $563,000 incurred in
connection with the resignation of Acorn's previous Chairman of the Board and
expense of $750,000 incurred in connection with self-insured life insurance
accruals related to the death of a former director of the Company.
40
<PAGE> 41
13. SUPPLEMENTAL ADJUSTED STATEMENT OF OPERATIONS DATA
The supplemental adjusted statement of operations data set forth below
presents the pro forma effects on the Company's historical results of operations
giving effect to the following transactions as if they occurred at the beginning
of each of the periods presented: (1) the Company's initial public offering and
the application of the net proceeds therefrom to repay indebtedness outstanding
under the Credit Facility and accrued interest thereon and to repay indebtedness
outstanding under the Subordinated Notes and accrued interest thereon and (ii)
the exchange of $24.0 million aggregate principal amount of Subordinated Notes
for 1.7 million shares of Common Stock.
<TABLE>
<CAPTION>
Year Ended
August 1, 1997
--------------
<S> <C>
Historical loss from continuing operations before cumulative
effect adjustment .............................................. $ (959)
The elimination of interest expense related to the repayment
of indebtedness under the Credit Facility ...................... 1,439
The elimination of interest expense related to the repayment
of indebtedness under the Subordinated Notes ................... 869
The elimination of interest expense related to the conversion
of Subordinated Notes to common stock .......................... 2,845
--------
Adjusted net income from continuing operations .................... $ 4,194
========
Adjusted net income from continuing operations, per share.......... $ .71
========
Historical loss from discontinued operations ...................... $ (9,920)
========
Adjusted loss from discontinued operations ........................ $ (9,920)
========
Adjusted loss from discontinued operations per share .............. $ (1.60)
========
Adjusted weighted average number of shares outstanding ............ 5,947,882
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers and directors of the
Company is included under the captions "Election of Directors" and "Executive
Officers" in Acorn's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on December 9, 1997 (the "Proxy Statement") and is
incorporated herein by reference. Information regarding compliance by Acorn's
officers, directors and ten percent beneficial owners with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is included in the Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included under the
captions "Information Concerning the Board of Directors, Executive Officers and
Principal Stockholders" and "Executive Compensation" in the Proxy Statement and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership is included under the caption
"Ownership of Common Stock by Principal Stockholders, Directors and Executive
Officers" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is included under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Acorn are
filed with this Annual Report on Form 10-K pursuant to Item 8:
* Report of Independent Auditors
* Consolidated Balance Sheets as of July 28, 1995, August 2,
1996 and August 1, 1997
* Consolidated Statements of Operations for fiscal 1995, fiscal
1996 and fiscal 1997
* Consolidated Statements of Stockholders' Equity for fiscal
1995, fiscal 1996 and fiscal 1997
* Consolidated Statements of Cash Flows for fiscal 1995, fiscal
1996 and fiscal 1997
* Notes to Consolidated Financial Statements
42
<PAGE> 43
(a)(2) The following financial statement schedules of Acorn are
filed with this Annual Report on Form 10-K pursuant to Item
14(d) and appear immediately preceding the exhibit index:
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefor have been
omitted.
(a)(3) The following items are filed as exhibits to this Annual
Report on Form 10-K (management contracts and compensatory
plans are indicated by an asterisk (*)):
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1 Asset Purchase Agreement, dated as of February 19, 1997,
between Greif Bros. Corporation and UnionTools, Inc.***
3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc.***
3.2 Amended and Restated Bylaws of Acorn Products, Inc.***
4.1 Specimen Stock Certificate for Common Stock.***
10.1* Employment Agreement, dated as of May 29, 1997, among the Company, UnionTools, Inc.
and Gabe Mihaly.***
10.2.1* Employment Severance Agreement, dated as of May 29, 1997, among the Company,
UnionTools and James B. Farland.***
10.2.2* Employment Severance Agreement, dated as of May 29, 1997,among the Company,
UnionTools and Thomas A. Hyrb.***
10.2.3* Employment Severance Agreement, dated as of May 29, 1997, among the Company,
UnionTools and Stephen M. Kaspirsin.***
10.2.4* Employment Severance Agreement, dated as of June 24, 1997, among the Company,
UnionTools and J. Mitchell Dolloff.***
10.3* Acorn Products, Inc. Deferred Equity Compensation Plan for Directors.***
10.4* Acorn Products, Inc. 1997 Stock Incentive Plan.***
10.5* Standard Form of Acorn Products, Inc. Stock Option Agreement.***
10.6* UnionTools, Inc. Retirement Plan for Salaried Employees.***
10.7* Amendment No. 1 to UnionTools, Inc. Retirement Plan for Salaried Employees.***
10.8* Acorn Products, Inc. Supplemental Pension Plan for Executive Employees.***
10.9 Amended and Restated Credit Agreement, dated as of May 20, 1997, between UnionTools,
Inc. and Heller Financial, Inc.***
10.10 License Agreement, dated as of August 1, 1992, between UnionTools, Inc. and The Scott
Company.***
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
10.11 Registration Rights Agreement, dated as of June 18, 1997,
between Acorn Products, Inc. and various funds and accounts
managed by TCW Special Credits.***
10.12 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc.
and OCM Prinicipal Opportunities Fund, L.P.***
21.1 Subsidiaries of the Company.***
23.1 Consent of Ernst & Young LLP.**
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
</TABLE>
- ------------------------
** 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., 500 Dublin Avenue, P.O. Box 1930, Columbus, Ohio 43216.
Persons requesting copies will be charged a reasonable fee to cover
reproduction and mailing expenses.
44
<PAGE> 45
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/ GABE MIHALY
-----------------------------------------------
Name: Gabe Mihaly
Title: President and Chief Executive 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 dates indicated.
Principal Executive Officer:
BY: /S/ GABE MIHALY
-----------------------------------------
Name: Gabe Mihaly
Title: President, Chief Executive Officer and a
director
Principal Accounting and Financial Officer:
By: /s/ STEPHEN M. KASPRISIN
-----------------------------------------
Name: Stephen M. Kasprisin
Title: Vice President and Chief Financial Officer
Directors:
*Conor D. Reilly
---------------------------------------------------
Conor D. Reilly, Chairman of the Board of Directors
*William W. Abbott
---------------------------------------------------
William W. Abbott, Director
*Matthew S. Barrett
---------------------------------------------------
Matthew S. Barrett, Director
*Stephen A. Kaplan
---------------------------------------------------
Stephen A. Kaplan, Director
*John I. Leahy
---------------------------------------------------
John I. Leahy, Director
*By: /s/ GABE MIHALY
---------------------------------------------------
Gabe Mihaly, Power of Attorney
Dated: October 29, 1997
45
<PAGE> 46
SCHEDULE 11 - VALUATION AND QUALIFYING ACCOUNTS
UNIONTOOLS, INC.
AUGUST 1, 1997
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Deductions Balance at End
Description Period Expenses Accounts Describe of Period
-------------------- --------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended August
1, 1997:
Deducted from asset
accounts:
Allowance for doubtful $ 140,000 $ 100,782 $ 4,000 $ 69,391 $ 175,391
accounts
Reserved for sales
discounts and allowances 416,673 121,276 0 0 537,949
-------------------- --------------- --------------- ---------------- -----------------
Total $ 556,673 $ 222,058 $ 4,000 $ 69,391 $ 713,340
Fiscal Year Ended August
2, 1996:
Deducted from asset
accounts:
Allowance for doubtful $ 175,000 $ 0 $ 0 $ 35,000 $ 140,000
accounts
Reserve for sales,
discounts and allowances 470,205 105,468 159,000 416,673
-------------------- --------------- --------------- ---------------- -----------------
Total $ 645,205 $ 105,468 $ 0 $ 194,000 $ 556,673
Fiscal Year Ended July 28,
1995:
Deducted from asset
accounts:
Allowance for doubtful $ 175,689 $ 0 $ 0 $ 689 $ 175,000
accounts
Reserve for sales,
discounts and allowances 305,962 329,000 0 164,757 470,205
-------------------- --------------- --------------- ---------------- -----------------
Total $ 481,651 $ 329,000 $ 0 $ 165,446 $ 645,205
</TABLE>
S-1
<PAGE> 47
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
August 2, August 1,
1996 1997
---------------- --------------
(in thousands)
<S> <C> <C>
ASSETS
Cash................................................................. $ 253 $ 466
Accounts receivable.................................................. 253 252
Prepaids and other................................................... 945 1,658
---------------- --------------
Total current assets................................................. 1,451 2,376
Property, plant and equipment, et.................................... 4 --
Goodwill............................................................. 6,812 6,629
Other assets (principally investment in and amounts due
from wholly-owned subsidiaries).................................. 57,420 56,309
---------------- --------------
Total assets.................................................. $65,687 $65,314
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility............................................ $12,537 $ --
Accounts payable and accrued expenses................................ 1,421 1,688
Accrued interest..................................................... -- --
Income taxes payable................................................. 875 142
Other current liabilities............................................ 220 260
---------------- --------------
Total current liabilities............................................ 15,053 2,090
Long-term debt....................................................... 31,354 --
Other long-term liabilities.......................................... 750 --
---------------- --------------
Total liabilities.................................................... 47,157 2,090
---------------- --------------
Stockholders' equity
Common stock..................................................... 14,406 78,391
Preferred stock.................................................. 8,596 --
Contributed capital - stock options.............................. 340 460
Minimum pension liability........................................ (197) (133)
Retained earnings (deficit)...................................... (4,615) (15,494)
---------------- --------------
Total stockholders' equity................................... 18,530 63,224
---------------- --------------
Total liabilities and stockholders' equity............... $65,687 $65,314
================ ==============
</TABLE>
S-2
<PAGE> 48
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(Parent Company)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
July 28, August 2, August 1,
1995 1996 1997
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Selling and administrative expenses........................... $ 1,524 $ 1,828 $ 1,785
Interest expense.............................................. -- 1,659 4,539
Amortization of goodwill...................................... 370 471 183
Other expenses................................................ -- 1,014 739
-------------- -------------- --------------
Loss before equity in earnings of subsidiaries................ (1,894) (4,972) (7,246)
Equity in earnings of wholly-owned subsidiaries............... (545) (2,307) (3,633)
-------------- -------------- --------------
Net loss...................................................... $(2,439) $(7,279) $(10,879)
============== ============== ==============
</TABLE>
S-3
<PAGE> 49
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(Parent Company)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
July 28, August 2, August 1,
1995 1996 1997
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Net cash from operating activities........................... $ (17,621) $ 5,661 $ (11,405)
INVESTING ACTIVITIES:
Property and equipment................................... 5 7 --
FINANCING ACTIVITIES:
Net activity on revolving loan............................... 16,750 (6,713) (12,537)
Redemption of subordinated debt.............................. -- -- (31,354)
Issuance of common stock..................................... -- 87 64,105
Retirement of preferred stock................................ -- -- (8,596)
-------------- -------------- --------------
16,750 (6,626) 11,618
-------------- -------------- --------------
Increase (decrease) in cash.................................. $ (866) $ (958) $ 213
============== ============== ==============
</TABLE>
S-4
<PAGE> 50
ACORN PRODUCTS, INC
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued)
(Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the parent company-only financial statements, the Company's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries. The Company's share of net income (loss) of its
unconsolidated subsidiaries is included in consolidated income using the equity
method. Parent company-only financial statements should be read in conjunction
with the Company's consolidated financial statements.
2. Long-Term Debt and Revolving Credit Facility
At August 2, 1996 and August 1, 1997, the Company had a revolving
credit facility with a maximum borrowing of $30 million (the Revolving
Facility). The Revolving Facility is collateralized by substantially all of the
assets and common stock of the Company's subsidiaries.
Available borrowings under the Revolving Facility are based on
specified percentages of accounts receivable, inventory and fixed assets of the
Company's subsidiaries. The Revolving Facility has a letter of credit
subcommitment of $5,000,000.
Borrowings under the Credit Facility bear interest at either the bank
prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 1,
1997 was 8.5%) or at the Company's option, the LIBOR rate plus a margin ranging
from 2.25% to 2.75% (LIBOR rate at August 1, 1997 was 5.75%). At August 1,
1997, the Company had $16.1 million of debt outstanding under the LIBOR option
and $2.8 million of debt outstanding under the bank prime rate option. The
interest rate margin fluctuates based on the ratio of total senior debt to
operating cash flow as set forth in a predetermined pricing table. In addition,
the Company is required to pay a fee of 0.5% per year on the unused portion of
the Revolving Facility and the Acquisition Line.
The Credit Facility contains certain covenants, which, among other
things, require the Company to maintain specified financial ratios and satisfy
certain tests, including minimum interest coverage ratios, and places limits on
future capital expenditures by the Company. The Credit Facility also includes
negative covenants including limitation on indebtedness, liens, guarantees,
obligations, mergers, consolidations, liquidations and dissolutions, sales of
assets, leases, dividends and other payments in respect of capital stock,
capital expenditures, investments, loans and advances, optional payments and
modifications and other debt instruments, transactions with affiliates, changes
in fiscal year, negative pledge clauses and changes in the line of business.
The Company was in compliance of all debt covenants at August 1, 1997.
The Company is required to make certain mandatory prepayments under
the Credit Facility based upon cash flow and certain other events described in
the Credit Facility. The Company may elect to prepay all or a portion of the
Credit Facility at any time. The fair value of the Company's long-term debt
approximates the carrying amount at August 1, 1997.
In December 1993, the Company issued a Subordinated Unsecured
Promissory Note in the amount of $25,000,000 to the TCW Funds. In May 1994 the
Company issued a Temporary Subordinated Promissory Note in the amount of
$6,354,000 to the TCW Funds. The Subordinated Unsecured Promissory Note and the
Temporary Subordinated Promissory Note collectively are referred to herein as
the "Subordinated Notes." The Subordinated Notes are due on July 31, 2003 and
carry interest at 13% per year.
Annual interest payments for the Subordinated Notes are contingent
upon meeting certain financial measures. These financial measures were not met
during fiscal 1995 and 1996, thus, no cash interest payments were permitted.
The Subordinated Notes require that any non-payment of interest be added of the
principal balance of the outstanding Subordinated Notes. On August 2, 1996, the
Company issued 100 shares of Series A Preferred Stock (the "Series A Preferred
Stock") with a par value of $.001 per share and a stated value of $8,596,000 as
payment in full of accrued interest on the Subordinated Notes due for fiscal
years 1995 and 1996.
Interest on the Subordinated Notes of $4,133,000 and $4,463,000 was
paid in the form of Series A Preferred Stock during fiscal 1995 and fiscal
1996, respectively.
The Subordinated Notes, accrued interest and Series A Preferred Stock
were redeemed with the proceeds of the Company's Initial Public Offering on
June 24, 1997.
S-5
<PAGE> 51
Acorn Products, Inc.
Form 10-K
Exhibit Index
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1 Asset Purchase Agreement, dated as of February 19, 1997,
between Greif Bros. Corporation and UnionTools, Inc.***
3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc.***
3.2 Amended and Restated Bylaws of Acorn Products, Inc.***
4.1 Specimen Stock Certificate for Common Stock.***
10.1* Employment Agreement, dated as of May 29, 1997, among the Company, UnionTools, Inc.
and Gabe Mihaly.***
10.2.1* Employment Severance Agreement, dated as of May 29, 1997, among the Company,
UnionTools and James B. Farland.***
10.2.2* Employment Severance Agreement, dated as of May 29, 1997,among the Company,
UnionTools and Thomas A. Hyrb.***
10.2.3* Employment Severance Agreement, dated as of May 29, 1997, among the Company,
UnionTools and Stephen M. Kaspirsin.***
10.2.4* Employment Severance Agreement, dated as of June 24, 1997, among the Company,
UnionTools and J. Mitchell Dolloff.***
10.3* Acorn Products, Inc. Deferred Equity Compensation Plan for Directors.***
10.4* Acorn Products, Inc. 1997 Stock Incentive Plan.***
10.5* Standard Form of Acorn Products, Inc. Stock Option Agreement.***
10.6* UnionTools, Inc. Retirement Plan for Salaried Employees.***
10.7* Amendment No. 1 to UnionTools, Inc. Retirement Plan for Salaried Employees.***
10.8* Acorn Products, Inc. Supplemental Pension Plan for Executive Employees.***
10.9 Amended and Restated Credit Agreement, dated as of May 20, 1997, between UnionTools,
Inc. and Heller Financial, Inc.***
10.10 License Agreement, dated as of August 1, 1992, between UnionTools, Inc. and The Scott
Company.***
10.11 Registration Rights Agreement, dated as of June 18, 1997,
between Acorn Products, Inc. and various funds and accounts
managed by TCW Special Credits.***
10.12 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc.
and OCM Prinicipal Opportunities Fund, L.P.***
21.1 Subsidiaries of the Company.***
23.1 Consent of Ernst & Young LLP.**
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
</TABLE>
- ------------------------
** 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.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 333-32087 and 33-32089) of Acorn Products, Inc. each dated July
25, 1997 of our report dated September 12, 1997, with respect to the
consolidated financial statements and the financial statement schedules
included in this Annual Report (Form 10-K) of Acorn Products, Inc.
Ernst & Young LLP
Columbus, Ohio
October 28, 1997
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
Each director and/or officer of Acorn Products, Inc. (the
"Corporation") whose signature appears below hereby appoints Gabe Mihaly,
Stephen M. Kasprisin and J. Mitchell Dolloff as the undersigned's attorneys or
any of them individually as the undersigned's attorney, to sign, in the
undersigned's name and behalf and in any and all capacities stated below, and to
cause to be filed with the Securities and Exchange Commission (the
"Commission"), the Corporation's Annual Report on Form 10-K (the "Form 10-K")
for the fiscal year ended August 1, 1997, and likewise to sign and file with the
Commission any and all amendments to the Form 10-K, and the Corporation hereby
also appoints such persons as its attorneys-in-fact and each of them as its
attorney-in-fact with like authority to sign and file the Form 10-K and any
amendments thereto granting to each such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or the undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 22nd day of
October, 1997.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Gabe Mihaly President, Chief Executive Officer
- ----------------------------------- and a Director (Principal Executive Officer)
Gabe Mihaly
/s/ Stephen M. Kasprisin Vice President and Chief Financial Officer
- ----------------------------------- (Principal Accounting and Financial Officer)
Stephen M. Kasprisin
/s/ Conor D. Reilly Chairman of the Board of Directors
- -----------------------------------
Conor D. Reilly
/s/ William W. Abbott Director
- -----------------------------------
William W. Abbott
/s/ Matthew S. Barrett Director
- -----------------------------------
Matthew S. Barrett
/s/ Stephen A. Kaplan Director
- -----------------------------------
Stephen A. Kaplan
/s/ John I. Leahy Director
- -----------------------------------
John I. Leahy
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-03-1996
<PERIOD-END> AUG-02-1997
<EXCHANGE-RATE> 1
<CASH> 1,500
<SECURITIES> 0
<RECEIVABLES> 19,175
<ALLOWANCES> 713
<INVENTORY> 27,642
<CURRENT-ASSETS> 51,386
<PP&E> 23,361
<DEPRECIATION> (7,711)
<TOTAL-ASSETS> 98,890
<CURRENT-LIABILITIES> 24,477
<BONDS> 6,098
0
0
<COMMON> 78,391
<OTHER-SE> (15,167)
<TOTAL-LIABILITY-AND-EQUITY> 98,890
<SALES> 101,011
<TOTAL-REVENUES> 101,011
<CGS> 73,982
<TOTAL-COSTS> 73,982
<OTHER-EXPENSES> 18,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,176
<INCOME-PRETAX> (825)
<INCOME-TAX> 134
<INCOME-CONTINUING> (959)
<DISCONTINUED> (9,920)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,879)
<EPS-PRIMARY> (5.99)
<EPS-DILUTED> (5.99)
</TABLE>
