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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
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:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.001 per share Nasdaq National Market
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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
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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 23, 1998, 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 $10,532,115.
As of October 23, 1998, 6,464,105 shares of Common Stock, par value
$.001 per share, were outstanding.
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TABLE OF CONTENTS
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DESCRIPTION PAGE
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Table of Contents 2
Part I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 29
Item 12. Security Ownership and Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 35
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 36
Signatures 39
Financial Statements F-1
Schedules to Financial Statements S-1
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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 SUBSIDIARIES UNIONTOOLS, INC. ("UNIONTOOLS"), H.B. SHERMAN MANUFACTURING
COMPANY, INC. ("SHERMAN"), AND UNIONTOOLS WATERING PRODUCTS, INC. 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 1998 MEANS THE FISCAL YEAR
ENDED JULY 31, 1998). AS USED IN THIS ANNUAL REPORT ON FORM 10-K, "ACE
HARDWARE" REFERS TO ACE HARDWARE CORP., "TRUSERV" REFERS TO TRUSERV
CORPORATION, "FRED MEYER" REFERS TO FRED MEYER, INC., "FRANK'S NURSERY"
REFERS TO FRANK'S NURSERY & CRAFTS INC., "HOME BASE" REFERS TO HOME BASE,
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-Registered Trademark-,
Perfect Cut-Registered Trademark-, Pro Force-Registered Trademark-,
Razor-Back-Registered Trademark-, UNION-Registered Trademark-,
UnionPro-Registered Trademark-AND Yard 'n Garden-Registered Trademark- ARE
REGISTERED TRADEMARKS OF THE COMPANY. Green Thumb-Registered Trademark-AND
True Value-Registered Trademark- ARE REGISTERED TRADEMARKS OF TRUSERV.
Frank's-Registered Trademark- IS A REGISTERED TRADEMARK OF FRANK'S NURSERY.
Craftsman-Registered Trademark- AND Sears-Registered Trademark- ARE
REGISTERED TRADEMARKS OF SEARS. Scotts-Registered Trademark- 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,
hose reels and watering products (such as sprinklers, hose nozzles and hose
couplings). The Company sells its products under a variety of well-known
brand names, including RAZOR-BACK, UNION, YARD 'N GARDEN, SHERMAN [SYMBOL]
THOMPSON, 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 TRUSERV'S GREEN
THUMB 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 TRUSERV and ACE HARDWARE and farm and
industrial distributors.
BUSINESS STRATEGY
Over the past seven 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
marketing programs. The Company's merchandising programs are
designed to (i) create brand
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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 1998, the Company
supplied long handle tools to 143 Home Depot stores. 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. There can be no assurance that
retailers in such distribution channels will continue to open a
significant number of new stores or, if opened, that 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 designed and manufactured by the Company, as
well as a line of wheelbarrows manufactured in conjunction with
the Company's Mexican joint-venture partner. In August 1998,
the Company introduced a wheeled garden tool organizer and
storage product designed and manufactured by the Company.
- 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 acquired Sherman
and Thompson Manufacturing Company, Inc. ("Thompson") in
February 1998 and June 1998, respectively, each manufacturers
of watering products such as sprinklers, hose nozzles and hose
couplings. The Company expects to substantially complete the
integration of its watering products division in the first half
of 1999. The Company's Credit Facility contains a $35 million
acquisition facility, approximately $19 million of which was
available at July
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31, 1998. There can be no assurance that the Company will be
able to identify additional 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, including Sherman and
Thompson, 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. 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.
See Note 3 to Consolidated Financial Statements.
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. 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.
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PRODUCTS AND BRANDS
PRODUCT LINES
The Company sells over 2,000 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; (v) hose reels; (vi)
watering products such as sprinklers, hose nozzles and hose couplings; and
(vii) other products such as garden tool organizers, 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
and, in 1998, also added wheelbarrows under the RAZOR-BACK name. 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.
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
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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 of the Company's primary 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.
SHERMAN [SYMBOL] THOMPSON. The Company developed the SHERMAN [SYMBOL]
THOMPSON name in 1998 to capitalize on the long history of its recent
Sherman and Thompson watering products acquisitions. The Company sells a
high-quality line of sprinklers, hose nozzles and hose couplings under the
SHERMAN [SYMBOL] THOMPSON name through all of the Company's primary
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, TruServ and
Frank's Nursery, which are sold under the CRAFTSMAN and SEARS, GREEN THUMB
and FRANK'S 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 $19.2 million, or 16.3%, of the Company's gross sales in fiscal
1998.
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 designed and manufactured by the Company, as well as wheelbarrows
manufactured in conjunction with the Company's Mexican joint-venture partner.
In August 1998, the Company introduced the Rack 'n Roll-TM- Tool Caddy, a
wheeled garden tool organizer and storage product designed and manufactured
by the Company.
CUSTOMERS
The Company's largest customer, Sears, which includes Sears' Orchard
Supply division, accounted for 12.5%, 10.9% and 13.6% of gross sales in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively. The Company's ten
largest customers accounted for approximately 50.5%, 50.1% and 51.5% 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 TruServ and Ace Hardware, (iv)
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farm distributors and stores such as Mid-States Distributing Co., 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 the 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 generally
consisting of 10 to 15 direct sales professionals who are employed by the
Company. In addition, the Company utilizes over 20 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. The
Company's 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 generally are
compensated with a base salary and bonuses based upon performance-oriented
objectives.
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 July 31, 1998, 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, metal painting, machining, die-casting and
injection molding. 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 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.
Manufacturing processes at the Company's Chino, California watering
products facility include machining of metal bar stock and metal castings on
automatic screw machines, turret lathes, CNC turning centers and multiple
spindle chuckers and mills to produce high-quality hose nozzles and
couplings, as well as component parts for use in the Company's sprinklers and
other products. The Company also performs zinc die-casting and metal punch
press operations at the facility.
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
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long-term contracts with regard to its steel purchases. The Company purchased
approximately 69% and 74% of its steel requirements from Worthington Steel in
fiscal 1997 and fiscal 1998, respectively. The Company has had a relationship
with this supplier in excess of 15 years.
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 also uses brass, zinc and aluminum in the production of
watering products. The Company does not enter into any long-term contracts
with regard to its brass, zinc and aluminum purchases.
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 of 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 July 31, 1998, the Company employed approximately 740 people
(including seasonal employees), approximately 540 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 2001, 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
10
<PAGE>
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 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 2001 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 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.
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 July 31, 1998, the Company had a reserve for environmental
remediation of approximately $185,000. 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. In addition, the Company leases approximately 6,000 square
feet for its accounting offices in a building adjacent to its Columbus, Ohio
facility. As of July 31, 1998, the other principal properties owned or leased
by the Company for use in its business are set forth below.
11
<PAGE>
DISTRIBUTION FACILITIES
<TABLE>
<CAPTION>
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ----
<S> <C> <C>
Columbus, Ohio ............................................................ Leased 179,200
Frankfort, New York(l) .................................................... Owned 31,500
La Mirada, California ..................................................... Leased 19,100
<CAPTION>
MANUFACTURING FACILITIES
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ----
Columbus, Ohio(2) ......................................................... Owned 160,900
Frankfort, New York(l) .................................................... Owned 360,500
Hebron, Ohio............................................................... Owned 107,200
Poplar Bluff, Missouri(3).................................................. Leased 41,000
Chino, California.......................................................... Leased 40,000
<CAPTION>
SAWMILLS
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- ----
Beverly, West Virginia (Inactive).......................................... Owned 10,000
Cookeville, Tennessee...................................................... Owned 12,100
Delaware, Ohio ............................................................ Owned 51,100
Frankfort, New York(l) .................................................... 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.
(3) The Company expects to integrate the operations of its watering
products division in its Chino, California facility in the first
half of fiscal 1999 and to lease operations at its Poplar Bluff,
Missouri facility during that period. There can be no assurance
that the Company will be successful in integrating the facilities or
that such integration will not result in unforseen operational
difficulties or require a disproportionate amount of management's
attention.
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.
12
<PAGE>
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.
On October 16, 1998, Huffy Corporation, True Temper Hardware Company
("True Temper") and Huffco Company (the "Huffy Parties") filed a complaint
against the Company in the Court of Common Pleas for Montgomery County, Ohio
alleging breach of contract, unfair competition, misappropriation of trade
secrets and fraud in connection with discussions between the Company and the
Huffy Parties regarding a possible merger of the Company and True Temper. As
of October 29, 1998, the Company has not been served with the complaint. The
Huffy Parties requested the following relief in the complaint: (i) an order
requiring the Company to merge with True Temper; (ii) an order enjoining the
Company from combining its business operations with any entity that is a
competitor of True Temper; (iii) an order enjoining the Company to return all
proprietary information relating to True Temper; (iv) alleged compensatory
damages of $138 million and unspecified punitive damages and (v) attorney's
fees. Management believes that the claims of the Huffy Parties set forth in
the complaint are without merit and, if the complaint is served, the Company
intends to contest the claims vigorously. Accordingly, management believes
that should the Company be served with the complaint, such litigation is not
likely to have a material adverse effect on the financial position or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
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)....... $14.50 $11.625
1998:
First Quarter......................................... $17.25 $13.25
Second Quarter........................................ $15.25 $ 9.00
Third Quarter......................................... $10.625 $ 7.875
Fourth Quarter........................................ $ 9.75 $ 5.00
1999:
First Quarter (through October 23, 1998).............. $ 8.875 $ 5.125
</TABLE>
As of October 23, 1998, the approximate number of record holders of
the Common Stock was 22. The closing sales price of the Common Stock on
October 23, 1998 was $7.50 per share.
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.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the four months ended
December 2, 1993, the eight months ended July 29, 1994, fiscal 1995, fiscal
1996, fiscal 1997 and fiscal 1998 have been derived from the audited
consolidated financial statements of the Company. Certain accounts from prior
years have been reclassified to conform to the fiscal 1998 presentation. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and notes thereto and the
other financial information included elsewhere in this Annual Report on Form
10-K.
14
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
-----------------------------------------------------------------------------------
EIGHT
FOUR MONTHS MONTHS
ENDED ENDED YEAR ENDED
-----------------------------------------------------------------------------------
DECEMBER 2, JULY 29, JULY 28, AUGUST 2, AUGUST 1, JULY 31,
1993 (1) 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 101,011 $ 107,758
Cost of goods sold.................... 14,185 52,271 63,411 67,496 73,982 82,480
--------- --------- --------- ---------- ---------- ----------
Gross profit.......................... 6,146 20,099 23,132 25,156 27,029 25,278
Selling, general and administrative
expenses.......................... 5,482 9,955 15,531 16,815 18,293 20,033
Interest expense ..................... 2,773 3,525 6,485 6,732 7,176 2,560
Amortization of intangibles .......... 124 601 1,061 1,173 837 917
Other expenses, net................... - 11 694 1,522 (2) 1,548 (3) 259
--------- --------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes and
cumulative effect adjustment ..... (2,233) 6,007 (639) (1,086) (825) 1,509
Income taxes.......................... - 290 - 582 134 230
--------- --------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before cumulative effect
adjustment ....................... (2,233) 5,717 (639) (1,668) (959) 1,279
Income (loss) from discontinued
operations(4) .................... (8,373) (614) (1,800) (6,480) (9,920) -
Cumulative effect of change in
accounting for post-retirement
benefits ......................... - - - 869 - -
--------- --------- --------- ---------- ---------- ----------
Net income (loss)..................... $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (10,879) $ 1,279
--------- --------- --------- ---------- ---------- ----------
--------- --------- --------- ---------- ---------- ----------
Net income (loss) applicable to
common stock...................... $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (11,897) $ 1,279
--------- --------- --------- ---------- ---------- ----------
--------- --------- --------- ---------- ---------- ----------
Loss from continuing operations per
share (basic and diluted)......... $ (1.10) $ (0.48) $ 0.20
Weighted average number of shares
outstanding....................... 1,520,066 1,985,758 6,464,105
OTHER DATA:
Gross margin ......................... 30.2% 27.8% 26.7% 27.2% 26.8% 23.5%
EBITDA(5) ............................ $ 1,168 $ 11,137 $ 8,876 $ 9,238 $ 9,840 $ 7,938
EBIT(6) .............................. 540 9,532 5,846 5,646 6,351 4,069
15
<PAGE>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------------------------------------------------------------------------------
DECEMBER 2, JULY 29, JULY 28, AUGUST 2, AUGUST 1, JULY 31,
1993 (1) 1994 1995 1996 1997 1998
----------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital from continuing
operations......................... $ (17,902) $ 21,081 $ 5,989 $ 8,543 $ 26,909 $ 30,645
Total assets.......................... 79,439 101,833 112,280 98,895 98,890 112,633
Total debt............................ 137,437 58,854 72,104 61,891 18,935 32,317
Stockholders' equity.................. (78,910) 19,422 17,323 18,530 63,224 64,351
</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 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.
(3) 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.
(4) 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 in fiscal 1997 of $8.4 million incurred in connection with the
sale of substantially all of the assets of McGuire-Nicholas.
(5) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent
cash flows for the period, nor has it been presented as an alternative
to income from continuing operations as an indicator of operating
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(6) EBIT represents earnings from continuing operations before interest
expense and income taxes. 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 income from continuing operations as an indicator of
operating performance and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
16
<PAGE>
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 $70.1 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 the TCW
Funds, 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 seven 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. An
increase in competitive pressures could result in additional increases in
selling, general and administrative expenses, as well as increases in volume
rebates and other discounts and allowances that reduce net sales and
adversely affect profitability.
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. 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. 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
17
<PAGE>
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
----------------------------------------------------------------
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---------------- ----------------------------------------
<S> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................... 72.8 73.2 76.5
------- ------- ------
Gross profit ............................... 27.2 26.8 23.5
Selling, general and administrative
expenses.................................. 18.1 18.1 18.6
Interest expense............................ 7.3 7.1 2.4
Amortization of intangibles................. 1.3 0.8 0.9
Other expenses, net......................... 1.6 1.6 0.2
------- ------- ------
Income (loss) from continuing operations
before income taxes and cumulative
effect adjustment........................ (1.1) (0.8) 1.4
Income taxes................................ 0.6 0.1 0.2
------- ------- ------
Income (loss) from continuing
operations before cumulative effect
adjustment............................... (1.7) (0.9) 1.2
Loss from discontinued operations........... (7.0) (9.9) --
Cumulative effect of change in accounting
for post-retirement benefits................ 0.9 -- --
------- ------- ------
Net income (loss)........................... (7.8)% (10.8)% 1.2%
------- ------- ------
------- ------- ------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. Net sales increased 6.7%, or $6.7 million, to $107.8
million in fiscal 1998 compared to $101.0 million in fiscal 1997. The
increase in net sales reflected an aggregate of $10.1 million of additional
net sales arising from a full year of operation of the Company's injection
molding division, from sales by the Company's watering products division and
from sales of new products, partially offset by a decline in net sales of
long handle tools and snow tools of approximately $3.3 million. Net sales of
long handle tools in the second and third quarters were negatively impacted
by unfavorable winter and spring weather conditions.
GROSS PROFIT. Gross profit decreased 6.5%, or $1.8 million, to $25.3
million in fiscal 1998 compared to $27.0 million in fiscal 1997. Gross margin
decreased to 23.5% in fiscal 1998 compared to 26.8% in fiscal 1997. The
decrease in gross margin primarily was due to lower net sales of long handle
tools and lower overhead absorption rates realized as the Company decreased
production in response to sluggish demand, as well as competitive pricing
pressures. Gross margin also was adversely affected by increased
manufacturing costs related to new product development and lower gross
margins realized by the Company's injection molding division.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9.5%, or $1.7 million, to $20.0 million in
fiscal 1998 compared to $18.3 million in fiscal 1997. As a percentage of net
sales, selling, general and administrative expenses increased to 18.6% in
fiscal 1998 from 18.1% in fiscal 1997. Selling, general and administrative
expenses were negatively impacted by increased administrative expenses
resulting from public company requirements and pursuit of the Company's
acquisition strategy.
OTHER EXPENSES, NET. Other expenses decreased $1.3 million to
approximately $300,000 in fiscal 1998 from $1.6 million in fiscal 1997. Other
expenses in fiscal 1997 included the write-off of $950,000 of capitalized
bank fees incurred in connection with the Company's previous bank credit
facility.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from
continuing operations before income taxes increased to $1.5 million in fiscal
1998 from a loss of approximately $825,000 in fiscal 1997. Interest expense
decreased $4.6 million to $2.6 million in fiscal 1998 from $7.2 million in
fiscal 1997. 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 INCOME. Net income increased to $1.3 million in fiscal 1998 from
a loss of $10.9 million in fiscal 1997, primarily as a result of a loss of
$9.9 million in fiscal 1997 from discontinued operations.
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.
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
19
<PAGE>
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.
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 1997 and fiscal 1998. 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.
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
------------------------------------------------------------- -------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
NOVEMBER 1, JANUARY 31, MAY 2, AUGUST 1, OCTOBER 31, JANUARY 30, MAY 1, JULY 31,
1996 1997 1997 1997 1997 1998 1998 1998
------------- ----------- --------- --------- ----------- ------------ ----------- ---------
(IN THOUSANDS - UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $19,679 $21,018 $37,270 $23,044 $20,416 $21,143 $37,911 $28,288
Cost of goods
sold............... 14,507 15,635 26,935 16,905 15,277 16,340 29,440 21,423
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 5,172 5,383 10,335 6,139 5,139 4,803 8,471 6,865
Selling, general and
administrative
expenses
(SG&A)............. 4,403 4,238 4,807 4,845 4,819 4,411 5,526 5,277
------- ------- ------- ------- ------- ------- ------- -------
Gross profit less
SG&A (1)........... $ 769 $ 1,145 $ 5,528 $ 1,294 $ 320 $ 392 $ 2,945 $ 1,588
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net sales as a
percentage of full
year net sales .... 19.5% 20.8% 36.9% 22.8% 18.9% 19.6% 35.2% 26.3%
Gross profit as a
percentage of full
year gross profit.. 19.1 19.9 38.2 22.7 20.3 19.0 33.5 27.2
Gross profit less
SG&A (1) as a
percentage of full
year operating
profit............. 8.8 13.1 63.3 14.8 6.1 7.5 56.1 30.3
</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 and 1998, can adversely affect overall
annual sales.
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 $233,000 in fiscal 1998
compared to net cash used in continuing operations of $7.6 million in fiscal
1997. The decrease in use of cash was principally the result of net income of
$1.3 million compared to a net loss of $10.9 million in fiscal 1997,
partially offset by an increase in accounts receivable of $4.4 million due to
increased sales volume. 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
reflected 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.
21
<PAGE>
The Company made capital expenditures of approximately $1.5 million,
$2.4 million and $2.9 million during fiscal 1996, fiscal 1997 and fiscal
1998, 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 1999
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 July 31, 1998, approximately $12.6
million was available under the revolving portion of the Credit Facility and
approximately $19.0 million was available under the acquisition line of the
Credit Facility. Indebtedness outstanding under the Credit Facility bears
interest at variable rates (8.2% per annum at July 31, 1998).
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. The Company currently is in discussions with the lenders under the
Credit Facility with regard to increasing the revolving and acquisition lines
of the Credit Facility, as well as amending certain financial covenants
contained in the Credit Facility.
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.
IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS
STATE OF READINESS. The Company has reviewed its Year 2000 issues in
regards to both its information-technology and its
non-information-technology. The Company's operating system software as well
as some of the Company's older software applications were written using two
digits rather than four to define the applicable year. As a result, those
software applications have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the Year 2000. This could cause a
system failure or miscalculations causing disruptions of operations,
including a temporary inability to process transactions, send invoices or
engage in similar normal business activities. The Company has determined that
it will have to modify or replace portions of its software applications and
hardware so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The Company expects that its
information-technology will be Year 2000-ready by June 1, 1999, which is
prior to any anticipated impact on its operating systems. The Company does
not believe that there are any material Year 2000 issues with regard to its
non-information-technology.
In addition, the Company has initiated communications with its
significant customers and suppliers to determine the extent to which the
Company's interface systems are vulnerable to the failure of such customers
and suppliers to remediate their own Year 2000 issues. Based on such
communications, the Company is not currently aware of any third-party issue
applicable to the Year 2000 that is likely to have a material impact on the
conduct of the business, the results of operations or the financial condition
of the Company.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Although the
Company is currently updating its computer systems, such updating was not
accelerated due to Year 2000 issues. The following chart reflects the
Company's estimated Year 2000-specific costs plus the estimated cost to
update its current computer systems.
Estimated Conversion Cost
<TABLE>
<CAPTION>
Expense Capital
------- -------
<S> <C> <C>
Hardware -- $200,000
Project Management $125,000 75,000
Software and Custom Coding $165,000 --
-------- --------
$290,000 $275,000
-------- --------
-------- --------
</TABLE>
RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company does not
believe that any Year 2000 issues will impact its manufacturing. However, it
is possible that Year 2000 issues may have an impact on the administration of
the Company. The Company believes that it's greatest Year 2000 risk is the
risk that its customers and suppliers are not Year 2000-ready. Failure by the
Company, or its customers or suppliers to adequately address the Year 2000
issues in a timely manner could have a material impact on the conduct of the
business, the results of operations and the financial condition of the
Company. Accordingly, the Company plans to address all Year 2000 issues
before problems materialize. The Company believes that the associated costs
are adequately budgeted for in its fiscal 1999 business plans. However,
should efforts on the part of the Company, its customers and suppliers fail
to adequately address their relevant Year 2000 issues, the most likely worst
case scenario would be a total loss of revenue to the Company.
THE COMPANY'S CONTINGENCY PLANS. The Company will produce
contingency plans on a case by case basis.
RISKS. There can be no assurance that the Company will not
experience cost overruns or delays in the completion of its Year 2000
project. Factors that could cause such cost overruns or delays include, among
other things, an unavailability of properly trained personnel, unforseen
difficulty locating and correcting relevant computer codes and similar
uncertainties.
22
<PAGE>
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 38.4% of gross sales in fiscal
1998. 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 the 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 that the Company
believes are growing more rapidly than the overall industry,
such as home centers and mass merchants through retailers such
as Home Depot and Sears. There can be no assurance that
retailers in such distribution channels will continue to open
a significant number of new stores or, if opened, that the
Company will be chosen to supply its products to all or a
significant portion of such
23
<PAGE>
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.
- 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. In
addition, brass, zinc and aluminum are the primary raw
materials used in the production of the Company's watering
products. 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 2001 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
24
<PAGE>
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.
- 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
The Consolidated Financial Statements of the Company, together with
the report thereon of Ernst & Young LLP, are set forth on pages F-1
through F-19 hereof (see Item 14 of this Annual Report for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth for each director of the Company,
such person's name, age, and his position with the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Conor D. Reilly 46 Chairman of the Board and Director of the Company
Gabe Mihaly 51 President, Chief Executive Officer, and Director of the Company
William W. Abbott 67 Director of the Company
Matthew S. Barrett 39 Director of the Company
Stephen A. Kaplan 40 Director of the Company
John I. Leahy 68 Director of the Company
</TABLE>
CONOR D. REILLY became Chairman and a director of the Company and
UnionTools in August 1996. Mr. Reilly has been a partner at Gibson, Dunn &
Crutcher LLP since January 1988. Mr. Reilly served as Vice Chairman of
Memorex-Telex N.V. in 1992 and 1993 and has been a director of John Deere
Insurance Group, Inc. since August 1992.
GABE MIHALY became President and Chief Executive Officer of
UnionTools in May 1991 and President, Chief Executive Officer and a director
of the Company in August 1996. From October 1986 to May 1991, Mr. Mihaly was
a partner at Ernst & Young LLP, where he provided consulting services to
senior executives in the areas of strategy, cost and operations management,
performance and competitive analysis and turnaround management.
WILLIAM W. ABBOTT became a director of the Company in January 1997.
Mr. Abbott currently is self-employed as a business consultant. From August
1989 to January 1995, Mr. Abbott served as Senior Advisor to the United
Nations Development Programme. In 1989, Mr. Abbott retired from 35 years of
service at Procter & Gamble as a Senior Vice President in charge of worldwide
sales and other operations. From April 1982 to April 1994, Mr. Abbott served
as a member of the Board of Directors of Armstrong World Industries. He
currently serves as a member of the Boards of Directors of Horace Mann
Educators Corporation and Fifth Third Bank of Naples, Florida, a member of
the Advisory Board of Deloitte & Touche LLP, a member of the Advisory Board
of Manco, a member of the Board of Overseers of the Duke Cancer Center and an
Executive in Residence of Appalachian State University.
MATTHEW S. BARRETT became a director of the Company in December
1993. Mr. Barrett is a managing director of Oaktree Capital Management, LLC
("Oaktree"). Prior to joining Oaktree, from 1991 to April 1995, Mr. Barrett
was Senior Vice President of TCW Asset Management Company.
STEPHEN A. KAPLAN became a director of the Company in December 1993.
Mr. Kaplan is a principal of Oaktree, where he runs the Principal Activities
Group. Prior to joining Oaktree, from November 1993 to April 1995, Mr. Kaplan
was a managing director of Trust Company of the West and was portfolio
manager of The Principal Fund. From January 1991 to October 1993, Mr. Kaplan
was a partner at Gibson, Dunn & Crutcher LLP. Mr. Kaplan currently serves as
a member of the Board of Directors of KinderCare Learning Centers, Inc.
26
<PAGE>
JOHN I. LEAHY became a director of the Company in August 1994. Mr.
Leahy has been the President of Management and Marketing Associates, a
management consulting firm owned by Mr. Leahy, since 1987. In 1987, Mr. Leahy
retired after 34 years of service at the Black & Decker Corporation, where he
was President and Group Executive, Western Hemisphere. Mr. Leahy currently
serves as a director of Allied Capital Corporation and several privately
held companies. Mr. Leahy is a Trustee of The Sellinger School of Business
and Management and St. Mary's University.
MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company had a total of four meetings
during fiscal 1998. During fiscal 1998, each of the directors attended 75% or
more of the total number of meetings of (i) the Board and (ii) the committees
of the Board on which such director served. Directors who are employees of
the Company receive no compensation for serving as directors. Non-employee
directors receive the following annual compensation: (i) $20,000 paid, at the
director's election, either in shares of Common Stock pursuant to the
Company's Deferred Equity Compensation Plan for Directors (the "Director
Stock Plan") or one-half in cash and one-half in shares of Common Stock
pursuant to the Director Stock Plan; (ii) stock options with an exercise
price equal to the fair market value of the Common Stock on the date of
grant, a Black-Scholes valuation of $25,000 and a ten year term; and (iii)
reimbursement of reasonable out-of-pocket expenses.
In March 1997, the Company created a Management Development and
Compensation Committee (the "Compensation Committee") and an Audit Committee
(the "Audit Committee"). The Compensation Committee has the authority to (i)
administer the Company's 1997 Stock Incentive Plan, including the selection
of optionees and the timing of option grants, and (ii) review and monitor key
employee compensation policies and administer the Company's management
compensation plans. The Audit Committee recommends the annual appointment of
the Company's independent public accountants with whom the Audit Committee
reviews the scope of audit and non-audit assignments and related fees, the
accounting principles used by the Company in financial reporting, internal
financial auditing procedures and the adequacy of the Company's internal
control procedures. Messrs. Abbott (Chairman), Kaplan and Reilly were
appointed to the Compensation Committee and Messrs. Leahy (Chairman) and
Barrett were appointed to the Audit Committee.
EXECUTIVE OFFICERS
In addition to Mr. Reilly and Mr. Mihaly, the following persons are
executive officers of the Company:
J. MITCHELL DOLLOFF became Vice President, General Counsel and
Director of Investor Relations of the Company and UnionTools in June 1997,
Vice President Corporate Development of the Company in February 1998 and
President of the Company's watering products division in June 1998. From
October 1991 to June 1997, Mr. Dolloff was an associate attorney at Gibson,
Dunn & Crutcher LLP.
THOMAS A. HYRB became Vice President Operations of UnionTools in
August 1991. From September 1982 to July 1991, Mr. Hyrb was Director of
Quality Assurance and Plant Manager of True Temper Hardware Company, Inc.
From May 1966 to August 1982, Mr. Hyrb held various manufacturing and
engineering management positions with Clarke (a division of McGraw Edison),
Roper Corporation and Allis Chalmers.
STEPHEN M. KASPRISIN became Chief Financial Officer and Vice
President of the Company in February 1989 and Chief Financial Officer and
Vice President of UnionTools in January 1994. From January 1981 to February
1989, Mr. Kasprisin held various financial positions with certain private
enterprises. From June 1976 to January 1981, Mr. Kasprisin was employed by
Coopers & Lybrand, certified public accountants.
Officers are elected annually by the Board of Directors and serve at
its discretion. There are no family relationships among directors and
executive officers of the Company.
27
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and greater than 10% stockholders to file
reports of ownership and changes in ownership of the Company's securities
with the Securities and Exchange Commission ("SEC"). Copies of the reports
are required by SEC regulation to be furnished to the Company. Based on its
review of such reports, the Company believes that all reporting persons
complied with all filing requirements during the year ended July 31, 1998,
except for late filings of Form 5 for the fiscal year ended July 31, 1998 for
Messrs. Reilly, Abbott, Barrett, Kaplan, and Leahy.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by the Company's
chief executive officer and each of the Company's other most highly
compensated executive officers whose annual salary and bonus during fiscal
1998 exceeded $100,000 (the "Named Executive Officers"). Mr. Mihaly's, Mr.
Kasprisin's, and Mr. Dolloff's cash compensation was paid by the Company. Mr.
Farland's and Mr. Hyrb's cash compensation was paid by UnionTools. Non-cash
compensation, other than options to purchase Common Stock, was paid by
UnionTools.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
AWARDS
--------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)(2)(3)(4)
- --------------------------------- ----------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
GABE MIHALY 1998 $309,145 -- 20,325 $11,284
President and Chief Executive 1997 299,269 $198,890 20,325 93,628
Officer of the Company and 1996 286,461 14,000 -- 22,706
UnionTools
J. MITCHELL DOLLOFF(5) 1998 155,000 -- 8,125 15,845
Vice President Corporate 1997 14,307 20,000 8,125 --
Development and General
Counsel of the Company and
UnionTools and President
Watering Products Division
JAMES B. FARLAND(6) 1998 183,681 -- 10,150 20,374
Vice President Sales and 1997 179,614 26,942 10,150 11,101
Marketing of UnionTools 1996 171,592 49,450 -- 19,360
THOMAS A. HYRB 1998 173,677 -- 10,150 9,943
Vice President of Operations of 1997 169,830 25,475 10,150 9,850
UnionTools 1996 151,335 46,500 -- 60,383
STEPHEN M. KASPRISIN 1998 173,085 -- 10,150 9,924
Chief Financial Officer and Vice 1997 169,252 25,388 10,150 10,623
President of the Company and 1996 154,530 46,359 -- 21,999
UnionTools
</TABLE>
- ----------------------
28
<PAGE>
(1) Amounts shown include matching benefits paid under the Company's
defined contribution 401(k) plan and other miscellaneous cash benefits,
but do not include retirement benefits under the Company's Salaried
Employee Pension Plan or Supplemental Pension Plan. See "Pension
Plans."
(2) Amounts shown for fiscal 1996 include the following: (a) $4,500 of
matching benefits paid under the Company's defined contribution 401(k)
plan for each of Messrs. Mihaly, Farland, Hyrb and Kasprisin; (b)
$9,720, $9,890, $8,631 and $10,122 paid by the Company to Messrs.
Mihaly, Farland, Hyrb and Kasprisin, respectively, for car allowances;
(c) $2,553 paid by the Company with respect to supplementary life
insurance for the benefit of Mr. Mihaly; and (d) $43,454 paid by the
Company to Mr. Hyrb with respect to relocation expenses.
(3) Amounts shown for fiscal 1997 include the following: (a) $6,210,
$5,683, $5,642 and $5,639 of matching benefits paid under the Company's
defined contribution 401(k) plan for Messrs. Mihaly, Farland, Hyrb and
Kasprisin, respectively; (b) $80,976 for Mr. Mihaly with respect to
accelerated vesting of in-the-money stock options; and (c) $2,553 paid
by the Company with respect to supplementary life insurance for the
benefit of Mr. Mihaly.
(4) Amounts shown for fiscal 1998 include the following: (a) $5,724,
$3,130, $5,736, $5,736 and $5,736 of matching benefits paid under
the Company's defined contribution 401(k) plan for Messrs. Mihaly,
Dolloff, Farland, Hyrb and Kasprisin, respectively; (b) $2,553 paid
by the Company with respect to supplementary life insurance for the
benefit of Mr. Mihaly; (c) $11,119 paid by the Company with respect
to relocation expenses of Mr. Dolloff and (d) a one time
extraordinary bonus of $10,778 paid to Mr. Farland.
(5) Mr. Dolloff commenced employment with the Company and UnionTools in
June 1997.
(6) Mr. Farland's employment with UnionTools ended upon his death in August
1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain information regarding the
number and value of stock options held by the Company's Named Executive
Officers at July 31, 1998.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
ON VALUE OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2)
EXERCISE REALIZED ------------------------------ ---------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gabe Mihaly 0 $ 0 63,786 40,650 $88,929 $ 0
J. Mitchell Dolloff 0 0 16,250 16,250 0 0
James B. Farland 0 0 20,300 20,300 0 0
Thomas A. Hyrb 0 0 20,300 20,300 0 0
Stephen M. Kasprisin 0 0 20,300 20,300 0 0
</TABLE>
- --------------------
(1) Value realized represents the difference between the exercise price of
the option shares and the market price of the option shares on the date
the option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses which may have been
owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the
per share option exercise price and the per share fair market value at
year end ($5.125 based on the average of the high and low sale prices
on July 31, 1998). An option is in-the-money if the fair market value
of the underlying shares exceeds the exercise price of the option.
29
<PAGE>
PENSION PLANS
UnionTools maintains seven noncontributory defined benefit pension
plans covering substantially all of the hourly employees of the Company.
UnionTools also maintains a noncontributory defined benefit pension plan
covering salaried, administrative and supervisory employees of the Company
(the "Salaried Employee Pension Plan") and a supplemental noncontributory
defined benefit pension plan covering certain senior executive officers of
the Company (the "Supplemental Pension Plan").
The following table sets forth the estimated annual benefits payable
upon retirement under the Salaried Employee Pension Plan based on retirement
at age 65 and fiscal 1998 covered compensation.
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION(1) 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 $42,187 $56,250 $70,313 $70,313 $70,313
160,000 and above 54,000 72,000 90,000 90,000 90,000
</TABLE>
- ---------------------------
(1) Based on final earnings.
For each of the Company's Named Executive Officers, the Salaried
Employee Pension Plan covers total compensation as listed in the summary
compensation table, but limited to $160,000 as required by the Employee
Retirement Income Security Act of 1974. Messrs. Mihaly, Dolloff, Farland,
Hyrb and Kasprisin have credited service of approximately 7, 1, 6, 6 and 9
years, respectively, under the Salaried Employee Pension Plan. Benefits under
the Salaried Employee Pension Plan are based on years of credited service and
final earnings (the highest average monthly earnings over any 60 consecutive
calendar month period in the 120 calendar months preceding retirement or
termination of employment). Monthly benefits are paid under the Salaried
Employee Pension Plan in an amount equal to 2.25% of the employees' final
earnings multiplied by the lesser of 25 years or the total number of years of
credited service. Benefits under the Salaried Employee Pension Plan for
credited years of service prior to 1993 were determined pursuant to a formula
that yielded slightly lower benefits. Accordingly, actual benefits for each
of the Named Executive Officers are slightly lower than the amounts indicated
in the foregoing table. Benefits under the Salaried Employee Pension Plan are
not subject to any offset.
The following table sets forth the estimated annual benefits payable
upon retirement under the Supplemental Pension Plan based on retirement at
age 65 and fiscal 1998 covered compensation.
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
REMUNERATION(1) 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$175,000 $ 5,062 $ 6,750 $ 8,437 $ 8,437 $ 8,437
200,000 13,500 18,000 22,500 22,500 22,500
225,000 21,938 29,250 36,563 36,563 36,563
250,000 30,375 40,500 50,625 50,625 50,625
300,000 47,250 63,000 78,750 78,750 78,750
400,000 81,000 108,000 135,000 135,000 135,000
</TABLE>
- -----------------------
(1) Based on final earnings.
For Mr. Mihaly, the Supplemental Pension Plan covers compensation as
listed in the summary compensation table above $160,000. Mr. Mihaly has
credited service of approximately 7 years under the Supplemental Pension
Plan. Benefits under the Supplemental Pension Plan are based on years of
credited service and final earnings (the highest average monthly earnings
over any 60 consecutive calendar month period in the 120 calendar months
preceding retirement or termination of employment). Monthly benefits are paid
under the Salaried Employee Pension Plan in an
30
<PAGE>
amount equal to 2.25% of the employees' final earnings (as described above)
multiplied by the lesser of 25 years or the total number of years of credited
service. Benefits under the Supplemental Pension Plan are not subject to any
offset.
AGREEMENTS WITH KEY EMPLOYEES
In May 1997, the Company entered into an employment agreement with
Mr. Mihaly which provides for his employment as the President of the Company
and the President and Chief Executive Officer of UnionTools. The agreement
has a five-year term and automatically is extended for successive one-year
periods thereafter unless notice is given at least 90 days, if by Mr. Mihaly,
or one year, if by the Company, prior to expiration of the then-current term.
Mr. Mihaly's employment agreement provides for a base salary of $296,181 per
year, a one-time cash bonus of $260,000 if Mr. Mihaly is employed by the
Company on January 5, 1998, an annual cash bonus in an amount to be
determined by the Board of Directors of the Company and certain additional
benefits, including participation in pension, health and other employee
benefits plans of the Company. The payment of Mr. Mihaly's one-time cash
bonus was deferred to October 1998. Mr. Mihaly's employment agreement
provides that if the term of the agreement is not extended by the Company,
the Company is required to make a lump sum payment to Mr. Mihaly in an amount
equal to his then-current base salary. Mr. Mihaly's employment agreement also
provides that if Mr. Mihaly's employment is terminated by the Company without
cause (as defined in the agreement) or if Mr. Mihaly resigns due to a
material diminution in his responsibilities or a material breach by the
Company of its obligations under the agreement (collectively, "Termination"),
the Company is required to make a lump sum payment to Mr. Mihaly in an amount
equal to the full cash compensation due through the remaining term of the
agreement (the "Remaining Salary"). In addition, Mr. Mihaly will be treated
for purposes of pension and related plans as having been employed by the
Company through the end of the then-current term of the agreement. If such
Termination occurs within two years following a change in control of the
Company (as defined in the agreement), the Company also is required to pay to
Mr. Mihaly an amount equal to the difference between (i) three times the
highest aggregate annual compensation (including salary, bonuses and
incentive payments) includable in gross income paid to Mr. Mihaly during any
one of the three taxable years preceding the date of the Termination and (ii)
the Remaining Salary.
In May 1997, the Company also entered into agreements with each of
Messrs. Hyrb and Kasprisin which provide that following the Termination of
such officers' employment with the Company, the Company will pay to such
employee an amount equal to the highest aggregate annual compensation
(including salary, bonuses and incentive payments) includable in gross income
paid to such employee during any one of the three taxable years preceding the
date of his Termination. If such Termination occurs within two years
following a change in control of the Company (as defined in such agreement),
the Company also is required to pay to such employee an amount equal to two
times the amount described in the preceding sentence. In June 1997, the
Company entered into an agreement with Mr. Dolloff on the same terms.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of the Company's Common Stock by each person known by the Company
to beneficially own more than 5% of the outstanding shares of Common Stock,
each director, each of the Company's Named Executive Officers, and all the
directors and executive officers of the Company as a group as of October 23,
1998:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)(2)
--------------------------------------------
STOCKHOLDER NUMBER PERCENT
- ---------------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
The TCW Group, Inc.(3)................................................ 3,162,049 48.9%
Oaktree Capital Management, LLC(4).................................... 1,107,500 17.1
OCM Principal Opportunities Fund, L.P................................. 1,107,500 17.1
J. & W. Seligman & Co. Incorporated(5)................................ 707,720 10.9
Gabe Mihaly(6)........................................................ 101,955 1.6
J. Mitchell Dolloff(7)................................................ 16,250 *
James B. Farland(8)................................................... 22,000 *
Thomas A. Hyrb(9)..................................................... 20,300 *
Stephen M. Kasprisin(10).............................................. 23,800 *
Conor D. Reilly(11)................................................... 38,001 *
William W. Abbott(12)................................................. 13,826 *
Matthew S. Barrett(13)................................................ 1,107,500 17.1
Stephen A. Kaplan(14)................................................. 1,107,500 17.1
John I. Leahy(15)..................................................... 18,186 *
All directors and executive officers as a group (10 persons)(16)...... 1,361,818 21.1%
</TABLE>
- ----------------------
* Represents beneficial ownership of less than 1% of the Company's
outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those shares.
(2) The address of the TCW Group, Inc. is 865 South Figueroa Street,
Los Angeles, California 90017. The address of Oaktree, the OCM
Principal Opportunities Fund, L.P. (the "Oaktree Fund"), Mr.
Barrett and Mr. Kaplan is 550 South Hope Street, 22nd Floor, Los
Angeles, California 90071. The address of J. & W. Seligman & Co.
Incorporated ("JWS") is 100 Park Avenue, New York, New York 10017.
The address for Messrs. Mihaly, Dolloff, Farland, Hyrb, Kasprisin
and Reilly is c/o Acorn Products, Inc., 500 Dublin Avenue,
Columbus, Ohio 43215. The address of Mr. Abbott is 6923 Greentree
Drive, Naples, Florida 33963. The address of Mr. Leahy is c/o
Management & Marketing Associates, 30 East Padonia Road, Timonium,
Maryland 21093.
(3) The TCW Group, Inc. is the parent corporation of TCW Asset Management
Company ("TAMCO"). TAMCO is the managing general partner of TCW Special
Credits, a general partnership among TAMCO and certain
32
<PAGE>
individual general partners (the "Individual Partners"). TCW Special
Credits is (i) the general partner of four limited partnerships that
hold shares of Common Stock (the "TCW Limited Partnerships") and (ii)
the investment advisor for three third party accounts that hold shares
of Common Stock (the "TCW Accounts"). The TCW Limited Partnerships and
the TCW Accounts in the aggregate hold 2,148,576 shares of Common
Stock. The TCW Group, Inc. also is the parent corporation of Trust
Company of the West, which is the trustee of four trusts that hold
shares of Common Stock (the "TCW Trusts"). The TCW Trusts in the
aggregate hold 1,013,473 shares of Common Stock. The following TCW
Limited Partnerships and TCW Trusts individually beneficially own more
than 5% of the outstanding shares of Common Stock: TCW Special Credits
Fund III (660,036 shares or 10.2%); TCW Special Credits Fund IIIb
(625,988 shares or 9.7%); and TCW Special Credits Trust IIIb (447,124
shares or 6.9%). Certain of the Individual Partners also are principals
of Oaktree. The Individual Partners, in their capacity as general
partners of TCW Special Credits, have been designated to manage the TCW
Limited Partnerships, the TCW Accounts and the TCW Trusts. Although
Oaktree provides consulting, research and other investment management
support to the Individual Partners, Oaktree does not have voting or
dispositive power with respect to the TCW Limited Partnerships, the TCW
Accounts or the TCW Trusts.
(4) All of such shares of Common Stock are owned by the Oaktree Fund.
(5) JWS directly owns 277,720, or 4.2%, of the Common Stock.
JWS, as investment adviser for Seligman Value Fund Series, Inc. --
Seligman Small-Cap Value Fund (the "Fund"), may be deemed to
beneficially own the shares of the Fund. The Fund owns 430,000
shares, or 6.7%, of the Common Stock. William C. Morris, as the owner
of a majority of the outstanding voting securities of JWS, may be
deemed to beneficially own the shares reported by JWS. The
information in this note is taken from a Schedule 13G filed by the
persons named herein.
(6) Includes 17,925 shares of Common Stock which are owned jointly by Mr.
Mihaly and his spouse. Also includes 63,786 shares of Common Stock
issuable pursuant to currently exercisable options.
(7) Reflects 16,250 shares of Common Stock issuable pursuant to currently
exercisable options.
(8) Mr. Farland's employment with UnionTools ended upon his death in
August 1998. Includes 20,300 shares of Common Stock issuable pursuant
to currently exercisable options that may be exercised by Mr.
Farland's heirs and beneficiaries.
(9) Reflects 20,300 shares of Common Stock issuable pursuant to currently
exercisable options.
(10) Includes 3,500 shares of Common Stock which are owned jointly by Mr.
Kasprisin and his spouse. Also includes 20,300 shares of Common Stock
issuable pursuant to currently exercisable options.
(11) Includes 1,050 shares of Common Stock held by Mr. Reilly's minor
children. Mr. Reilly, as custodian, holds voting and dispositive
power over such shares. Also includes 19,976 shares of Common Stock
issuable pursuant to currently exercisable options. Does not
include 3,383 shares of Common Stock issuable pursuant to the
Director Stock Plan.
(12) Includes 1,000 shares of Common Stock held by Mr. Abbott's spouse.
Mr. Abbott disclaims beneficial ownership of such shares. Also
includes 3,726 shares of Common Stock issuable pursuant to
currently exercisable options. Does not include 3,383 shares of
Common Stock issuable pursuant to the Director Stock Plan.
(13) Reflects shares of Common Stock owned by the Oaktree Fund and also
shown as beneficially owned by Oaktree. To the extent that Mr.
Barrett, as a managing director of Oaktree, participates in the
process to vote or dispose of any such shares, he may be deemed
under such circumstances for the purpose of Section 13 of the
Exchange Act to be the beneficial owner of such shares of Common
Stock. Mr. Barrett disclaims beneficial ownership of such shares of
Common Stock. Does not include 3,726 shares of Common Stock
issuable pursuant to currently exercisable options and 3,383 shares
of Common Stock issuable pursuant to the Director Stock Plan.
Pursuant to TCW's policy, all compensation paid to Mr. Barrett is
donated to charity.
33
<PAGE>
(14) Reflects shares of Common Stock owned by the Oaktree Fund and also
shown as beneficially owned by Oaktree. To the extent that Mr.
Kaplan, as a principal of Oaktree, participates in the process to
vote or dispose of any such shares, he may be deemed under such
circumstances for the purpose of Section 13 of the Exchange Act to
be the beneficial owner of such shares of Common Stock. Mr. Kaplan
disclaims beneficial ownership of such shares of Common Stock. Does
not include 3,726 shares of Common Stock issuable pursuant to
currently exercisable options and 3,383 shares of Common Stock
issuable pursuant to the Director Stock Plan. Pursuant to Oaktree's
policy, all compensation paid to Mr. Kaplan is contributed to the
Oaktree Fund.
(15) Includes 3,726 shares of Common Stock issuable pursuant to
currently exercisable options. Does not include 1,691 shares of
Common Stock issuable pursuant to the Director Stock Plan.
(16) See notes (6) through (15) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the executive officers of the Company served on the Board of
Directors or on the Compensation Committee of any other entity, any of whose
officers served either on the Board of Directors or on the Compensation
Committee of the Company.
TRANSACTIONS BETWEEN DIRECTORS, EXECUTIVE OFFICERS AND THE COMPANY
In December 1993 and May 1994, the Company issued the Subordinated
Notes in the aggregate principal amount of approximately $31.4 million to the
TCW Funds. In August 1996, the Company issued 100 shares of Series A
Preferred Stock to the TCW Funds as payment in full of accrued interest on
the Subordinated Notes for fiscal 1995 and fiscal 1996. In July 1997, the
Company 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 aggregated principal amount of the Subordinated Notes was
exchanged for 1,716,049 shares of Common Stock.
In December 1996, the Company 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, the
Company paid $6.3 million to the TCW Funds in prepayment of the subordinated
promissory note, accrued interest thereon and a $180,000 facility fee.
Conor D. Reilly, Chairman of the Board of the Company and a director
of the Company and UnionTools, is a partner in the law firm of Gibson, Dunn &
Crutcher LLP. The Company paid fees of approximately $1.2 million to Gibson,
Dunn & Crutcher LLP in fiscal 1998.
In January 1994, Mr. Mihaly, the President, Chief Executive Officer
and a director of the Company and UnionTools, received a loan from UnionTools
in the aggregate principal amount of $245,000. The loan was originally
intended to mature in January 1998, but the maturity date was subsequently
extended to October 1998 to coincide with the deferment of Mr. Mihaly's
one-time cash bonus to be paid in connection with his employment agreement as
more fully described in Item 11 above. The loan bears interest at an annual
rate of 5.34% and is secured by a pledge of Common Stock. The principal of,
and accrued interest on, the loan becomes due upon the occurrence of certain
events, including voluntary termination of Mr. Mihaly's employment with the
Company.
34
<PAGE>
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 August 1, 1997
and July 31, 1998
- Consolidated Statements of Operations for fiscal
1996, fiscal 1997 and fiscal 1998
- Consolidated Statements of Stockholders' Equity for
fiscal 1996, fiscal 1997 and fiscal 1998
- Consolidated Statements of Cash Flows for fiscal
1996, fiscal 1997 and fiscal 1998
- Notes to Consolidated Financial Statements
(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
Schedules not listed above are omitted because of the
absence of the conditions under which they are required
or because the required information is included in the
financial statements or the notes thereto.
(a)(3) The following items are filed as exhibits to this Annual
Report on Form 10-K (management contracts and compensatory
plans are indicated by an asterisk (*)):
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
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.***
35
<PAGE>
10.2.1* Employment Severance Agreement, dated as of May 29, 1997,
among the Company, UnionTools and Thomas A. Hyrb.***
10.2.2* Employment Severance Agreement, dated as of May 29, 1997,
among the Company, UnionTools and Stephen M. Kasprisin.***
10.2.3* 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 Principal
Opportunities Fund, L.P.***
10.13 Master Lease Agreement, dated as of June 4, 1998, between
BancBoston Leasing, Inc., and UnionTools, Inc.**
10.14 Rider No. 1 to Master Lease Agreement, dated as of June 4,
1998, between BancBoston Leasing, Inc., and UnionTools, Inc.**
10.15 Amendment No.1 to Credit Agreement, dated as of November
24, 1997, between Union Tools, Inc., and Heller Financial,
Inc. (Reference is made to Exhibit 10 to Form 10-Q for the
quarter ended October 31, 1997, filed with the Securities
and Exchange Commission on December 15, 1997.)
10.16 Amendment No. 2 to Credit Agreement, dated as of May 22,
1998, between Union Tools, Inc., and Heller Financial, Inc.
**
10.17* Acorn Products, Inc. 1997 Nonemployee Director Stock
Incentive Plan. (Reference is made to Exhibit 4(a) on a
Registration Statement on Form S-8 (Registration Number
333-58807) filed with the Securities and Exchange
Commission on July 9, 1998.)
21.1 Subsidiaries of the Company.**
23.1 Consent of Ernst & Young LLP.**
24.1 Power of Attorney.**
36
<PAGE>
27.1 Financial Data Schedule.**
- ----------------------
** 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.
</TABLE>
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.
37
<PAGE>
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 28, 1998
38
<PAGE>
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 1, 1997 and July 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the fiscal years
ended August 2, 1996, August 1, 1997 and July 31, 1998. 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 1, 1997 and July 31, 1998,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statements 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 22, 1998, except for Note 14, as
to which the date is October 29, 1998.
F-1
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................... $ 1,509 $ 1,240
Accounts receivable, less allowance for
doubtful accounts ($713 and $894, respectively) ...... 18,462 24,553
Inventories ............................................ 27,642 30,123
Prepaids and other current assets ...................... 3,773 2,948
--------- ---------
Total current assets ................................. 51,386 58,864
Property, plant and equipment, net of
accumulated depreciation ............................... 15,650 16,205
Goodwill, net of accumulated amortization ................ 29,808 35,271
Other intangible assets .................................. 2,046 2,293
--------- ---------
Total assets ......................................... $ 98,890 $ 112,633
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility .............................. $ 12,837 $ 16,308
Accounts payable ....................................... 5,872 7,010
Accrued expenses ....................................... 4,707 4,413
Income taxes payable ................................... 350 43
Other current liabilities .............................. 711 445
--------- ---------
Total current liabilities ............................ 24,477 28,219
Long-term debt ........................................... 6,098 16,009
Other long-term liabilities .............................. 4,496 4,054
Net liabilities of discontinued operations ............... 595 -
--------- ---------
Total liabilities .................................... 35,666 48,282
Stockholders' equity:
Common stock, par value of $.001 per share,
20,000,000 shares authorized, 6,464,105
shares issued and outstanding at August 1,
1997 and July 31, 1998 respectively ................... 78,391 78,391
Contributed capital-stock options ....................... 460 460
Minimum pension liability ............................... (133) (285)
Retained earnings (deficit) ............................. (15,494) (14,215)
--------- ---------
Total stockholders' equity ........................... 63,224 64,351
--------- ---------
Total liabilities and stockholders' equity ........... $ 98,890 $ 112,633
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-2
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales .............................................. $ 92,652 $ 101,011 $ 107,758
Cost of goods sold ..................................... 67,496 73,982 82,480
--------- --------- ---------
Gross profit ........................................... 25,156 27,029 25,278
Selling, general and administrative expenses ........... 16,815 18,293 20,033
Interest expense ....................................... 6,732 7,176 2,560
Amortization of intangibles ............................ 1,173 837 917
Other expenses, net .................................... 1,522 1,548 259
--------- --------- ---------
Income (loss) from continuing operations before
income taxes ......................................... (1,086) (825) 1,509
Income taxes ........................................... 582 134 230
--------- --------- ---------
Income (loss) from continuing operations ............... (1,668) (959) 1,279
Discontinued operations:
Loss from operations ................................. (5,815) (1,499) -
Loss from disposal ................................... (665) (8,421) -
--------- --------- ---------
Loss from discontinued operations .................. (6,480) (9,920) -
--------- --------- ---------
Net income (loss) ...................................... (8,148) (10,879) 1,279
Cumulative effect of change in accounting for post
retirement benefits .................................. 869 - -
--------- --------- ---------
Net income (loss) ...................................... $ (7,279) $ (10,879) $ 1,279
--------- --------- ---------
--------- --------- ---------
Net income (loss) applicable to common stock ........... $ (7,279) $ (11,897) $ 1,279
--------- --------- ---------
--------- --------- ---------
PER SHARE DATA (BASIC AND DILUTED):
Income (loss) from continuing operations ............... $ (1.10) $ (0.48) $ 0.20
Loss from discontinued operations per share ............ (4.26) (5.00) -
Cumulative effect of change in accounting for post
retirement benefits .................................. 0.57 - -
Preferred stock dividend ............................... - (0.51) -
--------- --------- ---------
Net Income (loss) per share ............................ $ (4.79) $ (5.99) $ 0.20
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONTRIBUTED
CAPITAL MINIMUM RETAINED
NUMBER NUMBER STOCK PENSION EARNINGS
OF SHARES AMOUNT OF SHARES AMOUNT OPTIONS LIABILITY (DEFICIT) TOTAL
--------- ------ --------- ------ ------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 ........... 6,464,105 78,391 - - 460 (133) (15,494) 63,224
Net income for the period
August 2, 1997 through
July 31, 1998 ............ - - - - - - 1,279 1,279
Adjustment to minimum
pension liability ........ - - - - - (152) - (152)
-----------------------------------------------------------------------------------------------
Balances at
July 31, 1998 ............ 6,464,105 $ 78,391 - $ - $ 460 $ (285) $ (14,215) $ 64,351
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (7,279) $ (10,879) $ 1,279
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Loss from discontinued operations..................... 6,480 9,920 -
Depreciation and amortization......................... 3,592 3,489 3,870
Deferred income taxes................................. 756 - -
Conversion of accrued interest to preferred stock..... 4,463 - -
Conversion of accrued interest to common stock........ - 3,714 -
Financing fees, net................................... (365) (1,218) -
Issuance of stock options............................. - 120 -
Cumulative effect of change in accounting
principal............................................. 869 - -
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,397) (6,395) (4,391)
Inventories.......................................... 8,369 (3,141) 151
Other assets......................................... (190) (886) 682
Accounts payable and accrued expenses................ 587 (773) (445)
Income taxes payable................................. (656) (750) (307)
Other liabilities.................................... (1,243) (751) (1,072)
--------- --------- --------
Net cash provided by (used in) continuing operations.... 13,986 (7,550) (233)
Net cash provided by (used in) discontinued
operations............................................ (4,001) 2,430 -
--------- --------- --------
Net cash provided by (used in) operating activities..... 9,985 (5,120) (233)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets from acquisition,
net of cash acquired.................................. - (6,499) (9,911)
Investment in joint venture............................. - (520) -
Purchases of property, plant and equipment, net......... (1,466) (2,436) (2,882)
Proceeds from disposal of discontinued operations....... - 6,863 (625)
--------- --------- --------
Net cash provided by (used in) investing activities..... (1,466) (2,592) (13,418)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debt retired............................... - (7,329) -
Acquisition line draws.................................. - 6,098 9,911
Net activity on term loan............................... (3,500) (18,000) -
Net activity on revolving loan.......................... (6,713) 300 3,471
Redemption of preferred stock and accrued dividends..... - (9,614) -
Net proceeds from IPO................................... - 37,176 -
Issuance of stock....................................... 87 88 -
--------- --------- --------
Net cash provided by (used in) financing activities..... (10,126) 8,719 13,382
--------- --------- --------
Net increase (decrease) in cash......................... (1,607) 1,007 (269)
Cash at beginning of period............................. 2,109 502 1,509
--------- --------- --------
Cash at end of period................................... $ 502 $ 1,509 $ 1,240
--------- --------- --------
--------- --------- --------
Interest paid........................................... $ 3,584 $ 7,175 $ 2,338
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
Founded in 1890, Acorn Products, Inc. (Acorn), through its wholly-owned
subsidiary 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, hose reels and watering products
(such as sprinklers, hose nozzles and hose couplings). 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, which includes Sears' Orchard
Supply division, accounted for 12.5%, 10.9% and 13.6% of gross sales in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively. No other customer
accounted for 10% or more of the Company's gross sales in fiscal 1996, fiscal
1997 or fiscal 1998.
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, McGuire-Nicholas Company, Inc.
("McGuire-Nicholas"), VSI Fasteners, Inc. ("VSI") and UnionTools, Inc.
(and its subsidiaries H.B. Sherman Manufacturing Company, Inc. and Union
Tools Watering Products, Inc.). All intercompany accounts and transactions
have been eliminated. (See Note 3 -- Discontinued Operations regarding the
disposal of VSI and McGuire-Nicholas).
INVENTORIES
Inventories 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:
F-6
<PAGE>
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Finished goods $14,460 $16,270
Work in process 7,041 5,709
Raw materials and supplies 6,741 9,212
------- -------
28,242 31,191
Valuation reserves (600) (1,068)
------- -------
Total inventories $27,642 $30,123
------- -------
</TABLE>
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 1, JULY 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land $ 1,626 $ 1,626
Buildings and improvements 4,909 5,033
Machinery and equipment 15,011 18,032
Furniture and fixtures 1,815 2,177
------- -------
23,361 26,868
Accumulated depreciation (7,711) (10,663)
------- -------
Property, plant and equipment, net $15,650 $16,205
------- -------
------- -------
</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 $3.0 million at August 1,
1997 and $4.0 million at July 31, 1998. The Company periodically assesses the
recoverability of its goodwill.
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.
F-7
<PAGE>
EARNING PER SHARE
Basic earnings per share is computed using the weighted-average
number of shares of Common Stock outstanding during each period. Diluted
earnings per share is computed using the weighted-average number of shares of
Common Stock outstanding during each period plus dilutive Common Stock
equivalents using the treasury stock method. The following table sets forth
the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (7,279,000) $(10,879,000) $ 1,279,000
Preferred stock dividend -- (1,018,000) --
------------ ------------ ------------
Numerator for basic and diluted earnings per share -
Net income (loss) applicable to common stock $ (7,279,000) $(11,897,000) $ 1,279,000
------------ ------------ ------------
------------ ------------ ------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 1,520,066 1,985,758 6,464,105
Effect of dilutive securities:
1997 Stock Incentive Plan -- -- --
1997 Nonemployee Director Stock Incentive Plan -- -- 1,132
Deferred Equity Compensation Plan for Directors -- -- 12,263
Other stock options -- -- 33,258
------------ ------------ ------------
Dilutive potential common shares -- -- 46,653
Denominator for diluted earnings per share -
weighted-average shares and
assumed conversions 1,520,066 1,985,758 6,510,758
------------ ------------ ------------
Basic earnings per share $ (4.79) $ (5.99) $ 0.20
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share $ (4.79) $ (5.99) $ 0.20
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For additional disclosure regarding outstanding stock options and the
Deferred Equity Compensation Plan for Directors, see Note 5 -- Stockholders'
Equity. Options to purchase 329,100 shares of Common Stock at $14.00 per
share and options to purchase 5,784 shares of Common Stock at $12.10 per
share were not included in the computation of diluted earnings per share
because the exercise price of the options was greater than the average market
price of the Common Stock and, therefore, the effect would be antidilutive.
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.
F-8
<PAGE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
fiscal 1998 presentation.
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 1996, fiscal 1997 and fiscal 1998 relate to the fiscal
years ended August 2, 1996, August 1, 1997 and July 31, 1998, respectively,
and were comprised of 53 weeks, 52 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. 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 1997 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. No additional gain or loss was incurred.
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 FISCAL
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Revenues $49,810 $29,643
Costs and expenses 50,143 30,731
Interest expense (1,577) (411)
Loss from operations (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.
F-9
<PAGE>
The following table summarizes the net liabilities of the Company's
discontinued operations at August 1, 1997 (in thousands):
<TABLE>
<S> <C>
Accounts receivable $ 3,548
Inventories 3,658
Property and equipment 1,686
Other assets 992
Liabilities (10,479)
---------
Net (liabilities) of discontinued operations $ (595)
---------
---------
</TABLE>
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Acquisition line of credit facility $6,098 $16,009
Less current portion of long-term debt -- --
------ -------
$6,098 $16,009
------ -------
------ -------
</TABLE>
CREDIT FACILITY
UnionTools entered into a credit facility (the "Credit Facility") in
December 1996 which, as amended and restated in May 1997, and with amendment
number 1 signed in November 1997 and amendment number 2 signed in May 1998,
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 July 31,
1998, there was $12.6 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 nonfinancial 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 ratably over the three-year term.
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 July
31, 1998 was 8.50%) or at UnionTools' option, the LIBOR rate plus a margin
ranging from 2.25% to 2.75% (LIBOR rate at July 31, 1998 was 5.69%). At July
31, 1998, UnionTools had $30 million of debt outstanding under the LIBOR
option and $2.3 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.
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,
F-10
<PAGE>
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 with all debt covenants at July 31,
1998.
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 July 31, 1998.
5. STOCKHOLDERS' EQUITY
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 nonvoting,
nonconvertible, 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 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 and nonemployee director stock options and,
accordingly, does not recognize compensation costs when the exercise price of
such 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 to purchase 39,042 shares of stock
remain outstanding at July 31, 1998.
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 options to purchase an
aggregate of 329,100 shares of stock under the Incentive Plan, at a
weighted-average exercise price of $14.00 per share.
In January 1998, Acorn adopted the 1997 Nonemployee Director Stock
Incentive Plan (the "Nonemployee Director Incentive Plan") for nonemployee
directors of the Company. The purpose of the Nonemployee Director Incentive
Plan is to enable the Company to attract and retain nonemployee directors by
granting awards tied to the performance of the Common Stock. Awards to
nonemployee directors may take the form of options, stock appreciation rights
or sales or grants of restricted stock. The Company has reserved an aggregate
of 25,000 shares of Common Stock
F-11
<PAGE>
for issuance under the Nonemployee Director Incentive Plan. Acorn has granted
options to purchase an aggregate of 18,630 shares of stock under the
Nonemployee Director Incentive Plan, at a weighted-average exercise price of
$10.25 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 SFAS
No. 123. The fair value of these options was $7.80 per share for the
Incentive Plan and $6.71 per share for the Nonemployee Director Incentive
Plan at July 31, 1998 and was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 1997 and 1998: (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 for the Incentive Plan and 10 years
for the Director Plan. 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 FISCAL
1997 1998
---- ----
<S> <C> <C>
Net income (loss) applicable to common stock (in thousands) $ (12,660) $ 43
Net income (loss) applicable to common stock per share (6.37) .01
</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.
The following table summarizes the stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES 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
Granted 0 0
Exercised 0 0
Expired/terminated 0 0
Outstanding at July 31, 1998 329,100 14.00
1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN:
Outstanding at August 1, 1997 0 $ 0
Granted 18,630 10.25
Exercised 0 0
Expired/terminated 0 0
Outstanding at July 31, 1998 18,630 10.25
F-12
<PAGE>
OTHER STOCK OPTIONS:
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
Granted 0 0
Exercised 0 0
Expired/terminated 0 0
Outstanding at July 31, 1998 39,042 1.79
</TABLE>
During fiscal 1998, options to purchase 82,275 shares of Common
Stock vested at an exercise price of $14.00 per share and 18,630 shares of
Common Stock vested at an exercise price of $10.25 per share. 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
33,258 and 5,784 shares, respectively) and 164,550 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 nonemployee
members of the Board of Directors thereby increasing their incentive to
contribute to the success of the Company. Only nonemployee directors are
eligible to participate in the Director Stock Plan. The number of shares of
Common Stock reserved for issuance pursuant to the Director Stock Plan is
73,000. In lieu of cash, nonemployee 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 NASDAQ 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 nonemployee directors in the
form of Common Stock following the director's resignation from the Board of
Directors. In addition, common 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 July 31, 1998,
12,263 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:
F-13
<PAGE>
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Inventory $ 681 $ 785
Accrued expenses and other 3,376 2,425
Net operating loss carryforwards 12,093 13,094
Capital loss carryforward 2,585 2,585
-------- --------
Total deferred tax assets 18,735 18,889
Valuation allowance for deferred tax assets (17,552) (17,323)
-------- --------
Deferred tax assets 1,183 1,566
Deferred tax liabilities:
Goodwill 966 1,376
Depreciation and other 217 190
-------- --------
Total deferred tax liabilities 1,183 1,566
-------- --------
Net deferred tax assets $ -- $ --
-------- --------
-------- --------
</TABLE>
Based upon the Company's history of operating losses prior to fiscal
1998 and in accordance with SFAS No. 109, management has recorded a 100%
valuation allowance resulting in no deferred tax assets being recognized.
At July 31, 1998, the Company has net operating loss carryforwards
of $31.4 million for income tax purposes that expire in the years 2009
through 2013 and capital loss carryforwards of $6.2 million for income tax
purposes that expire in 2002 through 2003.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current - Federal $ -- $ -- $ 40
Current -- State -- 134 190
Deferred -- State 582 -- --
------ -------- ------
$ 582 $ 134 $ 230
------ -------- ------
------ -------- ------
</TABLE>
For financial reporting purposes, the federal tax provision
represents tax due under the Alternative Minimum Tax (AMT) System as fully
reserved operating loss carryforwards eliminate book taxable income. However,
the Company generates a loss for federal income tax purposes for fiscal 1998.
Therefore, the federal income tax provision was recorded for fiscal 1998
based on the AMT system. AMT is calculated separately from the regular U.S.
federal income tax and is based on a flat rate applied to a broader tax base.
The higher of the two taxes is paid. The excess of the AMT paid over regular
tax can be carried forward indefinitely to reduce regular tax liabilities of
future years.
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.
F-14
<PAGE>
The following sets forth the funded status of the defined benefit
plans:
<TABLE>
<CAPTION>
PLANS WHOSE PLANS WHOSE
BENEFITS ASSETS
EXCEED ASSETS EXCEED BENEFITS
------------- ---------------
AUGUST 1, JULY 31, AUGUST 1, JULY 31,
1997 1998 1997 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
(primarily vested) $5,793 $6,147 $ 8,131 $ 9,021
------ ------ ------- -------
Projected benefit obligation for
service rendered to date $5,793 6,147 $ 8,252 $ 9,651
Plan assets at fair value 3,991 4,460 9,480 10,164
------ ------ ------- -------
Projected benefit obligation less
than (in excess) of plan assets (1,802) (1,687) 1,228 513
Unrecognized prior service cost 628 596 (40) (19)
Unrecognized net losses (gains) 445 607 364 1,277
Adjustment to recognize
minimum liability (1,074) (1,202) -- --
------ ------ ------- -------
Prepaid (accrued) pension cost
included in the accompanying
balance sheet $(1,803) $(1,686) $1,552 $1,771
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost $ 438 $ 619 $ 662
Interest on projected benefit obligation 981 1,045 1,149
Return on plan assets (411) (858) (1,254)
Net amortization and deferral (582) (229) 93
----- ------ -------
Net periodic pension cost $ 426 $ 577 $ 650
----- ------ -------
----- ------ -------
</TABLE>
Significant assumptions used in 1996, 1997 and 1998 in calculating
periodic pension cost are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Discount rate 8% 8% 8%
Expected long-term rate of return 8% 8.75% 8.75%
Rate of increase in future compensation 4% 4% 4%
</TABLE>
Plan assets consist primarily of guaranteed interest contracts, pooled
investment debt securities and equity mutual funds.
F-15
<PAGE>
The Company also sponsors defined contribution 401K plans covering
all employees. The Company's matching contribution varies by plan and
amounted to $141,785, $242,555 and $293,273 in fiscal 1996, fiscal 1997 and
fiscal 1998, respectively.
8. POST-RETIREMENT BENEFITS
In addition to providing pension benefits, the Company 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 (July 1, 1996 with respect to employees
represented by the International Brotherhood of Boilermakers, Iron Ship
Builders, Blacksmiths, Forgers and Helpers only) and to current participants
receiving benefits.
Effective August 1, 1996, the Company adopted SFAS 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 SFAS 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 $425,242 in fiscal 1996,
$349,032 in fiscal 1997 and $35,615 in fiscal 1998. The components of expense
in fiscal 1996, fiscal 1997 and fiscal 1998 follow:
<TABLE>
<CAPTION>
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned $ 80,131 $ 62,254 $ 17,041
Interest cost on projected benefit obligations 345,111 286,778 196,496
Amortization of unrecognized gain -- -- (177,922)
--------- --------- ---------
$ 425,242 $ 349,032 $ 35,615
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents supplemental information related to the
Company's post-retirement health care benefits:
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $2,411,657 $1,807,450
Active employees 1,371,907 1,094,554
---------- ----------
3,783,564 2,902,004
Unrecognized net gain 710,967 939,637
---------- ----------
Accrued post-retirement benefit cost $4,494,531 $3,841,641
---------- ----------
---------- ----------
</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,
F-16
<PAGE>
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 license 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-Registered Trademark- brand name. Under the
agreement, UnionTools must pay certain minimum royalty amounts annually.
Rent expense under operating leases was $2.0 million in fiscal 1996,
$1.2 million in fiscal 1997 and $1.2 million in fiscal 1998.
The minimum annual payments for leases under noncancelable operating
leases and the Scotts license agreement at July 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $1,200,000
2000 1,000,000
2001 800,000
2002 200,000
2003 100,000
Thereafter 100,000
</TABLE>
From time to time, 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.
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 2001, 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 BUSINESSES
In February 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 is amortizing
a non-compete agreement over a seven year period.
In February 1998, the Company acquired for approximately $3.1
million in cash with up to an additional $366,000 payable subject to the
achievement of certain profit levels in calendar 1998, the stock of H.B.
Sherman Manufacturing Company, Inc. ("Sherman"). The Company accounted for
the acquisition as a purchase and the results of Sherman's operations are
included in the accompanying financial statements beginning with the date of
acquisition. The Company is amortizing the goodwill over a forty-year period.
The purchase price allocation is subject to further adjustment based upon a
final valuation of the acquired net assets.
F-17
<PAGE>
In June 1998, the Company acquired for approximately $6.5 million in
cash certain assets of the Thompson Manufacturing Company, Inc. ("Thompson").
The final purchase price is subject to certain closing working capital
adjustments which are estimated to approximate $466,000. The Company
accounted for the acquisition as a purchase and the results of Thompson's
operations are included in the accompanying financial statements beginning
with the date of acquisition. The Company is amortizing the goodwill over a
forty-year period. The purchase price allocation is subject to further
adjustment based upon a final valuation of the acquired net assets.
Pro forma results including the acquired companies since the
beginning of the earliest period presented would not be materially different
from actual results.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data of the Company
for each quarter of fiscal 1997 and fiscal 1998. The financial data for each
of these quarters is unaudited but includes all adjustments, consisting of
only normal recurring adjustments, that 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) FROM
FROM CONTINUING LOSS FROM
CONTINUING OPERATIONS DISCONTINUED NET INCOME
NET SALES GROSS PROFIT OPERATIONS PER SHARE OPERATIONS (LOSS)
--------- ------------ ---------- ------------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
1997
First quarter $ 19,679 $ 5,172 $ (1,290) $ (.87) $ (985) $ (2,275)
Second quarter 21,018 5,383 (1,699) (1.14) (6,097) (7,796)
Third quarter 37,270 10,335 2,810 1.88 (2,493) 317
Fourth quarter 23,044 6,139 (780) (.23) (345) (1,125)
--------- -------- -------- ------- ---------
$ 101,011 $ 27,029 $ (959) $ (.48) $(9,920) $ (10,879)
--------- -------- -------- ------- ---------
--------- -------- -------- ------- ---------
1998
First quarter $ 20,416 $ 5,139 $ (324) $ (.05) $ - $ (324)
Second quarter 21,143 4,803 (275) (.04) - (275)
Third quarter 37,911 8,471 1,343 .21 - 1,343
Fourth quarter 28,288 6,865 535 .08 - 535
--------- -------- -------- ------- ---------
$ 107,758 $ 25,278 $ 1,279 $ .20 $ - $ 1,279
--------- -------- -------- ------- ---------
--------- -------- -------- ------- ---------
</TABLE>
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 the period 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.
F-18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 1, 1997
--------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<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>
14. SUBSEQUENT EVENT
On October 16, 1998, Huffy Corporation, True Temper Hardware Company
("True Temper") and Huffco Company (the "Huffy Parties") filed a complaint
against the Company in the Court of Common Pleas for Montgomery County, Ohio
alleging breach of contract, unfair competition, misappropriation of trade
secrets and fraud in connection with discussions between the Company and the
Huffy Parties regarding a possible merger of the Company and True Temper. As
of October 29, 1998, the Company has not been served with the complaint. The
Huffy Parties requested the following relief in the complaint: (i) an order
requiring the Company to merge with True Temper; (ii) an order enjoining the
Company from combining its business operations with any entity that is a
competitor of True Temper; (iii) an order enjoining the Company to return all
proprietary information relating to True Temper; (iv) alleged compensatory
damages of $138 million and unspecified punitive damages and (v) attorney's
fees. Management believes that the claims of the Huffy Parties set forth in
the complaint are without merit and, if the complaint is served, the Company
intends to contest the claims vigorously. Accordingly, management believes
that should the Company be served with the complaint, such litigation is not
likely to have a material adverse effect on the financial position or results
of operations of the Company.
F-19
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
UNIONTOOLS, INC.
AUGUST 1, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DESCRIBE OF PERIOD
----------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended July 31,1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 175,391 $ 83,987 $ 0 $ 0 $ 259,378
Reserved for sales discounts and
allowances 537,949 96,452 0 0 634,401
--------- -------- ------- --------- ---------
Total $ 713,340 $ 180,439 $ 0 $ 0 $ 893,779
Fiscal Year Ended August 1, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 140,000 $ 100,782 $ 4,000 $ 69,391 $ 175,391
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 accounts $ 175,000 $ 0 $ 0 $ 35,000 $ 140,000
Reserved for sales, discounts and
allowances 470,205 105,468 159,000 416,673
--------- --------- ------- --------- ---------
Total $ 645,205 $ 105,468 $ 0 $ 194,000 $ 556,673
</TABLE>
S-1
<PAGE>
ACORN PRODUCTS, INC.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 1, JULY 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 466 $ 76
Accounts receivable 252 265
Prepaids and other 1,658 1,021
--------- --------
Total current assets 2,376 1,362
Property, plant and equipment, net. -- --
Goodwill 6,629 6,446
Other assets (principally investment in and amounts due
from wholly-owned subsidiaries) 56,309 58,196
--------- --------
Total assets $ 65,314 $ 66,004
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,688 $ 1,292
Income taxes payable 142 101
Other current liabilities 260 260
--------- --------
Total current liabilities 2,090 1,653
--------- --------
Total liabilities 2,090 1,653
--------- --------
Stockholders' equity
Common stock 78,391 78,391
Contributed capital - stock options 460 460
Minimum pension liability (133) (285)
Retained earnings (deficit) (15,494) (14,215)
--------- --------
Total stockholders' equity 63,224 64,351
--------- --------
Total liabilities and stockholders' equity $ 65,314 $ 66,004
--------- --------
--------- --------
</TABLE>
S-2
<PAGE>
ACORN PRODUCTS, INC.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONTINUED
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Selling and administrative expenses $ 1,828 $ 1,785 $ 2,625
Interest expense 1,659 4,539 83
Amortization of goodwill 471 183 183
Other (income) expense 1,014 739 (54)
-------- ---------- -------
Loss before equity in earnings of subsidiaries (4,972) (7,246) (2,837)
Equity in earnings (loss) of wholly-owned subsidiaries (2,307) (3,633) 4,346
Income taxes (expense) -- -- (230)
-------- ---------- -------
Net income (loss) $ (7,279) $(10,879) $ 1,279
-------- ---------- -------
-------- ---------- -------
</TABLE>
S-3
<PAGE>
ACORN PRODUCTS, INC.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 2, AUGUST 1, JULY 31,
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash from operating activities $ 5,661 $ (11,405) $ (390)
-------- --------- --------
INVESTING ACTIVITIES:
Property and equipment 7 -- --
FINANCING ACTIVITIES:
Net activity on revolving loan (6,713) (12,537) --
Redemption of subordinated debt -- (31,354) --
Issuance of common stock 87 64,105 --
Retirement of preferred stock -- (8,596) --
-------- --------- --------
(6,626) 11,618 --
-------- --------- --------
Increase (decrease) in cash $ (958) $ 213 $ (390)
-------- --------- --------
-------- --------- --------
</TABLE>
S-4
<PAGE>
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
The Company is a guarantor of the Credit Facility of UnionTools, a
wholly-owned subsidiary. Cash utilized by the Company is provided through
intercompany borrowings and is subject to certain restrictions. See Note 4 to
the Consolidated Financial Statements.
S-5
<PAGE>
EXHIBIT 10.13
MASTER LEASE AGREEMENT
This MASTER LEASE AGREEMENT, dated as of the 4th day of June, 1998 ("Lease
Agreement") is made at Boston, Massachusetts by and between BancBoston
Leasing Inc. ("Lessor"), a Massachusetts corporation with its principal place
of business at 100 Federal Street, Boston, Massachusetts 02110 and Union
Tools, Inc. ("Lessee"), a Delaware with its principal place of business at
500 Dublin Avenue, Columbus, OH 43216-1930.
IN CONSIDERATION OF the mutual promises and covenants contained herein, Lessor
and Lessee hereby agree as follows:
1. Property Leased. At the request of Lessee and subject to the terms
and conditions of this Lease Agreement, Lessor shall lease to Lessee and
Lessee shall lease from Lessor such personal property ("Equipment") as may be
mutually agreed upon by Lessor and Lessee. The Equipment shall be selected
by or ordered at the request of Lessee, identified in one or more equipment
schedules substantially in the form of Exhibit A attached hereto ("Equipment
Schedule") and accepted by Lessee in one or more certificates of acceptance
("Certificate of Acceptance") in the form of Exhibit B attached hereto. Each
Equipment Schedule executed by Lessor and Lessee and each Certificate of
Acceptance executed by Lessee shall constitute a part of this Lease Agreement.
2. Certain Definitions.
2.1 The "Acquisition Cost" shall mean the total cost of the Equipment
paid by Lessor as set forth in the applicable Equipment Schedule.
2.2 The "Commencement Date" shall mean the date on which the Equipment
identified in the applicable Equipment Schedule is accepted and placed in
service by Lessee under this Lease Agreement. Each Commencement Date shall
be evidenced by the Certificate of Acceptance applicable to such Equipment
Schedule.
2.3 The "Rent Start Date" shall mean either (i) the first day of the
month following the month in which the Commencement Date occurs or (ii) the
Commencement Date, if the Commencement Date occurs on the first day of the
month.
2.4 The "Monthly Rent" shall mean the amount set forth in the
applicable Equipment Schedule as Monthly Rent for the Equipment identified on
such Equipment Schedule.
2.5 The "Daily Rent" shall mean one-thirtieth (1/30) of the Monthly
Rent.
2.6 The words "herein", "hereof", and "hereunder" shall refer to this
Lease Agreement as a whole and not to any particular section. All other
capitalized terms defined in this Lease Agreement shall have the meanings
assigned thereto.
3. Initial Term of Lease; Payment of Rent.
3.1 The term of lease for the Equipment ("Initial Term") shall begin on
the Commencement Date set forth in the applicable Certificate of Acceptance
and shall continue during and until the expiration of the number of full
calendar months set forth in the applicable Equipment Schedule, measured from
the Rent Start Date. The Initial Term may not be cancelled or terminated
except as set forth in Section 10.2 below.
3.2 At the expiration of the Initial Term, Lessor and Lessee may extend
the lease of the Equipment for any period as they may agree upon in writing
("Extended Term") at the then fair market rental value of the Equipment, as
determined in good faith by Lessor.
<PAGE>
3.3 Aggregate Daily Rent shall be due and payable by Lessee on the Rent
Start Date in an amount equal to the Daily Rent multiplied by the actual number
of days elapsed from, and including, the Commencement Date to, but excluding,
the Rent Start Date. The Monthly Rent shall be due and payable on the Rent
Start Date and, thereafter on the first day of each month of the Initial Term or
any Extended Term. All Daily Rents and Monthly Rents shall be paid to Lessor at
its office in Boston, Massachusetts.
4. Acceptance of Equipment; Exclusion of Warranties.
4.1 Lessee shall signify its acceptance of the Equipment identified in the
applicable Equipment Schedule by promptly executing and delivering to Lessor a
Certificate of Acceptance. Lessee acknowledges that its execution and delivery
of the Certificate of Acceptance shall conclusively establish, as between Lessor
and Lessee, that the Equipment has been inspected by Lessee, is in good repair
and working order, is of the design, manufacture and capacity selected by
Lessee, and is accepted by Lessee under this Lease Agreement.
4.2 In the event the Equipment is ordered by Lessor from a manufacturer or
supplier at the request of Lessee, Lessor shall not be required to pay the
Acquisition Cost for such Equipment unless and until the applicable Certificate
of Acceptance has been received by Lessor. Lessee hereby agrees to indemnify,
defend and hold Lessor harmless from any liability to any manufacturer or
supplier arising from the failure of Lessee to lease any Equipment which is
ordered by Lessor at the request of Lessee or for which Lessor has assumed an
obligation to purchase.
4.3 Lessor leases the Equipment to Lessee and Lessee leases the Equipment
from Lessor "AS IS" and "WITH ALL FAULTS". Lessee hereby acknowledges that (i)
Lessor is not a manufacturer, supplier or dealer of such Equipment nor an agent
thereof; and (ii) LESSOR HAS NOT MADE, DOES NOT MAKE, AND HEREBY DISCLAIMS ANY
REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE
EQUIPMENT INCLUDING, BUT NOT LIMITED TO, ITS DESIGN, CAPACITY, CONDITION,
MERCHANTABILITY, OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE. Lessee
further acknowledges that Lessor is not responsible for any repairs,
maintenance, service, latent or other defects in the Equipment or in the
operation thereof, or for compliance of any Equipment with requirements of any
laws, ordinances, governmental rules or regulations including, but not limited
to, laws with respect to environmental matters, patent, trademark, copyright or
trade secret infringement, or for any direct or consequential damages arising
out of the use of or inability to use the Equipment.
4.4 Provided no Event of Default, as defined in Section 16 below, has
occurred and is continuing, Lessor agrees to cooperate with Lessee, at the sole
cost and expense of Lessee, in making any claim against a manufacturer or
supplier of the Equipment arising from a defect in such Equipment. At the
request of Lessee, Lessor shall assign to Lessee all warranties on the Equipment
available from any manufacturer or supplier to the full extent permitted by the
terms of such warranties and by applicable law.
5. Ownership; Inspection; Maintenance and Use.
5.1 The Equipment shall at all times be the sole and exclusive property of
Lessor. Any Equipment subject to titling and registration laws shall be titled
and registered by Lessee on behalf of and in the name of Lessor at the sole cost
and expense of Lessee. Lessee shall cooperate with and provide Lessor with any
information or documents necessary for titling and registration of the
Equipment. Upon the request of Lessor, Lessee shall execute any documents or
instruments which may be necessary or appropriate to confirm, to record or to
give notice of the ownership of the Equipment by Lessor including, but not
limited to, financing statements under the Uniform Commercial Code. Lessee, at
the request of Lessor, shall affix to the Equipment, in a conspicuous place, any
label, plaque or other insignia supplied by Lessor designating the ownership of
the Equipment by Lessor.
5.2 The Equipment shall be located at the address specified in the
applicable Equipment Schedule and shall not be removed therefrom without the
prior written consent of Lessor. Lessor, its agents or employees shall have the
right to enter the premises of Lessee, upon reasonable notice and during normal
business hours, for the purpose of inspecting the Equipment.
<PAGE>
5.3 Lessee shall pay all costs, expenses, fees and charges whatsoever
incurred in connection with the use and operation of the Equipment. Lessee
shall, at all times and at its own expense, keep the Equipment in good repair
and working order, reasonable wear and tear excepted. Any maintenance contract
required by a manufacturer or supplier for the care and upkeep of the Equipment
shall be entered into by Lessee at its sole cost and expense. Lessee shall
permit the use and operation of the Equipment only by personnel authorized by
Lessee and shall comply with all laws, ordinances or governmental rules and
regulations relating to the use and operation of the Equipment.
6. Alterations and Modifications. Lessee may make, or cause to be made
on its behalf, any improvement, modification or addition to the Equipment with
the prior written consent of Lessor, provided, however, that such improvement,
modification or addition is readily removable without causing damage to or
impairment of the functional effectiveness of the Equipment. To the extent that
such improvement, modification or addition is not so removable, it shall
immediately become the property of Lessor and thereupon shall be considered
Equipment for all purposes of this Lease Agreement.
7. Quiet Enjoyment; No Defense, Set-Offs or Counterclaims.
7.1 Provided no Event of Default, as defined in Section 16 below, has
occurred and is continuing, Lessee shall have the quiet enjoyment and use of the
Equipment in the ordinary course of its business during the Initial Term or any
Extended Term without interruption by Lessor or any person or entity claiming
through or under Lessor.
7.2 Lessee acknowledges and agrees that ANY DAMAGE TO OR LOSS,
DESTRUCTION, OR UNFITNESS OF, OR DEFECT IN THE EQUIPMENT, OR THE INABILITY OF
LESSEE TO USE THE EQUIPMENT FOR ANY REASON WHATSOEVER, SHALL NOT (i) GIVE RISE
TO ANY DEFENSE, COUNTERCLAIM, OR RIGHT OF SET-OFF AGAINST LESSOR, OR (ii) PERMIT
ANY ABATEMENT OR RECOUPMENT OF, OR REDUCTION IN DAILY OR MONTHLY RENT, OR (iii)
RELIEVE LESSEE OF THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS LEASE AGREEMENT
INCLUDING, BUT NOT LIMITED TO, ITS OBLIGATION TO PAY THE FULL AMOUNT OF DAILY
RENT AND MONTHLY RENT, WHICH OBLIGATIONS ARE ABSOLUTE AND UNCONDITIONAL, unless
and until this Lease Agreement is terminated with respect to such Equipment in
accordance with the provisions of Section 10.2 below. Any claim that Lessee may
have which arises from a defect in or deficiency of the Equipment shall be
brought solely against the manufacturer or supplier of the Equipment and Lessee
shall, notwithstanding any such claim, continue to pay Lessor all amounts due
and to become due under this Lease Agreement.
8. Adverse Claims and Interests.
8.1 Except for any liens, claims, mortgages, pledges, encumbrances or
security interests created by Lessor, Lessee shall keep the Equipment, at all
times, free and clear from all liens, claims, mortgages, pledges, encumbrances
and security interests and from all levies, seizures and attachments. Without
limitation of the covenants and obligations of Lessee set forth in the preceding
sentence, Lessee shall immediately notify Lessor in writing of the imposition of
any prohibited lien, claim, levy or attachment on or seizure of the Equipment at
which time Lessee shall provide Lessor with all relevant information in
connection therewith.
8.2 Lessee agrees that the Equipment shall be and at all times shall
remain personal property. Accordingly, Lessee shall take such steps as may be
necessary to prevent any person from acquiring, having or retaining any rights
in or to the Equipment by reason of its being affixed or attached to real
property.
9. Indemnities; Payment of Taxes.
9.1 Lessee hereby agrees to indemnify, defend and hold harmless Lessor,
its agents, employees, successors and assigns from and against any and all
claims, actions, suits, proceedings, costs, expenses, damages and liabilities
whatsoever arising out of or in connection with the manufacture, ordering,
selection, specifications, availability, delivery, titling, registration,
rejection, installation, possession, maintenance, ownership, use, leasing,
operation or return of the Equipment including, but not limited to, any claim or
demand based upon any STRICT OR ABSOLUTE LIABILITY IN TORT and upon any
infringement or alleged infringement of any patent, trademark, trade secret,
license,
<PAGE>
copyright or otherwise. All costs and expenses incurred by Lessor in connection
with any of the foregoing including, but not limited to, reasonable legal fees,
shall be paid by Lessee on demand.
9.2 Lessee hereby agrees to indemnify, defend and hold Lessor harmless
against all Federal, state and local taxes, assessments, licenses, withholdings,
levies, imposts, duties, assessments, excise taxes, registration fees and other
governmental fees and charges whatsoever, which are imposed, assessed or levied
on or with respect to the Equipment or its use or related in any way to this
Lease Agreement ("Tax Assessments") except for taxes on or measured by the net
income of Lessor determined substantially in the same manner as under the
Internal Revenue Code of 1986, as amended. Lessee shall file all returns,
reports or other such documents required in connection with the Tax Assessments
and shall provide Lessor with copies thereof. If, under local law or custom,
Lessee is not authorized to make the filings required by a taxing authority,
Lessee shall notify Lessor in writing and Lessor shall thereupon file such
returns, reports or documents. Without limiting any of the foregoing, Lessee
shall indemnity, defend and hold Lessor harmless from all penalties, fines,
interest payments, claims and expenses including, but not limited to, reasonable
legal fees, arising from any failure of Lessee to comply with the requirements
of this Section 9.2.
9.3 The obligations and indemnities of Lessee under this Section 9 for
events occurring or arising during the Initial Term or any Extended Term shall
continue in full force and effect, notwithstanding the expiration or other
termination of this Lease Agreement.
10. Risk of Loss; Loss of Equipment.
10.1 Lessee hereby assumes and shall bear the entire risk of loss for
theft, damage, seizure, condemnation, destruction or other injury whatsoever to
the Equipment from any and every cause whatsoever. Such risk of loss shall be
deemed to have been assumed by Lessee from and after such risk passes from the
manufacturer or supplier by agreement or pursuant to applicable law.
10.2 In the event of any loss, seizure, condemnation or destruction of the
Equipment or damage to the Equipment which cannot be repaired by Lessee, Lessee
shall immediately notify Lessor in writing. Within thirty (30) days of such
notice, during which time Lessee shall continue to pay Monthly Rent, Lessee
shall, at the option of Lessor, either (i) replace the Equipment with equipment
of the same type and manufacture and in good repair, condition and working
order, transfer title to such equipment to Lessor free and clear of all liens,
claims and encumbrances, whereupon such equipment shall be deemed Equipment for
all purposes of this Lease Agreement, or (ii) pay to Lessor an amount equal to
the present value of both the aggregate of the remaining unpaid Monthly Rents
and the anticipated residual value of the Equipment plus any other costs
actually incurred by Lessor. Lessor and Lessee agree that the residual value of
the Equipment at the expiration of the Initial Term is reasonably anticipated to
be not less than twenty (20) percent of the Acquisition Cost of the Equipment.
The present value shall be determined by discounting the aggregate of the
remaining unpaid Monthly Rents and the anticipated residual value of the
Equipment to the date of payment by Lessee at the rate of five (5) percent per
annum. When and as requested by Lessor, Lessee shall also pay to Lessor amounts
due pursuant to Section 18 below, if any, arising as a result of the loss,
seizure, replacement, condemnation or destruction of the Equipment. Any
insurance or condemnation proceeds received by Lessor shall be credited to the
obligation of Lessee under this Section 10.2 and the remainder of such proceeds,
if any, shall be paid to Lessee by Lessor in full compensation for the loss of
the leasehold interest in the Equipment by Lessee.
10.3 Upon any replacement of or payment for the Equipment as provided in
Section 10.2 above, this Lease Agreement shall terminate only with respect to
the Equipment so replaced or paid for, and Lessor shall transfer to Lessee title
only to such Equipment "AS IS", "WITH ALL FAULTS", and WITH NO WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE.
Lessee shall pay any sales or use taxes due on such transfer.
11. Insurance.
11.1 Lessee shall keep the Equipment insured against all risks of loss or
damage from every cause whatsoever occurring during the Initial Term, or any
Extended Term for an amount not less than the higher of the full replacement
<PAGE>
value of the Equipment or the aggregate of unpaid Daily Rent and Monthly Rent
for the balance of the Initial Term, or the Extended Term. Lessee shall also
carry public liability insurance, both personal injury and property damage,
covering the Equipment, and Lessee shall be liable for any deductible portions
of all required insurance.
11.2 All insurance required under this Section 11 shall name Lessor as
additional insured and loss payee. Such insurance shall also be with such
insurers and shall be in such forms and amounts as are satisfactory to Lessor.
All applicable policies shall provide that no act, omission or breach of
warranty by Lessee shall give rise to any defense against payment of the
insurance proceeds to Lessor. Lessee shall pay the premiums for such insurance
and, at the request of Lessor, deliver to Lessor duplicates of such policies or
other evidence satisfactory to Lessor of such insurance coverage. In any event,
Lessee shall provide Lessor with endorsements upon the policies issued by the
insurers which evidence the existence of insurance coverage required by this
Section 11 and by which the insurers agree to give Lessor written notice at
least twenty (20) days prior to the effective date of any expiration,
modification, reduction, termination or cancellation of any such policies.
11.3 The proceeds of insurance required under this Section 11 and payable
as a result of loss or damage to the Equipment shall be applied as set forth in
Section 10.2 above. Upon the occurrence of an Event of Default as defined in
Section 16 below, Lessee hereby irrevocably appoints Lessor as its
attorney-in-fact, which power shall be deemed coupled with an interest, to make
claim for, receive payment of, execute and endorse all documents, checks or
drafts received in payment for loss or damage under any insurance policies
required by this Section 11.
11.4 Notwithstanding anything herein, Lessor shall not be under any duty to
examine any evidence of insurance furnished hereunder, or to ascertain the
existence of any policy or coverage, or to advise Lessee of any failure to
comply with the provisions of this Section 11.
12. Surrender To Lessor. Immediately upon the expiration of the Initial
Term or any Extended Term or at any other termination of this Lease Agreement,
Lessee shall surrender the Equipment to Lessor in good repair and working order,
reasonable wear and tear excepted, by assembling and delivering the Equipment,
ready for shipment, to a place or carrier, as Lessor may designate, within the
state in which the Equipment was originally delivered to Lessee or to which the
Equipment was thereafter moved with the written consent of Lessor. All costs of
removal, assembly, packing and delivery of such Equipment to the place
designated by Lessor shall be borne by Lessee.
13. Fair Market Value Purchase Option. Lessor hereby grants to Lessee
the option to purchase all, but not less than all, Equipment set forth on any
Equipment Schedule at the expiration of the applicable Initial Term or
Extended Term. Any such purchase shall be for cash in an amount equal to the
then fair market value of such Equipment, as determined in good faith by
Lessor. This purchase option may be exercised by Lessee, provided that no
Event of Default, as defined in Section 16 below, has occurred and is
continuing. Lessee shall notify Lessor in writing of its intention to
exercise its purchase option at least thirty (30) days prior to the
expiration of the Initial Term or any Extended Term. Upon payment of the
fair market value by Lessee to Lessor, Lessor shall transfer title to the
Equipment to Lessee "AS IS", "WITH ALL FAULTS", and WITH NO WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY PARTICULAR
PURPOSE.
14. Financial Statements. Lessee shall annually, within ninety (90) days
after the close of the fiscal year for Lessee, furnish to Lessor financial
statements of Lessee, including a balance sheet as of the close of such year and
statements of income and retained earnings for such year, prepared in accordance
with generally accepted accounting principles, consistently applied from year to
year, and certified by independent public accountants for Lessee. If requested
by Lessor, Lessee shall also provide quarterly financial statements of Lessee,
similarly prepared for each of the first three quarters of each fiscal year,
certified (subject to normal year-end audit adjustments) by the chief financial
officer of Lessee and furnished to Lessor within sixty (60) days following the
end of the quarter, and such other financial information as may be reasonably
requested by Lessor.
15. Delayed Payment Charge. Lessee shall pay to Lessor interest upon the
amount of any Daily Rent, Monthly Rent or other sums not paid by Lessee when due
and owing under this Lease Agreement, from the due date thereof until
<PAGE>
paid, at the rate of one and one half (1 1/2) percent per month, but if such
rate violates applicable law, then the maximum rate of interest allowed by such
law.
16. Default.
16.1 The occurrence of any of the following events shall constitute an
event of default ("Event of Default") under this Lease Agreement.
(a) Lessee fails to pay any Daily Rent or any Monthly Rent when due and such
failure to pay continues for ten (10) consecutive days; or
(b) Lessee fails to pay any other sum required hereunder, and such failure
continues for a period of ten (10) days following written notice from Lessor; or
(c) Lessee fails to maintain the insurance as required by Section 11 above and
such failure continues for ten (10) days after written notice from Lessor; or
(d) Lessee violates or fails to perform any other term, covenant or condition
of this Lease Agreement or any other document, agreement or instrument executed
pursuant hereto or in connection herewith, which failure is not cured within
thirty (30) days after written notice from Lessor; or
(e) Lessee ceases to exist or terminates its independent operations by reason
of any discontinuance, dissolution, liquidation, merger, sale of substantially
all of its assets, or otherwise ceases doing business as a going concern; or
(f) Lessee (i) applies for or consents to the appointment of, or the taking of
possession by, a receiver, custodian, trustee, liquidator or similar official
for itself or for all or a substantial part of its property, (ii) is generally
not paying its debts as such debts become due, (iii) makes a general assignment
for the benefit of its creditors, (iv) commences a voluntary case under the
United States Bankruptcy Code, as now or hereafter in effect, seeking
liquidation, reorganization or other relief with respect to itself or its debts,
(v) files a petition seeking to take advantage of any other law providing for
the relief of debtors, (vi) takes any action under the laws of its jurisdiction
of incorporation or organization similar to any of the foregoing, or (vii) takes
any corporate action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case is commenced, without the application or consent of
Lessee, in any court of competent jurisdiction, seeking (i) the liquidation,
reorganization, dissolution, winding up of Lessee or composition or readjustment
of the debts of Lessee, (ii) the appointment of a trustee, receiver, custodian,
liquidator or similar official for Lessee or for all or any substantial part of
its assets, or (iii) similar relief with respect to Lessee under any law
providing for the relief of debtors; or an order for relief is entered with
respect to Lessee in an involuntary case under the United States Bankruptcy
Code, as now or hereafter in effect, or an action under the laws of the
jurisdiction of incorporation or organization of Lessee, similar to any of the
foregoing, is taken with respect to Lessee without its application or consent;
or
(h) Lessee makes any representation or warranty herein or in any statement or
certificate at any time given in writing pursuant to or in connection with this
Lease Agreement, which is false or misleading in any material respect; or
(i) Lessee defaults under any promissory note, credit agreement, loan
agreement, conditional sales contract, guaranty, lease, indenture, bond,
debenture or other material obligation whatsoever, and a party thereto or a
holder thereof is entitled to accelerate the obligations of Lessee thereunder;
or Lessee defaults in meeting any of its trade, tax or other current obligations
as they mature, unless such obligations are being contested diligently and in
good faith; or
(j) Any party to any guaranty, letter of credit, subordination or credit
agreement or other undertaking, given for the benefit of Lessor and obtained in
connection with this Lease Agreement, breaches, fails to continue, contests, or
purports to terminate or to disclaim such guaranty, letter of credit,
subordination or credit agreement or other undertaking; or such guaranty, letter
of credit, subordination agreement or other undertaking becomes unenforceable;
or a guarantor of this Lease Agreement shall die, cease to exist or terminate
its independent operations.
<PAGE>
16.2 No waiver by Lessor of any Event of Default shall constitute a waiver
of any other Event of Default or of the same Event of Default at any other time.
17. Remedies.
17.1 Upon the occurrence of an Event of Default and while such Event of
Default is continuing, Lessor, at its sole option, upon its declaration, and to
the extent not inconsistent with applicable law, may exercise any one or more of
the following remedies:
(a) Lessor may terminate this Lease Agreement whereupon all rights of Lessee to
the quiet enjoyment and use of the Equipment shall cease;
(b) Whether or not this Lease Agreement is terminated, Lessor may cause Lessee,
at the sole cost and expense of Lessee, to return any or all of the Equipment
promptly to the possession of Lessor in good repair and working order,
reasonable wear and tear excepted. Lessor, at its sole option and through its
employees, agents or contractors, may peaceably enter upon the premises where
the Equipment is located and take immediate possession of and remove the
Equipment, all without liability to Lessor, its employees, agents or contractors
for such entry. LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHTS TO NOTICE AND/OR HEARING PRIOR TO THE REPOSSESSION OR
REPLEVIN OF THE EQUIPMENT BY LESSOR, ITS EMPLOYEES, AGENTS OR CONTRACTORS;
(c) Lessor may proceed by court action to enforce performance by Lessee of this
Lease Agreement or pursue any other remedy Lessor may have hereunder, at law, in
equity or under any applicable statute, and recover such other actual damages as
may be incurred by Lessor;
(d) Lessor may recover from Lessee damages, not as a penalty but as liquidation
for all purposes and without limitation of any other amounts due from Lessee
under this Lease Agreement, in an amount equal to the sum of (i) any unpaid
Daily Rents and/or Monthly Rents due and payable for periods prior to the
repossession of the Equipment by Lessor plus any interest due thereon pursuant
to Section 15 above, (ii) the present value of all future Monthly Rents required
to be paid over the remaining Initial Term or any Extended Term after
repossession of the Equipment by Lessor, determined by discounting such future
Monthly Rents to the date of payment by Lessee at a rate of five (5) percent per
annum, and (iii) all costs and expenses incurred in searching for, taking,
removing, storing, repairing, restoring, refurbishing and leasing or selling
such Equipment; or
(e) Lessor may sell, lease or otherwise dispose of any or all of the Equipment,
whether or not in the possession of Lessor, at public or private sale and with
or without notice to Lessee, which notice is hereby expressly waived by Lessee,
to the extent permitted by and not inconsistent with applicable law. Lessor
shall then apply against the obligations of Lessee hereunder the net proceeds of
such sale, lease or other disposition, after deducting therefrom (i) the present
value of the residual value of the Equipment at the expiration of the Initial
Term, which is anticipated by Lessor and Lessee to be not less than twenty (20)
percent of the Acquisition Cost, such present value to be determined by
discounting the residual value to the date of sale, lease or other disposition
at a rate of five (5) percent per annum, and (ii) all costs incurred by Lessor
in connection with such sale, lease or other disposition including, but not
limited to, costs of transportation, repossession, storage, refurbishing,
advertising or other fees. Lessee shall remain liable for any deficiency, and
any excess of such proceeds over the total obligations owed by Lessee shall be
retained by Lessor. If any notice of such sale, lease or other disposition of
the Equipment is required by applicable law, ten (10) days written notice to
Lessee shall be deemed reasonable.
17.2 No failure on the part of Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or remedy hereunder shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
Each right and remedy provided hereunder is cumulative and not exclusive of any
other right or remedy including, without limitation, any right or remedy
available to Lessor at law, by statute or in equity.
<PAGE>
17.3 Lessee shall pay all costs and expenses including, but not limited to,
reasonable legal fees incurred by Lessor arising out of or in connection with
any Event of Default or this Lease Agreement. Lessee shall also be liable for
any amounts due and payable to Lessor under any other provision of this Lease
Agreement including, but not limited to, amounts due and payable under Section
18 below.
18. Tax Indemnification.
18.1 Lessee represents and warrants that the Equipment is and will
remain, during the entire Initial Term and any Extended Term, property used
in a trade or business or for the production of income within the meaning of
Section 167 of the Internal Revenue Code of 1986, as amended ("Code").
Lessee further acknowledges and agrees that, pursuant to the Code, Lessor or
its affiliated group, as defined in Section 1504 of the Code ("Affiliated
Group"), shall be entitled to deductions for the recovery of the Acquisition
Cost of the Equipment over the recovery period as set forth in the applicable
Equipment Schedule, using the Accelerated Cost Recovery System as provided by
Section 168 (b) (1) of the Code ("ACRS Deductions").
18.2 If as a result of any reason or circumstance whatsoever, except as
specifically set forth in Section 18.3 below, Lessor or its Affiliated Group
shall not be entitled to, shall not be allowed, shall suffer recapture of or
shall lose any ACRS Deductions, then Lessee shall pay to Lessor, upon demand, a
sum to be computed by Lessor in the following manner. Such sum, after deduction
of all federal, state and local income taxes payable by Lessor as a result of
the receipt of such sum, shall be sufficient to restore Lessor or its Affiliated
Group to substantially the same position, on an after-tax basis, as it would
have been in but for the loss of such ACRS Deductions. In making its
computation, Lessor or its Affiliated Group shall Considers but shall not be
limited to, the following factors: (i) the amounts and timing of any net loss of
tax benefits resulting from any such lack of, entitlement to or loss, recapture,
or disallowance of ACRS Deductions but offset by any tax benefits derived from
any depreciation or other capital recovery deductions or exclusions from income
allowed to Lessor or its Affiliated Group with respect to the same Equipment;
(ii) penalties, interest or other charges imposed; (iii) differences in tax
years involved; and (iv) the time value of money at a reasonable rate
determined, in good faith, by Lessor. For purposes of computation only, the
amount of indemnification payments hereunder shall be calculated on the
assumption that Lessor and its Affiliated Group have or will have, in all tax
years involved, sufficient taxable income and the tax liability to realize all
tax benefits and incur all losses of tax benefits at the highest marginal
Federal corporate income tax rate in each year. Upon request, Lessor shall
provide Lessee with the methods of computation used in determining any sum that
may be due and payable by Lessee under this Section 18.
18.3 Lessee shall not be obligated to pay any sums required under this
Section 18 in the event that lack of entitlement to, or loss, recapture or
disallowance of any ACRS Deductions results from one or more of the following
events: (i) a disqualifying disposition due to the sale of the Equipment by
Lessor when no Event of Default, as defined in Section 16 above, has occurred,
(ii) a failure of Lessor or its Affiliated Group to timely claim any ACRS
Deductions for the Equipment in its tax return, and/or (iii) the fact that
Lessor or its Affiliated Group does not have, in any taxable year or years,
sufficient taxable income or tax liability to realize the benefit of any ACRS
Deductions that are otherwise allowable to Lessor or its Affiliated Group.
18.4 The representations, obligations and indemnities of Lessee under this
Section 18 shall continue in full force and effect, notwithstanding the
expiration or other termination of this Lease Agreement.
19. Assignment; Sublease.
19.1 Lessor may sell, assign or otherwise transfer all or any
part of its right, title and interest in and to the Equipment and/or this Lease
Agreement to a third-party assignee, subject to the terms and conditions of this
Lease Agreement including, but not limited to, the right to the quiet enjoyment
of the Equipment by Lessee as set forth in Section 7.1 above. Such assignee
shall assume all of the rights and obligations of Lessor under this Lease
Agreement and shall relieve Lessor therefrom. Thereafter, all references to
Lessor herein shall mean such assignee. Notwithstanding any such sale,
assignment or transfer, the obligations hereunder shall remain absolute and
unconditional as set forth in Section 7.2 above.
<PAGE>
19.2 Lessor may also pledge, mortgage or grant a security interest in the
Equipment and assign this Lease Agreement as collateral. Each such pledgee,
mortgagee, lienholder or assignee shall have any and all rights as may be
assigned by Lessor but none of the obligations of Lessor hereunder. Any pledge,
mortgage or grant of security interest in the Equipment or assignment of this
Lease Agreement shall be subject to the terms and conditions hereof including,
but not limited to, the right to the quiet enjoyment of the Equipment by Lessee
as set forth in Section 7.1 above. Lessor, by reason of such pledge, mortgage,
grant of security interest or collateral assignment, shall not be relieved of
any of its obligations hereunder which shall remain absolute and unconditional
as set forth in Section 7.2 above. Upon the written request of Lessor, Lessee
shall acknowledge such obligations the pledgee, mortgagee, lienholder or
assignee.
19.3 LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR PLEDGE
ANY OF ITS INTEREST IN THIS LEASE AGREEMENT OR ANY OF THE EQUIPMENT, WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR. Any such sale, transfer, assignment, sublease,
conveyance or pledge, whether by operation of law or otherwise, without the
prior written consent of Lessor, shall be void.
20. Optional Performance By Lessor. If an Event of Default, as defined in
Section 16 above, occurs and is continuing, Lessor in its sole discretion may
pay or perform such obligation in whole or in part, without thereby becoming
obligated to pay or to perform the same on any other occasion or to pay any
other obligation of Lessee. Any payment or performance by Lessor shall not be
deemed to cure any Event of Default hereunder. Upon such payment or performance
by Lessor, Lessee shall pay forthwith to Lessor the amount of such payment or an
amount equal to all costs and expenses of such performance, as well as any
delayed payment charges on such amounts as set forth in Section 15 above.
21. Compliance and Approvals. Lessee warrants and agrees that this Lease
Agreement and the performance by Lessee of all of its obligations hereunder have
been duly authorized, do not and will not conflict with any provision of the
charter or bylaws of Lessee or of any agreement, indenture, lease or other
instrument to which Lessee is a party or by which Lessee or any of its property
is or may be bound. Lessee warrants and agrees that this Lease Agreement does
not and will not require any governmental authorization, approval, license or
consent except those which have been duly obtained and will remain in effect
during the entire Initial Term and any Extended Term.
22. Miscellaneous.
22.1 The section headings are inserted herein for convenience of reference
and are not part of and shall not affect the meaning or interpretation of this
Lease Agreement.
22.2 Any provision of this Lease Agreement which is unenforceable in whole
or in part in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such unenforceability without invalidating any remaining
part or other provision hereof and shall not be affected in any manner by reason
of such enforceability in any other jurisdiction. The validity and
interpretation of this Lease Agreement and the rights and obligations of the
parties hereto shall be governed in all respects by the laws of The Commonwealth
of Massachusetts without giving effect to the conflicts of laws provisions
thereof.
22.3 This Lease Agreement, including all Equipment Schedules and
Certificates of Acceptance, constitutes the entire agreement between Lessor and
Lessee. Lessor and Lessee agree that this Lease Agreement shall not be amended,
altered or changed except by a written agreement signed by the parties hereto.
LESSEE ACKNOWLEDGES THAT THERE HAVE BEEN NO REPRESENTATIONS, EXPRESS OR IMPLIED,
BY LESSOR OTHER THAN AS SET FORTH HEREIN AND LESSEE EXPRESSLY CONFIRMS THAT IT
HAS NOT RELIED UPON ANY REPRESENTATIONS BY LESSOR, EXCEPT THOSE SET FORTH
HEREIN, AS A BASIS FOR ENTERING INTO THIS LEASE AGREEMENT.
22.4 Any notice required to be given by Lessee or Lessor hereunder shall be
deemed adequately given if sent by registered or certified mail, return receipt
requested, to the other party at their respective addresses stated herein or at
such other place as either party may designate in writing to the other.
<PAGE>
22.5 Lessee agrees to execute and deliver such additional documents and
to perform such further acts as may be reasonably requested by Lessor in
order to carry out and effectuate the purposes of this Lease Agreement. Upon
the written request of Lessor, Lessee further agrees to execute any
instrument necessary for filing or recording this Lease Agreement or to
confirm the ownership of the Equipment by Lessor. Lessor is hereby
authorized to insert in any Equipment Schedule the serial numbers of the
Equipment and other identifying marks or similar information and to sign, on
behalf of Lessee, any Uniform Commercial Code financing statements.
22.6 This Lease Agreement cannot be cancelled or terminated except as
expressly provided herein.
22.7 Whenever the context of this Lease Agreement requires, the singular
includes the plural and the plural includes the singular. Whenever the word
Lessor is used herein, it includes all assignees and successors in interest of
Lessor. If more than one Lessee are named in this Lease Agreement, the
liability of each shall be joint and several.
22.8 All agreements, indemnities, representations and warranties of Lessee
made herein and all rights and remedies of Lessor shall survive the expiration
or other termination of this Lease Agreement, whether or not expressly provided
herein.
22.9 Any waiver of any power, right, remedy or privilege of Lessor
hereunder shall not be effective unless in writing signed by Lessor.
22.10 This Lease Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee, each by its duly authorized officer or
agent, have duly executed and delivered this Lease Agreement, which is intended
to take effect as a sealed instrument, as of the day and year first written
above.
Accepted at Boston, Massachusetts
BANCBOSTON LEASING INC. UnionTools, Inc.
By: /s/ Stephen McCarthy By: /s/ Stephen M. Kasprisin
--------------------------- ----------------------------
Title: Associate Vice President Title: Vice President - CFO
------------------------- --------------------------
<PAGE>
EXHIBIT 10.14
RIDER NO. 1
To
MASTER LEASE AGREEMENT
Dated As of June 4, 1998
This Rider No. 1 ("Rider") is entered into between BANCBOSTON
LEASING INC. ("Lessor") and UNION TOOLS, INC. a Delaware
corporation("Lessee"), is contemporaneous with and amends the terms and
conditions of the above-referenced Master Lease Agreement (the "Master
Agreement") between Lessor and Lessee. It is the intention of Lessor and
Lessee that, upon execution, this Rider shall constitute a part of the Master
Agreement.
IN CONSIDERATION OF the mutual covenants and promises as hereinafter
set forth, Lessor and Lessee hereby agree as follows:
1. All capitalized terms used in the Rider shall, unless otherwise
defined, have the meanings set forth in the Master Agreement.
2. In Section 2.1 of the Master Agreement delete the word "The" before
"Acquisition Cost".
3. As new Section 2.2 of the Master Agreement insert the following:
"2.2 "Appraisal Procedure" means the determination of the
fair market value by an independent appraiser acceptable to Lessor and
Lessee, or if the parties are unable to agree on an acceptable appraiser, by
averaging the valuation (disregarding the one which differs the most from the
other two) of three independent appraisers, the first appointed by Lessor,
the second appointed by Lessee and the third appointed by the first two
appraisers. The expenses and fees of any appraisal shall be paid by Lessee."
4. Original Section 2.2 of the Master Agreement is re-numbered as Section
2.3.
5. In re-numbered Section 2.3 of the Master Agreement delete the word
"The" before "Commencement Date".
6. As new Section 2.4 of the Master Agreement insert the following:
"2.4 "Fair market" value shall mean the amount which would be
paid for an item of Equipment by an informed and willing buyer (other than a
used equipment or scrap dealer) to an informed and willing seller, neither
under a compulsion to buy or sell. For the purpose of the purchase option of
Lessee, the determination of the "fair market value" of any of the Equipment
shall be determined (1) by subtracting therefrom customary costs of
dismantling or removal from the location of use, and (2) on the assumption
that the Equipment is in the condition required by the return and maintenance
provisions of this Master Agreement, and (3) by mutual agreement of Lessee
and Lessor, or if Lessor and Lessee are not able to agree on such value, by
the Appraisal Procedure. For the purposes of the "Remedies" section of the
Master Agreement (Section 17), the fair market value shall be determined by
Lessor in good faith on an "as-is, where is" basis, without regard to
subclauses (1), (2) and or (3) of this definition. Lessee shall pay all fees,
costs and expenses of the appraisers. Lessor and Lessee anticipate that the
fair market value of the Equipment at the expiration of the Initial Term
shall be not less than twenty (20) percent of the Acquisition Cost."
7. Original Section 2.3 of the Master Agreement is re-numbered as Section
2.5.
8. In re-numbered Section 2.5 of the Master Agreement delete the word
"The" before "Rent Start Date".
9. Original Section 2.4 of the Master Agreement is re-numbered as Section
2.6.
10. In re-numbered Section 2.6 of the Master Agreement delete the word
"The" before "Monthly Rent".
<PAGE>
11. Original Section 2.5 is re-numbered as Section 2.7.
12. In re-numbered Section 2.7 of the Master Agreement delete the word
"The" before "Daily Rent".
13. As new Section 2.8 of the Master Agreement insert the following:
"2.8 The word "writing" shall include facsimile transmission,
electronic messaging, correspondence delivered by U.S. Mail and other
delivery services, and any other common and ordinary means of written
communication".
14. Original Section 2.6 of the Master Agreement is re-numbered as Section
2.9.
15. Section 3.2 of the Master Agreement is deleted in its entirety and is
replaced by new Section 3.2 in Rider No. 1 to Equipment Schedule No. 1 to the
Master Agreement.
16. At the end of Section 4.2 of the Maser Agreement, delete the period and add
the following clause: ", provided, however, Lessor shall not pay any invoice
relating to the Equipment unless the Purchase Order therefor has been authorized
in writing by the Lessee."
17. In Section 5.2 of the Master Agreement after the word "Lessor" in the
first sentence insert the words "which shall not be unreasonably withheld";
and after the word "reasonable" in the second sentence insert the words
"advance written".
18. Section 5.3 of the Master Agreement is deleted in its entirety and is
replaced by new Section 5.3 in Rider No. 1 to Equipment Schedule No. 1 to the
Master Agreement.
19. In Section 7.2, line 3 of the Master Agreement delete the word
"WHATSOEVER" after the word "REASON" and replace it with the following:
"OTHER THAN LESSOR'S GROSS NEGLIGENCE OR MALFEASANCE".
20. In Section 8.1, line 2 of the Master Agreement after the word
"created" insert the words "or consented to".
21. In Section 8.2, line 2 of the Master Agreement after the word
"steps" insert the following: "(and Lessor shall cooperate with Lessee)".
22. In Section 9.1, line 8 of the Master Agreement after the word
"otherwise" insert the following: ", other than claims arising from Lessor's
gross negligence or malfeasance".
23. In Section 9.2, line 5 of the Master Agreement delete the words "("Tax
Assessments") except for" and replace them with the word "excluding".
24. In Section 9.2, line 6 of the Master Agreement delete the words
"substantially in the same manner as".
25. In Section 9.2, line 6 of the Master Agreement after the word
"amended" insert the following: "or any applicable state, local, or foreign
income tax laws or regulations) (collectively the "Tax Assessments")".
26. In Section 9.2, line 12 of the Master Agreement after the word
"arising" insert the word "solely".
27. In Section 10.2 of the Master Agreement, delete subsection (ii) and
the remaining portion of Section 10.2 that appears thereafter, and substitute
the following:
"(ii) terminate this Master Agreement with respect to such
Equipment by paying to Lessor the stipulated loss value ("Stipulated Loss
Value") as defined in Exhibit A, which is attached to each Equipment
Schedule, for the date, appearing on such Exhibit, which next follows the
date on which the Equipment is lost, seized, condemned, destroyed or damaged
("Stipulated Loss Payment Date"). Upon payment of the Stipulated Loss Value
and any Monthly Rent or other sums due and owing by Lessee to Lessor, the
Master Agreement shall terminate with respect to such Equipment and all
right, title and interest of Lessor in and to the Equipment shall vest in
Lessee. Any insurance proceeds or awards relating to
<PAGE>
the loss, seizure, condemnation or destruction of or damage to the Equipment,
which are paid directly to Lessor, shall either be credited or paid over by
Lessor to Lessee up to the amount of any Stipulated Loss Value, either payable
or paid by Lessee.
"Any amounts paid by Lessee as a Stipulated Loss Value under this
Section 10.2 shall not be available to Lessee for the lease of additional
Equipment under the Master Agreement."
28. in Section 11.1, line 4 of the Master Agreement, after the words
"Extended Term", add the following parenthetical "(but in no event shall the
Lessee be required to insure the Equipment for more than its fair market
value or insure the Equipment against risks not customary to Lessee in
Lessees business)."
29. Section 12 of the Master Agreement is deleted in its entirety and
is replaced by new Section 12 in Rider No. 1 to Equipment Schedule No. 1 to
the Master Agreement.
30. In Section 13, line 4 of the Master Agreement delete the words "good
faith by Lessor" and replace them with the following: "accordance with the
provisions hereof."
31. In Section 16.1(f), line 2 of the Master Agreement delete the words
"a substantial part" and replace them with "substantially all".
32. In Section 16.1(g), line 2 of the Master Agreement after the word
"jurisdiction", insert the words "and the same is not dismissed or discharged
within 90 days thereafter".
33. In Section 16.1(g), line 5 of the Master Agreement delete the words
"any substantial part" and replace them with "substantially all".
34. Replace Section 16.1 (i) with the following:
(i) Lessee defaults under any promissory note, credit agreement,
loan agreement, conditional sales contract, guaranty, lease, indenture, bond,
debenture involving in excess of $5,000,000.00, and a party thereto or a
holder thereof has accelerated the obligations of Lessee thereunder.; or
35. Delete Section 16.1 (j)
36. Replace Section 17.1 (d) (ii) with the following:
"(ii) the Stipulated Loss Values as of the date of such Event of
Default corresponding with the applicable Stipulated Loss Payment Date set
forth on Exhibit A to the applicable Equipment Schedule..."
37 Replace Section 17.1 (e) ( i) with the following:
"(i) the Stipulated Loss Values as of the date of such Event of
Default corresponding with the applicable Stipulated Loss Payment Date set
forth on Exhibit A to the applicable Equipment Schedule..."
38. In Section 17.1(d), line 10 of the Master Agreement after the word
Equipment insert the following: "minus the fair market value of the Equipment
recovered by Lessor".
40. In Section 17.3, line 1 of the Master Agreement after the word "all"
insert the word "reasonable".
41. In Section 18.2, line 8 of the Master Agreement change the word
"Considers" to "consider" and add the following:
<PAGE>
After written notice from Lessor of a sum due under this Section
18, Lessee shall pay to Lessor the amount so computed as an indemnity under
this Section 18 under either of the following methods as Lessee may elect:
(i) a single payment on the next date Monthly Rent is due; or (ii) equal
additions to the Monthly Rent over then-remaining term of this Lease
Agreement, provided such additions shall have the present value of the amount
computed as an indemnity under this Section 18. The present value shall be
computed by discounting the rent additions at a rate of interest acceptable
and agreed to both Lessee and Lessor."
42. In Section 18.2, line 18 of the Master Agreement after the word
"with" insert the words a "written description of".
43. In Section 18.3, line 8 of the Master Agreement after the word
"Group" insert the following: "(iv) or any other action or inaction of Lessor
which results in a loss, recapture or disallowance of any ACRS deductions".
44. As new Sections 18.5 and 18.6 of the Master Agreement insert the
following:
"18.5 (a) Upon receipt by Lessor of written advice from the
Internal Revenue Service of a proposed disallowance or adjustment which gives
rise to an indemnity obligation under this Section 18 (the "Claim"), Lessor
will notify Lessee in writing. Upon the written request of Lessee which must
be received by Lessor within 45 days of such notice, Lessor shall contest the
Claim provided that (i) an Event of Default under Section 16 of this Lease
Agreement has not occurred and is continuing, (ii) Lessee has furnished
Lessor with a written opinion of independent tax counsel acceptable to Lessor
to the effect that there is a meritorious defense to the Claim and the
success for such defense is more likely than not, and (iii) Lessee shall have
agreed, in writing, to pay Lessor, on demand and regardless of the outcome,
all expenses which Lessor may incur in contesting the Claim including,
without limitation, legal and accounting fees. Lessor shall, thereupon,
contest the Claim in any permissible forum selected by Lessor either by
resisting payment of the Claim or by making payment of the Claim and suing
for a refund. If Lessor determines to pay the Claim and sue for a refund,
Lessee shall, within 10 days of Lessor's written request, pay to Lessor an
amount equal to the sum, on an after-tax basis, of the Claim which the
Internal Revenue Service requires to be paid. During any proceedings in
connection with the Claim, Lessor shall control all negotiations and
litigation but shall, from time to time, consult with Lessee or its counsel.
Upon any adverse decision on the Claim in the forum chosen by Lessor, Lessor
shall institute an appeal if requested to do so by Lessee provided that
independent tax counsel acceptable to Lessor furnishes Lessor with a written
opinion to the effect that there is a meritorious basis for an appeal and the
success for such appeal is more likely than not. Notwithstanding the
foregoing, Lessor shall not be obligated to appeal any such adverse decision
beyond the United States District Courts or the United States Tax Court.
(b) A "Final Determination" of the Claim means a final
decision of the Internal Revenue Service or a court of competent jurisdiction
after all contests or appeals requested by Lessee pursuant to Section 18.5(a)
have been either exhausted or terminated as may be agreed upon by Lessor and
Lessee. If the Final Determination of the Claim is all or partly adverse to
Lessor, the liability of Lessee to indemnify Lessor shall be fixed and
payable as provided in Section 18.4 provided, however, that Lessor shall
credit Lessee with any amounts previously paid by Lessee under Section
18.5(a) above. If the Final Determination of the Claim is all or partly in
favor of Lessor, then Lessor, upon receipt of any refund from the Internal
Revenue Service, shall reimburse Lessee the portion of such refund which
exceeds the indemnity obligation of Lessee under this Section 18 with respect
to any portion of the Claim not resolved in favor of Lessor.
(c) Notwithstanding the provisions of this Section 18.5,
Lessor may decline to contest all or any portion of the Claim upon written
notice to Lessee and Lessee shall thereupon be relieved of its obligation to
indemnify Lessor under this Section 18 with respect to the portion of the
Claim described in the notice.
(d) Nothing in this Section 18.5 shall be construed as
granting any right to Lessee to request a contest of any lack of entitlement
to, or any loss, disallowance or recapture of ACRS Deductions arising in
connection with events described in Section 10 of the Lease Agreement, or
from a sale or other disposition of the Equipment upon an Event of Default as
set forth in Section 16 of the Lease Agreement."
"18.6 The representations, obligations and indemnities of
Lessee under this Section 18 shall continue in full force and effect,
notwithstanding the expiration or other termination of this Lease Agreement."
<PAGE>
45. In Section 19.3, in the first sentence of the Master Agreement before
the word "LESSEE" insert the following: "EXCEPT AS PERMITTED IN THIS SECTION
19.3,".
46. At the end of Section 19.3 insert the following: "Without the written
consent of either Lessor or Lessee, however, either party may assign any of its
interest in this Lease Agreement to a corporation affiliated with such party by
common ownership provided such party remains liable for the performance of its
obligations of this Lease Agreement."
47. In Section 21, line 3 of the Master Agreement after the word "any"
insert the word "material".
48. In Section 21., line 4 of the Master Agreement after the word
"bound" insert the words "or that Lessee has obtained the consent of the
other parties thereto."
49. In Section 21., line 6 of the Master Agreement after the word
"consent" insert the words "to be obtained by Lessee".
The terms and conditions of this Rider shall prevail where there may
be conflicts or inconsistencies with the terms and conditions of the Master
Agreement.
IN WITNESS WHEREOF, Lessor and Lessee, by their duly authorized
representatives, have executed and delivered this Rider, which is intended to
take effect s a sealed instrument as of the date of the Master Agreement.
Accepted at Boston, Massachusetts
BANCBOSTON LEASING INC. UnionTools, Inc.
By: /s/ Stephen McCarthy By: /s/ Stephen M. Kasprisin
--------------------------- ----------------------------
Title: Associate Vice President Title: Vice President-CFO
---------------------------- --------------------------
<PAGE>
EXHIBIT 10.16
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as
of May 22, 1998 and entered into by and among UNIONTOOLS, INC., a Delaware
corporation ("BORROWER") and HELLER FINANCIAL, INC., in its individual capacity
as a Lender and as Agent for all Lenders ("AGENT"), and such other Persons
executing this Agreement as Lenders.
R E C I T A L S
WHEREAS, Borrower and Agent have entered into an Amended and Restated
Credit Agreement dated as of May 20, 1997, as amended by that certain Amendment
No. 1 to Credit Agreement dated November 24, 1997 (as the same may be further
amended, restated, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT"), pursuant to which, among other things, Lenders have agreed,
subject to the terms and conditions set forth in the Credit Agreement, to make
loans and financial accommodations to Borrower; and
WHEREAS, Borrower has requested that the Agent and Lenders agree to
modify the Credit Agreement pursuant to the terms and conditions of this
Amendment; and
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrower, Lenders and Agent agree as
follows:
1. DEFINED TERMS. All capitalized terms used herein but not
elsewhere defined shall have the respective meanings ascribed to
such terms in the Credit Agreement, as amended by this Amendment.
2. AMENDMENTS TO LOAN DOCUMENTS AND LIMITED WAIVER OF CONDITION
2.1 A. AMENDMENTS. The Credit Agreement is amended as follows:
2.1.1 SECTION 4.3. Section 4.3(b) of the Credit
Agreement is amended by deleting the amounts "$12,500,000",
"$13,2000,000" and "$13,500,000" set forth opposite, respectively, the
dates April 30, 1998, July 31, 1998 and October 31, 1998, and
substituting in lieu thereof the following respective amounts:
"$10,250,000", "$10,250,000" and "$10,250,000".
2.1.2 SECTION 4.5. Section 4.5(b) of the Credit
Agreement is amended by deleting the amounts "3.0:1", "3.0:1" and "3.0:1"
set forth opposite, respectively, the dates April 30, 1998, July 31,
1998, and October 31, 1998, and substituting in lieu thereof the
following respective amounts: "2.5:1", "2.5:1" and "2.5:1".
2.1.3 SECTION 4.6. Section 4.6(b) of the Credit
Agreement is amended by: (x) deleting the amounts "3.8:1", "2.7:1" and
"2.3:1" set forth opposite, respectively, the dates April 30, 1998, July
31, 1998, and October 31, 1998, and substituting in lieu thereof the
following respective amounts: "4.0:1", "4.0:1" and "4.0:1"; and (y)
inserting the following sentence as the last sentence thereof: "Provided,
however, solely with respect to the calculation of Total Indebtedness
under this Section 4.6(b) for the periods ending on the dates April 30,
1998, July 31, 1998, and October 31, 1998, the calculation of the
outstanding amount of the Revolving Loans included in such calculation
shall be based upon the average daily balance of the Revolving Loans for
the immediately prior twelve months ending as of such dates."
2.2 A. LIMITED WAIVER TO CONDITION. The requirement set forth
in Section 1.1(C)(6) of the Credit Agreement is waived solely with respect to an
acquisition meeting each of the following conditions: (i) the Target is
[THOMPSON MANUFACTURING] and no other Person; (ii) the acquisition of such
Target is completed in full by no later
<PAGE>
than June 30, 1998; and (iii) each other pertinent provision of the Credit
Agreement (including, without limitation, each other provision set forth in
Section 1.1(C)) is satisfied in full with respect to the acquisition of such
Target. If the preceding conditions are not satisfied in full, this waiver
shall automatically terminate and be of no effect. This waiver: (i) shall not
establish any custom or practice; and (ii) is specifically limited to the
acquisition of [THOMPSON MANUFACTURING] as conditioned above and does not
constitute (and shall not be deemed) a waiver of such Section 1.1(C)(6) with
respect to any other Target or acquisition.
3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment
shall be subject to the satisfaction of the following conditions in a manner,
form and substance satisfactory to Agent:
3.1 DELIVERY OF DOCUMENTS. This Amendment and, if requested by Agent,
a Reaffirmation Agreement from such Persons as Agent shall specify, shall have
been delivered to Agent, duly authorized and executed, together with such other
instruments, documents, certificates, consents, waivers, opinions and financing
statements as Agent may reasonably request.
3.2 MATERIAL ADVERSE CHANGE. No event shall have occurred since the
Closing Date which has had or reasonably could be expected to have a Material
Adverse Effect.
3.3 PERFORMANCE; NO DEFAULT. Borrower and each Loan Party shall have
performed and complied with all agreements and conditions contained in the Loan
Documents to be performed by or complied with by Borrower prior to the date
hereof, and no Event of Default shall exist.
4. REPRESENTATIONS AND WARRANTIES. Borrower and each Loan Party
hereby confirms to Agent and the Lenders that the representations and warranties
set forth in Section 5 of the Credit Agreement are true and correct in all
material respects as of the date hereof, and shall be deemed to be remade as of
the date hereof.
5. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Each Loan Party
hereby consents to the execution and delivery of this Amendment. Borrower and
each Loan Party hereby agrees that except as amended hereby, the Credit
Agreement and each of the other Loan Documents shall remain in full force and
effect in accordance with their respective terms. Borrower and each Loan Party
hereby ratifies and confirms its liabilities, obligations and agreements under
the Credit Agreement and each other Loan Document, all as amended by this
Amendment, and acknowledges that: (i) as of the date of this Amendment, such
Loan Party, to its knowledge, has no defenses, claims or set-offs to the
enforcement by Agent of such liabilities, obligations and agreements; and (ii)
other than as specifically set forth herein, Agent does not waive, diminish or
limit any term or condition contained in the Credit Agreement or any of the
other Loan Documents. Agent's agreement to the terms of this Amendment or any
other amendment shall not be deemed to establish or create a custom or course of
dealing between Agent and Borrower or any Loan Party.
6. COUNTERPARTS. This Amendment may be executed in one of more
counterparts, each of which shall be deemed to be an original, and all of which,
when taken together, shall constitute one and the same instrument.
7. FURTHER ASSURANCES AND FEES AND EXPENSES. Each Loan Party
covenants and agrees that it will at any time and from time to time do, execute,
acknowledge and deliver, or will cause to be done, executed, acknowledged and
delivered, all such further acts, documents and instruments as reasonably may be
required by Agent in order to effectuate fully the intent of this Amendment.
The Borrower shall pay all fees and expenses incurred in the preparation,
negotiation and execution of this Amendment, including, without limitation, the
fees and expenses of counsel for Agent.
8. GOVERNING LAW. This Amendment shall be a contract made under and
governed by the laws of the State of Illinois, without regard to conflict of
laws principles.
9. SEVERABILITY. In the event that any provision of this Amendment
is deemed to be invalid by reason of the operation of any law or by reason of
the interpretation placed thereon by any court or governmental authority, this
Amendment shall be construed as not containing such provision and the invalidity
of such provision shall not affect
<PAGE>
the validity of any other provisions hereof, and any and all other provisions
hereof which otherwise are lawful and valid shall remain in full force and
effect.
10. HEADINGS AND RECITALS. The paragraph headings used in this
Amendment are for convenience of reference only and in no way define, describe
or limit the scope or intent of this Amendment. The foregoing recitals are
hereby incorporated herein by this reference thereto.
11. PRIOR CONSENT. The terms and conditions of the prior Consent with
respect to Section 3.5 of the Credit Agreement from each of the Lenders to the
Borrower is hereby acknowledged, agreed and reaffirmed.
12. NO STRICT CONSTRUCTION. The language used in this Amendment shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party hereto.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed and delivered by
each of the parties hereto on the date first set forth above.
UNIONTOOLS, INC., a Delaware corporation
By: /s/ Gabe Mihaly
--------------------------------
Name: Gabe Mihaly
----------------------
Title: President
--------------------
ACORN PRODUCTS, INC., a Delaware
corporation
By: /s/ Gabe Mihaly
--------------------------------
Name: Gabe Mihaly
--------------------------
Title: President
--------------------------
HELLER FINANCIAL, INC., a Delaware
corporation, in its individual capacity as a
Lender and as Agent for all Lenders
By: /s/ William Vukovich
--------------------------------
Name: William Vukovich
--------------------------
Title: Assistant Vice President
--------------------------
FLEET CAPITAL CORPORATION
By: /s/ Celine Fredrick
--------------------------------
Name: Celine Fredrick
--------------------------
Title: Vice President
--------------------------
PNC BANK, OHIO, NATIONAL ASSOCIATION
By: /s/ Warren F. Weber
--------------------------------
Name: Warren F. Weber
--------------------------
Title: Vice President
--------------------------
BANKBOSTON, N.A., (formerly known as The
First National Bank of Boston)
By:
--------------------------------
Name:
--------------------------
Title:
--------------------------
<PAGE>
STAR BANK, N.A.
By:
--------------------------------
Name:
----------------------
Title:
--------------------
SANWA BUSINESS CREDIT CORPORATION
By:
--------------------------------
Name:
----------------------
Title:
--------------------
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company:
UnionTools, Inc., a Delaware corporation;
H.B. Sherman Manufacturing Company, Inc., a Missouri corporation;
UnionTools Watering Products, Inc., a Delaware corporation;
VSI Fasteners, Inc., a California corporation;
McGuire-Nicholas Company, Inc., a California corporation; and
VHG Tools, Inc., a Missouri corporation.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-58807); (Form S-8 No. 333-32087); and (Form S-8 No.
333-32089) of Acorn Products, Inc. of our report dated September 22, 1998,
except for Note 14, as to which the date is October 29, 1998, with respect to
the consolidated financial statements and schedules of Acorn Products, Inc.
included in this Annual Report (Form 10-K) for the year ended July 31, 1998.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Columbus, Ohio
October 29, 1998
<PAGE>
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 and Mitchell J.
Dolloff as the undersigned's attorneys or either of them individually as the
undersigned's attorney, to sign, in the undersigned's name and behalf and in any
and all capacities stated below, and to cause to be filed with the Securities
and Exchange Commission (the "Commission"), the Corporation's Annual Report on
Form 10-K (the "Form 10-K") for the fiscal year ended August 2, 1998, 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 13th day of
October, 1998.
SIGNATURE TITLE
/s/Gabe Mihaly President, Chief Executive Officer, and
- ------------------------------ 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
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<PAGE>
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<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-START> MAY-02-1998 AUG-02-1997
<PERIOD-END> JUL-31-1998 JUL-31-1998
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