<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 30, 1999
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to ____________________
Commission file number: 0-22717
ACORN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3265462
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 DUBLIN AVENUE, COLUMBUS, OHIO 43215
(Address of principal executive offices, including zip code)
(614) 222-4400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days. YES X NO_____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 6,021,705 shares
of Common Stock, $.001 par value, were outstanding at June 8, 1999.
<PAGE>
FORM 10-Q
ACORN PRODUCTS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets 3
July 31, 1998 and April 30, 1999
Consolidated Statements of Operations For the Three Months 4
and Nine Months Ended May 1, 1998 and April 30, 1999
Consolidated Statements of Cash Flows For the Nine Months 5
Ended May 1, 1998 and April 30, 1999
Interim Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-11
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 5. Other Matters. 12
Item 6. Exhibits and Reports on Form 8-K. 12
Signatures 13
</TABLE>
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 1,240 $ 1,075
Accounts receivable, less allowance for
doubtful accounts ($894 and $1,629, respectively)............... 24,553 40,716
Inventories....................................................... 30,123 34,827
Prepaids and other current assets................................. 2,948 2,430
-------- --------
Total current assets............................................ 58,864 79,048
Property, plant and equipment, net of accumulated depreciation.... 16,205 16,792
Goodwill, net of accumulated amortization......................... 35,271 35,215
Other intangible assets........................................... 2,293 2,077
-------- --------
Total assets.................................................... $112,633 $133,132
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility......................................... $ 16,308 $ 34,422
Accounts payable.................................................. 7,010 11,346
Accrued expenses.................................................. 4,413 5,532
Income taxes payable.............................................. 43 (65)
Other current liabilities......................................... 445 230
-------- --------
Total current liabilities....................................... 28,219 51,465
Long-term debt...................................................... 16,009 16,009
Other long-term liabilities......................................... 4,054 3,473
-------- --------
Total liabilities............................................... 48,282 70,947
Stockholders' equity:
Common stock, par value of $.001 per share, 20,000,000 shares
authorized, 6,464,105 shares issued at July 31,
1998 and at April 30, 1999, respectively..................... 78,391 78,391
Contributed capital-stock options.................................. 460 460
Minimum pension liability.......................................... (285) (285)
Retained earnings (deficit)........................................ (14,215) (14,055)
-------- --------
64,351 64,511
Less treasury stock, at cost, 0 and 417,400 shares at July 31, 1998
and April 30, 1999, respectively................................. -- 2,326
-------- --------
Total stockholders' equity...................................... 64,351 62,185
-------- --------
Total liabilities and stockholders' equity...................... $112,633 $133,132
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------- -------------------------
MAY 1, APRIL 30, MAY 1, APRIL 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales............................ $ 37,911 $ 40,434 $ 79,470 $ 85,055
Cost of goods sold................... 29,440 29,964 61,057 63,743
---------- ---------- ---------- ----------
Gross profit......................... 8,471 10,470 18,413 21,312
Selling, general and administrative 5,526 5,962 14,756 15,753
expenses...........................
Interest expense..................... 720 947 1,761 2,420
Amortization of intangibles.......... 231 263 668 786
Other expenses, net:
Watering products consolidation.... -- -- -- 355
Strategic transactions............. -- -- -- 994
Plant consolidation................ -- 284 -- 284
Miscellaneous...................... 102 109 181 313
---------- ---------- ---------- ----------
Income from continuing
operations before income taxes..... 1,892 2,905 1,047 407
Income taxes ........................ 549 581 303 81
---------- ---------- ---------- ----------
Income from continuing operations.... 1,343 2,324 744 326
Loss from discontinued operations,
net of tax......................... -- -- -- (166)
---------- ---------- ---------- ----------
Net income .......................... $ 1,343 $ 2,324 $ 744 $ 160
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE DATA (BASIC):
Net income .......................... $ 0.21 $ 0.37 $ 0.12 $ 0.02
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding........................ 6,464,105 6,307,400 6,464,105 6,411,870
---------- ---------- ---------- ----------
PER SHARE DATA (DILUTED):
Net income (loss) ................... $ 0.21 $ 0.37 $ 0.11 $ 0.02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding........................ 6,510,758 6,363,514 6,510,758 6,467,984
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
MAY 1, APRIL 30,
1998 1999
-------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 744 $ 160
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations:
Depreciation and amortization............................ 2,886 3,129
Changes in operating assets and liabilities:
Accounts receivable.................................... (17,464) (16,163)
Inventories............................................ (2,701) (4,704)
Other assets........................................... 1,755 734
Accounts payable and accrued expenses.................. 5,541 5,455
Income taxes payable................................... (92) (108)
Other liabilities...................................... (225) (796)
-------- --------
Net cash provided by (used in) continuing operations....... (9,556) (12,293)
Net cash provided by (used in) discontinued operations..... (625) --
-------- --------
Net cash provided by (used in) operating activities........ (10,181) (12,293)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of treasury stock................................. -- (2,326)
Additional cost of net assets acquired in acquisitions..... (3,260) (732)
Purchases of property, plant and equipment, net............ (2,925) (2,928)
-------- --------
Net cash provided by (used in) investing activities........ (6,185) (5,986)
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition line draws..................................... 3,260 --
Net activity on revolving loan............................. 13,327 18,114
-------- --------
Net cash provided by (used in) financing activities........ 16,587 18,114
-------- --------
Net increase (decrease) in cash............................ 221 (165)
Cash at beginning at period................................ 1,509 1,240
-------- --------
Cash at end of period...................................... $ 1,730 $ 1,075
-------- --------
-------- --------
Interest paid.............................................. $ 1,354 $ 2,244
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
INTERIM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Footnote disclosure that would substantially duplicate the disclosure
contained in the Annual Report to Stockholders for the year ended July 31,
1998 has not been included. The unaudited interim consolidated financial
statements reflect all adjustments that in the opinion of management are
necessary to a fair statement of results for the periods presented and to
present fairly the consolidated financial position of Acorn Products, Inc.
(the "Company") as of April 30, 1999. All such adjustments are of a normal
recurring nature.
2. Inventories of the Company are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method. Inventories
consist of the following:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Finished goods............................ $16,270 $18,777
Work in process........................... 5,709 3,296
Raw materials and supplies................ 9,212 13,964
------- -------
31,191 36,037
Valuation reserves........................ (1,068) (1,210)
------- -------
Total inventories......................... $30,123 $34,827
------- -------
------- -------
</TABLE>
3. In June 1997, the Financial Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires adoption for
fiscal years beginning after December 15, 1997. Therefore, the Company was
required to adopt SFAS 130 effective August 1, 1998. The total comprehensive
income for the quarter and the nine months ended April 30, 1999 was $2,324
and $160, respectively.
4. 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>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------- -------------------------
MAY 1, APRIL 30, MAY 1, APRIL 30,
1998 1999 1998 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................. $1,343,000 $2,324,000 $ 744,000 $ 160,000
Preferred stock dividend.......... -- -- -- --
---------- ---------- --------- ----------
Numerator for basic earnings per
share -
Net income (loss) applicable to
common stock................... $1,343,000 $2,324,000 $ 744,000 $ 160,000
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Denominator:
Denominator for basic earnings per
share -
Weighted-average shares......... 6,464,105 6,307,400 6,464,105 6,411,870
Effect of dilutive securities:
1997 Stock Incentive Plan......... -- -- -- --
1997 Nonemployee Director Stock
Incentive Plan................... 1,132 -- 1,132 --
Deferred Equity Compensation Plan
for Directors.................... 12,263 22,856 12,263 22,856
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<PAGE>
Other stock options............... 33,258 33,258 33,258 33,258
---------- ---------- --------- ----------
Dilutive potential common shares.... 46,653 56,114 46,653 56,114
Denominator for diluted earnings
per share-
Adjusted weighted-average shares
and assumed conversions.......... 6,510,758 6,363,514 6,510,758 6,467,984
Basic earnings per share............ $ 0.21 $ 0.37 $ 0.12 $ 0.02
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Diluted earnings per share.......... $ 0.21 $ 0.37 $ 0.11 $ 0.02
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
Options to purchase 329,100 shares of Common Stock at $14.00 per share,
18,630 shares of Common Stock at $10.25 per share, 28,800 shares of Common
Stock at $6.70 per share and 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.
5. In November 1998, the Company received notification of an assessment
of approximately $200,000 in state taxes and interest related to the sale in
August 1997 of substantially all of the assets of its McGuire-Nicholas
Company, Inc. subsidiary. The Company is contesting the amount of the
assessment. The Company has recorded the contingent liability associated with
the assessment, net of the effect of taxes, as a loss from discontinued
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Disposition of Non-Lawn and Garden Business
Operations."
6. In January 1999, the Company incurred expenses of $355 in
consolidating its watering products division into a single facility.
7. The Company incurred expenses for legal, accounting, consulting and
other expenses of $994 related to the explanation of certain strategic
transactions.
8. In March 1999, the Company announced that it will consolidate its
Columbus, Ohio manufacturing facility into its primary manufacturing facility
in Frankfort, New York. The Company will continue to operate the Columbus
facility through August 1999. The Company expects to incur the costs of the
consolidation through the second quarter of fiscal 2000.
9. In April 1999, Huffy Corporation and Huffco Company (collectively,
the "Huffy Parties") filed a complaint against the Company in the Court of
Common Pleas of Montgomery County, Ohio alleging breach of contract in
connection with discussions between the Company and the Huffy Parties
regarding a possible merger of the Company and True Temper Hardware Company.
The Huffy Parties seek payment of $450,000 in liquidated damages plus
expenses. In June 1999, the Company filed an answer to the complaint
vigorously denying any liability to the Huffy Parties and asserted a
counterclaim of fraud against the Huffy Parties relating to the transaction
discussions.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the other financial
information included elsewhere in this Quarterly Report on Form 10-Q, as well
as the factors set forth under the caption "Forward-Looking Information"
below.
FORWARD-LOOKING INFORMATION
Statements in the following discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements. Additional information concerning factors that
could cause actual results to differ materially from those suggested in the
forward-looking statements is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's Annual Report on Form 10-K for the year ended July 31, 1998, 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 amended on October 29, 1998
and as the same may be amended from time to time.
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED MAY 1, 1998
NET SALES. Net sales increased 6.7%, or $2.5 million, to $40.4 million
in the third quarter of fiscal 1999 compared to $37.9 million in the third
quarter of fiscal 1998. The increase in net sales reflected strong spring
sales, partially offset by a decline in net sales by the Company's injection
molding division and reported wheelbarrow sales. Although the Company's
overall wheelbarrow sales grew by over 90% during the period, most of those
sales were attributable to the Company's wheelbarrow joint venture. Only the
Company's portion of the profit or loss from the wheelbarrow joint venture is
included in the Company's financial statements.
GROSS PROFIT. Gross profit increased 23.6%, or $2.0 million, to $10.5
million in the third quarter of fiscal 1999 compared to $8.5 million in the
comparable period of fiscal 1998. Gross margin increased to 25.9% in the
third quarter of fiscal 1999 from 22.3% in the third quarter of fiscal 1998.
The increase in gross margin primarily was due to the realization of benefits
from the Company's cost reduction program, as well as greater overhead
absorption rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 7.9%, or $437,000, to $6.0 million in the
third quarter of fiscal 1999 from $5.5 million in the third quarter of fiscal
1998. As a percentage of net sales, selling, general and administrative
expenses were flat at 14.7% in the third quarter of fiscal 1999 compared to
14.6% in the third quarter of fiscal 1998.
OTHER EXPENSES, NET. Other expenses, net, increased to $393,000 in the
third quarter of fiscal 1999 from $102,000 in the third quarter of fiscal
1998. Approximately $284,000 of other expenses, net, in the third quarter of
fiscal 1999 related to plant consolidation costs incurred in connection with
the previously announced consolidation of the Company's Columbus, Ohio
manufacturing facility into its primary manufacturing facility located in
Frankfort, New York.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from
continuing operations before income taxes increased 53.5%, or $1.0 million,
to $2.9 million in the third quarter of fiscal 1999 from $1.9 million in the
third quarter of fiscal 1998. The increase in income from continuing
operations before income taxes primarily was due to the factors affecting
gross profit described above.
NET INCOME. Net income increased 73%, or $1.0 million, to $2.3 million
in the third quarter of fiscal 1999 from $1.3 million in the third quarter of
fiscal 1998.
NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED MAY 1, 1998
NET SALES. Net sales increased 6.7%, or $5.6 million, to $85.1 million
in the first nine months of fiscal 1999 compared to $79.5 million in the
first nine months of fiscal 1998. The increase in net sales primarily
reflected strong spring sales and the addition of the Company's watering
products division.
GROSS PROFIT. Gross profit increased 15.7%, or $2.9 million, in the
first nine months of fiscal 1999 to $21.3 million from $18.4 million in the
first nine months of fiscal 1998. Gross margin increased to 25.1% in the
first nine
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<PAGE>
months of fiscal 1999 from 23.2% in the comparable period of fiscal 1998. The
increase in gross margin primarily was due to the realization of benefits
from the Company's cost reduction program, as well as greater overhead
absorption rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 6.8%, or $1.0 million, to $15.8 million in
the first nine months of fiscal 1999 compared to $14.8 million in the first
nine months of fiscal 1998. As a percentage of net sales, selling, general
and administrative expenses were flat at 18.5% in the first nine months of
fiscal 1999 compared to 18.6% in the first nine months of fiscal 1998.
OTHER EXPENSES, NET. Other expenses, net increased to $1.9 million in
the first nine months of fiscal 1999 from $181,000 in the first nine months
of fiscal 1998. Approximately $994,000 of other expenses, net in the first
nine months of fiscal 1999 related to accounting, legal, consulting and other
related expenses incurred in connection with the exploration of strategic
transactions. In addition, the Company incurred expenses of approximately
$355,000 in the first nine months of fiscal 1999 related to the consolidation
of the manufacturing operations of the Company's watering products division.
The Company incurred $284,000 of other expenses, net in the first nine months
of fiscal 1999 related to plant consolidation costs incurred in connection
with the previously announced consolidation of the Company's Columbus, Ohio
manufacturing facility into its primary manufacturing facility located in
Frankfort, New York. The Company also incurred other expenses, net of
approximately $313,000 in the first nine months of fiscal 1999 primarily
related to the amortization of bank financing fees.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from
continuing operations before income taxes decreased to $407,000 in the first
nine months of fiscal 1999 from $1.0 million in the comparable period of
fiscal 1998. The decrease in income from continuing operations before income
taxes resulted primarily from the strategic transaction, watering products
consolidation and Frankfort, New York plan consolidation expenses described
above.
INCOME FROM CONTINUING OPERATIONS. The Company recognized income tax
expense of $81,000 in the first nine months of fiscal 1999 compared to income
tax expense of $303,000 in the first nine months of fiscal 1998, bringing
income from continuing operations to $326,000 for the first nine months of
fiscal 1999 compared to $744,000 in the first nine months of fiscal 1998.
NET INCOME. The Company incurred a loss from discontinued operations,
net of tax, of $166,000 in the first nine months of fiscal 1999, bringing net
income to $160,000 for the period compared to net income of $744,000 in the
first nine months of fiscal 1998.
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 level 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.
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 entered into an amendment to its bank credit facility in
June 1999 providing for modifications to certain financial covenants.
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<PAGE>
In March 1999, the Company's Board of Directors authorized a stock
repurchase program to permit the acquisition of up to $2.5 million of the
Company's common stock. The Company purchased an aggregate of 442,400 shares
of its common stock at an average purchase price of $5.62 per share. The
number of shares of common stock currently outstanding is 6,021,705. The
Company has concluded the program, having reached the limitations imposed on
stock repurchase transactions under its current bank credit facility.
Borrowings under the Company's revolving credit facility have increased
from July 31, 1998 in accordance with normal seasonal patters. There have
been no other significant changes in the Company's liquidity and capital
resources as of April 30, 1999 from those discussed in the Company's Annual
Report on Form 10-K for the year ended July 31, 1998.
DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS
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 consolidated financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q.
CONSOLIDATION OF MANUFACTURING FACILITIES
In March 1999, the Company announced that it will consolidate its
Columbus, Ohio manufacturing facility into its primary manufacturing facility
in Frankfort, New York. The Company will continue to operate the Columbus
facility through August 1999. The Company expects the total net cost of the
consolidation to be under $3 million, of which less than $1 million is
related to net capital expenditures, and expects the annual savings from the
consolidation to exceed $1 million. The Company expects to incur the costs of
the consolidation through the second quarter of fiscal 2000.
IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS
STATE OF READINESS. The Company has reviewed its Year 2000 issues in
regard 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 modified or replaced 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
believes that its information-technology is Year 2000-ready in all material
respects. The Company does not believe that there 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>
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<PAGE>
RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company does not believe
that any Year 2000 issues will impact its manufacturing. The Company believes
that its 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
material loss of revenue to the Company.
THE COMPANY'S CONTINGENCY PLANS. The Company will produce contingency
plans on a case by case basis as required as it completes its Year 2000
efforts. At the present time, as no material risks have been identified, no
contingency plans have been formed.
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, unforeseen difficulty locating
and correcting relevant computer codes and similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In April 1999, Huffy Corporation and Huffco Company (collectively, the
"Huffy Parties") filed a complaint against the Company in the Court of Common
Pleas of Montgomery County, Ohio alleging breach of contract in connection
with discussions between the Company and the Huffy Parties regarding a
possible merger of the Company and True Temper Hardware Company. The Huffy
Parties seek payment of $450,000 in liquidated damages plus expenses. In June
1999, the Company filed an answer to the complaint vigorously denying any
liability to the Huffy Parties and asserted a counterclaim of fraud against
the Huffy Parties relating to the transaction discussions.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER MATTERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.1 Fifth Amendment to Amended and Restated Credit
Agreement, dated as of June 10, 1999, between
the Company and Heller Financial, Inc., in its
capacity as Agent for the Lenders party to the
Amended and Restated Credit Agreement.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
The Company filed the following Current Report on Form 8-K
with the Securities and Exchange Commission:
(i) A current report on Form 8-K, dated March 3, 1999,
was filed with the Securities and Exchange Commission
on March 4, 1999 (Items 5 and 7).
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACORN PRODUCTS, INC.
Date: June 14, 1999 By: /s/ Gabe Mihaly
---------------------------------------
Gabe Mihaly, President and Chief
Executive Officer (Principal Executive
Officer)
Date: June 14, 1999 By: /s/ J. Mitchell Dolloff
---------------------------------------
J. Mitchell Dolloff, Senior Vice
President, Finance and Administration
(Principal Financial and Accounting
Officer)
-13-
<PAGE>
ACORN PRODUCTS, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.1 Fifth Amendment to Amended and Restated Credit Agreement,
dated as of June 10, 1999, between the Company and Heller
Financial, Inc., in its capacity as Agent for the Lenders
party to the Amended and Restated Credit Agreement.
27 Financial Data Schedule.
</TABLE>
<PAGE>
FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"AMENDMENT") is dated as of June 10, 1999 and entered into by and among
UNIONTOOLS, INC., a Delaware corporation ("BORROWER"), ACORN PRODUCTS, INC.,
a Delaware corporation ("HOLDINGS"), H.B. SHERMAN MANUFACTURING COMPANY, a
Missouri corporation ("H.B. SHERMAN"), UNIONTOOLS IRRIGATION, INC., a
Delaware corporation formerly known as UnionTools Watering Products, Inc.
("IRRIGATION" and together with Borrower, Holdings and H.B. Sherman
collectively, the "LOAN PARTIES"), HELLER FINANCIAL, INC., in its individual
capacity as a Lender and as Agent for all Lenders ("AGENT"), and the other
Lenders party hereto.
R E C I T A L S
WHEREAS, Borrower, Agent and Lenders 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, Second
Amendment to Credit Agreement dated as of May 22, 1998, Third Amendment to
Amended and Restated Credit Agreement dated as of October 29, 1998 and Fourth
Amendment to Amended and Restated Credit Agreement dated as of February 26,
1999 (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, the Loan Parties have requested that the Agent and Requisite
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, the Loan Parties, Requisite
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 CREDIT AGREEMENT. The Credit Agreement is amended as
follows:
2.1 TOTAL INTEREST COVERAGE. Subsection 4.5 of the Credit
Agreement is hereby deleted in its entirety and replaced with the following:
"4.5 TOTAL INTEREST COVERAGE. Borrower shall not permit Total
Interest Coverage of Holdings and its Subsidiaries on a consolidated
basis for the twelve (12) month period ending on the last day of any
fiscal quarter ending on the dates or during the
<PAGE>
periods set forth below to be less than the amount set forth below
for such date or period.
<TABLE>
<CAPTION>
DATE/PERIOD AMOUNT
<S> <C>
April 30, 1999 2.40:1
July 31, 1999 2.50:1
October 31, 1999 2.75:1
On and after
January 31, 2000 3.00:1
</TABLE>
"Total Interest Coverage" will be calculated as illustrated in Exhibit
4.10(C)."
2.2 TOTAL INDEBTEDNESS TO OPERATING CASH FLOW RATIO. Subsection
4.6 of the Credit Agreement is hereby deleted in its entirety and replaced
with the following:
"4.6 TOTAL INDEBTEDNESS TO OPERATING CASH FLOW RATIO. Borrower shall
not permit the ratio of Total Indebtedness to Operating Cash Flow of
Holdings and its Subsidiaries on a consolidated basis for the twelve
(12) month period ending on the last day of any fiscal quarter ending on
the dates or during the periods set forth below to be greater than the
amount set forth below for such date or period.
<TABLE>
<CAPTION>
DATE/PERIOD AMOUNT
<S> <C>
April 30, 1999 5.00:1
July 31, 1999 4.50:1
On and after
October 31, 1999 3.00:1
</TABLE>
"Total Indebtedness" and "Operating Cash Flow" will be calculated as
illustrated on Exhibit 4.10(C)."
2.3 CLOSING AND CONSOLIDATION EXPENSES. The following
non-recurring expenses in the sum of $805,000.00 shall not be deducted in
calculating EBIDAT for the purposes of determining compliance with the
financial covenants set forth in subsections 4.5 and 4.6 of the Credit
Agreement: expenses of $166,000.00 incurred during the quarter ended October
31, 1998 in connection with the discontinued operations of McGuire-Nicholas
Company; expenses of $355,000.00 incurred during the quarter ended January
29, 1999 in connection with the consolidation of the operations of
Irrigation; and expenses of $284,000.00 incurred during the quarter ended
April 30, 1999 in connection with the consolidation of Borrower's operations
at Columbus, Ohio into Frankfurt, New York.
2
<PAGE>
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 shall have been
delivered to Agent, duly authorized and executed by the Loan Parties and
Requisite Lenders, together with such other instruments, documents,
certificates, consents, waivers, opinions and financing statements as Agent
may reasonable 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. 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 such Loan Party prior to the
date hereof, and no Event of Default shall exist.
4. REPRESENTATIONS AND WARRANTIES. 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. 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. 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 the Amendment, such Loan Party, to
its knowledge, has no defenses, claims or set-offs to the enforcement by
Agent and Lenders of such liabilities, obligations and agreements; and (ii)
other than as specifically set forth herein, Agent and Lenders do not waive,
diminish or limit any term or condition contained in the Credit Agreement or
any of the other Loan Documents. Agent's and each Lender'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 or Lenders,
on the one hand, and any Loan Party, on the other hand.
6. COUNTERPARTS. This Amendment may be executed in one or 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,
3
<PAGE>
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 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. 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.
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/ J.M. Dolloff
-------------------------------------------
Name: J.M. Dolloff
------------------------------------
Title: Senior Vice President, Finance
and Administration
------------------------------------
ACORN PRODUCTS, INC., a Delaware corporation
By: /s/ J.M. Dolloff
-------------------------------------------
Name: J.M. Dolloff
------------------------------------
Title: Senior Vice President, Finance
and Administration
------------------------------------
H.B. SHERMAN MANUFACTURING COMPANY, a Missouri
corporation
4
<PAGE>
By: /s/ J.M. Dolloff
-------------------------------------------
Name: J.M. Dolloff
------------------------------------
Title: President
------------------------------------
UNIONTOOLS IRRIGATION, INC., a Delaware
corporation
By: /s/ J.M. Dolloff
-------------------------------------------
Name: J.M. Dolloff
------------------------------------
Title: President
------------------------------------
HELLER FINANCIAL, INC., a Delaware corporation, in
its individual capacity as a Lender and as Agent
for all Lenders
By: /s/ William Vokevich
-------------------------------------------
Name: William Vokevich
------------------------------------
Title: Asst Vice President
------------------------------------
FLEET CAPITAL CORPORATION
By: /s/ Matthew R. Van Steenhuyse
-------------------------------------------
Name: Matthew R. Van Steenhuyse
------------------------------------
Title: Senior Vice President
------------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Warren T. Weber
-------------------------------------------
Name: Warren T. Weber
------------------------------------
Title: Vice President
------------------------------------
BANKBOSTON, N.A., (formerly known as The First
National Bank of Boston)
5
<PAGE>
By: /s/ Gretchen Troiano
-------------------------------------------
Name: Gretchen Troiano
------------------------------------
Title: Vice President
------------------------------------
FIRSTAR BANK, N.A.
By:
-------------------------------------------
Name:
------------------------------------
Title:
------------------------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Matthew R. Van Steenhuyse
-------------------------------------------
Name: Matthew R. Van Steenhuyse
------------------------------------
Title: Senior Vice President
------------------------------------
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUL-30-1999 JUL-30-1999
<PERIOD-START> JAN-30-1999 JUL-31-1998
<PERIOD-END> APR-30-1999 APR-30-1999
<CASH> 1,075 1,075
<SECURITIES> 0 0
<RECEIVABLES> 42,345 42,345
<ALLOWANCES> (1,629) (1,629)
<INVENTORY> 34,827 34,827
<CURRENT-ASSETS> 79,048 79,048
<PP&E> 29,796 29,796
<DEPRECIATION> (13,004) (13,004)
<TOTAL-ASSETS> 133,132 133,132
<CURRENT-LIABILITIES> 51,465 51,465
<BONDS> 0 0
0 0
0 0
<COMMON> 78,391 78,391
<OTHER-SE> (18,208) (18,208)
<TOTAL-LIABILITY-AND-EQUITY> 133,132 133,132
<SALES> 40,434 85,065
<TOTAL-REVENUES> 40,434 85,065
<CGS> 29,964 63,743
<TOTAL-COSTS> 29,964 63,743
<OTHER-EXPENSES> 5,618 15,485
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 947 2,420
<INCOME-PRETAX> 2,905 407
<INCOME-TAX> 581 61
<INCOME-CONTINUING> 2,324 226
<DISCONTINUED> 0 (156)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,324 160
<EPS-BASIC> 0.37 0.02
<EPS-DILUTED> 0.37 0.02
</TABLE>
