-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ix+tQyn/ehEtqdeVNF9MXaMZNUoy5y5xdXpNXsczqOvkZcbAt+rf1R98wjDXx75B UVezsHYuaW4uymn9D/IDHg== 0001047469-98-038604.txt : 19981030 0001047469-98-038604.hdr.sgml : 19981030 ACCESSION NUMBER: 0001047469-98-038604 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 223265462 FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22717 FILM NUMBER: 98733206 BUSINESS ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 BUSINESS PHONE: 6142224400 MAIL ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, par value $.001 per share Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of October 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. TABLE OF CONTENTS
DESCRIPTION PAGE 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
2 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 3 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 4 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. 5 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 6 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) 7 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. 8 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 9 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 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 DISTRIBUTION FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET -------- --------- ---- Columbus, Ohio ............................................................ Leased 179,200 Frankfort, New York(l) .................................................... Owned 31,500 La Mirada, California ..................................................... Leased 19,100 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 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
- ------------------------ (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 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 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:
MARKET PRICE ---------------- FISCAL PERIOD HIGH LOW - ------------- ---- --- 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
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
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) 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 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
- -------------------- (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 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 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:
YEAR ENDED ---------------------------------------------------------------- AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---------------- ---------------------------------------- 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% ------- ------- ------ ------- ------- ------
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 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 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
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) 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
- ---------------------- (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 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
Expense Capital ------- ------- Hardware -- $200,000 Project Management $125,000 75,000 Software and Custom Coding $165,000 -- -------- -------- $290,000 $275,000 -------- -------- -------- --------
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 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 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 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 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:
Name Age Position ---- --- -------- 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
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 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 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 $100,000 (the "Named Executive Officers"). Mr. Mihaly's, Mr. Kasprisin's, and Mr. Dolloff's cash compensation was paid by the Company. Mr. Farland's and Mr. Hyrb's cash compensation was paid by UnionTools. Non-cash compensation, other than options to purchase Common Stock, was paid by UnionTools. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------- AWARDS -------------- SECURITIES UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)(2)(3)(4) - --------------------------------- ----------- ------------- -------------- -------------- --------------- 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
- ---------------------- 28 (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 $10,778 paid to Mr. Farland. (5) Mr. Dolloff commenced employment with the Company and UnionTools in June 1997. (6) Mr. Farland's employment with UnionTools ended upon his death in August 1998. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table provides certain information regarding the number and value of stock options held by the Company's Named Executive Officers at July 31, 1998.
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL ON VALUE OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2) EXERCISE REALIZED ------------------------------ --------------- NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- -------- -------- ----------- ------------- ----------- ------------- 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
- -------------------- (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 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.
YEARS OF SERVICE REMUNERATION(1) 15 20 25 30 35 - ------------ -- -- -- -- -- $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
- --------------------------- (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.
YEARS OF SERVICE ---------------- REMUNERATION(1) 15 20 25 30 35 - ------------ -- -- -- -- -- $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
- ----------------------- (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 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 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:
SHARES BENEFICIALLY OWNED(1)(2) -------------------------------------------- STOCKHOLDER NUMBER PERCENT - ---------------------------------------------------------------------- --------------------- ----------------- 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%
- ---------------------- * 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 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 (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 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 (*)):
Exhibit Number Description - -------------- ----------- 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 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 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.
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 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 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 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
AUGUST 1, JULY 31, 1997 1998 ---- ---- 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 --------- --------- --------- ---------
See accompanying notes. F-2 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL FISCAL FISCAL 1996 1997 1998 ---- ---- ---- 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 --------- --------- --------- --------- --------- ---------
See accompanying notes. F-3 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONTRIBUTED CAPITAL MINIMUM RETAINED NUMBER NUMBER STOCK PENSION EARNINGS OF SHARES AMOUNT OF SHARES AMOUNT OPTIONS LIABILITY (DEFICIT) TOTAL --------- ------ --------- ------ ------- --------- -------- ----- 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 ----------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
See accompanying notes. F-4 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- 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 --------- --------- -------- --------- --------- --------
See accompanying notes. F-5 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS Founded in 1890, Acorn Products, Inc. (Acorn), through its wholly-owned subsidiary 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
AUGUST 1, JULY 31, 1997 1998 ---- ---- (IN THOUSANDS) 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 ------- -------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: Machinery and equipment 3 to 15 years Buildings and improvements 3 to 40 years Furniture and fixtures 3 to 15 years
Property, plant and equipment consists of the following:
AUGUST 1, JULY 31, 1997 1998 ---- ---- (IN THOUSANDS) 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 ------- ------- ------- -------
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 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:
1996 1997 1998 ---- ---- ---- 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 ------------ ------------ ------------ ------------ ------------ ------------
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 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:
FISCAL FISCAL 1996 1997 ---- ---- (IN THOUSANDS) Revenues $49,810 $29,643 Costs and expenses 50,143 30,731 Interest expense (1,577) (411) Loss from operations (5,815) (1,499)
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 The following table summarizes the net liabilities of the Company's discontinued operations at August 1, 1997 (in thousands): Accounts receivable $ 3,548 Inventories 3,658 Property and equipment 1,686 Other assets 992 Liabilities (10,479) --------- Net (liabilities) of discontinued operations $ (595) --------- ---------
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt consists of the following:
AUGUST 1, JULY 31, 1997 1998 ---- ---- (IN THOUSANDS) Acquisition line of credit facility $6,098 $16,009 Less current portion of long-term debt -- -- ------ ------- $6,098 $16,009 ------ ------- ------ -------
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 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 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:
FISCAL FISCAL 1997 1998 ---- ---- Net income (loss) applicable to common stock (in thousands) $ (12,660) $ 43 Net income (loss) applicable to common stock per share (6.37) .01
The pro forma financial effects of applying SFAS No. 123 may not be representative of the pro forma effects on reported results of operations for future years. The following table summarizes the stock option activity:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ------ ----- 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 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
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
AUGUST 1, JULY 31, 1997 1998 ---- ---- (IN THOUSANDS) 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 $ -- $ -- -------- -------- -------- --------
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:
YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- (IN THOUSANDS) Current - Federal $ -- $ -- $ 40 Current -- State -- 134 190 Deferred -- State 582 -- -- ------ -------- ------ $ 582 $ 134 $ 230 ------ -------- ------ ------ -------- ------
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 The following sets forth the funded status of the defined benefit plans:
PLANS WHOSE PLANS WHOSE BENEFITS ASSETS EXCEED ASSETS EXCEED BENEFITS ------------- --------------- AUGUST 1, JULY 31, AUGUST 1, JULY 31, 1997 1998 1997 1998 ---- ---- ---- ---- (IN THOUSANDS) 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 ------ ------ ------- ------- ------ ------ ------- -------
The components of net periodic pension cost are as follows:
YEAR ENDED ---------- AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- (IN THOUSANDS) 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 ----- ------ ------- ----- ------ -------
Significant assumptions used in 1996, 1997 and 1998 in calculating periodic pension cost are as follows:
1996 1997 1998 ---- ---- ---- 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%
Plan assets consist primarily of guaranteed interest contracts, pooled investment debt securities and equity mutual funds. F-15 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:
AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- 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 --------- --------- --------- --------- --------- ---------
The following table presents supplemental information related to the Company's post-retirement health care benefits:
AUGUST 1, JULY 31, 1997 1998 ---- ---- 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 ---------- ---------- ---------- ----------
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 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:
1999 $1,200,000 2000 1,000,000 2001 800,000 2002 200,000 2003 100,000 Thereafter 100,000
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 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.
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) 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 --------- -------- -------- ------- --------- --------- -------- -------- ------- ---------
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
YEAR ENDED AUGUST 1, 1997 -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
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 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS UNIONTOOLS, INC. AUGUST 1, 1997
ADDITIONS BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DESCRIBE OF PERIOD ----------- --------- -------- -------- -------- --------- 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
S-1 ACORN PRODUCTS, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) CONDENSED BALANCE SHEETS
AUGUST 1, JULY 31, 1997 1998 ---- ---- (IN THOUSANDS) 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 --------- -------- --------- --------
S-2 ACORN PRODUCTS, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONTINUED (PARENT COMPANY) CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- (IN THOUSANDS) 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 -------- ---------- ------- -------- ---------- -------
S-3 ACORN PRODUCTS, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 2, AUGUST 1, JULY 31, 1996 1997 1998 ---- ---- ---- (IN THOUSANDS) 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) -------- --------- -------- -------- --------- --------
S-4 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 EX-10.13 2 EXHIBIT 10.13 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. 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. 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, 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 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 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. 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. 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. 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. 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 ------------------------- -------------------------- EX-10.14 3 EXHIBIT 10.14 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". 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 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: 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." 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 ---------------------------- -------------------------- EX-10.16 4 EXHIBIT 10.16 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 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 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] 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: -------------------------- STAR BANK, N.A. By: -------------------------------- Name: ---------------------- Title: -------------------- SANWA BUSINESS CREDIT CORPORATION By: -------------------------------- Name: ---------------------- Title: -------------------- EX-21.1 5 EXHIBIT 21.1 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. EX-23.1 6 EXHIBIT 23.1 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 EX-24.1 7 EXHIBIT 24.1 EXHIBIT 24.1 POWER OF ATTORNEY Each director and/or officer of Acorn Products, Inc. (the "Corporation") whose signature appears below hereby appoints Gabe Mihaly 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 EX-27 8 EXHIBIT 27
5 1,000 3-MOS YEAR JUL-31-1998 JUL-31-1998 MAY-02-1998 AUG-02-1997 JUL-31-1998 JUL-31-1998 1,240 1,240 0 0 24,553 24,553 0 0 30,123 30,123 58,864 58,864 16,205 16,205 0 0 112,633 112,633 28,219 28,219 0 0 0 0 0 0 78,391 78,391 (14,040) (14,040) 112,633 112,633 28,288 107,758 28,288 107,758 21,423 82,480 21,423 82,480 5,604 21,209 0 0 799 2,560 462 1,509 (73) 230 535 1,279 0 0 0 0 0 0 535 1,279 0.08 0.20 0.08 0.20
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