-----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, OzgApFnLKSAY5dW9Zxt2F5ehx14LupzZ3CQKJqUbmkGJA96pjuSJbrHAWh+nh55l c5IJ70a8I0jYlJQvR5xwfA== 0001047469-99-024130.txt : 19990615 0001047469-99-024130.hdr.sgml : 19990615 ACCESSION NUMBER: 0001047469-99-024130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 223265462 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22717 FILM NUMBER: 99646179 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-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1999 OR [X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ____________________ Commission file number: 0-22717 ACORN PRODUCTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3265462 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 DUBLIN AVENUE, COLUMBUS, OHIO 43215 (Address of principal executive offices, including zip code) (614) 222-4400 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO_____ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 6,021,705 shares of Common Stock, $.001 par value, were outstanding at June 8, 1999. FORM 10-Q ACORN PRODUCTS, INC. TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets 3 July 31, 1998 and April 30, 1999 Consolidated Statements of Operations For the Three Months 4 and Nine Months Ended May 1, 1998 and April 30, 1999 Consolidated Statements of Cash Flows For the Nine Months 5 Ended May 1, 1998 and April 30, 1999 Interim Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial 8-11 Condition and Results of Operations. PART II. OTHER INFORMATION Item 5. Other Matters. 12 Item 6. Exhibits and Reports on Form 8-K. 12 Signatures 13
-2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31, APRIL 30, 1998 1999 -------- ----------- (Unaudited) ASSETS Current assets: Cash.............................................................. $ 1,240 $ 1,075 Accounts receivable, less allowance for doubtful accounts ($894 and $1,629, respectively)............... 24,553 40,716 Inventories....................................................... 30,123 34,827 Prepaids and other current assets................................. 2,948 2,430 -------- -------- Total current assets............................................ 58,864 79,048 Property, plant and equipment, net of accumulated depreciation.... 16,205 16,792 Goodwill, net of accumulated amortization......................... 35,271 35,215 Other intangible assets........................................... 2,293 2,077 -------- -------- Total assets.................................................... $112,633 $133,132 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility......................................... $ 16,308 $ 34,422 Accounts payable.................................................. 7,010 11,346 Accrued expenses.................................................. 4,413 5,532 Income taxes payable.............................................. 43 (65) Other current liabilities......................................... 445 230 -------- -------- Total current liabilities....................................... 28,219 51,465 Long-term debt...................................................... 16,009 16,009 Other long-term liabilities......................................... 4,054 3,473 -------- -------- Total liabilities............................................... 48,282 70,947 Stockholders' equity: Common stock, par value of $.001 per share, 20,000,000 shares authorized, 6,464,105 shares issued at July 31, 1998 and at April 30, 1999, respectively..................... 78,391 78,391 Contributed capital-stock options.................................. 460 460 Minimum pension liability.......................................... (285) (285) Retained earnings (deficit)........................................ (14,215) (14,055) -------- -------- 64,351 64,511 Less treasury stock, at cost, 0 and 417,400 shares at July 31, 1998 and April 30, 1999, respectively................................. -- 2,326 -------- -------- Total stockholders' equity...................................... 64,351 62,185 -------- -------- Total liabilities and stockholders' equity...................... $112,633 $133,132 -------- -------- -------- --------
See accompanying notes. -3- ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED ------------------------- ------------------------- MAY 1, APRIL 30, MAY 1, APRIL 30, 1998 1999 1998 1999 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) Net sales............................ $ 37,911 $ 40,434 $ 79,470 $ 85,055 Cost of goods sold................... 29,440 29,964 61,057 63,743 ---------- ---------- ---------- ---------- Gross profit......................... 8,471 10,470 18,413 21,312 Selling, general and administrative 5,526 5,962 14,756 15,753 expenses........................... Interest expense..................... 720 947 1,761 2,420 Amortization of intangibles.......... 231 263 668 786 Other expenses, net: Watering products consolidation.... -- -- -- 355 Strategic transactions............. -- -- -- 994 Plant consolidation................ -- 284 -- 284 Miscellaneous...................... 102 109 181 313 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes..... 1,892 2,905 1,047 407 Income taxes ........................ 549 581 303 81 ---------- ---------- ---------- ---------- Income from continuing operations.... 1,343 2,324 744 326 Loss from discontinued operations, net of tax......................... -- -- -- (166) ---------- ---------- ---------- ---------- Net income .......................... $ 1,343 $ 2,324 $ 744 $ 160 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE DATA (BASIC): Net income .......................... $ 0.21 $ 0.37 $ 0.12 $ 0.02 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding........................ 6,464,105 6,307,400 6,464,105 6,411,870 ---------- ---------- ---------- ---------- PER SHARE DATA (DILUTED): Net income (loss) ................... $ 0.21 $ 0.37 $ 0.11 $ 0.02 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding........................ 6,510,758 6,363,514 6,510,758 6,467,984 ---------- ---------- ---------- ----------
See accompanying notes. -4- ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE NINE MONTHS ENDED -------------------------- MAY 1, APRIL 30, 1998 1999 -------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 744 $ 160 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Depreciation and amortization............................ 2,886 3,129 Changes in operating assets and liabilities: Accounts receivable.................................... (17,464) (16,163) Inventories............................................ (2,701) (4,704) Other assets........................................... 1,755 734 Accounts payable and accrued expenses.................. 5,541 5,455 Income taxes payable................................... (92) (108) Other liabilities...................................... (225) (796) -------- -------- Net cash provided by (used in) continuing operations....... (9,556) (12,293) Net cash provided by (used in) discontinued operations..... (625) -- -------- -------- Net cash provided by (used in) operating activities........ (10,181) (12,293) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of treasury stock................................. -- (2,326) Additional cost of net assets acquired in acquisitions..... (3,260) (732) Purchases of property, plant and equipment, net............ (2,925) (2,928) -------- -------- Net cash provided by (used in) investing activities........ (6,185) (5,986) CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition line draws..................................... 3,260 -- Net activity on revolving loan............................. 13,327 18,114 -------- -------- Net cash provided by (used in) financing activities........ 16,587 18,114 -------- -------- Net increase (decrease) in cash............................ 221 (165) Cash at beginning at period................................ 1,509 1,240 -------- -------- Cash at end of period...................................... $ 1,730 $ 1,075 -------- -------- -------- -------- Interest paid.............................................. $ 1,354 $ 2,244 -------- -------- -------- --------
See accompanying notes. -5- ACORN PRODUCTS, INC. AND SUBSIDIARIES INTERIM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Footnote disclosure that would substantially duplicate the disclosure contained in the Annual Report to Stockholders for the year ended July 31, 1998 has not been included. The unaudited interim consolidated financial statements reflect all adjustments that in the opinion of management are necessary to a fair statement of results for the periods presented and to present fairly the consolidated financial position of Acorn Products, Inc. (the "Company") as of April 30, 1999. All such adjustments are of a normal recurring nature. 2. Inventories of the Company are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following:
JULY 31, APRIL 30, 1998 1999 -------- -------- (In thousands) Finished goods............................ $16,270 $18,777 Work in process........................... 5,709 3,296 Raw materials and supplies................ 9,212 13,964 ------- ------- 31,191 36,037 Valuation reserves........................ (1,068) (1,210) ------- ------- Total inventories......................... $30,123 $34,827 ------- ------- ------- -------
3. In June 1997, the Financial Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires adoption for fiscal years beginning after December 15, 1997. Therefore, the Company was required to adopt SFAS 130 effective August 1, 1998. The total comprehensive income for the quarter and the nine months ended April 30, 1999 was $2,324 and $160, respectively. 4. Basic earnings per share is computed using the weighted-average number of shares of Common Stock outstanding during each period. Diluted earnings per share is computed using the weighted-average number of shares of Common Stock outstanding during each period plus dilutive Common Stock equivalents using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED ------------------------- ------------------------- MAY 1, APRIL 30, MAY 1, APRIL 30, 1998 1999 1998 1999 ---------- ---------- --------- ---------- Numerator: Net income (loss)................. $1,343,000 $2,324,000 $ 744,000 $ 160,000 Preferred stock dividend.......... -- -- -- -- ---------- ---------- --------- ---------- Numerator for basic earnings per share - Net income (loss) applicable to common stock................... $1,343,000 $2,324,000 $ 744,000 $ 160,000 ---------- ---------- --------- ---------- ---------- ---------- --------- ---------- Denominator: Denominator for basic earnings per share - Weighted-average shares......... 6,464,105 6,307,400 6,464,105 6,411,870 Effect of dilutive securities: 1997 Stock Incentive Plan......... -- -- -- -- 1997 Nonemployee Director Stock Incentive Plan................... 1,132 -- 1,132 -- Deferred Equity Compensation Plan for Directors.................... 12,263 22,856 12,263 22,856 -6- Other stock options............... 33,258 33,258 33,258 33,258 ---------- ---------- --------- ---------- Dilutive potential common shares.... 46,653 56,114 46,653 56,114 Denominator for diluted earnings per share- Adjusted weighted-average shares and assumed conversions.......... 6,510,758 6,363,514 6,510,758 6,467,984 Basic earnings per share............ $ 0.21 $ 0.37 $ 0.12 $ 0.02 ---------- ---------- --------- ---------- ---------- ---------- --------- ---------- Diluted earnings per share.......... $ 0.21 $ 0.37 $ 0.11 $ 0.02 ---------- ---------- --------- ---------- ---------- ---------- --------- ----------
Options to purchase 329,100 shares of Common Stock at $14.00 per share, 18,630 shares of Common Stock at $10.25 per share, 28,800 shares of Common Stock at $6.70 per share and 5,784 shares of Common Stock at $12.10 per share were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the Common Stock and, therefore, the effect would be antidilutive. 5. In November 1998, the Company received notification of an assessment of approximately $200,000 in state taxes and interest related to the sale in August 1997 of substantially all of the assets of its McGuire-Nicholas Company, Inc. subsidiary. The Company is contesting the amount of the assessment. The Company has recorded the contingent liability associated with the assessment, net of the effect of taxes, as a loss from discontinued operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disposition of Non-Lawn and Garden Business Operations." 6. In January 1999, the Company incurred expenses of $355 in consolidating its watering products division into a single facility. 7. The Company incurred expenses for legal, accounting, consulting and other expenses of $994 related to the explanation of certain strategic transactions. 8. In March 1999, the Company announced that it will consolidate its Columbus, Ohio manufacturing facility into its primary manufacturing facility in Frankfort, New York. The Company will continue to operate the Columbus facility through August 1999. The Company expects to incur the costs of the consolidation through the second quarter of fiscal 2000. 9. In April 1999, Huffy Corporation and Huffco Company (collectively, the "Huffy Parties") filed a complaint against the Company in the Court of Common Pleas of Montgomery County, Ohio alleging breach of contract in connection with discussions between the Company and the Huffy Parties regarding a possible merger of the Company and True Temper Hardware Company. The Huffy Parties seek payment of $450,000 in liquidated damages plus expenses. In June 1999, the Company filed an answer to the complaint vigorously denying any liability to the Huffy Parties and asserted a counterclaim of fraud against the Huffy Parties relating to the transaction discussions. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements of the Company and the other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as the factors set forth under the caption "Forward-Looking Information" below. FORWARD-LOOKING INFORMATION Statements in the following discussion that indicate the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those suggested in the forward-looking statements is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended July 31, 1998, as well as in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 1997, as amended on October 29, 1998 and as the same may be amended from time to time. THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED MAY 1, 1998 NET SALES. Net sales increased 6.7%, or $2.5 million, to $40.4 million in the third quarter of fiscal 1999 compared to $37.9 million in the third quarter of fiscal 1998. The increase in net sales reflected strong spring sales, partially offset by a decline in net sales by the Company's injection molding division and reported wheelbarrow sales. Although the Company's overall wheelbarrow sales grew by over 90% during the period, most of those sales were attributable to the Company's wheelbarrow joint venture. Only the Company's portion of the profit or loss from the wheelbarrow joint venture is included in the Company's financial statements. GROSS PROFIT. Gross profit increased 23.6%, or $2.0 million, to $10.5 million in the third quarter of fiscal 1999 compared to $8.5 million in the comparable period of fiscal 1998. Gross margin increased to 25.9% in the third quarter of fiscal 1999 from 22.3% in the third quarter of fiscal 1998. The increase in gross margin primarily was due to the realization of benefits from the Company's cost reduction program, as well as greater overhead absorption rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 7.9%, or $437,000, to $6.0 million in the third quarter of fiscal 1999 from $5.5 million in the third quarter of fiscal 1998. As a percentage of net sales, selling, general and administrative expenses were flat at 14.7% in the third quarter of fiscal 1999 compared to 14.6% in the third quarter of fiscal 1998. OTHER EXPENSES, NET. Other expenses, net, increased to $393,000 in the third quarter of fiscal 1999 from $102,000 in the third quarter of fiscal 1998. Approximately $284,000 of other expenses, net, in the third quarter of fiscal 1999 related to plant consolidation costs incurred in connection with the previously announced consolidation of the Company's Columbus, Ohio manufacturing facility into its primary manufacturing facility located in Frankfort, New York. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing operations before income taxes increased 53.5%, or $1.0 million, to $2.9 million in the third quarter of fiscal 1999 from $1.9 million in the third quarter of fiscal 1998. The increase in income from continuing operations before income taxes primarily was due to the factors affecting gross profit described above. NET INCOME. Net income increased 73%, or $1.0 million, to $2.3 million in the third quarter of fiscal 1999 from $1.3 million in the third quarter of fiscal 1998. NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED MAY 1, 1998 NET SALES. Net sales increased 6.7%, or $5.6 million, to $85.1 million in the first nine months of fiscal 1999 compared to $79.5 million in the first nine months of fiscal 1998. The increase in net sales primarily reflected strong spring sales and the addition of the Company's watering products division. GROSS PROFIT. Gross profit increased 15.7%, or $2.9 million, in the first nine months of fiscal 1999 to $21.3 million from $18.4 million in the first nine months of fiscal 1998. Gross margin increased to 25.1% in the first nine -8- months of fiscal 1999 from 23.2% in the comparable period of fiscal 1998. The increase in gross margin primarily was due to the realization of benefits from the Company's cost reduction program, as well as greater overhead absorption rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 6.8%, or $1.0 million, to $15.8 million in the first nine months of fiscal 1999 compared to $14.8 million in the first nine months of fiscal 1998. As a percentage of net sales, selling, general and administrative expenses were flat at 18.5% in the first nine months of fiscal 1999 compared to 18.6% in the first nine months of fiscal 1998. OTHER EXPENSES, NET. Other expenses, net increased to $1.9 million in the first nine months of fiscal 1999 from $181,000 in the first nine months of fiscal 1998. Approximately $994,000 of other expenses, net in the first nine months of fiscal 1999 related to accounting, legal, consulting and other related expenses incurred in connection with the exploration of strategic transactions. In addition, the Company incurred expenses of approximately $355,000 in the first nine months of fiscal 1999 related to the consolidation of the manufacturing operations of the Company's watering products division. The Company incurred $284,000 of other expenses, net in the first nine months of fiscal 1999 related to plant consolidation costs incurred in connection with the previously announced consolidation of the Company's Columbus, Ohio manufacturing facility into its primary manufacturing facility located in Frankfort, New York. The Company also incurred other expenses, net of approximately $313,000 in the first nine months of fiscal 1999 primarily related to the amortization of bank financing fees. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing operations before income taxes decreased to $407,000 in the first nine months of fiscal 1999 from $1.0 million in the comparable period of fiscal 1998. The decrease in income from continuing operations before income taxes resulted primarily from the strategic transaction, watering products consolidation and Frankfort, New York plan consolidation expenses described above. INCOME FROM CONTINUING OPERATIONS. The Company recognized income tax expense of $81,000 in the first nine months of fiscal 1999 compared to income tax expense of $303,000 in the first nine months of fiscal 1998, bringing income from continuing operations to $326,000 for the first nine months of fiscal 1999 compared to $744,000 in the first nine months of fiscal 1998. NET INCOME. The Company incurred a loss from discontinued operations, net of tax, of $166,000 in the first nine months of fiscal 1999, bringing net income to $160,000 for the period compared to net income of $744,000 in the first nine months of fiscal 1998. SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, the Company's sales tend to be greater during its third and fourth fiscal quarters. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, the Company's level of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the Company's first and second fiscal quarters. These factors increase variations in the Company's quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for the Company's products may vary substantially from the anticipated demand, leaving the Company with excess inventory or insufficient inventory to satisfy customer orders. Weather is the single most important factor in determining market demand for the Company's products and also is the least predictable. For example, while floods in the Midwest adversely affected the sale of most types of lawn and garden equipment in 1992, the severe winter of 1994 resulted in a surge in demand for snow shovels. In addition, bad weather during the spring gardening season, such as that experienced throughout most of the U.S. in the spring of 1995 and 1998, can adversely affect overall annual sales. LIQUIDITY AND CAPITAL RESOURCES The Company entered into an amendment to its bank credit facility in June 1999 providing for modifications to certain financial covenants. -9- In March 1999, the Company's Board of Directors authorized a stock repurchase program to permit the acquisition of up to $2.5 million of the Company's common stock. The Company purchased an aggregate of 442,400 shares of its common stock at an average purchase price of $5.62 per share. The number of shares of common stock currently outstanding is 6,021,705. The Company has concluded the program, having reached the limitations imposed on stock repurchase transactions under its current bank credit facility. Borrowings under the Company's revolving credit facility have increased from July 31, 1998 in accordance with normal seasonal patters. There have been no other significant changes in the Company's liquidity and capital resources as of April 30, 1999 from those discussed in the Company's Annual Report on Form 10-K for the year ended July 31, 1998. DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS In December 1996, the Company sold substantially all of the assets of VSI Fasteners, Inc. ("VSI"), a distributor of packaged fasteners, for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. In August 1997, the Company sold substantially all of the assets of McGuire-Nicholas Company, Inc. ("McGuire-Nicholas"), a manufacturer and distributor of leather, canvas and synthetic fabric tool holders and work aprons, for approximately $4.7 million, plus the assumption of approximately $4 million of related liabilities. VSI's and McGuire-Nicholas' results of operations are shown as "Loss from Discontinued Operations" in the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. CONSOLIDATION OF MANUFACTURING FACILITIES In March 1999, the Company announced that it will consolidate its Columbus, Ohio manufacturing facility into its primary manufacturing facility in Frankfort, New York. The Company will continue to operate the Columbus facility through August 1999. The Company expects the total net cost of the consolidation to be under $3 million, of which less than $1 million is related to net capital expenditures, and expects the annual savings from the consolidation to exceed $1 million. The Company expects to incur the costs of the consolidation through the second quarter of fiscal 2000. IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS STATE OF READINESS. The Company has reviewed its Year 2000 issues in regard to both its information-technology and its non-information-technology. The Company's operating system software as well as some of the Company's older software applications were written using two digits rather than four to define the applicable year. As a result, those software applications have time-sensitive software that recognize a date using "00" as the year 1900 rather than the Year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has modified or replaced portions of its software applications and hardware so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The Company believes that its information-technology is Year 2000-ready in all material respects. The Company does not believe that there any material Year 2000 issues with regard to its non-information-technology. In addition, the Company has initiated communications with its significant customers and suppliers to determine the extent to which the Company's interface systems are vulnerable to the failure of such customers and suppliers to remediate their own Year 2000 issues. Based on such communications, the Company is not currently aware of any third-party issue applicable to the Year 2000 that is likely to have a material impact on the conduct of the business, the results of operations or the financial condition of the Company. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Although the Company is currently updating its computer systems, such updating was not accelerated due to Year 2000 issues. The following chart reflects the Company's estimated Year 2000-specific costs plus the estimated cost to update its current computer systems. ESTIMATED CONVERSION COST
Expense Capital -------- -------- Hardware -- $200,000 Project Management $125,000 75,000 Software and Custom Coding 165,000 -- -------- -------- $290,000 $275,000 -------- -------- -------- --------
-10- RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company does not believe that any Year 2000 issues will impact its manufacturing. The Company believes that its greatest Year 2000 risk is the risk that its customers and suppliers are not Year 2000-ready. Failure by the Company, or its customers or suppliers to adequately address the Year 2000 issues in a timely manner could have a material impact on the conduct of the business, the results of operations and the financial condition of the Company. Accordingly, the Company plans to address all Year 2000 issues before problems materialize. The Company believes that the associated costs are adequately budgeted for in its fiscal 1999 business plans. However, should efforts on the part of the Company, its customers and suppliers fail to adequately address their relevant Year 2000 issues, the most likely worst case scenario would be a material loss of revenue to the Company. THE COMPANY'S CONTINGENCY PLANS. The Company will produce contingency plans on a case by case basis as required as it completes its Year 2000 efforts. At the present time, as no material risks have been identified, no contingency plans have been formed. RISKS. There can be no assurance that the Company will not experience cost overruns or delays in the completion of its year 2000 project. Factors that could cause such cost overruns or delays include, among other things, an unavailability of properly trained personnel, unforeseen difficulty locating and correcting relevant computer codes and similar uncertainties. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. -11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In April 1999, Huffy Corporation and Huffco Company (collectively, the "Huffy Parties") filed a complaint against the Company in the Court of Common Pleas of Montgomery County, Ohio alleging breach of contract in connection with discussions between the Company and the Huffy Parties regarding a possible merger of the Company and True Temper Hardware Company. The Huffy Parties seek payment of $450,000 in liquidated damages plus expenses. In June 1999, the Company filed an answer to the complaint vigorously denying any liability to the Huffy Parties and asserted a counterclaim of fraud against the Huffy Parties relating to the transaction discussions. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER MATTERS. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS.
EXHIBIT EXHIBIT NUMBER DESCRIPTION 10.1 Fifth Amendment to Amended and Restated Credit Agreement, dated as of June 10, 1999, between the Company and Heller Financial, Inc., in its capacity as Agent for the Lenders party to the Amended and Restated Credit Agreement. 27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. The Company filed the following Current Report on Form 8-K with the Securities and Exchange Commission: (i) A current report on Form 8-K, dated March 3, 1999, was filed with the Securities and Exchange Commission on March 4, 1999 (Items 5 and 7). -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACORN PRODUCTS, INC. Date: June 14, 1999 By: /s/ Gabe Mihaly --------------------------------------- Gabe Mihaly, President and Chief Executive Officer (Principal Executive Officer) Date: June 14, 1999 By: /s/ J. Mitchell Dolloff --------------------------------------- J. Mitchell Dolloff, Senior Vice President, Finance and Administration (Principal Financial and Accounting Officer) -13- ACORN PRODUCTS, INC. AND SUBSIDIARIES FORM 10-Q EXHIBIT INDEX
EXHIBIT EXHIBIT NUMBER DESCRIPTION 10.1 Fifth Amendment to Amended and Restated Credit Agreement, dated as of June 10, 1999, between the Company and Heller Financial, Inc., in its capacity as Agent for the Lenders party to the Amended and Restated Credit Agreement. 27 Financial Data Schedule.
EX-10.1 2 EXHIBIT 10.1 FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "AMENDMENT") is dated as of June 10, 1999 and entered into by and among UNIONTOOLS, INC., a Delaware corporation ("BORROWER"), ACORN PRODUCTS, INC., a Delaware corporation ("HOLDINGS"), H.B. SHERMAN MANUFACTURING COMPANY, a Missouri corporation ("H.B. SHERMAN"), UNIONTOOLS IRRIGATION, INC., a Delaware corporation formerly known as UnionTools Watering Products, Inc. ("IRRIGATION" and together with Borrower, Holdings and H.B. Sherman collectively, the "LOAN PARTIES"), HELLER FINANCIAL, INC., in its individual capacity as a Lender and as Agent for all Lenders ("AGENT"), and the other Lenders party hereto. R E C I T A L S WHEREAS, Borrower, Agent and Lenders have entered into an Amended and Restated Credit Agreement dated as of May 20, 1997, as amended by that certain Amendment No. 1 to Credit Agreement dated November 24, 1997, Second Amendment to Credit Agreement dated as of May 22, 1998, Third Amendment to Amended and Restated Credit Agreement dated as of October 29, 1998 and Fourth Amendment to Amended and Restated Credit Agreement dated as of February 26, 1999 (as the same may be further amended, restated, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), pursuant to which, among other things, Lenders have agreed, subject to the terms and conditions set forth in the Credit Agreement, to make loans and financial accommodations to Borrower; and WHEREAS, the Loan Parties have requested that the Agent and Requisite Lenders agree to modify the Credit Agreement pursuant to the terms and conditions of this Amendment; and NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Loan Parties, Requisite Lenders and Agent agree as follows: 1. DEFINED TERMS. All capitalized terms used herein but not elsewhere defined shall have the respective meanings ascribed to such terms in the Credit Agreement, as amended by this Amendment. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as follows: 2.1 TOTAL INTEREST COVERAGE. Subsection 4.5 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "4.5 TOTAL INTEREST COVERAGE. Borrower shall not permit Total Interest Coverage of Holdings and its Subsidiaries on a consolidated basis for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period.
DATE/PERIOD AMOUNT April 30, 1999 2.40:1 July 31, 1999 2.50:1 October 31, 1999 2.75:1 On and after January 31, 2000 3.00:1
"Total Interest Coverage" will be calculated as illustrated in Exhibit 4.10(C)." 2.2 TOTAL INDEBTEDNESS TO OPERATING CASH FLOW RATIO. Subsection 4.6 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "4.6 TOTAL INDEBTEDNESS TO OPERATING CASH FLOW RATIO. Borrower shall not permit the ratio of Total Indebtedness to Operating Cash Flow of Holdings and its Subsidiaries on a consolidated basis for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be greater than the amount set forth below for such date or period.
DATE/PERIOD AMOUNT April 30, 1999 5.00:1 July 31, 1999 4.50:1 On and after October 31, 1999 3.00:1
"Total Indebtedness" and "Operating Cash Flow" will be calculated as illustrated on Exhibit 4.10(C)." 2.3 CLOSING AND CONSOLIDATION EXPENSES. The following non-recurring expenses in the sum of $805,000.00 shall not be deducted in calculating EBIDAT for the purposes of determining compliance with the financial covenants set forth in subsections 4.5 and 4.6 of the Credit Agreement: expenses of $166,000.00 incurred during the quarter ended October 31, 1998 in connection with the discontinued operations of McGuire-Nicholas Company; expenses of $355,000.00 incurred during the quarter ended January 29, 1999 in connection with the consolidation of the operations of Irrigation; and expenses of $284,000.00 incurred during the quarter ended April 30, 1999 in connection with the consolidation of Borrower's operations at Columbus, Ohio into Frankfurt, New York. 2 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment shall be subject to the satisfaction of the following conditions in a manner, form and substance satisfactory to Agent: 3.1 DELIVERY OF DOCUMENTS. This Amendment shall have been delivered to Agent, duly authorized and executed by the Loan Parties and Requisite Lenders, together with such other instruments, documents, certificates, consents, waivers, opinions and financing statements as Agent may reasonable request. 3.2 MATERIAL ADVERSE CHANGE. No event shall have occurred since the Closing Date which has had or reasonably could be expected to have a Material Adverse Effect. 3.3 PERFORMANCE; NO DEFAULT. Each Loan Party shall have performed and complied with all agreements and conditions contained in the Loan Documents to be performed by or complied with by such Loan Party prior to the date hereof, and no Event of Default shall exist. 4. REPRESENTATIONS AND WARRANTIES. Each Loan Party hereby confirms to Agent and the Lenders that the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct in all material respects as of the date hereof, and shall be deemed to be remade as of the date hereof. 5. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Each Loan Party hereby consents to the execution and delivery of this Amendment. Each Loan Party hereby agrees that except as amended hereby, the Credit Agreement and each of the other Loan Documents shall remain in full force and effect in accordance with their respective terms. Each Loan Party hereby ratifies and confirms its liabilities, obligations and agreements under the Credit Agreement and each other Loan Document, all as amended by this Amendment, and acknowledges that: (i) as of the date of the Amendment, such Loan Party, to its knowledge, has no defenses, claims or set-offs to the enforcement by Agent and Lenders of such liabilities, obligations and agreements; and (ii) other than as specifically set forth herein, Agent and Lenders do not waive, diminish or limit any term or condition contained in the Credit Agreement or any of the other Loan Documents. Agent's and each Lender's agreement to the terms of this Amendment or any other amendment shall not be deemed to establish or create a custom or course of dealing between Agent or Lenders, on the one hand, and any Loan Party, on the other hand. 6. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same instrument. 7. FURTHER ASSURANCES AND FEES AND EXPENSES. Each Loan Party covenants and agrees that it will at any time and from time to time do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, documents and instruments as reasonably may be required by Agent in order to effectuate fully the intent of this Amendment. The Borrower shall pay all fees and expenses incurred in the preparation, 3 negotiation and execution of this Amendment, including, without limitation, the fees and expenses of counsel for Agent. 8. GOVERNING LAW. This Amendment shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. 9. SEVERABILITY. In the event that any provision of this Amendment is deemed to be invalid by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, this Amendment shall be construed as not containing such provision and the invalidity of such provision shall not affect the validity of any other provisions hereof, and any and all other provisions hereof which otherwise are lawful and valid shall remain in full force and effect. 10. HEADINGS AND RECITALS. The paragraph headings used in this Amendment are for convenience of reference only and in no way define, describe or limit the scope or intent of this Amendment. The foregoing recitals are hereby incorporated herein by this reference thereto. 11. NO STRICT CONSTRUCTION. The language used in this Amendment shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party hereto. IN WITNESS WHEREOF, this Amendment has been executed and delivered by each of the parties hereto on the date first set forth above. UNIONTOOLS, INC., a Delaware corporation By: /s/ J.M. Dolloff ------------------------------------------- Name: J.M. Dolloff ------------------------------------ Title: Senior Vice President, Finance and Administration ------------------------------------ ACORN PRODUCTS, INC., a Delaware corporation By: /s/ J.M. Dolloff ------------------------------------------- Name: J.M. Dolloff ------------------------------------ Title: Senior Vice President, Finance and Administration ------------------------------------ H.B. SHERMAN MANUFACTURING COMPANY, a Missouri corporation 4 By: /s/ J.M. Dolloff ------------------------------------------- Name: J.M. Dolloff ------------------------------------ Title: President ------------------------------------ UNIONTOOLS IRRIGATION, INC., a Delaware corporation By: /s/ J.M. Dolloff ------------------------------------------- Name: J.M. Dolloff ------------------------------------ Title: President ------------------------------------ HELLER FINANCIAL, INC., a Delaware corporation, in its individual capacity as a Lender and as Agent for all Lenders By: /s/ William Vokevich ------------------------------------------- Name: William Vokevich ------------------------------------ Title: Asst Vice President ------------------------------------ FLEET CAPITAL CORPORATION By: /s/ Matthew R. Van Steenhuyse ------------------------------------------- Name: Matthew R. Van Steenhuyse ------------------------------------ Title: Senior Vice President ------------------------------------ PNC BANK, NATIONAL ASSOCIATION By: /s/ Warren T. Weber ------------------------------------------- Name: Warren T. Weber ------------------------------------ Title: Vice President ------------------------------------ BANKBOSTON, N.A., (formerly known as The First National Bank of Boston) 5 By: /s/ Gretchen Troiano ------------------------------------------- Name: Gretchen Troiano ------------------------------------ Title: Vice President ------------------------------------ FIRSTAR BANK, N.A. By: ------------------------------------------- Name: ------------------------------------ Title: ------------------------------------ SANWA BUSINESS CREDIT CORPORATION By: /s/ Matthew R. Van Steenhuyse ------------------------------------------- Name: Matthew R. Van Steenhuyse ------------------------------------ Title: Senior Vice President ------------------------------------ 6 EX-27 3 EXHIBIT 27
5 1,000 3-MOS 9-MOS JUL-30-1999 JUL-30-1999 JAN-30-1999 JUL-31-1998 APR-30-1999 APR-30-1999 1,075 1,075 0 0 42,345 42,345 (1,629) (1,629) 34,827 34,827 79,048 79,048 29,796 29,796 (13,004) (13,004) 133,132 133,132 51,465 51,465 0 0 0 0 0 0 78,391 78,391 (18,208) (18,208) 133,132 133,132 40,434 85,065 40,434 85,065 29,964 63,743 29,964 63,743 5,618 15,485 0 0 947 2,420 2,905 407 581 61 2,324 226 0 (156) 0 0 0 0 2,324 160 0.37 0.02 0.37 0.02
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