ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Acorn
Products, Inc. and its subsidiary UnionTools, Inc. ("UnionTools"). References to
fiscal years 1998 and 1999 reflect the fiscal year ended on the Friday closest
to July 31 of the applicable year (e.g., "fiscal 1999" reflects the fiscal year
ended July 30, 1999). References to transition year 1999 reflect the five-month
period ended December 31, 1999 ("transition 1999"). References to calendar year
1999 reflect the calendar year period ended December 31, 1999 ("calendar 1999").
References to fiscal years 2000, 2001, and 2002 reflect the fiscal year period
ended on December 31 of the applicable year. As used in this Annual Report on
Form 10-K, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot"
refers to The Home Depot, Inc., "Lowe's" refers to Lowe's Companies, Inc.,
"Mid-States" refers to Mid-States Distributing Company, Inc., "Oklahoma Rig"
refers to Oklahoma Rig & Supply Company, Inc., "Orgill" refers to Orgill, Inc.,
"Sears" refers to Sears, Roebuck & Company, "Tractor Supply" refers to Tractor
Supply Company, Inc., "Wal-Mart" refers to Wal-Mart Stores, Inc., and "White
Cap" refers to White Cap Pro-Contractor Supplier. Our primary registered
trademarks include: Garden Craft(R), Gardener's Value(R), Landscape Gardener(R),
Perfect Cut(R), Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R),
UnionTools(R), and Yard `n Garden(R). Craftsman(R) and Sears(R) are registered
trademarks of Sears.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects", "intends", "plans", "projects", "believes", "estimates", and
similar expressions. In the normal course of business, we, in an effort to help
keep our stockholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statement on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in our forward-looking statements is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
GENERAL
Our primary business is associated with our UnionTools subsidiary.
UnionTools was founded in 1890, and is a leading designer, manufacturer, and
marketer of branded non-powered lawn and garden products. Our primary business
is the manufacturing, marketing, and distribution of garden tools through mass
market and other distribution channels in the United States. We also sell our
products to professional and commercial end-users through distributors and
industrial supply outlets. Our principal products include long handle tools
(such as shovels, forks, rakes, and hoes), snow tools, posthole diggers, wheeled
goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand
tools, and repair handles. Our products bear well known brand names, including
Garden Craft(R), Gardener's Value(R), Landscape Gardener(R), Perfect Cut(R),
Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R), UnionTools(R), Yard `n
Garden(R), and, pursuant to a license agreement, Scotts(R). In addition, we
manufacture and supply private label products for a variety of customers,
including products sold to Sears under the Craftsman(R) brand name and Ace
Hardware under the Ace(R) brand name.
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GOING PRIVATE TRANSACTION
In February 2003, Acorn Merger Corporation ("AMC"), The TCW Group,
Inc., Trust Company of the West, TCW Asset Management Company, TCW Special
Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund,
L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala
(collectively, the "Filing Persons"), who collectively own approximately 92.5%
of our common stock, filed a Schedule 13E-3 with the Securities and Exchange
Commission ("Commission") stating that they intend to merge AMC with and into
our Company. Upon consummation of the merger and filing of a Form 15 with the
Commission, we will no longer be subject to the reporting requirements of the
Securities Exchange Act of 1934 and cease to be a "public" company. In the
merger, each share of our common stock not owned by AMC will be converted into
the right to receive $3.50. For more information about the merger, see the
Schedule 13E-3 filed by the Filing Persons.
PRODUCTS
We sell non-powered lawn and garden tools, with our primary products
being long handle tools. We design, manufacture, source, and market tools in the
following product categories:
- Shovels, including round point and square point shovels;
garden/nursery shovels; roof rippers; irrigation and trenching
shovels; metal and plastic head snow shovels and pushers; garden,
nursery, and transplanting spades; drain and post spades;
- Posthole Diggers and Augers;
- Scoops, including aluminum, plastic, and steel scoops; general
and special purpose scoop shovels;
- Rakes, including steel and plastic/steel lawn, leaf and shrub
rakes; plastic lawn, leaf and shrub rakes; bow head and level head
rakes; specialty rakes and brooms;
- Garden Tools, including garden and special purpose hoes; weeders
and scrapers; rotary and half-moon edgers; fruit harvesters; bulb
planters; small hand tools like trowels, weeders, and cultivators;
- Cultivators and Forks, including forged cultivators and hooks in
different sizes and spread; spading forks, manure forks, and
special purpose forks;
- Striking Tools, including sledges and heavy hammers; axes, mauls,
and wedges; picks and mattocks; tampers; heavy bars; bars,
pullers, and rippers;
- Cutting Tools, including bypass and anvil hand pruners; hedge and
grass shears; bypass and anvil loppers and mini loppers; tree
pruners and saws;
- Wheeled Goods, including wheelbarrows and hand trucks; and
- Miscellaneous Products, including garden tool organizers, repair
handles, and edging tools.
We continue to develop new products and enhance existing products in
order to maintain and improve our position in the market. Our marketing and
engineering departments develop new products with assistance from independent
consultants.
Shovels and other steel head implements are primarily manufactured at
our Frankfort, New York facility. Forks, cutting tools, and other implements are
sourced worldwide. We process North American ash wood logs at our seven wood
mills and purchase fiberglass handles. Our Hebron, Ohio injection molding
facility manufactures some of the plastic components used in our products, such
as plastic snow shovel heads. In addition, this facility manufactures
proprietary custom molded products and component parts for other manufacturers
and distributors.
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SALES AND MARKETING
The non-powered lawn and garden industry is mature and, due in part to
the low-cost nature of non-powered equipment, generally is non-cyclical. Demand
for non-powered lawn and garden tools generally is driven by the desire of
do-it-yourself, or "DIY", consumers to maintain and landscape residential
properties and by the need of industrial and farm professionals to acquire and
utilize high-quality tools that will aid them in efficiently completing their
jobs. We promote our products primarily through cooperative advertising and
where applicable, provide customers with merchandising plan-o-grams and custom
designed product displays complete with informative signs to assist at the
retail level.
We market our products primarily within the United States. Sales within
the United States comprised 98% of total sales in fiscal 2001 and 96% of total
sales in fiscal 2002. Our products are sold primarily through mass merchants,
home centers, buying groups, and distributors. We market our products through
our own sales staff with significant support from manufacturers' representative
organizations.
Our sales force is comprised of regional managers and direct sales
professionals who regularly call on customers and manage manufacturers'
representatives who provide store level support to customers. These
manufacturers' representatives also sell lawn and garden products for other
manufacturers, but not products that compete with ours.
We also have an Internet web site at www.uniontools.com which provides
consumers with product information, dealer locations, and customer service
contacts. In addition, customers can download Company information, catalogs, and
line art and photographs for use in advertisements. The reference to our web
site address does not constitute incorporation by reference of the information
contained on our web site, so you should not consider any information on our web
site to be a part of this Annual Report on Form 10-K.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
Under a licensing agreement, we pay royalties to The Scotts Company and
therefore have the right to produce and market a line of garden tools bearing
the Scotts(R) trademark. We anticipate the licensing agreement with The Scotts
Company will expire on December 31, 2003. We also have other licensing
agreements that are not material to our business.
We apply for patents and trademarks as applicable. Patents presently
owned by us are considered, in the aggregate, to be important to the conduct of
our business. Patent protection does not, however, deter competitors from
attempting to develop similar products. We are licensed under a number of
patents, none of which individually is considered material to our business. We
own a number of patents and trademarks registered in the United States Patent
and Trademark Office, as well as the patent and trademark offices of certain
other countries. These include the trademarks:
- Garden Craft(R);
- Gardener's Value(R);
- Landscape Gardener(R);
- Perfect Cut(R);
- Razor-Back(R);
- SNOFORCE(R);
- Union(R);
- Union Pro(R);
- UnionTools(R); and
- Yard `n Garden(R).
Such registrations will continue as new patents and trademarks are developed or
acquired. We aggressively monitor and protect our brands against infringement
and other violations.
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ACQUISITIONS AND DIVESTITURES
During fiscal 2000, we discontinued the manufacture and sale of
watering products, and subsequently sold the related assets. These actions
represent the desire to dedicate our attention to core products: long handle
tools, cutting tools, striking tools, and wheeled goods.
COMPETITION
The markets for non-powered lawn and garden tools are highly
competitive, especially with respect to product pricing, product quality,
innovation in the design of new products, availability, customer service and
support, although the degree and nature of such competition vary by location and
product line. We are generally perceived by our customers to be the highest
quality provider and to have the best service levels in our industry. We also
enjoy strong brand name recognition. We believe that our commitment to customer
service, product innovation, and distribution systems position us well to
compete in the markets for non-powered lawn and garden tools.
We compete with various manufacturers and distributors. These
competitors also possess widely recognized brand names. With the merger of
Ames(R) and True Temper(R) in February 1999, the long handle tool market is now
primarily supplied by two domestic competitors - Ames(R) True Temper(R) and us.
Primary competitors in the cutting tools market are Fiskars(R) and Corona(R).
Our other product lines primarily compete with those of numerous small
manufacturers and distributors. In addition, we compete with various other
international manufacturers that export parts and finished goods to the United
States.
Our strategy requires that we continue to focus on customer service and
end-user needs, partly through the development and marketing of innovative new
products at competitive prices. We are also facing pricing pressures which, if
not mitigated by cost and expense reductions, may result in lower profitability
and could jeopardize our ability to grow or maintain market share. We believe
that our future success will depend upon our ability to produce and procure low
cost quality products and satisfy consumer tastes with respect to function and
design, and our ability to market such products in each applicable category at
competitive prices. No assurance can be given that we will be able to
successfully compete on the basis of these factors in the future.
CUSTOMERS
We sell our products through a variety of distribution channels
including:
- mass merchants such as Sears and Wal-Mart;
- home centers such as Home Depot and Lowe's;
- buying co-ops such as Ace Hardware;
- distributors and retailers such as Mid-States, Orgill, and Tractor
Supply; and
- industrial distributors such as Oklahoma Rig and White Cap.
Our largest customer is Home Depot and we have been a supplier to them
since 1997. Sears, which includes Sears' Orchard Supply division, is another
major customer. We have been a continuous supplier to Sears for more than eighty
years and the primary supplier of long handle tools to Sears for more than fifty
years. Home Depot and Sears together account for 32% of gross sales. Our ten
largest customers accounted for approximately 53% of gross sales during fiscal
2000, 57% of gross sales during fiscal 2001, and 65% of gross sales during
fiscal 2002. Most of our major customers are on electronic data interchange
(EDI) systems.
There can be no assurance that our sales to Home Depot, Sears, or other
major customers will continue at existing levels. A substantial reduction or
cessation of sales to Home Depot, Sears, or other major customers could have a
material adverse effect on our business, financial condition, and results of
operations. In addition, we continue to face increasing pressures from retailers
with respect to pricing, cooperative 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 our business, financial
condition, and results of operations.
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DISTRIBUTION AND LOGISTICS
Customer orders are placed and processed centrally at our headquarters
in Columbus, Ohio and then allocated from our current stock of finished goods in
our distribution facility in Louisville, Kentucky. We use common carriers to
ship finished products from our facilities to customer delivery points. We
continue to reassess the structure and processes of our logistics program for
opportunities to reduce costs and improve customer service.
In fiscal 2000, we exited our western distribution facility in
conjunction with the sale of assets related to the manufacture and sale of
watering products.
In fiscal 2001, in order to increase efficiency and verify accuracy of
shipments, we added a product scanning software enhancement that utilizes RF
technology at our distribution facility.
In fiscal 2002, we relocated our sole distribution facility from
Columbus, Ohio into a newly built customized facility in Louisville, Kentucky.
We utilize an information system that allows us to determine the status
of customer orders, process orders quickly, respond to customer inquiries, and
adjust shipping schedules to meet customer requirements. We believe that these
systems enable efficient order processing, expedite shipments, and improve
customer service. Prioritizing our efforts in distribution and logistics has
resulted in an improvement in service levels, and we consistently strive to
achieve On Time, In Full, Error Free ("OTIFEF") shipments.
MANUFACTURING AND SOURCING
We continue to strengthen our expertise and infrastructure. Our ongoing
efforts continued to improve both manufacturing and sourcing capabilities in
order to pursue the "world's low cost production" on all products and
components.
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, and injection molding. Over the last 100
years, we have developed unique processes that enable us to perform these
complex tasks in an efficient manner.
In addition, we use our 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
our own products.
Since many products and components are more competitively manufactured
outside our facilities, we began strategic sourcing of some product components
in China in 1999. During fiscal 2001 and 2002, we continued to expand our
sourcing capabilities to include manufacturers in Europe, Asia, Mexico, and
South America, and dedicated resources to manage these relationships.
INFORMATION TECHNOLOGY
In fiscal 2000, we outsourced our information technology function to
Acxiom Corporation. Acxiom is a global leader in real-time customer data
integration offering innovative database marketing services, infrastructure
management, premier data content, and integration technologies. Founded in 1969,
Acxiom is currently headquartered in Little Rock, Arkansas, with operations in
the United States, the United Kingdom, France, Spain, and Australia.
This relationship has allowed us to tap into the substantial resources
and expertise of Acxiom that were unavailable to us on a standalone basis.
Acxiom provides all information technology services support for us, including
server management, data network services, local area and wide area networks,
desktop support, help desk services, and all of our application software support
needs. We expect technology to provide significant efficiencies and capabilities
to us in servicing our customers in the future.
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RAW MATERIALS
The primary raw materials used to produce our products are steel,
fiberglass, and ash wood.
- Steel. We purchase our steel requirements from several domestic
suppliers. The primary considerations in specialty steel sourcing
are metallurgy, price, and width. We have strong and
long-established relationships with our steel suppliers and have
never experienced sourcing problems. We do not enter into
long-term contracts for steel purchases. We purchased the majority
of our steel requirements from Steel Technologies and Shiloh
Industries, Inc. in fiscal 2002.
- Fiberglass. The primary considerations for sourcing fiberglass are
production capacities, quality, and cost. Fiberglass is used
primarily in the production of high-end tools. We purchased the
majority of our fiberglass requirements from Strongwell in fiscal
2002.
- Ash Wood. Ash is the ideal hardwood for handles because it is
lightweight, flexible, and splinters less than most hardwoods. We
employ wood specialists who maintain relationships with numerous
log suppliers and are responsible for sourcing our ash needs. We
believe that sufficient quantities of ash will continue to be
available. Each of our sawmills typically maintains a five to
eight week inventory of ash to cover occasional short-term
fluctuations in supply. We import wood handles for some of our
promotionally priced products, such as rakes and hoes. Imported
wood is less expensive than ash and is of sufficient quality for
tools (other than shovels) designed for opening-price-point
levels. Our sawmills were "Green" certified in fiscal 2001. "Green
Certification" is to ensure that forests are managed in an
ecologically sound, socially responsible, and economically viable
manner.
We have several suppliers for most of our raw materials. There can be
no assurance, however, that we will not experience shortages of raw materials or
of components essential to our 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 our business, financial condition, and results of operations.
ASSOCIATES
As of December 31, 2002, we employed approximately 450 people
(including seasonal associates), approximately 350 of whom were paid on an
hourly basis. Our staffing requirements fluctuate during the year due to the
seasonal nature of sales in the lawn and garden industry, and approximately 50
additional seasonal associates are utilized during our busy season. The average
tenure of our hourly associates is over 10 years. Hourly associates at the
Delaware, Ohio sawmill are represented by the International Association of
Machinists ("IAM"). Our contract with the IAM expires in April 2003. During
2002, we negotiated a Closure Agreement with the IAM for our Columbus, Ohio
distribution facility. The International Brotherhood of Boilermakers, Iron Ship
Builders, Blacksmiths, Forgers and Helpers ("IBB") represents the hourly
associates in Frankfort, New York. Our contract with the IBB expires in June
2004. During 2002, we negotiated a Closure Agreement with the International
Brotherhood of Teamsters ("IBT") for our Portville, New York sawmill. The Glass,
Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO ("AGM")
represents hourly associates at our Hebron, Ohio injection molding facility. Our
contract with the AGM expires in March 2005. No other associates are represented
by unions.
We have not been subject to a strike or work stoppage in over 20 years,
and management believes that our relationships with associates, the IAM, the
IBB, and the AGM are good. There can be no assurance, however, that future labor
contract negotiations will be successful or occur without work stoppages or
strikes. A prolonged work stoppage or strike at any of our facilities could have
a material adverse effect on our business, financial condition, and results of
operations.
ENVIRONMENTAL MATTERS
We are 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. We have made, and
will continue to
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make, expenditures to comply with these environmental requirements and regularly
review our procedures and policies for compliance with environmental laws. We
also have been involved in remediation actions with respect to certain
facilities. The amounts thus far expended for such compliance and remediation
activities have been minimal. Current conditions and future events such as
changes in existing laws and regulations may, however, give rise to additional
compliance or remediation costs that could have a material adverse effect on our
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 any of our properties or associated offsite disposal location, or if
contamination from prior activities is discovered at any of our properties, we
may be held liable and the amount of such liability could be material.
At December 31, 2002, we believe that we have no significant
outstanding environmental issues.
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