UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-11549
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BLOUNT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-0780521
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 Executive Park Drive, Montgomery, Alabama 36116-1602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 244-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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State the aggregate market value of the voting common stock held by
nonaffiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the common stock was sold, or the average bid
and asked prices of such common stock, as of a specified date within 60 days
prior to the date of filing.
Aggregate market value of voting common stock held by nonaffiliates as of
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February 1, 2000: $58,772,304
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.01 par value, as of February 1, 2000: 30,795,882 shares
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes.
Portions of proxy statement for the annual meeting of stockholders to be held
April 17, 2000, are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
The Company is an international manufacturing and marketing company with sales
in over 100 countries and operations in three business segments: Outdoor
Products, Sporting Equipment, and Industrial and Power Equipment.
The following text contains various trademarks of Blount, Inc., a wholly-owned
subsidiary of the Company, and its subsidiaries.
OUTDOOR PRODUCTS
The Company's Outdoor Products segment is comprised of the Oregon Cutting
Systems Division ("Oregon"), Dixon Industries, Inc. ("Dixon") and Frederick
Manufacturing Corporation ("Frederick"). Oregon produces a wide variety of
cutting chain, chain saw guide bars, cutting chain drive sprockets and
maintenance tools for use primarily on portable gasoline and electric chain
saws, and mechanical timber harvesting equipment. The Oregon trademark is well
known to end-users and the Company believes that it is the world leader in the
production of cutting chain. Oregon's cutting chain and related products are
used primarily by professional loggers, construction workers, farmers, arborists
and homeowners. Oregon markets an Industrial Cutting System ("ICS"). ICS, a
diamond-segmented cutting system for concrete (including steel-reinforced
concrete), is a faster and more flexible concrete cutting method than others
currently employed in the construction and demolition industries.
Oregon sells to distributors, dealers and mass merchandisers serving the retail
replacement market. In addition, Oregon currently sells its products to more
than 30 original equipment manufacturers ("OEMs"). In 1999, approximately 13%
of the sales by the Outdoor Products segment were to one customer. Due to the
high level of technical expertise and capital investment required to manufacture
cutting chain and guide bars, the Company believes that it is able to produce
durable, high-quality cutting chain and guide bars more efficiently than most of
its competitors. The use of Oregon cutting chain as original equipment on chain
saws is also promoted through cooperation with OEMs in improving the design and
specifications of chain and saws.
The Outdoor Products segment's businesses are also affected to some extent by
severe weather. For example, severe weather patterns and events such as
hurricanes, tornadoes or ice storms generally result in greater chain saw use
and, therefore, stronger sales of saw chain and guide bars.
The Company has Oregon marketing personnel throughout the United States and in a
number of foreign countries. Oregon manufactures cutting chain and related
products in Milwaukie, Oregon; Guelph, Ontario, Canada; and Curitiba, Parana,
Brazil.
Oregon's products compete with other cutting chain manufacturers as well as a
small number of international chain saw manufacturers, some of whom are also
customers. This segment's principal raw material, strip steel, is generally
purchased from two vendors, and can be obtained from other sources.
Sales by Oregon accounted for 74% of sales attributable to the Outdoor Products
segment in the year ended December 31,1999.
Dixon, located in Coffeyville, Kansas, was acquired in 1990 and has manufactured
ZTR (zero turning radius) lawn mowers and related attachments since 1974. Dixon
pioneered the development of ZTR and is the only manufacturer to offer a full
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line of ZTR lawn mowers for both homeowner and commercial applications. The
Company believes Dixon is the leading manufacturer of residential zero turning
radius lawn mowers.
The key element which differentiates Dixon from its competitors is its unique
mechanical transaxle. The transaxle transmits power independently to the rear
drive wheels and enables the operator to move the back wheels at different
speeds and turn the mower in a circle no larger than the machine, a "zero radius
turn". This unique transmission enables the Dixon mower to out-maneuver
conventional ride-on products available in the market today and provides a cost
advantage over the more expensive hydrostatic drives used by competitors in the
market. Nonetheless, the latest product additions are in the hydrostatic
portion of the product line. In late 1997, Dixon introduced the "Estate Line"
featuring mowers which are designed for large, homeowner lawns and are lower
priced than commercial hydrostatic units. Models are available in 42-inch, 50-
inch and 60-inch sizes. Expanding on the Estate Line, Dixon introduced a low-
cost hydro line, IZT (integrated zero turn), in 1998. The IZT is positioned
between Dixon's normal hydro and transaxle models geared for the residential
user. It features models with cut widths of 42 inches, 50 inches and 60 inches.
Dixon sells its products through distribution channels comprised of full-service
dealers, North American distributors and export distributors.
Dixon's competitors include general lawn mower manufacturers such as MTD,
American Yard products and Murray as well as zero turning radius lawn mower
manufacturers such as Ariens, Snapper and Simplicity.
Frederick, located in Kansas City, Missouri, was acquired in January 1997. See
"Business - Acquisitions and Dispositions" on page 7. Frederick is a well-known
and highly respected manufacturer that supplies quality Silver Streak brand
accessories for lawn mowers and other outdoor products. Frederick fits well
into the Company's operations and is provided international sales opportunities
through Oregon's worldwide distribution outlets. Frederick's products are sold
through dealers and distributors. Frederick competes in a highly fragmented
industry where many competitors manufacture replacement products as one part of
a larger business.
Sales by Dixon and Frederick in the year ended December 31, 1999, accounted for
26% of sales of the Outdoor Products segment.
SPORTING EQUIPMENT
On November 4, 1997, the Company acquired the Federal Cartridge Company
("Federal"). See "Business - Acquisitions and Dispositions" on page 7. Federal
manufactures and markets shotshell, centerfire and rimfire cartridges,
ammunition components, and clay targets. These products are distributed
throughout the United States through a network of distributors and directly to
large retail chains, the U.S. government and federal, state, local and
international law enforcement agencies. The Federal acquisition both
complemented and significantly expanded the Sporting Equipment segment's product
offerings. Shotgun shells, a product not manufactured or sold by the Company
prior to this acquisition, represented approximately 21% of Sporting Equipment's
sales for 1999. Federal is also a significant producer and marketer of
centerfire rifle ammunition, products as to which the Company's market share had
been much smaller. Federal markets its products under the brand names of
"Premium," "Gold Medal," "American Eagle," "Classic," "BallistiClean" and
"Tactical." The acquisition of Federal placed the Company among the leading
United States producers of ammunition products. Ammunition sales accounted for
approximately 73% of the Sporting Equipment segment's sales in 1999.
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The Company's other Sporting Equipment segment operations manufacture small arms
ammunition, reloading equipment, primers, gun care products and accessories, and
distribute imported sports optical products. Principal products include CCI and
Speer ammunition sold for use by hunters, sportsmen and law enforcement and
military personnel; RCBS reloading equipment for use by hunters and sportsmen
who prefer to reload their own ammunition; Redfield scope mounting systems;
Outers gun care and trap-shooting products; Ram-Line gun accessories; Weaver
scope mounting systems; and Simmons and Weaver optics. The Company believes
that it is a market leader in the domestic gun care and ammunition reloading
markets with high levels of brand name recognition in each of these areas. The
Company believes that the Sporting Equipment segment is also a world leader in
the production of industrial powerloads which are used in the construction
industry to drive fastening pins into metal or concrete. The Sporting Equipment
segment distributes its products through multiple channels, including law
enforcement agencies, OEMs, national and regional retail accounts (including
sports super-stores and mass merchants), dealers and distributors.
The market for Sporting Equipment products is characterized by a high degree of
customer loyalty to brand names and historically has not been affected by
adverse economic conditions. A continuing focus on new and better technologies
has enabled the Company to introduce a number of new and improved products in
recent years. New product introductions in 1999 include expansion of our
Federal Premium Rifle line with the addition of the Barnes XLC, the expansion of
High-Energy wads and Tungsten based shotshells. Lead-free ammunition continues
to grow rapidly with law enforcement and general consumer groups and recent new
products such as Cleanfire and BallistiClean are experiencing strong demand.
Principal raw materials include brass, lead, aluminum and powder, which are
purchased from several suppliers. The Company manufactures ammunition and
powerloads in Lewiston, Idaho; shotshell, ammunition and ammunition components
in Anoka, Minnesota; reloading equipment in Oroville, California; mounts,
shooting accessories and gun care equipment in Onalaska, Wisconsin; and clay
targets in Richmond, Indiana. The Company imports substantially all its optical
products from foreign suppliers and does not rely on long-term agreements,
although it does have long-term relationships with some of its suppliers.
Optical products are distributed from a warehouse in Thomasville, Georgia.
In the market for ammunition and accessories, the Sporting Equipment segment
competes against manufacturers that also have well established brand names and
strong market positions, including Remington and Winchester. In accessories,
the Sporting Equipment segment competes against a number of smaller competitors,
none of which has a dominant market share. These competitors include Lyman and
Hornaday in reloading equipment, and Tasco and Bushnell in optics and scopes.
In 1999, approximately 20% of the Sporting Equipment segment's sales were to one
customer.
INDUSTRIAL AND POWER EQUIPMENT
The Company's Industrial and Power Equipment segment manufactures equipment for
the timber harvesting industry and for industrial use, industrial tractors for
land and utility right-of-way clearing, and components for the gear industry.
Major users of these products include logging contractors, harvesters, land
reclamation companies, utility contractors, building materials distributors,
scrap yard operators and original equipment manufacturers of hydraulic
equipment.
The Company believes that it is a world leader in the manufacture of hydraulic
timber harvesting equipment, which includes a line of truck-mounted, trailer-
mounted, stationary-mounted and self-propelled loaders and crawler feller
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bunchers (tractors with hydraulic attachments for felling timber) under the
Prentice brand name; a line of rubber-tired feller bunchers and related
attachments under the Hydro-Ax brand name; and a line of delimbers, slashers and
firewood processors under the CTR brand name.
The Company is a competitive force in the gear industry, selling power
transmissions and gear components under the Gear Products brand name.
The Company sells its timber harvesting products through a network of
approximately 250 dealers in over 400 locations in the United States and
currently has an additional 20 offshore dealers, primarily in the timber
harvesting regions of South America and Southeast Asia. Gear Products, Inc.
sells its products to over 350 original equipment manufacturers servicing the
utility, construction, forestry and marine industries. Over 89% of this
segment's sales in 1999 were in the United States, primarily in the southeastern
and south central states. In 1999, approximately 29% of the sales by the
Industrial and Power Equipment segment were to two customers.
The Company places a strong emphasis on the quality, safety, comfort, durability
and productivity of its products and on the after-market service provided by its
distribution and support network.
The timber harvesting equipment market faces cyclicality due to its reliance on
customers in the pulp and paper market. In the past, as pulp prices have
dropped and inventory levels have increased, pulp manufacturers postponed
purchases of new timber harvesting equipment as their existing machinery
provided them sufficient capacity to meet near-term demand.
Competition in markets served by the Industrial and Power Equipment segment is
based largely on quality, price, brand recognition and product support. The
segment's primary competition in timber harvesting equipment includes large
diversified equipment manufacturers, including Timberjack, Barko, Tigercat,
Hood, Deere, Franklin, Bell and Morbark. Gear Products' competition includes
relatively smaller players in this fragmented industry. These include SKF,
Avon, Kaydon, Rotec, Fairfield, Auburn, Tulsa and Braden.
The Company attempts to capitalize on its technological and manufacturing
expertise as a means of increasing its participation in the market for
replacement parts for products which it manufactures, as well as of developing
new product applications both within and beyond the timber, material handling,
scrap, land clearing and gear industries. The Company is committed to
continuing research and development in this segment to respond quickly to
increasing mechanization and environmental awareness in the timber harvesting
industry.
Gear Products was acquired in 1991 and operates from a production facility in
Tulsa, Oklahoma. Gear Products is a leading manufacturer of rotational system
components for mobile heavy equipment. Its primary products are bearings, winch
drives and swing drives used to provide hydraulic power transmission in heavy
equipment used in the forestry, construction and utilities industries. Due to
extreme wear-and-tear on its products, Gear Products sells its products in the
replacement parts market in addition to its sales to OEMs. Gear Products
accounted for approximately 16% of the Industrial and Power Equipment segment's
sales in 1999.
The Company's Industrial and Power Equipment segment has manufacturing
facilities in Owatonna, Minnesota; Prentice, Wisconsin; Tulsa, Oklahoma; and
Zebulon, North Carolina. A majority of the components used in the Company's
products are obtained from a number of domestic manufacturers.
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CAPACITY UTILIZATION
Based on a five-day, three-shift work week, the Outdoor Products, Sporting
Equipment, and Industrial and Power Equipment segments utilized approximately
87%, 72% and 50% of their respective production capacity in the year ended
December 31, 1999.
BACKLOG
The backlog for each of the Company's business segments as of the end of each of
its last four reporting periods was as follows (in millions):
December 31,
---------------------------------
1999 1998 1997 1996
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Outdoor Products $ 41.9 $ 30.2 $ 42.0 $ 35.5
Sporting Equipment 18.0 15.1 19.7 9.5
Industrial and Power Equipment 25.8 16.0 56.2 29.2
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$ 85.7 $ 61.3 $117.9 $ 74.2
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The total backlog as of December 31, 1999, is expected to be completed and
shipped within twelve months.
ACQUISITIONS AND DISPOSITIONS
In September 1998, the Company purchased certain operating assets of the
Redfield line for approximately $3 million. The operating assets consisted of
inventory (primarily rifle scopes, mounting systems and related items),
machinery and equipment, trademarks, sales literature and patents.
On November 4, 1997, the Company acquired Federal Cartridge Company (formerly
Federal-Hoffman, Inc.), a manufacturer of shotshell, centerfire and rimfire
cartridges, ammunition components and clay targets. The purchase price was
approximately $129 million, including a post-closing adjustment and acquisition
expenses.
In January 1997, the Company acquired the outstanding capital stock of the
Frederick Manufacturing Corporation and Orbex, Inc. for approximately $19
million and paid existing debt of the acquired companies in the amount of $5.8
million. The principal products of the acquired companies are accessories for
lawn mowers and sporting goods. Orbex, Inc. was subsequently merged into
Frederick Manufacturing Corporation.
In December 1995, the Company acquired all the outstanding capital stock of
Simmons Outdoor Corporation, a sports optics distributor, for cash of
approximately $38 million.
In fiscal 1995, in two separate transactions the Company acquired all the
outstanding capital stock of CTR Manufacturing, Inc., a manufacturer of
automated forestry harvesting equipment, and the operating assets of Ram-Line,
Inc., a manufacturer of stocks, magazines, lens caps and other products for the
shooting sports market. The combined purchase price paid for the two businesses
was approximately $18.2 million, including notes issued of $7.2 million.
See Note 4 of Notes to Consolidated Financial Statements on pages 32 and 33.
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EMPLOYEES
At December 31, 1999, the Company employed approximately 5,600 individuals.
None of the Company's domestic employees is unionized; the number of foreign
employees who belong to unions is not significant. The Company believes its
relations with its employees are satisfactory.
ENVIRONMENTAL MATTERS
For information regarding certain environmental matters, see Note 7 of Notes to
Consolidated Financial Statements on pages 38 and 39.
The Company's operations are subject to comprehensive U.S. and foreign laws and
regulations relating to the protection of the environment, including those
governing discharges of pollutants into the air and water, the management and
disposal of hazardous substances and the cleanup of contaminated sites. Permits
and environmental controls are required for certain of those operations to
prevent or reduce air and water pollution, and these permits are subject to
modification, renewal and revocation by issuing authorities.
On an ongoing basis, the Company incurs capital and operating costs to comply
with environmental laws. We expect to spend approximately $0.4 million in 2000,
$0.6 million in 2001 and $0.4 million in 2002 on environmental compliance.
Environmental laws and regulations generally have become stricter in recent
years, and the cost to comply with new laws and regulations may be greater than
these estimated amounts.
Some of the Company's manufacturing facilities are located on properties with a
long history of industrial use, including the use of hazardous substances. The
Company has identified soil and groundwater contamination from these historical
activities at several of its properties, which it is currently investigating,
monitoring or remediating. Management believes that costs incurred to
investigate, monitor and remediate known contamination at these sites will not
have a material adverse effect on the business, financial condition or results
of operations. The Company cannot be sure, however, that it has identified all
existing contamination on its properties or that its operations will not cause
contamination in the future. As a result, the Company could incur material
costs to cleanup contamination. Remediation liabilities are not discounted.
From time to time the Company may be identified as a potentially responsible
party with respect to a Superfund site. The United States Environmental
Protection Agency (or a state) can either (a) allow such a party to conduct and
pay for a remedial investigation and feasibility study and remedial action or
(b) conduct the remedial investigation and action and then seek reimbursement
from the parties. Each party can be held jointly, severally and strictly liable
for all costs, but the parties can then bring contribution actions against each
other or other third parties, where available. As a result of the Superfund
Act, the Company may be required to expend amounts on such remedial
investigations and actions which amounts cannot be determined at the present
time but may ultimately prove to be significant.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC
OPERATIONS
For information about industry segments and foreign and domestic operations, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 12 through 19 and Note 9 of Notes to Consolidated Financial
Statements on pages 40 through 42.
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SEASONALITY
Only the Company's Sporting Equipment segment experiences significant
seasonality with higher sales and operating income in the second half of the
year than the first half of the year.
ITEM 2. PROPERTIES
The corporate headquarters of the Company occupy executive offices at 4520
Executive Park Drive, Montgomery, Alabama.
The other principal properties of the Company and its subsidiaries are as
follows:
Cutting chain and accessories manufacturing plants are located in Milwaukie,
Oregon; Guelph, Ontario, Canada; and Curitiba, Parana, Brazil, and sales and
distribution offices are located in Europe, Japan and Russia. Lawn mowers and
related accessories are manufactured at plants in Coffeyville, Kansas and Kansas
City, Missouri. Sporting ammunition, reloading equipment products, gun care
equipment, industrial powerloads and shooting sports accessories are
manufactured at plants in Anoka, Minnesota; Lewiston, Idaho; Oroville,
California; Onalaska, Wisconsin; and Richmond, Indiana. The Company maintains a
warehouse facility in Thomasville, Georgia for distribution of sports optics and
hunting accessories. Log loaders, feller bunchers and accessories for automated
forestry equipment are manufactured at plants in Prentice, Wisconsin; Zebulon,
North Carolina; and Owatonna, Minnesota. Rotation bearings and mechanical power
transmission components are manufactured at a plant in Tulsa, Oklahoma.
All of these facilities are in good condition, are currently in normal operation
and are generally suitable and adequate for the business activity conducted
therein. Approximate square footage of principal properties is as follows:
Area in Square Feet
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Owned Leased
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Outdoor Products 1,015,000 213,000
Sporting Equipment 1,583,000 116,000
Industrial and Power Equipment 731,000
Corporate Office 192,000 13,000
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Total 3,521,000 342,000
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ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings see Note 7 of Notes to Consolidated
Financial Statements on pages 38 and 39.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. The
following table presents for the Company's last two years, the quarterly high
and low prices and cash dividends declared for the Company's Common Stock. The
Company had approximately 7,700 shareholders as of February 1, 2000.
<TABLE>
<CAPTION>
Common Stock Class A Common Stock Class B Common Stock
------------------------ ------------------------ ------------------------
High Low Dividend High Low Dividend High Low Dividend
- ------------------- ------ ------ -------- ------ ------ -------- ------ ------ --------
Year Ended
December 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter $14.82 $11.94 $.036 $14.00 $11.91 $.034
Second quarter 14.38 13.03 .036 14.16 13.63 .034
Third quarter $14.94 $10.50 14.97 12.75 14.78 13.13
Fourth quarter 17.69 11.44
Year Ended
December 31, 1998
First quarter $14.88 $11.50 $.036 $14.94 $11.75 $.034
Second quarter 17.19 13.25 .036 16.13 13.22 .034
Third quarter 14.75 9.97 .036 14.25 11.03 .034
Fourth quarter 12.47 9.47 .036 12.32 9.75 .034
- ------------------- ------ ------ ----- ------ ------ ----- ------ ------ -----
</TABLE>
All data has been restated to give effect to the merger described in Note 1 of
Notes to Consolidated Financial Statements on pages 26 through 28.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Twelve Months Ended Ten Months Twelve Months
December 31, Ended Ended Last Day
Dollar amounts in millions, ------------------------------------------------ December 31, of February
except per share data 1999 1998 1997 1996(1) 1995(1) 1996(1) 1996
- ---------------------------------------- -------- -------- -------- -------- -------- ------------ --------------
(Unaudited)
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Sales $ 809.9 $ 831.9 $ 716.9 $ 649.3 $ 621.4 $ 526.7 $ 644.3
Operating income from segments 111.1 132.4 117.9 113.1 104.9 91.2 112.8
Income (loss) from continuing operations
before extraordinary loss (21.8) 63.3 59.1 53.8 49.4 44.0 53.6
Net income (loss) (21.8) 61.3 59.1 55.2 49.4 45.4 53.6
Earnings per share:
Basic:
Income (loss) from continuing
operations before extraordinary loss (0.37) 0.85 0.79 0.70 0.65 0.57 0.70
Net income (loss) (0.37) 0.82 0.79 0.72 0.65 0.59 0.70
Diluted:
Income (loss) from continuing
operations before extraordinary loss (0.37) 0.83 0.77 0.69 0.63 0.56 0.69
Net income (loss) (0.37) 0.80 0.77 0.71 0.63 0.58 0.69
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
End of Period Financial Position:
Total assets $ 688.7 $ 668.8 $ 637.8 $ 533.8 $ 522.4 $ 533.8 $ 546.5
Working capital 187.5 232.2 171.1 166.2 122.2 166.2 136.2
Property, plant and equipment-gross 402.7 392.8 376.8 301.9 293.8 301.9 295.5
Property, plant and equipment-net 172.3 182.9 188.5 131.7 136.7 131.7 135.5
Long-term debt 809.7 161.6 138.8 84.6 95.9 84.6 95.9
Total debt 816.2 162.3 140.3 85.8 108.7 85.8 107.6
Stockholders' equity (deficit) (321.7) 354.6 316.1 290.8 244.6 290.8 255.0
Current ratio 2.3 to 1 3.4 to 1 2.3 to 1 2.4 to 1 1.9 to 1 2.4 to 1 1.9 to 1
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
Other Data:
Property, plant and equipment additions(2) $ 18.5 $ 21.7 $ 78.5 $ 21.3 $ 19.8 $ 18.7 $ 19.3
Depreciation and amortization 34.0 30.9 25.0 23.3 22.3 19.2 22.2
Interest expense, net of interest income 41.1 11.8 7.0 7.5 6.8 5.6 7.4
Stock price (3): Common high 17.69
Common low 10.50
Stock price (3): Class A high 14.97 17.19 13.44 9.72 8.79 9.72 8.79
Class A low 11.94 9.47 9.41 6.34 6.13 7.06 6.13
Stock price (3): Class B high 14.78 16.13 13.50 9.47 8.79 9.47 8.79
Class B low 11.91 9.75 9.38 7.38 6.29 7.38 6.29
Per common share dividends (3): Class A .072 .143 .131 .114 .099 .114 .099
Class B .067 .134 .122 .106 .090 .106 .090
Shares used in earnings per share
computations (in millions) (3):
Basic 58.2 74.7 75.3 76.7 75.9 76.8 76.0
Diluted 58.2 76.8 77.1 78.2 77.8 78.3 77.8
Employees (approximate) 5,600 5,300 5,700 4,400 4,400 4,400 4,400
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
(1) In April 1996, the Company changed its fiscal year from one ending on the
last day of February to one ending on December 31. Unaudited financial data
for the twelve months ended December 31, 1996 and 1995, is also presented in the
table above.
(2) Includes property, plant and equipment of acquired companies at date of
purchase of $0.7 million and $59.8 million in the twelve months ended
December 31, 1999 and 1997, and $0.6 million in the twelve months ended the
last day of February 1996.
(3) Gives effect to merger on August 19, 1999, described in Note 1 of Notes
to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes. All references to earnings per share
included in this discussion are to diluted earnings per share.
OPERATING RESULTS
TWELVE MONTHS ENDED DECEMBER 31, 1999, COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1998
Sales for 1999 were $809.9 million compared to $831.9 million for 1998.
Operating income from segments for 1999 was $111.1 million compared to $132.4
million for 1998. For 1999, income before extraordinary loss was $34.1 million
($.57 per share) before accounting for after-tax merger costs of $53.6 million
($.90 per share) and non-recurring costs of $2.3 million ($.03 per share). This
compares to income before extraordinary loss of $63.3 million ($.83 per share)
in 1998. These results reflect a significant reduction in sales and operating
income from the Industrial and Power Equipment segment due to adverse market
conditions, manufacturing problems at the Prentice facility which adversely
impacted productivity and costs associated with the plant consolidation and
realignment program, and improved results from the Sporting Equipment segment
and Outdoor Products segment. Corporate expenses include a donation of art with
a book value of $1.5 million in the first quarter of 1999 (see Note 1 of Notes
to Consolidated Financial Statements). Merger expenses of $76.1 million were
incurred in 1999 compared to $0.3 million in 1998 (for a summary description of
the merger, see Note 1 of Notes to Consolidated Financial Statements).
Excluding the expense associated with the donation of art and merger expenses,
selling, general and administrative expenses decreased $4.0 million in 1999
compared to 1998. These decreases reflect cost reduction efforts at each
segment and the corporate office. Higher interest expense for 1999 reflects
higher long-term debt levels during the current year resulting from the
transaction described in Note 1 of Notes to Consolidated Financial Statements.
The Company's effective income tax rate in 1999 reflects the donation of art and
the non-deductible portion of the expenses associated with the merger. The
principal reasons for these results and the status of the Company's financial
condition are set forth below.
Sales of the Outdoor Products segment for 1999 were $327.6 million compared to
$315.4 million in 1998. Operating income was $71.8 million in 1999 compared to
$68.4 million the prior year. Sales reflect a higher volume of sales of lawn
mowers and accessories and from flat to slightly lower sales of other product
lines as indicated in the following table (in millions):
% Increase
(Decrease)
1999 1998 in 1999
- ------------------------------------------ ------ ------ ----------
Chain saw components $201.1 $199.7 .7%
Lawn mowers and accessories 87.2 75.7 15.2
Other 39.3 40.0 (.2)
- ------------------------------------------ ------ ------
Total segment sales $327.6 $315.4 3.9%
- ------------------------------------------ ====== ======
The improvement in operating income is primarily due to the higher sales of lawn
mowers and accessories and the positive effect of favorable exchange rates in
Brazil which adds approximately $1.9 million.
Page 12
<PAGE>
Sales for the Sporting Equipment segment were up significantly to $323.7 million
from $286.7 million the prior year. Operating income improved to $40.4 million
from $36.1 million the previous year. These results reflect a higher volume for
ammunition and related components, sports optics and other products, partially
offset by competitive pricing actions required during the last half of the
current year in one of this segment's products. Sales by the segment's
principal product groups were as follows (in millions):
% Increase
(Decrease)
1999 1998 in 1999
- ------------------------------------------ ------ ------ ----------
Ammunition related products $234.9 $212.0 10.8%
Sports optical products 48.3 41.3 16.9
Other 40.5 33.4 21.3
- ------------------------------------------ ------ ------
Total segment sales $323.7 $286.7 12.9%
- ------------------------------------------ ====== ======
Additionally in the second half of 1998, the Sporting Equipment segment
completed certain cost reduction activities by consolidating its raw materials
purchasing and sales and marketing organizations, transferring certain
production to lower cost facilities and eliminating certain outsourcing. Annual
savings of $3.7 million from these efforts were realized in 1999.
The Company's Industrial and Power Equipment segment is a cyclical, capital
goods business whose results are closely linked to the strength of the forestry
industry in general. A key indicator of this segment's market is the price of
Northern Bleached Softwood Kraft ("pulp") which declined from an average of $598
per metric ton in the fourth quarter of 1997 to an average of $520 per metric
ton in 1999 ($460 per metric ton in the first quarter, $500 per metric ton in
the second quarter, $533 per metric ton in the third quarter and $587 per metric
ton in the fourth quarter), resulting in depressed market conditions
characterized by significant sales declines in the Company's most important
market (the Southeastern United States) and the need to offer discounts in
response to extremely aggressive competition for available sales. Operating
results of this segment were adversely affected by these poor market conditions
in 1999. Sales by the segment's principal product groups were as follows (in
millions):
% Increase
(Decrease)
1999 1998 in 1999
- ------------------------------------------ ------ ------ ----------
Timber harvesting and loading equipment $133.1 $199.8 (33.4)%
Gear components and rotation bearings 25.5 30.0 (15.0)
- ------------------------------------------ ------ ------
Total segment sales $158.6 $229.8 (31.0)%
- ------------------------------------------ ====== ======
This segment incurred an operating loss of $1.1 million in 1999 compared to
operating income of $27.9 million in 1998 primarily due to sharply reduced
demand and manufacturing problems at the Prentice facility which increased
costs. In response to weak market conditions and to improve capacity
utilization, the Company implemented a program of production consolidation and
realignments in this segment to lower costs and improve productivity. One
manufacturing facility was closed during the first half of 1999 with its
production shifted to other Company plants. Another small facility was closed
during the third quarter of 1999 with its production outsourced. Costs of
approximately $3.0 million related to these plant closings were charged to
Page 13
<PAGE>
operations during 1999. Management anticipates annual cost savings of
approximately $3.7 million beginning in the third quarter of 1999 as a result of
these actions. With recent pulp price increases, low pulp inventory levels,
increased demand for pulp and paper products from the economic recovery of
Southeast Asia, improved order backlog and improved performance in the fourth
quarter of 1999, management is cautiously optimistic of continued improvement in
the near future, although the extent and timing of further improvement is highly
uncertain. If the current slowdown were to continue, it would be unlikely this
segment could achieve historical levels of sales and profitability.
The Company's total backlog increased to $85.7 million at December 31, 1999,
from $61.3 million at December 31, 1998, as follows (in millions):
Increase
1999 1998 in 1999
- ------------------------------------------ ------ ------ ----------
Outdoor Products $ 41.9 $ 30.2 $ 11.7
Sporting Equipment 18.0 15.1 2.9
Industrial and Power Equipment 25.8 16.0 9.8
- ------------------------------------------ ------ ------ ------
Total $ 85.7 $ 61.3 $ 24.4
- ------------------------------------------ ====== ====== ======
Management continuously reviews for potential cost reductions. In addition to
cost savings efforts commented on elsewhere within management's discussion and
analysis, studies are underway to evaluate distribution processes and
distribution facility needs. These studies are expected to be completed in
2000. While no assurance can be given that savings can be achieved until these
studies are completed, management estimates that potential annual savings will
range from $2 million to $4 million with implementation expenses estimated at
$1.5 million to $2.5 million. Actual results could vary significantly from
these estimates.
TWELVE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997
Despite economic problems in some markets, the Company achieved record results
in 1998. Sales in 1998 were $831.9 million compared to $716.9 million in 1997.
Income before extraordinary loss was $63.3 million ($.83 per share) in 1998
compared to $59.1 million ($.77 per share) in 1997. Net income of $61.3 million
($.80 per share) for 1998 reflects a net extraordinary loss of $2.0 million
($.03 per share) on the redemption of long-term debt. The higher sales and
improved operating results in 1998 are primarily due to the full year
contribution to the Sporting Equipment segment by Federal Cartridge Company
("Federal") which was acquired during the fourth quarter of 1997.
Selling, general and administrative expenses were 17% of sales in 1998 compared
to 19% in 1997. Total selling, general and administrative expenses increased by
$10.0 million in 1998 primarily due to Federal being included in operating
results for the entire year. Higher interest expense in 1998 reflects higher
debt levels during the current year, principally due to the Federal acquisition.
Total backlog was $61.3 million at December 31, 1998, compared to $117.9 million
at December 31, 1997. The current year backlog is lower at each of the
Company's operating segments with the largest decrease at the Industrial and
Power Equipment segment, principally reflecting reduced demand for timber
harvesting and industrial equipment. The Company expects a challenging year in
1999 as economic conditions in Southeast Asia and South America and low pulp
prices and high mill inventories are likely to impact the demand for the
Page 14
<PAGE>
Industrial and Power Equipment segment's timber harvesting equipment. The
Industrial and Power Equipment segment has implemented production and cost
control measures to help mitigate the effect of the reduction in demand. In
1999, the Sporting Equipment segment should continue to benefit from the
acquisition of Federal and related consolidation and cost reduction activities.
Sales and operating income for the Outdoor Products segment for 1998 were $315.4
million and $68.4 million, respectively, compared to $319.3 million and $67.1
million during 1997. The operating results for this segment reflect a decrease
in sales and operating income of $10.0 million and $1.3 million, respectively,
at the Company's Oregon Cutting Systems Division ("Oregon") and higher sales and
operating income at Dixon Industries, Inc. ("Dixon"). Oregon's 1998 results
reflect an approximate $11.5 million sales decrease in Southeast Asia and the
Far East, primarily due to the economic problems in those areas, which has
contributed to an approximate 4% reduction in the sales volume of cutting chain
and chain saw guide bars, Oregon's principal products. Oregon has foreign
manufacturing or distribution operations in Canada, Europe, Brazil, Japan and
Russia. The Company estimates that foreign currency exchange rates in 1998, as
compared to 1997, provided a favorable impact on operating income of
approximately $1.5 million. During 1998, operating income from Brazil was $3.1
million compared to $2.6 million during 1997. Dixon's sales and operating
income improved in 1998 compared to the prior year due to higher volume and more
favorable weather conditions.
Sales and operating income for the Sporting Equipment segment were $286.7
million and $36.1 million, respectively, in 1998 compared to $158.5 million and
$18.1 million in 1997. The significant improvement in sales and operating
income reflect the sales and income added by Federal which was acquired during
the fourth quarter of 1997. Total sales and operating income at other Sporting
Equipment operations were flat in 1998 as compared to the prior year.
Sales and operating income for the Industrial and Power Equipment segment were
down to $229.8 million and $27.9 million, respectively, in 1998 from $239.1
million and $32.7 million in 1997. The results for 1998 reflect reduced demand
for timber harvesting equipment resulting principally from sharply lower pulp
prices since mid-year and higher mill inventories, higher competitive discounts
and higher warranty costs. The operating results for this segment's Gear
Products, Inc. subsidiary ("Gear") improved slightly in 1998 compared to 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, as a result of the recapitalization transactions (see Note
1 of Notes to Consolidated Financial Statements), the Company has significant
amounts of debt, with interest payments on the notes and interest and principal
payments under the new credit facilities representing significant obligations
for the Company. The notes require semi-annual interest payments and the term
loan facilities under the new credit facilities require payments of principal
commencing on December 31, 1999. Interest on the term loan facilities and
amounts outstanding under the revolving credit facility are payable in arrears
according to varying interest periods. The Company's remaining liquidity needs
relate to working capital needs, capital expenditures and potential
acquisitions.
The Company intends to fund working capital, capital expenditures and debt
service requirements through cash flows generated from operations and from the
revolving credit facility. The revolving credit facility has an availability of
up to $100.0 million. Letters of credit issued under the revolving credit
facility which reduced the amount available under the revolving credit facility
were $8.1 million at December 31, 1999. The revolving credit facility will
mature August 19, 2004.
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<PAGE>
Management believes that cash generated from operations, together with amounts
available under the revolving credit facility, will be sufficient to meet the
Company's working capital, capital expenditure and other cash needs, including
financing for acquisitions, in the foreseeable future. There can be no
assurance, however, that this will be the case. The Company may also consider
other options available to it in connection with future liquidity needs.
The Company has senior notes outstanding in the principal amount of $150 million
which mature in 2005. The Company also has senior subordinated notes
outstanding in the principal amount of $325 million which mature in 2009 and
senior term loans outstanding in the principal amount of $339 million which
mature at various dates through 2006. See Note 1 of Notes to Consolidated
Financial Statements for the terms and conditions of the senior notes, the
senior subordinated notes and senior term loans.
Cash balances at December 31, 1999, were $10.5 million compared to $45.1 million
at December 31, 1998. Cash provided by operating activities was $19.1 million
in 1999 compared to $88.9 million the prior year, principally due to a net
income decrease of $83.1 million. Working capital decreased $44.7 million to
$187.5 million, compared to $232.2 million last year. Accounts receivable
increased by $39.6 million, notes payable and current maturities of long-term
debt by $5.8 million, accounts payable by $20.6 million, and accrued expenses by
$27.2 million. Inventories decreased $4.0 million. The notes payable and
current maturities of long-term debt increase reflects $3.4 million of new term
loans and $3.0 million from short-term foreign lines of credit. The accounts
payable increase reflects purchases principally related to the higher level of
business in the fourth quarter and the extension of payments to partially offset
higher receivables. The increase in accrued expenses principally reflects the
increased interest on the additional debt. The accounts receivable increase
reflects higher sales by all three segments as compared to the fourth quarter of
1998 and extended terms used as a marketing tool by the Sporting Equipment
segment and the Industrial and Power Equipment segment.
Accounts receivable at December 31, 1999, and December 31, 1998, and sales by
segment for the fourth quarter of 1999 compared to the fourth quarter of 1998
were as follows (in millions):
December 31, December 31,
1999 1998 Increase
- ------------------------------------ ------------ ------------ ----------
Accounts Receivable:
Outdoor Products $ 65.6 $ 56.7 $ 8.9
Sporting Equipment 64.8 41.5 23.3
Industrial and Power Equipment 40.9 33.4 7.5
- ------------------------------------ ------ ------ ------
Total segment receivables $171.3 $131.6 $ 39.7
- ------------------------------------ ====== ====== ======
Three Months Ended
December 31, December 31,
1999 1998 Increase
- ------------------------------------ ------------ ------------ ----------
Sales:
Outdoor Products $ 84.3 $ 79.2 $ 5.1
Sporting Equipment 83.8 69.5 14.3
Industrial and Power Equipment 53.9 51.8 2.1
- ------------------------------------ ------ ------ ------
Total segment sales $222.0 $200.5 $ 21.5
- ------------------------------------ ====== ====== ======
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<PAGE>
The higher sales by the Outdoor Products segment are the principal reason for
the increase in that segment's receivables as compared to year-end. Because of
the seasonal nature of the sporting equipment business, the need to produce and
ship efficiently in order to ensure an adequate supply during peak sales periods
and in response to competitor programs, the Company offers extended payment
terms within its Sporting Equipment segment in advance of the fall hunting
season. As a result, receivables tend to peak in September and reach their low
point in January of each year. At December 31, 1999, extended term receivables
were $11 million greater than at December 31, 1998. In addition, the higher
sales occurred late in the quarter and result in increased receivables. The
Industrial and Power Equipment segment sales reflect the adverse market
conditions described in "Operating Results." Recently, this segment has begun
to see improvement in its market as reflected in the increased backlog of $25.8
million at December 31, 1999, compared to $16.0 million at December 31, 1998.
Sales increases during the fourth quarter are further evidence of this
improvement. In response to the adverse market conditions, this segment began
offering in the fourth quarter of 1998 payment terms of 90, 120 and, in some
cases, 180 days to certain dealers based on their financial strength. At
December 31, 1999, there were approximately $11.5 million in receivables with
extended terms compared to $14.5 million at December 31, 1998. The sales
increase of $5.7 million for the month of December 1999 compared to December
1998 and a collection of $4 million the first of January for amounts due at the
end of December 1999 from the two largest customers are the primary reasons for
the increase in receivables.
The Company has absorbed the increased receivables through operating cash flows
and, given historical operating cash flows, the Company expects operating cash
flows will be sufficient to cover any further increases until market conditions
in the Industrial and Power Equipment segment further improve and terms return
to those normally extended. No material adverse effect on the operations,
liquidity or capital resources of the Company is expected as a result of the
extended terms.
Cash used in investing activities in 1999 was $21.4 million, reflecting
principally purchases of property, plant and equipment of $17.5 million. Cash
used in financing activities in 1999 was $32.3 million, principally reflecting
$696.9 million from the issuance of senior subordinated notes and senior term
loans, and capital contribution of $417.5 million partially offset by the
redemption of common stock of $1,068.8 million, the payment of dividends of $7.8
million, and payment of long-term debt of $74.6 million.
Immediately after the merger transaction described in Note 1 of Notes to
Consolidated Financial Statements, the Company became substantially leveraged
which may adversely affect its operations.
This substantial leverage could have important consequences for the Company,
including the following:
1. the ability to obtain additional financing for working capital, capital
expenditures or other purposes may be impaired or that kind of financing may not
be on favorable terms;
2. a substantial portion of cash flows available from operations will be
dedicated to the payment of principal and interest expense, which will reduce
the funds that would otherwise be available for operations and future business
opportunities;
3. a substantial decrease in net income and cash flows or an increase in
expenses may make it difficult to meet debt service requirements or force the
Company to modify operations; and
Page 17
<PAGE>
4. substantial leverage may make the Company more vulnerable to economic
downturns and competitive pressure.
MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates and commodity prices. The Company manages its exposure
to these market risks through its regular operating and financing activities,
and, when deemed appropriate, through the use of derivatives. When utilized,
derivatives are used as risk management tools and not for trading purposes. See
Interest Rate Risk and Commodity Price Risk below for discussion of expectations
as regards future use of interest rate and commodity price derivatives.
Interest Rate Risk:
The Company manages its ratio of fixed to variable rate debt with the objective
of achieving a mix that management believes is appropriate. Historically, the
Company has, on occasion, entered into interest rate swap agreements to exchange
fixed and variable interest rates based on agreed upon notional amounts and has
entered into interest rate lock contracts to hedge the interest rate of an
anticipated debt issue. At December 31, 1999, no derivative financial
instruments were outstanding to hedge interest rate risk. A hypothetical
immediate 10% increase in interest rates would decrease the fair value of the
Company's fixed rate long-term debt outstanding at December 31, 1999, by $27.3
million. A hypothetical 10% increase in the interest rates on the Company's
variable rate long-term debt for a duration of one year would increase interest
expense by approximately $3.5 million in 2000.
Under its Credit Agreement, the Company is required to enter into hedge
agreements within 180 days of the borrowing and maintain such hedge agreements
in place until the second anniversary of the borrowing, such that at least 33%
of the aggregate principal amount of the borrowings are subject to a fixed rate
of interest. The Company will have in place by February 15, 2000, an interest
rate cap at an immaterial cost to comply with this requirement.
Foreign Currency Exchange Risk:
Approximately 36% of Oregon's sales and 42% of its operating costs and expenses
were transacted in foreign currencies in 1999. As a result, fluctuations in
exchange rates impact the amount of Oregon's reported sales and operating
income. Historically, the Company's principal exposures have been related to
local currency operating costs and expenses in Canada and local currency sales
in Europe (principally France and Germany). During the past three years, the
Company has not used derivatives to manage any significant foreign currency
exchange risk and, at December 31, 1999, no foreign currency exchange
derivatives were outstanding.
Commodity Price Risk:
During 1999, the Company purchased approximately 11.4 million pounds of brass
for use in its Sporting Equipment operations. While the Company has in previous
years hedged approximately 40% of these purchases and may in the current or
future years hedge these purchases if the price trend is such that it could have
a material effect on financial condition or results of operations, no futures
contracts to manage this price risk were entered into in 1999. Because there
are no copper and zinc contracts outstanding at December 31, 1999, an immediate
hypothetical 10% decrease in the futures prices of copper and zinc would have no
effect on fair value. In addition, a large quantity of other metals
(principally lead) were purchased by Sporting Equipment operations in 1999.
Derivatives were not used to manage this price risk.
Page 18
<PAGE>
IMPACT OF YEAR 2000 ISSUE
The Company evaluated its internal date-sensitive systems and equipment for Year
2000 compliance. The assessment phase included both information technology
equipment and non-information technology equipment. Based on its assessment,
the Company determined that it was necessary to modify or replace a portion of
its information systems and other equipment. The modification or replacement
and testing of the critical software, hardware and equipment requiring
remediation was completed and mitigated successfully the effect of the Year 2000
issue. The Company's operations incurred no disruption of their ability to
manufacture and ship products, process financial transactions or engage in
similar normal business activities. Likewise, the Company experienced no
significant problems with its non-information technology systems.
The total estimated cost of the Year 2000 project, including system upgrades,
was approximately $5.4 million and was funded by operating cash flows. As of
December 31, 1999, all costs had been incurred. Of the total cost of the
project, approximately $2.6 million was attributable to new software and
equipment, which was capitalized. The remaining costs were expensed as
incurred.
The Company experienced no significant problems with key suppliers and customers
as a result of the Year 2000 issue.
Where needed, the Company established contingency plans based on actual testing
results and assessment of outside risks; however, it was not necessary to
implement any contingency plan.
The above statement in its entirety is designated a Year 2000 readiness
disclosure under the Year 2000 Information and Readiness Disclosure Act.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivatives and hedging. It requires that all
derivatives be recognized as either assets or liabilities at fair value and
establishes specific criteria for the use of hedge accounting. The Company's
required adoption date is January 1, 2001. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material adverse effect on consolidated results of operations, financial
position or cash flows upon adoption of SFAS No. 133, but does expect a small
reduction in stockholders' equity.
FORWARD LOOKING STATEMENTS
Forward looking statements in this report, as defined by the Private Securities
Litigation Reform Law of 1995, involve certain risks and uncertainties that may
cause actual results to differ materially from expectations as of the date of
this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Market Risk" on page 18.
Page 19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders, Blount International, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Blount International, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 14(a)(2) present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
January 27, 2000
Page 20
<PAGE>
MANAGEMENT RESPONSIBILITY
All information contained in the consolidated financial statements of Blount
International, Inc., has been prepared by management, which is responsible for
the accuracy and internal consistency of the information. Generally accepted
accounting principles have been followed. Reasonable judgments and estimates
have been made where necessary.
Management is responsible for establishing and maintaining a system of internal
accounting controls designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The system of internal accounting
controls is tested by the independent auditors to the extent deemed necessary in
accordance with generally accepted auditing standards. Management believes the
system of internal controls has been effective during the Company's most recent
fiscal year and that no matters have arisen which indicate a material weakness
in the system. Management follows the policy of responding to the
recommendations concerning the system of internal controls made by the
independent auditors. Management implements those recommendations that it
believes would improve the system of internal controls and be cost justified.
Three directors of the Company, not members of management, serve as the Audit
Committee of the Board and are the principal means through which the Board
discharges its financial reporting responsibility. The Audit Committee meets
with management personnel and the Company's independent auditors each year to
consider the results of external audits of the Company and to discuss internal
accounting control, auditing and financial reporting matters. At these meetings,
the Audit Committee also meets privately with the independent auditors of the
Company to ensure free access by the independent auditors to the committee.
The Company's independent auditors, PricewaterhouseCoopers LLP, audited the
financial statements prepared by the Company. Their opinion on these statements
appears herein.
JOHN M. PANETTIERE HAROLD E. LAYMAN
Chairman of the Board President and Chief Operating Officer
and Chief Executive Officer and Chief Financial Officer
Page 21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
Twelve Months Ended
December 31,
(Dollar amounts in millions, --------------------------
except per share data) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Sales $809.9 $831.9 $716.9
Cost of sales 574.3 573.6 482.9
- ------------------------------------------------ ------ ------ ------
Gross profit 235.6 258.3 234.0
Selling, general and administrative
expenses 141.8 144.3 134.6
Merger expenses 76.1 0.3
- ------------------------------------------------ ------ ------ ------
Income from operations 17.7 113.7 99.4
Interest expense (44.8) (14.3) (9.5)
Interest income 3.7 2.5 2.5
Other income, net 0.8 0.3 1.3
- ------------------------------------------------ ------ ------ ------
Income (loss) before income taxes (22.6) 102.2 93.7
Provision (benefit) for income taxes (0.8) 38.9 34.6
- ------------------------------------------------ ------ ------ ------
Income (loss) before extraordinary loss (21.8) 63.3 59.1
Extraordinary loss on repurchase
of debt, net (2.0)
- ------------------------------------------------ ------ ------ ------
Net income (loss) $(21.8) $ 61.3 $ 59.1
- ------------------------------------------------ ------ ------ ------
Basic earnings (loss) per share:
Before extraordinary loss $(0.37) $ 0.85 $ 0.79
Extraordinary loss (.03)
- ------------------------------------------------ ------ ------ ------
Net income (loss) $(0.37) $ 0.82 $ 0.79
- ------------------------------------------------ ------ ------ ------
Diluted earnings (loss) per share:
Before extraordinary loss $(0.37) $ 0.83 $ 0.77
Extraordinary loss (.03)
- ------------------------------------------------ ------ ------ ------
Net income (loss) $(0.37) $ 0.80 $ 0.77
- ------------------------------------------------ ------ ------ ------
Cash dividends per share:
Class A $ .071 $ .143 $ .131
Class B .067 .134 .122
- ------------------------------------------------ ------ ------ ------
The accompanying notes are an integral part of the audited financial statements.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
December 31,
(Dollar amounts in millions, except per share data) 1999 1998
- ------------------------------------------------------------ -------- --------
Assets
- ------------------------------------------------------------ -------- --------
Current assets:
Cash and cash equivalents $ 10.5 $ 45.1
Accounts receivable, net of allowance for
doubtful accounts of $4.2 and $3.9 171.9 132.3
Inventories 117.0 121.0
Deferred income taxes 21.1 22.0
Other current assets 15.5 6.7
- ------------------------------------------------------------ -------- -------
Total current assets 336.0 327.1
Property, plant and equipment, net of accumulated
depreciation of $230.4 and $209.9 172.3 182.9
Cost in excess of net assets of acquired businesses, net 111.5 114.7
Other assets 68.9 44.1
- ------------------------------------------------------------ -------- -------
Total Assets $ 688.7 $ 668.8
- ------------------------------------------------------------ -------- -------
Liabilities and Stockholders' Equity (Deficit)
- ------------------------------------------------------------ -------- -------
Current liabilities:
Notes payable and current maturities of long-term debt $ 6.5 $ 0.7
Accounts payable 51.0 30.4
Accrued expenses 91.0 63.8
- ------------------------------------------------------------ -------- -------
Total current liabilities 148.5 94.9
Long-term debt, exclusive of current maturities 809.7 161.6
Deferred income taxes, exclusive of current portion 8.8 13.0
Other liabilities 43.4 44.7
- ------------------------------------------------------------ -------- -------
Total liabilities 1,010.4 314.2
- ------------------------------------------------------------ -------- -------
Commitments and Contingent Liabilities
- ------------------------------------------------------------ -------- -------
Stockholders' equity (deficit):
Common stock: par value $.01 per share, 100,000,000 shares
authorized, 30,795,882 outstanding 0.3
Common Stock: par value $.005 per share
Class A: 54,856,210 shares issued 0.3
Class B, convertible: 22,958,942 shares issued 0.1
Capital in excess of par value of stock 417.3 38.7
Retained earnings (deficit) (747.9) 348.9
Accumulated other comprehensive income 8.6 7.6
Less Class A treasury stock at cost, none and
3,704,604 shares (41.0)
- ------------------------------------------------------------ -------- -------
Total stockholders' equity (deficit) (321.7) 354.6
- ------------------------------------------------------------ -------- -------
Total Liabilities and Stockholders' Equity (Deficit) $ 688.7 $ 668.8
- ------------------------------------------------------------ -------- -------
The accompanying notes are an integral part of the audited financial statements.
Page 23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
-----------------------------
(Dollar amounts in millions) 1999 1998 1997
- -------------------------------------------------------- --------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (21.8) $ 61.3 $ 59.1
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss 2.0
Depreciation, amortization and other
noncash charges 34.0 30.9 25.0
Deferred income taxes (3.2) (2.3) (1.7)
Gain on disposals of property, plant
and equipment (0.5) (0.6)
Changes in assets and liabilities, net
of effects of businesses acquired and sold:
(Increase) decrease in accounts receivable (39.6) 3.4 20.4
(Increase) decrease in inventories 4.0 13.3 (10.4)
(Increase) decrease in other assets (2.8) 0.8
Increase (decrease) in accounts payable 20.6 (12.8) 0.8
Increase (decrease) in accrued expenses 30.3 (7.3) (15.5)
Increase (decrease) in other liabilities (1.9) 0.4 2.4
- -------------------------------------------------------- --------- ------ ------
Net cash provided by operating activities 19.1 88.9 80.3
- -------------------------------------------------------- --------- ------ ------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 0.8 1.3 0.9
Purchases of property, plant and equipment (17.5) (21.1) (17.8)
Acquisitions of businesses (1.4) (17.4) (132.5)
Other (3.3)
- -------------------------------------------------------- --------- ------ ------
Net cash used in investing activities (21.4) (37.2) (149.4)
- -------------------------------------------------------- --------- ------ ------
Cash flows from financing activities:
Net increase (reduction) in short-term borrowings 3.0 (0.4)
Issuance of long-term debt 696.9 149.4 62.0
Reduction of long-term debt (74.6) (137.5) (14.9)
Decrease in restricted funds 3.5 0.5 1.0
Dividends paid (7.8) (10.5) (9.4)
Redemption of Common Stock (1,068.8)
Capital contribution 417.5
Purchase of treasury stock (18.1) (27.5)
Other (2.0) 5.2 4.0
- -------------------------------------------------------- --------- ------ ------
Net cash provided by (used in) financing
activities (32.3) (11.4) 15.2
- -------------------------------------------------------- --------- ------ ------
Net increase (decrease) in cash and cash
equivalents (34.6) 40.3 (53.9)
- -------------------------------------------------------- --------- ------ ------
Cash and cash equivalents at beginning of period 45.1 4.8 58.7
- -------------------------------------------------------- --------- ------ ------
Cash and cash equivalents at end of period $ 10.5 $ 45.1 $ 4.8
- -------------------------------------------------------- --------- ------ ------
</TABLE>
The accompanying notes are an integral part of the audited financial statements.
Page 24
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Blount International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital Retained Other
(Dollar amounts in millions, ------------------------ In Excess Earnings Comprehensive Treasury
shares in thousands) Common Class A Class B of Par (Deficit) Income Stock Total
- ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 0.1 $ 0.1 $ 34.8 $ 252.2 $ 7.9 $ (4.3) $ 290.8
Stock split (27,276 Class A, 1,456 treasury,
and 11,622 Class B) 0.2 (0.2)
Net income 59.1 59.1
Other comprehensive income, net:
Foreign currency translation adjustment (0.9) (0.9)
-------
Comprehensive income 58.2
Dividends (9.6) (9.6)
Conversion of Class B to Class A
Common stock (158 shares)
Purchase of treasury stock
(1,346 Class A shares) (27.5) (27.5)
Other (458 Class A shares, 132 treasury)
- principally stock options exercised 3.1 (1.4) 2.5 4.2
- ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
Balance, December 31, 1997 0.3 0.1 37.7 300.3 7.0 (29.3) 316.1
Net income 61.3 61.3
Other comprehensive income, net:
Foreign currency translation adjustment 0.5 0.5
Unrealized gains on securities, net of
gains of $0.2 reclassified to net income 0.6 0.6
Minimum pension liability adjustment (0.5) (0.5)
-------
Comprehensive income 61.9
Dividends (10.5) (10.5)
Conversion of Class B to Class A
Common stock (282 shares)
Purchase of treasury stock
(1,410 Class A shares) (18.0) (18.0)
Other (630 Class A shares, 612 treasury)
- principally stock options exercised 1.0 (2.2) 6.3 5.1
- ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
Balance, December 31, 1998 0.3 0.1 38.7 348.9 7.6 (41.0) 354.6
Net income (loss) (21.8) (21.8)
Other comprehensive income, net:
Foreign currency translation adjustment (0.5) (0.5)
Unrealized gains on securities 1.0 1.0
Minimum pension liability adjustment 0.5 0.5
-------
Comprehensive income (loss) (20.8)
Redemption of Common Stock, 48,475 shares
of Class A and 22,776 shares of Class B (0.3) (0.1) (1,068.4) (1,068.8)
Capital Contributions (27,833 shares) $ 0.2 417.3 417.5
Exchange of Class A for 2,963 shares of Common 0.1 0.1
Conversion of Class B to Class A (183 shares)
Retire treasury stock (3,605 Class A) (38.8) (1.1) 39.9
Dividends (5.2) (5.2)
Other - principally stock options exercised 0.1 (0.3) 1.1 0.9
- ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
Balance, December 31, 1999 $ 0.3 $417.3 $ (747.9) $ 8.6 $(321.7)
- ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
</TABLE>
The accompanying notes are an integral part of the audited financial statements.
Page 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blount International, Inc. and Subsidiaries
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The consolidated financial statements include the accounts of Blount
International, Inc. and its subsidiaries ("the Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
Merger:
On August 19, 1999, Blount International, Inc., a Delaware corporation, merged
with Red Dog Acquisition, Corp., a Delaware corporation and a wholly-owned
subsidiary of Lehman Brothers Merchant Banking Partners II L.P. ("Lehman"). The
merger was completed pursuant to an Agreement and Plan of Merger and
Recapitalization dated as of April 18, 1999. Lehman is a $2.0 billion
institutional merchant banking fund focused on investments in established
operating companies. This transaction was accounted for as a recapitalization
under generally accepted accounting principles. Accordingly, the historical
basis of the Company's assets and liabilities has not been impacted by the
transaction.
As a result of the proration and stock election procedures related to the
merger, approximately 1.5 million shares of Blount International's pre-merger
outstanding common stock were retained by existing shareholders and exchanged,
on a two-for-one basis, for 3.0 million shares of post-merger outstanding common
stock. All share and per share information for periods prior to the merger have
been restated to reflect the split. Lehman and certain members of Company
management made a capital contribution of approximately $417.5 million and
received approximately 27.8 million shares of post-merger outstanding common
stock. Lehman controls approximately 85% of the 30.8 million shares outstanding
following the merger.
The merger was financed by the equity contribution of $417.5 million, senior
term loans of $400 million and senior subordinated notes of $325 million issued
by Blount, Inc., a wholly-owned subsidiary of Blount International, Inc. The
new credit facilities include two term loan facilities in an aggregate principal
amount of $400.0 million, comprised of a $60.0 million Tranche A Term Loan (none
of which was outstanding at December 31, 1999) and a $340.0 million Tranche B
Term Loan ($339.2 million of which was outstanding at December 31, 1999), and a
$100.0 million revolving credit facility (none of which was outstanding at
December 31, 1999). See Note 3.
Reclassifications:
Certain amounts in 1998 and 1997 and notes to consolidated financial statements
have been reclassified to conform with the 1999 presentation.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Estimates are used when accounting for the allowance for doubtful accounts,
inventory obsolescence, long-lived assets, product warranty expenses, casualty
insurance costs, product liability expenses, other legal proceedings, employee
benefit plans, income taxes, discontinued operations and contingencies. It is
reasonably possible that actual results could differ significantly from those
estimates and significant changes to estimates could occur in the near term.
Page 26
<PAGE>
Cash and cash equivalents:
The Company considers all highly liquid temporary cash investments that are
readily convertible to known amounts of cash and present minimal risk of changes
in value because of changes in interest rates to be cash equivalents.
Inventories:
Inventories are stated at the lower of first-in, first-out cost or market.
Property, plant and equipment:
These assets are stated at cost and are depreciated principally on the straight-
line method over the estimated useful lives of the individual assets. The
principal ranges of estimated useful lives for depreciation purposes are as
follows: buildings and improvements - 5 years to 45 years; machinery and
equipment - 3 years to 15 years; furniture, fixtures and office equipment - 3
years to 15 years; and transportation equipment - 1 year to 15 years. Gains or
losses on disposal are reflected in income. Property, plant and equipment held
under leases which are essentially installment purchases are capitalized with
the related obligations stated at the principal portion of future lease
payments. Depreciation charged to costs and expenses was $27.3 million, $25.9
million and $21.1 million in 1999, 1998 and 1997.
Interest cost incurred during the period of construction of plant and equipment
is capitalized. No material amounts of interest were capitalized on plant and
equipment during the three reporting periods ended December 31, 1999.
Cost in excess of net assets of acquired businesses:
The excess cost is being amortized by the straight-line method over periods
ranging from 5 to 40 years. Accumulated amortization was $38.3 million and
$34.4 million as of December 31, 1999 and 1998. The excess cost is evaluated
for impairment annually or sooner if events or changes in circumstances indicate
the carrying amount may exceed fair value based on the historic and estimated
future profitability and cash flows of the business units to which it relates.
Adjustments to carrying value are made if required.
Insurance accruals:
It is the Company's policy to retain a portion of expected losses related to
general and product liability through retentions or deductibles under its
insurance programs and for workers' compensation and vehicle liability losses
until October 1, 1999. Provisions for losses expected under these programs are
recorded based on estimates of the undiscounted aggregate liabilities for claims
incurred.
Foreign currency:
For foreign subsidiaries whose operations are principally conducted in U.S.
dollars, monetary assets and liabilities are translated into U.S. dollars at the
current exchange rate, while other assets (principally property, plant and
equipment and inventories) and related costs and expenses are generally
translated at historic exchange rates. Sales and other costs and expenses are
translated at the average exchange rate for the period and the resulting foreign
exchange adjustments are recognized in income. Assets and liabilities of the
remaining foreign operations are translated into U.S. dollars at the current
exchange rate and their statements of income are translated at the average
exchange rate for the period. Gains and losses resulting from translation of the
financial statements of these operations are reflected as "other comprehensive
income" in stockholders' equity. The amount of income taxes allocated to this
translation adjustment is not significant. Foreign exchange adjustments to
pretax income were not material in 1999, 1998 and 1997.
Page 27
<PAGE>
Derivative financial instruments:
The Company accounts for copper and zinc futures contracts in accordance with
SFAS No. 80, "Accounting for Futures Contracts." These contracts (no pounds and
approximately 4.0 million pounds at December 31, 1999 and 1998, respectively)
hedge a portion of the anticipated brass purchases the Company expects to carry
out in the normal course of business. Any gain or loss on futures contracts
accounted for as a hedge which are closed before the date of the anticipated
transaction is deferred until completion of the transaction. Deferred gains or
losses are amortized over the transaction period.
An interest rate contract accounted for as an interest rate hedge of an expected
debt issue was extinguished upon the issuance of 7% senior notes in the
principal amount of $150 million (see Note 3) in June 1998. The cost to
extinguish the interest rate contract is being amortized as an adjustment to
interest expense over the life of the senior notes.
Deferred gains and losses on derivative financial instruments are generally
classified as other assets or other liabilities in the consolidated balance
sheets.
Deferred Financing Costs:
The Company capitalizes costs incurred in connection with borrowings or
establishment of credit facilities. These costs are amortized as an adjustment
to interest expense over the life of the borrowing or life of the credit
facility.
Revenue recognition:
The Company's policy is to record sales as orders are shipped.
Advertising:
Advertising costs are expensed as incurred except for cooperative advertising
which is accrued over the period the revenues are recognized and sales materials
such as brochures and catalogs which are accounted for as prepaid supplies and
expensed over the period used. Advertising costs were $11.7 million, $13.5
million and $14.6 million for 1999, 1998 and 1997.
Research and development:
Expenditures for research and development are expensed as incurred. These costs
were $7.2 million, $7.4 million and $8.0 million for 1999, 1998 and 1997.
Contributions:
During the first quarter of 1999, the Company donated art with a book value of
$1.5 million and an appraised value of $4.7 million to The Blount Foundation,
Inc., a charitable foundation. On an after-tax basis, this donation had no
significant effect on net income.
Page 28
<PAGE>
NOTE 2:
INCOME TAXES
The provision (benefit) for income taxes attributable to income (loss) before
extraordinary loss is as follows:
Twelve Months Ended
December 31,
------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Current provision (benefit):
Federal $ (1.8) $ 33.3 $ 28.6
State 1.1 4.3 3.8
Foreign 5.0 4.2 3.9
Deferred provision (benefit):
Federal (5.0) (2.4) (1.5)
State (0.5) (0.1) 0.1
Foreign 0.4 (0.4) (0.3)
- ------------------------------------------------ ------ ------ ------
$ (0.8) $ 38.9 $ 34.6
- ------------------------------------------------ ------ ------ ------
A reconciliation of the provision (benefit) for income taxes to the amount
computed by applying the statutory federal income tax rate to income (loss)
before extraordinary loss and income taxes is as follows:
Twelve Months Ended
December 31,
------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Income (loss) before income taxes:
Domestic $(31.9) $ 91.5 $ 83.8
Foreign 9.3 10.7 9.9
- ------------------------------------------------ ------ ------ ------
(22.6) $102.2 $ 93.7
- ------------------------------------------------ ------ ------ ------
% % %
Statutory tax rate (35.0) 35.0 35.0
Impact of earnings of foreign operations 8.3 (0.7)
State income taxes, net of federal tax benefit 0.6 2.6 2.2
Merger expenses 25.3
Permanent differences 2.3 1.2 1.6
Other items, net (5.3) (0.7) (1.2)
- ------------------------------------------------ ------ ------ ------
Effective income tax rate (3.8) 38.1 36.9
- ------------------------------------------------ ------ ------ ------
All years reflect the allocation of substantially all corporate office expenses
and interest expense to domestic operations.
Page 29
<PAGE>
As of December 31, 1999 and 1998, deferred income tax assets were $39.5 million
and $35.7 million and deferred income tax liabilities were $27.2 million and
$26.7 million. Deferred income tax assets (liabilities) applicable to temporary
differences at December 31, 1999 and 1998, are as follows:
(Dollar amounts in millions) 1999 1998
- ------------------------------------------------------------ ------ ------
Property, plant and equipment basis differences $(16.9) $(17.8)
Employee benefits 21.4 19.1
Other accrued expenses 16.3 15.0
Other - net (8.5) (7.3)
- ------------------------------------------------------------ ------ ------
$ 12.3 $ 9.0
- ------------------------------------------------------------ ------ ------
Deferred income taxes of approximately $2.9 million have not been provided on
undistributed earnings of foreign subsidiaries in the amount of $28.7 million as
the earnings are considered to be permanently reinvested.
The Company has settled its issues with the Internal Revenue Service through the
1993 fiscal year with no material adverse effect. The periods from fiscal 1994
through 1999 are still open for review.
NOTE 3:
DEBT AND FINANCING AGREEMENTS
Long-term debt at December 31, 1999 and 1998, consists of the following:
(Dollar amounts in millions) 1999 1998
- ------------------------------------------------------------ ------ ------
13% Senior subordinated notes, maturing on
August 1, 2009 $325.0
7% Senior notes (net of discount), maturing on
June 15, 2005 148.8 $148.6
Tranche B senior term loans, maturing at various dates
through June 30, 2006, interest rate varies with libor,
prime or CD rate depending upon borrowing option selected 339.2
$100 million revolving credit agreement maturing
August 19, 2004, interest rate varies with libor, prime
or CD rate depending upon borrowing option selected
Industrial development revenue bonds payable, maturing
between 1999 and 2013, interest at varying rates 13.1
Other long-term debt, interest at 9.25% at
December 31, 1998 0.4
Lease purchase obligations, interest at varying
rates, payable in installments to 2003 0.2 0.2
- ------------------------------------------------------------ ------ ------
813.2 162.3
Less current maturities (3.5) (0.7)
- ------------------------------------------------------------ ------ ------
$809.7 $161.6
- ------------------------------------------------------------ ====== ======
Page 30
<PAGE>
Maturities of long-term debt and the principal and interest payments on long-
term capital leases are as follows:
Capital Leases
--------------------- Total
(Dollar amounts in millions) Debt Principal Interest Payments
- ------------------------------- ------ --------- -------- --------
2000 $ 3.4 $ 0.1 $ 0.0 $ 3.5
2001 3.4 0.1 3.5
2002 3.4 3.4
2003 3.4 3.4
2004 3.4 3.4
2005 and beyond 796.0 796.0
- ------------------------------- ------ ----- ----- ------
$813.0 $ 0.2 $ 0.0 $813.2
- ------------------------------- ------ ----- ----- ------
In June 1998, Blount, Inc., a wholly-owned subsidiary of Blount International,
Inc., issued senior notes ("the 7% senior notes") with a stated interest rate of
7% in the principal amount of $150 million maturing on June 15, 2005. The
senior notes are fully and unconditionally guaranteed by Blount International,
Inc. Approximately $8.3 million, reflecting the price discount and the cost to
extinguish an interest rate contract accounted for as a hedge of future interest
on the debt, is being amortized to expense over the life of the senior notes.
The senior notes are redeemable at a premium, in whole or in part, at the option
of the Company at any time. The debt indenture contains restrictions on secured
debt, sale and lease-back transactions, and the consolidation, merger and sale
of assets.
In July 1998, the Company redeemed all its 9% subordinated notes in the amount
of $68.8 million. The extraordinary loss on redemption was $2.0 million, net of
income taxes of $1.2 million.
In August 1999, Blount, Inc., a wholly-owned subsidiary of Blount International,
Inc., issued senior subordinated notes (the "senior subordinated notes") with an
interest rate of 13% in the principal amount of $325 million. The senior
subordinated notes provide at a premium for the redemption of an aggregate of
35% of the senior subordinated notes until August 1, 2002, and for redemption at
a premium of all or part of the senior subordinated notes after August 1, 2004,
until August 1, 2007, when the senior subordinated notes are redeemable at par.
Blount, Inc. also entered into new credit facilities which include two term loan
facilities in an aggregate principal amount of $400.0 million, comprised of a
$60.0 million Tranche A Term Loan (none of which was outstanding at December 31,
1999) and a $340.0 million Tranche B Term Loan ($339.2 million of which was
outstanding at December 31, 1999), and a $100.0 million revolving credit
facility (none of which was outstanding at December 31, 1999). In connection
with the $325 million senior subordinated notes, the Company filed a
registration statement on Form S-4 on July 15, 1999. The Tranche A Term Loan,
which has been paid in full, had scheduled quarterly repayments that increased
periodically from $2,000,000 beginning on December 31, 1999, to $3,750,000 by
the maturity date, June 30, 2004. The Tranche B Term Loan has quarterly
repayments of $850,000 beginning on December 31, 1999, until June 30, 2005, and
then increasing to $80,000,000 on September 30, 2005, until March 31, 2006, with
a final payment of $80,450,000 on the maturity date, June 30, 2006. The Tranche
B borrowings can be repaid, in whole or in part, at anytime; however, there is a
prepayment premium until August 19, 2001. The Company and all of the Company's
domestic subsidiaries other than Blount, Inc. guarantee Blount, Inc.'s
obligations under the debt issued to finance the merger. In addition, Blount,
Inc. has pledged 65% of the stock of its non-domestic subsidiaries as further
collateral. Blount, Inc.'s obligations and its domestic subsidiaries' guarantee
Page 31
<PAGE>
obligations under the new credit facilities are collateralized by a first
priority security interest in substantially all of their respective assets. The
Company's guarantee obligations in respect of the new credit facilities are
collateralized by a pledge of all of Blount, Inc.'s capital stock. The 7.0%
senior notes share equally and ratably in certain of the collateral securing the
new credit facilities. The Company is required to enter into hedge agreements
within 180 days of the Tranche B borrowing and maintain such hedge agreements in
place until the second anniversary of the Tranche B borrowing such that at least
33% of the aggregate principal amount of the Tranche B borrowing is subject to a
fixed rate of interest. The Company will have in place by February 15, 2000, an
interest rate cap at an immaterial cost to comply with this requirement.
In August 1999, the Company replaced its $150 million revolving credit agreement
expiring April 1, 2002, with a new $100 million revolving credit agreement
expiring on August 19, 2004. At December 31, 1999, no amounts were outstanding
under the new $100 million revolving credit agreement. The $100 million
revolving credit agreement provides for interest rates to be determined at the
time of borrowings based on a choice of formulas as specified in the agreement.
The interest rates and commitment fees may vary based on the ratio of total debt
to consolidated earnings before interest, taxes, depreciation, and amortization
(EBITDA) as defined in the agreement. The new agreement contains covenants
relating to indebtedness, liens, mergers, consolidations, disposals of property,
payment of dividends, capital expenditures, investments, optional payments and
modifications of the agreements, transactions with affiliates, sales and
leasebacks, changes in fiscal periods, negative pledges, subsidiary
distributions, lines of business, hedge agreements, and activities of the
Company and requires the Company to maintain certain leverage and interest
coverage ratios.
As of December 31, 1999, the weighted average interest rate on outstanding
foreign short-term borrowings was 7.3%. No short-term borrowings were
outstanding at December 31, 1998.
NOTE 4:
ACQUISITIONS AND DISPOSALS
The following acquisitions have been accounted for by the purchase method, and
the net assets and results of operations of the acquired companies have been
included in the Company's consolidated financial statements since the dates of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired is being amortized on a straight-line basis over 40 years.
In September 1998, the Company purchased certain operating assets of the
Redfield line for approximately $3 million. The fair value of the assets
acquired approximated the purchase price.
Page 32
<PAGE>
On November 4, 1997, the Company acquired Federal Cartridge Company ("Federal"),
formerly Federal-Hoffman, Inc. The purchase price was approximately $129
million including a post-closing adjustment and acquisition expenses. Federal
manufactures shotshell, centerfire and rimfire cartridges, ammunition components
and clay targets. The following summarized unaudited pro forma financial
information for the twelve months ended December 31, 1997, assumes the
acquisition had occurred on January 1, 1997:
Pro forma information
(Dollar amounts in millions, except per share data) 1997
- ------------------------------------------------------------------ ------
Sales $842.2
Income from continuing operations 65.1
Earnings per share from continuing operations:
Basic .87
Diluted .85
- ------------------------------------------------------------------ ------
The pro forma results do not necessarily represent the results which would have
occurred if the acquisition had taken place on the basis assumed nor are they
indicative of the results of future operations.
In January 1997, the Company acquired the outstanding capital stock of the
Frederick Manufacturing Corporation ("Frederick") and Orbex, Inc. ("Orbex") for
approximately $19 million and paid existing debt of the acquired companies in
the amount of $5.8 million. Orbex was subsequently merged into Frederick. The
principal products of the acquired companies are accessories for lawn mowers and
sporting goods. The combined sales and pretax income of the acquired companies
for their most recent year prior to the acquisition was $19.8 million and $2.5
million, respectively.
NOTE 5:
CAPITAL STOCK, STOCK OPTIONS AND EARNINGS PER SHARE DATA
The Company has authorized 100 million shares of Common Stock.
The number of shares used in the denominators of the basic and diluted earnings
(loss) per share computations were as follows (in thousands):
Twelve Months Ended
December 31,
----------------------
1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Shares for basic earnings (loss) per share
computation - weighted average
common shares outstanding 58,185 74,744 75,264
Dilutive effect of stock options 2,044 1,832
- ------------------------------------------------ ------ ------ ------
Shares for diluted earnings (loss) per
share computation 58,185 76,788 77,096
- ------------------------------------------------ ------ ------ ------
No adjustment was required to reported income amounts for inclusion in the
numerators of the earnings (loss) per share computations.
Prior to the merger described in Note 1, the Company had granted options to
purchase its Class A Common Stock to certain officers and key employees under
four fixed stock option plans. Under these plans, options could be granted up
Page 33
<PAGE>
to 13,500,000 shares. Each plan provided for the granting of options with an
option price per share not less than the fair market value of one share of Class
A Common Stock on the date of grant. The options granted were exercisable for a
period of up to ten years under each plan and vested in installments over
periods determined by the Compensation and Management Development Committee of
the Board of Directors. Options to purchase 1,121,200 shares were granted
during the first quarter of 1999 under the 1998 Blount Long-Term Executive Stock
Option Plan. As a result of the merger described in Note 1, all outstanding
options were canceled through a payment associated with the merger. During the
third quarter of 1999, the Company's Board of Directors adopted a new stock
option plan under which options, either incentive stock options or nonqualified
stock options, to purchase the Company's Common Stock may be granted to
employees, directors, and other persons who perform services for the Company.
The number of shares which may be issued under the plan may not exceed 2,875,000
shares. The option price per share for incentive stock options may not be less
than 100% of the average closing sale price for ten consecutive trading days
ended on the trading day immediately prior to the date of grant. The option
price for each grant of a nonqualified stock option shall be established on the
date of grant and may be less than the fair market value of one share of Common
Stock on the date of grant. During the third quarter of 1999, options were
granted to purchase 2,301,320 shares at the price of $15 per share. As of
December 31, 1999 and 1998, there were options for 623,680 shares and 1,630,040
shares available for grant.
A summary of the status of the Company's fixed stock option plans as of December
31, 1999, 1998 and 1997, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(in 000's) Price (in 000's) Price (in 000's) Price
- -------------------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 7,288 $ 8.19 6,932 $ 7.40 5,836 $ 5.94
Granted 3,422 14.27 1,196 12.58 2,070 9.99
Exercised (100) 8.81 (612) 6,85 (888) 3.94
Forfeited (106) 13.15 (228) 10.73 (86) 6.88
Canceled (8,253) (8.78)
- -------------------- ---------- --------- ---------- --------- ---------- ---------
Outstanding at
end of period 2,251 $15.00 7,288 $ 8.19 6,932 $ 7.40
- -------------------- ---------- --------- ---------- --------- ---------- ---------
Options exercisable
at end of period 0 3,896 2,770
- -------------------- ---------- ---------- ----------
</TABLE>
All options outstanding at December 31, 1999, have an exercise price of $15 per
share, vest over three to six years (none of which had vested at December 31,
1999) and have a remaining contractual life of approximately 9 1/2 years.
Page 34
<PAGE>
The Company applies APB Opinion 25 and related interpretations in accounting for
fixed stock option plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined based on the estimated fair
value at the grant dates for awards under the Company's plans, consistent with
the method of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been the pro forma amounts indicated below:
Twelve Months Ended
December 31,
(Dollar amounts in millions, ------------------------
except per share data) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Net income (loss):
As reported $(21.8) $ 61.3 $ 59.1
Pro forma 4.1 58.1 56.7
Earnings (loss) per share:
As reported:
Basic (0.37) 0.82 0.79
Diluted (0.37) 0.80 0.77
Pro forma:
Basic 0.07 0.78 0.76
Diluted 0.07 0.76 0.74
- ------------------------------------------------ ------ ------ ------
For purposes of computing the pro forma amounts above, the Black-Scholes option-
pricing model was used with the following weighted-average assumptions:
Twelve Months Ended
December 31,
------------------------
1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Estimated lives of plan options 6 years 6 years 6 years
Risk-free interest rates 5.8% 5.5% 6.2%
Expected volatility 30.0% 23.0% 23.0%
Dividend yield 0.5% 1.5% 1.5%
- ------------------------------------------------ ------ ------ ------
The weighted average estimated fair value of options granted during 1999, 1998
and 1997 was $5.47, $3.67 and $3.08, respectively.
Page 35
<PAGE>
NOTE 6:
PENSION AND POSTRETIREMENT BENEFIT PLANS
The changes in the benefit obligations, changes in plan assets, and funded
status of the Company's defined benefit pension plans and other postretirement
medical and life benefit plans for the periods ended December 31, 1999 and 1998,
were as follows:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
FUNDED PLANS ---------------- ----------------
(Dollar amounts in millions) 1999 1998 1999 1998
- ------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of period $(126.4) $(107.9) $ (2.4) $ (2.1)
Service cost (6.6) (6.2)
Interest cost (8.9) (8.4) (0.2) (0.2)
Plan participants' contributions (0.1) (0.2)
Actuarial gains (losses) 10.5 (6.8) 0.3 (0.4)
Benefits and plan expenses paid 3.8 2.9 0.5 0.5
- ------------------------------------------------ ------- ------- ------ ------
Benefit obligation at end of period (127.6) (126.4) (1.9) (2.4)
- ------------------------------------------------ ------- ------- ------ ------
Change in Plan Assets:
Fair value of plan assets at beginning of period 121.7 114.1 1.9 2.1
Actual return on plan assets 19.5 10.5 0.4 0.1
Company contributions 0.9
Plan participants' contributions 0.1 0.2
Benefits and plan expenses paid (3.8) (2.9) (0.5) (0.5)
- ------------------------------------------------ ------- ------- ------ ------
Fair value of plan assets at end of period 138.3 121.7 1.9 1.9
- ------------------------------------------------ ------- ------- ------ ------
Funded status 10.7 (4.7) (0.5)
Unrecognized actuarial (gains) losses (12.5) 7.3 0.5
Unrecognized transition asset (0.5) (0.6)
Unrecognized prior service cost (0.2) (0.2)
- ------------------------------------------------ ------- ------- ------ ------
Net amount recognized $ (2.5) $ 1.8 $ 0.0 $ 0.0
- ------------------------------------------------ ------- ------- ------ ------
Net amount recognized:
Prepaid benefits $ 2.1 $ 3.3
Accrued benefits (4.6) (1.5)
- ------------------------------------------------ ------- ------- ------ ------
$ (2.5) $ 1.8 $ 0.0 $ 0.0
- ------------------------------------------------ ------- ------- ------ ------
</TABLE>
Page 36
<PAGE>
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
OTHER PLANS ---------------- ----------------
(Dollar amounts in millions) 1999 1998 1999 1998
- ------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of period $(13.8) $ (6.3) $(17.4) $(16.8)
Service cost (0.9) (0.5) (0.4) (0.4)
Interest cost (0.9) (0.6) (1.2) (1.2)
Plan participants' contributions (0.6) (0.4)
Actuarial gains (losses) 0.7 (0.4) 2.3 0.3
Benefits and plan expenses paid 1.4 0.3 1.5 1.1
Plan amendments (6.3)
- ------------------------------------------------ ------ ------ ------ ------
Benefit obligation at end of period (13.5) (13.8) (15.8) (17.4)
Unrecognized actuarial (gains) losses 1.7 1.2 (3.0) (0.9)
Unrecognized transition obligation 0.1 0.1
Unrecognized prior service cost 4.0 6.2 0.1 0.1
- ------------------------------------------------ ------ ------ ------ ------
Net amount recognized $ (7.7) $ (6.3) $(18.7) $(18.2)
- ------------------------------------------------ ------ ------ ------ ------
Net amount recognized:
Accrued benefits $(11.1) $(13.4) $(18.7) $(18.2)
Intangible asset 3.4 6.3
Accumulated other comprehensive income 0.8
- ---------------------------------------- ------ ------ ------ ------
$ (7.7) $ (6.3) $(18.7) $(18.2)
- ---------------------------------------- ------ ------ ------ ------
</TABLE>
The accumulated pension benefit obligation of supplemental non-qualified defined
benefit pension plans was $11.1 million and $13.4 million at December 31, 1999
and 1998, respectively. Two Rabbi Trusts, whose assets are not included in the
table above has been established to fund part of these non-qualified benefits.
These two Rabbi Trusts required the funding of certain executive benefits upon a
change in control or threatened change in control such as the merger described
in Note 1 of Notes to Consolidated Financial Statements. During the second
quarter of 1999, approximately $10.4 million was funded under these trusts with
approximately $7.1 million coming from the proceeds of officer life insurance
loans and $3.3 million from general corporate funds. At December 31, 1999 and
1998, approximately $22.9 million and $11.5 million was held in these trusts and
is included in "Other assets" in the Condensed Consolidated Balance Sheet.
Page 37
<PAGE>
The components of net periodic benefit cost and the weighted average assumptions
used in accounting for pension and other postretirement benefits follow:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------ ------------------------------
Twelve Months Ended Twelve Months Ended
December 31, December 31,
------------------------------ ------------------------------
(Dollar amounts in millions) 1999 1998 1997 1999 1998 1997
- ------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 7.5 $ 6.7 $ 4.9 $ 0.4 $ 0.4 $ 0.3
Interest cost 9.8 9.0 6.7 1.3 1.4 1.2
Expected return on plan assets (10.8) (9.7) (7.3) (0.1) (0.2) (0.2)
Amortization of actuarial (gains) losses (0.2) 0.1 0.1 (0.1) 0.1
Amortization of transition asset (0.1) (0.1) (0.1)
Amortization of prior service cost 1.0 0.4 0.8
------ ------ ------ ------ ------ ------
$ 7.2 $ 6.4 $ 5.1 $ 1.6 $ 1.5 $ 1.4
------ ------ ------ ------ ------ ------
Weighted average assumptions:
Discount rate 7.4% 7.0% 7.4% 7.5% 7.0% 7.5%
Expected return on plan assets 8.9% 8.9% 8.7% 9.0% 9.0% 8.8%
Rate of compensation increase 4.0% 3.8% 4.0%
- ------------------------------------------- ------ ------ ------ ------ ------ ------
</TABLE>
A 6% annual rate of increase in the cost of health care benefits was assumed for
1999; the rate was assumed to decrease 1% per year until 4% is reached, remain
at that level for ten years, and then decrease to the ultimate trend rate of 3%.
A 1% change in assumed health care cost trend rates would have the following
effects:
(Dollar amounts in millions) 1% Increase 1% Decrease
- ------------------------------------------------ ----------- -----------
Effect on service and interest cost components $ 0.1 $ 0.1
Effect on other postretirement benefit obligations 0.8 0.7
- ------------------------------------------------ ----------- -----------
The Company sponsors a defined contribution 401(k) plan and matches a portion of
employee contributions. The expense was $4.9 million, $4.9 million and $3.6
million in 1999, 1998 and 1997.
NOTE 7:
COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space and equipment under operating leases expiring in
1 to 8 years. Most leases include renewal options and some contain purchase
options and escalation clauses. Future minimum rental commitments required
under operating leases having initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1999, are as follows (in millions): 2000--
$3.3; 2001--$2.7; 2002--$1.5; 2003--$1.0; 2004--$0.6; and 2005 and beyond--$0.5.
Rentals charged to costs and expenses under cancelable and noncancelable lease
arrangements were $4.0 million, $4.6 million and $4.9 million for 1999, 1998 and
1997, respectively.
Page 38
<PAGE>
Under the provisions of Washington State environmental laws, the Washington
State Department of Ecology ("WDOE") has notified the Company that it is one of
many companies named as a Potentially Liable Party ("PLP"), for the Pasco
Sanitary Landfill site, Pasco, Washington ("the Site"). Although the clean-up
costs are believed to be substantial, accurate estimates will not be available
until the environmental studies have been completed at the Site. However, based
upon the total documented volume of waste sent to the Site, the Company's waste
volume compared to that total waste volume should cause the Company to be
classified as a "de minimis" PLP. In July 1992, the Company and thirty-eight
other PLPs entered into an Administrative Agreed Order with WDOE to perform a
Phase I Remedial Investigation at the Site. In October 1994, WDOE issued an
administrative Unilateral Enforcement Order to all PLPs to complete a Phase II
Remedial Investigation and Feasibility Study ("RI/FS") under the Scope of Work
established by WDOE. The results of the RI/FS investigation are expected in the
near future. The Company is unable to determine, at this time, the level of
clean-up demands that may be ultimately placed on it. Management believes that,
given the number of PLPs named with respect to the Site and their financial
condition, the Company's potential response costs associated with the Site will
not have a material adverse effect on consolidated financial condition or
operating results.
In connection with his resignation effective October 20, 1999, a former
executive officer ("executive") cited "good reason" (in the nature of
constructive discharge) under his employment contract and claimed he was due
severance benefits in excess of $2.5 million. The Compensation Committee of the
Board of Directors reviewed the facts relating to executive's termination and
found no basis for a "good reason" termination. Therefore, the Committee denied
executive's right to any severance benefits. Executive has exercised his right
to request arbitration of this claim. Management believes that this matter will
not have a material adverse effect on consolidated financial condition or
operating results.
The Company is a defendant in a number of product liability lawsuits, some of
which seek significant or unspecified damages, involving serious personal
injuries for which there are retentions or deductible amounts under the
Company's insurance policies. In addition, the Company is a party to a number of
other suits arising out of the conduct of its business. While there can be no
assurance as to their ultimate outcome, management does not believe these
lawsuits will have a material adverse effect on consolidated financial condition
or operating results.
NOTE 8:
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The Company has manufacturing or distribution operations in Brazil, Canada,
Europe, Japan, Russia and the United States. The Company sells to customers in
these locations, primarily in the United States, and other countries throughout
the world (see Note 9). At December 31, 1999, approximately 82% of trade
accounts receivable were from customers within the United States. Trade
accounts receivable are principally from service and dealer groups,
distributors, mass merchants, and chain saw and other original equipment
manufacturers, and are normally not collateralized.
Page 39
<PAGE>
The estimated fair values of certain financial instruments at December 31, 1999
and 1998, are as follows:
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
- ---------------------------------- --------- --------- --------- ---------
Cash and short-term investments $ 10.5 $ 10.5 $ 45.1 $ 45.1
Futures contracts (see Note 1) 0.0 0.0 0.0 (0.1)
Other assets (restricted trust
funds and notes receivable) 25.2 25.0 17.3 17.1
Notes payable and long-term debt
(see Note 3) (816.2) (815.3) (162.3) (163.7)
- ---------------------------------- ------- ------- ------- -------
The carrying amount of cash and short-term investments approximates fair value
because of the short maturity of those instruments. The fair value of
derivative financial instruments (futures contracts) is estimated by obtaining
market quotes. The fair value of notes receivable is estimated based on the
discounted value of estimated future cash flows. The fair value of restricted
trust funds approximates the carrying amount for short-term instruments and is
estimated by obtaining market quotes for longer term instruments. The fair
value of long-term debt is estimated based on recent market transaction prices
or on current rates available for debt with similar terms and maturities.
NOTE 9:
SEGMENT INFORMATION
The Company identifies operating segments based on management responsibility.
The Company has three reportable segments: Outdoor Products, Sporting
Equipment, and Industrial and Power Equipment. Outdoor Products produces or
markets chain saw components (chain, bars and sprockets), lawn mowers and
related products, and other outdoor care products. Sporting Equipment produces
or markets small arms ammunition, sports optical products, reloading equipment
and other shooting sports accessories. Industrial and Power Equipment produces
timber harvesting and industrial loading equipment and power transmission and
gear components.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are not
significant.
Page 40
<PAGE>
Information on Segments:
Twelve Months Ended
December 31,
--------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Sales:
Outdoor products $327.6 $315.4 $319.3
Sporting equipment 323.7 286.7 158.5
Industrial and power equipment 158.6 229.8 239.1
- ------------------------------------------------ ------ ------ ------
$809.9 $831.9 $716.9
- ------------------------------------------------ ------ ------ ------
Operating income (loss):
Outdoor products $ 71.8 $ 68.4 $ 67.1
Sporting equipment 40.4 36.1 18.1
Industrial and power equipment (1.1) 27.9 32.7
- ------------------------------------------------ ------ ------ ------
Operating income from segments 111.1 132.4 117.9
Corporate office expenses (17.3) (18.4) (18.5)
Merger expenses (76.1) (0.3)
- ------------------------------------------------ ------ ------ ------
Income from operations 17.7 113.7 99.4
Interest expense (44.8) (14.3) (9.5)
Interest income 3.7 2.5 2.5
Other income, net 0.8 0.3 1.3
- ------------------------------------------------ ------ ------ ------
Income (loss) before income taxes $(22.6) $102.2 $ 93.7
- ------------------------------------------------ ------ ------ ------
Identifiable assets:
Outdoor products $210.6 $209.1 $221.9
Sporting equipment 246.2 226.8 236.6
Industrial and power equipment 109.2 107.1 102.7
Corporate office 122.7 125.8 76.6
- ------------------------------------------------ ------ ------ ------
$688.7 $668.8 $637.8
- ------------------------------------------------ ------ ------ ------
Depreciation and amortization:
Outdoor products $ 13.9 $ 13.6 $ 13.4
Sporting equipment 11.1 10.7 5.7
Industrial and power equipment 4.9 4.2 4.1
Corporate office 4.1 2.4 1.8
- ------------------------------------------------ ------ ------ ------
$ 34.0 $ 30.9 $ 25.0
- ------------------------------------------------ ------ ------ ------
Capital expenditures:
Outdoor products $ 9.3 $ 7.9 $ 13.5
Sporting equipment 7.8 6.9 60.5
Industrial and power equipment 1.3 6.7 4.2
Corporate office 0.1 0.2 0.3
- ------------------------------------------------ ------ ------ ------
$ 18.5 $ 21.7 $ 78.5
- ------------------------------------------------ ------ ------ ------
Page 41
<PAGE>
Information on Sales By Significant Product Groups:
Twelve Months Ended
December 31,
--------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Chain saw components $201.1 $199.7 $211.1
Ammunition and related products 234.9 212.0 87.9
Timber harvesting and loading equipment 133.1 199.8 210.5
Lawn mowers and related products 87.2 75.7 66.2
Sports optical products 48.3 41.3 36.6
All others, less than 5% each 105.3 103.4 104.6
- ------------------------------------------------ ------ ------ ------
$809.9 $831.9 $716.9
- ------------------------------------------------ ====== ====== ======
Information on Geographic Areas:
Twelve Months Ended
December 31,
--------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Sales:
United States $601.5 $623.4 $495.1
Canada 32.2 32.4 36.5
Germany 22.4 24.0 24.5
All others, less than 3% each 153.8 152.1 160.8
- ------------------------------------------------ ------ ------ ------
$809.9 $831.9 $716.9
- ------------------------------------------------ ------ ------ ------
Long-Lived Assets:
United States $147.5 $156.1 $159.6
Canada 18.0 20.1 22.3
Brazil 3.7 3.7 3.6
All others, less than 3% each 3.1 3.0 3.0
- ------------------------------------------------ ------ ------ ------
$172.3 $182.9 $188.5
- ------------------------------------------------ ------ ------ ------
The geographic sales information is by country of destination. Long-lived
assets exclude the cost in excess of net assets of acquired businesses. No
customer accounted for more than 10% of consolidated sales in 1999, 1998 or
1997. In 1999, approximately 13% of sales by Outdoor Products were to one
customer, 20% of Sporting Equipment sales were to one customer, and 29% of
Industrial and Power Equipment sales were to two customers. While the Company
expects these business relationships to continue, the loss of any of these
customers could affect the operations of the segments. Each of the Company's
segments purchases certain important materials from a limited number of
suppliers that meet quality criteria. Although alternative sources of supply
are available, the sudden elimination of certain suppliers could result in
manufacturing delays, a reduction in product quality and a possible loss of
sales in the near term.
Page 42
<PAGE>
NOTE 10:
CONSOLIDATING FINANCIAL INFORMATION
The following consolidating financial information sets forth condensed
consolidating statements of operations, and the balance sheets and cash flows of
Blount International, Inc., Blount, Inc., the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries (in millions).
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For The Twelve Months
Ended December 31, 1999
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 436.8 $333.7 $167.1 $ (127.7) $809.9
Cost of sales 336.7 249.5 115.3 (127.2) 574.3
-------- ------ ------ --------- ------
Gross profit 100.1 84.2 51.8 (0.5) 235.6
Selling, general and administrative expenses $ 1.1 63.6 38.8 38.3 141.8
Merger expenses 69.6 6.5 76.1
------ -------- ------ ------ --------- ------
Income (loss) from operations (70.7) 30.0 45.4 13.5 (0.5) 17.7
Interest expense (44.7) (6.4) 6.3 (44.8)
Interest income 1.3 7.9 0.5 0.3 (6.3) 3.7
Other income (expense), net 6.7 (5.0) (0.9) 0.8
------ -------- ------ ------ --------- ------
Income (loss) before income taxes (69.4) (0.1) 34.5 12.9 (0.5) (22.6)
Provision (benefit) for income taxes (20.2) 13.2 6.2 0.8
------ -------- ------ ------ --------- ------
Income (loss) before earnings (losses)
of affiliated companies (49.2) (0.1) 21.3 6.7 (0.5) (21.8)
Equity in earnings (losses) of
affiliated companies, net 27.4 27.5 (0.1) (54.8)
------ -------- ------ ------ --------- ------
Net income $(21.8) $ 27.4 $ 21.2 $ 6.7 $ (55.3) $(21.8)
====== ======== ====== ====== ========= ======
Page 43
<PAGE>
For The Twelve Months
Ended December 31, 1998
</TABLE>
<TABLE>
<CAPTION>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 478.5 $315.3 $163.5 $ (125.4) $831.9
Cost of sales 350.5 229.4 119.7 (126.0) 573.6
-------- ------ ------ --------- ------
Gross profit 128.0 85.9 43.8 0.6 258.3
Selling, general and administrative expenses $ 1.3 71.8 38.2 33.0 144.3
Merger expenses 0.3 0.3
------ -------- ------ ------ --------- ------
Income (loss) from operations (1.6) 56.2 47.7 10.8 0.6 113.7
Interest expense (14.1) (7.1) (0.1) 7.0 (14.3)
Interest income 8.6 0.5 0.4 (7.0) 2.5
Other income (expense), net 5.1 (4.2) (0.6) 0.3
------ -------- ------ ------ --------- ------
Income (loss) before income taxes (1.6) 55.8 36.9 10.5 0.6 102.2
Provision (benefit) for income taxes (0.6) 21.0 14.0 4.5 38.9
------ -------- ------ ------ --------- ------
Income (loss) before earnings of
affiliated companies (1.0) 34.8 22.9 6.0 0.6 63.3
Extraordinary loss on repurchase of debt (2.0) (2.0)
Equity in earnings of affiliated companies, net 62.3 29.5 (0.3) (91.5)
------ -------- ------ ------ --------- ------
Net income $ 61.3 $ 62.3 $ 22.6 $ 6.0 $ (90.9) $ 61.3
====== ======== ====== ====== ========= ======
For The Twelve Months
Ended December 31, 1997
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 507.2 $170.9 $145.8 $ (107.0) $716.9
Cost of sales 355.0 117.4 116.4 (105.9) 482.9
-------- ------ ------ --------- ------
Gross profit 152.2 53.5 29.4 (1.1) 234.0
Selling, general and administrative expenses $ 1.3 84.6 28.2 20.5 134.6
------ -------- ------ ------ --------- ------
Income (loss) from operations (1.3) 67.6 25.3 8.9 (1.1) 99.4
Interest expense (9.1) (4.2) (0.2) 4.0 (9.5)
Interest income 5.5 0.5 0.5 (4.0) 2.5
Other income (expense), net 3.3 (1.7) (0.3) 1.3
------ -------- ------ ------ --------- ------
Income (loss) before income taxes (1.3) 67.3 19.9 8.9 (1.1) 93.7
Provision (benefit) for income taxes (0.4) 23.3 7.6 4.1 34.6
------ -------- ------ ------ --------- ------
Income (loss) before earnings (losses)
of affiliated companies (0.9) 44.0 12.3 4.8 (1.1) 59.1
Equity in earnings (losses) of
affiliated companies, net 60.0 16.0 (0.1) (75.9)
------ -------- ------ ------ --------- ------
Net income $ 59.1 $ 60.0 $ 12.2 $ 4.8 $ (77.0) $ 59.1
====== ======== ====== ====== ========= ======
</TABLE>
Page 44
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5.3 $ 0.3 $ 4.9 $ 10.5
Accounts receivable, net 77.6 79.3 15.0 171.9
Intercompany receivables 613.7 86.9 6.0 $ (706.6)
Inventories 47.5 55.2 14.3 117.0
Deferred income taxes 21.2 (0.1) 21.1
Other current assets 13.1 1.6 0.8 15.5
-------- ------ ------ --------- ---------
Total current assets 778.4 223.3 41.0 (706.7) 336.0
Investments in affiliated companies $385.0 386.4 0.2 (771.6)
Property, plant and equipment, net 71.6 75.9 24.8 172.3
Cost in excess of net assets of acquired
businesses, net 32.7 71.7 7.1 111.5
Intercompany notes receivable 3.0 (3.0)
Other assets 64.9 1.9 2.1 68.9
------ -------- ------ ------ --------- ---------
Total Assets $385.0 $1,334.0 $372.8 $ 78.2 $(1,481.3) $ 688.7
====== ======== ====== ====== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 3.1 $ 6.5
Accounts payable 24.9 $ 21.0 5.1 51.0
Intercompany payables $706.7 $ (706.7)
Accrued expenses 63.5 20.4 7.1 91.0
------ -------- ------ ------ --------- ---------
Total current liabilities 706.7 91.8 41.4 15.3 (706.7) 148.5
Long-term debt, exclusive of current maturities 809.5 0.2 809.7
Intercompany notes payable 3.0 (3.0)
Deferred income taxes, exclusive of
current portion 7.3 1.5 8.8
Other liabilities 37.4 5.2 0.8 43.4
------ -------- ------ ------ --------- ---------
Total liabilities 706.7 949.0 46.6 17.8 (709.7) 1,010.4
Stockholders' equity (deficit) (321.7) 385.0 326.2 60.4 (771.6) (321.7)
------ -------- ------ ------ --------- ---------
Total Liabilities and
Stockholders' Equity (Deficit) $385.0 $1,334.0 $372.8 $ 78.2 $(1,481.3) $ 688.7
====== ======== ====== ====== ========= =========
</TABLE>
Page 45
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39.7 $ (1.5) $ 6.9 $ 45.1
Accounts receivable, net 58.0 61.2 13.1 132.3
Intercompany receivables 71.3 3.3 $ (74.6)
Inventories 54.4 54.0 12.6 121.0
Deferred income taxes 22.1 (0.1) 22.0
Other current assets 3.7 2.1 0.9 6.7
-------- ------ ------ --------- ------
Total current assets 177.9 187.1 36.8 (74.7) 327.1
Investments in affiliated companies $381.5 651.1 0.2 (1,032.8)
Property, plant and equipment, net 80.6 75.6 26.7 182.9
Cost in excess of net assets of acquired
businesses, net 34.2 73.1 7.4 114.7
Intercompany notes receivable 0.1 (0.1)
Other assets 39.5 2.3 2.3 44.1
------ -------- ------ ------ --------- ------
Total Assets $381.5 $ 983.4 $338.1 $ 73.4 $(1,107.6) $668.8
====== ======== ====== ====== ========= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 0.3 $ 0.2 $ 0.2 $ 0.7
Accounts payable 14.5 11.6 4.3 30.4
Intercompany payables $ 24.3 50.3 $ (74.6)
Accrued expenses 2.6 41.6 13.2 6.4 63.8
Deferred income taxes 0.1 (0.1)
------ -------- ----- ----- --------- ------
Total current liabilities 26.9 106.7 25.0 11.0 (74.7) 94.9
Long-term debt, exclusive of current
maturities 159.5 2.1 161.6
Intercompany notes payable 0.1 (0.1)
Deferred income taxes, exclusive of
current portion 12.0 1.0 13.0
Other liabilities 38.7 5.3 0.7 44.7
------ -------- ------ ------ --------- ------
Total liabilities 26.9 316.9 32.4 12.8 (74.8) 314.2
Stockholders' equity 354.6 666.5 305.7 60.6 (1,032.8) 354.6
------ -------- ------ ------ --------- ------
Total Liabilities and
Stockholders' Equity $381.5 $ 983.4 $338.1 $ 73.4 $(1,107.6) $668.8
====== ======== ====== ====== ========= ======
</TABLE>
Page 46
<PAGE>
<TABLE>
<CAPTION>
For The Twelve Months
Ended December 31, 1999
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ (24.2) $ 52.9 $ 16.7 $ 2.9 $ (29.2) $ 19.1
--------- -------- ------ ------ --------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 0.7 0.1 0.8
Purchases of property, plant and equipment (6.2) (7.7) (3.6) (17.5)
Acquisitions of product lines (0.7) (0.7) (1.4)
Other (3.3) (3.3)
--------- -------- ------ ------ --------- ---------
Net cash used in investing activities (9.5) (8.4) (3.5) (21.4)
--------- -------- ------ ------ --------- ---------
Cash flows from financing activities:
Net increase (reduction) in short-term
borrowings 3.0 3.0
Issuance of long-term debt 696.9 696.9
Reduction of long-term debt (72.1) (2.3) (0.2) (74.6)
Decrease in restricted funds 3.5 3.5
Dividends paid (7.8) (25.0) (4.2) 29.2 (7.8)
Redemption of Common Stock (1,068.8) (1,068.8)
Capital contribution 417.5 417.5
Advances from (to) affiliated companies 682.3 (678.1) (4.2)
Other 1.0 (3.0) (2.0)
--------- -------- ------ ------ --------- ---------
Net cash provided by (used in) financing
activities $ 24.2 (77.8) (6.5) (1.4) $ 29.2 (32.3)
--------- -------- ------ ------ --------- ---------
Net increase (decrease) in cash and cash
equivalents (34.4) 1.8 (2.0) (34.6)
Cash and cash equivalents at beginning of period 39.7 (1.5) 6.9 45.1
--------- -------- ------ ------ --------- ---------
Cash and cash equivalents at end of period $ 5.3 $ 0.3 $ 4.9 $ 10.5
========= ======== ====== ====== ========= =========
</TABLE>
Page 47
<PAGE>
<TABLE>
<CAPTION>
For The Twelve Months
Ended December 31, 1998
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ (0.9) $ 43.9 $ 39.2 $ 9.8 $ (3.1) $ 88.9
------ -------- ------ ------ --------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 0.1 1.1 0.1 1.3
Purchases of property, plant and equipment (11.0) (6.8) (3.3) (21.1)
Acquisition of businesses (17.4) (17.4)
------ -------- ------ ------ --------- ---------
Net cash used in investing activities (28.3) (5.7) (3.2) (37.2)
------ -------- ------ ------ --------- ---------
Cash flows from financing activities:
Net reduction in short-term borrowings (0.4) (0.4)
Issuance of long-term debt 149.4 149.4
Reduction of long-term debt (136.9) (0.2) (0.4) (137.5)
Decrease in restricted funds 0.5 0.5
Dividends paid (10.5) (3.1) 3.1 (10.5)
Purchase of treasury stock (18.1) (18.1)
Advances from (to) affiliated companies 25.1 8.1 (33.2)
Other 4.4 0.8 5.2
------ -------- ------ ------ --------- ---------
Net cash provided by (used in) financing
activities $ 0.9 21.9 (33.4) (3.9) $ 3.1 (11.4)
------ -------- ------ ------ --------- ---------
Net increase in cash and cash equivalents 37.5 0.1 2.7 40.3
Cash and cash equivalents at beginning of period 2.2 (1.6) 4.2 4.8
------ -------- ------ ------ --------- ---------
Cash and cash equivalents at end of period $ 39.7 $ (1.5) $ 6.9 $ 45.1
====== ======== ====== ====== ========= =========
</TABLE>
Page 48
<PAGE>
<TABLE>
<CAPTION>
For The Twelve Months
Ended December 31, 1997
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 40.2 $ 42.7 $ 31.9 $ 11.4 $ (45.9) $ 80.3
------ -------- ------ ------ --------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 0.6 0.3 0.9
Purchases of property, plant and equipment (9.2) (2.5) (6.1) (17.8)
Acquisition of businesses (132.5) (132.5)
------ -------- ------ ------ --------- ---------
Net cash used in investing activities (141.1) (2.5) (5.8) (149.4)
------ -------- ------ ------ --------- ---------
Cash flows from financing activities:
Issuance of long-term debt 62.0 62.0
Reduction of long-term debt (8.3) (5.9) (0.7) (14.9)
Decrease in restricted funds 1.0 1.0
Dividends paid (9.4) (41.0) (4.9) 45.9 (9.4)
Purchase of treasury stock (27.5) (27.5)
Advances from (to) affiliated companies (6.9) 30.9 (24.0)
Other 3.6 0.4 4.0
------ -------- ------ ------ --------- ---------
Net cash provided by (used in) financing
activities $(40.2) 45.0 (29.9) (5.6) $ 45.9 15.2
------ -------- ------ ------ --------- ---------
Net decrease in cash and cash equivalents (53.4) (0.5) (53.9)
Cash and cash equivalents at beginning of period 55.6 (1.1) 4.2 58.7
------ -------- ------ ------ --------- ---------
Cash and cash equivalents at end of period $ 2.2 $ (1.6) $ 4.2 $ 4.8
====== ======== ====== ====== ========= =========
</TABLE>
Page 49
<PAGE>
NOTE 11:
OTHER INFORMATION
At December 31, 1999 and 1998, the following balance sheet captions are
comprised of the items specified below:
(Dollar amounts in millions) 1999 1998
- ----------------------------------------------- --------- ---------
Accounts receivable:
Trade accounts $ 172.9 $ 132.9
Other 3.2 3.3
Allowance for doubtful accounts (4.2) (3.9)
- ----------------------------------------------- ------- -------
$ 171.9 $ 132.3
- ----------------------------------------------- ------- -------
Inventories:
Finished goods $ 67.1 $ 73.6
Work in process 21.3 19.3
Raw materials and supplies 28.6 28.1
- ----------------------------------------------- ------- -------
$ 117.0 $ 121.0
- ----------------------------------------------- ------- -------
Property, plant and equipment:
Land $ 12.6 $ 12.6
Buildings and improvements 107.1 107.1
Machinery and equipment 230.7 219.8
Furniture, fixtures and office equipment 23.4 26.0
Transportation equipment 16.5 16.7
Construction in progress 12.4 10.6
Accumulated depreciation (230.4) (209.9)
- ----------------------------------------------- ------- -------
$ 172.3 $ 182.9
- ----------------------------------------------- ------- -------
Other Assets:
Deferred financing costs $ 35.8 $ 7.8
Rabbi trusts (see Note 6) 22.9 11.5
Other 10.2 24.8
- ----------------------------------------------- ------- -------
$ 68.9 $ 44.1
- ----------------------------------------------- ------- -------
Accrued expenses:
Salaries, wages and related withholdings $ 25.3 $ 23.6
Employee benefits 12.1 8.6
Casualty insurance costs 7.7 9.5
Accrued interest 21.5 1.4
Other 24.4 20.7
- ----------------------------------------------- ------- -------
$ 91.0 $ 63.8
- ----------------------------------------------- ------- -------
Other liabilities:
Employee benefits $ 41.7 $ 41.3
Casualty insurance costs 1.3 1.5
Other 0.4 1.9
- ----------------------------------------------- ------- -------
$ 43.4 $ 44.7
- ----------------------------------------------- ------- -------
Page 50
<PAGE>
Supplemental cash flow information is as follows:
Twelve Months Ended
December 31,
--------------------------
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------ ------ ------ ------
Interest paid $ 52.5 $ 20.9 $ 10.4
Income taxes paid 14.0 39.3 38.4
Noncash investing and financing activities:
Capital lease obligations incurred 0.2 0.8
Fair value of assets acquired 175.3
Cash paid (132.5)
Liabilities assumed and incurred 42.8
- ------------------------------------------------ ------ ------ -------
Page 51
<PAGE>
SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS
(unaudited)
The following tables set forth a summary of the unaudited quarterly results of
operations for the twelve-month periods ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
in millions, except Ended Ended Ended Ended
per share data) March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 Total
- ----------------- -------------- ------------- ------------------ ----------------- -------
1999
<S> <C> <C> <C> <C> <C>
Sales $185.1 $183.2 $219.6 $222.0 $809.9
Gross profit 53.2 51.8 63.5 67.1 235.6
Net income (loss) 8.8 8.9 (42.6) 3.1 (21.8)
Earnings (loss) per share:
Basic .12 .12 (.79) .10 (.37)
Diluted .12 .12 (.79) .10 (.37)
</TABLE>
The third and fourth quarter include after-tax merger expense of $53.6 million
($.90 per share) and $0.9 million ($.03 per share).
<TABLE>
<CAPTION>
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
in millions, except Ended Ended Ended Ended
per share data) March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998 Total
- ----------------- -------------- ------------- ------------------ ----------------- -------
1998
<S> <C> <C> <C> <C> <C>
Sales $199.7 $205.1 $226.6 $200.5 $831.9
Gross profit 60.5 63.1 70.7 64.0 258.3
Income before
extraordinary loss 13.7 13.8 19.2 16.6 63.3
Net income 13.7 13.8 17.2 16.6 61.3
Earnings per share:
Basic:
Income before
extraordinary loss .19 .18 .26 .23 .85
Net income .19 .18 .23 .23 .82
Diluted:
Income before
extraordinary loss .18 .18 .25 .22 .83
Net income .18 .18 .22 .22 .80
</TABLE>
The third quarter includes a net extraordinary loss of $2.0 million ($.03 per
share) on the redemption of long-term debt.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 52
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
See the "Election of Directors," "Executive Officers," and "Filing Disclosure"
sections of the proxy statement for the April 17, 2000, Annual Meeting of
Stockholders of Blount International, Inc., which sections are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the "Executive Compensation," "Compensation of Directors," "Compensation
Committee Interlocks and Insider Participation," and "Employment Contracts,
Termination of Employment and Change in Control Arrangements" sections of the
proxy statement for the April 17, 2000, Annual Meeting of Stockholders of Blount
International, Inc., which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the "Principal Stockholders" section of the proxy statement for the April
17, 2000, Annual Meeting of Stockholders of Blount International, Inc., which
section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the "Certain Transactions and Other Matters" section of the proxy statement
for the April 17, 2000, Annual Meeting of Stockholders of Blount International,
Inc., which section is incorporated herein by reference.
Page 53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
Reference
---------
(a) Certain documents filed as part of Form 10-K
(1) Financial Statements and Supplementary Data
Report of Independent Accountants 20
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997 22
Consolidated Balance Sheets as of
December 31, 1999 and 1998 23
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 24
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1999, 1998 and 1997 25
Notes to Consolidated Financial Statements 26 - 51
Supplementary Data 52
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts
for the years ended December 31, 1999, 1998 and 1997 59
All other schedules have been omitted because they are not required or
because the information is presented in the Notes to Consolidated Financial
Statements.
(b) Reports on Form 8-K in the Fourth Quarter
None.
(c) Exhibits required by Item 601 of Regulation S-K:
* 2(a) Plan and Agreement of Merger among Blount International, Inc.,
HBC Transaction Subsidiary, Inc. and Blount, Inc., dated August 17, 1995 filed
as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount
International, Inc., including amendments and exhibits, which became effective
on October 4, 1995 (Commission File No. 33-63141).
* 2(b) Stock Purchase Agreement, dated November 4, 1997, by and among
Blount, Inc., Hoffman Enclosures, Inc., Pentair, Inc. and Federal-Hoffman, Inc.
which was filed as Exhibit No. 2 to the Form 8-K filed by Blount International,
Inc. on November 19, 1997 (Commission File No. 001-11549).
Page 54
<PAGE>
* 2(c) Agreement and Plan of Merger and Recapitalization, dated as of
April 18, 1999, between Blount International, Inc. and Red Dog Acquisition,
Corp. (included as Appendix A to the Proxy Statement-Prospectus which forms a
part of the Registration Statement) previously filed on July 15, 1999, by Blount
International, Inc.(Reg. No. 333-82973).
* 3(c) Post-Merger Restated Certificate of Incorporation of Blount
International, Inc. (included as Exhibit A to the Agreement and Plan of Merger
and Recapitalization which is Exhibit 2.1) filed as part of the Proxy Statement-
Prospectus which forms a part of the Registration Statement on Form S-4 (Reg.
No. 333-82973) previously filed on July 15, 1999, by Blount International, Inc.
* 3(d) Post-Merger Bylaws of Blount International, Inc. (included as
Exhibit B to the Agreement and Plan of Merger and Recapitalization which is
Exhibit 2.1) filed as part of the Proxy Statement-Prospectus which forms a part
of the Registration Statement on Form S-4 (Reg. No. 333-82973).
* 4(a) Registration Rights and Stock Transfer Restriction agreement
filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of
Blount International, Inc., including amendments and exhibits, which became
effective on October 4, 1995 (Commission File No. 33-63141).
* 4(b) Registration Statement on Form S-3 (Reg. Nos. 333-42481 and
333-42481-01), with respect to the 7% $150 million Senior Notes due 2005 of
Blount, Inc. which are guaranteed by Blount International, Inc., including
amendments and exhibits, which became effective on June 17, 1998.
* 4(c) Form of stock certificate of New Blount common stock filed as
part of the Proxy Statement-Prospectus which forms a part of the previously
filed on July 15, 1999, by Blount International, Inc. Registration Statement on
Form S-4 (Reg. No. 333-82973).
* 4(d) $500,000,000 Credit Agreement dated as of August 19, 1999
among Blount International, Inc., Blount, Inc., as Borrower, and the Several
Lenders from time to time Parties Hereto which was filed as Exhibit 4 to the
report on Form 10-Q for the third quarter ended September 30, 1999.
* 4(e) Indenture between Blount, Inc., as Issuer, Blount
International, Inc., BI Holdings Corp., Benjamin F. Shaw Company, BI, L.L.C.,
Blount Development Corp., Omark Properties, Inc., 4520 Corp., Inc., Gear
Products, Inc., Dixon Industries, Inc., Frederick Manufacturing Corporation,
Federal Cartridge Company, Simmons Outdoor Corporation, Mocenplaza Development
Corp., and CTR Manufacturing, Inc., as Guarantors, and United States Trust
Company of New York, dated as of August 19, 1999, (including exhibits) which was
filed as Exhibit 4.1 to the report on Form 10-Q for the third quarter ended
September 30, 1999.
* 4(f) Registration Right Agreement by and among Blount, Inc., Blount
International, Inc., BI Holdings Corp., Benjamin F. Shaw Company, BI, L.L.C.,
Blount Development Corp., Omark Properties, Inc., Gear Products, Inc., Dixon
Industries, Inc., Frederick Manufacturing Corporation, Federal Cartridge
Company, Simmons Outdoor Corporation, Mocenplaza Development Corp., CTR
Manufacturing, Inc., and Lehman Brothers Inc., dated as of August 19, 1999,
which was filed as Exhibit 4.2 to the report on Form 10-Q for the third quarter
ended September 30, 1999.
* 4(g) Registration Statement on Form S-4 (Reg. No. 333-92481) with
respect to the 13% $325 million Senior Subordinated Notes of Blount, Inc.
guaranteed by Blount International, Inc., including amendments and exhibits,
which became effective on January 19, 2000.
Page 55
<PAGE>
* 9(a) Stockholder Agreement, dated as of April 18, 1999, between Red
Dog Acquisition, Corp., a Delaware corporation and a wholly-owned subsidiary of
Lehman Brothers Merchant Banking Partners II L.P., a Delaware limited
partnership, and The Blount Holding Company, L.P., a Delaware limited
partnership which was filed as Exhibit 9 to the Form 8-K/A filed April 20, 1999.
*10(a) Form of Indemnification Agreement between Blount
International, Inc. and The Blount Holding Company, L.P. filed as part of
Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount International,
Inc., including amendments and exhibits, which became effective on October 4,
1995 (Commission File No. 33-63141).
*10(b) Supplemental Retirement and Disability Plan of Blount, Inc.
which was filed as Exhibit 10(e) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 29, 1992 (Commission File No. 1-7002).
*10(c) Written description of the Management Incentive Plan of
Blount, Inc. which was included within the Proxy Statement of Blount, Inc. for
the Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1-
7002).
*10(d) Supplemental Retirement Savings Plan of Blount, Inc. which was
filed as Exhibit 10(i) to the Annual Report of Blount, Inc. on Form 10-K for the
fiscal year ended February 29, 1992 (Commission File No. 1-7002).
*10(e) Supplemental Executive Retirement Plan between Blount, Inc.
and John M. Panettiere which was filed as Exhibit 10(t) to the Annual Report of
Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1993
(Commission File No. 1-7002).
*10(f) Executive Management Target Incentive Plan of Blount, Inc.
which was filed as Exhibit B to the Proxy Statement of Blount, Inc. for the
Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1-7002).
*10(g) Supplemental Executive Retirement Plan between Blount, Inc.
and Donald B. Zorn which was filed as Exhibit 10(v) to the Annual Report of
Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1995
(Commission File No. 1-7002).
*10(h) Blount, Inc. Executive Benefit Plans Trust Agreement and
Amendment to and Assumption of Blount, Inc. Executive Benefit Plans Trust which
were filed as Exhibits 10(x)(i) and 10(x)(ii) to the Annual Report of Blount
International, Inc. on Form 10-K for the fiscal year ended February 29, 1996
(Commission File No. 001-11549).
*10(i) Blount, Inc. Benefits Protection Trust Agreement and Amendment
To and Assumption of Blount, Inc. Benefits Protection Trust which were filed as
Exhibits 10(y)(i) and 10(y)(ii) to the Annual Report of Blount International,
Inc. on Form 10-K for the fiscal year ended February 29, 1996 (Commission File
No. 001-11549).
*10(j) 1998 Blount Long-Term Executive Stock Option Plan of Blount
International, Inc. filed as part of Registration Statement on Form S-8 (Reg.
No. 333-56701), including exhibits, which became effective on June 12, 1998.
*10(k) Supplemental Executive Retirement Plan between Blount, Inc.
and Gerald W. Bersett which was filed as Exhibit 10(z) to the Annual Report of
Blount International, Inc. on Form 10-K for the year ended December 31, 1998
(Commission File No. 001-11549).
Page 56
<PAGE>
*10(l) The Blount Deferred Compensation Plan which was filed as
Exhibit 10(cc) to the Annual Report of Blount International, Inc. on Form 10-K
for the year ended December 31, 1998 (Commission File No. 001-11549).
*10(m) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and John M. Panettiere filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
*10(n) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and Donald B. Zorn filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
*10(o) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and Gerald W. Bersett filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
*10(p) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and James S. Osterman filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
*10(q) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and Richard H. Irving filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
*10(r) Employment Agreement, dated as of April 18, 1999, between
Blount International, Inc. and Harold E. Layman filed as part of Registration
Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc.,
including amendments and exhibits, which became effective January 19, 2000.
**10(s) Employee Stockholder Agreement dated as of August 19, 1999,
among Blount International, Inc., Lehman Brothers Merchant Banking Partners II
L.P. and Certain Employee Stockholders.
21. A list of the significant subsidiaries of Blount International, Inc.
included herein on page 60.
23. Consent of Independent Accountants included herein on page 61.
27. **Financial Data Schedule included herein on page 62.
* Incorporated by reference.
** Filed electronically herewith. Copies of such exhibits may be obtained
upon written request from:
Blount International, Inc.
P.O. Box 949
Montgomery, AL 36101-0949
Page 57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BLOUNT INTERNATIONAL, INC.
By: /s/ Harold E. Layman
Harold E. Layman
President and Chief Operating Officer
and Chief Financial Officer
Dated: March 2, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: March 2, 2000
/s/ John M. Panettiere /s/ Alan L. Magdovitz
John M. Panettiere Alan L. Magdovitz
Chairman of the Board and Director
Chief Executive Officer and Director
/s/ Eliot M. Fried
/s/ Harold E. Layman Eliot M. Fried
Harold E. Layman Director
President and Chief Operating Officer,
Chief Financial Officer and Director /s/ E. Daniel James
E. Daniel James
/s/ Rodney W. Blankenship Director
Rodney W. Blankenship
Vice President and Controller
(Chief Accounting Officer)
Page 58
<PAGE>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Dollar amounts in millions)
- ----------------------------
Column A Column B Column C Column D Column E
-------- ------------ ------------------------- ----------- ----------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning of Cost and Other End of
Description Period Expenses Accounts Deductions Period
----------- ------------ ---------- ---------- ------------ ----------
Year ended
December 31, 1997
- -----------------
<S> <C> <C> <C> <S> <C> <S> <C>
Allowance for doubtful
accounts receivable $ 3.0 $ 1.0 $ 0.9 (2) $ 1.2 (1) $ 3.7
======= ======= ======= ======= =======
Year ended
December 31, 1998
- -------------------
Allowance for doubtful
accounts receivable $ 3.7 $ 0.9 $ 0.7 (1) $ 3.9
======= ======= ======= =======
Year ended
December 31, 1999
- -------------------
Allowance for doubtful
accounts receivable $ 3.9 $ 1.5 $ 1.2 (1) $ 4.2
======= ======= ======= =======
</TABLE>
(1) Principally amounts written-off less recoveries of amounts previously
written-off.
(2) Principally allowances established for companies acquired by purchase.
Page 59
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1999, consolidated, directly or indirectly, wholly-owned
subsidiaries of Blount International, Inc. were as follows:
NAME OF PLACE OF
SUBSIDIARY INCORPORATION
- ---------- -------------
Blount, Inc. Delaware
Blount Holdings, Ltd. Canada
Blount Canada, Ltd. Canada
Federal Cartridge Company Minnesota
Dixon Industries, Inc. Kansas
Gear Products, Inc. Oklahoma
Simmons Outdoor Corporation Delaware
CTR Manufacturing, Inc. North Carolina
Frederick Manufacturing Corporation Delaware
The names of particular subsidiaries have been omitted because when considered
in the aggregate or as a single subsidiary they would not constitute a
significant subsidiary as of December 31, 1999.
Page 60
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Blount International, Inc. on Form S-4 (File No. 333-92481) of our report dated
January 27, 2000, on our audits of the consolidated financial statements and
financial statement schedules of Blount International, Inc. and subsidiaries as
of December 31, 1999 and 1998, and for the three years ended December 31, 1999,
which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, Georgia
January 27, 2000
Page 61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BLOUNT INTERNATIONAL, INC. FOR THE PERIOD ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
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EXHIBIT 10(s)
==============================================================================
EMPLOYEE STOCKHOLDER AGREEMENT
dated as of August 19, 1999,
among
BLOUNT INTERNATIONAL, INC.,
LEHMAN BROTHERS MERCHANT BANKING
PARTNERS II, L.P.,
and
THE EMPLOYEE STOCKHOLDERS NAMED HEREIN
=============================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS.................................................................1
ARTICLE II
GENERAL; RESTRICTIONS ON TRANSFER
SECTION 2.01. General......................................................7
SECTION 2.02. General Transfer Restrictions................................7
SECTION 2.03. Legend.......................................................8
SECTION 2.04. Additional Restrictions on Transfer..........................8
SECTION 2.05. Registration of Option Shares................................8
ARTICLE III
TAG-ALONG RIGHTS, AND DRAG-ALONG RIGHTS
SECTION 3.01. Tag-Along Rights.............................................8
SECTION 3.02. Drag-Along Rights...........................................10
SECTION 3.03. Cooperation.................................................10
ARTICLE IV
CALL AND PUT RIGHTS
SECTION 4.01. Call and Puts Rights ......................................11
ARTICLE V
REGISTRATION RIGHTS
SECTION 5.01. Registration................................................12
SECTION 5.02. Demand Registration Rights. ................................13
SECTION 5.03. Registration Expenses.......................................15
SECTION 5.04. Restrictions on Public Sale by Sellers and the Company......15
SECTION 5.05. Registration Procedures.....................................15
SECTION 5.06. Obligations of Sellers......................................18
SECTION 5.07. Indemnification.............................................19
SECTION 5.08. Rule 144 Reporting..........................................22
i
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Notices....................................................22
SECTION 6.02. Applicable Law.............................................22
SECTION 6.03. Entire Agreement; No Third-Party Beneficiaries.............23
SECTION 6.04. Descriptive Headings.......................................23
SECTION 6.05. Severability...............................................23
SECTION 6.06. Agreement To Be Bound......................................23
SECTION 6.07. Additional Holders.........................................23
SECTION 6.08. Additional Employee Stockholders...........................23
SECTION 6.09. Other Agreements...........................................23
SECTION 6.10. Successors, Assigns, Transferees...........................23
SECTION 6.11. Amendments; Waivers........................................23
SECTION 6.12. Counterparts...............................................24
SECTION 6.13. Specific Performance.......................................24
SECTION 6.14. Attorneys' Fees............................................24
SECTION 6.15. Recapitalization, Exchanges, etc., Affecting Common Stock..24
Exhibit A -- Form of Option Agreement
Exhibit B -- Equity Rollover Amounts
ii
<PAGE>
EMPLOYEE STOCKHOLDER AGREEMENT dated as of August 19,
1999 (this "Agreement"), among BLOUNT INTERNATIONAL, INC.,
a Delaware corporation (the "Company"), Lehman Brothers
Merchant Banking Partners II, L.P., a Delaware limited
partnership, on behalf of itself and its affiliated
co-investors (collectively, "Lehman Brothers Merchant
Banking Partners"), and each employee of the Company whose
names and addresses are set forth on the signature page
hereof or who otherwise become parties to this Agreement
(each, an "Employee Stockholder").
WHEREAS pursuant to an Agreement and Plan of Merger and
Recapitalization (as amended from time to time, the "Merger Agreement") dated
April 18, 1999, between Red Dog Acquisition, Corp., a Delaware corporation,
and the Company (a) each share of issued and outstanding common stock of the
Company (with certain exceptions set forth in the Merger Agreement) shall be
converted into the right to receive, at the election of the stockholders of
the Company and subject to proration, either (i) an amount in cash equal to
$30.00 or (ii) two shares of common stock of the Company;
WHEREAS upon completion of the merger contemplated by the Merger
Agreement (the "Merger"), Lehman Brothers Merchant Banking Partners will own a
substantial majority of the Company.
WHEREAS the Employee Stockholders have agreed to invest in the
Company after the Merger, on the terms and subject to the conditions set forth
in this Agreement;
WHEREAS it is in the best interests of Lehman Brothers Merchant
Banking Partners, the Company and the Employee Stockholder to set forth
certain additional provisions governing certain aspects of their
relationships.
NOW THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
meanings ascribed to them below:
"Affiliate" of any Person means another Person that, directly or
indirectly through one or more intermediaries, controls, is controlled by or
is under common control with such first Person.
"Associate" of a Person means any Person who is an officer of, or
employed by, such first Person or such first Person's Affiliates.
"Board" means the Board of Directors of the Company.
"Call Event" shall have the meaning set forth in Section 4.01(d).
"Call Notice" shall have the meaning set forth in Section 4.01(e).
<PAGE>
2
"Cause", in respect of any Employee Stockholder, shall have the
meaning set forth in such Employee Stockholder's Employment Agreement, or if
such Agreement does not define such term, "Cause" means the involuntary
termination of an Employee Stockholder by the Company for any of the following
reasons: (a) as result of an act or acts by the Employee Stockholder which
have been found in an applicable court of law to constitute a felony (other
than traffic-related offenses); (b) as result of an act or acts by the
Employee Stockholder which are in the good faith judgment of the Board to be
in violation of law or of policies of the Company and which result in
demonstrably material injury to the Company; (c) as result of an act or acts
of proven dishonesty by the Employee Stockholder resulting or intended to
result directly or indirectly in significant gain or personal enrichment to
the Employee Stockholder at the expense of the Company or public stockholders
of the Company; or (d) upon the willful and continued failure by the Employee
Stockholder substantially to perform his duties with the Company (other than
any such failure resulting from incapacity due to mental or physical illness
not constituting a Disability), after a demand in writing for substantial
performance is delivered by the Board, which demand specifically identifies
the manner in which the Board believes that the Employee Stockholder has not
substantially performed his duties. With respect to clauses (b), (c) or (d)
above, the Employee Stockholder shall not be deemed to have been involuntarily
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of the Board
(after reasonable notice to the Employee Stockholder and an opportunity for
him, together with his counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, the Employee Stockholder was guilty of
conduct set forth above in clauses (b), (c) or (d) and specifying the
particulars thereof in detail. For purposes of this Agreement, no act or
failure to act by the Employee Stockholder shall be deemed to be "willful"
unless done or omitted to be done by the Employee Stockholder not in good
faith and without reasonable belief that the Employee Stockholder's action or
omission was in the best interests of the Company.
"Change in Control", in respect of any Employee Stockholder, shall
have the meaning set forth in such Employee Stockholder's Employment
Agreement, or if such Agreement does not define such term, "Change in Control"
means (i) (a) the acquisition, directly or indirectly, by any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than
any member of the Lehman Group, of securities of the Company representing an
aggregate of more than 50% of the combined voting power of the Company's then
outstanding securities (excluding the acquisitions by persons who acquire such
amount through inheritance); (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board, cease
for any reason to constitute at least a majority thereof, unless the election
of each new director was approved in advance by a vote of at least a majority
of the directors then still in office who were directors at the beginning of
the period; (c) consummation of (i) a merger, consolidation or other business
combination of the Company with any other "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) or affiliate thereof, other than
a merger, consolidation or business combination which would result in the
outstanding common stock of the Company immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
common stock of the surviving entity or a parent or affiliate thereof) more
than 50% of the outstanding common stock of the Company, or such surviving
entity or partners or affiliate thereof, outstanding immediately after such
merger, consolidation or business combination, or (ii) a plan of complete
liquidation of Company or an agreement for the sale or disposition by Company
of all or substantially all of Company's assets; (d) an Initial Public
Offering; or (e) a sale of more than 50% of the assets of the Company;
provided that none of the events described in clauses (b) through (e) shall be
deemed a Change in Control if, immediately following such event, the Lehman
Group owns 50% or more of the combined voting power of the Company's then
outstanding securities.
<PAGE>
3
"Closing Date" shall have the meaning set forth in the Merger
Agreement.
"Common Stock" means the Common Stock, par value $.01 per share, of
the Company and any other capital stock or securities into which such Common
Stock is reclassified or changed, including by reason of merger,
consolidation, reorganization or recapitalization or that are otherwise
distributed with respect to Common Stock.
"Company" shall have the meaning set forth in the preamble to this
Agreement. It is understood that references to the "Company" herein that apply
to time periods after the Effective Date, shall be to Blount International,
Inc. as the surviving corporation in the Merger.
"Disability" means the inability as a result of physical or mental
incapacity of an Employee Stockholder to substantially perform his duties for
the Company on a full-time basis for a period of six consecutive months.
"Disability Cause Event" shall have the meaning set forth in Section
4.01(c).
"Drag-Along Disposition Transaction" shall have the meaning set
forth in Section 3.02(a).
"Drag-Along Notice" shall have the meaning set forth in Section
3.02(a).
"Drag-Along Purchasers" shall have the meaning set forth in Section
3.02(a).
"Drag-Along Rights" shall have the meaning set forth in Section
3.02(a).
"Drag-Along Shares" shall have the meaning set forth in Section
3.02(b).
"Drag-Along Stockholders" shall have the meaning set forth in
Section 3.02(a).
"Drag-Along Transferors" shall have the meaning set forth in Section
3.02(a).
"Effective Time" shall mean the Effective Time of the Merger as set
forth in the Merger Agreement.
"Employee Demand Registration Right" shall have the meaning set
forth in Section 5.02(a).
"Employee Demand Right Effective Date" shall have the meaning set
forth in Section 5.02(a).
"Employee Demand Right Notice" shall have the meaning set forth in
Section 5.02(a).
"Employee Stockholder" shall have the meaning set forth in the
recitals to this Agreement.
"Employment Agreement" means, with respect to any Employee
Stockholder, the written agreement between the Company and such Employee
Stockholder providing for the terms of such Employee Stockholder's employment
with the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
<PAGE>
4
"Fair Market Value" means, in respect of each share of Common Stock,
(i) to the extent the call or put under Article IV herein, as the case may be,
occurs concurrently with or within 30 days of an Initial Public Offering, the
offering price to the public per share of common stock of such Initial Public
Offering; (ii) to the extent the call or put under Article IV herein, as the
case may be, occurs concurrently with or within 30 days of a Change in
Control, the value of the Company's total equity, as determined based upon the
price per share paid in connection with such Change in Control, divided by the
total number of shares of Common Stock then outstanding; (iii) to the extent
clauses (i) and (ii) above do not apply and a regular trading market for the
Company's common stock exists following an Initial Public Offering, the
average closing price of such common stock for 10 consecutive trading days
ending on the trading day immediately prior to such call or put; and (iv) at
all other times, the fair market value of the Company's total equity, as
determined by the Board in good faith divided by the total number of shares of
Common Stock then outstanding; provided, however, that if the Employee
Stockholder disputes the Board's determination, within 10 days of the Employee
Stockholder's receipt of notice of the Board's determination, the Employee
Stockholder and the Board shall jointly select a qualified independent
financial advisor to make such determination, which determination shall be
final and binding upon the parties, provided, further, that the fees and costs
of such financial advisor in connection with its determination shall be borne
equally by the Company and the Employee Stockholder unless such financial
advisor's fair market value determination is at least 10% greater than the
Board's determination, in which case, such fees and costs shall be borne
entirely by the Company
"For Cause Call Event" shall have the meaning set forth in Section
4.01(b).
"Good Reason", in respect of any Employee Stockholder, shall have
the meaning set forth in such Employee Stockholder's Employment Agreement. If
such Employment Agreement does not define "Good Reason", the provisions of
this Agreement that utilize such term shall not be applicable to such Employee
Stockholder.
"Holders" means the Employee Stockholders and all Permitted
Transferees thereof who shall become a party to this Agreement pursuant to
Section 6.06, and any combination of them.
"Incidental Registration Statement" shall have the meaning set forth
in Section 5.01(a).
"Initial Public Offering" means the sale after the Effective Time
pursuant to one or more effective registration statements under the Securities
Act (other than in connection with employee benefit or similar plans or
acquisitions of companies or businesses by, or business combinations involving
the Company or any of its subsidiaries) of shares of Common Stock which
results in an active trading market of 25% or more of the outstanding shares
of the Common Stock. There shall be deemed to be an "active trading market" if
the Common Stock is listed or quoted on a national exchange or NASDAQ on the
applicable determination date.
"Lehman Brothers Merchant Banking Partners" shall have the meaning
set forth in the recitals to this Agreement.
"Lehman Demand Registration Right" shall have the meaning set forth
in Section 5.02(b).
"Lehman Demand Right Notice" shall have the meaning set forth in
Section 5.02(b).
<PAGE>
5
"Lehman Group" shall mean Lehman Brothers Merchant Banking Partners
and (a) any Affiliate of Lehman Brothers Merchant Banking Partners, (b) any
Associates of Lehman Brothers Merchant Banking Partners, (c) the heirs,
executors, administrators, testamentary trustees, legatees or beneficiaries of
any member of the Lehman Group and (d) a trust, the beneficiaries of which, or
a corporation or partnership, the stockholders or general or limited partners
of which, include only Lehman Brothers Merchant Banking Partners, Affiliates
and Associates of Lehman Brothers Merchant Banking Partners, their spouses,
their lineal descendants and any other members of their families, if, in the
cases of clauses (b) through (d) above, such Person agrees in writing to be
bound by the terms of this Agreement as a member of the Lehman Group.
"Merger" shall have the meaning set forth in the recitals to this
Agreement.
"Merger Agreement" shall have the meaning set forth in the recitals
to this Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means the NASDAQ stock market.
"New Options" shall have the meaning set forth in the Option
Agreement.
"Non-Cause Call Event" shall have the meaning set forth in Section
4.01(a).
"NYSE" means New York Stock Exchange, Inc.
"Option Agreement" means the 1999 Employee Stock Option Plan
substantially in the form contained in Exhibit A attached hereto.
"Option Shares" means the shares of Common Stock issued upon
exercise of any New Options granted to the Employee Stockholders.
"Other Registration Rights Agreements" shall have the meaning set
forth in Section 5.01(a).
"Permitted Transferees" means:
(i) in the case of the Employee Stockholders, (A) each Employee
Stockholder's heirs, executors, administrators, testamentary
trustees, legatees, beneficiaries or charitable remaindermen, (B) a
trust the beneficiaries of which include only an Employee
Stockholder, the spouse, the lineal descendants or any other member
of the family of such Employee Stockholder approved by the Board or
(C) any Person if Lehman Brothers Merchant Banking Partners has
given its prior written consent to the applicable transfer; and
(ii) in the case of any member of the Lehman Group, any other
Person who is a member of the Lehman Group.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
"Purchased Shares" means shares of Common Stock representing the
Rollover Stock.
<PAGE>
6
"Put Event" shall have the meaning set forth in Section 4.02(c).
"Registrable Securities" means the Common Stock held by a Holder;
provided that in the event that the Holder is participating in an offering
pursuant to Section 5.01(a), "Registrable Securities" shall mean the Common
Stock held by the Holder multiplied by a fraction, the numerator of which is
the number of shares of Common Stock offered by Lehman Brothers Merchant
Banking Partners for sale in connection with the relevant registered offering
described in Section 5.01(a) and the denominator of which is the total number
of shares of Common Stock owned by Lehman Brothers Merchant Banking Partners
as of the date of such offering. As to any particular Registrable Securities,
once issued, such securities shall cease to be Registrable Securities when (i)
such securities have been registered under the Securities Act, the
registration statement with respect to the sale of such securities has become
effective under the Securities Act and such securities have been disposed of
pursuant to such effective registration statement, (ii) such securities have
been distributed pursuant to Rule 144 or Rule 144A (or any similar provision
then in force) under the Securities Act, (iii) such securities have been
otherwise transferred, if new certificates or other evidences of ownership for
them not bearing a legend restricting further transfer and not subject to any
stop-transfer order or other restrictions on transfer have been delivered by
the Company and subsequent disposition of such securities does not require
registration or qualification of such securities under the Securities Act or
any state securities laws then applicable, (iv) following the Initial Public
Offering, such securities may be sold without restriction under Rule 144(k)
(or any similar provision then in force) under the Securities Act, or (v) such
securities shall cease to be outstanding.
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with Article V, including all
registration and filing fees and expenses (including SEC, stock exchange and
NASD fees), fees and expenses of compliance with state securities or "blue
sky" laws (including reasonable fees and disbursements of counsel for the
underwriters in connection with "blue sky" qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, the fees and
expenses incurred in connection with the listing, if any, of the securities to
be registered on each securities exchange or national market system on which
the Common Stock is then listed, fees and disbursements of one counsel for the
Company, one counsel for Lehman Brothers Merchant Banking Partners and one
counsel selected by holders of a majority of shares to be sold in connection
with the relevant registration of Common Stock held by the Employee
Stockholders taken together, and of the independent certified public
accountants of the Company (including the expenses of any annual audit,
special audit and "cold comfort" letters required by or incident to such
performance and compliance), the fees and disbursements of underwriters
customarily paid by issuers or sellers of securities (including, if
applicable, the fees and expenses of any "qualified independent underwriter"
(and its counsel) that is required to be retained in accordance with the rules
and regulations of the NASD), the reasonable fees and expenses of any special
experts retained by the Company in connection with such registration, and fees
and expenses of other Persons retained by the Company (but not including any
underwriting discounts or commissions or transfer taxes, if any, attributable
to the sale of securities by holders of such securities).
"Retirement" with respect to any Employee Stockholder, shall have
the meaning set forth in such Employee Stockholder's Employment Agreement. To
the extent no such Employment Agreement is in effect or such Employment
Agreement does not define "Retirement", "Retirement" means normal retirement
under the terms of any tax-qualified retirement plan of the Company or if no
such plan is in existence or does not define "Retirement", "Retirement" means
termination of employment (other than an involuntary termination for Cause) at
anytime on or after attainment of the age of 65, in each case which retirement
occurs no earlier than three years after the Effective Time. Except as
provided in the applicable
<PAGE>
7
Employment Agreement, any purported retirement prior to the third anniversary
of the Effective Time shall be treated the same as a voluntary termination.
"Rollover Stock" shall have the meaning set forth in Section 2.01.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.
"Seller" shall mean any Person selling securities of the Company
pursuant to an Incidental Registration.
"Tag-Along Acceptance Notice" shall have the meaning set forth in
Section 3.01(a).
"Tag-Along Notice" shall have the meaning set forth in Section
3.01(a).
"Tag-Along Offerees" shall have the meaning set forth in Section
3.01(a).
"Third Party" shall have the meaning set forth in Section 3.01(a).
"Transfer" shall have the meaning set forth in Section 2.02.
"Transferors" shall have the meaning ascribed to such term in
Section 3.01(a).
"Underwriter" shall have the meaning set forth in Section 5.08(a).
"Underwritten Offering" shall have the meaning set forth in Section
5.01(b).
ARTICLE II
GENERAL; RESTRICTIONS ON TRANSFER
SECTION 2.01. General. (a) As contemplated by their respective
Employment Agreements or otherwise, each Employee Stockholder agrees at the
Effective Time to purchase the amount of shares of Common Stock set forth on
Exhibit B hereto (the "Rollover Stock"). The terms of this Agreement shall
apply to all Common Stock owned by an Employee Stockholder on the Effective
Time and to all Common Stock the Employee Stockholder subsequently acquires,
other than acquisitions through purchase of Common Stock on the NYSE or on a
national stock exchange or market on which the Common Stock is traded or
quoted, including NASDAQ. This Agreement shall only be effective upon the
Effective Time.
(b) Each Employee Stockholder hereby represents that the shares of
Rollover Stock were acquired for investment purposes and not with a view to
the sale or distribution thereof. Each Employee Stockholder acknowledges and
understands that such shares of Rollover Stock have not been registered under
the Securities Act, by reason of their issuance in a transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof and that such shares of Rollover Stock must be held indefinitely
unless a subsequent disposition thereof is either (i) registered under the
Securities Act or (ii) exempt from registration thereunder. Each Employee
Stockholder further understands and acknowledges that the certificates
representing the Rollover Stock will contain legends to the effect of the
foregoing.
<PAGE>
8
SECTION 2.02. General Transfer Restrictions. Prior to the fifth
anniversary of the Effective Time, each Employee Stockholder agrees to not,
directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or
otherwise dispose of (collectively, "Transfer") any shares of Common Stock, or
solicit any offers to purchase or otherwise acquire or take a pledge of any
shares of Common Stock, unless such Transfer is expressly permitted by, and
complies with the provisions of, this Agreement and either (i) such Transfer
is made pursuant to an effective registration statement under the Securities
Act and has been registered under all applicable state securities or "blue
sky" laws; (ii) the Employee Stockholder shall have furnished the Company with
an opinion of counsel, which opinion of counsel shall be reasonably
satisfactory to the Company, to the effect that no such registration is
required because of the availability of an exemption from registration under
the Securities Act and all applicable state securities or "blue sky" laws; or
(iii) such Transfer is by the Employee Stockholder to a Permitted Transferee
in accordance with Section 6.06.
SECTION 2.03. Legend. Each certificate representing shares of Common
Stock held by the Employee Stockholder shall bear a legend substantially in
the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS OF, AND IN PARTICULAR MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER,
SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION
COMPLIES WITH THE PROVISIONS OF, AN EMPLOYEE STOCKHOLDER AGREEMENT
AMONG EMPLOYEE STOCKHOLDER, LEHMAN BROTHERS MERCHANT BANKING
PARTNERS II L.P. AND BLOUNT INTERNATIONAL, INC. (THE "AGREEMENT") (A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF BLOUNT INTERNATIONAL,
INC. (TOGETHER WITH ITS SUCCESSORS, THE "COMPANY") AND WHICH WILL BE
MAILED TO A STOCKHOLDER WITHOUT CHARGE WITHIN FIVE DAYS AFTER
RECEIPT BY THE COMPANY OF A WRITTEN REQUEST THEREFOR FROM SUCH
STOCKHOLDER). THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS
CERTIFICATE, AGREES TO BE BOUND BY ALL OF THE PROVISIONS OF THE
AFORESAID AGREEMENT.
SECTION 2.04. Additional Restrictions on Transfer. Notwithstanding
anything in this Agreement to the contrary, prior to the fifth anniversary of
the Effective Time, no Holder may Transfer any shares of Common Stock to any
Person other than (a) to a Permitted Transferee, (b) pursuant to Sections
3.01, 3.02, Article IV or Article V or (c) in connection with a
Change-in-Control so long as such transfers are on a pro rata basis with
transfers made by the Lehman Group in connection with such Change-in-Control.
SECTION 2.05. Registration of Option Shares. The Company will
register all Option Shares on Form S-8 under the Securities Act within a
reasonable time after the date hereof in order to ensure that the Option
Shares are so registered prior to the vesting of the Options and will maintain
such registration in effect during the term of the Options.
ARTICLE III
TAG-ALONG RIGHTS, AND DRAG-ALONG RIGHTS
SECTION 3.01. Tag-Along Rights. (a) No member of the Lehman Group
shall sell or otherwise dispose of shares of Common Stock to any Person or
Persons (other than a
<PAGE>
9
Permitted Transferee of the Lehman Group) (the "Third Parties"), unless the
terms and conditions of such sale or other disposition to such Third Parties
shall include an offer to each Holder who at such time owns any shares of
Common Stock subject to this Agreement (the "Tag-Along Offerees") to include,
at the option of each Tag-Along Offeree, in the sale or other disposition to
the Third Parties such number of shares of Common Stock owned by such
Tag-Along Offeree determined in accordance with this Section 3.01. The members
of the Lehman Group proposing to effect such sale or other disposition (the
"Transferors") shall send a written notice (the "Tag- Along Notice") to each
Tag-Along Offeree setting forth the maximum number of shares of Common Stock
the Third Party is willing to purchase or otherwise acquire, along with the
price and the other terms and conditions of the Third Party offer. At any time
within 30 days after the date the Tag-Along Notice is received by each
Tag-Along Offeree, such Tag-Along Offeree may exercise its option to sell a
number of shares of Common Stock owned by such Tag-Along Offeree determined in
accordance with the provisions of this Section 3.01 by furnishing written
notice of such acceptance (the "Tag-Along Acceptance Notice") to the
Transferors (which Tag- Along Acceptance Notice shall set forth the maximum
number of shares of Common Stock that such Tag-Along Offeree wishes to sell or
otherwise dispose of to the Third Party) and delivering to the Transferors the
certificate or certificates representing the maximum number of shares of
Common Stock to be sold or otherwise disposed of pursuant to such offer by
such Tag-Along Offeree, together with a limited power-of-attorney authorizing
the Transferors to sell or otherwise dispose of such shares of Common Stock to
the Third Parties as part of such proposed sale or other disposition, all in a
form reasonably satisfactory to the Transferor and the Third Parties.
Notwithstanding anything to the contrary, Section 3.01 shall not apply to any
sale of shares of Common Stock by Lehman Brothers Merchant Banking Partners or
its Affiliates pursuant to a syndication of its equity interest in the Company
during the six-month period commencing from and after the Effective Time,
provided that the aggregate amount of such sales do not exceed $100 million.
(b) If the proposed sale or other disposition to the Third Parties
by the Transferors is consummated, each Tag-Along Offeree shall have the right
to sell to the Third Party as part of such proposed sale or other disposition
a number of shares of Common Stock up to the product (rounded up to the
nearest whole number) of (i) the quotient determined by dividing (A) the
aggregate number of shares of Common Stock owned by such Tag-Along Offeree by
(B) the aggregate number of shares owned by the Lehman Group, the Holders and
all other Persons who have "tag-along" rights of a similar nature under this
Agreement and (ii) the total number of shares of Common Stock proposed to be
acquired by the Third Party; provided that, in order to be entitled to
exercise its right to sell shares of Common Stock to the Third Party pursuant
to this Section 3.01, each Tag-Along Offeree (x) shall agree to the same
covenants as Transferors agree to in connection with the proposed sale and (y)
shall make such representations and warranties concerning title to the shares
of Common Stock to be sold in connection with the proposed sale as Transferors
make, all in a form reasonably satisfactory to the Transferor and the Third
Party.
(c) Each of the Transferors and the Third Party shall have the
right, in its sole discretion, at all times prior to consummation of the
proposed sale or other disposition giving rise to the tag-along right granted
by this Section 3.01, to abandon or otherwise terminate such sale or other
disposition, whereupon all rights of the Tag-Along Offerees under this Section
3.01 in respect of such sale or other disposition shall become null and void,
and neither the Transferors nor the Third Party shall have any liability or
obligation to any Tag-Along Offeree with respect thereto by virtue of such
abandonment or termination.
(d) The purchase from the Tag-Along Offerees pursuant to this
Section 3.01 shall be on the same terms and conditions, including the per
share price and the date of sale or other disposition, as are applicable to
the Transferors, which shall be not less favorable than as stated in the
Tag-Along Notice provided to the Tag-Along Offerees by the Transferors.
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10
(e) If within 30 days after the date of the Tag-Along Notice is
received by the Tag-Along Offerees, any Tag-Along Offeree has not delivered a
Tag-Along Acceptance Notice, such Tag-Along Offeree shall be deemed to have
waived any and all of such Tag-Along Offeree's rights with respect to the sale
or other disposition of Common Stock described in the Tag-Along Notice.
(f) The provisions of this Section 3.01 shall not be applicable to
any bona fide public offering of Common Stock made pursuant to a registration
statement under the Securities Act.
SECTION 3.02. Drag-Along Rights. (a) If any member or members of the
Lehman Group at any time propose to sell or otherwise dispose of shares of
Common Stock to any Person or Persons other than any Permitted Transferee of
the Lehman Group (including through a private placement or similar
transaction), who shall have offered to (or who, in accordance with the terms
of a prospectus or other offering document, will) acquire any shares of Common
Stock held by the Lehman Group (such transferee Person or Persons are
hereinafter referred to collectively as the "Drag-Along Purchasers"), the
Drag-Along Transferors (as defined below) shall have the right (the
"Drag-Along Right"), exercisable in accordance with Section 3.02(b), to
require each Holder (collectively, the "Drag-Along Stockholders") to sell or
dispose to the Drag-Along Purchasers such number of shares of Common Stock
owned by each such Drag-Along Stockholder determined in accordance with this
Section 3.02 (a "Drag-Along Disposition Transaction"). The members of the
Lehman Group who wish to exercise the Drag- Along Right (the "Drag-Along
Transferors") shall send a written notice (a "Drag-Along Notice") to each
Drag-Along Stockholder not less than 30 days prior to the date upon which such
sale is scheduled to close. Each Drag-Along Notice shall (i) specify in
reasonable detail all the terms and conditions upon which such sale or
disposition is to occur, and (ii) make reference to this Section 3.02 and
state that each Drag-Along Stockholder is obligated to sell or dispose of its
Drag-Along Shares pursuant to such sale.
(b) In connection with any Drag-Along Disposition Transaction, each
Drag-Along Stockholder shall be required to sell or dispose of the number of
shares of Common Stock (the "Drag-Along Shares") requested in the Drag-Along
Notice which shall in no event exceed the product (rounded up to the nearest
whole number) of (i) the quotient obtained by dividing (A) the number of
shares of Common Stock to be sold or disposed of in such Drag-Along
Disposition Transaction by (B) the aggregate number of shares of Common Stock
owned by the Lehman Group, the Holders and such Drag-Along Stockholder and
(ii) the number of shares of Common Stock held by such Drag-Along Stockholder.
Each Drag-Along Stockholder, unless such Drag- Along Stockholder agrees
otherwise, shall receive as consideration upon such sale or disposition for
its shares of Common Stock the same type of consideration and the same amount
of consideration per share and on the same terms and conditions as are
applicable to the shares of Common Stock to be sold by the Drag-Along
Transferors; provided, however, that such Drag- Along Stockholder shall not be
required to make any representations, warranties or covenants other than a
representation and warranty as to title to such Drag-Along Stockholder's
Common Stock and shall not be required to give any indemnification other than
for the breach of such representation and warranty and in an amount not to
exceed the proceeds to such Drag-Along Stockholder from such sale or
disposition.
(c) If the proposed sale or disposition is not consummated within
120 days of its scheduled closing date, the Drag-Along Right of the Drag-Along
Transferors pursuant to Section 3.02 with respect to the sale or disposition
which was the subject of such Drag-Along Notice shall on such 120th day
terminate.
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11
SECTION 3.03. Cooperation. Subject to the terms of an Employee
Stockholders' Employment Agreement with the Company and the requirements of
applicable law and regulation each Employee Stockholder hereby agrees that in
addition to performing his or her ordinary obligations as an employee of the
Company, he or she will fully support, and take all actions and provide all
reasonable assistance and cooperation deemed necessary by Lehman Brothers
Merchant Banking Partners in connection with, any strategic or other material
transaction supported by Lehman Brothers Merchant Banking Partners which
involves the Company and any Person, and will not take any action which could
reasonably be expected to be, or which Lehman Brother Merchant Banking
Partners determines in good faith is, adverse to the negotiation or
consummation of such transaction in any material respect.
ARTICLE IV
CALL AND PUT RIGHTS
SECTION 4.01. Call and Put Rights. (a) If an Employee Stockholder's
active employment with the Company (and/or, if applicable, any of its
subsidiaries) is terminated (x) by the Company for any reason other than for
Cause, (y) by the Employee Stockholder for Good Reason or (z) terminated as a
result of the Employee Stockholder's Retirement from employment with the
Company (in any such case, a "Non-Cause Call Event"), then the Company shall
have the right to purchase all, but not less than all, of the shares of Common
Stock then held by the Employee Stockholder or any Permitted Transferee
thereof at Fair Market Value. Notwithstanding the foregoing, if the Employee
Stockholder elects, he may override any such calls and retain all or any
portion of the shares of Common Stock subject to such call by giving the
Company written notice of such override within 30 days of his receipt of the
Call Notice.
(b) If an Employee Stockholder's active employment with the Company
(and/or, if applicable, any of its subsidiaries) is terminated by the Company
for Cause or is terminated by an Employee Stockholder without Good Reason (a
"For Cause Call Event)", then the Company shall have the right to (i) purchase
all, but not less than all, of the shares of Common Stock then held by the
Employee Stockholder or any Permitted Transferee at Fair Market Value, or if
lesser in the case of Option Shares, the purchase price paid by the Employee
Stockholder therefor and (ii) terminate all, but not less than all, of the
outstanding Options then held by the Employee Stockholder.
(c) If an Employee Stockholder's active employment with the Company
(and/or, if applicable, any of its subsidiaries) is terminated by the Company
due to his death or Disability, (a "Put Event") the Employee Stockholder (or
his legal representative or the legal representative of his estate, if
applicable) may put all New Options, Option Shares and Purchased Shares to the
Company, and the Company may call such New Options, Option Shares and
Purchased Shares subject to such call, in each case at Fair Market Value (in
the case of New Options, net of the exercise price thereof ) (a "Disability
Call Event"); provided, however, that if the Employee Stockholder elects, he
may override any such call and retain all or any portion of his New Options,
Option Shares and Purchased Shares by providing the Company with a written
notice of such override within 30 days of his receipt of the Call Notice.
(d) If the Company shall sell the business division in which the
Employee Stockholder is principally employed, the Company may call the
Employee Stockholder's New Options, Option Shares and Purchased Shares at Fair
Market Value (in the case of New Options, net of the exercise price thereof);
(collectively with any Non-Cause Call Event, any For-Cause Call Event or any
Disability Call Event, a "Call Event") provided, however, that if the Employee
Stockholder elects, he may override such call by the Company and retain all or
any portion of his
<PAGE>
12
New Options, Option Shares and Purchased Shares subject to such call by
providing the Company with a written notice of such override within 30 days of
his receipt of the Call Notice.
(e) The Company shall have a period of 75 days from the date of a
Call Event in which to give notice in writing to the applicable Holder of the
exercise of any such call right ("Call Notice"). If the Employee Stockholder
(or the Employee Stockholder's legal representative or the legal
representative of his estate, as applicable) is entitled to put any or all of
his New Options, Option Shares or Purchased Shares, notice of such intent must
be given by the Executive no later than 90 days after the Company gives notice
that it will not exercise its call.
(f) The completion of the purchases pursuant to any Call Event or
Put Event shall take place at the principal office of the Company on the 30th
business day after the giving of notice of the exercise of the applicable call
or put right. The applicable price under this Article IV and any payment with
respect thereto shall be paid by delivery to the Employee Stockholder or any
Permitted Transferee, as the case may be, of a certified bank check or checks
in the appropriate amount payable to the order of the Employee Stockholder or
any Permitted Transferee, as the case may be, against delivery of certificates
or other instruments representing the Stock so purchased and appropriate
documents canceling the Options so terminated, appropriately endorsed or
executed by the Employee Stockholder or any Permitted Transferee or his, her
or its authorized representative.
(g) The parties acknowledge that certain Employment Agreements
contain provisions regarding "put" and "call" rights and this Article IV
supersedes such provisions.
(h) The provisions of this Article IV shall terminate upon an
Initial Public Offering.
ARTICLE V
REGISTRATION RIGHTS
SECTION 5.01. Registration. (a) If at any time the Company proposes
to register under the Securities Act any shares of Common Stock for sale for
its own account other than (i) any registration relating to any employee
benefit or similar plan, any dividend reinvestment plan, or any acquisition by
or business combination involving the Company or any of its subsidiaries or
(ii) pursuant to a registration statement filed in connection with an exchange
offer, or if Lehman Brothers Merchant Banking Partners, has requested that the
Company file a registration statement to effect registration of shares of
Common Stock owned by it pursuant to the terms of a written registration
rights agreement, including Section 5.02(b) of this Agreement, the Company
shall give written notice to each Holder at least 20 days prior to the initial
filing of such registration statement with the SEC pertaining thereto (an
"Incidental Registration Statement") informing such Holder of its intent to
file such Incidental Registration Statement and of such Holder's rights, if
any, under this Section 5.01 to request the registration of the Registrable
Securities held by such Holder. Upon the written request of any such Holder
made within 10 days after any such notice is given (which request shall
specify the Registrable Securities intended to be disposed of by such Holder
and the intended method of distribution thereof), the Company shall use
reasonable efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the Holders, to the extent required to permit the disposition of the
Registrable Securities so requested to be registered, including, if necessary,
by filing with the SEC a post-effective amendment or a supplement to the
Incidental Registration Statement or the related prospectus or any document
incorporated therein by reference or by filing any other required document or
otherwise
<PAGE>
13
supplementing or amending the Incidental Registration Statement, if required
by the rules, regulations or instructions applicable to the registration form
used by the Company for such Incidental Registration Statement or by the
Securities Act or by any other rules and regulations thereunder.
(b) If a registration pursuant to this Section 5.01 involves an
underwritten offering of the securities being registered (an "Underwritten
Offering"), which securities are to be distributed on a firm commitment basis
by or through one or more underwriters of recognized standing under
underwriting terms appropriate for such transaction, and the underwriter or
the managing underwriter, as the case may be, of such Underwritten Offering
shall inform the Company and the Holders requesting such registration of
Registrable Securities, on or before the date five days prior to the date then
scheduled for such offering, that, in its opinion, the amount of securities
requested to be included in such registration exceeds the amount which can be
sold in (or during the time of) such offering without adversely affecting the
distribution of the securities being offered, then the Company will include in
such registration only the amount of Registrable Securities and other
securities that the Company is so advised can be sold in (or during the time
of) such offering within such price range; provided, however, that the Company
shall be required to include in such required registration: first, all the
securities proposed to be sold pursuant to an Incidental Registration
Statement initiated by the Company to effect a primary offering of securities,
second, the securities requested to be included in a registration that the
Company is required to include pursuant to the terms of any other registration
rights agreements (other than securities requested to be included by the
Lehman Group or the Holders) and third, the amount of Registrable Securities
and other securities requested to be included by the Lehman Group and by the
Holders in such registration that the Company is so advised can be sold in (or
during the time of) such offering, allocated pro rata among the Lehman Group
and the Holders requesting such registration on the basis of the number of
Registrable Securities and other securities requested to be included by the
Lehman Group and the Holders.
(c) No Holder may participate in any Incidental Registration
Statement hereunder unless such Holder (i) agrees to sell its Registrable
Securities on the basis provided in any arrangements approved by the Company
and (ii) completes and executes all reasonable and customary questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such arrangements.
SECTION 5.02. Demand Registration Rights. (a) Beginning upon the
later of (i) the occurrence of an Initial Public Offering or (ii) or the fifth
anniversary of the Effective Time (the "Employee Demand Right Effective
Date"), the Holders may request the Company to file a registration statement
to effect the registration of all or a portion of the Common Stock held by
such Holders (the "Employee Demand Registration Right"). The Employee Demand
Registration Right shall be exercised by delivery of a written notice to the
Company by the holders of a majority of the Common Stock held by the Holders
(the "Employee Demand Right Notice"), a copy of which must be provided to the
Company at least 15 days prior to delivery to the Company. Notwithstanding
anything contained in this Section 5.02 to the contrary, (A) the Company shall
be obligated to effect no more than two registrations in the aggregate
pursuant to this Section 5.02(a), (B) the Company shall not be obligated to
effect a subsequent registration pursuant to this Section 5.02(a) within 12
months of the effective date of any prior such registration, (C) the Company
shall not be obligated to effect any registration pursuant to this Section
5.02(a) if less than 10% of the Common Stock held in the aggregate by the
Holders at the time of such registration will be offered for sale pursuant
thereto and (D) the provisions of this Section 5.02(a) shall expire and be of
no further force and effect on the third anniversary of the Employee Demand
Right Effective Date.
<PAGE>
14
(b) Upon delivery of a Employee Demand Right Notice, the Company
shall, not later than the 60th calendar day after the receipt of such a
request, cause to be filed a Registration Statement providing for the
registration under the Securities Act of the Registrable Securities which the
Company has been so requested to register, to the extent necessary to permit
the disposition of such Registrable Securities in accordance with the intended
methods of distribution thereof specified in such request. The Company shall
use its reasonable best efforts to have such Registration Statement declared
effective by the SEC as soon as practicable thereafter (but in no event later
than the 150th calendar day after the receipt of such a request) and to keep
such Registration Statement continuously effective for a period of time
necessary following the date on which such Registration Statement is declared
effective for the underwriters or the Holders, as the case may be, to sell all
the Registrable Securities issued under such Registration Statement, or such
shorter period that will terminate when all of the Registrable Securities
covered by such Registration Statement have been sold pursuant thereto
(including, if necessary, by filing with the SEC a post-effective amendment or
a supplement to the Registration Statement or the related prospectus or any
document incorporated therein by reference or by filing any other required
document or otherwise supplementing or amending the Registration Statement, if
required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Registration Statement or by
the Securities Act, any state securities or blue sky laws, or any other rules
and regulations thereunder).
(c) A Registration Statement pursuant to this Section 5.02 shall be
deemed not to have become effective (and the related registration shall be
deemed not to have been effected) unless it has been declared effective by the
SEC; provided, however, that if, after it has been declared effective, the
offering of any Registrable Securities pursuant to such Incidental
Registration Statement is interfered with by any stop order, injunction or
other order or requirement of the SEC or any other governmental agency or
court (other than any such stop order or injunction issued as a result of the
inclusion in such Incidental Registration Statement of any information
supplied to the Company for inclusion therein by a selling stockholder) such
Incidental Registration Statement will be deemed not to have become effective.
(d) If a registration pursuant to this Section 5.02 involves an
Underwritten Offering, which securities are to be distributed on a firm
commitment basis by or through one or more underwriters of recognized standing
under underwriting terms appropriate for such transaction, and the underwriter
or the managing underwriter, as the case may be, of such Underwritten Offering
shall inform the Company and the individuals requesting such registration, on
or before the date five days prior to the date then scheduled for such
offering, that, in its opinion, the amount of securities requested to be
included in such registration exceeds the amount which can be sold in (or
during the time of) such offering without adversely affecting the distribution
of the securities being offered, then the Company will include in such
registration only the amount of registrable securities and other securities
that the Company is so advised can be sold in (or during the time of) such
offering within such price range; provided, however, that the Company shall be
required to include in such required registration the amount of securities
proposed to be registered by the Holders, allocated pro rata among the
Holders, on the basis of the number of securities requested to be included by
the Holders.
(e) The Company will not be obligated to effect the Demand
Registration within six months after an Initial Public Offering by the Company
for which registration pursuant to Section 5.01 was fully available. If at the
time of any request to register Registrable Securities pursuant to Section
5.02, the Company is engaged, or has plans (which have been or are reasonably
expected to be approved by the Board of Directors within 60 days) to engage
within 90 days of the time of the request in a registered public offering as
to which the Holders may include such Registrable Securities pursuant to
Section 5.01 hereof, or is engaged in any activity which, in the good faith
determination of the Board of Directors, would be adversely affected by
<PAGE>
15
the requested registration to the material detriment of the Company, then the
Company may at its option direct that such request be delayed for a period not
in excess of 180 days from the effective date of such offering, or in the case
of such other material activity, the lesser of (i) 180 days from the date of
such request for registration or (ii) such time when the registration would
not adversely affect such activity of the Company, such right to delay a
request to be exercised by the Company not more than once within any
twelve-month period.
(f) No Holder may participate in any registration statement
hereunder unless such Holder (i) agrees to sell its Registrable Securities on
the basis provided in any arrangements approved by the Company and (ii)
completes and executes all reasonable and customary questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
(f) At any time after the Lehman Group owns less than 50% of the
shares of Common Stock, each of its members shall have the same demand
registration rights that the Holders have pursuant to this Section 5.02 and
this Article V.
SECTION 5.03. Registration Expenses. The Company shall pay all
Registration Expenses in connection with each registration pursuant to Section
5.01 or Section 5.02. Each Seller shall pay all discounts and commissions
payable to underwriters, selling brokers, managers or other similar Persons
related or allocable to the sale or disposition of such Seller's registrable
securities pursuant to any Incidental Registration Statement.
SECTION 5.04. Restrictions on Public Sale by Sellers and the
Company. If requested by the underwriter or managing underwriter, as
applicable, in any Underwritten Offering (by the Company or any other Person)
of Common Stock or of any securities convertible into or exchangeable for
Common Stock, or of warrants or other securities entitling the holder thereof
to purchase Common Stock, each party hereto shall agree not to effect any
public sale or distribution of Common Stock during the 14-day period prior to,
and during the 90- day period beginning on, the date of sale of securities in
connection with such Underwritten Offering (except pursuant to such
registration statement).
SECTION 5.05. Registration Procedures. In connection with the
obligations of the Company pursuant to Section 5.01 and Section 5.02, the
Company shall use its reasonable best efforts to effect or cause to be
effected the registration under the Securities Act of the securities entitled
to be included in such registration in order to permit the sale of such
securities, and the Company shall:
(a) (i) prepare and file a Registration Statement with the SEC which
Registration Statement (x) shall be on a form for which the Company qualifies
selected by the Person first requesting registration and (y) shall comply as
to form in all material respects with the requirements of the applicable form
and include all financial statements required by the SEC to be filed
therewith, (ii) use its reasonable best efforts to prevent the happening of
any event that would cause a Registration Statement to contain a material
misstatement or omission or to be not effective and usable for resale of the
securities registered pursuant thereto (during the period that such
Registration Statement is required to be effective and usable); provided,
however, that the foregoing shall not apply to actions taken by the Company in
good faith and for valid business reasons (including any acquisition or
divestiture of assets or the consummation of any business combination or any
agreement to do so) so long as the Company as promptly as reasonably possible
thereafter complies with the requirements of Section 5.05(i), if applicable,
and (iii) cause each Registration Statement and the related prospectus and any
amendment or supplement thereto, as of the effective date of such Registration
Statement, amendment or supplement (x) to comply in all material respects with
any requirements of the Securities Act and
<PAGE>
16
the rules and regulations of the SEC and (y) not to contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
(b) furnish to each Seller holding securities covered by a
Registration Statement and to each underwriter of an Underwritten Offering of
the securities covered by a Registration Statement, if any, without charge, as
many copies of each prospectus forming part of such Registration Statement,
including each preliminary prospectus, and any amendment or supplement thereto
and such other documents as such Seller or underwriter may reasonably request
in order to facilitate the public sale or other disposition of such
Registrable Securities; and the Company hereby consents to the use of such
prospectus, including each such preliminary prospectus, by each such holder
and underwriter, if any, in connection with the offering and sale of such
securities;
(c) (i) use its reasonable best efforts to register or qualify the
securities covered by a Registration Statement, no later than the time such
Registration Statement is declared effective by the SEC, under all applicable
state securities or "blue sky" laws of such jurisdictions as each underwriter,
if any, or any Seller shall reasonably request; and (ii) do any and all other
acts and things which may be reasonably necessary or advisable to enable each
such underwriter, if any, and Seller to consummate the disposition in each
such jurisdiction of the securities covered by such Registration Statement;
provided, however, that the Company shall not be required to register or
qualify any securities in any jurisdiction if registration or qualification in
such jurisdiction would subject the Company to unreasonable expense or, in the
case of an Underwritten Offering, would unreasonably delay the commencement of
such Underwritten Offering; and provided, further, that the Company shall not
be obligated to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject or to consent to be subject to general service of process
(other than service of process in connection with such registration or
qualification or any sale of Registrable Securities in connection therewith)
in any such jurisdiction;
(d) notify each Seller promptly, and, if requested by such Seller,
confirm such notice in writing, (i) when a Registration Statement has become
effective and when any post- effective amendments and supplements thereto
become effective, (ii) of the issuance by the SEC or any state securities
authority of any stop order, injunction or other order or requirement
suspending the effectiveness of a Registration Statement or the initiation of
any proceeding for that purpose, (iii) if, between the effective date of a
Registration Statement and the closing of any sale of securities covered
thereby pursuant to any agreement to which the Company is a party, the
representations and warranties of the Company contained in such agreement
cease to be true and correct in all material respects or if the Company
receives any notification with respect to the suspension of the qualification
of such securities for sale in any jurisdiction or the initiation of any
proceeding for such purpose, and (iv) of the happening of any event during the
period a Registration Statement is required to be effective as a result of
which such Registration Statement or the related prospectus contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstance under which they were made, not misleading;
(e) furnish counsel for each underwriter, if any, and for the
Sellers copies of any request by the SEC or any state securities authority for
amendments or supplements to a Registration Statement and prospectus or for
additional information;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible time;
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17
(g) upon request, furnish to the underwriter or managing
underwriter, as applicable, of an Underwritten Offering of Registrable
Securities, if any, without charge, at least one signed copy of each
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits; and furnish to each Seller, without charge, at
least one conformed copy of each Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference or
exhibits thereto, unless requested);
(h) cooperate with each Seller and the underwriter or managing
underwriter, as applicable, of an Underwritten Offering of securities, if any,
to facilitate the timely preparation and delivery of certificates representing
securities to be sold and not bearing any restrictive legends; and enable such
securities to be in such denominations (consistent with the provisions of the
governing documents thereof) and registered in such names as each Seller or
the underwriter or managing underwriter, as applicable, of an Underwritten
Offering of securities, if any, may reasonably request at least three business
days prior to any sale of securities;
(i) upon the occurrence of any event contemplated by Section
5.05(d)(iv), during the period in which a Registration Statement is required
to be kept in effect, use reasonable best efforts to prepare a supplement or
post-effective amendment to a Registration Statement or the related
prospectus, or any document incorporated therein as thereafter delivered to
the purchasers of the securities covered by such Registration Statement, so
that such prospectus will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading;
(j) enter into customary agreements (including, in the case of an
Underwritten Offering, underwriting agreements in customary form, and
including provisions with respect to indemnification and contribution in
customary form and consistent with the provisions relating to indemnification
and contribution contained herein) and, in the case of a Registration
Statement relating to a secondary offering filed at the request of a Seller,
take all other customary and appropriate actions in order to expedite or
facilitate the disposition of the securities covered by a Registration
Statement as shall be requested by the Seller, and in connection therewith:
(i) make such representations and warranties to the Sellers and
the underwriters, if any, in form, substance and scope as are
customarily made by issuers to underwriters in similar underwritten
offerings;
(ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the managing underwriters, if
any, and the Sellers) addressed to each Seller and the underwriters,
if any, covering the matters customarily covered in opinions
requested in sales of securities or underwritten offerings and such
other matters as may be reasonably requested by such Sellers and
underwriters;
(iii) obtain "cold comfort" letters and updates thereof from
the Company's independent certified public accountants addressed to
each Seller and the underwriters, if any, which letters shall be
customary in form and shall cover matters of the type customarily
covered in "cold comfort" letters to underwriters in connection with
primary underwritten offerings;
(iv) enter into a securities sales agreement, which shall be
customary in form, substance and scope and shall contain customary
representations, warranties and covenants;
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18
(v) if an underwriting agreement is entered into, cause the
same to set forth indemnification provisions and procedures
substantially equivalent to the indemnification provisions and
procedures set forth in Section 5.07; and
(vi) deliver such customary documents and certificates as may
be reasonably requested by the Sellers or by the managing
underwriters, if any;
(k) make available for inspection by representatives of the Sellers
and any underwriters participating in any disposition pursuant to a
Registration Statement and any counsel or accountant retained by such Sellers
or underwriters all relevant financial and other records, pertinent corporate
documents and properties of the Company and cause the respective officers,
directors and employees of the Company to supply all information reasonably
requested by any such representative, underwriter, counsel or accountant in
connection with a Registration Statement;
(l) (i) within a reasonable time prior to the filing of any
Registration Statement, any related prospectus, any amendment to a
Registration Statement or amendment or supplement to a prospectus, provide
copies of such document to the Sellers and to counsel to such Sellers and to
the underwriter or underwriters of an Underwritten Offering of securities, if
any; and, consider in good faith such reasonable changes in any such document
prior to or after the filing thereof as counsel to the Sellers or the
underwriter or underwriters may request and make available such of the
representatives of the Company as shall be reasonably requested by the Sellers
or any underwriter for discussion of such document; and
(ii) within a reasonable time prior to the filing of any
document which is to be incorporated by reference into a
Registration Statement or a related prospectus, provide copies of
such document to counsel for the Sellers and the underwriter or
underwriters of an Underwritten Offering of securities; consider in
good faith such reasonable changes in such document prior to or
after the filing thereof as counsel for such Sellers or such
underwriter shall request; and make available such of the
representatives of the Company as shall be reasonably requested by
such counsel for discussion of such document;
(m) use its reasonable best efforts to cause all securities covered
by a Registration Statement to be listed on any securities exchange on which
the common stock of the Company is then listed if so requested by any
applicable Seller;
(n) provide a CUSIP number for all securities covered by a
Registration Statement, no later than the effective date of such Registration
Statement;
(o) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the SEC and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering at
least 12 months which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder; and
(p) cooperate and assist in any filing required to be made with the
NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter" that is
required to be retained in accordance with the rules and regulations of the
NASD).
SECTION 5.06. Obligations of Sellers. (a) Each Seller shall, as a
condition to the registration obligations with respect to such Seller provided
herein, furnish to the Company such information regarding such Seller, the
ownership of securities by such Seller and the
<PAGE>
19
proposed distribution by such Seller of such securities as the Company may
from time to time reasonably request in writing.
(b) Upon receipt of any notice of the Company of the happening of
any event of the kind described in Section 5.05(d)(iv), such Seller shall
forthwith discontinue disposition of securities pursuant to the affected
Registration Statement until such Seller's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 5.05(i), and, if so
directed by the Company, such Seller shall deliver to the Company (at the
expense of the Company) all copies in its possession, other than permanent
file copies then in such Seller's possession, of the prospectus covering such
securities which was current at the time of receipt of such notice. If any
offering requested by the Holders pursuant to Section 5.02(a) is terminated is
a result of the happening of any event at the kind described in Section
5.05(d)(iv), such offering shall not count against the number of registrations
available to the Holders pursuant to Section 5.02(a).
SECTION 5.07. Indemnification. (a) The Company shall indemnify and
hold harmless each Person who participates as an underwriter (any such Person
being an "Underwriter"), each Seller and their respective partners, directors,
officers and employees and each Person, if any, who controls any Seller or
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act as follows:
(i) against any and all losses, liabilities, claims, damages,
judgments and reasonable expenses whatsoever, as incurred, arising
out of any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement (or any
amendment thereto) pursuant to which securities were registered
under the Securities Act, including all documents incorporated
therein by reference, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained
in any prospectus (or any amendment or supplement thereto) including
all documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all losses, liabilities, claims, damages,
judgments and reasonable expenses whatsoever, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation,
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any other claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission, if such settlement is effected with the
written consent of the Company; and
(iii) against any and all reasonable expense whatsoever, as
incurred (including, subject to Section 5.07(c), fees and
disbursements of counsel) incurred in investigating, preparing or
defending against any litigation, investigation or proceeding by any
governmental agency or body, commenced or threatened, in each case
whether or not such Person is a party, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged
untrue statement or omission, to the extent that any such expense is
not paid under subparagraph (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any Seller
or Underwriter with respect to any loss, liability, claim, damage, judgment or
expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission (A) made in reliance upon and in
conformity with written information furnished to the Company by such Seller or
Underwriter expressly for use in a Registration Statement (or any amendment
thereto) or any
<PAGE>
20
related prospectus (or any amendment or supplement thereto) or (B) if such
untrue statement or omission or alleged untrue statement or omission was
corrected in an amended or supplemented Registration Statement or prospectus
and the Company had furnished copies thereof to the Underwriter or Seller from
which the Person asserting such loss, liability, claim, damage, judgment or
expense purchased the securities that are the subject thereof prior to the
date of sale by such Underwriter or Seller to such Person.
(b) Indemnification by Sellers, Underwriters, Etc. Each Seller shall
severally indemnify and hold harmless the Company, each Underwriter and the
other Sellers, and each of their respective partners, directors, officers and
employees (including each officer of the Company who signed the Registration
Statement) and each Person, if any, who controls the Company, any Underwriter
or any other Seller within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, against any and all losses, liabilities,
claims, damages, judgments and expenses described in the indemnity contained
in Section 5.07(a) (provided that any settlement of the type described therein
is effected with the written consent of such Seller) as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements
or omissions, made in a Registration Statement (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Seller expressly for use in such Registration Statement
(or any amendment thereto) or such prospectus (or any amendment or supplement
thereto); provided, however, that an indemnifying Seller shall not be required
to provide indemnification in any amount in excess of the amount by which (x)
the total price at which the securities sold by such indemnifying Seller and
its affiliated indemnifying Sellers and distributed to the public were offered
to the public exceeds (y) the amount of any damages which such indemnifying
Seller has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. The Company shall be
entitled, to the extent customary, to receive indemnification and contribution
from underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, to the same extent
as provided above with respect to information so furnished in writing by such
Persons specifically for inclusion in any prospectus or Registration
Statement.
(c) Conduct of Indemnification Proceedings. Each indemnified party
or parties shall give reasonably prompt notice to each indemnifying party or
parties of any action or proceeding commenced against it in respect of which
indemnity may be sought hereunder, but failure so to notify an indemnifying
party or parties shall not relieve it or them from any liability which it or
they may have under this indemnity agreement, except to the extent that the
indemnifying party is materially prejudiced by such failure to give notice. If
the indemnifying party or parties so elects within a reasonable time after
receipt of such notice, the indemnifying party or parties may assume the
defense of such action or proceeding at such indemnifying party's or parties'
expense with counsel chosen by the indemnifying party or parties and approved
by the indemnified party defendant in such action or proceeding, which
approval shall not be unreasonably withheld; provided, however, that, if such
indemnified party or parties reasonably determine that a conflict of interest
exists and that therefore it is advisable for such indemnified party or
parties to be represented by separate counsel or that, upon advice of counsel,
there may be legal defenses available to it or them which are different from
or in addition to those available to the indemnifying party, then the
indemnifying party or parties shall not be entitled to assume such defense and
the indemnified party or parties shall be entitled to separate counsel
(limited in each jurisdiction to one counsel for all Underwriters and another
counsel for all other indemnified parties under this Agreement) at the
indemnifying party's or parties' expense. If any indemnifying party or parties
are not so entitled to assume the defense of such action or does not assume
such defense, after having received the notice referred to in the first
sentence of this paragraph, the indemnifying party or parties will pay the
reasonable fees and expenses of counsel for the indemnified party or parties
(limited in each jurisdiction to one counsel for all
<PAGE>
21
Underwriters and another counsel for all other indemnified parties under this
Agreement). In such event, however, no indemnifying party or parties will be
liable for any settlement effected without the written consent of such
indemnifying party or parties (which consent shall not be unreasonably
withheld or delayed); provided, however, that if at any time an indemnified
party or parties shall have requested an indemnifying party or parties to
reimburse the indemnified party or parties for fees and expenses of counsel as
contemplated by this paragraph, the indemnifying party or parties shall be
liable for any settlement of any proceeding effected without the written
consent of such indemnifying party or parties if (x) such settlement is
entered into more than 15 business days after receipt by such indemnifying
party or parties of the aforesaid request accompanied by supporting documents
reasonably satisfactory to the indemnifying party or parties and (y) such
indemnifying party or parties shall not have reimbursed the indemnified party
or parties in accordance with such request prior to the date of such
settlement. If an indemnifying party is entitled to assume, and assumes, the
defense of such action or proceeding in accordance with this paragraph, such
indemnifying party or parties shall not, except as otherwise provided in this
subsection (c), be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action or
proceeding.
(d) Contribution. (i) In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
this Section 6.07 is for any reason held to be unenforceable by the
indemnified parties although applicable in accordance with its terms in
respect of any losses, liabilities, claims, damages, judgments and expenses
suffered by an indemnified party referred to therein, each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, liabilities, claims, damages, judgments and expenses in such
proportion as is appropriate to reflect the relative fault of the Company on
the one hand and of the liable Sellers or Underwriters (including, in each
case, that of their respective officers, directors, employees and agents) on
the other in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages, judgments or expenses, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of the liable Sellers or Underwriters (including, in each
case, that of their respective officers, directors, employees and agents) on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company, on the one hand, or by or on behalf of the Sellers or
Underwriters, on the other, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
liabilities, claims, damages, judgments and expenses referred to above shall
be deemed to include, subject to the limitations set forth in Section 5.07(c),
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
(ii) The Company and each Seller agree that it would not be
just and equitable if contribution pursuant to this Section 5.07(d)
were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable
considerations referred to in sub-paragraph (i) above.
Notwithstanding anything in this Section 5.07(d) to the contrary, in
the case of distributions to the public, an indemnifying Seller
shall not be required to contribute any amount in excess of the
amount by which (A) the total price at which the securities sold by
such indemnifying Seller and its affiliated indemnifying Sellers and
distributed to the public were offered to the public exceeds (B) the
amount of any damages which such indemnifying Seller has otherwise
been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
<PAGE>
22
(iii) For purposes of this Section, each Person, if any, who
controls a Seller or an Underwriter within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Seller or Underwriter; and
each director of the Company, each officer of the Company who signed
the Registration Statement, and each Person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company.
(e) Non-Exclusivity. The obligation of the parties under this
Section 6.07 will be in addition to any liability which any party may
otherwise have to any other party.
SECTION 5.08. Rule 144. To enable the Holders that are Affiliates of
the Company to transfer Common Stock in accordance with this Agreement, the
Company will use all commercially reasonable efforts to permit such Holders to
rely on Rule 144 of the Securities Act in connection with such transfers.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, telecopied (with confirmation) or sent by overnight or same-day
courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to the Company, to it at the following address:
Blount International, Inc.
4520 Executive Park Drive
Montgomery, AL 36116-1602
Attention: Richard H. Irving, III
Facsimile: (334) 270-8130;
If to Lehman Brothers Merchant Banking Partners:
Lehman Brothers Merchant
Banking Partners II L.P.
3 World Financial Center
New York, New York 10285
Attention: Mr. Steven Berkenfeld
Facsimile: (212) 526-2198.
If to an Employee Stockholder, to the last known address in the
Company's files, or, in the case of any Holder or other Person who becomes a
party to, or subject to, this Agreement, to the address set forth in the
written agreement executed pursuant to Section 6.06, or to such other address
as the party to whom notice is to be given may provide in a written notice to
the Company, a copy of which written notice shall be on file with the
Secretary. Notice shall be effective when delivered to the applicable address
set forth above.
SECTION 6.02. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
<PAGE>
23
STATE OF DELAWARE, WITHOUT REGARD TO ANY PRINCIPLES OF CONFLICTS OF LAW OF
SUCH STATE.
SECTION 6.03. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, together with the documents referred to herein or delivered
pursuant hereto, (a) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and of the documents referred to herein
or delivered pursuant hereto, and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
SECTION 6.04. Descriptive Headings. The headings in this Agreement
are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein.
SECTION 6.05. Severability. The invalidity or unenforceability of
any provisions of this Agreement in any jurisdiction shall not affect the
validity, legality or enforceability of the remainder of this Agreement in
such jurisdiction or the validity, legality or enforceability of this
Agreement, or any provision hereof, in any other jurisdiction, it being
intended that all rights and obligations of the parties hereunder shall be
enforceable to the fullest extent permitted by law.
SECTION 6.06. Agreement To Be Bound. Notwithstanding anything to the
contrary contained in this Agreement, no shares of Common Stock held by the
Employee Stockholders may be Transferred to any Permitted Transferee, unless
such Permitted Transferee, prior to such Transfer, agrees in writing to be
bound by the terms of this Agreement to the same extent and in the same manner
as the transferor of such shares, a copy of which writing shall be maintained
on file with the Secretary of the Company and shall include the address of
such Permitted Transferee to which notices hereunder shall be sent.
SECTION 6.07. Additional Holders. Each Permitted Transferee of
Lehman Brothers Merchant Banking Partners and any other member of the Lehman
Group who becomes a holder of Common Stock after the date hereof in a Transfer
which complies with Section 6.06 shall be deemed a party to this Agreement and
be bound by its terms and be able to enforce its rights as a member of the
Lehman Group hereunder.
SECTION 6.08. Additional Employee Stockholders. No employee of the
Company or its subsidiaries shall become a party to this Agreement until the
Company, Lehman Brothers Merchant Banking Partners and the applicable employee
have executed the applicable signature page for such employee.
SECTION 6.09. Other Agreements. Nothing contained in this Agreement
shall be deemed to be a waiver of, or release from, any obligations any party
hereto may have under, or any restrictions on the Transfer of Common Stock or
other securities of the Company imposed by, any other agreement, if any.
SECTION 6.10. Successors, Assigns, Transferees. The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, successors and permitted assigns. Neither
this Agreement nor any right, remedy, obligation or liability arising
hereunder or by reason hereof may be Transferred by any party hereto without
the prior written consent of the other parties hereto except as expressly
provided in this Agreement. Any purported Transfer of rights under this
Agreement in violation of this Section 6.10 shall be void and of no effect.
<PAGE>
24
SECTION 6.11. Amendments; Waivers. This Agreement may not be
amended, modified or supplemented and no waivers of or consents to departures
from the provisions hereof may be given unless consented to in writing by the
parties hereto; provided, that for purposes of this Section 6.11, the consent
of Holders who beneficially own 50% or more of the amount of Common Stock
owned in the aggregate by all Holders shall be conclusively deemed to be the
consent of each and every Holder.
SECTION 6.12. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party.
SECTION 6.13. Specific Performance. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement in any
Delaware state court or any Federal court located in the State of Delaware,
this being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto (a) consents to submit
itself to the personal jurisdiction of any Delaware state court or any Federal
court located in the State of Delaware in the event any dispute arises out of
this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such
court, (c) agrees that it will not bring any action relating to this Agreement
in any court other than any Delaware state court or any Federal court sitting
in the State of Delaware and (d) waives any right to trial by jury with
respect to any action related to or arising out of this Agreement. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement in any
Delaware state court or any Federal court located in the State of Delaware,
and hereby further irrevocably and unconditionally waive and agree not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
SECTION 6.14. Attorneys' Fees. In any action or proceeding brought
to enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to
recover reasonable attorneys' fees in addition to any other available remedy.
SECTION 6.15. Recapitalization, Exchanges, etc., Affecting Common
Stock. The provisions of this Agreement shall apply, to the full extent set
forth herein with respect to Common Stock, to any and all shares of capital
stock of the Company or any successor or assign of the Company (whether by
merger, consolidation, sale of assets or otherwise) which may be issued in
respect of, in exchange for or in substitution of the Common Stock, by reason
of any stock dividend, stock split, stock issuance, reverse stock split,
combination, recapitalization, reclassification, merger, consolidation or
otherwise. Upon the
<PAGE>
25
occurrence of any of such events, amounts an numbers hereunder, including
numbers of shares of Common Stock, shall be appropriately adjusted.
IN WITNESS WHEREOF and intending to be bound hereby, each of the
parties set forth below have executed this Agreement as of the date set forth
below.
BLOUNT INTERNATIONAL, INC.
by
--------------------------------
Name:
Title:
LEHMAN BROTHERS MERCHANT BANKING
PARTNERS
by
--------------------------------
Name:
Title:
<PAGE>
26
Name of Employee Stockholder: [NAME] John M. Panettiere
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
Name of Employee Stockholder: [NAME] Harold E. Layman
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
Name of Employee Stockholder: [NAME] James S. Osterman
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
Name of Employee Stockholder: [NAME] Gerald W. Bersett
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
Name of Employee Stockholder: [NAME] Donald B. Zorn
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
<PAGE>
27
Name of Employee Stockholder: [NAME] Richard H. Irving
-------------------------------
Address of Employee Stockholder: [ADDRESS]
-----------------------------
Signature of Employee Stockholder: [SIGNATURE]
---------------------------
