SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Amendment No. 3)
(Mark one)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-11549
---------
BLOUNT INTERNATIONAL, INC.
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0780521
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S employer
incorporation or organization) Identification No.)
4909 SE International Way
Portland, Oregon 97222-4679
------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
(503) 653-8881
(Registrant's telephone number, including area code)
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
- ------------------------------------- -------------------------
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934)
Yes No X
------ ------
Page 1
Indicate the number of shares outstanding of each of the issued classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at June 30, 2003
--------------------- ----------------------------
$ .01 Par Value 30,814,073
Explanatory Note
This Amendment No. 3 on Form 10-Q/A to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2003, as originally filed
with the Commission on August 14, 2003, and as amended on July 13, 2004, and
August 2, 2004 is being filed because, in October, 2004, the Company received
$26.6 million in payments from the Internal Revenue Service comprised of
refund claims of $21.6 million and accumulated interest of $5.0 million. In
reviewing these payments, the Company determined on October 29, 2004 that the
majority of the interest portion of the payments should have been recorded as
income in prior reporting periods and that the failure to so record interest
income was an accounting error. The audit committee has concluded that the
previously issued financial statements should not be relied upon. Therefore,
the Company is restating its historical financial results to reflect
additional interest income of $3.6 million in 2003 and $1.1 million in the
first six months of 2004. This Amendment No. 3 reflects the additional income
that should have been recorded during the quarterly period ended June 30,
2003.
This Form 10-Q/A continues to speak as of the date that the initial Form 10-Q
was filed with the SEC, and we have not otherwise updated the disclosure
herein to reflect any information or events subsequent to the filing of the
initial Form 10-Q.
Page 2
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I Financial Information
Item 1 - Financial Statements
Unaudited Consolidated Statements of Income (Loss) -
three and six months ended June 30, 2003 and 2002 4
Unaudited Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 5
Unaudited Consolidated Statements of Cash Flows -
six months ended June 30, 2003 and 2002 6
Unaudited Consolidated Statements of Changes in
Stockholders' Deficit - three and six months ended
June 30, 2003 and 2002 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 25
Item 4 - Controls and Procedures 31
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K 32
Signature 33
Page 3
ITEM 1 - FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Blount International, Inc. and Subsidiaries
Three Months Six Months
ended June 30, ended June 30,
--------------------- ---------------------
(Dollar amounts in millions, (Restated) (Restated)
except per share data) 2003 2002 2003 2002
- ---------------------------------- ---------- ---------- ---------- ---------
Sales $ 131.2 $ 123.3 $ 254.1 $ 229.9
Cost of Sales 86.5 81.2 166.6 150.9
- ---------------------------------- ---------- ---------- ---------- ---------
Gross Profit 44.7 42.1 87.5 79.0
Selling, general and
administrative expenses 25.4 23.0 49.7 45.4
Restructuring expenses 0.0 (0.1) 0.2 5.5
- ---------------------------------- ---------- ---------- ---------- ---------
Income from operations 19.3 19.2 37.6 28.1
Interest expense (17.7) (18.1) (35.3) (36.3)
Interest income 3.5 0.2 3.8 0.5
Other expense (3.0) (0.5) (3.1) (1.2)
- ---------------------------------- ---------- ---------- ---------- ---------
Income (loss) before income taxes 2.1 0.8 3.0 (8.9)
Provision (benefit) for income
taxes 0.8 0.3 1.2 (2.9)
- ---------------------------------- ---------- ---------- ---------- ---------
Net income (loss) $ 1.3 $ 0.5 $ 1.8 $ (6.0)
- ---------------------------------- ========== ========== ========== ==========
Net income (loss) per common share:
Basic $ 0.04 $ 0.02 $ 0.06 $ (0.19)
Diluted 0.04 0.02 0.06 (0.19)
- ---------------------------------- ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Page 4
UNAUDITED CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
June 30, December 31,
---------- ------------
(Restated)
(Dollar amounts in millions, except share and per share data) 2003 2002
- -------------------------------------------------------------- -------- --------
Assets
- -------------------------------------------------------------- -------- --------
Current assets:
Cash and cash equivalents $ 24.7 $ 26.4
Accounts receivable, net of allowance for
doubtful accounts of $3.5 and $4.3 58.7 58.5
Inventories 64.3 64.8
Deferred income taxes 29.2 30.5
Other current assets 14.9 11.0
- -------------------------------------------------------------- -------- --------
Total current assets 191.8 191.2
Property, plant and equipment, net of accumulated
depreciation of $185.0 and $180.5 90.9 90.7
Goodwill 76.9 76.9
Other assets 49.5 69.2
- -------------------------------------------------------------- -------- --------
Total Assets $ 409.1 $ 428.0
- -------------------------------------------------------------- ======== ========
Liabilities and Stockholders' Equity (Deficit)
- -------------------------------------------------------------- -------- --------
Current liabilities:
Notes payable and current maturities of long-term debt $ 5.0 $ 3.4
Accounts payable 22.7 25.5
Accrued expenses 65.4 71.3
- -------------------------------------------------------------- -------- --------
Total current liabilities 93.1 100.2
Long-term debt, exclusive of current maturities 606.2 624.1
Deferred income taxes, exclusive of current portion 1.1
Other liabilities 74.6 72.6
- -------------------------------------------------------------- -------- --------
Total Liabilities 775.0 796.9
- -------------------------------------------------------------- -------- --------
Stockholders' equity (deficit):
Common stock: par value $0.01 per share, 100,000,000 shares
authorized, 30,814,073 outstanding 0.3 0.3
Capital in excess of par value of stock 424.5 424.3
Accumulated deficit (784.5) (786.3)
Accumulated other comprehensive income (6.2) (7.2)
- -------------------------------------------------------------- -------- --------
Total Stockholder's Deficit (365.9) (368.9)
- -------------------------------------------------------------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 409.1 $ 428.0
- -------------------------------------------------------------- ======== ========
The accompanying notes are an integral part of these financial statements.
Page 5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
Six Months Ended June 30,
-------------------------
(Restated)
(Dollar amounts in millions) 2003 2002
- ------------------------------------------------------------ ---------- --------
Cash flows from operating activities:
Net income (loss) $ 1.8 $ (6.0)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Early extinguishment of debt 2.8 0.3
Depreciation, amortization and other non-cash charges 10.5 11.0
Deferred income taxes 1.8 (9.1)
Loss on disposals of property, plant & equipment 0.2 0.9
Changes in assets and liabilities, net of effects of
businesses acquired and sold:
Increase in accounts receivable (0.2) (2.2)
Decrease (increase) in inventories 0.5 (0.5)
Decrease in other assets 20.8 2.5
(Decrease) increase in accounts payable (2.7) 3.5
Decrease in accrued expenses (5.5) (1.6)
Increase in other liabilities 2.8 10.0
- ------------------------------------------------------------ ---------- --------
Net cash provided by operating activities 32.8 8.8
- ------------------------------------------------------------ ---------- --------
Cash flows from investing activities:
Proceeds (payments) from sales of property, plant & equipment (0.4) 2.4
Purchases of property, plant & equipment (6.8) (9.4)
Expenses from sale of discontinued operations (14.3)
- ------------------------------------------------------------ ---------- --------
Net cash used in investing activities (7.2) (21.3)
- ------------------------------------------------------------ ---------- --------
Cash flows from financing activities:
Net increase in short-term borrowing 1.6
Issuance of long-term debt 113.0
Reduction of long-term debt (132.4) (4.2)
Other financing activities (9.5) (0.3)
- ------------------------------------------------------------ ---------- --------
Net cash used in financing activities (27.3) (4.5)
- ------------------------------------------------------------ ---------- --------
Net decrease in cash and cash equivalents (1.7) (17.0)
Cash and cash equivalents at beginning of period 26.4 47.6
- ------------------------------------------------------------ ---------- --------
Cash and cash equivalents at end of period $ 24.7 $ 30.6
- ------------------------------------------------------------ ========== ========
The accompanying notes are an integral part of these financial statements.
Page 6
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Blount International, Inc. and Subsidiaries
Accumulated
Capital Retained Other
(Dollar amounts in millions, Common In Excess Earnings Comprehensive
shares in thousands) Stock of Par (Deficit) Income Total
- -------------------------------------- ------- -------- --------- -------------- ------
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2003
Balance March 31, 2003 $0.3 $424.3 $(785.8) $(7.1) $(368.3)
Net income 1.3 1.3
Other comprehensive income, net:
Foreign currency translation adjustment 0.7 0.7
Unrealized gains 0.2 0.2
--------
Comprehensive income 2.2
Exercised stock options 0.2 0.2
- -------------------------------------- ------- ------- -------- ------- --------
Balance June 30, 2003 (Restated) $0.3 $424.5 $(784.5) $(6.2) $(365.9)
======= ======= ======== ======= ========
Balance December 31, 2002 $0.3 $424.3 $(786.3) $(7.2) $(368.9)
Net income 1.8 1.8
Other comprehensive income, net:
Foreign currency translation adjustment 0.8 0.8
Unrealized gains 0.2 0.2
--------
Comprehensive income 2.8
Exercised stock options 0.2 0.2
- -------------------------------------- ------- ------- -------- ------- --------
Balance June 30, 2003 (Restated) $0.3 $424.5 $(784.5) $(6.2) $(365.9)
======= ======= ======== ======= ========
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2002:
Balance March 31, 2002 $0.3 $424.3 $(787.1) $6.0 $(356.5)
Net income 0.5 0.5
Other comprehensive loss, net:
Foreign currency translation adjustment 1.0 1.0
Unrealized losses (0.5) (0.5)
--------
Comprehensive loss 1.0
- -------------------------------------- ------- ------- -------- ------- --------
Balance June 30, 2002 $0.3 $424.3 $(786.6) $6.5 $(355.5)
======= ======= ======== ======= ========
Balance December 31, 2001 $0.3 $424.3 $(780.6) $6.1 $(349.9)
Net loss (6.0) (6.0)
Other comprehensive loss, net:
Foreign currency translation adjustment 0.9 0.9
Unrealized losses (0.5) (0.5)
--------
Comprehensive loss (5.6)
- -------------------------------------- ------- ------- -------- ------- --------
Balance June 30, 2002 $0.3 $424.3 $(786.6) $6.5 $(355.5)
======= ======= ======== ======= ========
The accompanying notes are an integral part of these financial statements.
Page 7
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Blount International, Inc. and Subsidiaries ("the
Company") contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position at June 30, 2003
and the results of operations and cash flows for the periods ended June 30,
2003 and 2002. These financial statements should be read in conjunction with
the notes to the financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
In October, 2004, the Company received $26.6 million in payments from the
Internal Revenue Service consisting of refund claims of $21.6 million and
accumulated interest of $5.0 million. The Company has restated its historical
financial results in this filing to reflect additional interest income of $3.3
million and an additional tax provision of $1.3 million through June 30, 2003,
as further discussed in Note 13.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation, including the
reclassification of an extraordinary loss in accordance with the Company's
adoption of SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," and the
realignment of business segments. The reclassification of an extraordinary
expense recognized in the first quarter of 2002 for penalties on
extinguishment of debt resulted in increases in other expense of $0.3 million
and benefit for income taxes of $0.1 million. The Company has realigned its
business segments effective January 1, 2003 and now reports results in three
segments: Outdoor Products, Lawnmower, and Industrial and Power Equipment.
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations." The adoption of SFAS No. 143 has not had a material impact on
the 2003 financial statements.
Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement addresses, among several items, the
reporting of debt extinguishments. As a result of the adoption of SFAS No.
145, the Company has reclassified prior years' extraordinary items
attributable to debt extinguishment to other income (expense) in this and all
subsequent reports.
Effective January 1, 2003, the Company's method of accounting for initial
recognition and measurement of guarantees changed as a result of the adoption
of FASB Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The interpretation expands on the accounting guidance
of FASB Statements No. 5, 57 and 107 and incorporates without change the
provisions of FASB Interpretation No. 34, which is being superseded. Under the
provisions of FIN 45, at the time a guarantee is issued, the Company will
recognize an initial liability for the fair value or market value of the
obligation it assumes. The adoption of FIN 45 has not had a material impact on
the 2003 financial statements.
The Company's internet home page is http://www.blount.com.
Page 8
NOTE 2:
STOCK BASED COMPENSATION
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply intrinsic value accounting for its stock option
plans. Compensation cost for stock options, if any, is measured as the excess
of the quoted market price of the stock at the date of grant less the amount
an employee must pay to acquire the stock. The Company has adopted
disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure-an Amendment of FASB
Statement No. 123". If the Company had elected to recognize compensation
expense based upon the fair value at the grant dates for awards under these
plans, the Company's net earnings (loss) and net earnings (loss) per share
would have been as follows:
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
(Dollars in millions, (Restated) (Restated)
except per share amounts) 2003 2002 2003 2002
- ------------------------------------ -------- -------- -------- --------
Net income (loss) as reported $1.3 $0.5 $1.8 $(6.0)
Add: Stock-based employee compensation cost,
net of tax, included in net income (loss) 0.1 0.1
Deduct: total stock-based employee
compensation cost, net of tax, that would
have been included in net income (loss)
under fair value method 0.3 0.4 0.7 1.2
-------- -------- -------- --------
Proforma net income (loss) $1.1 $0.1 $1.2 $(7.2)
======== ======== ======== ========
Basic earnings (loss) per share
As reported $0.04 $0.02 $0.06 $(0.19)
Pro forma 0.04 0.00 0.04 (0.23)
Diluted earnings (loss) per share
As reported 0.04 0.02 0.06 (0.19)
Pro forma 0.03 0.00 0.04 (0.23)
NOTE 3:
RESTRUCTURING EXPENSES
In the first quarter of 2002, the Company incurred a restructuring charge
related to the closure and relocation of the Company's headquarters from
Montgomery, Alabama to Portland, Oregon. An initial charge of $5.6 million was
recorded and was subsequently adjusted to reflect transition expenses and a
revision of estimates. In the fourth quarter of 2002, the Company recorded a
$1.4 million charge related to the closure of a portion of a facility and
relocation of that equipment between its plants within its Oregon Cutting
Systems Group. In the first quarter of 2003, the Company reported an
additional $0.2 million in restructuring expenses associated with this Oregon
Cutting Systems Group relocation project for severance expenses affecting 19
hourly employees and 4 salaried employees. The following table outlines the
classification of the original expenses, and the subsequent charge against the
restructuring liability for these restructuring actions. Previous actions
represent a 2001 plant closure, benefit modification, and reduction in
headcount. These expenses are included in accrued expenses.
Page 9
Restructuring Actions
---------------------------------------------------------------
Previous Corporate Office Asset
Recognition date Actions Relocation Relocation
-------------------- ---------------- ----------------
Balance at January 1, 2002 $3.1
Expense/Adjustments (0.3) $5.2
Charges against liability (0.1) (0.4)
------------------- ---------------- ----------------
Balance at June 30, 2002 $ 2.7 $4.8 $ 0.0
==================== ================ ================
Balance at January 1, 2003 $ 1.1 $ 0.4 $ 1.4
Expense/Adjustments 0.2
Charges against liability (0.3) (0.2) (0.3)
------------------- ---------------- ----------------
Balance at June 30, 2003 $ 0.8 $ 0.2 $ 1.3
==================== ================ ================
NOTE 4:
INVENTORIES
Inventories consist of the following (in millions):
June 30, December 31,
2003 2002
--------------------------------- ------------ ------------
Finished goods $ 32.5 $ 31.8
Work in process 9.0 9.3
Raw materials and supplies 22.8 23.7
--------------------------------- ------ ------
Total Inventories $ 64.3 $ 64.8
--------------------------------- ====== ======
NOTE 5:
SEGMENT INFORMATION
Effective January 1, 2003, the Company realigned its business segments and
began reporting results in three business segments: Outdoor Products,
Lawnmower, and Industrial and Power Equipment. The Lawnmower segment consists
of the Company's Dixon subsidiary that historically was included in the
Outdoor Products segment. Inter-segment sales are now eliminated on a separate
line and historical amounts have been adjusted to reflect this change.
Page 10
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
(Dollars in millions) (Restated) (Restated)
2003 2002 2003 2002
- ------------------------------------ -------- -------- -------- --------
Sales:
Outdoor Products $ 87.9 $ 77.0 $ 173.1 $ 150.1
Lawnmower 10.2 13.5 18.1 21.3
Industrial and Power Equipment 33.2 32.8 63.1 59.3
Elimination (0.1) (0.2) (0.8)
- ------------------------------------ -------- -------- -------- --------
Total Sales $ 131.2 $ 123.3 $ 254.1 $ 229.9
- ------------------------------------ ======== ======== ======== ========
Operating income (loss):
Outdoor Products $ 21.1 $ 17.3 $ 42.9 $ 33.7
Lawnmower 0.4 1.6 (0.3) 1.3
Industrial and Power Equipment 0.9 1.4 0.9 1.7
Corporate expense/Elimination (3.1) (1.2) (5.7) (3.1)
Restructuring expenses 0.1 (0.2) (5.5)
- ------------------------------------ -------- -------- -------- --------
Income from operations 19.3 19.2 37.6 28.1
Interest expense (17.7) (18.1) (35.3) (36.3)
Interest income 3.5 0.2 3.8 0.5
Other income (expense), net (3.0) (0.5) (3.1) (1.2)
- ------------------------------------ -------- -------- -------- --------
Income (loss)before income taxes $ 2.1 $ 0.8 $ 3.0 $ (8.9)
- ------------------------------------ ======== ======== ======== ========
NOTE 6:
COMMITMENTS AND CONTINGENT LIABILITIES
Blount was named a potentially liable person ("PLP") by the Washington State
Department of Ecology ("WDOE") in connection with the Pasco Sanitary Landfill
Site ("Site"). This site has been monitored by WDOE since 1988. From available
records, the Company believes that it sent 26 drums of chromic hydroxide
sludge in a non-toxic, trivalent state to the site. It further believes that
the site contains more than 50,000 drums in total and millions of gallons of
additional wastes, some potentially highly toxic in nature. Accordingly, based
both on volume and on nature of the waste, the Company believes that it is a
de minimis contributor.
The current on-site monitoring program is being conducted with the WDOE by,
and being funded by certain PLPs, excluding the Company and several other
PLPs. It is estimated that this study will cost between $7 million and $10
million. Depending upon the results of this study, further studies or
remediation could be required. The Company may or may not be required to pay a
share of the current study, or to contribute to the cost of subsequent studies
or remediation, if any. The Company is unable to estimate such costs, or the
likelihood of being assessed any portion thereof. However, during the most
recent negotiations with those PLPs that are funding the work at the Site, the
Company's potential share ranged from approximately $20,000 to $250,000, with
estimates of approximately $90,000 being the "reasonably most probable".
The Company had accrued $75,000 at December 31, 2002 and June 30, 2003 for the
potential costs of any clean-up. The Company spent $3,000 and $5,600 in the
years ended December 31, 2001 and 2002 respectively for expenses that are
primarily the cost of outside counsel to provide updates on the Site status.
Page 11
In July 2001, the Company's former Federal Cartridge Company subsidiary
("Federal") received notice from the Region 5 Office of the United States
Environmental Protection Agency ("EPA") that it intended to file an
administrative proceeding for civil penalties in connection with alleged
violations of applicable statutes, rules, and regulations or permit conditions
at Federal's Anoka, Minnesota ammunition manufacturing plant. The alleged
violations include (i) unpermitted treatment of hazardous wastes, (ii)
improper management of hazardous wastes, (iii) permit violations and (iv)
improper training of certain responsible personnel. Blount retained the
liability for this matter under the terms of the sale of its Sporting
Equipment Group ("SEG") segment (including Federal) to Alliant Techsystems,
Inc. ("ATK") as discussed in Note 5 of the 2002 Annual Report on Form 10-K.
To the knowledge of the Company, Federal has corrected the alleged violations.
The Company has tendered this matter for partial indemnification to a prior
owner of Federal.
In March 2002, EPA served an Administrative Complaint and Compliance Order
("Complaint") on Federal. The Complaint proposes civil penalties in the amount
of $258,593. Federal answered the Complaint, denied liability and opposed the
proposed penalties. In August 2002, Federal and the EPA filed cross motions
for Accelerated Decision on both liability and penalties issues with the
assigned Administrative Law Judge. On December 6, 2002 the Administrative Law
Judge issued an Order Granting in Part and Denying in Part the EPA's Motion
for Accelerated Decision and Denying Federal's Motion for Accelerated Decision
("Order"). The Order established that Federal is liable for $6,270 in civil
penalties and stated the remaining issues of liability and proposed penalties
totaling $252,323 would be ruled on after an administrative hearing. On
January 28, 2003, EPA and Federal held an administrative hearing on both
liability and penalties issues not resolved by the Order. The Administrative
Law Judge will make a decision on liability and penalties following submission
by EPA and Federal of Findings of Fact and Conclusions of Law ("Findings").
The EPA and Federal submitted proposed findings to the Administrative Law
Judge on May 7, 2003. It is anticipated that a ruling will be made in the near
future. Nonetheless, at the current time the Company does not believe payment
of the civil penalties sought by the EPA will have a materially adverse effect
on its 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. One such suit resulted in the Company paying its
self-insured retention of $1.0 million during the second quarter. In addition,
the Company is a party to a number of other suits arising out of the normal
course 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 7:
OTHER INFORMATION
During the six months ended June 30, 2003 net tax payments of $3.6 million
were made compared to $4.9 million last year. The Company has settled its
issues with the Internal Revenue Service through the 1997 fiscal year with no
material adverse effect. The periods from fiscal 1998 through 2002 are still
open for review. Interest paid during the six months ended June 30, 2003 and
2002 was $32.9 million and $32.4 million, respectively. Included in this
year's amounts are $5.6 million of taxes and $1.3 million of interest paid in
Canada for settlement of returns through 1999.
The Company's "Other Income (Expense)" includes the gains and losses on
disposed assets and liabilities. Included in the results for the second
quarter and six
Page 12
months ended June 30, 2003 is a $3.1 million loss on deferred financing costs
related to the extinguishment of its term loans and revolving credit
facilities. This is partially offset by a gain of $0.3 million on the
extinguishment of a portion of its 13% Senior Subordinated notes. In the first
quarter of 2002, the Company sold a storage warehouse in Montgomery, Alabama
that resulted in a gain of $0.2 million and also recorded an anticipated loss
on the sale of corporate assets of $0.4 million in conjunction with the
closure of the corporate headquarters. An expense of $0.3 million was also
recorded in the first quarter of 2002 for penalties related to the early
repayment of debt. In the second quarter of 2002 the Company sold a fractional
interest in an aircraft and realized a loss of $0.6 million.
On December 7, 2001, the Company sold its Sporting Equipment Group ("SEG") to
Alliant Techsystems, Inc. ("ATK"). The sale included the establishment of a
$25.0 million escrow account as required by the Stock Purchase Agreement
between the Company and ATK to cover certain potential indemnification matters
in connection with the SEG sale. As of December 31, 2002 this amount was
included in other assets, but was reclassified into other current assets as of
March 31, 2003. These funds were returned to the Company on May 21, 2003.
NOTE 8:
EARNINGS PER SHARE DATA
For the three months and six months ended June 30, 2003 and 2002, net income
(loss) and shares used in the earnings per share ("EPS") computations were the
following amounts:
Three months Six months
ended June 30, ended June 30,
--------------------- ---------------------
(Dollars in millions, (Restated) (Restated)
except per share amounts) 2003 2002 2003 2002
- ------------------------------------ ---------- ---------- ---------- ----------
Net income (loss), as reported $1.3 $0.5 $1.8 $(6.0)
- ------------------------------------ ========== ========== ========== ==========
Shares:
Basic EPS - weighted average 30,808,010 30,795,882 30,801,946 30,795,882
Common shares outstanding
Dilutive effect of stock options 1,528,334 1,049,871 1,373,830
- ------------------------------------ ---------- ---------- ---------- ----------
Diluted EPS 32,336,344 31,845,753 32,175,776 30,795,882
- ------------------------------------ ========== ========== ========== ==========
NOTE 9:
CONSOLIDATING FINANCIAL INFORMATION
Blount, Inc., a wholly-owned subsidiary of the Company, has two registered
debt securities that have different guarantees: 1) 7% Senior notes due June
15, 2005, and 2) 13% Senior Subordinated notes due August 1, 2009. The 7%
Senior notes are fully and unconditionally, jointly and severally, guaranteed
by the Company. Holders have first priority interest in all the shares or
other equity interest of all domestic subsidiaries and other entities, first
priority mortgage on all principal domestic properties, and the pledge of 65%
of outstanding shares of first tier foreign subsidiaries. These interests are
held in parri passu, ratably, with the Company's secured lenders. The 13%
Senior Subordinated notes are unconditionally guaranteed by the Company and
all of the Company's domestic subsidiaries ("guarantor subsidiaries"). All
guarantor subsidiaries of the 13% Senior Subordinated notes are 100% owned,
directly or indirectly, by the Company. While the Company and all of the
Company's domestic subsidiaries guarantee the 13% Senior Subordinated notes,
none of Blount's existing foreign subsidiaries ("non-guarantor subsidiaries")
guarantee the 13%
Page 13
Senior Subordinated notes. The following consolidating financial information
sets forth condensed consolidating financial information, statements of
operation 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
UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION
For the Six Months
Ended June 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 164.4 $ 60.0 $ 97.3 $ (67.6) $ 254.1
Cost of sales 115.9 47.0 71.8 (68.1) 166.6
-------- -------- -------- -------- ---------
Gross profit 48.5 13.0 25.5 0.5 87.5
Selling, general and administrative expenses 29.5 8.2 12.0 49.7
Restructuring expenses 0.2 0.2
Income (loss) from operations 19.0 4.6 13.5 0.5 37.6
Interest expense $ (9.9) (23.7) (0.3) (1.4) (35.3)
Interest income 3.6 0.2 3.8
Other income (expense), net (2.6) (0.5) (3.1)
-------- -------- -------- -------- -------- ---------
Income (loss) before income taxes (9.9) (3.7) 4.3 11.8 0.5 3.0
Provision (benefit) for income taxes (4.0) (5.5) 1.7 9.0 1.2
-------- -------- -------- -------- -------- ---------
Income (loss) before earnings (losses)
Of affiliated companies (5.9) 1.8 2.6 2.8 0.5 1.8
Equity in earnings (losses) of
affiliated companies, net 5.7 5.9 0.2 (11.8)
-------- -------- -------- -------- --------- ---------
Net income (loss) $ (0.2) $ 7.7 $ 2.8 $ 2.8 $ (11.3) $ 1.8
======== ======== ======= ======== ========= =========
Page 14
For the Three Months
Ended June 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 83.6 $ 31.2 $ 49.5 $ (33.1) $ 131.2
Cost of sales 59.9 24.3 36.3 (34.0) 86.5
------- ------- ------- --------- -------
Gross profit 23.7 6.9 13.2 0.9 44.7
Selling, general and administrative expenses 15.4 3.9 6.1 25.4
Restructuring expenses
------- ------- ------- --------- -------
Income (loss) from operations 8.3 3.0 7.1 0.9 19.3
Interest expense $ (5.0) (11.2) (0.1) (1.4) 0.0 (17.7)
Interest income 3.5 3.5
Other income (expense), net (2.7) (0.3) (3.0)
------- ------- ------- ------- --------- -------
Income (loss) before income taxes (5.0) (2.1) 2.9 5.4 0.9 2.1
Provision (benefit) for income taxes (1.7) (5.7) 1.1 7.1 0.8
------- ------- ------- ------- --------- -------
Income (loss) before earnings (losses)
of affiliated companies (3.3) 3.6 1.8 (1.7) 0.9 1.3
Equity in earnings (losses) of
Affiliated companies, net 2.6 1.0 (3.6)
------- ------- ------- ------- --------- -------
Net income (loss) $ (0.7) $ 4.6 $ 1.8 $ (1.7) $ (2.7) $ 1.3
======= ======= ======= ======= ======= =======
Page 15
For the Six Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 144.2 $ 61.5 $ 80.0 $ (55.8) $ 229.9
Cost of sales 97.8 46.6 61.7 (55.2) 150.9
------- ------- ------- -------- --------
Gross profit 46.4 14.9 18.3 (0.6) 79.0
Selling, general and administrative expenses $ 0.3 26.1 8.8 10.2 45.4
Restructuring expenses 5.5 5.5
------- ------- ------- ------- -------- --------
Income (loss) from operations (0.3) 14.8 6.1 8.1 (0.6) 28.1
Interest expense (10.6) (34.6) (0.3) (0.2) 9.4 (36.3)
Interest income 9.7 0.2 (9.4) 0.5
Other income (expense), net (0.8) (0.4) (1.2)
------- ------- ------- ------- -------- --------
Income (loss) before income taxes (10.9) (10.9) 5.8 7.7 (0.6) (8.9)
Provision (benefit) for income taxes (3.5) (4.2) 2.2 2.6 (2.9)
------- ------- ------- ------- -------- --------
Income (loss) before earnings (losses)
Of affiliated companies (7.4) (6.7) 3.6 5.1 (0.6) (6.0)
Equity in earnings (losses) of
affiliated companies, net 1.4 8.1 (9.5)
------- ------- ------- ------- -------- --------
Net income (loss) $ (6.0) $ 1.4 $ 3.6 $ 5.1 $(10.1) $ (6.0)
======= ======= ======= ======= ======== ========
Page 16
For the Three Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 62.7 $ 34.3 $ 38.5 $ (12.2) $ 123.3
Cost of sales 37.6 26.2 29.3 (11.9) 81.2
------- ------- ------- -------- --------
Gross profit 25.1 8.1 9.2 (0.3) 42.1
Selling, general and administrative expenses $ 0.1 13.3 4.5 5.1 23.0
Restructuring expenses (0.1) (0.1)
------- ------- ------- ------- -------- --------
Income (loss) from operations (0.1) 11.9 3.6 4.1 (0.3) 19.2
Interest expense (5.4) (17.2) (0.1) (0.1) 4.7 (18.1)
Interest income 4.8 0.1 (4.7) 0.2
Other income (expense), net (0.3) (0.2) (0.5)
------- ------- ------- ------- -------- --------
Income (loss) before income taxes (5.5) (0.8) 3.5 3.9 (0.3) 0.8
Provision (benefit) for income taxes (1.8) (0.1) 1.3 0.9 0.3
------- ------- ------- ------- -------- --------
Income (loss) before earnings (losses)
of affiliated companies (3.7) (0.7) 2.2 3.0 (0.3) 0.5
Equity in earnings (losses) of
Affiliated companies, net (4.2) 4.9 (9.1)
------- ------- ------- ------- -------- --------
Net income (loss) $ 0.5 $ 4.2 $ 2.2 $ 3.0 $ (9.4) $ 0.5
======= ======= ======= ======= ======== ========
Page 17
June 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 11.7 $ (0.6) $ 13.6 $ 24.7
Accounts receivable, net 28.3 12.8 17.6 58.7
Intercompany receivables 265.9 48.6 10.9 $(325.4)
Inventories 23.5 19.9 20.9 64.3
Deferred income taxes 29.2 29.2
Other current assets 12.8 0.4 1.7 14.9
-------- -------- ------- -------- --------
Total current assets 371.4 81.1 64.7 (325.4) 191.8
Investments in affiliated companies $ (19.0) 211.6 0.3 (192.9)
Property, plant and equipment, net 37.7 25.3 27.9 90.9
Cost in excess of net assets of acquired
businesses, net 30.2 40.1 6.6 76.9
Other assets 45.6 3.9 49.5
--------- -------- -------- ------- -------- --------
Total Assets $ (19.0) $ 696.5 $ 146.5 $ 103.4 $(518.3) $ 409.1
========= ======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 4.2 $ 0.8 $ 5.0
Accounts payable 12.6 $ 4.6 5.5 22.7
Intercompany payables $ 325.4 $(325.4)
Accrued expenses 48.9 6.4 10.1 65.4
--------- -------- -------- ------- -------- --------
Total current liabilities 325.4 65.7 11.0 16.4 (325.4) 93.1
Long-term debt, exclusive of current maturities 20.4 585.8 606.2
Deferred income taxes, exclusive of
current portion (1.2) 2.3 1.1
Other liabilities 3.1 63.1 2.3 6.1 74.6
--------- -------- -------- ------- -------- --------
Total Liabilities 348.9 713.4 13.3 24.8 (325.4) 775.0
--------- -------- -------- ------- -------- --------
Stockholders Equity (Deficit) (367.9) (16.9) 133.2 78.6 (192.9) (365.9)
Total Liabilities and --------- -------- -------- ------- -------- --------
Stockholders' Equity (Deficit) $ (19.0) $ 696.5 $ 146.5 $ 103.4 $(518.3) $ 409.1
========= ======== ======== ======= ======== ========
Page 18
DECEMBER 31, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 16.3 $ (0.1) $ 10.2 $ 26.4
Accounts receivable, net 26.2 15.1 17.2 58.5
Intercompany receivables 274.7 39.3 7.3 $(321.3)
Inventories 27.5 21.4 15.9 64.8
Deferred income taxes 30.4 0.1 30.5
Other current assets 9.2 0.5 1.3 11.0
------- ------- ------- -------- --------
Total current assets 384.3 76.2 52.0 (321.3) 191.2
Investments in affiliated companies $ (25.7) 201.6 0.2 (176.1)
Property, plant and equipment, net 35.6 26.4 28.7 90.7
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Other assets 65.9 3.3 69.2
------- ------- ------- ------- -------- -------
Total Assets $ (25.7) $ 717.6 $ 142.8 $ 90.7 $(497.4) $ 428.0
======= ======= ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 3.4
Accounts payable 14.0 $ 5.5 $ 6.0 25.5
Intercompany payables $ 321.3 $(321.3)
Accrued expenses 55.6 6.9 8.8 71.3
------- ------- ------- ------- -------- -------
Total current liabilities 321.3 73.0 12.4 14.8
(321.3) 100.2
Long-term debt, exclusive of current maturities 18.7 605.4 624.1
Deferred income taxes, exclusive of
current portion (1.9) 1.9
Other liabilities 3.2 66.9 1.6 0.9 72.6
------- ------- ------- ------- -------- -------
Total Liabilities 343.2 743.4 14.0 17.6 (321.3) 796.9
------- ------- ------- ------- -------- -------
Stockholders Equity (Deficit) (368.9) (25.8) 128.8 73.1 (176.1) (368.9)
------- ------- ------- ------- -------- -------
Total Liabilities and
Stockholders' Equity (Deficit) $ (25.7) $ 717.6 $ 142.8 $ 90.7 $(497.4) $ 428.0
======= ======= ======= ======= ======= ========
Page 19
For the Six Months
Ended June 30, 2003
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) operating
activities $ (4.1) $ 30.2 $ 1.0 $ 5.7 $ 32.8
-------- -------- -------- ------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment (0.4) (0.4)
Purchases of property, plant and equipment (4.3) (0.7) (1.8) (6.8)
-------- -------- -------- ------- -------- --------
Net cash (used in) investing activities (4.7) (0.7) (1.8) (7.2)
-------- -------- -------- ------- -------- --------
Cash flows from financing activities:
Net increase in short-term borrowings 0.9 0.7 1.6
Issuance of long-term debt 113.0 113.0
Reduction of long-term debt (132.4) (132.4)
Advances from (to) affiliated companies 4.1 (3.6) (0.5)
Other (9.5) (9.5)
-------- -------- -------- ------- -------- --------
Net cash provided by (used in) financing
activities 4.1 (31.6) (0.5) 0.7 (27.3)
-------- -------- -------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents (6.1) (0.2) 4.6 (1.7)
-------- -------- -------- ------- -------- --------
Cash and cash equivalents at beginning of period 18.6 (0.2) 8.0 26.4
-------- -------- -------- ------- -------- --------
Cash and cash equivalents at end of period $ 0.0 $ 12.5 $ (0.4) $ 12.6 $ 24.7
======== ======= ========= ======= ======== ========
Page 20
For the Six Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) operating
activities $ (2.7) $ (2.7) $ 3.1 $ 11.1 $ 8.8
-------- -------- -------- ------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 2.4 2.4
Purchases of property, plant and equipment (3.4) (1.5) (4.5) (9.4)
Proceeds (expenses) from sale of discontinued (14.3) (14.3)
operations
-------- -------- -------- ------- -------- --------
Net cash (used in) investing activities (15.3) (1.5) (4.5) (21.3)
-------- -------- -------- ------- -------- --------
Cash flows from financing activities:
Reduction of long-term debt (4.2) (4.2)
Advances from (to) affiliated companies 2.7 (2.2) (0.5)
Other (0.3) (0.3)
-------- -------- -------- ------- -------- --------
Net cash provided by (used in) financing
activities 2.7 (6.7) (0.5) (0.0) (4.5)
-------- -------- -------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents (24.7) 1.1 6.6 (17.0)
Cash and cash equivalents at beginning of period 44.0 (1.1) 4.7 47.6
-------- -------- -------- ------- -------- --------
Cash and cash equivalents at end of period $ 0.0 $ 19.3 $(0.0) $ 11.3 $30.6
======== ======== ======== ======= ======== ========
Page 21
NOTE 10:
DEBT AND FINANCING AGREEMENTS
On January 31, 2001, the Company amended the terms of its credit facilities
related to $400 million in term loans. The amendment was entered into, in
part, to avoid a possible default under the covenants for the leverage and
interest coverage ratios of the credit facilities. The amendment eased the
financial covenants through March 31, 2002, increased the interest rate on
outstanding amounts under the credit facilities until more favorable financial
ratios are achieved, and required an amendment fee. The amendment also
required an infusion of $20 million in the form of equity capital or mezzanine
financing. On March 2, 2001, an affiliate of Lehman Brothers, Inc., the
Company's principal shareholder, invested $20 million in the Company in the
form of a convertible preferred equivalent security, together with warrants
for 1,000,000 shares of Blount common stock (or approximately 3% of the
outstanding shares of common stock of the Company) that are exercisable
immediately at a price of $0.01 per share. The security can be converted into
convertible preferred stock at the option of the holder as a result of the
Company's stockholders passing an amendment to the Certificate of
Incorporation authorizing the issuance of a class, or classes, of preferred
stock at the Annual Meeting of Stockholders held on April 19, 2001. The
Company has recorded the fair value of the warrants at $7 million as a credit
to additional paid-in capital and a debt discount to the $20 million security.
On December 7, 2001, the Company amended the terms of its credit agreement to
incorporate the sale of SEG to ATK. The amendment addressed, among other
things, the SEG sale, revisions to the consolidated leverage and interest
coverage ratios, a reduction in the revolving credit facility to $75.0
million, and certain prepayment and amendment fees. The agreement also cured
any event of default under the credit agreement that had been communicated to
the lenders on October 31, 2001.
During 2001, the Company would not have been in compliance with certain of its
debt covenants except for the fact that, in connection with the sale of SEG,
the Company and its lenders amended the covenants; as a result, the Company
was in compliance with all debt covenants as of and for the year ended
December 31, 2002 and the first quarter ended March 31, 2003.
On May 15, 2003 the Company entered into a new senior credit facility
replacing a previous credit facility. The new credit facility consists of a
$67.0 million revolving credit facility, a Term A loan of up to $38.0 million
and a Term B loan of up to $85.0 million. These loans are collateralized by
certain Company assets, some of which are held in trust in parri passu,
ratably with the Company's 7% Senior notes. The new credit facility is subject
to certain reporting and financial covenant compliance requirements.
Specifically the Company must meet minimum EBITDA thresholds and maintain a
certain fixed coverage ratio which is defined as EBITDA divided by the sum of
cash interest paid, capital spending and cash income taxes paid. The Company
was in compliance with these covenants as of June 30, 2003.
The term of the credit facility is for five years with scheduled quarterly
repayments as follows: the Term A loan requires quarterly repayments of
$1,250,000 beginning July 1, 2003 until April 1, 2004 and then increasing to
$2,062,500 per quarter on July 1, 2004 until the last payment on May 14, 2008;
Term B requires quarterly payments of $1,250,000 beginning July 1,2005 until
April 1,2006 and then increasing to $1,875,000 per quarter until January 1,
2008 with the final payment of $66,875,000 due on May 14, 2008. The term loans
can be repaid at anytime but are subject to a prepayment premium during the
initial two years of the credit agreement. There can also be additional
mandatory repayment amounts due related to sale of Company assets under
certain circumstances and upon the Company's annual excess cash flow as
determined by the credit agreement.
The Company utilized $149.5 million of the facility, including $31.8 million
on the revolver, on May 15 to extinguish $133.5 million of the existing senior
credit facility, pay $8.3 million towards fees and expenses for the loan agent
and others,
Page 22
and provide $7.7 million to temporarily cash collateralize outstanding letters
of credit. Prior to the end of the second quarter the company paid off the
revolver balance in full, in part, with $25.0 million returned to the Company
that was previously held in escrow as part of the sale of the Company's
Sporting Equipment segment in 2001. As of June 30, 2003 the outstanding
balances on the new credit facility were $38.0 million of Term A, $80.0
million of Term B and no amounts drawn on the revolving facility.
Long-term debt at June 30, 2003 and December 31, 2002 consisted of the
following:
June 30, December 31,
(Dollars in millions) 2003 2002
- ---------------------------------
13% Senior subordinated notes $ 323.2 $ 325.0
7% Senior notes 149.6 149.4
Term loans 118.0 134.4
Revolver credit agreements
12% preferred equivalent security 20.4 18.7
- --------------------------------- --------- ---------
Total Debt 611.2 627.5
Less current maturities (5.0) (3.4)
- --------------------------------- --------- ---------
Total long-term debt $ 606.2 $ 624.1
- --------------------------------- ========= =========
NOTE 11:
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142,
amortization of goodwill and indefinite-lived intangible assets is prohibited.
Also, SFAS No. 142 established two broad categories of intangible assets:
definite-lived intangible assets which are subject to amortization and
indefinite-lived intangible assets which are not subject to amortization. For
additional information on the impact to the Company of the adoption of SFAS
No. 142, see Note 7 to the 2002 Annual Report on Form 10-K .
As of January 1, 2002 the Company's goodwill balance of $76.9 million was
comprised of $43.8 million related to the Outdoor Products segment, $28.1
million related to the Industrial and Power Equipment segment, and $5.0
million related to the Lawnmower segment. There have been no adjustments to
the goodwill balance since adoption.
NOTE 12:
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities
("VIEs")created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
Page 23
annual periods. Management has evaluated the Company for possible VIEs and
believes that FIN 46 will not have a material impact on the Company's
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable
characteristics to be accounted for similarly. SFAS No. 149 clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. This statement is effective for contracts entered into or modified
after June 30, 2003, except for hedging relationships designated after June
30, 2003, where the guidance should be applied prospectively. The Company is
currently evaluating the effect that the adoption of SFAS No. 149 will have on
its results of operations and financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity, by requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. SFAS No. 150 requires
disclosure regarding the terms of those instruments and settlement
alternatives. This statement is effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of SFAS No. 150
will have on its financial statements.
NOTE 13:
RESTATEMENT
In October, 2004, the Company received $26.6 million in payments from the
Internal Revenue Service consisting of refund claims of $21.6 million and
accumulated interest of $5.0 million. The $21.6 million of refund claims was
included in the Consolidated Balance Sheet in Other Current Assets, while no
interest receivable was recorded. In reviewing these payments, the Company has
determined that a significant portion of the interest for the payments should
have been recorded as income in prior reporting periods. Based on this
determination, the Company has restated its historical financial results to
reflect additional interest income of $3.3 million and an additional tax
provision of $1.3 million through June 30, 2003. The amounts included in this
Form 10-Q reflect the restated and increased income amounts for comparative
periods.
The effect of this restatement on the balance sheet and income statement at
June 30, 2003 and for the three months and six months ended June 30, 2003 are
as follows:
June 30, 2003
------------------------------
Previously
(Dollar amounts in millions) Reported Restated
- ----------------------------------------------- ---------- ----------
Other current assets $ 11.6 $ 14.9
Accumulated deficit (786.6) (784.5)
Page 24
Three months Six months
ended June 30, 2003 ended June 30, 2003
--------------------- ---------------------
Previously Previously
(Dollars in millions) Reported Restated Reported Restated
- ---------------------------------- ------------ --------- ----------- ----------
Interest income $ 0.2 $ 3.5 $ 0.5 $ 3.8
Income (loss) before income taxes (1.2) 2.1 (0.3) 3.0
Provision for income taxes (0.5) 0.8 (0.1) 1.2
Net income (loss) (0.7) 1.3 (0.2) 1.8
Basic earnings (loss) per share $(0.02) $0.04 $(0.01) $0.06
Diluted earnings (loss) per share (0.02) 0.04 (0.01) 0.06
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Results for the three months and six months ended June 30, 2003 showed
improvement from last year in sales and income from operations, but were
partially offset by costs during the second quarter related to the refinancing
of a portion of the Company's debt.
Sales for the second quarter of 2003 were $131.2 million, compared to $123.3
million for the same period last year. The increase of $7.9 million or 6% is
the result of a 14% year-over-year increase for Outdoor Products and a 1%
increase for Industrial and Power Equipment, partially offset by a 24%
decrease in Lawnmowers. Currency rates continue to be favorable for foreign
markets with the effect on unit prices estimated to yield $2.8 million in
additional sales revenue.
Sales for the six months ended June 30, 2003 were $254.1 million compared to
$229.9 million for the same period last year. The increase of $24.2 million or
11% is driven by a 15% increase for Outdoor Products and a 6% increase in the
Industrial and Power Equipment segment partially offset by a 15% decline in
Lawnmower sales. Compared to last year, sales in the first six months have
generally improved for many of the Company's products and, in foreign markets,
currency rates continue to be favorable with the effect on unit prices
yielding an estimated $4.6 million in additional sales revenue.
Income from operations for the second quarter of 2003 was $19.3 million
compared to $19.2 million for the same period last year. This increase
reflected a $2.6 million increase in gross profit, driven by higher sales
volume, largely offset by higher SG&A expense. Total SG&A expense in the
second quarter of 2003 of $25.4 million compared to $23.0 million reported in
2002. This increase of $2.4 million, or 10%, included $0.8 million due to the
weaker US Dollar, $0.8 million increase in pension and post retirement
expense, and $0.4 million increase for insurance.
Income from operations for the six months ended June 30, 2003 of $37.6 million
compares to $28.1 million for the same period last year. The increase of $9.5
million or 34% is primarily due to a $8.5 million increase in gross profit and
a $5.3 million reduction in restructuring expense partially offset by a $4.3
million increase in SG&A expense. The increase in gross profit is due to the
higher sales volume, supported by the effect of currency rates. Total SG&A
expense for the six months ended June 30, 2003 was $49.7 million compared to
$45.4 million for the same period last year. This increase includes the effect
of currency rates estimated at $1.7 million, $1.5 million increase for pension
and post retirement expense, and $0.7 million increase for insurance.
Restructuring expense of $0.2 million was incurred in the six months ended
June 30, 2003 for severance associated with the relocation of a production
process within the Outdoor Products segment. Restructuring expense of $5.5
million was incurred in the same period last year for
Page 25
the relocation of corporate headquarters from Montgomery, Alabama to Portland,
Oregon.
Net income for the second quarter of 2003 was $1.3 million or $0.04 per share
compared to net income of $0.5 million or $0.02 per share for the same period
in 2002. The change in net income is due to higher operating income of $0.1
million, lower interest expense of $0.4 million, higher interest income of
$3.3 million and increased income tax expense of $0.5 million, partially offset
by higher other expense of $2.5 million. The increase in interest income
includes $3.3 million for the second quarter of 2003 related to an income tax
receivable. The increase in other expense reflects $2.8 million of expense
related to the early extinguishment of debt in conjunction with the Company's
refinancing in May of this year. Last year's results included $0.6 million in
expense related to the sale of a fractional interest in an aircraft. A tax
provision of $0.8 million in the second quarter of 2003 is $0.5 million higher
than the $0.3 million provision reported in the same period last year. The
higher taxes were primarily due to higher income.
Net income for the six months ended June 30, 2003 of $1.8 million or $0.06 per
share compares to a net loss of $6.0 million or $0.19 per share for the same
period in 2002. The improvement in net income (from net loss) reflects the
$9.5 improvement in operating income, a $1.0 million decrease in interest
expense and a $3.3 million increase in interest income, partially offset by a
$4.1 million increase in income taxes and a $1.9 million increase in other
expense. Interest expense was 3% lower than the previous year due to lower
interest rates and a lower level of debt(see text above). Other expense of
$3.1 million in 2003 compares to $1.2 million in 2002 with the increase
primarily the result of this year's debt extinguishment expense and offset
somewhat by a $0.8 million loss on the sale of Company assets during 2002. A
tax provision of $1.2 million in 2003 compares to a benefit of $2.9 million in
2002. The change in tax benefit is due to an increase in pretax income.
SEGMENT RESULTS
Effective January 1, 2003, the Company realigned its business and now reports
results in three business segments: Outdoor Products, Lawnmower, and
Industrial and Power Equipment. The Lawnmower segment consists of the
Company's Dixon subsidiary that historically was included in the Outdoor
Products segment. Inter-segment sales are now eliminated on a separate line
and historical amounts have been adjusted to reflect this change.
Sales for the Outdoor Products segment in the second quarter of 2003 were
$87.9 million compared to $77.0 million in 2002, a 14% increase. The increase
in sales was driven by stronger demand in all major geographical markets and
in both original equipment manufacturer ("OEM") and replacement channels.
Growth in demand was especially strong for the European market. A weaker US
Dollar contributed to this increase and the effect on translation estimated at
$2.8 million.
Sales for the six months ended June 30, 2003 were $173.1 million compared to
$150.1 million in the same period of 2002. The increase of $23.0 million or
15% continues to show a recovery from last year's performance that was a 6%
decline compared to 2001 results. As with the quarter results, the six month
comparison shows an increase driven by stronger demand in all major
geographical markets and in both OEM and replacement channels. Growth in
demand occurred in all product lines led by chain saw components and is
particularly strong in the European market. A weaker US Dollar contributed to
this increase and the effect on translation is estimated at $4.6 million.
Operating profit increased to $21.1 million from $17.3 million in the second
quarter of 2002. The increase is the result of an increase in gross profit,
offset, in part, by higher SG&A costs. Gross profit increased to $35.8 million
from $31.2 million due to higher sales volume and the net favorable effect of
currency rates of $2.2 million. SG&A increased to $14.7 million from $13.9
million in 2002 due to a $0.8 million due to the weaker US Dollar as well as
rising insurance and benefit expense, but was partially offset by a reduction
resulting from the reassignment of certain positions to the corporate office.
For the six months ended June 30, 2003 operating profit increased to $42.9
million compared to $33.7 million for the same period in 2002. As with the
quarter's results the six month year-over-year comparison reflects an increase
in gross profit, offset, in part, by higher SG&A costs. Gross profit increased
to $71.5 million from $60.7 million due to higher sales volume and the net
favorable effect of currency rates of $3.9 million. SG&A increased to $28.6
million from $27.0 million in 2002 due to a $1.7 million due to the weaker US
Dollar as well as rising insurance and benefit expense, but partially offset
by a reduction resulting from the reassignment of certain positions to the
corporate office.
Sales for the Lawnmower segment in the second quarter of 2003 were $10.2
million compared to $13.5 million for the same period of 2002, a 24% decrease.
Sales for six months ended June 30, 2003 were $18.1 million compared to $21.3
million for the same period last year, a 15% decrease. For the second quarter
and six month period, the decline in sales is due primarily to a decline in
unit volume reflecting the increased competition that resulted in a decline of
market share of the zero-turning-radius lawnmower products. This decline in
volume is partially offset by a new entry-level model called the "Zeeter",
introduced in the middle of 2002, and which provided one-fifth of unit sales
for both the second quarter and six month period ended June 30, 2003.
The segment's operating income for the second quarter was $0.4 million
compared to $1.6 million for the same period in 2002. For the six months ended
June 30, 2003 the segment had an operating loss of $0.3 million compared to an
operating profit of $1.3 million for the same period last year. Lower
profitability is due primarily to a decline in sales volume, but also higher
employee benefit costs and a shift in product mix to smaller and lower margin
units.
Sales of the Company's Industrial and Power Equipment segment in the second
quarter of 2003 were $33.2 million compared to $32.8 million in 2002. This
$0.4 million, or 1% increase was driven by stronger sales of timber harvesting
and loading equipment, including a new product line, a skidder, introduced in
mid-2002. The year over year growth rate for these products declined from the
first quarter, however, and results continue to be offset partially by lower
demand for the segment's power transmission components business as
construction and utility equipment markets remain weak. Sales for the six
months ended June 30, 2003 were $63.1 million compared to $59.3 million for
the same period last year, a $3.8 million or 6% increase.
The segment's operating income in the second quarter of 2003 was $0.9 million
compared to $1.4 million in 2002. Results for the six months ended June 30,
2003 were $0.9 million compared to $1.7 million for the same period last year.
For both the second quarter and the six months ended June 30, 2003, the
decrease from comparable periods last year reflects the decline in power
transmission components business and lower margins in the timber harvesting
and loading equipment business due to higher discounting on product sales.
On March 11, 2003 the Company announced marketing and supply agreements with
Caterpillar, Inc. These agreements will expand the line of purpose-built
forestry equipment currently available to dealers and customers of the
Company's Forestry & Industrial Equipment Division ("FIED"). The long-term
agreements with Caterpillar leverage both companies' capabilities in specific
areas of the forestry business and expand the Prentice brand of track
feller-bunchers and Hydro-Ax brand of wheel feller-bunchers already
distributed by FIED dealers.
Corporate office expense was $3.1 million for the second quarter compared to
$1.2 million in 2002. For the six months ended June 30, 2003, corporate office
expense
Page 27
was $5.7 million compared to $3.1 million in 2002. The increase reflects the
reassignment of certain positions from the Outdoor Products segment from 2002.
The estimated impact of this reassignment is $0.7 million in the second
quarter and $1.4 million for the six months. Other year-over year-increases
include higher pension and post retirement benefits of $0.3 million for the
quarter and $0.5 million for six months; accrued performance bonus of $0.3
million for the quarter and $0.4 million year for six months; and higher
insurance costs of $0.2 million for the quarter and $0.4 million for six
months.
The Company's total backlog increased to $86.5 million at June 30, 2003 from
$56.3 million at December 31, 2002 and from $48.4 million at June 30, 2002 as
follows (in millions):
Backlog
----------------------------------------
June 30, December 31, June 30,
2003 2002 2002
- ------------------------------------ ------------ ------------ ------------
Outdoor Products $ 57.9 $ 42.9 $ 33.0
Lawnmower 0.1 3.1 0.1
Industrial and Power Equipment 28.5 10.3 15.3
- ------------------------------------ ------ ------ ------
Total segment backlog $ 86.5 $ 56.3 $ 48.4
- ------------------------------------ ====== ====== ======
Backlog for the Outdoor Products segment has increased over the past year due
to improved customer inventory positions and current product demand. It should
be noted however that during significant increases in demand for chain saw
product, the backlog may be somewhat overstated as some customers place
duplicate orders to ensure order fulfillment. The Lawnmower segment's backlog
is typically low at this time of year. The Industrial and Power Equipment
segment backlog has increased largely due to a new program encouraging dealers
to order with greater lead time. This program is being implemented during the
second and third quarters of 2003 and accounts for about half of the segment's
increase.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company continues to be substantially leveraged which may adversely affect
its operations. This could have important consequences, including the
following:
1. a substantial portion of cash flows available from operations are required
to be dedicated to the payment of interest expense and principal, which will
reduce the funds that would otherwise be available for operations and future
business opportunities;
2. 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;
3. substantial leverage may make the Company more vulnerable to economic
downturns and competitive pressure; and
4. the ability to obtain additional financing to fund the Company's
operational needs may be impaired or may not be available on favorable terms.
Total debt at June 30, 2003 was $611.2 million compared to $627.5 million at
December 31, 2002. On May 15, 2003 the Company entered into a new senior
credit facility. The new credit facility consists of a $67.0 million revolving
credit facility, a Term A loan of up to $38.0 million and a Term B loan of up
to $85.0 million. These loans are collateralized by certain Company assets and
interest and principal payments continue to represent significant obligations.
Interest on certain loan and credit facilities are payable in arrears
according to varying
Page 28
interest rates and periods. The Company's remaining liquidity needs relate to
working capital and capital expenditures.
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. Furthermore, the Company expects these resources
will be sufficient to cover any additional increases in working capital and
capital expenditures. The new revolving credit facility, with availability of
up to $67.0 million, replaced a previously available facility of up to $75.0
million, and none was drawn as of June 30, 2003. Letters of credit issued
under the new revolving credit facility, which reduce the amount available,
were $7.9 million as of June 30, 2003 compared to $11.4 million under the
previous facility at December 31, 2002. The new revolving credit facility will
mature in May of 2008.
Cash balances at June 30, 2003 were $24.7 million compared to $26.4 million at
December 31, 2002. The decline in cash balance in the first six months of 2003
is $1.7 million compared to a decline of $17.0 million for the same period in
2002. In addition the Company had $0.5 million of temporary collateralization
of letters of credit that will be returned in the third quarter.
Cash generated from operating activities was $32.8 million in the first six
months of 2003 compared to $8.8 million for the same period in 2002. The $24.0
million increase in cash provided includes an increase in pretax income of
$6.1 million, after adjusting to exclude the non-cash decrease in
restructuring expense of $5.1 million, a non-cash increase in interest income
of $3.3 million, an increase in non-cash debt extinguishment costs of $2.5
million, a $10.9 million increase in net deferred tax assets, and the receipt
of $25.0 million in escrowed funds associated with the sale of the Company's
"Sporting Equipment Group" ("SEG") in 2001. These increases are partially
offset by a higher use of funds for accounts payable of $6.2 million, accrued
expense of $3.9 million, and other liabilities of $7.2 million.
Accounts receivable at June 30, 2003 and December 31, 2002 and sales by
segment for the second quarter of 2003 compared to the fourth quarter of 2002
were as follows:
June 30, December 31, Increase
(Dollars in millions) 2003 2002 (Decrease)
- ------------------------------------ ------------ ------------ ------------
Accounts Receivable:
Outdoor Products $ 41.2 $ 37.9 $ 3.3
Lawnmower 2.5 3.4 (0.9)
Industrial and Power Equipment 15.2 16.1 (0.9)
- ------------------------------------ ------ ------ ------
Total segment receivables $ 58.9 $ 57.4 $ 1.5
- ------------------------------------ ====== ====== ======
Three Months Ended
June 30, December 31, Increase
2003 2002 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Sales:
Outdoor Products $ 87.9 $ 83.1 $ 4.8
Lawnmower 10.2 9.2 1.0
Industrial and Power Equipment 33.2 35.8 (2.6)
Elimination (0.1) (0.1)
- ------------------------------------ ------ ------ ------
Total segment sales $ 131.2 $ 128.1 $ 3.1
- ------------------------------------ ====== ====== ======
Page 29
The $1.5 million increase in segment accounts receivable from December 31,
2002 is in line with the increase in sales. In addition the Company received
$0.4 million on a receivable related to discontinued operations, and reduced
the allowance for doubtful accounts $0.8 million from $3.5 million reported at
December 31, 2002.
Net cash used for investing activities for the first six months of 2003 was
$7.2 million compared to $21.3 million for the same period of 2002. Purchases
for property, plant and equipment during this period of 2003 were $6.8 million
compared to $9.4 million for the same period last year which was higher due to
the purchase of certain equipment from a company that was exiting one of its
businesses. Payments associated with the sales of assets during the first six
months of 2003 are $0.4 million and are related to the 2002 sale of an office
building in Montgomery, Alabama. This is $2.8 million lower than receipts of
$2.4 million in the same period of 2002 that were due primarily to the sale of
a storage warehouse and a fractional interest in an aircraft. In the first six
months of 2003 there were less than $0.1 million in expenses associated with
the sale of discontinued operations compared to $14.3 million in the first six
months of 2002.
Cash used in financing activities for the first six months of 2003 was $27.3
million compared to $4.5 million for the same period last year. In the second
quarter the Company, utilizing $149.5 million of its new credit facility,
extinguished its Tranche B term loan with an outstanding balance of $133.5
million. The borrowings on the new facility consisted of $118.0 million from
new term loans, and $31.8 million from the new revolver facility. Included in
other financing activities are $9.7 million for fees and expenses paid as part
of the transaction. The revolver was subsequently fully paid down, in part,
with $25.0 million returned to the Company that was previously held in escrow
as part of the sale of the Company's Sporting Equipment segment in 2001. Cash
used in 2002 for financing activities included scheduled debt payment of $1.7
million and additional payment resulting from the application of proceeds
generated from sale of assets to the reduction of long term debt.
Due to a decline in asset values of the Company's sponsored defined benefit
plan during the past two years, the Company's annual cash contributions to the
pension fund will increase in 2003 and 2004. The decline in asset value is due
to overall weakness in the stock and bond markets. The estimated amount of
incremental cash contributions over 2002 is estimated to be $3.7 million and
$8.7 million respectively for 2003 and 2004. Furthermore, the Company adjusted
its balance sheet at the end of 2002 to record a minimum pension liability in
accordance with SFAS 87 "Employers' Accounting for Pensions". The adjustment
resulted in a non-cash reduction of shareholder's equity by $14.2 million. The
Company believes that cash flow from operations and amounts available under
its revolving credit agreement will be sufficient to cover the higher pension
contribution levels.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Boards
Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities
("VIEs")created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual periods. Management has evaluated the Company for possible VIEs and
Page 30
believes that FIN 46 will not have a material impact on the Company's
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. This statement is effective for contracts entered into or modified
after June 30, 2003, except for hedging relationships designated after June
30, 2003, where the guidance should be applied prospectively. The Company is
currently evaluating the effect that the adoption of SFAS No. 149 will have on
its results of operations and financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity, by requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. SFAS No. 150 requires
disclosure regarding the terms of those instruments and settlement
alternatives. This statement is effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of SFAS No. 150
will have on its financial statements.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this release, including without limitation the
Company's "expectations," "beliefs," "indications," "estimates," and their
variants, as defined by the Private Securities Litigation Reform Law of 1995,
involve certain risks and actual results subsequent to the date of this
announcement may differ materially.
ITEM 4 - CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of
the effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective.
On November 2, 2004 the Company announced that it determined it was necessary
to restate certain Financial Statements in 2003 and 2004 relating to interest
received in October of 2004 for income tax refunds (see Note 13 to the
Consolidated Financial Statements). Management of the Company has evaluated
this matter relative to its current and past internal controls and disclosure
controls and procedures. Management of the Company was aware of the potential
for interest on its income tax refunds; however in 2003 it was the Company's
judgment not to accrue interest on the tax refunds that had been applied for.
After receiving the refunds and the related interest thereon, and especially
considering the amount of the
Page 31
interest that the Company ultimately collected, it was determined that it was
prudent to reassess the accounting judgment that was made in 2003. After
completion of this reassessment the Company and the Audit Committee concluded
that the interest should have been accrued beginning in 2003. While it has
been concluded that this is an accounting error that needs to be corrected
retroactively, it is not believed that this represents a breakdown in the
internal control structure since management of the Company was aware of this
interest potential dating back to 2003.
Subsequent to the date of their evaluation, there were no significant changes
in the Company's internal controls or in the factors that could significantly
affect these controls.
PART II Other Information
Item 6(a) Exhibits
* 4(a) Credit Agreement, dated as of May 15, 2003 among Blount, Inc., the
other parties named therein as credit parties, the several banks and
financial institutions or entities named therein as lenders, General
Electric Capital Canada, Inc., as Canadian agent, and General
Electric Capital Corporation, as agent and collateral agent, which
was filed as Exhibit 99.2 to the report on Form 8-K filed by Blount
International, Inc., on May 19, 2003.
** 4(b) Collateral Agency Agreement, dated as of May 15, 2003, among Blount
International, Inc., Blount, Inc., each of the Subsidiaries of
Blount, Inc. signatory thereto, and General Electric Capital
Corporation, as collateral agent.
** 4(c) Shared Pledge Agreement, dated as of May 15, 2003, among Blount
International, Inc., Blount, Inc., each of the Subsidiaries of
Blount, Inc. signatory thereto, and General Electric Capital
Corporation, as collateral agent.
** 4(d) US Guaranty Agreement, dated as of May 15, 2003, among
the guarantors signatory thereto and General Electric
Capital Corporation.
** 4(e) US Security Agreement, dated as of May 15, 2003, among
the grantors signatory thereto and General Electric Capital
Corporation.
** 4(f) Copyright Security Agreement, dated as of May 15, 2003, among Blount
International, Inc., Blount, Inc., each of the Subsidiaries of
Blount, Inc. signatory thereto, and General Electric Capital
Corporation.
** 4(g) Trademark Security Agreement, dated as of May 15, 2003, among Blount
International, Inc., Blount, Inc., each of the Subsidiaries of
Blount, Inc. signatory thereto, and General Electric Capital
Corporation.
** 4(h) Patent Security Agreement, dated as of May 15, 2003, among Blount
International, Inc., Blount, Inc., each of the Subsidiaries of
Blount, Inc. signatory thereto, and General Electric Capital
Corporation.
** 4(i) Canadian Security Agreement, dated as of May 15, 2003, between Blount
Canada Ltd. and General Electric Capital Canada Inc., as Canadian
agent.
** 4(j) Canadian Security Agreement, dated as of May 15, 2003, between
Blount Holdings Ltd. and General Electric Capital Canada Inc., as
Canadian agent.
Page 32
** 4(k) Canadian Security Agreement, dated as of May 15, 2003, between Oregon
Distribution Ltd. and General Electric Capital Canada Inc., as
Canadian agent.
** 4(l) Canadian Guaranty, dated as of May 15, 2003, between Blount Holdings
Ltd., as guarantor, and General Electric Capital Canada Inc., as
Canadian agent.
** 4(m) Canadian Guaranty, dated as of May 15, 2003, between Oregon
Distribution Ltd., as guarantor, and General Electric Capital Canada
Inc., as Canadian agent.
** 99(.1) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by James S. Osterman, Chief
Executive Officer for the quarter ended June 30, 2003.
** 99(.2) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Chief
Financial Officer for the quarter ended June 30, 2003.
** 99(.3) Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 by James S. Osterman, Chief
Executive Officer for the quarter ended June 30, 2003.
** 99(.4) Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Chief
Financial Officer for the quarter ended June 30, 2003.
Item 6(b) Reports on Form 8-K
On May 19, 2003 the Company filed a Form 8-K regarding the
closing of a $190 million senior credit facility.
On August 11, 2003 the Company released on Form 8-K its
financial results and public release for the second quarter
2003.
* Incorporated by reference.
** Filed electronically herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOUNT INTERNATIONAL, INC.
- ----------------------------------
Registrant
Date: November 19, 2004 /s/ Calvin E. Jenness
---------------------------------------
Calvin E. Jenness
Senior Vice President, Chief Financial
Officer and Treasurer
Page 33