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 September 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 September 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 September 30, 2003, as originally
filed with the Commission on November 13, 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 quarter and nine month periods ended
September 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 nine months ended September 30, 2003 and 2002 4
Unaudited Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 5
Unaudited Consolidated Statements of Cash Flows -
nine months ended September 30, 2003 and 2002 6
Unaudited Consolidated Statements of Changes in
Stockholders' Deficit - three and nine months ended
September 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 32
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K 33
Signature 33
Page 3
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Blount International, Inc. and Subsidiaries
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
(Dollar amounts in millions, (Restated) (Restated)
except per share data) 2003 2002 2003 2002
- ---------------------------------- ---------- -------- -------- --------
Sales $ 145.8 $ 121.5 $ 399.9 $ 351.4
Cost of sales 95.6 80.7 262.2 231.6
- ---------------------------------- ---------- -------- -------- --------
Gross profit 50.2 40.8 137.7 119.8
Selling, general and
administrative expenses 26.0 23.1 75.7 68.5
Restructuring expenses 0.3 0.2 5.8
- ---------------------------------- ---------- -------- -------- --------
Income from operations 24.2 17.4 61.8 45.5
Interest expense (17.4) (18.0) (52.7) (54.3)
Interest income 0.2 0.2 4.0 0.7
Other expense (0.2) (1.4) (3.3) (2.6)
- ---------------------------------- ---------- -------- -------- --------
Income (loss) before income taxes 6.8 (1.8) 9.8 (10.7)
Provision (benefit) for income
taxes 43.0 44.2 (2.9)
- ---------------------------------- ---------- -------- -------- --------
Net loss from continuing
operations (36.2) (1.8) (34.4) (7.8)
- ---------------------------------- ---------- -------- -------- --------
Discontinued operations: loss on
disposal, net of taxes of $0.4 (1.7) (1.7)
- ---------------------------------- ---------- -------- -------- --------
Net loss $ (36.2) $ (3.5) $ (34.4) $ (9.5)
- ---------------------------------- ========== ======== ======== ========
Basic loss per share:
Continuing operations $ (1.17) $ (0.06) $ (1.12) $ (0.25)
Discontinued operations (0.05) (0.06)
- ---------------------------------- ----------- -------- -------- --------
Net loss $ (1.17) $ (0.11) $ (1.12) $ (0.31)
- ---------------------------------- =========== ======== ========= ========
Diluted loss per share:
Continuing operations $ (1.17) $ (0.06) $ (1.12) $ (0.25)
Discontinued operations (0.05) (0.06)
- ---------------------------------- ----------- -------- --------- --------
Net loss $ (1.17) $ (0.11) $ (1.12) $ (0.31)
- ---------------------------------- =========== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Page 4
UNAUDITED CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
September 30, December 31,
------------- ------------
(Restated)
(Dollar amounts in millions, except share and per share data) 2003 2002
- -------------------------------------------------------------- --------- --------
Assets
- -------------------------------------------------------------- --------- --------
Current assets:
Cash and cash equivalents $ 20.7 $ 26.4
Accounts receivable, net of allowance for
doubtful accounts of $3.3 and $4.3 66.1 58.5
Inventories 67.6 64.8
Deferred income taxes 30.5
Other current assets 29.7 11.0
- -------------------------------------------------------------- --------- --------
Total current assets 184.1 191.2
Property, plant and equipment, net of accumulated
depreciation of $187.5 and $180.5 92.6 90.7
Goodwill 76.9 76.9
Other assets 37.6 69.2
- -------------------------------------------------------------- --------- ---------
Total Assets $ 391.2 $ 428.0
- -------------------------------------------------------------- ========= =========
Liabilities and Stockholders' Equity (Deficit)
- -------------------------------------------------------------- --------- ---------
Current liabilities:
Notes payable and current maturities of long-term debt $ 5.8 $ 3.4
Accounts payable 31.9 25.5
Accrued expenses 63.3 71.3
- -------------------------------------------------------------- --------- ---------
Total current liabilities 101.0 100.2
Long-term debt, exclusive of current maturities 605.0 624.1
Deferred income taxes, exclusive of current portion 1.0
Other liabilities 85.8 72.6
- -------------------------------------------------------------- --------- ---------
Total Liabilities 792.8 796.9
- -------------------------------------------------------------- --------- ---------
Stockholders' equity (deficit):
Common stock: par value $0.01 per share, 100,000,000 shares
authorized, 30,814,073 and 30,795,882 outstanding 0.3 0.3
Capital in excess of par value of stock 424.5 424.3
Accumulated deficit (820.7) (786.3)
Accumulated other comprehensive income (5.7) (7.2)
- -------------------------------------------------------------- --------- ---------
Total Stockholders' Deficit (401.6) (368.9)
- -------------------------------------------------------------- --------- ---------
Total Liabilities and Stockholders' Equity (Deficit) $ 391.2 $ 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
Nine Months September 30,
-------------------------
(Restated)
(Dollar amounts in millions) 2003 2002
- ------------------------------------------------------------ --------- --------
Cash flows from operating activities:
Net loss $ (34.4) $ (9.5)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations 1.7
Early extinguishment of debt 2.8 0.4
Depreciation, amortization and other non-cash charges 16.1 16.3
Deferred income taxes 41.3 (10.9)
Loss on disposals of property, plant & equipment 0.3 1.6
Changes in assets and liabilities, net of effects of
businesses acquired and sold:
Increase in accounts receivable (7.6) (1.1)
Decrease (increase) in inventories (2.8) 0.1
Decrease in other assets 6.3 4.5
Increase in accounts payable 6.4 2.7
Decrease in accrued expenses (7.2) (11.9)
Increase in other liabilities 14.4 7.9
- ------------------------------------------------------------ --------- --------
Net cash provided by operating activities 35.6 1.8
- ------------------------------------------------------------ --------- --------
Cash flows from investing activities:
(Payments for) proceeds from sales of property, plant
& equipment (0.6) 8.3
Purchases of property, plant & equipment (12.0) (11.8)
Expenses from sale of discontinued operations (14.5)
- ------------------------------------------------------------ --------- --------
Net cash used in investing activities (12.6) (18.0)
- ------------------------------------------------------------ --------- --------
Cash flows from financing activities:
Issuance of debt 118.0
Reduction of debt (137.1) (10.9)
Other financing activities (9.6) (0.4)
- ------------------------------------------------------------ --------- --------
Net cash used in financing activities (28.7) (11.3)
- ------------------------------------------------------------ --------- --------
Net decrease in cash and cash equivalents (5.7) (27.5)
Cash and cash equivalents at beginning of period 26.4 47.6
- ------------------------------------------------------------ --------- --------
Cash and cash equivalents at end of period $ 20.7 $ 20.1
- ------------------------------------------------------------ ========= ========
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 NINE MONTHS
ENDED SEPTEMBER 30, 2003
Balance June 30, 2003 (Restated) $0.3 $424.5 $(784.5) $(6.2) $(365.9)
Net loss (36.2) (36.2)
Other comprehensive loss, net:
Foreign currency translation adjustment 0.5 0.5
-------
Comprehensive loss (35.7)
- -------------------------------------- ------- --------- --------- ------- -------
Balance September 30, 2003 (Restated) $0.3 $424.5 $(820.7) $(5.7) $(401.6)
======= ========= ========= ======= =======
Balance December 31, 2002 $0.3 $424.3 $(786.3) $(7.2) $(368.9)
Net loss (34.4) (34.4)
Exercised stock options 0.2 0.2
Other comprehensive loss, net:
Foreign currency translation adjustment 1.3 1.3
Unrealized gains 0.2 0.2
-------
Comprehensive loss (32.7)
- -------------------------------------- ------- --------- --------- ------- -------
Balance September 30, 2003 (Restated) $0.3 $424.5 $(820.7) $(5.7) $(401.6)
======= ========= ========= ======= =======
THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 2002:
Balance June 30, 2002 $0.3 $424.3 $(786.6) $6.5 $(355.5)
Net loss (3.5) (3.5)
Other comprehensive loss, net:
Unrealized losses (0.1) (0.1)
-------
Comprehensive loss (3.6)
- -------------------------------------- ------- --------- --------- ------- -------
Balance September 30, 2002 $0.3 $424.3 $(790.1) $6.4 $(359.1)
======= ========= ========= ======= =======
Balance December 31, 2001 $0.3 $424.3 $(780.6) $6.1 $(349.9)
Net loss (9.5) (9.5)
Other comprehensive loss, net:
Foreign currency translation adjustment 0.9 0.9
Unrealized losses (0.6) (0.6)
--------
Comprehensive loss (9.2)
- -------------------------------------- ------- --------- --------- ------- -------
Balance September 30, 2002 $0.3 $424.3 $(790.1) $6.4 $(359.1)
======= ========= ========= ======= =======
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 September 30,
2003 and the results of operations and cash flows for the periods ended
September 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 $3.4 million through September 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 and third quarters of 2002 for penalties on
extinguishment of debt resulted in increases in other expense of $0.4 million
and benefit for income taxes of $0.1 million for the nine months ended
September 30, 2002. 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 other 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 the
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 Nine months
ended September 30, ended September 30,
------------------ ------------------
(Dollars in millions, (Restated) (Restated)
except per share amounts) 2003 2002 2003 2002
- ------------------------------------ -------- -------- -------- --------
Net loss, as reported $(36.2) $ (3.5) $(34.4) $ (9.5)
Add: stock-based employee compensation cost,
net of tax, included in net loss 0.1
Deduct: total stock-based employee
compensation cost, net of tax, that would
have been included in net loss
under fair value method (0.2) (0.9) (1.2)
-------- -------- -------- --------
Proforma net loss $(36.4) $(3.5) $(35.2) $(10.7)
======== ======== ======== ========
Basic loss per share
As reported $(1.17) $(0.11) $(1.12) $(0.31)
Pro forma (1.18) (0.11) (1.14) (0.35)
Diluted loss per share
As reported (1.17) (0.11) (1.12) (0.31)
Pro forma (1.18) (0.11) (1.14) (0.35)
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
Actions Relocation Relocation
-------------------- ---------------- ----------------
Balance at January 1, 2002 $ 3.1
Expense/Adjustments (0.3) $ 5.2
Charges against liability (0.4) (4.5)
------------------- ---------------- ----------------
Balance at September 30, 2002 $ 2.4 $ 0.7 $ 0.0
=================== ================ ================
Balance at January 1, 2003 $ 1.1 $ 0.4 $ 1.4
Expense/Adjustments (0.1) 0.1 0.2
Charges against liability (0.4) (0.4) (0.5)
------------------- ---------------- ----------------
Balance at September 30, 2003 $ 0.6 $ 0.1 $ 1.1
=================== ================ ================
NOTE 4:
INVENTORIES
Inventories consist of the following (in millions):
September 30, December 31,
2003 2002
--------------------------------- ------------ ------------
Finished goods $ 33.5 $ 31.8
Work in process 9.6 9.3
Raw materials and supplies 24.5 23.7
--------------------------------- ------ ------
Total Inventories $ 67.6 $ 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 which 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 Nine months
ended September 30, ended September 30,
---------------------- --------------------
(Restated) (Restated)
(Dollars in millions) 2003 2002 2003 2002
- ------------------------------------ ---------- ---------- -------- --------
Sales:
Outdoor Products $ 92.5 $ 74.2 $ 265.6 $ 224.3
Lawnmower 8.3 10.9 26.4 32.2
Industrial and Power Equipment 45.1 36.6 108.2 95.9
Elimination (0.1) (0.2) (0.3) (1.0)
- ------------------------------------ -------- --------- -------- --------
Total Sales $ 145.8 $ 121.5 $ 399.9 $ 351.4
- ------------------------------------ ======== ========= ======== ========
Operating income (loss):
Outdoor Products $ 24.0 $ 16.3 $ 66.9 $ 50.0
Lawnmower (0.4) 0.7 (0.7) 2.0
Industrial and Power Equipment 3.8 2.2 4.7 3.9
Corporate expense/elimination (3.2) (1.5) (8.9) (4.6)
Restructuring expenses (0.3) (0.2) (5.8)
- ------------------------------------ -------- --------- -------- --------
Income from operations 24.2 17.4 61.8 45.5
Interest expense (17.4) (18.0) (52.7) (54.3)
Interest income 0.2 0.2 4.0 0.7
Other income (expense), net (0.2) (1.4) (3.3) (2.6)
- ------------------------------------ -------- --------- -------- --------
Income (loss) from continuing
Operations before income taxes $ 6.8 $ (1.8) $ 9.8 $ (10.7)
- ------------------------------------ ======== ========= ======== ========
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 September 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 monitor updates on the Site
status.
Page 11
In July 2001, the Company's former Federal Cartridge Company subsidiary
("Federal") received notice from the Region V 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 segment (including Federal) to Alliant Techsystems, Inc. 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 attended 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.
On September 12, 2003, the Company received a General Notice Letter as a
Potentially Responsible De Minimis Party from Region IX of the United States
Environmental Protection Agency ("EPA") regarding the Operating Industries,
Inc. Superfund Site in Monterey Park, California. The notice stated that the
EPA would submit an offer to settle and an explanation as to why it believes
the Company or a predecessor unit is a de minimis participant at the site in
mid-November. The site was operated as a landfill from 1948 to 1984, and
received wastes from over 4,000 generators during this time. At the present
time, the Company has no knowledge of which of its units, if any, was involved
at the site, or the amounts, if any, sent there. However, based upon its
current knowledge, and its alleged status as a Potentially Responsible De
Minimis Party, the Company does not believe that any settlement or
participation in any remediation will have a material adverse effect on its
consolidated financial conditions 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 of 2003. 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.
Page 12
NOTE 7:
OTHER INFORMATION
During the nine months ended September 30, 2003 net tax payments of $5.6
million were made compared to $6.2 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 nine months ended September
30, 2003 and 2002 was $56.2 million and $57.0 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 third quarter and nine
months ended September 30, 2003 is a $3.3 million loss on deferred financing
costs related to the extinguishment of the Company's 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. In the third
quarter of 2002, the Company incurred a loss of $0.8 million related to the
sale of the Company's corporate office building in Montgomery, Alabama.
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 nine months ended September 30, 2003 and 2002, net
loss and shares used in the earnings per share ("EPS") computations were the
following amounts:
Three months Nine months
ended September 30, ended September 30,
---------------------- -----------------------
(Dollars in millions) (Restated) (Restated)
except per share amounts) 2003 2002 2003 2002
- ------------------------------------ ---------- ---------- ---------- ----------
Net loss, as reported $(36.2) $ (3.5) $(34.4) $ (9.5)
- ------------------------------------ ========== ========== ========== ==========
Shares:
Basic EPS - weighted average 30,814,073 30,795,882 30,805,794 30,795,882
Common shares outstanding
Dilutive effect of stock options
- ------------------------------------ ---------- ---------- ---------- ----------
Adjusted weighted average shares 30,814,073 30,795,882 30,805,794 30,795,882
- ------------------------------------ ========== ========== ========== ==========
Page 13
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 and other entities.
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% 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 Nine Months
Ended September 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 262.6 $ 89.8 $ 149.2 $ (101.7) $ 399.9
Cost of sales 185.8 70.4 110.0 (104.0) 262.2
------- ------- ------- -------- -------
Gross profit 76.8 19.4 39.2 2.3 137.7
Selling, general and administrative expenses 45.5 12.3 17.9 75.7
Restructuring expenses 0.2 0.2
------- ------- ------- ------- -------- -------
Income from operations 31.3 6.9 21.3 2.3 61.8
Interest expense $ (14.8) (36.1) (0.3) (1.5) (52.7)
Interest income 3.8 0.2
4.0
Other income (expense), net (2.3) (0.1) (0.9) (3.3)
------- ------- ------- ------- -------- -------
Income (loss) before income taxes (14.8) (3.3) 6.5 19.1 2.3 9.8
Provision (benefit) for income taxes (0.7) 30.6 2.4 11.9 44.2
------- ------- ------- ------- -------- -------
Income (loss) before earnings (losses)
of affiliated companies (14.1) (33.9) 4.1 7.2 2.3 (34.4)
Equity in earnings (losses) of
affiliated companies, net (20.4) 13.5 0.2 10.0
------- ------- ------- ------- -------- -------
Net income (loss) $(37.8) $ (20.4) $ 4.3 $ 7.2 $ 12.3 $ (34.4)
======= ======= ======= ======= ======== =======
Page 14
For the Three Months
Ended September 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 98.3 $ 29.8 $ 51.8 $ (34.1) $ 145.8
Cost of sales 69.8 23.4 38.3 (35.9) 95.6
-------- ------- ------- ------- -------
Gross profit 28.5 6.4 13.5 1.8 50.2
Selling, general and administrative expenses 16.0 4.2 5.8 26.0
Restructuring expenses
------- -------- ------- ------- ------- -------
Income from operations 12.5 2.2 7.7 1.8 24.2
Interest expense $ (4.9) (12.4) (0.1) (17.4)
Interest income 0.1 0.1 0.2
Other income (expense), net 0.3 (0.1) (0.4) (0.2)
------- -------- ------- ------- ------- -------
Income (loss) before income taxes (4.9) 0.5 2.1 7.3 1.8 6.8
Provision (benefit) for income taxes 3.2 36.2 0.8 2.8 43.0
------- -------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (8.1) (35.7) 1.3 4.5 1.8 (36.2)
Equity in earnings (losses) of
affiliated companies, net (29.5) 7.7 21.8
------- ------- ------- -------- ------- -------
Net income (loss) $ (37.6) $ (28.0) $ 1.3 $ 4.5 $ 23.6 $ (36.2)
======= ======= ======= ======= ======= =======
Page 15
For the Nine Months
Ended September 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 225.5 $ 89.5 $ 121.0 $ (84.6) $ 351.4
Cost of sales 154.5 69.0 92.6 (84.5) 231.6
------- ------- ------- ------- -------
Gross profit 71.0 20.5 28.4 (0.1) 119.8
Selling, general and administrative expenses $ 0.5 39.5 13.2 15.3 68.5
Restructuring expenses
5.8 5.8
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.5) 25.7 7.3 13.1 (0.1) 45.5
Interest expense (16.0) (51.7) (0.4) (0.2) 14.0 (54.3)
Interest income 14.5 0.2 (14.0) 0.7
Other income (expense), net (2.0) (0.6) (2.6)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (16.5) (13.5) 6.9 12.5 (0.1) (10.7)
Provision (benefit) for income taxes (4.5) (5.4) 2.6 4.4 (2.9)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (12.0) (8.1) 4.3 8.1 (0.1) (7.8)
Discontinued operations: loss on disposal,
net of taxes of $0.4 (1.7) (1.7)
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (12.0) (9.8) 4.3 8.1 (0.1) (9.5)
Equity in earnings (losses) of
affiliated companies, net 2.5 12.2 0.1 (14.8)
------- ------- ------- ------- ------- -------
Net income (loss) $ (9.5) $ 2.4 $ 4.4 $ 8.1 $ (14.9) $ (9.5)
======= ======= ======= ======= ========= ========
Page 16
For the Three Months
Ended September 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 81.3 $ 28.0 $ 41.0 $ (28.8) $ 121.5
Cost of sales 56.6 22.3 31.0 (29.2) 80.7
------- ------- ------ ------- ------- -------
Gross profit 24.7 5.7 10.0 0.4 40.8
Selling, general and administrative expenses $ 0.1 13.5 4.5 5.0 23.1
Restructuring expenses 0.3 0.3
------- ------- ------ ------- ------- -------
Income (loss) from operations (0.1) 10.9 1.2 5.0 0.4 17.4
Interest expense (5.4) (17.1) (0.1) 4.6 (18.0)
Interest income 4.8 (4.6) 0.2
Other income (expense), net (1.2) (0.2) (1.4)
------- ------- ------ ------- ------- -------
Income (loss) before income taxes (5.5) (2.6) 1.2 4.7 0.4 (1.8)
Provision (benefit) for income taxes (0.9) (1.2) 0.4 1.7
------- ------- ------ ------- ------- -------
Income (loss) from continuing operations (4.6) (1.4) 0.8 3.0 0.4 (1.8)
Discontinued operations: loss on disposal
net of taxes of $0.4 (1.7) (1.7)
------- ------- ------ ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (4.6) (3.1) 0.8 3.0 0.4 (3.5)
Equity in earnings (losses) of
affiliated companies, net 1.2 4.1 0.1 (5.4)
------- ------- ------ ------- ------- -------
Net income (loss) $ (3.4) $ 1.0 $ 0.9 $ 3.0 $ (5.0) $ (3.5)
======= ======= ====== ======= ========= =======
Page 17
September 30, 2003
(Restated)
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5.2 $ (0.8) $ 16.3 $ 20.7
Accounts receivable, net 35.1 10.5 20.5 66.1
Intercompany receivables 265.9 54.4 12.4 $(332.7)
Inventories 25.3 22.6 19.7 67.6
Other current assets 27.5 0.6 1.6 29.7
------- ------- ------- ------- -------- -------
Total current assets 359.0 87.3 70.5 (332.7) 184.1
Investments in affiliated companies $ (48.1) 218.0 0.3 (170.2)
Property, plant and equipment, net 40.4 24.5 27.7 92.6
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Other assets 33.7 3.9 37.6
------- ------- ------- ------- -------- -------
Total Assets $ (48.1) $ 681.3 $ 152.0 $ 108.9 $(502.9) $ 391.2
======= ======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 4.9 $ 0.9 $ 5.8
Accounts payable 19.4 $ 6.7 5.8 31.9
Intercompany payables $ 332.7 $(332.7)
Accrued expenses 44.8 7.1 11.4 63.3
------- ------- ------- ------- ------- -------
Total current liabilities 332.7 69.1 13.8 18.1 (332.7) 101.0
Long-term debt, exclusive of current maturities 21.3 583.7 605.0
Deferred income taxes, exclusive of
current portion (1.2) 2.2 1.0
Other liabilities 3.0 74.3 2.6 5.9 85.8
------- ------- ------- ------- ------- -------
Total Liabilities 357.0 725.9 16.4 26.2 (332.7) 792.8
------- ------- ------- ------- ------- -------
Stockholders Equity (Deficit) (405.1) (44.6) 135.6 82.7 (170.2) (401.6)
Total Liabilities and ------- ------- ------- ------- ------- -------
Stockholders' Equity (Deficit) $ (48.1) $ 681.3 $ 152.0 $ 108.9 $(502.9) $ 391.2
======= ======= ======= ======= ======= =======
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 Nine Months
Ended September 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 $ (11.4) $ 40.6 $ 1.1 $ 5.3 $ 35.6
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment (0.6) (0.6)
Purchases of property, plant and equipment (8.5) (0.8) (2.7) (12.0)
------- ------- ------- ------- ------- -------
Net cash used in investing activities (9.1) (0.8) (2.7) (12.6)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Issuance of debt 118.0 118.0
Reduction of debt (137.2) 0.1 (137.1)
Advances from (to) affiliated companies 11.4 (10.9) (0.5)
Other (9.6) (9.6)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 11.4 (39.7) (0.5) 0.1 (28.7)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (8.2) (0.2) 2.7 (5.7)
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 $ 10.4 $ (0.4) $ 10.7 $ 20.7
======= ======= ======= ======= ======= =======
Page 20
For the Nine Months
Ended September 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 $ (6.4) $ 3.6 $ 2.2 $ 2.4 $ 1.8
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 8.2 0.1 8.3
Purchases of property, plant and equipment (4.5) (1.7) (5.6) (11.8)
Proceeds (expenses) from sale of discontinued (14.5) (14.5)
operations
------- ------- ------- ------- ------- -------
Net cash used in investing activities (10.8) (1.7) (5.5) (18.0)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Reduction of debt (10.9) (10.9)
Advances from (to) affiliated companies 6.4 (5.9) (0.5)
Other (0.4) (0.4)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 6.4 (17.2) (0.5) (0.0) (11.3)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (24.4) 0.0 (3.1) (27.5)
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 $ 19.6 $ (1.1) $ 1.6 $ 20.1
======= ======= ======= ======= ======= =======
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 and $100 million in revolving credit
facility. 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 were 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 the
Company's 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 convertible preferred equivalent 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 the 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, cash income taxes paid and scheduled
debt repayments. The Company was in compliance with these covenants as of
September 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 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.
Page 22
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 previous senior
credit facility, pay $8.3 million towards fees and expenses for the loan agent
and others, and provide $7.7 million cash to temporarily collateralize
outstanding letters of credit. Prior to the end of the second quarter the
Company paid off the revolver balance in full, by, among other sources using
the $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
September 30, 2003 the outstanding balances on the new credit facility were
$36.7 million of Term A, $80.0 million of Term B and no amounts drawn on the
revolving facility.
Long-term debt at September 30, 2003 and December 31, 2002 consisted of the
following:
September 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 116.7 134.4
Revolving credit facility
12% preferred equivalent security 21.3 18.7
- --------------------------------- ------- -------
Total Debt 610.8 627.5
Less current maturities (5.8) (3.4)
- --------------------------------- ------- -------
Total long-term debt $ 605.0 $ 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 to public
Page 23
enterprises in the first fiscal year or interim period ending after December
15, 2003, to VIEs in which an enterprise holds a variable interest that it
acquired before February 1, 2003. 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 was effective for contracts entered into or modified
after June 30, 2003, except for hedging relationships designated after June
30, 2003, where the guidance is required to be applied prospectively. The
Company believes that SFAS No. 149 will not have a material impact 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 was effective for all financial instruments
entered into or modified after May 31, 2003, and was otherwise effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company has evaluated the effect of the adoption of SFAS No. 150 and believes
that it will not have a material impact 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
financial results to reflect additional interest income of $3.4 million
through September 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
September 30, 2003 and for the three months and nine months ended September
30, 2003 are as follows:
September 30, 2003
-------------------------
Previously
(Dollar amounts in millions) Reported Restated
- ---------------------------------------- ---------- --------
Other current assets $ 26.3 $ 29.7
Accumulated deficit (824.1) (820.7)
Page 24
Three months ended Nine months ended
September 30, 2003 September 30, 2003
--------------------- ---------------------
Previously Previously
(Dollars in millions) Reported Restated Reported Restated
- --------------------------------- ----------- -------- --------- --------
Interest income $ 0.1 $ 0.2 $ 0.6 $ 4.0
Income (loss) before income taxes 6.7 6.8 6.4 9.8
Provision for income taxes 44.3 43.0 44.2 44.2
Net loss (37.6) (36.2) (37.8) (34.4)
Basic loss per share $(1.22) $(1.17) $(1.23) $(1.12)
Diluted loss per share (1.22) (1.17) (1.23) (1.12)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Results for the three months and nine months ended September 30, 2003 showed
improvement from last year in sales and income from operations, but were
offset by a non-cash valuation allowance on deferred tax assets recognized in
the third quarter.
Sales for the third quarter of 2003 were $145.8 million, compared to $121.5
million for the same period last year. The increase of $24.3 million or 20% is
the result of a 25% year-over-year increase for Outdoor Products and a 23%
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 $2.0 million in
additional sales revenue from last year's third quarter.
Sales for the nine months ended September 30, 2003 were $399.9 million
compared to $351.4 million for the same period last year. The increase of
$48.5 million or 14% is driven by an 18% increase for Outdoor Products and a
13% increase in the Industrial and Power Equipment segment, partially offset
by an 18% decline in Lawnmower sales. In foreign markets, currency rates
continue to be favorable with the effect on unit prices yielding an estimated
$6.6 million in additional sales revenue. Demand for the Company's products
has increased over 2002 due to improved economic conditions, the effect of
stormy weather in the eastern United States and the initial roll-out of the
Timberking product line in conjunction with the previously announced joint
marketing arrangement with Caterpillar, Inc.
Income from operations for the third quarter of 2003 was $24.2 million
compared to $17.4 million for the same period last year. This $6.8 million or
39% increase reflected a $9.4 million increase in gross profit, driven by
higher sales volume, partially offset by higher selling, general and
administration expense ("SG&A"). Total SG&A expense in the third quarter of
2003 of $26.0 million compared to $23.1 million reported in 2002. This
increase of $2.9 million, or 13%, included $0.7 million due to the weaker US
Dollar and increases of $0.2 million for incentive compensation, $0.4 million
for insurance premiums, and $0.4 million for startup costs associated with the
new supply and marketing agreements with Caterpillar, Inc.
Income from operations for the nine months ended September 30, 2003 of $61.8
million compares to $45.5 million for the same period last year. The increase
of $16.3 million or 36% is primarily due to a $17.9 million increase in gross
profit and a $5.6 million reduction in restructuring expense, partially offset
by a $7.2 million increase in SG&A expense. The increase in gross profit is
due to the higher
Page 25
unit sales volume in two of the three business segments, supported by the
effect of currency rates. Total SG&A expense for the nine months ended
September 30, 2003 was $75.7 million compared to $68.5 million for the same
period last year. This increase includes the effect of currency rates
estimated at $2.4 million, $1.4 million increase for pension and post
retirement expense, $1.1 million increase for insurance premiums, $1.2 million
increase for incentive compensation, and $0.6 million increase due to startup
costs associated with the supply and marketing agreements with Caterpillar,
Inc. Restructuring expense of $0.2 million was incurred in the nine months
ended September 30, 2003 for severance associated with the relocation of a
production process within the Outdoor Products segment. Restructuring expense
of $5.8 million was incurred in the same period last year for the relocation
of corporate headquarters from Montgomery, Alabama to Portland, Oregon.
Net loss for the third quarter of 2003 was $36.2 million or $1.17 per share
compared to net loss of $3.5 million or $0.11 per share for the same period in
2002. The change in net loss includes higher operating income of $6.8 million,
lower other expense of $1.2 million and lower interest expense of $0.6
million. These are offset by higher income tax expense of $43.0 million. The
decrease in other expense reflects $0.2 million for other expense in 2003
compared to $1.4 million in other expense incurred in 2002, of which $0.8
million was related to the sale of an office building and $0.5 million to
realized losses in the rabbi trust, created to fund certain executive
benefits. Lower interest expense is due to a combination of lower rates and
outstanding debt. The higher tax expense includes $39.7 million to record a
valuation allowance since the Company has now determined it will likely not be
able to utilize its deferred tax asset, and a $3.3 million tax provision due
to an increase in pre-tax income. The Company has exhausted its ability to
carry back net operating losses to prior years and will only be able to
utilize accumulated net operating losses on a carry forward basis. Although
the Company expects to be profitable on a go-forward consolidated basis, the
existing outstanding debt requires significant annual interest payments which
result in operating losses in the United States. The combination of
anticipated operating losses in the United States for the foreseeable future
and the fact that certain tax planning strategies have diminished in the
quarter ended September 30, 2003 has led to the determination that the Company
will not likely be able to utilize its deferred tax benefits.
Net loss for the nine months ended September 30, 2003 of $34.4 million or
$1.12 per share compares to a net loss of $9.5 million or $0.31 per share for
the same period in 2002. The increase in net loss reflects a $47.1 million
increase in income taxes primarily due to the recognition of a $39.7 million
deferred tax valuation allowance, and also includes $0.7 million increase in
other expense. These increases in expense are partially offset by $16.3
million improvement in income from operations, a $1.6 million decrease in
interest expense and a $3.3 million increase in interest income. Interest
expense was 3% lower than the previous year due to lower interest rates and a
lower average level of debt. The increase in interest income reflects $3.4
million of interest related to income tax refund receivables. Other expense of
$3.3 million in 2003 compares to $2.6 million in 2002, with the increase
primarily the result of this year's debt extinguishment expense but offset
somewhat by a $1.7 million loss on the sale of Company assets during 2002. A
tax provision of $44.2 million in 2003 compares to a benefit of $2.9 million
in 2002. Included in the current year amount is a $4.5 million provision on
pre-tax earnings and $39.7 million as a one hundred percent valuation
allowance on deferred tax assets the Company has now determined it will likely
not be able to utilize.
SEGMENT RESULTS
Effective January 1, 2003, the Company realigned its businesses and now
reports results in three segments: Outdoor Products, Lawnmower, and Industrial
and Power Equipment. The Lawnmower segment consists of the Company's Dixon
subsidiary, which
Page 26
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 third quarter of 2003 were $92.5
million compared to $74.2 million in 2002, a 25% increase. This increase was
driven by stronger demand across all product lines and major geographical
markets and in both original equipment manufacturer ("OEM") and replacement
channels. A weaker US Dollar contributed to this increase and the effect on
translation is estimated to be $2.0 million. The effects of hurricane Isabel
on the eastern United States increased demand for products in the third
quarter.
Sales for the nine months ended September 30, 2003 were $265.6 million
compared to $224.3 million in the same period of 2002. The increase of $41.3
million or 18% continues to show a recovery from last year's nine month
performance, when sales declined 3% from comparable 2001 results. As with the
quarter's results, the nine 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 was particularly strong in the European market. A
weaker US Dollar contributed to this increase and the effect on translation is
estimated at $6.6 million.
Operating profit increased to $24.0 million from $16.3 million in the third
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 $38.5 million
from $30.1 million due to higher sales volume and the net favorable effect in
currency rates of $0.6 million. SG&A increased to $14.6 million from $13.8
million in 2002, reflecting the weaker US Dollar and, the rising insurance and
benefit expenses, but partially offset by a reduction resulting from the
reassignment of certain functions to the corporate office.
For the nine months ended September 30, 2003, the Outdoor Products segment
operating profit increased to $66.9 million compared to $50.0 million for the
same period in 2002. As with the quarter's results, the nine month
year-over-year comparison reflects an increase in gross profit, offset, in
part, by higher SG&A costs. Gross profit increased to $110.1 million from
$90.8 million due to higher sales volume and the net favorable effect of
currency rates of $4.5 million. SG&A increased to $43.2 million from $40.8
million in 2002, with $2.4 million due to the weaker US Dollar and rising
insurance and benefit expense, but partially offset by a reduction resulting
from the reassignment of certain functions to the corporate office.
Sales for the Lawnmower segment in the third quarter of 2003 were $8.3 million
compared to $10.9 million for the same period of 2002, a 24% decrease. Sales
for nine months ended September 30, 2003 were $26.4 million compared to $32.2
million for the same period last year, an 18% decrease. For the third quarter
and nine 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
the Company's 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, which provided one-fifth of unit
sales for both the third quarter and nine month period ended September 30,
2003.
The segment's operating loss for the third quarter was $0.4 million compared
to an operating profit of $0.7 million for the same period in 2002. For the
nine months ended September 30, 2003, the segment had an operating loss of
$0.7 million compared to an operating profit of $2.0 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.
Page 27
Sales of the Company's Industrial and Power Equipment segment in the third
quarter of 2003 were $45.1 million compared to $36.6 million in 2002. This
$8.5 million, or 23% increase was driven by stronger sales of timber
harvesting and loading equipment. The year-over-year growth rate for these
products was up 28% for the quarter, supported by an increase in demand for
existing products and incremental sales resulting from a joint marketing
arrangement with Caterpiller, Inc. established earlier in the year. These
developments are partially offset by lower demand for the segment's power
transmission components business, as construction and utility equipment
markets remain weak. Sales for the nine months ended September 30, 2003 were
$108.2 million compared to $95.9 million for the same period last year, a
$12.3 million or 13% increase. Included in the year-to-date results was an 18%
increase of timber harvesting and loading equipment, partially offset by a 15%
decrease in the segment's power transmission components business.
The segment's operating income in the third quarter of 2003 was $3.8 million
compared to $2.2 million in 2002. This increase was driven by growth in unit
sales volume providing improvement in gross margins and lower SG&A as a
percent of sales. Operating income for the nine months ended September 30,
2003 were $4.7 million compared to $3.9 million for the same period last year.
This increase was due to the improved sales of timber harvesting and loading
equipment, but is partially offset by the decrease in power transmission
components business.
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 distribution channels for the
Prentice brand of track feller-bunchers and Hydro-Ax brand of wheel
feller-bunchers already distributed by FIED dealers.
Corporate office expense was $3.2 million for the third quarter compared to
$1.5 million in 2002. For the nine months ended September 30, 2003, corporate
office expense was $8.9 million compared to $4.6 million in 2002. The increase
reflects the reassignment of certain functions from the Outdoor Products
segment in 2002. The estimated impact of this reassignment is $0.7 million in
the third quarter and $2.1 million for the nine months. Other year-over-year
increases include higher pension and post retirement benefits of $0.1 million
for the quarter and $0.6 million for the nine months; accrued incentive
compensation of $0.3 million for the quarter and $0.8 million year for nine
months; and higher insurance costs of $0.2 million for the quarter and $0.6
million for nine months.
The Company's total backlog increased to $110.8 million at September 30, 2003
from $56.3 million at December 31, 2002 and from $60.6 million at September
30, 2002 as follows (in millions):
Backlog
-------------------------------------------
September 30, December 31, September 30,
2003 2002 2002
- -------------------------------- ------------ ------------ ------------
Outdoor Products $ 61.1 $ 42.9 $ 38.5
Lawnmower 6.4 3.1 4.9
Industrial and Power Equipment 43.3 10.3 17.2
- -------------------------------- ------ ------ ------
Total segment backlog $ 110.8 $ 56.3 $ 60.6
- -------------------------------- ====== ====== ======
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
Page 28
ensure order fulfillment. The Lawnmower segment's backlog is typically higher
at this time of the year after the introduction of a new model year and shows
a 31% improvement over a year ago. The Industrial and Power Equipment segment
backlog has increased largely due to a new program encouraging dealers to
order with greater lead time, the initiation of Timberking orders associated
with the Caterpillar joint marketing arrangement and an increase in the
distribution of the Company's skidder product line.
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 September 30, 2003 was $610.8 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 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 for the next twelve months 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. There were no amounts
drawn on the revolver as of September 30, 2003. Letters of credit issued under
the new revolving credit facility, which reduce the amount of borrowing
available, were $7.5 million as of September 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 September 30, 2003 were $20.7 million compared to $26.4
million at December 31, 2002. The decline in cash balance in the first nine
months of 2003 is $5.7 million compared to a decline of $27.5 million for the
same period in 2002.
Cash generated from operating activities was $35.6 million in the first nine
months of 2003 compared to $1.8 million for the same period in 2002. The $33.8
million increase in cash provided is primarily the result of an increase in
pretax income of $20.5 million and the receipt of $25.0 million in escrowed
funds associated with the sale of the Company's Sporting Equipment segment in
2001. These increases are partially offset by a higher use of funds for
accounts receivable of $6.6 million and inventory of $2.9 million.
Page 29
Accounts receivable at September 30, 2003 and December 31, 2002 and sales by
segment for the third quarter of 2003 compared to the fourth quarter of 2002
were as follows:
September 30, December 31, Increase
(Dollars in millions) 2003 2002 (Decrease)
- --------------------------------- ------------ ------------ -----------
Accounts Receivable:
Outdoor Products $ 44.8 $ 37.9 $ 6.9
Lawnmower 3.2 3.4 (0.2)
Industrial and Power Equipment 18.1 16.1 2.0
- --------------------------------- ------ ------ ------
Total segment receivables $ 66.1 $ 57.4 $ 8.7
- --------------------------------- ====== ====== ======
Three Months Ended
September 30, December 31, Increase
2003 2002 (Decrease)
- --------------------------------- ------------ ------------ -----------
Sales:
Outdoor Products $ 92.5 $ 83.1 $ 9.4
Lawnmower 8.3 9.2 (0.9)
Industrial and Power Equipment 45.1 35.8 9.3
Elimination (0.1) (0.1)
- --------------------------------- ------ ------ ------
Total segment sales $145.8 $128.1 $ 17.7
- --------------------------------- ====== ====== ======
The $8.7 million increase in segment accounts receivable from December 31,
2002 is consistent with the increase in sales. In addition to operating
segment receivables, the Company received $0.4 million on a receivable related
to discontinued operations and reduced the associated allowance for doubtful
accounts $0.8 million. This was the primary cause for a $1.0 million decrease
in total allowance for doubtful accounts from $4.3 million reported at
December 31, 2002.
Net cash used for investing activities for the first nine months of 2003 was
$12.6 million compared to $18.0 million for the same period of 2002. Purchases
for property, plant and equipment during this period of 2003 were $12.0
million compared to $11.8 million for the same period last year. Payments
associated with the sales of assets during the first nine months of 2003 are
$0.6 million and are related to the 2002 sale of an office building in
Montgomery, Alabama. This is $8.9 million lower than receipts of $8.3 million
in the same period of 2002 that were due primarily to the sales of a storage
warehouse, a fractional interest in an aircraft and an office building. In the
first nine months of 2003 there were less than $0.1 million in expenses
associated with the sale of discontinued operations compared to $14.5 million
in the first nine months of 2002.
Cash used in financing activities for the first nine months of 2003 was $28.7
million compared to $11.3 million for the same period last year. In the second
quarter, the Company, utilizing $149.8 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 which was previously held in escrow
as part of the sale of the Company's Sporting Equipment segment in 2001. In
the third quarter the Company made a scheduled payment of $1.3 million on the
new term loans. Cash used in 2002 for financing activities included scheduled
debt payment of $2.5 million, an additional payment of $5.9 million resulting
from the application of proceeds
Page 30
generated from sale of the office building in Montgomery, Alabama and $1.9
million resulting from the application of proceeds from the sale of the
company aircraft.
Due to a decline in asset values of the Company's sponsored defined benefit
plan during 2001 and 2002, the Company's annual cash contributions to the
pension fund will increase in 2003 and will increase further in 2004. The
decline in asset value is due to overall weakness in the stock and bond
markets. Cash contributions are estimated to be $3.7 million for 2003 and
$12.6 million for 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 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 to public enterprises in the
first fiscal year or interim period ending after December 15, 2003, to VIEs in
which an enterprise holds a variable interest that it acquired before February
1, 2003. 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 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 is required to be applied prospectively. The
Company believes that SFAS No. 149 will not have a material impact 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 has evaluated the effect of the adoption of SFAS No. 150 and believes
that it will not have a material impact on its financial statements.
Page 31
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
quarterly report may differ materially.
ITEM 4 - CONTROLS AND PROCEDURES
The Registrant carried out an evaluation, under the supervision and with the
participation of the Registrant's management, including the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures as of
September 30, 2003 were effective to ensure that information required to be
disclosed by the Registrant 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's rules and forms.
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 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 potentially dating back to 2003.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be detected.
Page 32
There were no changes in the Registrant's internal control over financial
reporting that occurred during the quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
PART II Other Information
Item 6(a) Exhibits
** 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by James S. Osterman, Chief Executive Officer for the quarter
ended September 30, 2003.
** 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by Calvin E. Jenness, Chief Financial Officer for the quarter
ended September 30, 2003.
** 32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by James S. Osterman, Chief Executive Officer for the quarter
ended September 30, 2003.
** 32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by Calvin E. Jenness, Chief Financial Officer for the quarter
ended September 30, 2003.
Item 6(b) Reports on Form 8-K
On November 4, 2003, the Company filed its financial results and
public release for the third quarter 2003 as a report pursuant to
Form 8-K.
* 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