-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RV34MqFD0/QtxLSGq1UfyWO5uCkxBmTvTa2JfTEJHYoZuf9twwzYeM9XYZQuqpJ2 zVMOy3BrSkFF9bvrhlYiWA== 0001001606-00-000006.txt : 20000307 0001001606-00-000006.hdr.sgml : 20000307 ACCESSION NUMBER: 0001001606-00-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLOUNT INTERNATIONAL INC CENTRAL INDEX KEY: 0001001606 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 630780521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11549 FILM NUMBER: 559336 BUSINESS ADDRESS: STREET 1: PO BOX 949 STREET 2: 4520 EXECUTIVE PK DR CITY: MONTGOMERY STATE: AL ZIP: 36116-1602 BUSINESS PHONE: 3342444000 MAIL ADDRESS: STREET 1: P.O. BOX 949 STREET 2: 4520 EXECUTIVE PARK DRIVE CITY: MONTGOMERY STATE: AL ZIP: 36116-1602 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-11549 --------- 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.) 4520 Executive Park Drive, Montgomery, Alabama 36116-1602 - ---------------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (334) 244-4000 -------------- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------- Page 1 State the aggregate market value of the voting common stock held by nonaffiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common stock was sold, or the average bid and asked prices of such common stock, as of a specified date within 60 days prior to the date of filing. Aggregate market value of voting common stock held by nonaffiliates as of - ------------------------------------------------------------------------- February 1, 2000: $58,772,304 - ------------------------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock $.01 par value, as of February 1, 2000: 30,795,882 shares ---------- DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes. Portions of proxy statement for the annual meeting of stockholders to be held April 17, 2000, are incorporated by reference in Part III. Page 2 PART I ITEM 1. BUSINESS The Company is an international manufacturing and marketing company with sales in over 100 countries and operations in three business segments: Outdoor Products, Sporting Equipment, and Industrial and Power Equipment. The following text contains various trademarks of Blount, Inc., a wholly-owned subsidiary of the Company, and its subsidiaries. OUTDOOR PRODUCTS The Company's Outdoor Products segment is comprised of the Oregon Cutting Systems Division ("Oregon"), Dixon Industries, Inc. ("Dixon") and Frederick Manufacturing Corporation ("Frederick"). Oregon produces a wide variety of cutting chain, chain saw guide bars, cutting chain drive sprockets and maintenance tools for use primarily on portable gasoline and electric chain saws, and mechanical timber harvesting equipment. The Oregon trademark is well known to end-users and the Company believes that it is the world leader in the production of cutting chain. Oregon's cutting chain and related products are used primarily by professional loggers, construction workers, farmers, arborists and homeowners. Oregon markets an Industrial Cutting System ("ICS"). ICS, a diamond-segmented cutting system for concrete (including steel-reinforced concrete), is a faster and more flexible concrete cutting method than others currently employed in the construction and demolition industries. Oregon sells to distributors, dealers and mass merchandisers serving the retail replacement market. In addition, Oregon currently sells its products to more than 30 original equipment manufacturers ("OEMs"). In 1999, approximately 13% of the sales by the Outdoor Products segment were to one customer. Due to the high level of technical expertise and capital investment required to manufacture cutting chain and guide bars, the Company believes that it is able to produce durable, high-quality cutting chain and guide bars more efficiently than most of its competitors. The use of Oregon cutting chain as original equipment on chain saws is also promoted through cooperation with OEMs in improving the design and specifications of chain and saws. The Outdoor Products segment's businesses are also affected to some extent by severe weather. For example, severe weather patterns and events such as hurricanes, tornadoes or ice storms generally result in greater chain saw use and, therefore, stronger sales of saw chain and guide bars. The Company has Oregon marketing personnel throughout the United States and in a number of foreign countries. Oregon manufactures cutting chain and related products in Milwaukie, Oregon; Guelph, Ontario, Canada; and Curitiba, Parana, Brazil. Oregon's products compete with other cutting chain manufacturers as well as a small number of international chain saw manufacturers, some of whom are also customers. This segment's principal raw material, strip steel, is generally purchased from two vendors, and can be obtained from other sources. Sales by Oregon accounted for 74% of sales attributable to the Outdoor Products segment in the year ended December 31,1999. Dixon, located in Coffeyville, Kansas, was acquired in 1990 and has manufactured ZTR (zero turning radius) lawn mowers and related attachments since 1974. Dixon pioneered the development of ZTR and is the only manufacturer to offer a full Page 3 line of ZTR lawn mowers for both homeowner and commercial applications. The Company believes Dixon is the leading manufacturer of residential zero turning radius lawn mowers. The key element which differentiates Dixon from its competitors is its unique mechanical transaxle. The transaxle transmits power independently to the rear drive wheels and enables the operator to move the back wheels at different speeds and turn the mower in a circle no larger than the machine, a "zero radius turn". This unique transmission enables the Dixon mower to out-maneuver conventional ride-on products available in the market today and provides a cost advantage over the more expensive hydrostatic drives used by competitors in the market. Nonetheless, the latest product additions are in the hydrostatic portion of the product line. In late 1997, Dixon introduced the "Estate Line" featuring mowers which are designed for large, homeowner lawns and are lower priced than commercial hydrostatic units. Models are available in 42-inch, 50- inch and 60-inch sizes. Expanding on the Estate Line, Dixon introduced a low- cost hydro line, IZT (integrated zero turn), in 1998. The IZT is positioned between Dixon's normal hydro and transaxle models geared for the residential user. It features models with cut widths of 42 inches, 50 inches and 60 inches. Dixon sells its products through distribution channels comprised of full-service dealers, North American distributors and export distributors. Dixon's competitors include general lawn mower manufacturers such as MTD, American Yard products and Murray as well as zero turning radius lawn mower manufacturers such as Ariens, Snapper and Simplicity. Frederick, located in Kansas City, Missouri, was acquired in January 1997. See "Business - Acquisitions and Dispositions" on page 7. Frederick is a well-known and highly respected manufacturer that supplies quality Silver Streak brand accessories for lawn mowers and other outdoor products. Frederick fits well into the Company's operations and is provided international sales opportunities through Oregon's worldwide distribution outlets. Frederick's products are sold through dealers and distributors. Frederick competes in a highly fragmented industry where many competitors manufacture replacement products as one part of a larger business. Sales by Dixon and Frederick in the year ended December 31, 1999, accounted for 26% of sales of the Outdoor Products segment. SPORTING EQUIPMENT On November 4, 1997, the Company acquired the Federal Cartridge Company ("Federal"). See "Business - Acquisitions and Dispositions" on page 7. Federal manufactures and markets shotshell, centerfire and rimfire cartridges, ammunition components, and clay targets. These products are distributed throughout the United States through a network of distributors and directly to large retail chains, the U.S. government and federal, state, local and international law enforcement agencies. The Federal acquisition both complemented and significantly expanded the Sporting Equipment segment's product offerings. Shotgun shells, a product not manufactured or sold by the Company prior to this acquisition, represented approximately 21% of Sporting Equipment's sales for 1999. Federal is also a significant producer and marketer of centerfire rifle ammunition, products as to which the Company's market share had been much smaller. Federal markets its products under the brand names of "Premium," "Gold Medal," "American Eagle," "Classic," "BallistiClean" and "Tactical." The acquisition of Federal placed the Company among the leading United States producers of ammunition products. Ammunition sales accounted for approximately 73% of the Sporting Equipment segment's sales in 1999. Page 4 The Company's other Sporting Equipment segment operations manufacture small arms ammunition, reloading equipment, primers, gun care products and accessories, and distribute imported sports optical products. Principal products include CCI and Speer ammunition sold for use by hunters, sportsmen and law enforcement and military personnel; RCBS reloading equipment for use by hunters and sportsmen who prefer to reload their own ammunition; Redfield scope mounting systems; Outers gun care and trap-shooting products; Ram-Line gun accessories; Weaver scope mounting systems; and Simmons and Weaver optics. The Company believes that it is a market leader in the domestic gun care and ammunition reloading markets with high levels of brand name recognition in each of these areas. The Company believes that the Sporting Equipment segment is also a world leader in the production of industrial powerloads which are used in the construction industry to drive fastening pins into metal or concrete. The Sporting Equipment segment distributes its products through multiple channels, including law enforcement agencies, OEMs, national and regional retail accounts (including sports super-stores and mass merchants), dealers and distributors. The market for Sporting Equipment products is characterized by a high degree of customer loyalty to brand names and historically has not been affected by adverse economic conditions. A continuing focus on new and better technologies has enabled the Company to introduce a number of new and improved products in recent years. New product introductions in 1999 include expansion of our Federal Premium Rifle line with the addition of the Barnes XLC, the expansion of High-Energy wads and Tungsten based shotshells. Lead-free ammunition continues to grow rapidly with law enforcement and general consumer groups and recent new products such as Cleanfire and BallistiClean are experiencing strong demand. Principal raw materials include brass, lead, aluminum and powder, which are purchased from several suppliers. The Company manufactures ammunition and powerloads in Lewiston, Idaho; shotshell, ammunition and ammunition components in Anoka, Minnesota; reloading equipment in Oroville, California; mounts, shooting accessories and gun care equipment in Onalaska, Wisconsin; and clay targets in Richmond, Indiana. The Company imports substantially all its optical products from foreign suppliers and does not rely on long-term agreements, although it does have long-term relationships with some of its suppliers. Optical products are distributed from a warehouse in Thomasville, Georgia. In the market for ammunition and accessories, the Sporting Equipment segment competes against manufacturers that also have well established brand names and strong market positions, including Remington and Winchester. In accessories, the Sporting Equipment segment competes against a number of smaller competitors, none of which has a dominant market share. These competitors include Lyman and Hornaday in reloading equipment, and Tasco and Bushnell in optics and scopes. In 1999, approximately 20% of the Sporting Equipment segment's sales were to one customer. INDUSTRIAL AND POWER EQUIPMENT The Company's Industrial and Power Equipment segment manufactures equipment for the timber harvesting industry and for industrial use, industrial tractors for land and utility right-of-way clearing, and components for the gear industry. Major users of these products include logging contractors, harvesters, land reclamation companies, utility contractors, building materials distributors, scrap yard operators and original equipment manufacturers of hydraulic equipment. The Company believes that it is a world leader in the manufacture of hydraulic timber harvesting equipment, which includes a line of truck-mounted, trailer- mounted, stationary-mounted and self-propelled loaders and crawler feller Page 5 bunchers (tractors with hydraulic attachments for felling timber) under the Prentice brand name; a line of rubber-tired feller bunchers and related attachments under the Hydro-Ax brand name; and a line of delimbers, slashers and firewood processors under the CTR brand name. The Company is a competitive force in the gear industry, selling power transmissions and gear components under the Gear Products brand name. The Company sells its timber harvesting products through a network of approximately 250 dealers in over 400 locations in the United States and currently has an additional 20 offshore dealers, primarily in the timber harvesting regions of South America and Southeast Asia. Gear Products, Inc. sells its products to over 350 original equipment manufacturers servicing the utility, construction, forestry and marine industries. Over 89% of this segment's sales in 1999 were in the United States, primarily in the southeastern and south central states. In 1999, approximately 29% of the sales by the Industrial and Power Equipment segment were to two customers. The Company places a strong emphasis on the quality, safety, comfort, durability and productivity of its products and on the after-market service provided by its distribution and support network. The timber harvesting equipment market faces cyclicality due to its reliance on customers in the pulp and paper market. In the past, as pulp prices have dropped and inventory levels have increased, pulp manufacturers postponed purchases of new timber harvesting equipment as their existing machinery provided them sufficient capacity to meet near-term demand. Competition in markets served by the Industrial and Power Equipment segment is based largely on quality, price, brand recognition and product support. The segment's primary competition in timber harvesting equipment includes large diversified equipment manufacturers, including Timberjack, Barko, Tigercat, Hood, Deere, Franklin, Bell and Morbark. Gear Products' competition includes relatively smaller players in this fragmented industry. These include SKF, Avon, Kaydon, Rotec, Fairfield, Auburn, Tulsa and Braden. The Company attempts to capitalize on its technological and manufacturing expertise as a means of increasing its participation in the market for replacement parts for products which it manufactures, as well as of developing new product applications both within and beyond the timber, material handling, scrap, land clearing and gear industries. The Company is committed to continuing research and development in this segment to respond quickly to increasing mechanization and environmental awareness in the timber harvesting industry. Gear Products was acquired in 1991 and operates from a production facility in Tulsa, Oklahoma. Gear Products is a leading manufacturer of rotational system components for mobile heavy equipment. Its primary products are bearings, winch drives and swing drives used to provide hydraulic power transmission in heavy equipment used in the forestry, construction and utilities industries. Due to extreme wear-and-tear on its products, Gear Products sells its products in the replacement parts market in addition to its sales to OEMs. Gear Products accounted for approximately 16% of the Industrial and Power Equipment segment's sales in 1999. The Company's Industrial and Power Equipment segment has manufacturing facilities in Owatonna, Minnesota; Prentice, Wisconsin; Tulsa, Oklahoma; and Zebulon, North Carolina. A majority of the components used in the Company's products are obtained from a number of domestic manufacturers. Page 6 CAPACITY UTILIZATION Based on a five-day, three-shift work week, the Outdoor Products, Sporting Equipment, and Industrial and Power Equipment segments utilized approximately 87%, 72% and 50% of their respective production capacity in the year ended December 31, 1999. BACKLOG The backlog for each of the Company's business segments as of the end of each of its last four reporting periods was as follows (in millions): December 31, --------------------------------- 1999 1998 1997 1996 - ------------------------------------------ ------ ------ ------ ------ Outdoor Products $ 41.9 $ 30.2 $ 42.0 $ 35.5 Sporting Equipment 18.0 15.1 19.7 9.5 Industrial and Power Equipment 25.8 16.0 56.2 29.2 - ------------------------------------------ ------ ------ ------ ------ $ 85.7 $ 61.3 $117.9 $ 74.2 - ------------------------------------------ ====== ====== ====== ====== The total backlog as of December 31, 1999, is expected to be completed and shipped within twelve months. ACQUISITIONS AND DISPOSITIONS In September 1998, the Company purchased certain operating assets of the Redfield line for approximately $3 million. The operating assets consisted of inventory (primarily rifle scopes, mounting systems and related items), machinery and equipment, trademarks, sales literature and patents. On November 4, 1997, the Company acquired Federal Cartridge Company (formerly Federal-Hoffman, Inc.), a manufacturer of shotshell, centerfire and rimfire cartridges, ammunition components and clay targets. The purchase price was approximately $129 million, including a post-closing adjustment and acquisition expenses. In January 1997, the Company acquired the outstanding capital stock of the Frederick Manufacturing Corporation and Orbex, Inc. for approximately $19 million and paid existing debt of the acquired companies in the amount of $5.8 million. The principal products of the acquired companies are accessories for lawn mowers and sporting goods. Orbex, Inc. was subsequently merged into Frederick Manufacturing Corporation. In December 1995, the Company acquired all the outstanding capital stock of Simmons Outdoor Corporation, a sports optics distributor, for cash of approximately $38 million. In fiscal 1995, in two separate transactions the Company acquired all the outstanding capital stock of CTR Manufacturing, Inc., a manufacturer of automated forestry harvesting equipment, and the operating assets of Ram-Line, Inc., a manufacturer of stocks, magazines, lens caps and other products for the shooting sports market. The combined purchase price paid for the two businesses was approximately $18.2 million, including notes issued of $7.2 million. See Note 4 of Notes to Consolidated Financial Statements on pages 32 and 33. Page 7 EMPLOYEES At December 31, 1999, the Company employed approximately 5,600 individuals. None of the Company's domestic employees is unionized; the number of foreign employees who belong to unions is not significant. The Company believes its relations with its employees are satisfactory. ENVIRONMENTAL MATTERS For information regarding certain environmental matters, see Note 7 of Notes to Consolidated Financial Statements on pages 38 and 39. The Company's operations are subject to comprehensive U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and the cleanup of contaminated sites. Permits and environmental controls are required for certain of those operations to prevent or reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. On an ongoing basis, the Company incurs capital and operating costs to comply with environmental laws. We expect to spend approximately $0.4 million in 2000, $0.6 million in 2001 and $0.4 million in 2002 on environmental compliance. Environmental laws and regulations generally have become stricter in recent years, and the cost to comply with new laws and regulations may be greater than these estimated amounts. Some of the Company's manufacturing facilities are located on properties with a long history of industrial use, including the use of hazardous substances. The Company has identified soil and groundwater contamination from these historical activities at several of its properties, which it is currently investigating, monitoring or remediating. Management believes that costs incurred to investigate, monitor and remediate known contamination at these sites will not have a material adverse effect on the business, financial condition or results of operations. The Company cannot be sure, however, that it has identified all existing contamination on its properties or that its operations will not cause contamination in the future. As a result, the Company could incur material costs to cleanup contamination. Remediation liabilities are not discounted. From time to time the Company may be identified as a potentially responsible party with respect to a Superfund site. The United States Environmental Protection Agency (or a state) can either (a) allow such a party to conduct and pay for a remedial investigation and feasibility study and remedial action or (b) conduct the remedial investigation and action and then seek reimbursement from the parties. Each party can be held jointly, severally and strictly liable for all costs, but the parties can then bring contribution actions against each other or other third parties, where available. As a result of the Superfund Act, the Company may be required to expend amounts on such remedial investigations and actions which amounts cannot be determined at the present time but may ultimately prove to be significant. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS For information about industry segments and foreign and domestic operations, see "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 12 through 19 and Note 9 of Notes to Consolidated Financial Statements on pages 40 through 42. Page 8 SEASONALITY Only the Company's Sporting Equipment segment experiences significant seasonality with higher sales and operating income in the second half of the year than the first half of the year. ITEM 2. PROPERTIES The corporate headquarters of the Company occupy executive offices at 4520 Executive Park Drive, Montgomery, Alabama. The other principal properties of the Company and its subsidiaries are as follows: Cutting chain and accessories manufacturing plants are located in Milwaukie, Oregon; Guelph, Ontario, Canada; and Curitiba, Parana, Brazil, and sales and distribution offices are located in Europe, Japan and Russia. Lawn mowers and related accessories are manufactured at plants in Coffeyville, Kansas and Kansas City, Missouri. Sporting ammunition, reloading equipment products, gun care equipment, industrial powerloads and shooting sports accessories are manufactured at plants in Anoka, Minnesota; Lewiston, Idaho; Oroville, California; Onalaska, Wisconsin; and Richmond, Indiana. The Company maintains a warehouse facility in Thomasville, Georgia for distribution of sports optics and hunting accessories. Log loaders, feller bunchers and accessories for automated forestry equipment are manufactured at plants in Prentice, Wisconsin; Zebulon, North Carolina; and Owatonna, Minnesota. Rotation bearings and mechanical power transmission components are manufactured at a plant in Tulsa, Oklahoma. All of these facilities are in good condition, are currently in normal operation and are generally suitable and adequate for the business activity conducted therein. Approximate square footage of principal properties is as follows: Area in Square Feet --------------------- Owned Leased ------------------------------- --------- -------- Outdoor Products 1,015,000 213,000 Sporting Equipment 1,583,000 116,000 Industrial and Power Equipment 731,000 Corporate Office 192,000 13,000 ------------------------------- --------- ------- Total 3,521,000 342,000 ------------------------------- ========= ======= ITEM 3. LEGAL PROCEEDINGS For information regarding legal proceedings see Note 7 of Notes to Consolidated Financial Statements on pages 38 and 39. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Page 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. The following table presents for the Company's last two years, the quarterly high and low prices and cash dividends declared for the Company's Common Stock. The Company had approximately 7,700 shareholders as of February 1, 2000.
Common Stock Class A Common Stock Class B Common Stock ------------------------ ------------------------ ------------------------ High Low Dividend High Low Dividend High Low Dividend - ------------------- ------ ------ -------- ------ ------ -------- ------ ------ -------- Year Ended December 31, 1999 First quarter $14.82 $11.94 $.036 $14.00 $11.91 $.034 Second quarter 14.38 13.03 .036 14.16 13.63 .034 Third quarter $14.94 $10.50 14.97 12.75 14.78 13.13 Fourth quarter 17.69 11.44 Year Ended December 31, 1998 First quarter $14.88 $11.50 $.036 $14.94 $11.75 $.034 Second quarter 17.19 13.25 .036 16.13 13.22 .034 Third quarter 14.75 9.97 .036 14.25 11.03 .034 Fourth quarter 12.47 9.47 .036 12.32 9.75 .034 - ------------------- ------ ------ ----- ------ ------ ----- ------ ------ -----
All data has been restated to give effect to the merger described in Note 1 of Notes to Consolidated Financial Statements on pages 26 through 28. Page 10 ITEM 6. SELECTED FINANCIAL DATA
Twelve Months Ended Ten Months Twelve Months December 31, Ended Ended Last Day Dollar amounts in millions, ------------------------------------------------ December 31, of February except per share data 1999 1998 1997 1996(1) 1995(1) 1996(1) 1996 - ---------------------------------------- -------- -------- -------- -------- -------- ------------ -------------- (Unaudited) ------------------ Operating Results: Sales $ 809.9 $ 831.9 $ 716.9 $ 649.3 $ 621.4 $ 526.7 $ 644.3 Operating income from segments 111.1 132.4 117.9 113.1 104.9 91.2 112.8 Income (loss) from continuing operations before extraordinary loss (21.8) 63.3 59.1 53.8 49.4 44.0 53.6 Net income (loss) (21.8) 61.3 59.1 55.2 49.4 45.4 53.6 Earnings per share: Basic: Income (loss) from continuing operations before extraordinary loss (0.37) 0.85 0.79 0.70 0.65 0.57 0.70 Net income (loss) (0.37) 0.82 0.79 0.72 0.65 0.59 0.70 Diluted: Income (loss) from continuing operations before extraordinary loss (0.37) 0.83 0.77 0.69 0.63 0.56 0.69 Net income (loss) (0.37) 0.80 0.77 0.71 0.63 0.58 0.69 - ---------------------------------------- -------- -------- -------- -------- -------- -------- -------- End of Period Financial Position: Total assets $ 688.7 $ 668.8 $ 637.8 $ 533.8 $ 522.4 $ 533.8 $ 546.5 Working capital 187.5 232.2 171.1 166.2 122.2 166.2 136.2 Property, plant and equipment-gross 402.7 392.8 376.8 301.9 293.8 301.9 295.5 Property, plant and equipment-net 172.3 182.9 188.5 131.7 136.7 131.7 135.5 Long-term debt 809.7 161.6 138.8 84.6 95.9 84.6 95.9 Total debt 816.2 162.3 140.3 85.8 108.7 85.8 107.6 Stockholders' equity (deficit) (321.7) 354.6 316.1 290.8 244.6 290.8 255.0 Current ratio 2.3 to 1 3.4 to 1 2.3 to 1 2.4 to 1 1.9 to 1 2.4 to 1 1.9 to 1 - ---------------------------------------- -------- -------- -------- -------- -------- -------- -------- Other Data: Property, plant and equipment additions(2) $ 18.5 $ 21.7 $ 78.5 $ 21.3 $ 19.8 $ 18.7 $ 19.3 Depreciation and amortization 34.0 30.9 25.0 23.3 22.3 19.2 22.2 Interest expense, net of interest income 41.1 11.8 7.0 7.5 6.8 5.6 7.4 Stock price (3): Common high 17.69 Common low 10.50 Stock price (3): Class A high 14.97 17.19 13.44 9.72 8.79 9.72 8.79 Class A low 11.94 9.47 9.41 6.34 6.13 7.06 6.13 Stock price (3): Class B high 14.78 16.13 13.50 9.47 8.79 9.47 8.79 Class B low 11.91 9.75 9.38 7.38 6.29 7.38 6.29 Per common share dividends (3): Class A .072 .143 .131 .114 .099 .114 .099 Class B .067 .134 .122 .106 .090 .106 .090 Shares used in earnings per share computations (in millions) (3): Basic 58.2 74.7 75.3 76.7 75.9 76.8 76.0 Diluted 58.2 76.8 77.1 78.2 77.8 78.3 77.8 Employees (approximate) 5,600 5,300 5,700 4,400 4,400 4,400 4,400 - ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
(1) In April 1996, the Company changed its fiscal year from one ending on the last day of February to one ending on December 31. Unaudited financial data for the twelve months ended December 31, 1996 and 1995, is also presented in the table above. (2) Includes property, plant and equipment of acquired companies at date of purchase of $0.7 million and $59.8 million in the twelve months ended December 31, 1999 and 1997, and $0.6 million in the twelve months ended the last day of February 1996. (3) Gives effect to merger on August 19, 1999, described in Note 1 of Notes to Consolidated Financial Statements. Page 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. All references to earnings per share included in this discussion are to diluted earnings per share. OPERATING RESULTS TWELVE MONTHS ENDED DECEMBER 31, 1999, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998 Sales for 1999 were $809.9 million compared to $831.9 million for 1998. Operating income from segments for 1999 was $111.1 million compared to $132.4 million for 1998. For 1999, income before extraordinary loss was $34.1 million ($.57 per share) before accounting for after-tax merger costs of $53.6 million ($.90 per share) and non-recurring costs of $2.3 million ($.03 per share). This compares to income before extraordinary loss of $63.3 million ($.83 per share) in 1998. These results reflect a significant reduction in sales and operating income from the Industrial and Power Equipment segment due to adverse market conditions, manufacturing problems at the Prentice facility which adversely impacted productivity and costs associated with the plant consolidation and realignment program, and improved results from the Sporting Equipment segment and Outdoor Products segment. Corporate expenses include a donation of art with a book value of $1.5 million in the first quarter of 1999 (see Note 1 of Notes to Consolidated Financial Statements). Merger expenses of $76.1 million were incurred in 1999 compared to $0.3 million in 1998 (for a summary description of the merger, see Note 1 of Notes to Consolidated Financial Statements). Excluding the expense associated with the donation of art and merger expenses, selling, general and administrative expenses decreased $4.0 million in 1999 compared to 1998. These decreases reflect cost reduction efforts at each segment and the corporate office. Higher interest expense for 1999 reflects higher long-term debt levels during the current year resulting from the transaction described in Note 1 of Notes to Consolidated Financial Statements. The Company's effective income tax rate in 1999 reflects the donation of art and the non-deductible portion of the expenses associated with the merger. The principal reasons for these results and the status of the Company's financial condition are set forth below. Sales of the Outdoor Products segment for 1999 were $327.6 million compared to $315.4 million in 1998. Operating income was $71.8 million in 1999 compared to $68.4 million the prior year. Sales reflect a higher volume of sales of lawn mowers and accessories and from flat to slightly lower sales of other product lines as indicated in the following table (in millions): % Increase (Decrease) 1999 1998 in 1999 - ------------------------------------------ ------ ------ ---------- Chain saw components $201.1 $199.7 .7% Lawn mowers and accessories 87.2 75.7 15.2 Other 39.3 40.0 (.2) - ------------------------------------------ ------ ------ Total segment sales $327.6 $315.4 3.9% - ------------------------------------------ ====== ====== The improvement in operating income is primarily due to the higher sales of lawn mowers and accessories and the positive effect of favorable exchange rates in Brazil which adds approximately $1.9 million. Page 12 Sales for the Sporting Equipment segment were up significantly to $323.7 million from $286.7 million the prior year. Operating income improved to $40.4 million from $36.1 million the previous year. These results reflect a higher volume for ammunition and related components, sports optics and other products, partially offset by competitive pricing actions required during the last half of the current year in one of this segment's products. Sales by the segment's principal product groups were as follows (in millions): % Increase (Decrease) 1999 1998 in 1999 - ------------------------------------------ ------ ------ ---------- Ammunition related products $234.9 $212.0 10.8% Sports optical products 48.3 41.3 16.9 Other 40.5 33.4 21.3 - ------------------------------------------ ------ ------ Total segment sales $323.7 $286.7 12.9% - ------------------------------------------ ====== ====== Additionally in the second half of 1998, the Sporting Equipment segment completed certain cost reduction activities by consolidating its raw materials purchasing and sales and marketing organizations, transferring certain production to lower cost facilities and eliminating certain outsourcing. Annual savings of $3.7 million from these efforts were realized in 1999. The Company's Industrial and Power Equipment segment is a cyclical, capital goods business whose results are closely linked to the strength of the forestry industry in general. A key indicator of this segment's market is the price of Northern Bleached Softwood Kraft ("pulp") which declined from an average of $598 per metric ton in the fourth quarter of 1997 to an average of $520 per metric ton in 1999 ($460 per metric ton in the first quarter, $500 per metric ton in the second quarter, $533 per metric ton in the third quarter and $587 per metric ton in the fourth quarter), resulting in depressed market conditions characterized by significant sales declines in the Company's most important market (the Southeastern United States) and the need to offer discounts in response to extremely aggressive competition for available sales. Operating results of this segment were adversely affected by these poor market conditions in 1999. Sales by the segment's principal product groups were as follows (in millions): % Increase (Decrease) 1999 1998 in 1999 - ------------------------------------------ ------ ------ ---------- Timber harvesting and loading equipment $133.1 $199.8 (33.4)% Gear components and rotation bearings 25.5 30.0 (15.0) - ------------------------------------------ ------ ------ Total segment sales $158.6 $229.8 (31.0)% - ------------------------------------------ ====== ====== This segment incurred an operating loss of $1.1 million in 1999 compared to operating income of $27.9 million in 1998 primarily due to sharply reduced demand and manufacturing problems at the Prentice facility which increased costs. In response to weak market conditions and to improve capacity utilization, the Company implemented a program of production consolidation and realignments in this segment to lower costs and improve productivity. One manufacturing facility was closed during the first half of 1999 with its production shifted to other Company plants. Another small facility was closed during the third quarter of 1999 with its production outsourced. Costs of approximately $3.0 million related to these plant closings were charged to Page 13 operations during 1999. Management anticipates annual cost savings of approximately $3.7 million beginning in the third quarter of 1999 as a result of these actions. With recent pulp price increases, low pulp inventory levels, increased demand for pulp and paper products from the economic recovery of Southeast Asia, improved order backlog and improved performance in the fourth quarter of 1999, management is cautiously optimistic of continued improvement in the near future, although the extent and timing of further improvement is highly uncertain. If the current slowdown were to continue, it would be unlikely this segment could achieve historical levels of sales and profitability. The Company's total backlog increased to $85.7 million at December 31, 1999, from $61.3 million at December 31, 1998, as follows (in millions): Increase 1999 1998 in 1999 - ------------------------------------------ ------ ------ ---------- Outdoor Products $ 41.9 $ 30.2 $ 11.7 Sporting Equipment 18.0 15.1 2.9 Industrial and Power Equipment 25.8 16.0 9.8 - ------------------------------------------ ------ ------ ------ Total $ 85.7 $ 61.3 $ 24.4 - ------------------------------------------ ====== ====== ====== Management continuously reviews for potential cost reductions. In addition to cost savings efforts commented on elsewhere within management's discussion and analysis, studies are underway to evaluate distribution processes and distribution facility needs. These studies are expected to be completed in 2000. While no assurance can be given that savings can be achieved until these studies are completed, management estimates that potential annual savings will range from $2 million to $4 million with implementation expenses estimated at $1.5 million to $2.5 million. Actual results could vary significantly from these estimates. TWELVE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1997 Despite economic problems in some markets, the Company achieved record results in 1998. Sales in 1998 were $831.9 million compared to $716.9 million in 1997. Income before extraordinary loss was $63.3 million ($.83 per share) in 1998 compared to $59.1 million ($.77 per share) in 1997. Net income of $61.3 million ($.80 per share) for 1998 reflects a net extraordinary loss of $2.0 million ($.03 per share) on the redemption of long-term debt. The higher sales and improved operating results in 1998 are primarily due to the full year contribution to the Sporting Equipment segment by Federal Cartridge Company ("Federal") which was acquired during the fourth quarter of 1997. Selling, general and administrative expenses were 17% of sales in 1998 compared to 19% in 1997. Total selling, general and administrative expenses increased by $10.0 million in 1998 primarily due to Federal being included in operating results for the entire year. Higher interest expense in 1998 reflects higher debt levels during the current year, principally due to the Federal acquisition. Total backlog was $61.3 million at December 31, 1998, compared to $117.9 million at December 31, 1997. The current year backlog is lower at each of the Company's operating segments with the largest decrease at the Industrial and Power Equipment segment, principally reflecting reduced demand for timber harvesting and industrial equipment. The Company expects a challenging year in 1999 as economic conditions in Southeast Asia and South America and low pulp prices and high mill inventories are likely to impact the demand for the Page 14 Industrial and Power Equipment segment's timber harvesting equipment. The Industrial and Power Equipment segment has implemented production and cost control measures to help mitigate the effect of the reduction in demand. In 1999, the Sporting Equipment segment should continue to benefit from the acquisition of Federal and related consolidation and cost reduction activities. Sales and operating income for the Outdoor Products segment for 1998 were $315.4 million and $68.4 million, respectively, compared to $319.3 million and $67.1 million during 1997. The operating results for this segment reflect a decrease in sales and operating income of $10.0 million and $1.3 million, respectively, at the Company's Oregon Cutting Systems Division ("Oregon") and higher sales and operating income at Dixon Industries, Inc. ("Dixon"). Oregon's 1998 results reflect an approximate $11.5 million sales decrease in Southeast Asia and the Far East, primarily due to the economic problems in those areas, which has contributed to an approximate 4% reduction in the sales volume of cutting chain and chain saw guide bars, Oregon's principal products. Oregon has foreign manufacturing or distribution operations in Canada, Europe, Brazil, Japan and Russia. The Company estimates that foreign currency exchange rates in 1998, as compared to 1997, provided a favorable impact on operating income of approximately $1.5 million. During 1998, operating income from Brazil was $3.1 million compared to $2.6 million during 1997. Dixon's sales and operating income improved in 1998 compared to the prior year due to higher volume and more favorable weather conditions. Sales and operating income for the Sporting Equipment segment were $286.7 million and $36.1 million, respectively, in 1998 compared to $158.5 million and $18.1 million in 1997. The significant improvement in sales and operating income reflect the sales and income added by Federal which was acquired during the fourth quarter of 1997. Total sales and operating income at other Sporting Equipment operations were flat in 1998 as compared to the prior year. Sales and operating income for the Industrial and Power Equipment segment were down to $229.8 million and $27.9 million, respectively, in 1998 from $239.1 million and $32.7 million in 1997. The results for 1998 reflect reduced demand for timber harvesting equipment resulting principally from sharply lower pulp prices since mid-year and higher mill inventories, higher competitive discounts and higher warranty costs. The operating results for this segment's Gear Products, Inc. subsidiary ("Gear") improved slightly in 1998 compared to 1997. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, as a result of the recapitalization transactions (see Note 1 of Notes to Consolidated Financial Statements), the Company has significant amounts of debt, with interest payments on the notes and interest and principal payments under the new credit facilities representing significant obligations for the Company. The notes require semi-annual interest payments and the term loan facilities under the new credit facilities require payments of principal commencing on December 31, 1999. Interest on the term loan facilities and amounts outstanding under the revolving credit facility are payable in arrears according to varying interest periods. The Company's remaining liquidity needs relate to working capital needs, capital expenditures and potential acquisitions. The Company intends to fund working capital, capital expenditures and debt service requirements through cash flows generated from operations and from the revolving credit facility. The revolving credit facility has an availability of up to $100.0 million. Letters of credit issued under the revolving credit facility which reduced the amount available under the revolving credit facility were $8.1 million at December 31, 1999. The revolving credit facility will mature August 19, 2004. Page 15 Management believes that cash generated from operations, together with amounts available under the revolving credit facility, will be sufficient to meet the Company's working capital, capital expenditure and other cash needs, including financing for acquisitions, in the foreseeable future. There can be no assurance, however, that this will be the case. The Company may also consider other options available to it in connection with future liquidity needs. The Company has senior notes outstanding in the principal amount of $150 million which mature in 2005. The Company also has senior subordinated notes outstanding in the principal amount of $325 million which mature in 2009 and senior term loans outstanding in the principal amount of $339 million which mature at various dates through 2006. See Note 1 of Notes to Consolidated Financial Statements for the terms and conditions of the senior notes, the senior subordinated notes and senior term loans. Cash balances at December 31, 1999, were $10.5 million compared to $45.1 million at December 31, 1998. Cash provided by operating activities was $19.1 million in 1999 compared to $88.9 million the prior year, principally due to a net income decrease of $83.1 million. Working capital decreased $44.7 million to $187.5 million, compared to $232.2 million last year. Accounts receivable increased by $39.6 million, notes payable and current maturities of long-term debt by $5.8 million, accounts payable by $20.6 million, and accrued expenses by $27.2 million. Inventories decreased $4.0 million. The notes payable and current maturities of long-term debt increase reflects $3.4 million of new term loans and $3.0 million from short-term foreign lines of credit. The accounts payable increase reflects purchases principally related to the higher level of business in the fourth quarter and the extension of payments to partially offset higher receivables. The increase in accrued expenses principally reflects the increased interest on the additional debt. The accounts receivable increase reflects higher sales by all three segments as compared to the fourth quarter of 1998 and extended terms used as a marketing tool by the Sporting Equipment segment and the Industrial and Power Equipment segment. Accounts receivable at December 31, 1999, and December 31, 1998, and sales by segment for the fourth quarter of 1999 compared to the fourth quarter of 1998 were as follows (in millions): December 31, December 31, 1999 1998 Increase - ------------------------------------ ------------ ------------ ---------- Accounts Receivable: Outdoor Products $ 65.6 $ 56.7 $ 8.9 Sporting Equipment 64.8 41.5 23.3 Industrial and Power Equipment 40.9 33.4 7.5 - ------------------------------------ ------ ------ ------ Total segment receivables $171.3 $131.6 $ 39.7 - ------------------------------------ ====== ====== ====== Three Months Ended December 31, December 31, 1999 1998 Increase - ------------------------------------ ------------ ------------ ---------- Sales: Outdoor Products $ 84.3 $ 79.2 $ 5.1 Sporting Equipment 83.8 69.5 14.3 Industrial and Power Equipment 53.9 51.8 2.1 - ------------------------------------ ------ ------ ------ Total segment sales $222.0 $200.5 $ 21.5 - ------------------------------------ ====== ====== ====== Page 16 The higher sales by the Outdoor Products segment are the principal reason for the increase in that segment's receivables as compared to year-end. Because of the seasonal nature of the sporting equipment business, the need to produce and ship efficiently in order to ensure an adequate supply during peak sales periods and in response to competitor programs, the Company offers extended payment terms within its Sporting Equipment segment in advance of the fall hunting season. As a result, receivables tend to peak in September and reach their low point in January of each year. At December 31, 1999, extended term receivables were $11 million greater than at December 31, 1998. In addition, the higher sales occurred late in the quarter and result in increased receivables. The Industrial and Power Equipment segment sales reflect the adverse market conditions described in "Operating Results." Recently, this segment has begun to see improvement in its market as reflected in the increased backlog of $25.8 million at December 31, 1999, compared to $16.0 million at December 31, 1998. Sales increases during the fourth quarter are further evidence of this improvement. In response to the adverse market conditions, this segment began offering in the fourth quarter of 1998 payment terms of 90, 120 and, in some cases, 180 days to certain dealers based on their financial strength. At December 31, 1999, there were approximately $11.5 million in receivables with extended terms compared to $14.5 million at December 31, 1998. The sales increase of $5.7 million for the month of December 1999 compared to December 1998 and a collection of $4 million the first of January for amounts due at the end of December 1999 from the two largest customers are the primary reasons for the increase in receivables. The Company has absorbed the increased receivables through operating cash flows and, given historical operating cash flows, the Company expects operating cash flows will be sufficient to cover any further increases until market conditions in the Industrial and Power Equipment segment further improve and terms return to those normally extended. No material adverse effect on the operations, liquidity or capital resources of the Company is expected as a result of the extended terms. Cash used in investing activities in 1999 was $21.4 million, reflecting principally purchases of property, plant and equipment of $17.5 million. Cash used in financing activities in 1999 was $32.3 million, principally reflecting $696.9 million from the issuance of senior subordinated notes and senior term loans, and capital contribution of $417.5 million partially offset by the redemption of common stock of $1,068.8 million, the payment of dividends of $7.8 million, and payment of long-term debt of $74.6 million. Immediately after the merger transaction described in Note 1 of Notes to Consolidated Financial Statements, the Company became substantially leveraged which may adversely affect its operations. This substantial leverage could have important consequences for the Company, including the following: 1. the ability to obtain additional financing for working capital, capital expenditures or other purposes may be impaired or that kind of financing may not be on favorable terms; 2. a substantial portion of cash flows available from operations will be dedicated to the payment of principal and interest expense, which will reduce the funds that would otherwise be available for operations and future business opportunities; 3. a substantial decrease in net income and cash flows or an increase in expenses may make it difficult to meet debt service requirements or force the Company to modify operations; and Page 17 4. substantial leverage may make the Company more vulnerable to economic downturns and competitive pressure. MARKET RISK The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity prices. The Company manages its exposure to these market risks through its regular operating and financing activities, and, when deemed appropriate, through the use of derivatives. When utilized, derivatives are used as risk management tools and not for trading purposes. See Interest Rate Risk and Commodity Price Risk below for discussion of expectations as regards future use of interest rate and commodity price derivatives. Interest Rate Risk: The Company manages its ratio of fixed to variable rate debt with the objective of achieving a mix that management believes is appropriate. Historically, the Company has, on occasion, entered into interest rate swap agreements to exchange fixed and variable interest rates based on agreed upon notional amounts and has entered into interest rate lock contracts to hedge the interest rate of an anticipated debt issue. At December 31, 1999, no derivative financial instruments were outstanding to hedge interest rate risk. A hypothetical immediate 10% increase in interest rates would decrease the fair value of the Company's fixed rate long-term debt outstanding at December 31, 1999, by $27.3 million. A hypothetical 10% increase in the interest rates on the Company's variable rate long-term debt for a duration of one year would increase interest expense by approximately $3.5 million in 2000. Under its Credit Agreement, the Company is required to enter into hedge agreements within 180 days of the borrowing and maintain such hedge agreements in place until the second anniversary of the borrowing, such that at least 33% of the aggregate principal amount of the borrowings are subject to a fixed rate of interest. The Company will have in place by February 15, 2000, an interest rate cap at an immaterial cost to comply with this requirement. Foreign Currency Exchange Risk: Approximately 36% of Oregon's sales and 42% of its operating costs and expenses were transacted in foreign currencies in 1999. As a result, fluctuations in exchange rates impact the amount of Oregon's reported sales and operating income. Historically, the Company's principal exposures have been related to local currency operating costs and expenses in Canada and local currency sales in Europe (principally France and Germany). During the past three years, the Company has not used derivatives to manage any significant foreign currency exchange risk and, at December 31, 1999, no foreign currency exchange derivatives were outstanding. Commodity Price Risk: During 1999, the Company purchased approximately 11.4 million pounds of brass for use in its Sporting Equipment operations. While the Company has in previous years hedged approximately 40% of these purchases and may in the current or future years hedge these purchases if the price trend is such that it could have a material effect on financial condition or results of operations, no futures contracts to manage this price risk were entered into in 1999. Because there are no copper and zinc contracts outstanding at December 31, 1999, an immediate hypothetical 10% decrease in the futures prices of copper and zinc would have no effect on fair value. In addition, a large quantity of other metals (principally lead) were purchased by Sporting Equipment operations in 1999. Derivatives were not used to manage this price risk. Page 18 IMPACT OF YEAR 2000 ISSUE The Company evaluated its internal date-sensitive systems and equipment for Year 2000 compliance. The assessment phase included both information technology equipment and non-information technology equipment. Based on its assessment, the Company determined that it was necessary to modify or replace a portion of its information systems and other equipment. The modification or replacement and testing of the critical software, hardware and equipment requiring remediation was completed and mitigated successfully the effect of the Year 2000 issue. The Company's operations incurred no disruption of their ability to manufacture and ship products, process financial transactions or engage in similar normal business activities. Likewise, the Company experienced no significant problems with its non-information technology systems. The total estimated cost of the Year 2000 project, including system upgrades, was approximately $5.4 million and was funded by operating cash flows. As of December 31, 1999, all costs had been incurred. Of the total cost of the project, approximately $2.6 million was attributable to new software and equipment, which was capitalized. The remaining costs were expensed as incurred. The Company experienced no significant problems with key suppliers and customers as a result of the Year 2000 issue. Where needed, the Company established contingency plans based on actual testing results and assessment of outside risks; however, it was not necessary to implement any contingency plan. The above statement in its entirety is designated a Year 2000 readiness disclosure under the Year 2000 Information and Readiness Disclosure Act. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivatives and hedging. It requires that all derivatives be recognized as either assets or liabilities at fair value and establishes specific criteria for the use of hedge accounting. The Company's required adoption date is January 1, 2001. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. The Company expects no material adverse effect on consolidated results of operations, financial position or cash flows upon adoption of SFAS No. 133, but does expect a small reduction in stockholders' equity. FORWARD LOOKING STATEMENTS Forward looking statements in this report, as defined by the Private Securities Litigation Reform Law of 1995, involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk" on page 18. Page 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders, Blount International, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Blount International, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Atlanta, Georgia January 27, 2000 Page 20 MANAGEMENT RESPONSIBILITY All information contained in the consolidated financial statements of Blount International, Inc., has been prepared by management, which is responsible for the accuracy and internal consistency of the information. Generally accepted accounting principles have been followed. Reasonable judgments and estimates have been made where necessary. Management is responsible for establishing and maintaining a system of internal accounting controls designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The system of internal accounting controls is tested by the independent auditors to the extent deemed necessary in accordance with generally accepted auditing standards. Management believes the system of internal controls has been effective during the Company's most recent fiscal year and that no matters have arisen which indicate a material weakness in the system. Management follows the policy of responding to the recommendations concerning the system of internal controls made by the independent auditors. Management implements those recommendations that it believes would improve the system of internal controls and be cost justified. Three directors of the Company, not members of management, serve as the Audit Committee of the Board and are the principal means through which the Board discharges its financial reporting responsibility. The Audit Committee meets with management personnel and the Company's independent auditors each year to consider the results of external audits of the Company and to discuss internal accounting control, auditing and financial reporting matters. At these meetings, the Audit Committee also meets privately with the independent auditors of the Company to ensure free access by the independent auditors to the committee. The Company's independent auditors, PricewaterhouseCoopers LLP, audited the financial statements prepared by the Company. Their opinion on these statements appears herein. JOHN M. PANETTIERE HAROLD E. LAYMAN Chairman of the Board President and Chief Operating Officer and Chief Executive Officer and Chief Financial Officer Page 21 CONSOLIDATED STATEMENTS OF INCOME Blount International, Inc. and Subsidiaries Twelve Months Ended December 31, (Dollar amounts in millions, -------------------------- except per share data) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Sales $809.9 $831.9 $716.9 Cost of sales 574.3 573.6 482.9 - ------------------------------------------------ ------ ------ ------ Gross profit 235.6 258.3 234.0 Selling, general and administrative expenses 141.8 144.3 134.6 Merger expenses 76.1 0.3 - ------------------------------------------------ ------ ------ ------ Income from operations 17.7 113.7 99.4 Interest expense (44.8) (14.3) (9.5) Interest income 3.7 2.5 2.5 Other income, net 0.8 0.3 1.3 - ------------------------------------------------ ------ ------ ------ Income (loss) before income taxes (22.6) 102.2 93.7 Provision (benefit) for income taxes (0.8) 38.9 34.6 - ------------------------------------------------ ------ ------ ------ Income (loss) before extraordinary loss (21.8) 63.3 59.1 Extraordinary loss on repurchase of debt, net (2.0) - ------------------------------------------------ ------ ------ ------ Net income (loss) $(21.8) $ 61.3 $ 59.1 - ------------------------------------------------ ------ ------ ------ Basic earnings (loss) per share: Before extraordinary loss $(0.37) $ 0.85 $ 0.79 Extraordinary loss (.03) - ------------------------------------------------ ------ ------ ------ Net income (loss) $(0.37) $ 0.82 $ 0.79 - ------------------------------------------------ ------ ------ ------ Diluted earnings (loss) per share: Before extraordinary loss $(0.37) $ 0.83 $ 0.77 Extraordinary loss (.03) - ------------------------------------------------ ------ ------ ------ Net income (loss) $(0.37) $ 0.80 $ 0.77 - ------------------------------------------------ ------ ------ ------ Cash dividends per share: Class A $ .071 $ .143 $ .131 Class B .067 .134 .122 - ------------------------------------------------ ------ ------ ------ The accompanying notes are an integral part of the audited financial statements. Page 22 CONSOLIDATED BALANCE SHEETS Blount International, Inc. and Subsidiaries December 31, (Dollar amounts in millions, except per share data) 1999 1998 - ------------------------------------------------------------ -------- -------- Assets - ------------------------------------------------------------ -------- -------- Current assets: Cash and cash equivalents $ 10.5 $ 45.1 Accounts receivable, net of allowance for doubtful accounts of $4.2 and $3.9 171.9 132.3 Inventories 117.0 121.0 Deferred income taxes 21.1 22.0 Other current assets 15.5 6.7 - ------------------------------------------------------------ -------- ------- Total current assets 336.0 327.1 Property, plant and equipment, net of accumulated depreciation of $230.4 and $209.9 172.3 182.9 Cost in excess of net assets of acquired businesses, net 111.5 114.7 Other assets 68.9 44.1 - ------------------------------------------------------------ -------- ------- Total Assets $ 688.7 $ 668.8 - ------------------------------------------------------------ -------- ------- Liabilities and Stockholders' Equity (Deficit) - ------------------------------------------------------------ -------- ------- Current liabilities: Notes payable and current maturities of long-term debt $ 6.5 $ 0.7 Accounts payable 51.0 30.4 Accrued expenses 91.0 63.8 - ------------------------------------------------------------ -------- ------- Total current liabilities 148.5 94.9 Long-term debt, exclusive of current maturities 809.7 161.6 Deferred income taxes, exclusive of current portion 8.8 13.0 Other liabilities 43.4 44.7 - ------------------------------------------------------------ -------- ------- Total liabilities 1,010.4 314.2 - ------------------------------------------------------------ -------- ------- Commitments and Contingent Liabilities - ------------------------------------------------------------ -------- ------- Stockholders' equity (deficit): Common stock: par value $.01 per share, 100,000,000 shares authorized, 30,795,882 outstanding 0.3 Common Stock: par value $.005 per share Class A: 54,856,210 shares issued 0.3 Class B, convertible: 22,958,942 shares issued 0.1 Capital in excess of par value of stock 417.3 38.7 Retained earnings (deficit) (747.9) 348.9 Accumulated other comprehensive income 8.6 7.6 Less Class A treasury stock at cost, none and 3,704,604 shares (41.0) - ------------------------------------------------------------ -------- ------- Total stockholders' equity (deficit) (321.7) 354.6 - ------------------------------------------------------------ -------- ------- Total Liabilities and Stockholders' Equity (Deficit) $ 688.7 $ 668.8 - ------------------------------------------------------------ -------- ------- The accompanying notes are an integral part of the audited financial statements. Page 23 CONSOLIDATED STATEMENTS OF CASH FLOWS Blount International, Inc. and Subsidiaries
Twelve Months Ended December 31, ----------------------------- (Dollar amounts in millions) 1999 1998 1997 - -------------------------------------------------------- --------- ------ ------ Cash flows from operating activities: Net income (loss) $ (21.8) $ 61.3 $ 59.1 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss 2.0 Depreciation, amortization and other noncash charges 34.0 30.9 25.0 Deferred income taxes (3.2) (2.3) (1.7) Gain on disposals of property, plant and equipment (0.5) (0.6) Changes in assets and liabilities, net of effects of businesses acquired and sold: (Increase) decrease in accounts receivable (39.6) 3.4 20.4 (Increase) decrease in inventories 4.0 13.3 (10.4) (Increase) decrease in other assets (2.8) 0.8 Increase (decrease) in accounts payable 20.6 (12.8) 0.8 Increase (decrease) in accrued expenses 30.3 (7.3) (15.5) Increase (decrease) in other liabilities (1.9) 0.4 2.4 - -------------------------------------------------------- --------- ------ ------ Net cash provided by operating activities 19.1 88.9 80.3 - -------------------------------------------------------- --------- ------ ------ Cash flows from investing activities: Proceeds from sales of property, plant and equipment 0.8 1.3 0.9 Purchases of property, plant and equipment (17.5) (21.1) (17.8) Acquisitions of businesses (1.4) (17.4) (132.5) Other (3.3) - -------------------------------------------------------- --------- ------ ------ Net cash used in investing activities (21.4) (37.2) (149.4) - -------------------------------------------------------- --------- ------ ------ Cash flows from financing activities: Net increase (reduction) in short-term borrowings 3.0 (0.4) Issuance of long-term debt 696.9 149.4 62.0 Reduction of long-term debt (74.6) (137.5) (14.9) Decrease in restricted funds 3.5 0.5 1.0 Dividends paid (7.8) (10.5) (9.4) Redemption of Common Stock (1,068.8) Capital contribution 417.5 Purchase of treasury stock (18.1) (27.5) Other (2.0) 5.2 4.0 - -------------------------------------------------------- --------- ------ ------ Net cash provided by (used in) financing activities (32.3) (11.4) 15.2 - -------------------------------------------------------- --------- ------ ------ Net increase (decrease) in cash and cash equivalents (34.6) 40.3 (53.9) - -------------------------------------------------------- --------- ------ ------ Cash and cash equivalents at beginning of period 45.1 4.8 58.7 - -------------------------------------------------------- --------- ------ ------ Cash and cash equivalents at end of period $ 10.5 $ 45.1 $ 4.8 - -------------------------------------------------------- --------- ------ ------
The accompanying notes are an integral part of the audited financial statements. Page 24 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Blount International, Inc. and Subsidiaries
Accumulated Common Stock Capital Retained Other (Dollar amounts in millions, ------------------------ In Excess Earnings Comprehensive Treasury shares in thousands) Common Class A Class B of Par (Deficit) Income Stock Total - ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- ------- Balance, December 31, 1996 $ 0.1 $ 0.1 $ 34.8 $ 252.2 $ 7.9 $ (4.3) $ 290.8 Stock split (27,276 Class A, 1,456 treasury, and 11,622 Class B) 0.2 (0.2) Net income 59.1 59.1 Other comprehensive income, net: Foreign currency translation adjustment (0.9) (0.9) ------- Comprehensive income 58.2 Dividends (9.6) (9.6) Conversion of Class B to Class A Common stock (158 shares) Purchase of treasury stock (1,346 Class A shares) (27.5) (27.5) Other (458 Class A shares, 132 treasury) - principally stock options exercised 3.1 (1.4) 2.5 4.2 - ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- ------- Balance, December 31, 1997 0.3 0.1 37.7 300.3 7.0 (29.3) 316.1 Net income 61.3 61.3 Other comprehensive income, net: Foreign currency translation adjustment 0.5 0.5 Unrealized gains on securities, net of gains of $0.2 reclassified to net income 0.6 0.6 Minimum pension liability adjustment (0.5) (0.5) ------- Comprehensive income 61.9 Dividends (10.5) (10.5) Conversion of Class B to Class A Common stock (282 shares) Purchase of treasury stock (1,410 Class A shares) (18.0) (18.0) Other (630 Class A shares, 612 treasury) - principally stock options exercised 1.0 (2.2) 6.3 5.1 - ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- ------- Balance, December 31, 1998 0.3 0.1 38.7 348.9 7.6 (41.0) 354.6 Net income (loss) (21.8) (21.8) Other comprehensive income, net: Foreign currency translation adjustment (0.5) (0.5) Unrealized gains on securities 1.0 1.0 Minimum pension liability adjustment 0.5 0.5 ------- Comprehensive income (loss) (20.8) Redemption of Common Stock, 48,475 shares of Class A and 22,776 shares of Class B (0.3) (0.1) (1,068.4) (1,068.8) Capital Contributions (27,833 shares) $ 0.2 417.3 417.5 Exchange of Class A for 2,963 shares of Common 0.1 0.1 Conversion of Class B to Class A (183 shares) Retire treasury stock (3,605 Class A) (38.8) (1.1) 39.9 Dividends (5.2) (5.2) Other - principally stock options exercised 0.1 (0.3) 1.1 0.9 - ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- ------- Balance, December 31, 1999 $ 0.3 $417.3 $ (747.9) $ 8.6 $(321.7) - ------------------------------------------- ------ ------- ------- --------- --------- ------------- -------- -------
The accompanying notes are an integral part of the audited financial statements. Page 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Blount International, Inc. and Subsidiaries NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of Blount International, Inc. and its subsidiaries ("the Company"). All significant intercompany balances and transactions are eliminated in consolidation. Merger: On August 19, 1999, Blount International, Inc., a Delaware corporation, merged with Red Dog Acquisition, Corp., a Delaware corporation and a wholly-owned subsidiary of Lehman Brothers Merchant Banking Partners II L.P. ("Lehman"). The merger was completed pursuant to an Agreement and Plan of Merger and Recapitalization dated as of April 18, 1999. Lehman is a $2.0 billion institutional merchant banking fund focused on investments in established operating companies. This transaction was accounted for as a recapitalization under generally accepted accounting principles. Accordingly, the historical basis of the Company's assets and liabilities has not been impacted by the transaction. As a result of the proration and stock election procedures related to the merger, approximately 1.5 million shares of Blount International's pre-merger outstanding common stock were retained by existing shareholders and exchanged, on a two-for-one basis, for 3.0 million shares of post-merger outstanding common stock. All share and per share information for periods prior to the merger have been restated to reflect the split. Lehman and certain members of Company management made a capital contribution of approximately $417.5 million and received approximately 27.8 million shares of post-merger outstanding common stock. Lehman controls approximately 85% of the 30.8 million shares outstanding following the merger. The merger was financed by the equity contribution of $417.5 million, senior term loans of $400 million and senior subordinated notes of $325 million issued by Blount, Inc., a wholly-owned subsidiary of Blount International, Inc. The new credit facilities include two term loan facilities in an aggregate principal amount of $400.0 million, comprised of a $60.0 million Tranche A Term Loan (none of which was outstanding at December 31, 1999) and a $340.0 million Tranche B Term Loan ($339.2 million of which was outstanding at December 31, 1999), and a $100.0 million revolving credit facility (none of which was outstanding at December 31, 1999). See Note 3. Reclassifications: Certain amounts in 1998 and 1997 and notes to consolidated financial statements have been reclassified to conform with the 1999 presentation. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for the allowance for doubtful accounts, inventory obsolescence, long-lived assets, product warranty expenses, casualty insurance costs, product liability expenses, other legal proceedings, employee benefit plans, income taxes, discontinued operations and contingencies. It is reasonably possible that actual results could differ significantly from those estimates and significant changes to estimates could occur in the near term. Page 26 Cash and cash equivalents: The Company considers all highly liquid temporary cash investments that are readily convertible to known amounts of cash and present minimal risk of changes in value because of changes in interest rates to be cash equivalents. Inventories: Inventories are stated at the lower of first-in, first-out cost or market. Property, plant and equipment: These assets are stated at cost and are depreciated principally on the straight- line method over the estimated useful lives of the individual assets. The principal ranges of estimated useful lives for depreciation purposes are as follows: buildings and improvements - 5 years to 45 years; machinery and equipment - 3 years to 15 years; furniture, fixtures and office equipment - 3 years to 15 years; and transportation equipment - 1 year to 15 years. Gains or losses on disposal are reflected in income. Property, plant and equipment held under leases which are essentially installment purchases are capitalized with the related obligations stated at the principal portion of future lease payments. Depreciation charged to costs and expenses was $27.3 million, $25.9 million and $21.1 million in 1999, 1998 and 1997. Interest cost incurred during the period of construction of plant and equipment is capitalized. No material amounts of interest were capitalized on plant and equipment during the three reporting periods ended December 31, 1999. Cost in excess of net assets of acquired businesses: The excess cost is being amortized by the straight-line method over periods ranging from 5 to 40 years. Accumulated amortization was $38.3 million and $34.4 million as of December 31, 1999 and 1998. The excess cost is evaluated for impairment annually or sooner if events or changes in circumstances indicate the carrying amount may exceed fair value based on the historic and estimated future profitability and cash flows of the business units to which it relates. Adjustments to carrying value are made if required. Insurance accruals: It is the Company's policy to retain a portion of expected losses related to general and product liability through retentions or deductibles under its insurance programs and for workers' compensation and vehicle liability losses until October 1, 1999. Provisions for losses expected under these programs are recorded based on estimates of the undiscounted aggregate liabilities for claims incurred. Foreign currency: For foreign subsidiaries whose operations are principally conducted in U.S. dollars, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate, while other assets (principally property, plant and equipment and inventories) and related costs and expenses are generally translated at historic exchange rates. Sales and other costs and expenses are translated at the average exchange rate for the period and the resulting foreign exchange adjustments are recognized in income. Assets and liabilities of the remaining foreign operations are translated into U.S. dollars at the current exchange rate and their statements of income are translated at the average exchange rate for the period. Gains and losses resulting from translation of the financial statements of these operations are reflected as "other comprehensive income" in stockholders' equity. The amount of income taxes allocated to this translation adjustment is not significant. Foreign exchange adjustments to pretax income were not material in 1999, 1998 and 1997. Page 27 Derivative financial instruments: The Company accounts for copper and zinc futures contracts in accordance with SFAS No. 80, "Accounting for Futures Contracts." These contracts (no pounds and approximately 4.0 million pounds at December 31, 1999 and 1998, respectively) hedge a portion of the anticipated brass purchases the Company expects to carry out in the normal course of business. Any gain or loss on futures contracts accounted for as a hedge which are closed before the date of the anticipated transaction is deferred until completion of the transaction. Deferred gains or losses are amortized over the transaction period. An interest rate contract accounted for as an interest rate hedge of an expected debt issue was extinguished upon the issuance of 7% senior notes in the principal amount of $150 million (see Note 3) in June 1998. The cost to extinguish the interest rate contract is being amortized as an adjustment to interest expense over the life of the senior notes. Deferred gains and losses on derivative financial instruments are generally classified as other assets or other liabilities in the consolidated balance sheets. Deferred Financing Costs: The Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or life of the credit facility. Revenue recognition: The Company's policy is to record sales as orders are shipped. Advertising: Advertising costs are expensed as incurred except for cooperative advertising which is accrued over the period the revenues are recognized and sales materials such as brochures and catalogs which are accounted for as prepaid supplies and expensed over the period used. Advertising costs were $11.7 million, $13.5 million and $14.6 million for 1999, 1998 and 1997. Research and development: Expenditures for research and development are expensed as incurred. These costs were $7.2 million, $7.4 million and $8.0 million for 1999, 1998 and 1997. Contributions: During the first quarter of 1999, the Company donated art with a book value of $1.5 million and an appraised value of $4.7 million to The Blount Foundation, Inc., a charitable foundation. On an after-tax basis, this donation had no significant effect on net income. Page 28 NOTE 2: INCOME TAXES The provision (benefit) for income taxes attributable to income (loss) before extraordinary loss is as follows: Twelve Months Ended December 31, ------------------------ (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Current provision (benefit): Federal $ (1.8) $ 33.3 $ 28.6 State 1.1 4.3 3.8 Foreign 5.0 4.2 3.9 Deferred provision (benefit): Federal (5.0) (2.4) (1.5) State (0.5) (0.1) 0.1 Foreign 0.4 (0.4) (0.3) - ------------------------------------------------ ------ ------ ------ $ (0.8) $ 38.9 $ 34.6 - ------------------------------------------------ ------ ------ ------ A reconciliation of the provision (benefit) for income taxes to the amount computed by applying the statutory federal income tax rate to income (loss) before extraordinary loss and income taxes is as follows: Twelve Months Ended December 31, ------------------------ (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Income (loss) before income taxes: Domestic $(31.9) $ 91.5 $ 83.8 Foreign 9.3 10.7 9.9 - ------------------------------------------------ ------ ------ ------ (22.6) $102.2 $ 93.7 - ------------------------------------------------ ------ ------ ------ % % % Statutory tax rate (35.0) 35.0 35.0 Impact of earnings of foreign operations 8.3 (0.7) State income taxes, net of federal tax benefit 0.6 2.6 2.2 Merger expenses 25.3 Permanent differences 2.3 1.2 1.6 Other items, net (5.3) (0.7) (1.2) - ------------------------------------------------ ------ ------ ------ Effective income tax rate (3.8) 38.1 36.9 - ------------------------------------------------ ------ ------ ------ All years reflect the allocation of substantially all corporate office expenses and interest expense to domestic operations. Page 29 As of December 31, 1999 and 1998, deferred income tax assets were $39.5 million and $35.7 million and deferred income tax liabilities were $27.2 million and $26.7 million. Deferred income tax assets (liabilities) applicable to temporary differences at December 31, 1999 and 1998, are as follows: (Dollar amounts in millions) 1999 1998 - ------------------------------------------------------------ ------ ------ Property, plant and equipment basis differences $(16.9) $(17.8) Employee benefits 21.4 19.1 Other accrued expenses 16.3 15.0 Other - net (8.5) (7.3) - ------------------------------------------------------------ ------ ------ $ 12.3 $ 9.0 - ------------------------------------------------------------ ------ ------ Deferred income taxes of approximately $2.9 million have not been provided on undistributed earnings of foreign subsidiaries in the amount of $28.7 million as the earnings are considered to be permanently reinvested. The Company has settled its issues with the Internal Revenue Service through the 1993 fiscal year with no material adverse effect. The periods from fiscal 1994 through 1999 are still open for review. NOTE 3: DEBT AND FINANCING AGREEMENTS Long-term debt at December 31, 1999 and 1998, consists of the following: (Dollar amounts in millions) 1999 1998 - ------------------------------------------------------------ ------ ------ 13% Senior subordinated notes, maturing on August 1, 2009 $325.0 7% Senior notes (net of discount), maturing on June 15, 2005 148.8 $148.6 Tranche B senior term loans, maturing at various dates through June 30, 2006, interest rate varies with libor, prime or CD rate depending upon borrowing option selected 339.2 $100 million revolving credit agreement maturing August 19, 2004, interest rate varies with libor, prime or CD rate depending upon borrowing option selected Industrial development revenue bonds payable, maturing between 1999 and 2013, interest at varying rates 13.1 Other long-term debt, interest at 9.25% at December 31, 1998 0.4 Lease purchase obligations, interest at varying rates, payable in installments to 2003 0.2 0.2 - ------------------------------------------------------------ ------ ------ 813.2 162.3 Less current maturities (3.5) (0.7) - ------------------------------------------------------------ ------ ------ $809.7 $161.6 - ------------------------------------------------------------ ====== ====== Page 30 Maturities of long-term debt and the principal and interest payments on long- term capital leases are as follows: Capital Leases --------------------- Total (Dollar amounts in millions) Debt Principal Interest Payments - ------------------------------- ------ --------- -------- -------- 2000 $ 3.4 $ 0.1 $ 0.0 $ 3.5 2001 3.4 0.1 3.5 2002 3.4 3.4 2003 3.4 3.4 2004 3.4 3.4 2005 and beyond 796.0 796.0 - ------------------------------- ------ ----- ----- ------ $813.0 $ 0.2 $ 0.0 $813.2 - ------------------------------- ------ ----- ----- ------ In June 1998, Blount, Inc., a wholly-owned subsidiary of Blount International, Inc., issued senior notes ("the 7% senior notes") with a stated interest rate of 7% in the principal amount of $150 million maturing on June 15, 2005. The senior notes are fully and unconditionally guaranteed by Blount International, Inc. Approximately $8.3 million, reflecting the price discount and the cost to extinguish an interest rate contract accounted for as a hedge of future interest on the debt, is being amortized to expense over the life of the senior notes. The senior notes are redeemable at a premium, in whole or in part, at the option of the Company at any time. The debt indenture contains restrictions on secured debt, sale and lease-back transactions, and the consolidation, merger and sale of assets. In July 1998, the Company redeemed all its 9% subordinated notes in the amount of $68.8 million. The extraordinary loss on redemption was $2.0 million, net of income taxes of $1.2 million. In August 1999, Blount, Inc., a wholly-owned subsidiary of Blount International, Inc., issued senior subordinated notes (the "senior subordinated notes") with an interest rate of 13% in the principal amount of $325 million. The senior subordinated notes provide at a premium for the redemption of an aggregate of 35% of the senior subordinated notes until August 1, 2002, and for redemption at a premium of all or part of the senior subordinated notes after August 1, 2004, until August 1, 2007, when the senior subordinated notes are redeemable at par. Blount, Inc. also entered into new credit facilities which include two term loan facilities in an aggregate principal amount of $400.0 million, comprised of a $60.0 million Tranche A Term Loan (none of which was outstanding at December 31, 1999) and a $340.0 million Tranche B Term Loan ($339.2 million of which was outstanding at December 31, 1999), and a $100.0 million revolving credit facility (none of which was outstanding at December 31, 1999). In connection with the $325 million senior subordinated notes, the Company filed a registration statement on Form S-4 on July 15, 1999. The Tranche A Term Loan, which has been paid in full, had scheduled quarterly repayments that increased periodically from $2,000,000 beginning on December 31, 1999, to $3,750,000 by the maturity date, June 30, 2004. The Tranche B Term Loan has quarterly repayments of $850,000 beginning on December 31, 1999, until June 30, 2005, and then increasing to $80,000,000 on September 30, 2005, until March 31, 2006, with a final payment of $80,450,000 on the maturity date, June 30, 2006. The Tranche B borrowings can be repaid, in whole or in part, at anytime; however, there is a prepayment premium until August 19, 2001. The Company and all of the Company's domestic subsidiaries other than Blount, Inc. guarantee Blount, Inc.'s obligations under the debt issued to finance the merger. In addition, Blount, Inc. has pledged 65% of the stock of its non-domestic subsidiaries as further collateral. Blount, Inc.'s obligations and its domestic subsidiaries' guarantee Page 31 obligations under the new credit facilities are collateralized by a first priority security interest in substantially all of their respective assets. The Company's guarantee obligations in respect of the new credit facilities are collateralized by a pledge of all of Blount, Inc.'s capital stock. The 7.0% senior notes share equally and ratably in certain of the collateral securing the new credit facilities. The Company is required to enter into hedge agreements within 180 days of the Tranche B borrowing and maintain such hedge agreements in place until the second anniversary of the Tranche B borrowing such that at least 33% of the aggregate principal amount of the Tranche B borrowing is subject to a fixed rate of interest. The Company will have in place by February 15, 2000, an interest rate cap at an immaterial cost to comply with this requirement. In August 1999, the Company replaced its $150 million revolving credit agreement expiring April 1, 2002, with a new $100 million revolving credit agreement expiring on August 19, 2004. At December 31, 1999, no amounts were outstanding under the new $100 million revolving credit agreement. The $100 million revolving credit agreement provides for interest rates to be determined at the time of borrowings based on a choice of formulas as specified in the agreement. The interest rates and commitment fees may vary based on the ratio of total debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) as defined in the agreement. The new agreement contains covenants relating to indebtedness, liens, mergers, consolidations, disposals of property, payment of dividends, capital expenditures, investments, optional payments and modifications of the agreements, transactions with affiliates, sales and leasebacks, changes in fiscal periods, negative pledges, subsidiary distributions, lines of business, hedge agreements, and activities of the Company and requires the Company to maintain certain leverage and interest coverage ratios. As of December 31, 1999, the weighted average interest rate on outstanding foreign short-term borrowings was 7.3%. No short-term borrowings were outstanding at December 31, 1998. NOTE 4: ACQUISITIONS AND DISPOSALS The following acquisitions have been accounted for by the purchase method, and the net assets and results of operations of the acquired companies have been included in the Company's consolidated financial statements since the dates of acquisition. The excess of the purchase price over the fair value of the net assets acquired is being amortized on a straight-line basis over 40 years. In September 1998, the Company purchased certain operating assets of the Redfield line for approximately $3 million. The fair value of the assets acquired approximated the purchase price. Page 32 On November 4, 1997, the Company acquired Federal Cartridge Company ("Federal"), formerly Federal-Hoffman, Inc. The purchase price was approximately $129 million including a post-closing adjustment and acquisition expenses. Federal manufactures shotshell, centerfire and rimfire cartridges, ammunition components and clay targets. The following summarized unaudited pro forma financial information for the twelve months ended December 31, 1997, assumes the acquisition had occurred on January 1, 1997: Pro forma information (Dollar amounts in millions, except per share data) 1997 - ------------------------------------------------------------------ ------ Sales $842.2 Income from continuing operations 65.1 Earnings per share from continuing operations: Basic .87 Diluted .85 - ------------------------------------------------------------------ ------ The pro forma results do not necessarily represent the results which would have occurred if the acquisition had taken place on the basis assumed nor are they indicative of the results of future operations. In January 1997, the Company acquired the outstanding capital stock of the Frederick Manufacturing Corporation ("Frederick") and Orbex, Inc. ("Orbex") for approximately $19 million and paid existing debt of the acquired companies in the amount of $5.8 million. Orbex was subsequently merged into Frederick. The principal products of the acquired companies are accessories for lawn mowers and sporting goods. The combined sales and pretax income of the acquired companies for their most recent year prior to the acquisition was $19.8 million and $2.5 million, respectively. NOTE 5: CAPITAL STOCK, STOCK OPTIONS AND EARNINGS PER SHARE DATA The Company has authorized 100 million shares of Common Stock. The number of shares used in the denominators of the basic and diluted earnings (loss) per share computations were as follows (in thousands): Twelve Months Ended December 31, ---------------------- 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Shares for basic earnings (loss) per share computation - weighted average common shares outstanding 58,185 74,744 75,264 Dilutive effect of stock options 2,044 1,832 - ------------------------------------------------ ------ ------ ------ Shares for diluted earnings (loss) per share computation 58,185 76,788 77,096 - ------------------------------------------------ ------ ------ ------ No adjustment was required to reported income amounts for inclusion in the numerators of the earnings (loss) per share computations. Prior to the merger described in Note 1, the Company had granted options to purchase its Class A Common Stock to certain officers and key employees under four fixed stock option plans. Under these plans, options could be granted up Page 33 to 13,500,000 shares. Each plan provided for the granting of options with an option price per share not less than the fair market value of one share of Class A Common Stock on the date of grant. The options granted were exercisable for a period of up to ten years under each plan and vested in installments over periods determined by the Compensation and Management Development Committee of the Board of Directors. Options to purchase 1,121,200 shares were granted during the first quarter of 1999 under the 1998 Blount Long-Term Executive Stock Option Plan. As a result of the merger described in Note 1, all outstanding options were canceled through a payment associated with the merger. During the third quarter of 1999, the Company's Board of Directors adopted a new stock option plan under which options, either incentive stock options or nonqualified stock options, to purchase the Company's Common Stock may be granted to employees, directors, and other persons who perform services for the Company. The number of shares which may be issued under the plan may not exceed 2,875,000 shares. The option price per share for incentive stock options may not be less than 100% of the average closing sale price for ten consecutive trading days ended on the trading day immediately prior to the date of grant. The option price for each grant of a nonqualified stock option shall be established on the date of grant and may be less than the fair market value of one share of Common Stock on the date of grant. During the third quarter of 1999, options were granted to purchase 2,301,320 shares at the price of $15 per share. As of December 31, 1999 and 1998, there were options for 623,680 shares and 1,630,040 shares available for grant. A summary of the status of the Company's fixed stock option plans as of December 31, 1999, 1998 and 1997, and changes during the periods ending on those dates is presented below:
Twelve Months Ended December 31, -------------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (in 000's) Price (in 000's) Price (in 000's) Price - -------------------- ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of period 7,288 $ 8.19 6,932 $ 7.40 5,836 $ 5.94 Granted 3,422 14.27 1,196 12.58 2,070 9.99 Exercised (100) 8.81 (612) 6,85 (888) 3.94 Forfeited (106) 13.15 (228) 10.73 (86) 6.88 Canceled (8,253) (8.78) - -------------------- ---------- --------- ---------- --------- ---------- --------- Outstanding at end of period 2,251 $15.00 7,288 $ 8.19 6,932 $ 7.40 - -------------------- ---------- --------- ---------- --------- ---------- --------- Options exercisable at end of period 0 3,896 2,770 - -------------------- ---------- ---------- ----------
All options outstanding at December 31, 1999, have an exercise price of $15 per share, vest over three to six years (none of which had vested at December 31, 1999) and have a remaining contractual life of approximately 9 1/2 years. Page 34 The Company applies APB Opinion 25 and related interpretations in accounting for fixed stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the estimated fair value at the grant dates for awards under the Company's plans, consistent with the method of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated below: Twelve Months Ended December 31, (Dollar amounts in millions, ------------------------ except per share data) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Net income (loss): As reported $(21.8) $ 61.3 $ 59.1 Pro forma 4.1 58.1 56.7 Earnings (loss) per share: As reported: Basic (0.37) 0.82 0.79 Diluted (0.37) 0.80 0.77 Pro forma: Basic 0.07 0.78 0.76 Diluted 0.07 0.76 0.74 - ------------------------------------------------ ------ ------ ------ For purposes of computing the pro forma amounts above, the Black-Scholes option- pricing model was used with the following weighted-average assumptions: Twelve Months Ended December 31, ------------------------ 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Estimated lives of plan options 6 years 6 years 6 years Risk-free interest rates 5.8% 5.5% 6.2% Expected volatility 30.0% 23.0% 23.0% Dividend yield 0.5% 1.5% 1.5% - ------------------------------------------------ ------ ------ ------ The weighted average estimated fair value of options granted during 1999, 1998 and 1997 was $5.47, $3.67 and $3.08, respectively. Page 35 NOTE 6: PENSION AND POSTRETIREMENT BENEFIT PLANS The changes in the benefit obligations, changes in plan assets, and funded status of the Company's defined benefit pension plans and other postretirement medical and life benefit plans for the periods ended December 31, 1999 and 1998, were as follows:
Other Pension Postretirement Benefits Benefits FUNDED PLANS ---------------- ---------------- (Dollar amounts in millions) 1999 1998 1999 1998 - ------------------------------------------------ ------ ------ ------ ------ Change in Benefit Obligation: Benefit obligation at beginning of period $(126.4) $(107.9) $ (2.4) $ (2.1) Service cost (6.6) (6.2) Interest cost (8.9) (8.4) (0.2) (0.2) Plan participants' contributions (0.1) (0.2) Actuarial gains (losses) 10.5 (6.8) 0.3 (0.4) Benefits and plan expenses paid 3.8 2.9 0.5 0.5 - ------------------------------------------------ ------- ------- ------ ------ Benefit obligation at end of period (127.6) (126.4) (1.9) (2.4) - ------------------------------------------------ ------- ------- ------ ------ Change in Plan Assets: Fair value of plan assets at beginning of period 121.7 114.1 1.9 2.1 Actual return on plan assets 19.5 10.5 0.4 0.1 Company contributions 0.9 Plan participants' contributions 0.1 0.2 Benefits and plan expenses paid (3.8) (2.9) (0.5) (0.5) - ------------------------------------------------ ------- ------- ------ ------ Fair value of plan assets at end of period 138.3 121.7 1.9 1.9 - ------------------------------------------------ ------- ------- ------ ------ Funded status 10.7 (4.7) (0.5) Unrecognized actuarial (gains) losses (12.5) 7.3 0.5 Unrecognized transition asset (0.5) (0.6) Unrecognized prior service cost (0.2) (0.2) - ------------------------------------------------ ------- ------- ------ ------ Net amount recognized $ (2.5) $ 1.8 $ 0.0 $ 0.0 - ------------------------------------------------ ------- ------- ------ ------ Net amount recognized: Prepaid benefits $ 2.1 $ 3.3 Accrued benefits (4.6) (1.5) - ------------------------------------------------ ------- ------- ------ ------ $ (2.5) $ 1.8 $ 0.0 $ 0.0 - ------------------------------------------------ ------- ------- ------ ------
Page 36
Other Pension Postretirement Benefits Benefits OTHER PLANS ---------------- ---------------- (Dollar amounts in millions) 1999 1998 1999 1998 - ------------------------------------------------ ------ ------ ------ ------ Change in Benefit Obligation: Benefit obligation at beginning of period $(13.8) $ (6.3) $(17.4) $(16.8) Service cost (0.9) (0.5) (0.4) (0.4) Interest cost (0.9) (0.6) (1.2) (1.2) Plan participants' contributions (0.6) (0.4) Actuarial gains (losses) 0.7 (0.4) 2.3 0.3 Benefits and plan expenses paid 1.4 0.3 1.5 1.1 Plan amendments (6.3) - ------------------------------------------------ ------ ------ ------ ------ Benefit obligation at end of period (13.5) (13.8) (15.8) (17.4) Unrecognized actuarial (gains) losses 1.7 1.2 (3.0) (0.9) Unrecognized transition obligation 0.1 0.1 Unrecognized prior service cost 4.0 6.2 0.1 0.1 - ------------------------------------------------ ------ ------ ------ ------ Net amount recognized $ (7.7) $ (6.3) $(18.7) $(18.2) - ------------------------------------------------ ------ ------ ------ ------ Net amount recognized: Accrued benefits $(11.1) $(13.4) $(18.7) $(18.2) Intangible asset 3.4 6.3 Accumulated other comprehensive income 0.8 - ---------------------------------------- ------ ------ ------ ------ $ (7.7) $ (6.3) $(18.7) $(18.2) - ---------------------------------------- ------ ------ ------ ------
The accumulated pension benefit obligation of supplemental non-qualified defined benefit pension plans was $11.1 million and $13.4 million at December 31, 1999 and 1998, respectively. Two Rabbi Trusts, whose assets are not included in the table above has been established to fund part of these non-qualified benefits. These two Rabbi Trusts required the funding of certain executive benefits upon a change in control or threatened change in control such as the merger described in Note 1 of Notes to Consolidated Financial Statements. During the second quarter of 1999, approximately $10.4 million was funded under these trusts with approximately $7.1 million coming from the proceeds of officer life insurance loans and $3.3 million from general corporate funds. At December 31, 1999 and 1998, approximately $22.9 million and $11.5 million was held in these trusts and is included in "Other assets" in the Condensed Consolidated Balance Sheet. Page 37 The components of net periodic benefit cost and the weighted average assumptions used in accounting for pension and other postretirement benefits follow:
Pension Benefits Other Postretirement Benefits ------------------------------ ------------------------------ Twelve Months Ended Twelve Months Ended December 31, December 31, ------------------------------ ------------------------------ (Dollar amounts in millions) 1999 1998 1997 1999 1998 1997 - ------------------------------------------- -------- -------- -------- -------- -------- -------- Components of net periodic benefit cost: Service cost $ 7.5 $ 6.7 $ 4.9 $ 0.4 $ 0.4 $ 0.3 Interest cost 9.8 9.0 6.7 1.3 1.4 1.2 Expected return on plan assets (10.8) (9.7) (7.3) (0.1) (0.2) (0.2) Amortization of actuarial (gains) losses (0.2) 0.1 0.1 (0.1) 0.1 Amortization of transition asset (0.1) (0.1) (0.1) Amortization of prior service cost 1.0 0.4 0.8 ------ ------ ------ ------ ------ ------ $ 7.2 $ 6.4 $ 5.1 $ 1.6 $ 1.5 $ 1.4 ------ ------ ------ ------ ------ ------ Weighted average assumptions: Discount rate 7.4% 7.0% 7.4% 7.5% 7.0% 7.5% Expected return on plan assets 8.9% 8.9% 8.7% 9.0% 9.0% 8.8% Rate of compensation increase 4.0% 3.8% 4.0% - ------------------------------------------- ------ ------ ------ ------ ------ ------
A 6% annual rate of increase in the cost of health care benefits was assumed for 1999; the rate was assumed to decrease 1% per year until 4% is reached, remain at that level for ten years, and then decrease to the ultimate trend rate of 3%. A 1% change in assumed health care cost trend rates would have the following effects: (Dollar amounts in millions) 1% Increase 1% Decrease - ------------------------------------------------ ----------- ----------- Effect on service and interest cost components $ 0.1 $ 0.1 Effect on other postretirement benefit obligations 0.8 0.7 - ------------------------------------------------ ----------- ----------- The Company sponsors a defined contribution 401(k) plan and matches a portion of employee contributions. The expense was $4.9 million, $4.9 million and $3.6 million in 1999, 1998 and 1997. NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES The Company leases office space and equipment under operating leases expiring in 1 to 8 years. Most leases include renewal options and some contain purchase options and escalation clauses. Future minimum rental commitments required under operating leases having initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999, are as follows (in millions): 2000-- $3.3; 2001--$2.7; 2002--$1.5; 2003--$1.0; 2004--$0.6; and 2005 and beyond--$0.5. Rentals charged to costs and expenses under cancelable and noncancelable lease arrangements were $4.0 million, $4.6 million and $4.9 million for 1999, 1998 and 1997, respectively. Page 38 Under the provisions of Washington State environmental laws, the Washington State Department of Ecology ("WDOE") has notified the Company that it is one of many companies named as a Potentially Liable Party ("PLP"), for the Pasco Sanitary Landfill site, Pasco, Washington ("the Site"). Although the clean-up costs are believed to be substantial, accurate estimates will not be available until the environmental studies have been completed at the Site. However, based upon the total documented volume of waste sent to the Site, the Company's waste volume compared to that total waste volume should cause the Company to be classified as a "de minimis" PLP. In July 1992, the Company and thirty-eight other PLPs entered into an Administrative Agreed Order with WDOE to perform a Phase I Remedial Investigation at the Site. In October 1994, WDOE issued an administrative Unilateral Enforcement Order to all PLPs to complete a Phase II Remedial Investigation and Feasibility Study ("RI/FS") under the Scope of Work established by WDOE. The results of the RI/FS investigation are expected in the near future. The Company is unable to determine, at this time, the level of clean-up demands that may be ultimately placed on it. Management believes that, given the number of PLPs named with respect to the Site and their financial condition, the Company's potential response costs associated with the Site will not have a material adverse effect on consolidated financial condition or operating results. In connection with his resignation effective October 20, 1999, a former executive officer ("executive") cited "good reason" (in the nature of constructive discharge) under his employment contract and claimed he was due severance benefits in excess of $2.5 million. The Compensation Committee of the Board of Directors reviewed the facts relating to executive's termination and found no basis for a "good reason" termination. Therefore, the Committee denied executive's right to any severance benefits. Executive has exercised his right to request arbitration of this claim. Management believes that this matter will not have a material adverse effect on consolidated financial condition or operating results. The Company is a defendant in a number of product liability lawsuits, some of which seek significant or unspecified damages, involving serious personal injuries for which there are retentions or deductible amounts under the Company's insurance policies. In addition, the Company is a party to a number of other suits arising out of the conduct of its business. While there can be no assurance as to their ultimate outcome, management does not believe these lawsuits will have a material adverse effect on consolidated financial condition or operating results. NOTE 8: FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION The Company has manufacturing or distribution operations in Brazil, Canada, Europe, Japan, Russia and the United States. The Company sells to customers in these locations, primarily in the United States, and other countries throughout the world (see Note 9). At December 31, 1999, approximately 82% of trade accounts receivable were from customers within the United States. Trade accounts receivable are principally from service and dealer groups, distributors, mass merchants, and chain saw and other original equipment manufacturers, and are normally not collateralized. Page 39 The estimated fair values of certain financial instruments at December 31, 1999 and 1998, are as follows: 1999 1998 -------------------- -------------------- Carrying Fair Carrying Fair (Dollar amounts in millions) Amount Value Amount Value - ---------------------------------- --------- --------- --------- --------- Cash and short-term investments $ 10.5 $ 10.5 $ 45.1 $ 45.1 Futures contracts (see Note 1) 0.0 0.0 0.0 (0.1) Other assets (restricted trust funds and notes receivable) 25.2 25.0 17.3 17.1 Notes payable and long-term debt (see Note 3) (816.2) (815.3) (162.3) (163.7) - ---------------------------------- ------- ------- ------- ------- The carrying amount of cash and short-term investments approximates fair value because of the short maturity of those instruments. The fair value of derivative financial instruments (futures contracts) is estimated by obtaining market quotes. The fair value of notes receivable is estimated based on the discounted value of estimated future cash flows. The fair value of restricted trust funds approximates the carrying amount for short-term instruments and is estimated by obtaining market quotes for longer term instruments. The fair value of long-term debt is estimated based on recent market transaction prices or on current rates available for debt with similar terms and maturities. NOTE 9: SEGMENT INFORMATION The Company identifies operating segments based on management responsibility. The Company has three reportable segments: Outdoor Products, Sporting Equipment, and Industrial and Power Equipment. Outdoor Products produces or markets chain saw components (chain, bars and sprockets), lawn mowers and related products, and other outdoor care products. Sporting Equipment produces or markets small arms ammunition, sports optical products, reloading equipment and other shooting sports accessories. Industrial and Power Equipment produces timber harvesting and industrial loading equipment and power transmission and gear components. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales are not significant. Page 40 Information on Segments: Twelve Months Ended December 31, -------------------------- (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Sales: Outdoor products $327.6 $315.4 $319.3 Sporting equipment 323.7 286.7 158.5 Industrial and power equipment 158.6 229.8 239.1 - ------------------------------------------------ ------ ------ ------ $809.9 $831.9 $716.9 - ------------------------------------------------ ------ ------ ------ Operating income (loss): Outdoor products $ 71.8 $ 68.4 $ 67.1 Sporting equipment 40.4 36.1 18.1 Industrial and power equipment (1.1) 27.9 32.7 - ------------------------------------------------ ------ ------ ------ Operating income from segments 111.1 132.4 117.9 Corporate office expenses (17.3) (18.4) (18.5) Merger expenses (76.1) (0.3) - ------------------------------------------------ ------ ------ ------ Income from operations 17.7 113.7 99.4 Interest expense (44.8) (14.3) (9.5) Interest income 3.7 2.5 2.5 Other income, net 0.8 0.3 1.3 - ------------------------------------------------ ------ ------ ------ Income (loss) before income taxes $(22.6) $102.2 $ 93.7 - ------------------------------------------------ ------ ------ ------ Identifiable assets: Outdoor products $210.6 $209.1 $221.9 Sporting equipment 246.2 226.8 236.6 Industrial and power equipment 109.2 107.1 102.7 Corporate office 122.7 125.8 76.6 - ------------------------------------------------ ------ ------ ------ $688.7 $668.8 $637.8 - ------------------------------------------------ ------ ------ ------ Depreciation and amortization: Outdoor products $ 13.9 $ 13.6 $ 13.4 Sporting equipment 11.1 10.7 5.7 Industrial and power equipment 4.9 4.2 4.1 Corporate office 4.1 2.4 1.8 - ------------------------------------------------ ------ ------ ------ $ 34.0 $ 30.9 $ 25.0 - ------------------------------------------------ ------ ------ ------ Capital expenditures: Outdoor products $ 9.3 $ 7.9 $ 13.5 Sporting equipment 7.8 6.9 60.5 Industrial and power equipment 1.3 6.7 4.2 Corporate office 0.1 0.2 0.3 - ------------------------------------------------ ------ ------ ------ $ 18.5 $ 21.7 $ 78.5 - ------------------------------------------------ ------ ------ ------ Page 41 Information on Sales By Significant Product Groups: Twelve Months Ended December 31, -------------------------- (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Chain saw components $201.1 $199.7 $211.1 Ammunition and related products 234.9 212.0 87.9 Timber harvesting and loading equipment 133.1 199.8 210.5 Lawn mowers and related products 87.2 75.7 66.2 Sports optical products 48.3 41.3 36.6 All others, less than 5% each 105.3 103.4 104.6 - ------------------------------------------------ ------ ------ ------ $809.9 $831.9 $716.9 - ------------------------------------------------ ====== ====== ====== Information on Geographic Areas: Twelve Months Ended December 31, -------------------------- (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Sales: United States $601.5 $623.4 $495.1 Canada 32.2 32.4 36.5 Germany 22.4 24.0 24.5 All others, less than 3% each 153.8 152.1 160.8 - ------------------------------------------------ ------ ------ ------ $809.9 $831.9 $716.9 - ------------------------------------------------ ------ ------ ------ Long-Lived Assets: United States $147.5 $156.1 $159.6 Canada 18.0 20.1 22.3 Brazil 3.7 3.7 3.6 All others, less than 3% each 3.1 3.0 3.0 - ------------------------------------------------ ------ ------ ------ $172.3 $182.9 $188.5 - ------------------------------------------------ ------ ------ ------ The geographic sales information is by country of destination. Long-lived assets exclude the cost in excess of net assets of acquired businesses. No customer accounted for more than 10% of consolidated sales in 1999, 1998 or 1997. In 1999, approximately 13% of sales by Outdoor Products were to one customer, 20% of Sporting Equipment sales were to one customer, and 29% of Industrial and Power Equipment sales were to two customers. While the Company expects these business relationships to continue, the loss of any of these customers could affect the operations of the segments. Each of the Company's segments purchases certain important materials from a limited number of suppliers that meet quality criteria. Although alternative sources of supply are available, the sudden elimination of certain suppliers could result in manufacturing delays, a reduction in product quality and a possible loss of sales in the near term. Page 42 NOTE 10: CONSOLIDATING FINANCIAL INFORMATION The following consolidating financial information sets forth condensed consolidating statements of operations, and the balance sheets and cash flows of Blount International, Inc., Blount, Inc., the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries (in millions). BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL INFORMATION
For The Twelve Months Ended December 31, 1999 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS - ----------------------- Sales $ 436.8 $333.7 $167.1 $ (127.7) $809.9 Cost of sales 336.7 249.5 115.3 (127.2) 574.3 -------- ------ ------ --------- ------ Gross profit 100.1 84.2 51.8 (0.5) 235.6 Selling, general and administrative expenses $ 1.1 63.6 38.8 38.3 141.8 Merger expenses 69.6 6.5 76.1 ------ -------- ------ ------ --------- ------ Income (loss) from operations (70.7) 30.0 45.4 13.5 (0.5) 17.7 Interest expense (44.7) (6.4) 6.3 (44.8) Interest income 1.3 7.9 0.5 0.3 (6.3) 3.7 Other income (expense), net 6.7 (5.0) (0.9) 0.8 ------ -------- ------ ------ --------- ------ Income (loss) before income taxes (69.4) (0.1) 34.5 12.9 (0.5) (22.6) Provision (benefit) for income taxes (20.2) 13.2 6.2 0.8 ------ -------- ------ ------ --------- ------ Income (loss) before earnings (losses) of affiliated companies (49.2) (0.1) 21.3 6.7 (0.5) (21.8) Equity in earnings (losses) of affiliated companies, net 27.4 27.5 (0.1) (54.8) ------ -------- ------ ------ --------- ------ Net income $(21.8) $ 27.4 $ 21.2 $ 6.7 $ (55.3) $(21.8) ====== ======== ====== ====== ========= ====== Page 43 For The Twelve Months Ended December 31, 1998
Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS - ----------------------- Sales $ 478.5 $315.3 $163.5 $ (125.4) $831.9 Cost of sales 350.5 229.4 119.7 (126.0) 573.6 -------- ------ ------ --------- ------ Gross profit 128.0 85.9 43.8 0.6 258.3 Selling, general and administrative expenses $ 1.3 71.8 38.2 33.0 144.3 Merger expenses 0.3 0.3 ------ -------- ------ ------ --------- ------ Income (loss) from operations (1.6) 56.2 47.7 10.8 0.6 113.7 Interest expense (14.1) (7.1) (0.1) 7.0 (14.3) Interest income 8.6 0.5 0.4 (7.0) 2.5 Other income (expense), net 5.1 (4.2) (0.6) 0.3 ------ -------- ------ ------ --------- ------ Income (loss) before income taxes (1.6) 55.8 36.9 10.5 0.6 102.2 Provision (benefit) for income taxes (0.6) 21.0 14.0 4.5 38.9 ------ -------- ------ ------ --------- ------ Income (loss) before earnings of affiliated companies (1.0) 34.8 22.9 6.0 0.6 63.3 Extraordinary loss on repurchase of debt (2.0) (2.0) Equity in earnings of affiliated companies, net 62.3 29.5 (0.3) (91.5) ------ -------- ------ ------ --------- ------ Net income $ 61.3 $ 62.3 $ 22.6 $ 6.0 $ (90.9) $ 61.3 ====== ======== ====== ====== ========= ====== For The Twelve Months Ended December 31, 1997 STATEMENT OF OPERATIONS - ----------------------- Sales $ 507.2 $170.9 $145.8 $ (107.0) $716.9 Cost of sales 355.0 117.4 116.4 (105.9) 482.9 -------- ------ ------ --------- ------ Gross profit 152.2 53.5 29.4 (1.1) 234.0 Selling, general and administrative expenses $ 1.3 84.6 28.2 20.5 134.6 ------ -------- ------ ------ --------- ------ Income (loss) from operations (1.3) 67.6 25.3 8.9 (1.1) 99.4 Interest expense (9.1) (4.2) (0.2) 4.0 (9.5) Interest income 5.5 0.5 0.5 (4.0) 2.5 Other income (expense), net 3.3 (1.7) (0.3) 1.3 ------ -------- ------ ------ --------- ------ Income (loss) before income taxes (1.3) 67.3 19.9 8.9 (1.1) 93.7 Provision (benefit) for income taxes (0.4) 23.3 7.6 4.1 34.6 ------ -------- ------ ------ --------- ------ Income (loss) before earnings (losses) of affiliated companies (0.9) 44.0 12.3 4.8 (1.1) 59.1 Equity in earnings (losses) of affiliated companies, net 60.0 16.0 (0.1) (75.9) ------ -------- ------ ------ --------- ------ Net income $ 59.1 $ 60.0 $ 12.2 $ 4.8 $ (77.0) $ 59.1 ====== ======== ====== ====== ========= ======
Page 44
December 31, 1999 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ BALANCE SHEET - ------------- ASSETS Current assets: Cash and cash equivalents $ 5.3 $ 0.3 $ 4.9 $ 10.5 Accounts receivable, net 77.6 79.3 15.0 171.9 Intercompany receivables 613.7 86.9 6.0 $ (706.6) Inventories 47.5 55.2 14.3 117.0 Deferred income taxes 21.2 (0.1) 21.1 Other current assets 13.1 1.6 0.8 15.5 -------- ------ ------ --------- --------- Total current assets 778.4 223.3 41.0 (706.7) 336.0 Investments in affiliated companies $385.0 386.4 0.2 (771.6) Property, plant and equipment, net 71.6 75.9 24.8 172.3 Cost in excess of net assets of acquired businesses, net 32.7 71.7 7.1 111.5 Intercompany notes receivable 3.0 (3.0) Other assets 64.9 1.9 2.1 68.9 ------ -------- ------ ------ --------- --------- Total Assets $385.0 $1,334.0 $372.8 $ 78.2 $(1,481.3) $ 688.7 ====== ======== ====== ====== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current maturities of long-term debt $ 3.4 $ 3.1 $ 6.5 Accounts payable 24.9 $ 21.0 5.1 51.0 Intercompany payables $706.7 $ (706.7) Accrued expenses 63.5 20.4 7.1 91.0 ------ -------- ------ ------ --------- --------- Total current liabilities 706.7 91.8 41.4 15.3 (706.7) 148.5 Long-term debt, exclusive of current maturities 809.5 0.2 809.7 Intercompany notes payable 3.0 (3.0) Deferred income taxes, exclusive of current portion 7.3 1.5 8.8 Other liabilities 37.4 5.2 0.8 43.4 ------ -------- ------ ------ --------- --------- Total liabilities 706.7 949.0 46.6 17.8 (709.7) 1,010.4 Stockholders' equity (deficit) (321.7) 385.0 326.2 60.4 (771.6) (321.7) ------ -------- ------ ------ --------- --------- Total Liabilities and Stockholders' Equity (Deficit) $385.0 $1,334.0 $372.8 $ 78.2 $(1,481.3) $ 688.7 ====== ======== ====== ====== ========= =========
Page 45
December 31, 1998 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ BALANCE SHEET - ------------- ASSETS Current assets: Cash and cash equivalents $ 39.7 $ (1.5) $ 6.9 $ 45.1 Accounts receivable, net 58.0 61.2 13.1 132.3 Intercompany receivables 71.3 3.3 $ (74.6) Inventories 54.4 54.0 12.6 121.0 Deferred income taxes 22.1 (0.1) 22.0 Other current assets 3.7 2.1 0.9 6.7 -------- ------ ------ --------- ------ Total current assets 177.9 187.1 36.8 (74.7) 327.1 Investments in affiliated companies $381.5 651.1 0.2 (1,032.8) Property, plant and equipment, net 80.6 75.6 26.7 182.9 Cost in excess of net assets of acquired businesses, net 34.2 73.1 7.4 114.7 Intercompany notes receivable 0.1 (0.1) Other assets 39.5 2.3 2.3 44.1 ------ -------- ------ ------ --------- ------ Total Assets $381.5 $ 983.4 $338.1 $ 73.4 $(1,107.6) $668.8 ====== ======== ====== ====== ========= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt $ 0.3 $ 0.2 $ 0.2 $ 0.7 Accounts payable 14.5 11.6 4.3 30.4 Intercompany payables $ 24.3 50.3 $ (74.6) Accrued expenses 2.6 41.6 13.2 6.4 63.8 Deferred income taxes 0.1 (0.1) ------ -------- ----- ----- --------- ------ Total current liabilities 26.9 106.7 25.0 11.0 (74.7) 94.9 Long-term debt, exclusive of current maturities 159.5 2.1 161.6 Intercompany notes payable 0.1 (0.1) Deferred income taxes, exclusive of current portion 12.0 1.0 13.0 Other liabilities 38.7 5.3 0.7 44.7 ------ -------- ------ ------ --------- ------ Total liabilities 26.9 316.9 32.4 12.8 (74.8) 314.2 Stockholders' equity 354.6 666.5 305.7 60.6 (1,032.8) 354.6 ------ -------- ------ ------ --------- ------ Total Liabilities and Stockholders' Equity $381.5 $ 983.4 $338.1 $ 73.4 $(1,107.6) $668.8 ====== ======== ====== ====== ========= ======
Page 46
For The Twelve Months Ended December 31, 1999 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ STATEMENT OF CASH FLOWS - ----------------------- Net cash provided by (used in) operating activities $ (24.2) $ 52.9 $ 16.7 $ 2.9 $ (29.2) $ 19.1 --------- -------- ------ ------ --------- --------- Cash flows from investing activities: Proceeds from sales of property, plant and equipment 0.7 0.1 0.8 Purchases of property, plant and equipment (6.2) (7.7) (3.6) (17.5) Acquisitions of product lines (0.7) (0.7) (1.4) Other (3.3) (3.3) --------- -------- ------ ------ --------- --------- Net cash used in investing activities (9.5) (8.4) (3.5) (21.4) --------- -------- ------ ------ --------- --------- Cash flows from financing activities: Net increase (reduction) in short-term borrowings 3.0 3.0 Issuance of long-term debt 696.9 696.9 Reduction of long-term debt (72.1) (2.3) (0.2) (74.6) Decrease in restricted funds 3.5 3.5 Dividends paid (7.8) (25.0) (4.2) 29.2 (7.8) Redemption of Common Stock (1,068.8) (1,068.8) Capital contribution 417.5 417.5 Advances from (to) affiliated companies 682.3 (678.1) (4.2) Other 1.0 (3.0) (2.0) --------- -------- ------ ------ --------- --------- Net cash provided by (used in) financing activities $ 24.2 (77.8) (6.5) (1.4) $ 29.2 (32.3) --------- -------- ------ ------ --------- --------- Net increase (decrease) in cash and cash equivalents (34.4) 1.8 (2.0) (34.6) Cash and cash equivalents at beginning of period 39.7 (1.5) 6.9 45.1 --------- -------- ------ ------ --------- --------- Cash and cash equivalents at end of period $ 5.3 $ 0.3 $ 4.9 $ 10.5 ========= ======== ====== ====== ========= =========
Page 47
For The Twelve Months Ended December 31, 1998 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ STATEMENT OF CASH FLOWS - ----------------------- Net cash provided by (used in) operating activities $ (0.9) $ 43.9 $ 39.2 $ 9.8 $ (3.1) $ 88.9 ------ -------- ------ ------ --------- --------- Cash flows from investing activities: Proceeds from sales of property, plant and equipment 0.1 1.1 0.1 1.3 Purchases of property, plant and equipment (11.0) (6.8) (3.3) (21.1) Acquisition of businesses (17.4) (17.4) ------ -------- ------ ------ --------- --------- Net cash used in investing activities (28.3) (5.7) (3.2) (37.2) ------ -------- ------ ------ --------- --------- Cash flows from financing activities: Net reduction in short-term borrowings (0.4) (0.4) Issuance of long-term debt 149.4 149.4 Reduction of long-term debt (136.9) (0.2) (0.4) (137.5) Decrease in restricted funds 0.5 0.5 Dividends paid (10.5) (3.1) 3.1 (10.5) Purchase of treasury stock (18.1) (18.1) Advances from (to) affiliated companies 25.1 8.1 (33.2) Other 4.4 0.8 5.2 ------ -------- ------ ------ --------- --------- Net cash provided by (used in) financing activities $ 0.9 21.9 (33.4) (3.9) $ 3.1 (11.4) ------ -------- ------ ------ --------- --------- Net increase in cash and cash equivalents 37.5 0.1 2.7 40.3 Cash and cash equivalents at beginning of period 2.2 (1.6) 4.2 4.8 ------ -------- ------ ------ --------- --------- Cash and cash equivalents at end of period $ 39.7 $ (1.5) $ 6.9 $ 45.1 ====== ======== ====== ====== ========= =========
Page 48
For The Twelve Months Ended December 31, 1997 Blount Non- International, Blount, Guarantor Guarantor Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ ------------ STATEMENT OF CASH FLOWS - ----------------------- Net cash provided by (used in) operating activities $ 40.2 $ 42.7 $ 31.9 $ 11.4 $ (45.9) $ 80.3 ------ -------- ------ ------ --------- --------- Cash flows from investing activities: Proceeds from sales of property, plant and equipment 0.6 0.3 0.9 Purchases of property, plant and equipment (9.2) (2.5) (6.1) (17.8) Acquisition of businesses (132.5) (132.5) ------ -------- ------ ------ --------- --------- Net cash used in investing activities (141.1) (2.5) (5.8) (149.4) ------ -------- ------ ------ --------- --------- Cash flows from financing activities: Issuance of long-term debt 62.0 62.0 Reduction of long-term debt (8.3) (5.9) (0.7) (14.9) Decrease in restricted funds 1.0 1.0 Dividends paid (9.4) (41.0) (4.9) 45.9 (9.4) Purchase of treasury stock (27.5) (27.5) Advances from (to) affiliated companies (6.9) 30.9 (24.0) Other 3.6 0.4 4.0 ------ -------- ------ ------ --------- --------- Net cash provided by (used in) financing activities $(40.2) 45.0 (29.9) (5.6) $ 45.9 15.2 ------ -------- ------ ------ --------- --------- Net decrease in cash and cash equivalents (53.4) (0.5) (53.9) Cash and cash equivalents at beginning of period 55.6 (1.1) 4.2 58.7 ------ -------- ------ ------ --------- --------- Cash and cash equivalents at end of period $ 2.2 $ (1.6) $ 4.2 $ 4.8 ====== ======== ====== ====== ========= =========
Page 49 NOTE 11: OTHER INFORMATION At December 31, 1999 and 1998, the following balance sheet captions are comprised of the items specified below: (Dollar amounts in millions) 1999 1998 - ----------------------------------------------- --------- --------- Accounts receivable: Trade accounts $ 172.9 $ 132.9 Other 3.2 3.3 Allowance for doubtful accounts (4.2) (3.9) - ----------------------------------------------- ------- ------- $ 171.9 $ 132.3 - ----------------------------------------------- ------- ------- Inventories: Finished goods $ 67.1 $ 73.6 Work in process 21.3 19.3 Raw materials and supplies 28.6 28.1 - ----------------------------------------------- ------- ------- $ 117.0 $ 121.0 - ----------------------------------------------- ------- ------- Property, plant and equipment: Land $ 12.6 $ 12.6 Buildings and improvements 107.1 107.1 Machinery and equipment 230.7 219.8 Furniture, fixtures and office equipment 23.4 26.0 Transportation equipment 16.5 16.7 Construction in progress 12.4 10.6 Accumulated depreciation (230.4) (209.9) - ----------------------------------------------- ------- ------- $ 172.3 $ 182.9 - ----------------------------------------------- ------- ------- Other Assets: Deferred financing costs $ 35.8 $ 7.8 Rabbi trusts (see Note 6) 22.9 11.5 Other 10.2 24.8 - ----------------------------------------------- ------- ------- $ 68.9 $ 44.1 - ----------------------------------------------- ------- ------- Accrued expenses: Salaries, wages and related withholdings $ 25.3 $ 23.6 Employee benefits 12.1 8.6 Casualty insurance costs 7.7 9.5 Accrued interest 21.5 1.4 Other 24.4 20.7 - ----------------------------------------------- ------- ------- $ 91.0 $ 63.8 - ----------------------------------------------- ------- ------- Other liabilities: Employee benefits $ 41.7 $ 41.3 Casualty insurance costs 1.3 1.5 Other 0.4 1.9 - ----------------------------------------------- ------- ------- $ 43.4 $ 44.7 - ----------------------------------------------- ------- ------- Page 50 Supplemental cash flow information is as follows: Twelve Months Ended December 31, -------------------------- (Dollar amounts in millions) 1999 1998 1997 - ------------------------------------------------ ------ ------ ------ Interest paid $ 52.5 $ 20.9 $ 10.4 Income taxes paid 14.0 39.3 38.4 Noncash investing and financing activities: Capital lease obligations incurred 0.2 0.8 Fair value of assets acquired 175.3 Cash paid (132.5) Liabilities assumed and incurred 42.8 - ------------------------------------------------ ------ ------ ------- Page 51 SUPPLEMENTARY DATA QUARTERLY RESULTS OF OPERATIONS (unaudited) The following tables set forth a summary of the unaudited quarterly results of operations for the twelve-month periods ended December 31, 1999 and 1998.
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter in millions, except Ended Ended Ended Ended per share data) March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 Total - ----------------- -------------- ------------- ------------------ ----------------- ------- 1999 Sales $185.1 $183.2 $219.6 $222.0 $809.9 Gross profit 53.2 51.8 63.5 67.1 235.6 Net income (loss) 8.8 8.9 (42.6) 3.1 (21.8) Earnings (loss) per share: Basic .12 .12 (.79) .10 (.37) Diluted .12 .12 (.79) .10 (.37)
The third and fourth quarter include after-tax merger expense of $53.6 million ($.90 per share) and $0.9 million ($.03 per share).
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter in millions, except Ended Ended Ended Ended per share data) March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998 Total - ----------------- -------------- ------------- ------------------ ----------------- ------- 1998 Sales $199.7 $205.1 $226.6 $200.5 $831.9 Gross profit 60.5 63.1 70.7 64.0 258.3 Income before extraordinary loss 13.7 13.8 19.2 16.6 63.3 Net income 13.7 13.8 17.2 16.6 61.3 Earnings per share: Basic: Income before extraordinary loss .19 .18 .26 .23 .85 Net income .19 .18 .23 .23 .82 Diluted: Income before extraordinary loss .18 .18 .25 .22 .83 Net income .18 .18 .22 .22 .80
The third quarter includes a net extraordinary loss of $2.0 million ($.03 per share) on the redemption of long-term debt. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 52 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT See the "Election of Directors," "Executive Officers," and "Filing Disclosure" sections of the proxy statement for the April 17, 2000, Annual Meeting of Stockholders of Blount International, Inc., which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See the "Executive Compensation," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation," and "Employment Contracts, Termination of Employment and Change in Control Arrangements" sections of the proxy statement for the April 17, 2000, Annual Meeting of Stockholders of Blount International, Inc., which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the "Principal Stockholders" section of the proxy statement for the April 17, 2000, Annual Meeting of Stockholders of Blount International, Inc., which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the "Certain Transactions and Other Matters" section of the proxy statement for the April 17, 2000, Annual Meeting of Stockholders of Blount International, Inc., which section is incorporated herein by reference. Page 53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page Reference --------- (a) Certain documents filed as part of Form 10-K (1) Financial Statements and Supplementary Data Report of Independent Accountants 20 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 22 Consolidated Balance Sheets as of December 31, 1999 and 1998 23 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 24 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997 25 Notes to Consolidated Financial Statements 26 - 51 Supplementary Data 52 (2) Financial Statement Schedules Schedule II - Valuation and qualifying accounts for the years ended December 31, 1999, 1998 and 1997 59 All other schedules have been omitted because they are not required or because the information is presented in the Notes to Consolidated Financial Statements. (b) Reports on Form 8-K in the Fourth Quarter None. (c) Exhibits required by Item 601 of Regulation S-K: * 2(a) Plan and Agreement of Merger among Blount International, Inc., HBC Transaction Subsidiary, Inc. and Blount, Inc., dated August 17, 1995 filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount International, Inc., including amendments and exhibits, which became effective on October 4, 1995 (Commission File No. 33-63141). * 2(b) Stock Purchase Agreement, dated November 4, 1997, by and among Blount, Inc., Hoffman Enclosures, Inc., Pentair, Inc. and Federal-Hoffman, Inc. which was filed as Exhibit No. 2 to the Form 8-K filed by Blount International, Inc. on November 19, 1997 (Commission File No. 001-11549). Page 54 * 2(c) Agreement and Plan of Merger and Recapitalization, dated as of April 18, 1999, between Blount International, Inc. and Red Dog Acquisition, Corp. (included as Appendix A to the Proxy Statement-Prospectus which forms a part of the Registration Statement) previously filed on July 15, 1999, by Blount International, Inc.(Reg. No. 333-82973). * 3(c) Post-Merger Restated Certificate of Incorporation of Blount International, Inc. (included as Exhibit A to the Agreement and Plan of Merger and Recapitalization which is Exhibit 2.1) filed as part of the Proxy Statement- Prospectus which forms a part of the Registration Statement on Form S-4 (Reg. No. 333-82973) previously filed on July 15, 1999, by Blount International, Inc. * 3(d) Post-Merger Bylaws of Blount International, Inc. (included as Exhibit B to the Agreement and Plan of Merger and Recapitalization which is Exhibit 2.1) filed as part of the Proxy Statement-Prospectus which forms a part of the Registration Statement on Form S-4 (Reg. No. 333-82973). * 4(a) Registration Rights and Stock Transfer Restriction agreement filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount International, Inc., including amendments and exhibits, which became effective on October 4, 1995 (Commission File No. 33-63141). * 4(b) Registration Statement on Form S-3 (Reg. Nos. 333-42481 and 333-42481-01), with respect to the 7% $150 million Senior Notes due 2005 of Blount, Inc. which are guaranteed by Blount International, Inc., including amendments and exhibits, which became effective on June 17, 1998. * 4(c) Form of stock certificate of New Blount common stock filed as part of the Proxy Statement-Prospectus which forms a part of the previously filed on July 15, 1999, by Blount International, Inc. Registration Statement on Form S-4 (Reg. No. 333-82973). * 4(d) $500,000,000 Credit Agreement dated as of August 19, 1999 among Blount International, Inc., Blount, Inc., as Borrower, and the Several Lenders from time to time Parties Hereto which was filed as Exhibit 4 to the report on Form 10-Q for the third quarter ended September 30, 1999. * 4(e) Indenture between Blount, Inc., as Issuer, Blount International, Inc., BI Holdings Corp., Benjamin F. Shaw Company, BI, L.L.C., Blount Development Corp., Omark Properties, Inc., 4520 Corp., Inc., Gear Products, Inc., Dixon Industries, Inc., Frederick Manufacturing Corporation, Federal Cartridge Company, Simmons Outdoor Corporation, Mocenplaza Development Corp., and CTR Manufacturing, Inc., as Guarantors, and United States Trust Company of New York, dated as of August 19, 1999, (including exhibits) which was filed as Exhibit 4.1 to the report on Form 10-Q for the third quarter ended September 30, 1999. * 4(f) Registration Right Agreement by and among Blount, Inc., Blount International, Inc., BI Holdings Corp., Benjamin F. Shaw Company, BI, L.L.C., Blount Development Corp., Omark Properties, Inc., Gear Products, Inc., Dixon Industries, Inc., Frederick Manufacturing Corporation, Federal Cartridge Company, Simmons Outdoor Corporation, Mocenplaza Development Corp., CTR Manufacturing, Inc., and Lehman Brothers Inc., dated as of August 19, 1999, which was filed as Exhibit 4.2 to the report on Form 10-Q for the third quarter ended September 30, 1999. * 4(g) Registration Statement on Form S-4 (Reg. No. 333-92481) with respect to the 13% $325 million Senior Subordinated Notes of Blount, Inc. guaranteed by Blount International, Inc., including amendments and exhibits, which became effective on January 19, 2000. Page 55 * 9(a) Stockholder Agreement, dated as of April 18, 1999, between Red Dog Acquisition, Corp., a Delaware corporation and a wholly-owned subsidiary of Lehman Brothers Merchant Banking Partners II L.P., a Delaware limited partnership, and The Blount Holding Company, L.P., a Delaware limited partnership which was filed as Exhibit 9 to the Form 8-K/A filed April 20, 1999. *10(a) Form of Indemnification Agreement between Blount International, Inc. and The Blount Holding Company, L.P. filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount International, Inc., including amendments and exhibits, which became effective on October 4, 1995 (Commission File No. 33-63141). *10(b) Supplemental Retirement and Disability Plan of Blount, Inc. which was filed as Exhibit 10(e) to the Annual Report of Blount, Inc. on Form 10-K for the fiscal year ended February 29, 1992 (Commission File No. 1-7002). *10(c) Written description of the Management Incentive Plan of Blount, Inc. which was included within the Proxy Statement of Blount, Inc. for the Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1- 7002). *10(d) Supplemental Retirement Savings Plan of Blount, Inc. which was filed as Exhibit 10(i) to the Annual Report of Blount, Inc. on Form 10-K for the fiscal year ended February 29, 1992 (Commission File No. 1-7002). *10(e) Supplemental Executive Retirement Plan between Blount, Inc. and John M. Panettiere which was filed as Exhibit 10(t) to the Annual Report of Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1993 (Commission File No. 1-7002). *10(f) Executive Management Target Incentive Plan of Blount, Inc. which was filed as Exhibit B to the Proxy Statement of Blount, Inc. for the Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1-7002). *10(g) Supplemental Executive Retirement Plan between Blount, Inc. and Donald B. Zorn which was filed as Exhibit 10(v) to the Annual Report of Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1995 (Commission File No. 1-7002). *10(h) Blount, Inc. Executive Benefit Plans Trust Agreement and Amendment to and Assumption of Blount, Inc. Executive Benefit Plans Trust which were filed as Exhibits 10(x)(i) and 10(x)(ii) to the Annual Report of Blount International, Inc. on Form 10-K for the fiscal year ended February 29, 1996 (Commission File No. 001-11549). *10(i) Blount, Inc. Benefits Protection Trust Agreement and Amendment To and Assumption of Blount, Inc. Benefits Protection Trust which were filed as Exhibits 10(y)(i) and 10(y)(ii) to the Annual Report of Blount International, Inc. on Form 10-K for the fiscal year ended February 29, 1996 (Commission File No. 001-11549). *10(j) 1998 Blount Long-Term Executive Stock Option Plan of Blount International, Inc. filed as part of Registration Statement on Form S-8 (Reg. No. 333-56701), including exhibits, which became effective on June 12, 1998. *10(k) Supplemental Executive Retirement Plan between Blount, Inc. and Gerald W. Bersett which was filed as Exhibit 10(z) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 1998 (Commission File No. 001-11549). Page 56 *10(l) The Blount Deferred Compensation Plan which was filed as Exhibit 10(cc) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 1998 (Commission File No. 001-11549). *10(m) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and John M. Panettiere filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. *10(n) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and Donald B. Zorn filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. *10(o) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and Gerald W. Bersett filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. *10(p) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and James S. Osterman filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. *10(q) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and Richard H. Irving filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. *10(r) Employment Agreement, dated as of April 18, 1999, between Blount International, Inc. and Harold E. Layman filed as part of Registration Statement on Form S-4 (Reg. No.333-92481) of Blount International, Inc., including amendments and exhibits, which became effective January 19, 2000. **10(s) Employee Stockholder Agreement dated as of August 19, 1999, among Blount International, Inc., Lehman Brothers Merchant Banking Partners II L.P. and Certain Employee Stockholders. 21. A list of the significant subsidiaries of Blount International, Inc. included herein on page 60. 23. Consent of Independent Accountants included herein on page 61. 27. **Financial Data Schedule included herein on page 62. * Incorporated by reference. ** Filed electronically herewith. Copies of such exhibits may be obtained upon written request from: Blount International, Inc. P.O. Box 949 Montgomery, AL 36101-0949 Page 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLOUNT INTERNATIONAL, INC. By: /s/ Harold E. Layman Harold E. Layman President and Chief Operating Officer and Chief Financial Officer Dated: March 2, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 2, 2000 /s/ John M. Panettiere /s/ Alan L. Magdovitz John M. Panettiere Alan L. Magdovitz Chairman of the Board and Director Chief Executive Officer and Director /s/ Eliot M. Fried /s/ Harold E. Layman Eliot M. Fried Harold E. Layman Director President and Chief Operating Officer, Chief Financial Officer and Director /s/ E. Daniel James E. Daniel James /s/ Rodney W. Blankenship Director Rodney W. Blankenship Vice President and Controller (Chief Accounting Officer) Page 58 BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(Dollar amounts in millions) - ---------------------------- Column A Column B Column C Column D Column E -------- ------------ ------------------------- ----------- ---------- Additions ------------------------- Balance at Charged to Charged to Balance at Beginning of Cost and Other End of Description Period Expenses Accounts Deductions Period ----------- ------------ ---------- ---------- ------------ ---------- Year ended December 31, 1997 - ----------------- Allowance for doubtful accounts receivable $ 3.0 $ 1.0 $ 0.9 (2) $ 1.2 (1) $ 3.7 ======= ======= ======= ======= ======= Year ended December 31, 1998 - ------------------- Allowance for doubtful accounts receivable $ 3.7 $ 0.9 $ 0.7 (1) $ 3.9 ======= ======= ======= ======= Year ended December 31, 1999 - ------------------- Allowance for doubtful accounts receivable $ 3.9 $ 1.5 $ 1.2 (1) $ 4.2 ======= ======= ======= =======
(1) Principally amounts written-off less recoveries of amounts previously written-off. (2) Principally allowances established for companies acquired by purchase. Page 59 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT At December 31, 1999, consolidated, directly or indirectly, wholly-owned subsidiaries of Blount International, Inc. were as follows: NAME OF PLACE OF SUBSIDIARY INCORPORATION - ---------- ------------- Blount, Inc. Delaware Blount Holdings, Ltd. Canada Blount Canada, Ltd. Canada Federal Cartridge Company Minnesota Dixon Industries, Inc. Kansas Gear Products, Inc. Oklahoma Simmons Outdoor Corporation Delaware CTR Manufacturing, Inc. North Carolina Frederick Manufacturing Corporation Delaware The names of particular subsidiaries have been omitted because when considered in the aggregate or as a single subsidiary they would not constitute a significant subsidiary as of December 31, 1999. Page 60 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Blount International, Inc. on Form S-4 (File No. 333-92481) of our report dated January 27, 2000, on our audits of the consolidated financial statements and financial statement schedules of Blount International, Inc. and subsidiaries as of December 31, 1999 and 1998, and for the three years ended December 31, 1999, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia January 27, 2000 Page 61 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF BLOUNT INTERNATIONAL, INC. FOR THE PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 11 0 176 4 117 336 402 230 689 149 810 0 0 0 (322) 689 810 810 574 574 0 0 45 (23) (1) (22) 0 0 0 (22) (.37) (.37)
EX-10 3 EXHIBIT 10(s) ============================================================================== EMPLOYEE STOCKHOLDER AGREEMENT dated as of August 19, 1999, among BLOUNT INTERNATIONAL, INC., LEHMAN BROTHERS MERCHANT BANKING PARTNERS II, L.P., and THE EMPLOYEE STOCKHOLDERS NAMED HEREIN ============================================================================= TABLE OF CONTENTS ARTICLE I DEFINITIONS.................................................................1 ARTICLE II GENERAL; RESTRICTIONS ON TRANSFER SECTION 2.01. General......................................................7 SECTION 2.02. General Transfer Restrictions................................7 SECTION 2.03. Legend.......................................................8 SECTION 2.04. Additional Restrictions on Transfer..........................8 SECTION 2.05. Registration of Option Shares................................8 ARTICLE III TAG-ALONG RIGHTS, AND DRAG-ALONG RIGHTS SECTION 3.01. Tag-Along Rights.............................................8 SECTION 3.02. Drag-Along Rights...........................................10 SECTION 3.03. Cooperation.................................................10 ARTICLE IV CALL AND PUT RIGHTS SECTION 4.01. Call and Puts Rights ......................................11 ARTICLE V REGISTRATION RIGHTS SECTION 5.01. Registration................................................12 SECTION 5.02. Demand Registration Rights. ................................13 SECTION 5.03. Registration Expenses.......................................15 SECTION 5.04. Restrictions on Public Sale by Sellers and the Company......15 SECTION 5.05. Registration Procedures.....................................15 SECTION 5.06. Obligations of Sellers......................................18 SECTION 5.07. Indemnification.............................................19 SECTION 5.08. Rule 144 Reporting..........................................22 i ARTICLE VI MISCELLANEOUS SECTION 6.01. Notices....................................................22 SECTION 6.02. Applicable Law.............................................22 SECTION 6.03. Entire Agreement; No Third-Party Beneficiaries.............23 SECTION 6.04. Descriptive Headings.......................................23 SECTION 6.05. Severability...............................................23 SECTION 6.06. Agreement To Be Bound......................................23 SECTION 6.07. Additional Holders.........................................23 SECTION 6.08. Additional Employee Stockholders...........................23 SECTION 6.09. Other Agreements...........................................23 SECTION 6.10. Successors, Assigns, Transferees...........................23 SECTION 6.11. Amendments; Waivers........................................23 SECTION 6.12. Counterparts...............................................24 SECTION 6.13. Specific Performance.......................................24 SECTION 6.14. Attorneys' Fees............................................24 SECTION 6.15. Recapitalization, Exchanges, etc., Affecting Common Stock..24 Exhibit A -- Form of Option Agreement Exhibit B -- Equity Rollover Amounts ii EMPLOYEE STOCKHOLDER AGREEMENT dated as of August 19, 1999 (this "Agreement"), among BLOUNT INTERNATIONAL, INC., a Delaware corporation (the "Company"), Lehman Brothers Merchant Banking Partners II, L.P., a Delaware limited partnership, on behalf of itself and its affiliated co-investors (collectively, "Lehman Brothers Merchant Banking Partners"), and each employee of the Company whose names and addresses are set forth on the signature page hereof or who otherwise become parties to this Agreement (each, an "Employee Stockholder"). WHEREAS pursuant to an Agreement and Plan of Merger and Recapitalization (as amended from time to time, the "Merger Agreement") dated April 18, 1999, between Red Dog Acquisition, Corp., a Delaware corporation, and the Company (a) each share of issued and outstanding common stock of the Company (with certain exceptions set forth in the Merger Agreement) shall be converted into the right to receive, at the election of the stockholders of the Company and subject to proration, either (i) an amount in cash equal to $30.00 or (ii) two shares of common stock of the Company; WHEREAS upon completion of the merger contemplated by the Merger Agreement (the "Merger"), Lehman Brothers Merchant Banking Partners will own a substantial majority of the Company. WHEREAS the Employee Stockholders have agreed to invest in the Company after the Merger, on the terms and subject to the conditions set forth in this Agreement; WHEREAS it is in the best interests of Lehman Brothers Merchant Banking Partners, the Company and the Employee Stockholder to set forth certain additional provisions governing certain aspects of their relationships. NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the meanings ascribed to them below: "Affiliate" of any Person means another Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such first Person. "Associate" of a Person means any Person who is an officer of, or employed by, such first Person or such first Person's Affiliates. "Board" means the Board of Directors of the Company. "Call Event" shall have the meaning set forth in Section 4.01(d). "Call Notice" shall have the meaning set forth in Section 4.01(e). 2 "Cause", in respect of any Employee Stockholder, shall have the meaning set forth in such Employee Stockholder's Employment Agreement, or if such Agreement does not define such term, "Cause" means the involuntary termination of an Employee Stockholder by the Company for any of the following reasons: (a) as result of an act or acts by the Employee Stockholder which have been found in an applicable court of law to constitute a felony (other than traffic-related offenses); (b) as result of an act or acts by the Employee Stockholder which are in the good faith judgment of the Board to be in violation of law or of policies of the Company and which result in demonstrably material injury to the Company; (c) as result of an act or acts of proven dishonesty by the Employee Stockholder resulting or intended to result directly or indirectly in significant gain or personal enrichment to the Employee Stockholder at the expense of the Company or public stockholders of the Company; or (d) upon the willful and continued failure by the Employee Stockholder substantially to perform his duties with the Company (other than any such failure resulting from incapacity due to mental or physical illness not constituting a Disability), after a demand in writing for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board believes that the Employee Stockholder has not substantially performed his duties. With respect to clauses (b), (c) or (d) above, the Employee Stockholder shall not be deemed to have been involuntarily terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Employee Stockholder and an opportunity for him, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Employee Stockholder was guilty of conduct set forth above in clauses (b), (c) or (d) and specifying the particulars thereof in detail. For purposes of this Agreement, no act or failure to act by the Employee Stockholder shall be deemed to be "willful" unless done or omitted to be done by the Employee Stockholder not in good faith and without reasonable belief that the Employee Stockholder's action or omission was in the best interests of the Company. "Change in Control", in respect of any Employee Stockholder, shall have the meaning set forth in such Employee Stockholder's Employment Agreement, or if such Agreement does not define such term, "Change in Control" means (i) (a) the acquisition, directly or indirectly, by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than any member of the Lehman Group, of securities of the Company representing an aggregate of more than 50% of the combined voting power of the Company's then outstanding securities (excluding the acquisitions by persons who acquire such amount through inheritance); (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election of each new director was approved in advance by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; (c) consummation of (i) a merger, consolidation or other business combination of the Company with any other "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) or affiliate thereof, other than a merger, consolidation or business combination which would result in the outstanding common stock of the Company immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into common stock of the surviving entity or a parent or affiliate thereof) more than 50% of the outstanding common stock of the Company, or such surviving entity or partners or affiliate thereof, outstanding immediately after such merger, consolidation or business combination, or (ii) a plan of complete liquidation of Company or an agreement for the sale or disposition by Company of all or substantially all of Company's assets; (d) an Initial Public Offering; or (e) a sale of more than 50% of the assets of the Company; provided that none of the events described in clauses (b) through (e) shall be deemed a Change in Control if, immediately following such event, the Lehman Group owns 50% or more of the combined voting power of the Company's then outstanding securities. 3 "Closing Date" shall have the meaning set forth in the Merger Agreement. "Common Stock" means the Common Stock, par value $.01 per share, of the Company and any other capital stock or securities into which such Common Stock is reclassified or changed, including by reason of merger, consolidation, reorganization or recapitalization or that are otherwise distributed with respect to Common Stock. "Company" shall have the meaning set forth in the preamble to this Agreement. It is understood that references to the "Company" herein that apply to time periods after the Effective Date, shall be to Blount International, Inc. as the surviving corporation in the Merger. "Disability" means the inability as a result of physical or mental incapacity of an Employee Stockholder to substantially perform his duties for the Company on a full-time basis for a period of six consecutive months. "Disability Cause Event" shall have the meaning set forth in Section 4.01(c). "Drag-Along Disposition Transaction" shall have the meaning set forth in Section 3.02(a). "Drag-Along Notice" shall have the meaning set forth in Section 3.02(a). "Drag-Along Purchasers" shall have the meaning set forth in Section 3.02(a). "Drag-Along Rights" shall have the meaning set forth in Section 3.02(a). "Drag-Along Shares" shall have the meaning set forth in Section 3.02(b). "Drag-Along Stockholders" shall have the meaning set forth in Section 3.02(a). "Drag-Along Transferors" shall have the meaning set forth in Section 3.02(a). "Effective Time" shall mean the Effective Time of the Merger as set forth in the Merger Agreement. "Employee Demand Registration Right" shall have the meaning set forth in Section 5.02(a). "Employee Demand Right Effective Date" shall have the meaning set forth in Section 5.02(a). "Employee Demand Right Notice" shall have the meaning set forth in Section 5.02(a). "Employee Stockholder" shall have the meaning set forth in the recitals to this Agreement. "Employment Agreement" means, with respect to any Employee Stockholder, the written agreement between the Company and such Employee Stockholder providing for the terms of such Employee Stockholder's employment with the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. 4 "Fair Market Value" means, in respect of each share of Common Stock, (i) to the extent the call or put under Article IV herein, as the case may be, occurs concurrently with or within 30 days of an Initial Public Offering, the offering price to the public per share of common stock of such Initial Public Offering; (ii) to the extent the call or put under Article IV herein, as the case may be, occurs concurrently with or within 30 days of a Change in Control, the value of the Company's total equity, as determined based upon the price per share paid in connection with such Change in Control, divided by the total number of shares of Common Stock then outstanding; (iii) to the extent clauses (i) and (ii) above do not apply and a regular trading market for the Company's common stock exists following an Initial Public Offering, the average closing price of such common stock for 10 consecutive trading days ending on the trading day immediately prior to such call or put; and (iv) at all other times, the fair market value of the Company's total equity, as determined by the Board in good faith divided by the total number of shares of Common Stock then outstanding; provided, however, that if the Employee Stockholder disputes the Board's determination, within 10 days of the Employee Stockholder's receipt of notice of the Board's determination, the Employee Stockholder and the Board shall jointly select a qualified independent financial advisor to make such determination, which determination shall be final and binding upon the parties, provided, further, that the fees and costs of such financial advisor in connection with its determination shall be borne equally by the Company and the Employee Stockholder unless such financial advisor's fair market value determination is at least 10% greater than the Board's determination, in which case, such fees and costs shall be borne entirely by the Company "For Cause Call Event" shall have the meaning set forth in Section 4.01(b). "Good Reason", in respect of any Employee Stockholder, shall have the meaning set forth in such Employee Stockholder's Employment Agreement. If such Employment Agreement does not define "Good Reason", the provisions of this Agreement that utilize such term shall not be applicable to such Employee Stockholder. "Holders" means the Employee Stockholders and all Permitted Transferees thereof who shall become a party to this Agreement pursuant to Section 6.06, and any combination of them. "Incidental Registration Statement" shall have the meaning set forth in Section 5.01(a). "Initial Public Offering" means the sale after the Effective Time pursuant to one or more effective registration statements under the Securities Act (other than in connection with employee benefit or similar plans or acquisitions of companies or businesses by, or business combinations involving the Company or any of its subsidiaries) of shares of Common Stock which results in an active trading market of 25% or more of the outstanding shares of the Common Stock. There shall be deemed to be an "active trading market" if the Common Stock is listed or quoted on a national exchange or NASDAQ on the applicable determination date. "Lehman Brothers Merchant Banking Partners" shall have the meaning set forth in the recitals to this Agreement. "Lehman Demand Registration Right" shall have the meaning set forth in Section 5.02(b). "Lehman Demand Right Notice" shall have the meaning set forth in Section 5.02(b). 5 "Lehman Group" shall mean Lehman Brothers Merchant Banking Partners and (a) any Affiliate of Lehman Brothers Merchant Banking Partners, (b) any Associates of Lehman Brothers Merchant Banking Partners, (c) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any member of the Lehman Group and (d) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only Lehman Brothers Merchant Banking Partners, Affiliates and Associates of Lehman Brothers Merchant Banking Partners, their spouses, their lineal descendants and any other members of their families, if, in the cases of clauses (b) through (d) above, such Person agrees in writing to be bound by the terms of this Agreement as a member of the Lehman Group. "Merger" shall have the meaning set forth in the recitals to this Agreement. "Merger Agreement" shall have the meaning set forth in the recitals to this Agreement. "NASD" means the National Association of Securities Dealers, Inc. "NASDAQ" means the NASDAQ stock market. "New Options" shall have the meaning set forth in the Option Agreement. "Non-Cause Call Event" shall have the meaning set forth in Section 4.01(a). "NYSE" means New York Stock Exchange, Inc. "Option Agreement" means the 1999 Employee Stock Option Plan substantially in the form contained in Exhibit A attached hereto. "Option Shares" means the shares of Common Stock issued upon exercise of any New Options granted to the Employee Stockholders. "Other Registration Rights Agreements" shall have the meaning set forth in Section 5.01(a). "Permitted Transferees" means: (i) in the case of the Employee Stockholders, (A) each Employee Stockholder's heirs, executors, administrators, testamentary trustees, legatees, beneficiaries or charitable remaindermen, (B) a trust the beneficiaries of which include only an Employee Stockholder, the spouse, the lineal descendants or any other member of the family of such Employee Stockholder approved by the Board or (C) any Person if Lehman Brothers Merchant Banking Partners has given its prior written consent to the applicable transfer; and (ii) in the case of any member of the Lehman Group, any other Person who is a member of the Lehman Group. "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. "Purchased Shares" means shares of Common Stock representing the Rollover Stock. 6 "Put Event" shall have the meaning set forth in Section 4.02(c). "Registrable Securities" means the Common Stock held by a Holder; provided that in the event that the Holder is participating in an offering pursuant to Section 5.01(a), "Registrable Securities" shall mean the Common Stock held by the Holder multiplied by a fraction, the numerator of which is the number of shares of Common Stock offered by Lehman Brothers Merchant Banking Partners for sale in connection with the relevant registered offering described in Section 5.01(a) and the denominator of which is the total number of shares of Common Stock owned by Lehman Brothers Merchant Banking Partners as of the date of such offering. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (i) such securities have been registered under the Securities Act, the registration statement with respect to the sale of such securities has become effective under the Securities Act and such securities have been disposed of pursuant to such effective registration statement, (ii) such securities have been distributed pursuant to Rule 144 or Rule 144A (or any similar provision then in force) under the Securities Act, (iii) such securities have been otherwise transferred, if new certificates or other evidences of ownership for them not bearing a legend restricting further transfer and not subject to any stop-transfer order or other restrictions on transfer have been delivered by the Company and subsequent disposition of such securities does not require registration or qualification of such securities under the Securities Act or any state securities laws then applicable, (iv) following the Initial Public Offering, such securities may be sold without restriction under Rule 144(k) (or any similar provision then in force) under the Securities Act, or (v) such securities shall cease to be outstanding. "Registration Expenses" shall mean all expenses incident to the Company's performance of or compliance with Article V, including all registration and filing fees and expenses (including SEC, stock exchange and NASD fees), fees and expenses of compliance with state securities or "blue sky" laws (including reasonable fees and disbursements of counsel for the underwriters in connection with "blue sky" qualifications of the Registrable Securities), printing expenses, messenger and delivery expenses, the fees and expenses incurred in connection with the listing, if any, of the securities to be registered on each securities exchange or national market system on which the Common Stock is then listed, fees and disbursements of one counsel for the Company, one counsel for Lehman Brothers Merchant Banking Partners and one counsel selected by holders of a majority of shares to be sold in connection with the relevant registration of Common Stock held by the Employee Stockholders taken together, and of the independent certified public accountants of the Company (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance), the fees and disbursements of underwriters customarily paid by issuers or sellers of securities (including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained in accordance with the rules and regulations of the NASD), the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, and fees and expenses of other Persons retained by the Company (but not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of securities by holders of such securities). "Retirement" with respect to any Employee Stockholder, shall have the meaning set forth in such Employee Stockholder's Employment Agreement. To the extent no such Employment Agreement is in effect or such Employment Agreement does not define "Retirement", "Retirement" means normal retirement under the terms of any tax-qualified retirement plan of the Company or if no such plan is in existence or does not define "Retirement", "Retirement" means termination of employment (other than an involuntary termination for Cause) at anytime on or after attainment of the age of 65, in each case which retirement occurs no earlier than three years after the Effective Time. Except as provided in the applicable 7 Employment Agreement, any purported retirement prior to the third anniversary of the Effective Time shall be treated the same as a voluntary termination. "Rollover Stock" shall have the meaning set forth in Section 2.01. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. "Seller" shall mean any Person selling securities of the Company pursuant to an Incidental Registration. "Tag-Along Acceptance Notice" shall have the meaning set forth in Section 3.01(a). "Tag-Along Notice" shall have the meaning set forth in Section 3.01(a). "Tag-Along Offerees" shall have the meaning set forth in Section 3.01(a). "Third Party" shall have the meaning set forth in Section 3.01(a). "Transfer" shall have the meaning set forth in Section 2.02. "Transferors" shall have the meaning ascribed to such term in Section 3.01(a). "Underwriter" shall have the meaning set forth in Section 5.08(a). "Underwritten Offering" shall have the meaning set forth in Section 5.01(b). ARTICLE II GENERAL; RESTRICTIONS ON TRANSFER SECTION 2.01. General. (a) As contemplated by their respective Employment Agreements or otherwise, each Employee Stockholder agrees at the Effective Time to purchase the amount of shares of Common Stock set forth on Exhibit B hereto (the "Rollover Stock"). The terms of this Agreement shall apply to all Common Stock owned by an Employee Stockholder on the Effective Time and to all Common Stock the Employee Stockholder subsequently acquires, other than acquisitions through purchase of Common Stock on the NYSE or on a national stock exchange or market on which the Common Stock is traded or quoted, including NASDAQ. This Agreement shall only be effective upon the Effective Time. (b) Each Employee Stockholder hereby represents that the shares of Rollover Stock were acquired for investment purposes and not with a view to the sale or distribution thereof. Each Employee Stockholder acknowledges and understands that such shares of Rollover Stock have not been registered under the Securities Act, by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and that such shares of Rollover Stock must be held indefinitely unless a subsequent disposition thereof is either (i) registered under the Securities Act or (ii) exempt from registration thereunder. Each Employee Stockholder further understands and acknowledges that the certificates representing the Rollover Stock will contain legends to the effect of the foregoing. 8 SECTION 2.02. General Transfer Restrictions. Prior to the fifth anniversary of the Effective Time, each Employee Stockholder agrees to not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of (collectively, "Transfer") any shares of Common Stock, or solicit any offers to purchase or otherwise acquire or take a pledge of any shares of Common Stock, unless such Transfer is expressly permitted by, and complies with the provisions of, this Agreement and either (i) such Transfer is made pursuant to an effective registration statement under the Securities Act and has been registered under all applicable state securities or "blue sky" laws; (ii) the Employee Stockholder shall have furnished the Company with an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Company, to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and all applicable state securities or "blue sky" laws; or (iii) such Transfer is by the Employee Stockholder to a Permitted Transferee in accordance with Section 6.06. SECTION 2.03. Legend. Each certificate representing shares of Common Stock held by the Employee Stockholder shall bear a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF, AND IN PARTICULAR MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF, AN EMPLOYEE STOCKHOLDER AGREEMENT AMONG EMPLOYEE STOCKHOLDER, LEHMAN BROTHERS MERCHANT BANKING PARTNERS II L.P. AND BLOUNT INTERNATIONAL, INC. (THE "AGREEMENT") (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF BLOUNT INTERNATIONAL, INC. (TOGETHER WITH ITS SUCCESSORS, THE "COMPANY") AND WHICH WILL BE MAILED TO A STOCKHOLDER WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT BY THE COMPANY OF A WRITTEN REQUEST THEREFOR FROM SUCH STOCKHOLDER). THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY ALL OF THE PROVISIONS OF THE AFORESAID AGREEMENT. SECTION 2.04. Additional Restrictions on Transfer. Notwithstanding anything in this Agreement to the contrary, prior to the fifth anniversary of the Effective Time, no Holder may Transfer any shares of Common Stock to any Person other than (a) to a Permitted Transferee, (b) pursuant to Sections 3.01, 3.02, Article IV or Article V or (c) in connection with a Change-in-Control so long as such transfers are on a pro rata basis with transfers made by the Lehman Group in connection with such Change-in-Control. SECTION 2.05. Registration of Option Shares. The Company will register all Option Shares on Form S-8 under the Securities Act within a reasonable time after the date hereof in order to ensure that the Option Shares are so registered prior to the vesting of the Options and will maintain such registration in effect during the term of the Options. ARTICLE III TAG-ALONG RIGHTS, AND DRAG-ALONG RIGHTS SECTION 3.01. Tag-Along Rights. (a) No member of the Lehman Group shall sell or otherwise dispose of shares of Common Stock to any Person or Persons (other than a 9 Permitted Transferee of the Lehman Group) (the "Third Parties"), unless the terms and conditions of such sale or other disposition to such Third Parties shall include an offer to each Holder who at such time owns any shares of Common Stock subject to this Agreement (the "Tag-Along Offerees") to include, at the option of each Tag-Along Offeree, in the sale or other disposition to the Third Parties such number of shares of Common Stock owned by such Tag-Along Offeree determined in accordance with this Section 3.01. The members of the Lehman Group proposing to effect such sale or other disposition (the "Transferors") shall send a written notice (the "Tag- Along Notice") to each Tag-Along Offeree setting forth the maximum number of shares of Common Stock the Third Party is willing to purchase or otherwise acquire, along with the price and the other terms and conditions of the Third Party offer. At any time within 30 days after the date the Tag-Along Notice is received by each Tag-Along Offeree, such Tag-Along Offeree may exercise its option to sell a number of shares of Common Stock owned by such Tag-Along Offeree determined in accordance with the provisions of this Section 3.01 by furnishing written notice of such acceptance (the "Tag-Along Acceptance Notice") to the Transferors (which Tag- Along Acceptance Notice shall set forth the maximum number of shares of Common Stock that such Tag-Along Offeree wishes to sell or otherwise dispose of to the Third Party) and delivering to the Transferors the certificate or certificates representing the maximum number of shares of Common Stock to be sold or otherwise disposed of pursuant to such offer by such Tag-Along Offeree, together with a limited power-of-attorney authorizing the Transferors to sell or otherwise dispose of such shares of Common Stock to the Third Parties as part of such proposed sale or other disposition, all in a form reasonably satisfactory to the Transferor and the Third Parties. Notwithstanding anything to the contrary, Section 3.01 shall not apply to any sale of shares of Common Stock by Lehman Brothers Merchant Banking Partners or its Affiliates pursuant to a syndication of its equity interest in the Company during the six-month period commencing from and after the Effective Time, provided that the aggregate amount of such sales do not exceed $100 million. (b) If the proposed sale or other disposition to the Third Parties by the Transferors is consummated, each Tag-Along Offeree shall have the right to sell to the Third Party as part of such proposed sale or other disposition a number of shares of Common Stock up to the product (rounded up to the nearest whole number) of (i) the quotient determined by dividing (A) the aggregate number of shares of Common Stock owned by such Tag-Along Offeree by (B) the aggregate number of shares owned by the Lehman Group, the Holders and all other Persons who have "tag-along" rights of a similar nature under this Agreement and (ii) the total number of shares of Common Stock proposed to be acquired by the Third Party; provided that, in order to be entitled to exercise its right to sell shares of Common Stock to the Third Party pursuant to this Section 3.01, each Tag-Along Offeree (x) shall agree to the same covenants as Transferors agree to in connection with the proposed sale and (y) shall make such representations and warranties concerning title to the shares of Common Stock to be sold in connection with the proposed sale as Transferors make, all in a form reasonably satisfactory to the Transferor and the Third Party. (c) Each of the Transferors and the Third Party shall have the right, in its sole discretion, at all times prior to consummation of the proposed sale or other disposition giving rise to the tag-along right granted by this Section 3.01, to abandon or otherwise terminate such sale or other disposition, whereupon all rights of the Tag-Along Offerees under this Section 3.01 in respect of such sale or other disposition shall become null and void, and neither the Transferors nor the Third Party shall have any liability or obligation to any Tag-Along Offeree with respect thereto by virtue of such abandonment or termination. (d) The purchase from the Tag-Along Offerees pursuant to this Section 3.01 shall be on the same terms and conditions, including the per share price and the date of sale or other disposition, as are applicable to the Transferors, which shall be not less favorable than as stated in the Tag-Along Notice provided to the Tag-Along Offerees by the Transferors. 10 (e) If within 30 days after the date of the Tag-Along Notice is received by the Tag-Along Offerees, any Tag-Along Offeree has not delivered a Tag-Along Acceptance Notice, such Tag-Along Offeree shall be deemed to have waived any and all of such Tag-Along Offeree's rights with respect to the sale or other disposition of Common Stock described in the Tag-Along Notice. (f) The provisions of this Section 3.01 shall not be applicable to any bona fide public offering of Common Stock made pursuant to a registration statement under the Securities Act. SECTION 3.02. Drag-Along Rights. (a) If any member or members of the Lehman Group at any time propose to sell or otherwise dispose of shares of Common Stock to any Person or Persons other than any Permitted Transferee of the Lehman Group (including through a private placement or similar transaction), who shall have offered to (or who, in accordance with the terms of a prospectus or other offering document, will) acquire any shares of Common Stock held by the Lehman Group (such transferee Person or Persons are hereinafter referred to collectively as the "Drag-Along Purchasers"), the Drag-Along Transferors (as defined below) shall have the right (the "Drag-Along Right"), exercisable in accordance with Section 3.02(b), to require each Holder (collectively, the "Drag-Along Stockholders") to sell or dispose to the Drag-Along Purchasers such number of shares of Common Stock owned by each such Drag-Along Stockholder determined in accordance with this Section 3.02 (a "Drag-Along Disposition Transaction"). The members of the Lehman Group who wish to exercise the Drag- Along Right (the "Drag-Along Transferors") shall send a written notice (a "Drag-Along Notice") to each Drag-Along Stockholder not less than 30 days prior to the date upon which such sale is scheduled to close. Each Drag-Along Notice shall (i) specify in reasonable detail all the terms and conditions upon which such sale or disposition is to occur, and (ii) make reference to this Section 3.02 and state that each Drag-Along Stockholder is obligated to sell or dispose of its Drag-Along Shares pursuant to such sale. (b) In connection with any Drag-Along Disposition Transaction, each Drag-Along Stockholder shall be required to sell or dispose of the number of shares of Common Stock (the "Drag-Along Shares") requested in the Drag-Along Notice which shall in no event exceed the product (rounded up to the nearest whole number) of (i) the quotient obtained by dividing (A) the number of shares of Common Stock to be sold or disposed of in such Drag-Along Disposition Transaction by (B) the aggregate number of shares of Common Stock owned by the Lehman Group, the Holders and such Drag-Along Stockholder and (ii) the number of shares of Common Stock held by such Drag-Along Stockholder. Each Drag-Along Stockholder, unless such Drag- Along Stockholder agrees otherwise, shall receive as consideration upon such sale or disposition for its shares of Common Stock the same type of consideration and the same amount of consideration per share and on the same terms and conditions as are applicable to the shares of Common Stock to be sold by the Drag-Along Transferors; provided, however, that such Drag- Along Stockholder shall not be required to make any representations, warranties or covenants other than a representation and warranty as to title to such Drag-Along Stockholder's Common Stock and shall not be required to give any indemnification other than for the breach of such representation and warranty and in an amount not to exceed the proceeds to such Drag-Along Stockholder from such sale or disposition. (c) If the proposed sale or disposition is not consummated within 120 days of its scheduled closing date, the Drag-Along Right of the Drag-Along Transferors pursuant to Section 3.02 with respect to the sale or disposition which was the subject of such Drag-Along Notice shall on such 120th day terminate. 11 SECTION 3.03. Cooperation. Subject to the terms of an Employee Stockholders' Employment Agreement with the Company and the requirements of applicable law and regulation each Employee Stockholder hereby agrees that in addition to performing his or her ordinary obligations as an employee of the Company, he or she will fully support, and take all actions and provide all reasonable assistance and cooperation deemed necessary by Lehman Brothers Merchant Banking Partners in connection with, any strategic or other material transaction supported by Lehman Brothers Merchant Banking Partners which involves the Company and any Person, and will not take any action which could reasonably be expected to be, or which Lehman Brother Merchant Banking Partners determines in good faith is, adverse to the negotiation or consummation of such transaction in any material respect. ARTICLE IV CALL AND PUT RIGHTS SECTION 4.01. Call and Put Rights. (a) If an Employee Stockholder's active employment with the Company (and/or, if applicable, any of its subsidiaries) is terminated (x) by the Company for any reason other than for Cause, (y) by the Employee Stockholder for Good Reason or (z) terminated as a result of the Employee Stockholder's Retirement from employment with the Company (in any such case, a "Non-Cause Call Event"), then the Company shall have the right to purchase all, but not less than all, of the shares of Common Stock then held by the Employee Stockholder or any Permitted Transferee thereof at Fair Market Value. Notwithstanding the foregoing, if the Employee Stockholder elects, he may override any such calls and retain all or any portion of the shares of Common Stock subject to such call by giving the Company written notice of such override within 30 days of his receipt of the Call Notice. (b) If an Employee Stockholder's active employment with the Company (and/or, if applicable, any of its subsidiaries) is terminated by the Company for Cause or is terminated by an Employee Stockholder without Good Reason (a "For Cause Call Event)", then the Company shall have the right to (i) purchase all, but not less than all, of the shares of Common Stock then held by the Employee Stockholder or any Permitted Transferee at Fair Market Value, or if lesser in the case of Option Shares, the purchase price paid by the Employee Stockholder therefor and (ii) terminate all, but not less than all, of the outstanding Options then held by the Employee Stockholder. (c) If an Employee Stockholder's active employment with the Company (and/or, if applicable, any of its subsidiaries) is terminated by the Company due to his death or Disability, (a "Put Event") the Employee Stockholder (or his legal representative or the legal representative of his estate, if applicable) may put all New Options, Option Shares and Purchased Shares to the Company, and the Company may call such New Options, Option Shares and Purchased Shares subject to such call, in each case at Fair Market Value (in the case of New Options, net of the exercise price thereof ) (a "Disability Call Event"); provided, however, that if the Employee Stockholder elects, he may override any such call and retain all or any portion of his New Options, Option Shares and Purchased Shares by providing the Company with a written notice of such override within 30 days of his receipt of the Call Notice. (d) If the Company shall sell the business division in which the Employee Stockholder is principally employed, the Company may call the Employee Stockholder's New Options, Option Shares and Purchased Shares at Fair Market Value (in the case of New Options, net of the exercise price thereof); (collectively with any Non-Cause Call Event, any For-Cause Call Event or any Disability Call Event, a "Call Event") provided, however, that if the Employee Stockholder elects, he may override such call by the Company and retain all or any portion of his 12 New Options, Option Shares and Purchased Shares subject to such call by providing the Company with a written notice of such override within 30 days of his receipt of the Call Notice. (e) The Company shall have a period of 75 days from the date of a Call Event in which to give notice in writing to the applicable Holder of the exercise of any such call right ("Call Notice"). If the Employee Stockholder (or the Employee Stockholder's legal representative or the legal representative of his estate, as applicable) is entitled to put any or all of his New Options, Option Shares or Purchased Shares, notice of such intent must be given by the Executive no later than 90 days after the Company gives notice that it will not exercise its call. (f) The completion of the purchases pursuant to any Call Event or Put Event shall take place at the principal office of the Company on the 30th business day after the giving of notice of the exercise of the applicable call or put right. The applicable price under this Article IV and any payment with respect thereto shall be paid by delivery to the Employee Stockholder or any Permitted Transferee, as the case may be, of a certified bank check or checks in the appropriate amount payable to the order of the Employee Stockholder or any Permitted Transferee, as the case may be, against delivery of certificates or other instruments representing the Stock so purchased and appropriate documents canceling the Options so terminated, appropriately endorsed or executed by the Employee Stockholder or any Permitted Transferee or his, her or its authorized representative. (g) The parties acknowledge that certain Employment Agreements contain provisions regarding "put" and "call" rights and this Article IV supersedes such provisions. (h) The provisions of this Article IV shall terminate upon an Initial Public Offering. ARTICLE V REGISTRATION RIGHTS SECTION 5.01. Registration. (a) If at any time the Company proposes to register under the Securities Act any shares of Common Stock for sale for its own account other than (i) any registration relating to any employee benefit or similar plan, any dividend reinvestment plan, or any acquisition by or business combination involving the Company or any of its subsidiaries or (ii) pursuant to a registration statement filed in connection with an exchange offer, or if Lehman Brothers Merchant Banking Partners, has requested that the Company file a registration statement to effect registration of shares of Common Stock owned by it pursuant to the terms of a written registration rights agreement, including Section 5.02(b) of this Agreement, the Company shall give written notice to each Holder at least 20 days prior to the initial filing of such registration statement with the SEC pertaining thereto (an "Incidental Registration Statement") informing such Holder of its intent to file such Incidental Registration Statement and of such Holder's rights, if any, under this Section 5.01 to request the registration of the Registrable Securities held by such Holder. Upon the written request of any such Holder made within 10 days after any such notice is given (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof), the Company shall use reasonable efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holders, to the extent required to permit the disposition of the Registrable Securities so requested to be registered, including, if necessary, by filing with the SEC a post-effective amendment or a supplement to the Incidental Registration Statement or the related prospectus or any document incorporated therein by reference or by filing any other required document or otherwise 13 supplementing or amending the Incidental Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Incidental Registration Statement or by the Securities Act or by any other rules and regulations thereunder. (b) If a registration pursuant to this Section 5.01 involves an underwritten offering of the securities being registered (an "Underwritten Offering"), which securities are to be distributed on a firm commitment basis by or through one or more underwriters of recognized standing under underwriting terms appropriate for such transaction, and the underwriter or the managing underwriter, as the case may be, of such Underwritten Offering shall inform the Company and the Holders requesting such registration of Registrable Securities, on or before the date five days prior to the date then scheduled for such offering, that, in its opinion, the amount of securities requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering without adversely affecting the distribution of the securities being offered, then the Company will include in such registration only the amount of Registrable Securities and other securities that the Company is so advised can be sold in (or during the time of) such offering within such price range; provided, however, that the Company shall be required to include in such required registration: first, all the securities proposed to be sold pursuant to an Incidental Registration Statement initiated by the Company to effect a primary offering of securities, second, the securities requested to be included in a registration that the Company is required to include pursuant to the terms of any other registration rights agreements (other than securities requested to be included by the Lehman Group or the Holders) and third, the amount of Registrable Securities and other securities requested to be included by the Lehman Group and by the Holders in such registration that the Company is so advised can be sold in (or during the time of) such offering, allocated pro rata among the Lehman Group and the Holders requesting such registration on the basis of the number of Registrable Securities and other securities requested to be included by the Lehman Group and the Holders. (c) No Holder may participate in any Incidental Registration Statement hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any arrangements approved by the Company and (ii) completes and executes all reasonable and customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. SECTION 5.02. Demand Registration Rights. (a) Beginning upon the later of (i) the occurrence of an Initial Public Offering or (ii) or the fifth anniversary of the Effective Time (the "Employee Demand Right Effective Date"), the Holders may request the Company to file a registration statement to effect the registration of all or a portion of the Common Stock held by such Holders (the "Employee Demand Registration Right"). The Employee Demand Registration Right shall be exercised by delivery of a written notice to the Company by the holders of a majority of the Common Stock held by the Holders (the "Employee Demand Right Notice"), a copy of which must be provided to the Company at least 15 days prior to delivery to the Company. Notwithstanding anything contained in this Section 5.02 to the contrary, (A) the Company shall be obligated to effect no more than two registrations in the aggregate pursuant to this Section 5.02(a), (B) the Company shall not be obligated to effect a subsequent registration pursuant to this Section 5.02(a) within 12 months of the effective date of any prior such registration, (C) the Company shall not be obligated to effect any registration pursuant to this Section 5.02(a) if less than 10% of the Common Stock held in the aggregate by the Holders at the time of such registration will be offered for sale pursuant thereto and (D) the provisions of this Section 5.02(a) shall expire and be of no further force and effect on the third anniversary of the Employee Demand Right Effective Date. 14 (b) Upon delivery of a Employee Demand Right Notice, the Company shall, not later than the 60th calendar day after the receipt of such a request, cause to be filed a Registration Statement providing for the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register, to the extent necessary to permit the disposition of such Registrable Securities in accordance with the intended methods of distribution thereof specified in such request. The Company shall use its reasonable best efforts to have such Registration Statement declared effective by the SEC as soon as practicable thereafter (but in no event later than the 150th calendar day after the receipt of such a request) and to keep such Registration Statement continuously effective for a period of time necessary following the date on which such Registration Statement is declared effective for the underwriters or the Holders, as the case may be, to sell all the Registrable Securities issued under such Registration Statement, or such shorter period that will terminate when all of the Registrable Securities covered by such Registration Statement have been sold pursuant thereto (including, if necessary, by filing with the SEC a post-effective amendment or a supplement to the Registration Statement or the related prospectus or any document incorporated therein by reference or by filing any other required document or otherwise supplementing or amending the Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Registration Statement or by the Securities Act, any state securities or blue sky laws, or any other rules and regulations thereunder). (c) A Registration Statement pursuant to this Section 5.02 shall be deemed not to have become effective (and the related registration shall be deemed not to have been effected) unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of any Registrable Securities pursuant to such Incidental Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court (other than any such stop order or injunction issued as a result of the inclusion in such Incidental Registration Statement of any information supplied to the Company for inclusion therein by a selling stockholder) such Incidental Registration Statement will be deemed not to have become effective. (d) If a registration pursuant to this Section 5.02 involves an Underwritten Offering, which securities are to be distributed on a firm commitment basis by or through one or more underwriters of recognized standing under underwriting terms appropriate for such transaction, and the underwriter or the managing underwriter, as the case may be, of such Underwritten Offering shall inform the Company and the individuals requesting such registration, on or before the date five days prior to the date then scheduled for such offering, that, in its opinion, the amount of securities requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering without adversely affecting the distribution of the securities being offered, then the Company will include in such registration only the amount of registrable securities and other securities that the Company is so advised can be sold in (or during the time of) such offering within such price range; provided, however, that the Company shall be required to include in such required registration the amount of securities proposed to be registered by the Holders, allocated pro rata among the Holders, on the basis of the number of securities requested to be included by the Holders. (e) The Company will not be obligated to effect the Demand Registration within six months after an Initial Public Offering by the Company for which registration pursuant to Section 5.01 was fully available. If at the time of any request to register Registrable Securities pursuant to Section 5.02, the Company is engaged, or has plans (which have been or are reasonably expected to be approved by the Board of Directors within 60 days) to engage within 90 days of the time of the request in a registered public offering as to which the Holders may include such Registrable Securities pursuant to Section 5.01 hereof, or is engaged in any activity which, in the good faith determination of the Board of Directors, would be adversely affected by 15 the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of 180 days from the effective date of such offering, or in the case of such other material activity, the lesser of (i) 180 days from the date of such request for registration or (ii) such time when the registration would not adversely affect such activity of the Company, such right to delay a request to be exercised by the Company not more than once within any twelve-month period. (f) No Holder may participate in any registration statement hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any arrangements approved by the Company and (ii) completes and executes all reasonable and customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. (f) At any time after the Lehman Group owns less than 50% of the shares of Common Stock, each of its members shall have the same demand registration rights that the Holders have pursuant to this Section 5.02 and this Article V. SECTION 5.03. Registration Expenses. The Company shall pay all Registration Expenses in connection with each registration pursuant to Section 5.01 or Section 5.02. Each Seller shall pay all discounts and commissions payable to underwriters, selling brokers, managers or other similar Persons related or allocable to the sale or disposition of such Seller's registrable securities pursuant to any Incidental Registration Statement. SECTION 5.04. Restrictions on Public Sale by Sellers and the Company. If requested by the underwriter or managing underwriter, as applicable, in any Underwritten Offering (by the Company or any other Person) of Common Stock or of any securities convertible into or exchangeable for Common Stock, or of warrants or other securities entitling the holder thereof to purchase Common Stock, each party hereto shall agree not to effect any public sale or distribution of Common Stock during the 14-day period prior to, and during the 90- day period beginning on, the date of sale of securities in connection with such Underwritten Offering (except pursuant to such registration statement). SECTION 5.05. Registration Procedures. In connection with the obligations of the Company pursuant to Section 5.01 and Section 5.02, the Company shall use its reasonable best efforts to effect or cause to be effected the registration under the Securities Act of the securities entitled to be included in such registration in order to permit the sale of such securities, and the Company shall: (a) (i) prepare and file a Registration Statement with the SEC which Registration Statement (x) shall be on a form for which the Company qualifies selected by the Person first requesting registration and (y) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, (ii) use its reasonable best efforts to prevent the happening of any event that would cause a Registration Statement to contain a material misstatement or omission or to be not effective and usable for resale of the securities registered pursuant thereto (during the period that such Registration Statement is required to be effective and usable); provided, however, that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons (including any acquisition or divestiture of assets or the consummation of any business combination or any agreement to do so) so long as the Company as promptly as reasonably possible thereafter complies with the requirements of Section 5.05(i), if applicable, and (iii) cause each Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of such Registration Statement, amendment or supplement (x) to comply in all material respects with any requirements of the Securities Act and 16 the rules and regulations of the SEC and (y) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (b) furnish to each Seller holding securities covered by a Registration Statement and to each underwriter of an Underwritten Offering of the securities covered by a Registration Statement, if any, without charge, as many copies of each prospectus forming part of such Registration Statement, including each preliminary prospectus, and any amendment or supplement thereto and such other documents as such Seller or underwriter may reasonably request in order to facilitate the public sale or other disposition of such Registrable Securities; and the Company hereby consents to the use of such prospectus, including each such preliminary prospectus, by each such holder and underwriter, if any, in connection with the offering and sale of such securities; (c) (i) use its reasonable best efforts to register or qualify the securities covered by a Registration Statement, no later than the time such Registration Statement is declared effective by the SEC, under all applicable state securities or "blue sky" laws of such jurisdictions as each underwriter, if any, or any Seller shall reasonably request; and (ii) do any and all other acts and things which may be reasonably necessary or advisable to enable each such underwriter, if any, and Seller to consummate the disposition in each such jurisdiction of the securities covered by such Registration Statement; provided, however, that the Company shall not be required to register or qualify any securities in any jurisdiction if registration or qualification in such jurisdiction would subject the Company to unreasonable expense or, in the case of an Underwritten Offering, would unreasonably delay the commencement of such Underwritten Offering; and provided, further, that the Company shall not be obligated to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject or to consent to be subject to general service of process (other than service of process in connection with such registration or qualification or any sale of Registrable Securities in connection therewith) in any such jurisdiction; (d) notify each Seller promptly, and, if requested by such Seller, confirm such notice in writing, (i) when a Registration Statement has become effective and when any post- effective amendments and supplements thereto become effective, (ii) of the issuance by the SEC or any state securities authority of any stop order, injunction or other order or requirement suspending the effectiveness of a Registration Statement or the initiation of any proceeding for that purpose, (iii) if, between the effective date of a Registration Statement and the closing of any sale of securities covered thereby pursuant to any agreement to which the Company is a party, the representations and warranties of the Company contained in such agreement cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of such securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, and (iv) of the happening of any event during the period a Registration Statement is required to be effective as a result of which such Registration Statement or the related prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstance under which they were made, not misleading; (e) furnish counsel for each underwriter, if any, and for the Sellers copies of any request by the SEC or any state securities authority for amendments or supplements to a Registration Statement and prospectus or for additional information; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible time; 17 (g) upon request, furnish to the underwriter or managing underwriter, as applicable, of an Underwritten Offering of Registrable Securities, if any, without charge, at least one signed copy of each Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits; and furnish to each Seller, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) cooperate with each Seller and the underwriter or managing underwriter, as applicable, of an Underwritten Offering of securities, if any, to facilitate the timely preparation and delivery of certificates representing securities to be sold and not bearing any restrictive legends; and enable such securities to be in such denominations (consistent with the provisions of the governing documents thereof) and registered in such names as each Seller or the underwriter or managing underwriter, as applicable, of an Underwritten Offering of securities, if any, may reasonably request at least three business days prior to any sale of securities; (i) upon the occurrence of any event contemplated by Section 5.05(d)(iv), during the period in which a Registration Statement is required to be kept in effect, use reasonable best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related prospectus, or any document incorporated therein as thereafter delivered to the purchasers of the securities covered by such Registration Statement, so that such prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (j) enter into customary agreements (including, in the case of an Underwritten Offering, underwriting agreements in customary form, and including provisions with respect to indemnification and contribution in customary form and consistent with the provisions relating to indemnification and contribution contained herein) and, in the case of a Registration Statement relating to a secondary offering filed at the request of a Seller, take all other customary and appropriate actions in order to expedite or facilitate the disposition of the securities covered by a Registration Statement as shall be requested by the Seller, and in connection therewith: (i) make such representations and warranties to the Sellers and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the Sellers) addressed to each Seller and the underwriters, if any, covering the matters customarily covered in opinions requested in sales of securities or underwritten offerings and such other matters as may be reasonably requested by such Sellers and underwriters; (iii) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to each Seller and the underwriters, if any, which letters shall be customary in form and shall cover matters of the type customarily covered in "cold comfort" letters to underwriters in connection with primary underwritten offerings; (iv) enter into a securities sales agreement, which shall be customary in form, substance and scope and shall contain customary representations, warranties and covenants; 18 (v) if an underwriting agreement is entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 5.07; and (vi) deliver such customary documents and certificates as may be reasonably requested by the Sellers or by the managing underwriters, if any; (k) make available for inspection by representatives of the Sellers and any underwriters participating in any disposition pursuant to a Registration Statement and any counsel or accountant retained by such Sellers or underwriters all relevant financial and other records, pertinent corporate documents and properties of the Company and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, underwriter, counsel or accountant in connection with a Registration Statement; (l) (i) within a reasonable time prior to the filing of any Registration Statement, any related prospectus, any amendment to a Registration Statement or amendment or supplement to a prospectus, provide copies of such document to the Sellers and to counsel to such Sellers and to the underwriter or underwriters of an Underwritten Offering of securities, if any; and, consider in good faith such reasonable changes in any such document prior to or after the filing thereof as counsel to the Sellers or the underwriter or underwriters may request and make available such of the representatives of the Company as shall be reasonably requested by the Sellers or any underwriter for discussion of such document; and (ii) within a reasonable time prior to the filing of any document which is to be incorporated by reference into a Registration Statement or a related prospectus, provide copies of such document to counsel for the Sellers and the underwriter or underwriters of an Underwritten Offering of securities; consider in good faith such reasonable changes in such document prior to or after the filing thereof as counsel for such Sellers or such underwriter shall request; and make available such of the representatives of the Company as shall be reasonably requested by such counsel for discussion of such document; (m) use its reasonable best efforts to cause all securities covered by a Registration Statement to be listed on any securities exchange on which the common stock of the Company is then listed if so requested by any applicable Seller; (n) provide a CUSIP number for all securities covered by a Registration Statement, no later than the effective date of such Registration Statement; (o) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; and (p) cooperate and assist in any filing required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). SECTION 5.06. Obligations of Sellers. (a) Each Seller shall, as a condition to the registration obligations with respect to such Seller provided herein, furnish to the Company such information regarding such Seller, the ownership of securities by such Seller and the 19 proposed distribution by such Seller of such securities as the Company may from time to time reasonably request in writing. (b) Upon receipt of any notice of the Company of the happening of any event of the kind described in Section 5.05(d)(iv), such Seller shall forthwith discontinue disposition of securities pursuant to the affected Registration Statement until such Seller's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.05(i), and, if so directed by the Company, such Seller shall deliver to the Company (at the expense of the Company) all copies in its possession, other than permanent file copies then in such Seller's possession, of the prospectus covering such securities which was current at the time of receipt of such notice. If any offering requested by the Holders pursuant to Section 5.02(a) is terminated is a result of the happening of any event at the kind described in Section 5.05(d)(iv), such offering shall not count against the number of registrations available to the Holders pursuant to Section 5.02(a). SECTION 5.07. Indemnification. (a) The Company shall indemnify and hold harmless each Person who participates as an underwriter (any such Person being an "Underwriter"), each Seller and their respective partners, directors, officers and employees and each Person, if any, who controls any Seller or Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act as follows: (i) against any and all losses, liabilities, claims, damages, judgments and reasonable expenses whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which securities were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any prospectus (or any amendment or supplement thereto) including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all losses, liabilities, claims, damages, judgments and reasonable expenses whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, or of any other claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all reasonable expense whatsoever, as incurred (including, subject to Section 5.07(c), fees and disbursements of counsel) incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not such Person is a party, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any Seller or Underwriter with respect to any loss, liability, claim, damage, judgment or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission (A) made in reliance upon and in conformity with written information furnished to the Company by such Seller or Underwriter expressly for use in a Registration Statement (or any amendment thereto) or any 20 related prospectus (or any amendment or supplement thereto) or (B) if such untrue statement or omission or alleged untrue statement or omission was corrected in an amended or supplemented Registration Statement or prospectus and the Company had furnished copies thereof to the Underwriter or Seller from which the Person asserting such loss, liability, claim, damage, judgment or expense purchased the securities that are the subject thereof prior to the date of sale by such Underwriter or Seller to such Person. (b) Indemnification by Sellers, Underwriters, Etc. Each Seller shall severally indemnify and hold harmless the Company, each Underwriter and the other Sellers, and each of their respective partners, directors, officers and employees (including each officer of the Company who signed the Registration Statement) and each Person, if any, who controls the Company, any Underwriter or any other Seller within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all losses, liabilities, claims, damages, judgments and expenses described in the indemnity contained in Section 5.07(a) (provided that any settlement of the type described therein is effected with the written consent of such Seller) as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in a Registration Statement (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Seller expressly for use in such Registration Statement (or any amendment thereto) or such prospectus (or any amendment or supplement thereto); provided, however, that an indemnifying Seller shall not be required to provide indemnification in any amount in excess of the amount by which (x) the total price at which the securities sold by such indemnifying Seller and its affiliated indemnifying Sellers and distributed to the public were offered to the public exceeds (y) the amount of any damages which such indemnifying Seller has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Company shall be entitled, to the extent customary, to receive indemnification and contribution from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Each indemnified party or parties shall give reasonably prompt notice to each indemnifying party or parties of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure so to notify an indemnifying party or parties shall not relieve it or them from any liability which it or they may have under this indemnity agreement, except to the extent that the indemnifying party is materially prejudiced by such failure to give notice. If the indemnifying party or parties so elects within a reasonable time after receipt of such notice, the indemnifying party or parties may assume the defense of such action or proceeding at such indemnifying party's or parties' expense with counsel chosen by the indemnifying party or parties and approved by the indemnified party defendant in such action or proceeding, which approval shall not be unreasonably withheld; provided, however, that, if such indemnified party or parties reasonably determine that a conflict of interest exists and that therefore it is advisable for such indemnified party or parties to be represented by separate counsel or that, upon advice of counsel, there may be legal defenses available to it or them which are different from or in addition to those available to the indemnifying party, then the indemnifying party or parties shall not be entitled to assume such defense and the indemnified party or parties shall be entitled to separate counsel (limited in each jurisdiction to one counsel for all Underwriters and another counsel for all other indemnified parties under this Agreement) at the indemnifying party's or parties' expense. If any indemnifying party or parties are not so entitled to assume the defense of such action or does not assume such defense, after having received the notice referred to in the first sentence of this paragraph, the indemnifying party or parties will pay the reasonable fees and expenses of counsel for the indemnified party or parties (limited in each jurisdiction to one counsel for all 21 Underwriters and another counsel for all other indemnified parties under this Agreement). In such event, however, no indemnifying party or parties will be liable for any settlement effected without the written consent of such indemnifying party or parties (which consent shall not be unreasonably withheld or delayed); provided, however, that if at any time an indemnified party or parties shall have requested an indemnifying party or parties to reimburse the indemnified party or parties for fees and expenses of counsel as contemplated by this paragraph, the indemnifying party or parties shall be liable for any settlement of any proceeding effected without the written consent of such indemnifying party or parties if (x) such settlement is entered into more than 15 business days after receipt by such indemnifying party or parties of the aforesaid request accompanied by supporting documents reasonably satisfactory to the indemnifying party or parties and (y) such indemnifying party or parties shall not have reimbursed the indemnified party or parties in accordance with such request prior to the date of such settlement. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this paragraph, such indemnifying party or parties shall not, except as otherwise provided in this subsection (c), be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action or proceeding. (d) Contribution. (i) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 6.07 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms in respect of any losses, liabilities, claims, damages, judgments and expenses suffered by an indemnified party referred to therein, each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, liabilities, claims, damages, judgments and expenses in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the liable Sellers or Underwriters (including, in each case, that of their respective officers, directors, employees and agents) on the other in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages, judgments or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the liable Sellers or Underwriters (including, in each case, that of their respective officers, directors, employees and agents) on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or by or on behalf of the Sellers or Underwriters, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, liabilities, claims, damages, judgments and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 5.07(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (ii) The Company and each Seller agree that it would not be just and equitable if contribution pursuant to this Section 5.07(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in sub-paragraph (i) above. Notwithstanding anything in this Section 5.07(d) to the contrary, in the case of distributions to the public, an indemnifying Seller shall not be required to contribute any amount in excess of the amount by which (A) the total price at which the securities sold by such indemnifying Seller and its affiliated indemnifying Sellers and distributed to the public were offered to the public exceeds (B) the amount of any damages which such indemnifying Seller has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 22 (iii) For purposes of this Section, each Person, if any, who controls a Seller or an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Seller or Underwriter; and each director of the Company, each officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. (e) Non-Exclusivity. The obligation of the parties under this Section 6.07 will be in addition to any liability which any party may otherwise have to any other party. SECTION 5.08. Rule 144. To enable the Holders that are Affiliates of the Company to transfer Common Stock in accordance with this Agreement, the Company will use all commercially reasonable efforts to permit such Holders to rely on Rule 144 of the Securities Act in connection with such transfers. ARTICLE VI MISCELLANEOUS SECTION 6.01. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation) or sent by overnight or same-day courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company, to it at the following address: Blount International, Inc. 4520 Executive Park Drive Montgomery, AL 36116-1602 Attention: Richard H. Irving, III Facsimile: (334) 270-8130; If to Lehman Brothers Merchant Banking Partners: Lehman Brothers Merchant Banking Partners II L.P. 3 World Financial Center New York, New York 10285 Attention: Mr. Steven Berkenfeld Facsimile: (212) 526-2198. If to an Employee Stockholder, to the last known address in the Company's files, or, in the case of any Holder or other Person who becomes a party to, or subject to, this Agreement, to the address set forth in the written agreement executed pursuant to Section 6.06, or to such other address as the party to whom notice is to be given may provide in a written notice to the Company, a copy of which written notice shall be on file with the Secretary. Notice shall be effective when delivered to the applicable address set forth above. SECTION 6.02. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE 23 STATE OF DELAWARE, WITHOUT REGARD TO ANY PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE. SECTION 6.03. Entire Agreement; No Third-Party Beneficiaries. This Agreement, together with the documents referred to herein or delivered pursuant hereto, (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and of the documents referred to herein or delivered pursuant hereto, and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 6.04. Descriptive Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. SECTION 6.05. Severability. The invalidity or unenforceability of any provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, or any provision hereof, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. SECTION 6.06. Agreement To Be Bound. Notwithstanding anything to the contrary contained in this Agreement, no shares of Common Stock held by the Employee Stockholders may be Transferred to any Permitted Transferee, unless such Permitted Transferee, prior to such Transfer, agrees in writing to be bound by the terms of this Agreement to the same extent and in the same manner as the transferor of such shares, a copy of which writing shall be maintained on file with the Secretary of the Company and shall include the address of such Permitted Transferee to which notices hereunder shall be sent. SECTION 6.07. Additional Holders. Each Permitted Transferee of Lehman Brothers Merchant Banking Partners and any other member of the Lehman Group who becomes a holder of Common Stock after the date hereof in a Transfer which complies with Section 6.06 shall be deemed a party to this Agreement and be bound by its terms and be able to enforce its rights as a member of the Lehman Group hereunder. SECTION 6.08. Additional Employee Stockholders. No employee of the Company or its subsidiaries shall become a party to this Agreement until the Company, Lehman Brothers Merchant Banking Partners and the applicable employee have executed the applicable signature page for such employee. SECTION 6.09. Other Agreements. Nothing contained in this Agreement shall be deemed to be a waiver of, or release from, any obligations any party hereto may have under, or any restrictions on the Transfer of Common Stock or other securities of the Company imposed by, any other agreement, if any. SECTION 6.10. Successors, Assigns, Transferees. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof may be Transferred by any party hereto without the prior written consent of the other parties hereto except as expressly provided in this Agreement. Any purported Transfer of rights under this Agreement in violation of this Section 6.10 shall be void and of no effect. 24 SECTION 6.11. Amendments; Waivers. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by the parties hereto; provided, that for purposes of this Section 6.11, the consent of Holders who beneficially own 50% or more of the amount of Common Stock owned in the aggregate by all Holders shall be conclusively deemed to be the consent of each and every Holder. SECTION 6.12. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. SECTION 6.13. Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any Delaware state court or any Federal court located in the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any Delaware state court or any Federal court located in the State of Delaware in the event any dispute arises out of this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) agrees that it will not bring any action relating to this Agreement in any court other than any Delaware state court or any Federal court sitting in the State of Delaware and (d) waives any right to trial by jury with respect to any action related to or arising out of this Agreement. The parties hereby irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement in any Delaware state court or any Federal court located in the State of Delaware, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. SECTION 6.14. Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. SECTION 6.15. Recapitalization, Exchanges, etc., Affecting Common Stock. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Common Stock, to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for or in substitution of the Common Stock, by reason of any stock dividend, stock split, stock issuance, reverse stock split, combination, recapitalization, reclassification, merger, consolidation or otherwise. Upon the 25 occurrence of any of such events, amounts an numbers hereunder, including numbers of shares of Common Stock, shall be appropriately adjusted. IN WITNESS WHEREOF and intending to be bound hereby, each of the parties set forth below have executed this Agreement as of the date set forth below. BLOUNT INTERNATIONAL, INC. by -------------------------------- Name: Title: LEHMAN BROTHERS MERCHANT BANKING PARTNERS by -------------------------------- Name: Title: 26 Name of Employee Stockholder: [NAME] John M. Panettiere ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- Name of Employee Stockholder: [NAME] Harold E. Layman ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- Name of Employee Stockholder: [NAME] James S. Osterman ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- Name of Employee Stockholder: [NAME] Gerald W. Bersett ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- Name of Employee Stockholder: [NAME] Donald B. Zorn ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- 27 Name of Employee Stockholder: [NAME] Richard H. Irving ------------------------------- Address of Employee Stockholder: [ADDRESS] ----------------------------- Signature of Employee Stockholder: [SIGNATURE] --------------------------- -----END PRIVACY-ENHANCED MESSAGE-----