**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM10-Q**

 
| **(Mark One)**                                                                              | ** **                                                                                    |
|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                       | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
| **For the  Quarterly Period Ended October 31, 2004**                                        |
| **OR**                                                                                      |
| ** ̈**                                                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the  transition period from         to** |

 

Commission file number **1-12557**

 

 

**CASCADECORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Oregon**                                                     | ** ** | **93-0136592**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **2201 N.E. 201st Ave.  Fairview, Oregon** | ** ** | **97024-9718** |
|--------------------------------------------|------------|----------------|
| (Address of principal executive office)    |       | (Zip Code)     |

 

Registrant’s telephone number, including area code: **(503) 669-6300**

 

 

                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

                Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange ActRule 12b-2).  Yes ý  No o

 

                The number of shares outstandingof the registrant’s common stock as of November 29, 2004 was 12,200,722.

 

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**Forward-Looking Statements**

 

                This report contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions which,if they never materialize or prove incorrect, could cause our results to differmaterially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of revenue, gross margin, expenses, earnings or losses fromoperations, synergies or other financial items; any statements of plans,strategies, and objectives of management for future operations; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties, and assumptions referred to above include, but are notlimited to, competitive factors in, and the cyclical nature of, the materialshandling industry; fluctuations in lift truck orders or deliveries,availability and cost of raw materials; general business and economicconditions in North America, Europe, Australia and Asia; assumptions relatingto pension and other post-retirement costs; foreign currency fluctuations;pending litigation; environmental matters; and the effectiveness of our capitalexpenditures and cost reduction initiatives. We undertake no obligation to publiclyrevise or update forward-looking statements to reflect events orcircumstances that arise after the date of this report.

 

2

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**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**CASCADECORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited—in thousands,except per share amounts)**

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **October 31**         | ** ** | **October 31**        | ** ** |
| ** **                                       | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                        |       | $                      | 96,342     |                  | $          | 75,772 |   | $ | 282,246 |   | $ | 220,338 |   |
| Cost of goods sold                               |       | 65,458                 |       | 50,948                |       | 190,635 |   | 147,817 |   |
| Gross profit                                     |       | 30,884                 |       | 24,824                |       | 91,611 |   | 72,521 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Selling and administrative expenses              |       | 17,631                 |       | 15,806                |       | 53,275 |   | 45,575 |   |
| Amortization                                     |       | 682                    |       | 117                   |       | 1,330 |   | 313 |   |
| Insurance litigation recovery                    |       | (1,300                 | )          | —                |       | (1,300 | ) | — |   |
| Environmental expense                            |       | 155                    |       | —                |       | 155 |   | — |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Operating income                                 |       | 13,716                 |       | 8,901                 |       | 38,151 |   | 26,633 |   |
| Interest expense                                 |       | 934                    |       | 1,165                 |       | 2,758 |   | 3,496 |   |
| Interest income                                  |       | (144                   | )          | (234                  | )          | (364 | ) | (779 | ) |
| Other (income) expenses                          |       | 516                    |       | 126                   |       | 574 |   | (273 | ) |
| Gain on sale of investment                       |       | (1,044                 | )          | —                |       | (1,044 | ) | — |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Income before provision for income taxes         |       | 13,454                 |       | 7,844                 |       | 36,227 |   | 24,189 |   |
| Provision for income taxes                       |       | 4,763                  |       | 2,752                 |       | 12,824 |   | 7,982 |   |
| Net income                                       |       | 8,691                  |       | 5,092                 |       | 23,403 |   | 16,207 |   |
| Dividends paid on preferred shares of subsidiary |       | —                 |       | —                |       | — |   | (30 | ) |
| Net income applicable to common shareholders     |       | $                      | 8,691      |                  | $          | 5,092 |   | $ | 23,403 |   | $ | 16,177 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Basic earnings per share                         |       | $                      | 0.71       |                  | $          | 0.42 |   | $ | 1.93 |   | $ | 1.36 |   |
| Diluted earnings per share                       |       | $                      | 0.68       |                  | $          | 0.41 |   | $ | 1.84 |   | $ | 1.31 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Basic weighted average shares outstanding        |       | 12,195                 |       | 12,054                |       | 12,149 |   | 11,882 |   |
| Diluted weighted average shares outstanding      |       | 12,799                 |       | 12,534                |       | 12,705 |   | 12,335 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

3

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**CASCADECORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited—in thousands,except per share amounts)**

 
| ** **                                                                                                    | ** ** | **October 31** | ** ** | **January 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                                    | ** ** | **2004**       | ** ** | **2004**       | ** ** |
| **ASSETS**                                                                                                    |       |           |       |           |       |
| Current assets:                                                                                               |       |           |       |           |       |
| Cash and cash equivalents                                                                                     |       | $              | 34,983     |           | $          | 25,584 |   |
| Marketable securities                                                                                         |       | 7,342          |       | 6,002          |       |
| Accounts receivable, less allowance for doubtful accounts of $1,889 and $2,023                           |       | 68,955         |       | 57,871         |       |
| Inventories                                                                                                   |       | 41,661         |       | 36,353         |       |
| Deferred income taxes                                                                                         |       | 3,020          |       | 2,542          |       |
| Income taxes receivable                                                                                       |       | —         |       | 142            |       |
| Prepaid expenses and other                                                                                    |       | 5,485          |       | 4,626          |       |
| Total current assets                                                                                          |       | 161,446        |       | 133,120        |       |
| Property, plant and equipment, net                                                                            |       | 81,608         |       | 75,244         |       |
| Goodwill                                                                                                      |       | 74,568         |       | 68,915         |       |
| Deferred income taxes                                                                                         |       | 9,663          |       | 9,703          |       |
| Other assets                                                                                                  |       | 5,099          |       | 5,837          |       |
| Total assets                                                                                                  |       | $              | 332,384    |           | $          | 292,819 |   |
|                                                                                                          |       |           |       |           |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                |       |           |       |           |       |
| Current liabilities:                                                                                          |       |           |       |           |       |
| Notes payable to banks                                                                                        |       | $              | 2,039      |           | $          | 2,805 |   |
| Current portion of long-term debt                                                                             |       | 12,858         |       | 13,018         |       |
| Accounts payable                                                                                              |       | 21,047         |       | 17,904         |       |
| Accrued payroll and payroll taxes                                                                             |       | 6,821          |       | 6,815          |       |
| Accrued environmental expenses                                                                                |       | 794            |       | 847            |       |
| Other accrued expenses                                                                                        |       | 18,547         |       | 10,011         |       |
| Total current liabilities                                                                                     |       | 62,106         |       | 51,400         |       |
| Long-term debt                                                                                                |       | 37,932         |       | 38,111         |       |
| Accrued environmental expenses                                                                                |       | 8,144          |       | 8,551          |       |
| Deferred income taxes                                                                                         |       | 2,458          |       | 1,441          |       |
| Other liabilities                                                                                             |       | 10,430         |       | 9,628          |       |
| Total liabilities                                                                                             |       | 121,070        |       | 109,131        |       |
|                                                                                                          |       |           |       |           |       |
| Commitments and contingencies (Note 8)                                                                        |       |           |       |           |       |
| Shareholders’ equity:                                                                                    |       |           |       |           |       |
| Common stock, $.50 par value, 20,000 authorized shares; 12,201 and 12,102 shares issued  and outstanding |       | 6,100          |       | 6,051          |       |
| Additional paid-in capital                                                                                    |       | 16,599         |       | 11,111         |       |
| Unamortized deferred compensation                                                                             |       | (3,012         | )          | —         |       |
| Retained earnings                                                                                             |       | 184,886        |       | 165,495        |       |
| Accumulated other comprehensive income                                                                        |       | 6,741          |       | 1,031          |       |
|                                                                                                          |       |           |       |           |       |
| Total shareholders’ equity                                                                               |       | 211,314        |       | 183,688        |       |
| Total liabilities and shareholders’ equity                                                               |       | $              | 332,384    |           | $          | 292,819 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

4

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**CASCADECORPORATION**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(Unaudited—in thousands,except per share amounts)**

 
| ** **                                            | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                            | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | **Unamortized**  | ** ** | ** **        | ** ** | **Other**         | ** ** | **Annual** | ** ** |
| ** **                                            | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Deferred**   | ** ** | **Retained**     | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                            | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Earnings**      | ** ** | **Income**        | ** ** | **Income** | ** ** |
| **Balance  at January 31, 2004**                      |       | 12,102            |       | $           | 6,051      |           | $          | 11,111           |       | $                 | —     |              | $          | 165,495    |       | $ | 1,031 |   | — |   |
|                                                  |       |              |       |        |       |           |       |             |       |              |       |              |       |       |       |
| Net income                                            |       | —            |       | —      |       | —         |       | —           |       | 23,403            |       | —            |       | 23,403     |       |
| Dividends ($0.33  per share)                          |       | —            |       | —      |       | —         |       | —           |       | (4,012            | )          | —            |       | —     |       |
| Common stock  issued                                  |       | 99                |       | 49          |       | 1,257          |       | —           |       | —            |       | —            |       | —     |       |
| Tax benefit from  exercise of stock options           |       | —            |       | —      |       | 358            |       | —           |       | —            |       | —            |       | —     |       |
| Deferred  compensation from stock appreciation rights |       | —            |       | —      |       | 3,873          |       | (3,873           | )          | —            |       | —            |       | —     |       |
| Amortization of  deferred compensation                |       | —            |       | —      |       | —         |       | 861              |       | —            |       | —            |       | —     |       |
| Translation  adjustment                               |       | —            |       | —      |       | —         |       | —           |       | —            |       | 5,710             |       | 5,710      |       |
|                                                  |       |              |       |        |       |           |       |             |       |              |       |              |       |       |       |
| **Balance  at October 31, 2004**                      |       | 12,201            |       | $           | 6,100      |           | $          | 16,599           |       | $                 | (3,012     | )                 | $          | 184,886    |       | $ | 6,741 |   | $ | 29,113 |   |
|                                                       |            |                   |            |             |            |                |            |                  |            |                   |            |                   |            |            |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

5

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**CASCADECORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited—in thousands)**

 
| ** **                                                                             | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **October 31**                | ** ** |
| ** **                                                                             | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                              |       |                          |       |   |   |
| Net income                                                                             |       | $                             | 23,403     |   | $ | 16,207 |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                          |       | 10,672                        |       | 9,202 |   |
| Amortization of deferred compensation                                                  |       | 861                           |       | - |   |
| Deferred income taxes                                                                  |       | (331                          | )          | 736 |   |
| Gain on disposition of assets                                                          |       | (76                           | )          | (71 | ) |
| Changes in operating assets and liabilities, net of effects of acquisitions:      |       |                          |       |   |   |
| Accounts receivable                                                                    |       | (11,212                       | )          | (10,044 | ) |
| Inventories                                                                            |       | (3,704                        | )          | 622 |   |
| Prepaid expenses and other                                                             |       | (859                          | )          | 108 |   |
| Accounts payable and accrued expenses                                                  |       | 3,149                         |       | 988 |   |
| Current income taxes payable and receivable                                            |       | 3,957                         |       | 3,954 |   |
| Other liabilities                                                                      |       | 2,922                         |       | 2,814 |   |
| Net cash provided by operating activities                                              |       | 28,782                        |       | 24,516 |   |
|                                                                                   |       |                          |       |   |   |
| **Cash flows from investing activities:**                                              |       |                          |       |   |   |
| Capital expenditures                                                                   |       | (9,710                        | )          | (8,835 | ) |
| Purchase of marketable securities, net                                                 |       | (2,384                        | )          | (17,228 | ) |
| Proceeds from sale of investment                                                       |       | 1,044                         |       | - |   |
| Business acquisitions                                                                  |       | (4,710                        | )          | (11,173 | ) |
| Proceeds from sale of assets                                                           |       | 275                           |       | 819 |   |
| Other assets                                                                           |       | 269                           |       | (377 | ) |
| Proceeds from notes receivable                                                         |       | —                        |       | 9,556 |   |
| Net cash used in investing activities                                                  |       | (15,216                       | )          | (27,238 | ) |
|                                                                                   |       |                          |       |   |   |
| **Cash flows from financing activities:**                                              |       |                          |       |   |   |
| Cash dividends paid                                                                    |       | (4,012                        | )          | (3,606 | ) |
| Payments on long-term debt and capital leases                                          |       | (338                          | )          | (63 | ) |
| Notes payable to banks, net                                                            |       | (766                          | )          | (130 | ) |
| Common stock issued under stock option plan                                            |       | 1,306                         |       | 1,094 |   |
| Net cash used in financing activities                                                  |       | (3,810                        | )          | (2,705 | ) |
|                                                                                   |       |                          |       |   |   |
| **Effect of exchange rate changes**                                                    |       | (357                          | )          | 1,499 |   |
|                                                                                   |       |                          |       |   |   |
| Change in cash and cash equivalents                                                    |       | 9,399                         |       | (3,928 | ) |
|                                                                                   |       |                          |       |   |   |
| Cash and cash equivalents at beginning of period                                       |       | 25,584                        |       | 29,501 |   |
|                                                                                   |       |                          |       |   |   |
| Cash and cash equivalents at end of period                                             |       | $                             | 34,983     |   | $ | 25,573 |   |

 

**Supplemental disclosure ofnoncash information:**

See Note 10 to consolidated financialstatements.

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

6

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**CASCADECORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Description of Business**

 

                Cascade Corporation is aninternational company engaged in the design, manufacture and distribution ofmaterials handling products that are widely used on industrial forklift trucksand, to a lesser extent, construction and agricultural vehicles. Accordingly,our sales are largely dependent on sales of lift trucks. Our products areproduced at facilities located in three global regions: North America, Europeand Asia Pacific. Our products are sold to lift truck manufacturers and alsodistributed through retail lift truck dealers.

 

**Note 2—Interim Financial Information**

 

                The accompanying consolidatedfinancial statements for the interim periods ended October 31, 2004 and 2003are unaudited. In the opinion of management, the accompanying consolidated financialstatements reflect normal recurring adjustments necessary for a fair statementof the financial position, results of operations and cash flows for thoseinterim periods. Results of operations for the interim periods are notnecessarily indicative of the results to be expected for the full year, andthese financial statements do not contain the detail or footnote disclosuresconcerning accounting policies and other matters that would be included in fullfiscal year financial statements. Therefore, these statements should be read inconjunction with our audited financial statements included on Form 10-K inour Annual Report for the fiscal year ended January 31, 2004.

 

**Note 3—Segment Information**

 

                All of our worldwide operatingunits have similar economic characteristics, attributes, products, distributionchannels and customers. As a result, we aggregate our operating units into asingle operating segment related to the manufacturing, distribution andservicing of material handling load engagement products primarily for the lifttruck industry. Revenues and operating results are classified according to theregion of origin. Property, plant and equipment are attributed to thegeographic location in which they are located. Net sales, operating income and property,plant and equipment by geographic region were as follows (in thousands):

 
| **For  the three months ended October 31, 2004** | ** ** | ** **        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **North America** | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Sales to  unaffliated customers                  |       | $                 | 53,898     |       | $          | 27,614           |       | $                | 14,830     |             | $          | — |   | $ | 96,342 |   |
| Transfers between  areas                         |       | 4,571             |       | 203        |       | 16               |       | (4,790           | )          | —           |       |
| Net sales                                        |       | $                 | 58,469     |       | $          | 27,817           |       | $                | 14,846     |             | $          | (4,790 | ) | $ | 96,342 |   |
| Operating income                                 |       | $                 | 11,299     |       | $          | (487             | )          | $                | 2,904      |             |       |   | $ | 13,716 |   |
| Property, plant  and equipment                   |       | $                 | 36,418     |       | $          | 40,337           |       | $                | 4,853      |             |       |   | $ | 81,608 |   |
|                                             |       |              |       |       |       |             |       |             |       |             |       |
| **For the  three months ended October 31, 2003** |       |              |       |       |       |             |       |             |       |             |       |
|                                             |       |              |       |       |       |             |       |             |       |             |       |
| Sales to  unaffliated customers                  |       | $                 | 44,167     |       | $          | 19,443           |       | $                | 12,162     |             | $          | — |   | $ | 75,772 |   |
| Transfers between  areas                         |       | 4,327             |       | 475        |       | 5                |       | (4,807           | )          | —           |       |
| Net sales                                        |       | $                 | 48,494     |       | $          | 19,918           |       | $                | 12,167     |             | $          | (4,807 | ) | $ | 75,772 |   |
| Operating income  (loss)                         |       | $                 | 6,928      |       | $          | (478             | )          | $                | 2,451      |             |       |   | $ | 8,901 |   |
| Property, plant  and equipment                   |       | $                 | 35,737     |       | $          | 31,428           |       | $                | 4,406      |             |       |   | $ | 71,571 |   |

 

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** **

 
| **For the  nine months ended October 31, 2004** | ** ** | ** **        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **North America** | ** ** | **Europe** | ** ** | **Asia Pacific** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Sales to  unaffliated customers                 |       | $                 | 153,520    |       | $          | 84,517           |       | $                | 44,209     |             | $          | — |   | $ | 282,246 |   |
| Transfers between  areas                        |       | 15,637            |       | 1,515      |       | 49               |       | (17,201          | )          | —           |       |
| Net sales                                       |       | $                 | 169,157    |       | $          | 86,032           |       | $                | 44,258     |             | $          | (17,201 | ) | $ | 282,246 |   |
| Operating income                                |       | $                 | 29,343     |       | $          | 483              |       | $                | 8,325      |             |       |   | $ | 38,151 |   |
|                                            |       |              |       |       |       |             |       |             |       |             |       |
| **For the nine months ended October 31, 2003**  |       |              |       |       |       |             |       |             |       |             |       |
|                                            |       |              |       |       |       |             |       |             |       |             |       |
| Sales to  unaffliated customers                 |       | $                 | 129,977    |       | $          | 57,123           |       | $                | 33,238     |             | $          | — |   | $ | 220,338 |   |
| Transfers between  areas                        |       | 12,382            |       | 1,182      |       | 20               |       | (13,584          | )          | —           |       |
| Net sales                                       |       | $                 | 142,359    |       | $          | 58,305           |       | $                | 33,258     |             | $          | (13,584 | ) | $ | 220,338 |   |
| Operating income                                |       | $                 | 20,951     |       | $          | 20               |       | $                | 5,662      |             |       |   | $ | 26,633 |   |

 

                The breakdown of goodwill bygeographic region at October 31, 2004 and January 31, 2004 is provided inthe table below (in thousands). The change in balances between periods isentirely due to fluctuations in foreign currencies.

 
| ** **    | ** ** | **October 31** | ** ** | **January 31** | ** ** |
|---------------|------------|----------------|------------|----------------|------------|
| ** **    | ** ** | **2004**       | ** ** | **2004**       | ** ** |
| North America |       | $              | 60,593     |           | $          | 56,612 |   |
| Europe        |       | 10,823         |       | 9,154          |       |
| Other         |       | 3,152          |       | 3,149          |       |
|          |       | $              | 74,568     |           | $          | 68,915 |   |

 

**Note 4—Marketable Securities**

 

                Marketable securities consistprimarily of asset-backed notes issued by various state agenciesthroughout the United States and guaranteed by state governments or agencies.The specific identification method is used to determine the cost of securitiessold. There were no realized or unrealized gains or losses related to thesenotes. The notes are long-term instruments maturing through 2031; however, theinterest rates and maturities are reset approximately every month, at whichtime we can sell the notes. Accordingly, we have classified the notes ascurrent assets in our consolidated balance sheet.

 

**Note 5—Gain on Sale of Investment**

 

                During the three months endedOctober 31, 2004, a trust under a U.S. defined benefit plan we terminated in1997 sold publicly traded common stock received in a demutualization of aninsurance company.  The trust purchasedannuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain of approximately$1.0 million and proceeds in the same amount, which were available forreversion to the Company.  We contributed$324,000 of the proceeds directly to a defined contribution plan maintained forthe benefit of all U.S. employees.  The$324,000 contribution is included in selling and administrative expenses.  We will retain the balance of the proceeds.  We hold no shares of publicly traded commonstock at October 31, 2004.

8

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**Note 6—Inventories**

 

                Inventories stated at the lowerof average cost or market are presented below by major class (in thousands).

 
| ** **                    | ** ** | **October 31** | ** ** | **January 31** | ** ** |
|-------------------------------|------------|----------------|------------|----------------|------------|
| ** **                    | ** ** | **2004**       | ** ** | **2004**       | ** ** |
| Finished goods and components |       | $              | 28,403     |           | $          | 23,490 |   |
| Work in process               |       | 745            |       | 1,251          |       |
| Raw materials                 |       | 12,513         |       | 11,612         |       |
|                          |       | $              | 41,661     |           | $          | 36,353 |   |

 

**Note 7—Stock-Based Compensation**

 

                We account for our stock-basedemployee compensation under Accounting Principles Board Opinion No. 25(APB 25), “Accounting for Stock Issued to Employees,” which permits the use ofintrinsic value accounting. No stock-based employee compensation expenserelated to stock options is reflected in net income, as all options granted hadan exercise price equal to the market price of the underlying common stock onthe date of grant.

 

                Our shareholders approved theCascade Corporation Stock Appreciation Rights Plan (SARS Plan) inMay 2004. The SARS Plan provides for the award of stock appreciationrights (SARS) to key executives and directors. The SARS provide the holder theright to receive an amount, payable in our common shares, equal to the excessof the market value of our common shares on the date of exercise over the baseprice established by our Board of Directors’ Compensation Committee at the timethe right was granted. The base price may not be less than the market price ofour common shares on the date of grant.

 

                Under FIN 28, “Accountingfor Stock Appreciation Rights and Other Variable Stock Option or Award Plans,”SARS are accounted for under variable plan accounting. Accordingly, we recorddeferred compensation as a reduction of shareholders’ equity, equal to theexcess of the market value of our common shares on the balance sheet date ordate of exercise over the base price at the date of grant. The deferredcompensation is amortized to expense over the vesting period based on theperiods in which the executives and directors perform services. On May 26,2004, the Board of Directors awarded 453,000 SARS which vest over four years.Stock-based employee compensation of $520,000 and $861,000 was recognizedas amortization expense related to the SARS for the three and nine monthperiods ended October 31, 2004, respectively. Unamortized deferredcompensation recorded as a reduction of shareholders’ equity at October 31,2004 was $3.0 million.

 

9

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                We have adopted disclosure-onlyprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation” and SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure—an Amendment of FASBStatement No. 123.” The following table illustrates the effect on netincome applicable to common shareholders and earnings per share if we hadapplied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation (in thousands, expect per share amounts):

 
| ** **                                                                                                                         | ** ** | **Three  Months Ended October 31** | ** ** | **Nine  Months Ended October 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income  applicable to common shareholders - as reported                                                                        |       | $                                  | 8,691      |                              | $          | 5,092 |   | $ | 23,403 |   | $ | 16,177 |   |
| Add: SARS  amortization, net of income taxes of $184 and $305                                                                      |       | $                                  | 336        |                              | —     |   | $ | 556 |   | — |   |
| Net income  excluding SARS amortization                                                                                            |       | 9,027                              |       | 5,092                             |       | 23,959 |   | 16,177 |   |
| Deduct: total  stock-based compensation, net of income taxes of $116, $97, $348 and $122,determined under  fair value based method |       | (297                               | )          | (180                              | )          | (891 | ) | (247 | ) |
| Net income  applicable to common shareholders - pro forma                                                                          |       | $                                  | 8,730      |                              | $          | 4,912 |   | $ | 23,068 |   | $ | 15,930 |   |
|                                                                                                                               |       |                               |       |                              |       |   |   |   |   |
| Basic earnings  per share - as reported                                                                                            |       | $                                  | 0.71       |                              | $          | 0.42 |   | $ | 1.93 |   | $ | 1.36 |   |
| Basic earnings  per share - pro forma                                                                                              |       | $                                  | 0.72       |                              | $          | 0.41 |   | $ | 1.90 |   | $ | 1.34 |   |
| Diluted earnings  per share - as reported                                                                                          |       | $                                  | 0.68       |                              | $          | 0.41 |   | $ | 1.84 |   | $ | 1.31 |   |
| Diluted earnings  per share - pro forma                                                                                            |       | $                                  | 0.68       |                              | $          | 0.39 |   | $ | 1.82 |   | $ | 1.29 |   |

 

**Note 8—Contingencies**

 

**Environmental Matters**

 

                We are subject to environmentallaws and regulations, which include obligations to remove or mitigateenvironmental effects of past disposal and release of certain wastes andsubstances at various sites. We record liabilities for affected sites whenenvironmental assessments indicate probable cleanup will be required and thecosts can be reasonably estimated. Our liabilities for environmental costs,other than for costs of assessments themselves, are generally determined afterthe completion of investigations and studies or our commitment to a formal planof action, such as an approved remediation plan, and are based on our bestestimate of undiscounted future costs using currently available technology,applying current regulations, as well as our own historical experienceregarding environmental cleanup costs. The reliability and precision of theloss estimates are affected by numerous factors, such as different stages ofsite evaluation and reevaluation of the degree of remediation required. Weadjust our liabilities as new remediation requirements are defined, as informationbecomes available permitting reasonable estimates to be made and to reflect newand changing facts.

 

                It is reasonably possible thatchanges in estimates will occur in the near term and the related adjustments toenvironmental liabilities may have a material impact on our net income andoperating cash flows. Unasserted claims are not currently reflected in ourenvironmental liabilities. It is also reasonably possible that these changes orclaims may also have a material impact on our net income and operating cashflows if asserted. We cannot estimate at this time the amount of any additionalloss or range of loss that is reasonably possible.

 

                Our specific environmentalmatters consist of the following:

 

**Fairview, Oregon**

 

                In 1996, the Oregon Departmentof Environmental Quality issued two Records of Decision impacting our Fairview,Oregon manufacturing facility. The Records of Decision required us to initiateremedial activities related to the cleanup of groundwater contamination at andnear the facility. Remediation activities have been conducted at or near thefacility since 1996 and current estimates provide for some level of activity tocontinue through 2027. Costs of certain remediation activities at the facilityare shared with The Boeing Company, with Cascade paying 70% of these costs. Wehave a

 

10

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liabilityfor the ongoing remediation activities at our Fairview facility of$7.7 million and $8.3 million at October 31, 2004 andJanuary 31, 2004, respectively.

 

**Springfield, Ohio**

 

                In 1994, we entered into aconsent order with the Ohio Environmental Protection Agency, which required theinstallation of remediation systems for the cleanup of groundwatercontamination at our Springfield, Ohio facility. The current estimate is thatthe remediation activities will continue through 2010. We have a liability forongoing remediation activities at our Springfield facility of $1.1 and$1.1 million at October 31, 2004 and January 31, 2004, respectively.  During the three months ended October 31,2004, we recorded $155,000 of additional environmental expenses related tochanges in remediation activities.  Thesechanges were based on a reevaluation of the prior remediation plan afterregularly scheduled meetings with the Ohio Environmental Protection Agency.

 

**Insurance Litigation**

 

On April 22, 2002, theCircuit Court of the State of Oregon for Multnomah County entered judgment inour favor for approximately $1.6 million against two non-settling insurers inan action originally brought in 1992 against several insurers to recovervarious expenses incurred in connection with environmental litigation andrelated proceedings.  The Company and thetwo insurers appealed the judgment.  OnOctober 22, 2004, we received a settlement of $1.3 million from one of the two insurers.  The appellateproceeding is continuing with the other.  The trial court judgment requires the remaining insurer to defend us insuits alleging liability because of groundwater contamination  at our Fairview, Oregon plant,  and to pay approximately 3% of any liabilityimposed against us by judgment or settlement on or after March 1, 1997 onaccount of such contamination. We have not recorded any amounts we may recoverfrom the remaining insurer in our consolidated financial statements.

 

##### **Legal Proceedings**

 

                We are subject to legalproceedings, claims and litigation, in addition to the environmental matterspreviously discussed, arising in the ordinary course of business.  While the outcome of these matters iscurrently not determinable, management does not expect the ultimate costs toresolve these matters will have a material adverse effect on our consolidatedfinancial position, result of operations, or cash flows.

 

**Lease Guarantee**

 

                Wesold our hydraulic cylinder division to Precision HydraulicCylinders, Inc. (Precision) on January 15, 2002. Under the terms ofthe sale, we assigned to Precision an operating lease related to amanufacturing facility in Beulaville, North Carolina. We are a guarantor on thelease in the event Precision fails to comply with the lease terms. The leaserequires payments by Precision of approximately $21,000 per month throughNovember 2007. In the event Precision defaults under the lease, we canseek to recover losses related to the guarantee by pursuing our remedies underagreements securing payment of amounts receivable from Precision. The maximumpotential amount of future payments that we could be required to make under theguarantee using undiscounted cash flows was approximately $777,000 and $966,000at October 31, 2004 and January 31, 2004, respectively.

 

11

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**Note 9—Earnings Per Share**

 

                The following table presents thecalculation of basic and diluted earnings per share (in thousands, except pershare amounts):

 
| ** **                                                   | ** ** | **Three  Months Ended October 31** | ** ** | **Nine  Months Ended October 31** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **2004**                           | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic earnings  per share:                                   |       |                               |       |                              |       |   |   |   |   |
| Net income                                                   |       | $                                  | 8,691      |                              | $          | 5,092 |   | $ | 23,403 |   | $ | 16,207 |   |
| Preferred stock  dividends                                   |       | —                             |       | —                            |       | — |   | (30 | ) |
| Net income  available to common shareholders                 |       | $                                  | 8,691      |                              | $          | 5,092 |   | $ | 23,403 |   | $ | 16,177 |   |
|                                                         |       |                               |       |                              |       |   |   |   |   |
| Weighted average  shares of common stock outstanding         |       | 12,195                             |       | 12,054                            |       | 12,149 |   | 11,882 |   |
|                                                         |       | $                                  | 0.71       |                              | $          | 0.42 |   | $ | 1.93 |   | $ | 1.36 |   |
| Diluted earnings  per share:                                 |       |                               |       |                              |       |   |   |   |   |
| Net income  applicable to common shareholders                |       | $                                  | 8,691      |                              | $          | 5,092 |   | $ | 23,403 |   | $ | 16,177 |   |
| Preferred stock  dividends                                   |       | —                             |       | —                            |       | — |   | 30 |   |
| Net income                                                   |       | 8,691                              |       | 5,092                             |       | 23,403 |   | 16,207 |   |
|                                                         |       |                               |       |                              |       |   |   |   |   |
| Weighted average  shares of common stock outstanding         |       | 12,195                             |       | 12,054                            |       | 12,149 |   | 11,882 |   |
| Assumed  conversion of exchangeable preferred stock          |       | —                             |       | —                            |       | — |   | 135 |   |
| Dilutive effect  of stock options and appreciation rights    |       | 604                                |       | 480                               |       | 556 |   | 318 |   |
| Diluted weighted  average shares of common stock outstanding |       | 12,799                             |       | 12,534                            |       | 12,705 |   | 12,335 |   |
|                                                         |       | $                                  | 0.68       |                              | $          | 0.41 |   | $ | 1.84 |   | $ | 1.31 |   |

 

                Earnings per share is based onthe weighted average number of common shares and potentially dilutive sharesoutstanding during the period, computed using the treasury stock method.Diluted weighted average common shares includes the incremental shares thatwould be issued upon the assumed exercise of stock options and stockappreciation rights, as well as the assumed conversion of exchangeablepreferred stock. For the nine month period ended October 31, 2003, 51,000of our unexercised stock options were excluded from the calculation of dilutedearnings per share because they were antidilutive. No unexercised stock optionswere excluded from the calculation of diluted earnings per share for the threeand nine month periods ended October 31, 2004 and for the three monthperiod ended October 31, 2003.

 

**Note 10—Supplemental Cash Flow Information**

** **
| ** **                                                  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash paid during period  for:                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest                                                    |       | $          | 1,892      |       | $          | 3,541 |   |
| Income taxes                                                |       | $          | 8,851      |       | $          | 2,766 |   |
| Business acquisitions:                                      |       |       |       |       |       |
| Accounts receivable                                         |       | $          | —     |       | $          | 5,079 |   |
| Inventories                                                 |       | —     |       | 4,677      |       |
| Plant and equipment                                         |       | 4,949      |       | 4,171      |       |
| Goodwill and intangible assets                              |       | —     |       | 4,193      |       |
| Accounts payable assumed                                    |       | —     |       | (5,662     | )          |
| Notes payable assumed                                       |       | —     |       | (1,285     | )          |
| Other liabilities                                           |       | (239       | )          | —     |       |
|                                                        |       | $          | 4,710      |       | $          | 11,173 |   |
| Supplemental disclosure of  noncash information:            |       |       |       |       |       |
| Conversion of exchangeable  preferred stock to common stock |       | $          | —     |       | $          | 8,530 |   |
| Deferred compensation from  stock appreciation rights       |       | $          | 3,873      |       | $          | — |   |

 

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**Note 11—Benefit Plans**

 

                The following represents the netperiodic cost related to our benefit plans (in thousands):

 
| ** **                                | ** ** | **Three  months ended** | ** ** | **Three  months ended**     | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **October  31**         | ** ** | **October  31**             | ** ** |
| ** **                                | ** ** | **Defined  Benefit**    | ** ** | **Postretirement  Benefit** | ** ** |
| ** **                                | ** ** | **2004**                | ** ** | **2003**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Components of net  periodic benefit cost: |       |                    |       |                        |       |   |   |   |   |
| Service cost                              |       | 84                      |       | 50                          |       | $ | 32 |   | $ | 41 |   |
| Interest cost                             |       | 112                     |       | 107                         |       | 116 |   | 157 |   |
| Expected return  on plan assets           |       | (103                    | )          | (98                         | )          | — |   | — |   |
| Recognized net  actuarial loss            |       | 29                      |       | 56                          |       | 99 |   | 113 |   |
|                                      |       |                    |       |                        |       |   |   |   |   |
| Net periodic  benefit cost                |       | $                       | 122        |                        | $          | 115 |   | $ | 247 |   | $ | 311 |   |
|                                      |       |                    |       |                        |       |   |   |   |   |
|                                      | ** ** | **Nine  months ended**  | ** ** | **Nine  months ended**      | ** ** |
|                                      | ** ** | **October  31**         | ** ** | **October  31**             | ** ** |
|                                      | ** ** | **Defined  Benefit**    | ** ** | **Postretirement  Benefit** | ** ** |
|                                      | ** ** | **2004**                | ** ** | **2003**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                              |       | $                       | 251        |                        | $          | 150 |   | $ | 106 |   | $ | 124 |   |
| Interest cost                             |       | 337                     |       | 321                         |       | 390 |   | 472 |   |
| Expected return  on plan assets           |       | (309                    | )          | (294                        | )          | — |   | — |   |
| Recognized net  actuarial loss            |       | 88                      |       | 168                         |       | 389 |   | 338 |   |
|                                      |       |                    |       |                        |       |   |   |   |   |
| Net periodic  benefit cost                |       | $                       | 367        |                        | $          | 345 |   | $ | 885 |   | $ | 934 |   |

 

              Our net periodic benefit costs forthe three and nine month periods ended October 31, 2004 have been reduced toaccount for the effects of the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act).  SeeNote 12.

 

**Note 12—Recent Accounting Pronouncements**

 

                In January 2004, FASB StaffPosition No. 106-1 (FSP 106-1), “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003” was issued. FSP 106-1 permitted the deferral of recognizing the effectsof the Act in the accounting for post retirement health care plans underStatement of Financial Accounting Standards (SFAS) No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions,” and in providingdisclosure related to the plans required by SFAS No. 132 (revised 2003), “Employers’Disclosures about Pensions and Other Postretirement Benefits.” We elected thedeferral provided by this FSP.

 

                In May 2004, the FASBissued Staff Position No. 106-2 (FSP 106-2), “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003.” FSP No. 106-2 discusses further the effect ofthe Act and supersedes FSP 106-1. FSP 106-2 considers the effect of the two newfeatures introduced in the Act in determining our accumulated postretirementbenefit obligation (“APBO”) and net periodic post retirement benefit cost. Theeffect on the APBO will be accounted for as an actuarial experience gain to beamortized into income over the average remaining service period of planparticipants.  As permitted by FSP 106-2, we haveelected to account for the impact of this benefit prospectively beginning inthe three months ended October 31, 2004. The adoption of FSP 106-2 reduced our accumulated postretirement benefitobligation at June 30, 2004 from $9.5 million to $8 million.  This reduction relates to benefits attributedto past service.  Our estimated annualnet periodic benefit cost after the adoption of FSP 106-2 was reduced by$286,000 to $1 million.  The $286,000reduction in annual cost includes $20,000, $85,000 and $181,000 in servicecost, interest cost and amortization of recognized actuarial losses,respectively.    The impact on the netperiodic benefit cost for the three months ended October 31, 2004 was a $72,000reduction in the cost.  Since we electedto account for FSP 106-2

 

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prospectively, theperiodic pension costs for the first six months ended July 31, 2004 did notchange from the amounts previously reported.

 

                The American Jobs Creation Act of 2004, signed intolaw in October 2004, provides for a variety of changes in the tax law includingincentives to repatriate undistributed earnings of foreign subsidiaries, phasedelimination of the Foreign Sales Corporation/Extraterritorial Income benefitand a domestic manufacturing benefit.  Weare currently evaluating the potential impact of this legislation, includingassessing the details of the Act, analyzing the funds available forrepatriation and the economic cost of doing so, assessing the qualified uses ofrepatriated funds and assessing the domestic manufacturing benefit.  However, given the preliminary stage of ourevaluation, it is not possible at this time to determine what impact thislegislation will have on our consolidated tax accruals or our effective taxrate.

 

14

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**Note 13—Warranty Obligations**

 

                We record a liability on ourconsolidated balance sheet for costs related to certain warranties with thesales of our products. This liability is estimated through historical customerclaims, product failure rates, material usage and service delivery costsincurred in correcting a product failure. Our warranty obligations, included inother accrued expenses on the balance sheet, were as follows (in thousands):

 
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning obligation, January 31                 |       | $        | 1,610      |     | $          | 1,322 |   |
| Accruals for warranties issued during the period |       | 1,228    |       | 673      |       |
| Accruals for pre-existing warranties             |       | 33       |       | -        |       |
| Settlements during the quarter                   |       | (877     | )          | (429     | )          |
| Ending obligation, October 31                    |       | $        | 1,994      |     | $          | 1,566 |   |

 

 

**Note 14—Accumulated Other Comprehensive Income (Loss)**

 

 
| ** **                  | ** ** | **Accumulated Other Comprehensive Income (Loss)** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **Translation Adjustment**                        | ** ** | **Minimum Pension Liability Adjustment** | ** ** | **Total** | ** ** |
| Balance at January 31, 2004 |       | $                                                 | 3,340      |   | $ | (2,309 | ) | $ | 1,031 |   |
| Translation adjustment      |       | 5,706                                             |       | — |   | 5,706 |   |
|                        |       |                                              |       |   |   |   |   |
| Balance at October 31, 2004 |       | $                                                 | 9,046      |   | $ | (2,309 | ) | $ | 6,737 |   |

 

15

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

                All references to fiscal periodsare defined as periods ending in the year ended January 31, 2004 (fiscal2004) and the year ending January 31, 2005 (fiscal 2005).

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

                Our discussion and analysis offinancial condition and results of operations is based on our consolidatedfinancial statements which have been prepared in accordance with generallyaccepted accounting principles in the United States of America (GAAP). Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and the disclosure of contingent assets and liabilities. We evaluateour estimates and judgments on an on-going basis, including those related touncollectible receivables, inventories, goodwill and long-lived assets,warranty obligations, environmental liabilities and deferred taxes. We base ourestimates on historical experience and various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. A descriptionof our critical accounting policies and related judgments and estimates thataffect the preparation of our consolidated financial statements is set forth onForm 10-K in our Annual Report for the year ended January 31, 2004.

 

**COMPARISON OF THIRD QUARTER OF FISCAL 2005 AND FISCAL2004**

 

**Consolidated Summary**

 

                Net income for the third quarterof fiscal 2005 increased 71% to $8.7 million ($0.68 per diluted share)from $5.1 million ($0.41 per diluted share) for the third quarter offiscal 2004. Net sales for the third quarter of fiscal 2005 were$96.3 million or 27% greater than the third quarter of fiscal 2004.Excluding the effect of foreign currency fluctuations and acquisitions, netsales in North America, Europe and Asia Pacific grew 21%, 20% and 18%,respectively, in the third quarter of fiscal 2005 as compared to the samequarter of the prior year. The increased net sales largely reflected highervolumes of business in existing product lines in all geographic regions.  The increase also reflects higher salesprices on certain products to cover increases in steel costs.  The consolidated gross margin decreased from33% in the third quarter of the prior year to 32% in the third quarter of thecurrent year. The decrease was due primarily to higher steel costs, which werepartially offset by price increases and better absorption of fixed costs due tothe higher sales volumes.  Selling andadministrative costs increased by 12% in the third quarter of fiscal 2005 overthe comparable quarter of the prior year. Excluding foreign currency changesand acquisitions, costs increased 5% over the third quarter of the prior year.The increase is primarily due to the implementation of Sarbanes-Oxleyrequirements, increased warranty expenses and costs for the continuingexpansion of our marketing and customer service capabilities in China.  Amortization expenses were higher in fiscal2005 due to stock appreciation rights granted in May 2004.  Results for the third quarter also include$1.3 million of income related to a payment received from the settlement of aninsurance litigation matter and a $1 million gain from the sale of marketablesecurities.

 

**North America**

 
| ** **                     | ** ** | **Three months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2004**                          | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                      |       | $                                 | 53,898     |       | 100        | %          | $          | 44,168 |   | 100 | % | $ | 9,730 |   | 22 | % |
| Cost of goods sold             |       | 33,000                            |       | 61         | %          | 27,520     |       | 62 | % | 5,480 |   | 20 | % |
| Gross profit                   |       | 20,898                            |       | 39         | %          | 16,648     |       | 38 | % | 4,250 |   | 26 | % |
|                           |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative     |       | 10,194                            |       | 19         | %          | 9,662      |       | 22 | % | 532 |   | 6 | % |
| Amortization                   |       | 550                               |       | 1          | %          | 59         |       | — |   | 491 |   | — |   |
| Insurance litigation  recovery |       | (1,300                            | )          | (2         | )%         | —     |       | — |   | (1,300 | ) | — |   |
| Environmental expense          |       | 155                               |       | —     |       | —     |       | — |   | 155 |   | — |   |
|                           |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Operating income               |       | $                                 | 11,299     |       | 21         | %          | $          | 6,927 |   | 16 | % | $ | 4,372 |   | 63 | % |
|                                |            |                                   |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

16

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                North America net salesincreased $9.7 million or 22% in the third quarter of fiscal 2005 over thesame quarter of fiscal 2004. Higher volumes of shipments from North Americanplants accounted for most of the increase. Shipments benefited from a stronglift truck market in the third quarter of fiscal 2005 in comparison with theprior year. Price increases to date have sufficiently covered increases insteel costs. Similar to the first two quarters of fiscal 2005, the relationbetween the U.S. dollar and the Euro in the third quarter of fiscal 2005continued to be unfavorable for European imports into the U.S. market whencompared to the same quarter in fiscal 2004.

 

                Historically, we have found thatchanges in the level of our net sales do not correspond directly to thepercentage changes in lift truck industry shipments, but industry statistics doprovide an indication of the direction of business activity. North Americanlift truck industry shipments in the third quarter of fiscal 2005 were 16%higher than the third quarter of fiscal 2004.

 

                Gross margins for the thirdquarter of fiscal 2005 in North America benefited from the contribution ofadditional shipment volumes. Improved fixed cost absorption and sales priceincreases more than offset the impact of increases in the cost of steel,resulting in an increase in margins from 38% to 39%.

 

                Selling and administrative costsfor the third quarter of fiscal 2005 increased 6% or $532,000 over the samequarter of the prior year.  This increasewas primarily due to higher information systems consulting costs and anadditional employer contribution to our U.S.A. defined contribution plan of$324,000.

 

                In May 2004, ourshareholders approved a stock appreciation rights plan (SARS Plan), whichprovides for the award of stock appreciation rights (SARS) to key executivesand directors. Our Proxy Statement, dated April 13, 2004, contains adetailed description of the terms of the SARS Plan. Amortization expense forthe third quarter of fiscal 2005 increased by $520,000 due to SARS granted onMay 26, 2004. The SARS Plan was not in effect during the third quarter offiscal 2004.

 

                In October 2004, we reached a settlement with one oftwo insurers in litigation relating to recovery of expenses incurred in thecleanup of groundwater contamination at our Fairview, Oregon, plant. Theinsurer paid us $1.3 million in October and will be dismissed from a pendingappeal of a lower court judgment in our favor. During the third quarter of fiscal 2005, we recorded an additional$155,000 in environmental expenses related to changes in remediation activitiesat our Springfield, Ohio facility.  Thesechanges were based on a reevaluation of the prior remediation plan afterregularly scheduled meetings with the Ohio Environmental Protection Agency.

 

**Europe**

 
| ** **                 | ** ** | **Three months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2004**                          | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                  |       | $                                 | 27,614     |       | 100        | %          | $          | 19,442 |   | 100 | % | $ | 8,172 |   | 42 | % |
| Cost of goods sold         |       | 22,479                            |       | 81         | %          | 15,485     |       | 80 | % | 6,994 |   | 45 | % |
| Gross profit               |       | 5,135                             |       | 19         | %          | 3,957      |       | 20 | % | 1,178 |   | 30 | % |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 5,496                             |       | 20         | %          | 4,383      |       | 22 | % | 1,113 |   | 25 | % |
| Amortization               |       | 126                               |       | 1          | %          | 51         |       | — |   | 75 |   | — |   |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Operating loss             |       | $                                 | (487       | )          | (2         | )%         | $          | (477 | ) | (2 | )% | $ | (10 | ) | — |   |

 

                Net sales in Europe for thethird quarter of fiscal 2005 increased $8.2 million or 42% over the samequarter of fiscal 2004.  An increase inshipments from our European plants accounted for  $3.9 million or 20% of theincrease.    This is due to added demandresulting from a strong European lift truck market in fiscal 2005. The changesin foreign currency rates, primarily the Euro and the British Pound, accountedfor $2.1 million or 11% of the sales increase. The remaining increaserelates to our acquisition in Italy late in the third quarter of fiscal 2004,which also accounted for $2.2 million or 11% of the increase.

 

                During the third quarter offiscal 2005, we purchased the assets of Falkenroth Foerdertechnik (Falkenroth),a major

 

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Germanfork manufacturer.  Falkenroth was placedinto insolvency by its creditors in March 2004. The total purchase price for the assets was approximately $6.6 million,net of assumed liabilities.  As ofOctober 31, 2004, we had paid $4.7 million of the purchase price pending finalresolution of the inventory valuation. The remaining purchase price will be paid in the fourth quarter offiscal 2005.

 

                Gross margins in Europe declinedfrom 20% for the third quarter of fiscal 2004 to 19% for the third quarter offiscal 2005. The primary factor contributing to this was increases in steelcosts that were not sufficiently offset by customer price increases.

 

                Selling and administrative costsin Europe increased by $1.1 million or 25% for the third quarter of fiscal2005 as compared to the third quarter of fiscal 2004. The increase wasprimarily due to selling and administrative costs of an acquired company, Roncarisrl, which accounted for an increase of $466,000 or 11% in comparison with thethird quarter of fiscal 2004. We acquired Roncari srl late in October 2003.Changes in foreign currency rates accounted for $391,000 of additional sellingand administrative costs or an increase of 9% over the prior year. Exclusive of acquisitions and foreign currencyfluctuations, selling and administrative costs increased approximately $256,000for the third quarter of fiscal 2005 as compared to the comparable period of fiscal2004. The increase was primarily due to warranty costs related to new productintroductions and information consulting costs.

 

**Asia Pacific**

 
| ** **                 | ** ** | **Three months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2004**                          | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                  |       | $                                 | 14,830     |       | 100        | %          | $          | 12,162 |   | 100 | % | $ | 2,668 |   | 22 | % |
| Cost of goods sold         |       | 9,979                             |       | 67         | %          | 7,943      |       | 65 | % | 2,036 |   | 26 | % |
| Gross profit               |       | 4,851                             |       | 33         | %          | 4,219      |       | 35 | % | 632 |   | 15 | % |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 1,941                             |       | 13         | %          | 1,761      |       | 14 | % | 180 |   | 10 | % |
| Amortization               |       | 6                                 |       | —     |       | 7          |       | 1 | % | (1 | ) | (14 | )% |
|                       |       |                              |       |       |       |       |       |   |   |   |   |   |   |
| Operating income           |       | $                                 | 2,904      |       | 20         | %          | $          | 2,451 |   | 20 | % | $ | 453 |   | 18 | % |

 

                Asia Pacific net sales increased$2.7 million or 22% in the third quarter of fiscal 2005 over fiscal 2004.Excluding the effect of foreign currencies, net sales increased$2.2 million or 18%. Virtually all of the Asia Pacific markets experiencedstrong sales results during the third quarter, with China posting the strongestgrowth.  Sales in China for the thirdquarter of fiscal 2005 increased $1.7 million from the expansion of our forkmanufacturing operations in Hebei, China. The expanded facility became fully operational in the second quarter offiscal 2005.

 

                Gross margins in the AsiaPacific region decreased from 35% to 33% in the third quarter of fiscal 2005when compared to the same quarter of the prior year.  The decrease is due to both higher materialcosts and higher volume of lower margin OEM products.

 

                Selling and administrative costsin the Asia Pacific region increased $180,000 for the third quarter of fiscal2005 as compared to fiscal 2004.  Foreigncurrency fluctuations accounted for $84,000 of this change. The remainder ofthe increase was due to continued expansion of our marketing and engineeringefforts in China and expenses to support increased levels of business.

 

**Non-Operating Items**

 

                Interest expense wasapproximately $934,000 or 20% lower in the third quarter of fiscal 2005 ascompared to the same quarter of fiscal 2004. Total borrowings atOctober 31, 2004 were $12.5 million lower than October  31, 2003due to scheduled debt payments in the fourth quarter of fiscal 2004. See “FinancialCondition and Liquidity” for additional discussion of debt levels and payments.

 

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                Interest income decreased$90,000 from the third quarter of fiscal 2004 to the third quarter of fiscal2005. This was due primarily to payment in full of the Precision HydraulicCylinders, Inc. note receivable during the third quarter of fiscal 2004.

 

                During the three months endedOctober 31, 2004, a trust under a U.S. defined benefit plan we terminated in1997 sold publicly traded common stock received in a demutualization of aninsurance company.  The trust purchasedannuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain approximately$1.0 million and proceeds in the same amount, which were available forreversion to the Company.  We contributed$324,000 of the proceeds directly to a defined contribution plan maintained forthe benefit of all U.S. employees.  The$324,000 contribution is included in selling and administrative expenses.  We will retain the balance of the proceeds.  We hold no shares of publicly traded commonstock at October 31, 2004.

 

 

                Other expenses related primarilyto net losses on foreign currency translation in the third quarter of fiscal2005 and fiscal 2004.

 

                The effective tax rate of 35%was consistent in both the third quarter of fiscal 2005 and 2004.

 

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**COMPARISON OF THE FIRST NINE MONTHS OF FISCAL 2005 ANDFISCAL 2004**

 

**Consolidated Summary**

 

                Net income for the first ninemonths of fiscal 2005 increased 45% to $23.4 million ($1.84 per dilutedshare) from $16.2 million ($1.31 per diluted share) for the first ninemonths of fiscal 2004. The largest contributor to the increased net income wasa higher volume of business in all geographic regions.  Net sales for the first nine months of fiscal2005 increased by $61.9 million or 28% over the comparable period offiscal 2004. Excluding the effect of foreign currency fluctuations andacquisitions, net sales in North America, Europe and Asia Pacific grew 18%, 22%and 28%, respectively, in the first nine months of fiscal 2005 as compared tothe same period of the prior year. Gross margin for the first nine months offiscal 2005 of 32% was slightly lower than the 33% margin in fiscal 2004.  The net effect of steel cost increases andlower margin product mix in Europe and Asia Pacific reduced margins; but thiswas offset by improved margins in North America.   Selling and administrative costs increased$7.7 million or 17% in the first nine months of fiscal 2005 over the comparableperiod of the prior year. Excluding foreign currency changes and acquisitions,costs increased $4.1 million or 9% over the comparable prior year period. Theincrease was due primarily to research and development, engineering costs,Sarbanes-Oxley implementation costs, employee compensation and benefits,costs related to expansion efforts in China and additional warranty costsrelated to new product introductions. Amortization expenses were higher in fiscal 2005 due to stockappreciation rights granted in May 2004. Nine month results for fiscal 2005 also include the settlement ofinsurance litigation and a gain on the sale of marketable securities.

 

**North America**

 
| ** **                    | ** ** | **Nine months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2004**                         | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                     |       | $                                | 153,520    |       | 100        | %          | $          | 129,977 |   | 100 | % | $ | 23,543 |   | 18 | % |
| Cost of goods sold            |       | 93,730                           |       | 61         | %          | 81,189     |       | 62 | % | 12,541 |   | 15 | % |
| Gross profit                  |       | 59,790                           |       | 39         | %          | 48,788     |       | 38 | % | 11,002 |   | 23 | % |
|                          |       |                             |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative    |       | 30,630                           |       | 20         | %          | 27,663     |       | 21 | % | 2,968 |   | 11 | % |
| Amortization                  |       | 961                              |       | 1          | %          | 173        |       | 1 | %  | 787 |   | — |   |
| Insurance litigation recovery |       | (1,300                           | )          | (1         | )%         | —     |       | — |   | (1,300 | ) | — |   |
| Environmental expense         |       | 155                              |       | —     |       | —     |       | — |   | 155 |   | — |   |
| Operating income              |       | $                                | 29,344     |       | 19         | %          | $          | 20,952 |   | 16 | % | $ | 8,392 |   | 40 | % |

 

                North America net salesincreased  $23.5 million or 18% inthe first nine months of fiscal 2005 over the same period of fiscal 2004primarily due to higher shipments. Price increases contributed to a lesserextent to the increase.

 

                Historically, we have found thatchanges in the level of our net sales do not correspond directly to thepercentage changes in lift truck industry shipments, but industry statistics doprovide an indication of the direction of business activity. North Americanlift truck industry shipments for the first nine months of fiscal 2005 ascompared to the first nine months of fiscal 2004 increased 12%.

 

                Gross margins for the first ninemonths of fiscal 2005 in North America benefited from the contribution ofadditional unit volume through the plants, absorbing more fixed costs. Inaddition, price increases to date have kept pace with increases in the cost ofsteel. The net result was an improvement in the margin from 38% for the firstnine months in fiscal 2004 to 39% for the same period in fiscal 2005.

 

                Selling and administrative costsfor the first nine months of fiscal 2005 increased 11% or $3 million overthe same period of the prior year. Implementation costs related to therequirements of Sarbanes-Oxley increased by $466,000. Research anddevelopment and engineering costs were $145,000 greater than the prioryear.  Foreign currency fluctuationsincreased selling and administrative costs by $160,000 during the first ninemonths of fiscal 2005. The remaining increase related to

 

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employeecompensation and benefits, miscellaneous costs and a general increase inbusiness levels.

 

                Amortization expense increasedby $861,000 for the first nine months of fiscal 2005 due to stock appreciationrights granted in May 2004.

 

                In October 2004, we reached a settlement with one oftwo insurers in litigation relating to recovery of expenses incurred in thecleanup of groundwater contamination at our Fairview, Oregon, plant. Theinsurer paid us $1.3 million in October and has been dismissed from a pendingappeal of a lower court judgment in our favor.

 

                During the third quarter of fiscal 2005, we recordedan additional $155,000 in environmental expenses related to changes inremediation activities at our Springfield, Ohio facility.  These changes were based on a reevaluation ofthe remediation plan after regularly scheduled meetings with the OhioEnvironmental Protection Agency.

 

**Europe**

 
| ** **                 | ** ** | **Nine months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2004**                         | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                  |       | $                                | 84,517     |       | 100        | %          | $          | 57,123 |   | 100 | % | $ | 27,394 |   | 48 | % |
| Cost of goods sold         |       | 67,367                           |       | 80         | %          | 44,317     |       | 78 | % | 23,050 |   | 52 | % |
| Gross profit               |       | 17,150                           |       | 20         | %          | 12,806     |       | 22 | % | 4,344 |   | 34 | % |
|                       |       |                             |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 16,319                           |       | 19         | %          | 12,663     |       | 22 | % | 3,656 |   | 29 | % |
| Amortization               |       | 348                              |       | —     |       | 123        |       | — |   | 225 |   | — |   |
| Operating income           |       | $                                | 483        |       | 1          | %          | $          | 20 |   | — |   | $ | 463 |   | — |   |

 

                Net sales in Europe for thefirst nine months of fiscal 2005 increased $27.4 million or 48% over the sameperiod of fiscal 2004.  The changes inforeign currency rates, primarily the Euro and the British Pound, accounted for$6.1 million or 11% of the increase.  Theacquisition of Roncari srl near the end of October 2003 accounted for $8.9million or about 16% of the increase. The remaining increase of $12.4 million or 21% was the result ofincreased shipments of OEM products out of our European plants.

 

                Gross margins in Europe declinedslightly from 22% for the first nine months of fiscal 2004 to 20% for the firstnine months of fiscal 2005. The two primary factors contributing to thisdecrease were increased shipments of lower margin OEM products relative tototal shipments, as well as increases in steel costs that were not sufficientlyoffset by price increases.

 

                Selling and administrative costsin Europe increased by $3.7 million or 29% for the first nine months of fiscal2005 as compared to the first nine months of fiscal 2004.  Selling and administrative  costs of acquired companies accounted for$1.7 million or 14% of the increase during the first nine months of fiscal2005.  Changes in foreign currency ratesaccounted for $1.1 million or 9% of the increase.  Exclusive of acquisitions and foreigncurrency fluctuations, selling and administrative costs increased by $794,000for the first nine months of fiscal 2005 as compared to fiscal 2004.    Warranty cost increases related primarilyto new product introductions were $440,000. The remaining increase relates to miscellaneous costs for theintegration of acquisitions, Sarbanes-Oxley implementation and otherinformation technology initiatives. These increases were partially offset by a net reduction of leaseexpenses of $538,000.  We reduced a leaseloss accrual in the second quarter of fiscal 2005 after the lease in questionwas resolved for a lower amount than had been anticipated.

 

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**Asia Pacific**

 
| ** **                 | ** ** | **Nine months ended October 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2004**                         | ** ** | **%**      | ** ** | **2003**   | ** ** | **%** | ** ** | **Change** | ** ** | **Change %** | ** ** |
| Net sales                  |       | $                                | 44,209     |       | 100        | %          | $          | 33,238 |   | 100 | % | $ | 10,971 |   | 33 | % |
| Cost of goods sold         |       | 29,538                           |       | 67         | %          | 22,311     |       | 67 | % | 7,227 |   | 32 | % |
| Gross profit               |       | 14,671                           |       | 33         | %          | 10,927     |       | 33 | % | 3,744 |   | 34 | % |
|                       |       |                             |       |       |       |       |       |   |   |   |   |   |   |
| Selling and administrative |       | 6,326                            |       | 14         | %          | 5,249      |       | 16 | % | 1,077 |   | 21 | % |
| Amortization               |       | 21                               |       | —     |       | 17         |       | — |   | 4 |   | 24 | % |
| Operating income           |       | $                                | 8,324      |       | 19         | %          | $          | 5,661 |   | 17 | % | $ | 2,663 |   | 47 | % |

 

                Asia Pacific net sales increased$11 million or 33% in the first nine months of fiscal 2005 over fiscal2004.  Excluding the effect of foreigncurrencies, net sales increased $9.3 million or 28%.  The increase was due to the general strengthof the economies in all markets and the expansion of manufacturing operationsin China.

 

                Gross margins in the AsiaPacific region were consistent for the nine months ended October 31 in bothfiscal 2004 and 2005.

 

                Selling and administrative costsin the Asia Pacific region increased $1.1 million for the first nine months offiscal 2005 as compared to fiscal 2004. Foreign currency fluctuations accounted for $309,000 of theincrease.  The remainder of the increasewas due to expansion of marketing and engineering efforts in China.

 

**Non-Operating Items**

 

                Interest expense wasapproximately $738,000 or 21% lower in the first nine months of fiscal 2005 ascompared to the same period of fiscal 2004. Total borrowings at the end of October 2004 were $12.5 million  lower than the same period of the prior yeardue to scheduled debt payments in the fourth quarter of fiscal 2004.  See “Financial Condition and Liquidity” foradditional discussion of debt levels and payments.

 

                Interest income decreasedapproximately $415,000 from the first nine months of fiscal 2004 to the firstnine months of fiscal 2005. This was due primarily to payment in full of thePrecision note receivable during the third quarter of fiscal 2004.

 

                During the three months endedOctober 31, 2004, a trust under a U.S. defined benefit plan we terminated in1997 sold publicly traded common stock received in a demutualization of aninsurance company.  The trust purchasedannuities from the insurance company prior to the termination of the plan.  The sale resulted in a gain approximately$1.0 million and proceeds in the same amount, which were available forreversion to the Company.  We contributed$324,000 of the proceeds directly to a defined contribution plan maintained forthe benefit of all U.S. employees.  The$324,000 contribution is included in selling and administrative expenses.  We will retain the balance of theproceeds.  We hold no shares of publiclytraded common stock at October 31, 2004.

 

 

                Other expense in the first ninemonths of fiscal 2005 related primarily to net losses on foreign currency translations.  We maintain a foreign currency riskmanagement strategy to mitigate the impact of unanticipated fluctuations inearnings caused by changes in foreign currency exchange rates. Other income of$273,000 in the first nine months of fiscal 2004 related to the gain on thesale of a building in Germany and the elimination of remaining liabilities fromthe sale of our cylinder division, which were offset by losses on foreigncurrency translation.

 

                The effective tax rate increasedfrom 33% in the first nine months of fiscal 2004 to 35% in the current period.This was primarily due to a decrease in benefits of international financingactivities and an increase in the recording of additional

 

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valuationallowances on deferred tax assets in Europe.

** **

**CASH FLOWS**

 

                The statements of cash flowsreflect the changes in cash and cash equivalents for the nine months endedOctober  31, 2004 and October  31, 2003 by classifying transactionsinto three major categories of activities: operating, investing and financing.

 

**Operating**

 

                Our main source of liquidity iscash generated from operating activities. This consists of net income adjustedfor noncash operating items such as depreciation and amortization, losses andgains on disposition of assets, deferred income taxes, and changes in operatingassets and liabilities.

 

                Net cash provided by operatingactivities from continuing operations was $28.8 million in first ninemonths of fiscal 2005 compared to $24.5 million for the same period infiscal 2004. The increase in fiscal 2005 was due to higher levels of netincome, depreciation and amortization as well as increases in accounts payableand accrued expenses. This increase was partially offset by changes in other operatingaccounts, primarily accounts receivables and inventories.   These changes are primarily due to increasedbusiness activity in the first nine months of fiscal 2005 as compared to thesame period in fiscal 2004.

 

**Investing**

 

                The principal recurring investingactivities are capital expenditures. These expenditures are primarily forequipment and tooling related to product improvements, more efficientproduction methods and replacement for normal wear and tear. Capitalexpenditures were $9.7 million and $8.8 million in the first ninemonths of fiscal 2005 and 2004, respectively. We expect capital expenditures inthe rest of fiscal 2005 to approximate depreciation expense. Depreciationexpense for the first nine months in fiscal 2005 and fiscal 2004 was $10.2 millionand $8.9 million, respectively.

 

                Marketable securities atOctober 31, 2004 consist primarily of asset-backed notes issued byvarious state agencies throughout the United States and guaranteed by stategovernments and agencies. The notes are long-term instruments maturing through2031; however, the interest rates and maturities are reset approximately everymonth, at which time we can sell the notes. Tax-free interest rates on thenotes ranged from 1.8% to 2.6% per annum. Net purchases of marketablesecurities were $2.4 million and $17.2 million in the first ninemonths of fiscal 2005 and fiscal 2004, respectively.

 

                Proceeds from the sale ofsecurities received as a reversion from a pension plan terminated in 1997 were$1.0 million during the nine months ended October 31, 2004. See Note 5 to theConsolidated Financial Statements.

 

**Financing**

 

                The issuance of common stockrelated to the exercise of stock options generated $1.3 million of cashfor the first nine months in fiscal 2005 as compared to $1.1 million in thecomparable period of the prior year.

 

                We declared dividends totaling$0.33 and $0.30 per share during the first nine months of fiscal 2005 and 2004,respectively.

 

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**FINANCIAL CONDITION AND LIQUIDITY**

 

                Our working capital atOctober 31, 2004 was $99.3 million as compared to $81.7 millionat January 31, 2004. Our current ratio at October 31, 2004 was 2.60 to 1as compared to 2.59 to 1 at January 31, 2004.

 

                Total outstanding debt, includingnotes payable to banks and capital leases, at October 31, 2004 was$52.8 million in comparison with $53.9 million at January 31,2004. Our debt to equity ratio improved to .25 to 1 at October 31, 2004 from..29 to 1 at January 31, 2004. Our debt agreements contain covenantsrelating to net worth and leverage ratios. We are in compliance with these covenants at October 31, 2004.  Borrowing arrangements currently in placewith commercial banks provide lines of credit totaling $35 million, ofwhich $2.8 million was used to issue letters of credit. The average interestrate on notes payable to banks was 4.0% at October 31, 2004 and 2.8% atJanuary 31, 2004.

 

                We believe that our cash andcash equivalents, existing credit facilities and cash flows from operationswill be sufficient to satisfy our expected working capital, capital expenditureand debt retirement requirements for fiscal 2005.

 

**OTHER MATTERS**

 

                Duringfiscal 2004, the holder of our exchangeable preferred stock exchanged 600,000shares of exchangeable preferred stock for 600,000 shares of common stock. Thisnon-cash transaction resulted in a reclassification of $8.2 million fromexchangeable preferred stock into common stock and additional paid-in-capitaland had no effect on earnings per share. No exchangeable preferred stockremained outstanding at October 31, 2004 and January 31, 2004.

 

                The U.S. dollar weakened in thethird quarter of fiscal 2005 in comparison to most foreign currencies used byour significant foreign operations. As a result, foreign currency translationadjustments increased shareholders’ equity by $8.6 million in the thirdquarter of fiscal 2005. The primary currencies driving the increase inshareholders’ equity were the Euro and the Canadian dollar. During the firstnine months of fiscal 2005, the U.S. dollar weakened against most currencies,increasing shareholders’ equity by $5.7 million from January 31, 2004to October 31, 2004.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

                At October 31, 2004, we didnot have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or for other contractually narrowor limited purposes. As such, we are not materially exposed to any financing,liquidity market or credit risk that could arise if we had engaged in suchrelationships.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

                In January 2004, FASB StaffPosition No. 106-1 (FSP 106-1), “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003” was issued. FSP 106-1 permitted the deferral of recognizing the effectsof the Medicare Prescription Drug, Improvement and Modernization Act of 2003(the Act) in the accounting for post retirement health care plans underStatement of Financial Accounting Standards (SFAS) No. 106, “Employers’Accounting for Postretirement Benefactors Other Than Pensions,” and inproviding disclosure related to the plans required by SFAS No. 132(revised 2003), “Employers’ Disclosures about Pensions and Other PostretirementBenefits.” We elected the deferral provided by this FSP.

 

                In May 2004, the FASBissued Staff Position No. 106-2 (FSP 106-2), “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003.” FSP No. 106-2 discusses further the effect ofthe Act and supersedes FSP 106-1. FSP 106-2 considers the effect of the two newfeatures introduced in the Act in determining our accumulated postretirementbenefit obligation (“APBO”) and net periodic post retirement benefit cost. Theeffect on the APBO will be accounted for as an actuarial experience gain to beamortized into income over the average remaining service period of planparticipants.  As permitted by FSP 106-2, we haveelected to account for the impact of this benefit prospectively beginning inthe three months ended October 31, 2004. The adoption of FSP 106-2 reduced our accumulated postretirement benefitobligation at June 30, 2004 from $9.5 million to $8 million.  Our estimated annual net periodic benefitcost after the adoption of FSP 106-2 was reduced by $286,000 to $1million.  The $286,000 reduction inannual cost includes $20,000, $85,000 and $181,000 in service cost, interestcost and amortization of recognized actuarial losses, respectively.    The impact on the net periodic benefit costfor the three months ended October 31, 2004 was a $72,000 reduction in thecost.  Since we elected to account forFSP 106-2 prospectively, the periodic pension costs for the first six monthsended July 31, 2004 did not change from the amounts previously reported.

 

                The American Jobs Creation Act of 2004, signed intolaw in October 2004, provides for a variety of changes in the tax law includingincentives to repatriate undistributed earnings of foreign subsidiaries, phasedelimination of the Foreign Sales Corporation/Extraterritorial Income benefitand a domestic manufacturing benefit.  Weare currently evaluating the potential impact of this legislation, includingassessing the details of the Act, analyzing the funds available for repatriationand the economic cost of doing so, assessing the qualified uses of repatriatedfunds and assessing the domestic manufacturing benefit.  However, given the preliminary stage of ourevaluation, it is not possible at this time to determine what impact thislegislation will have on our consolidated tax accruals or our effective taxrate.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

                Market risk is the potentialloss arising from adverse changes in market rates and prices, such as foreigncurrency exchange rate and interest rate fluctuations. A significant portion ofour revenues and expenses are denominated in foreign currencies. As a result,our operating results could become subject to significant fluctuations basedupon changes in the exchange rates of the foreign currencies in relation to theU.S. dollar. The table below illustrates the hypothetical increase in net salesfor the third quarter of fiscal 2005 resulting from a 10% weaker U.S. dollarduring the entire quarter, measured against foreign currencies that affect ouroperations (in millions):

 

| Euro                                                                    |   | $   | 2.0    |   |
|-------------------------------------------------------------------------|--------|-----|--------|--------|
| Canadian dollar                                                         |   | 0.2 |   |
| British pound                                                           |   | 0.7 |   |
| Other currencies with net sales less than 5% of consolidated net  sales |   | 1.0 |   |

 

                We enter into foreign currencyforward exchange contracts to offset the impact of currency fluctuations oncertain nonfunctional currency assets and liabilities. The principal currencieshedged are denominated in Japanese yen, Canadian dollars, Euros and Britishpounds. Our foreign currency forward exchange contracts have terms lasting upto six months, but generally less than one month. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

                A majority of our products aremanufactured using steel as a primary raw material and steel based componentsas purchased parts. As such, our cost of goods sold is sensitive tofluctuations in steel prices, either directly through the purchase of steel asraw material or indirectly through the purchase of steel based components.Presuming that the full impact of commodity steel cost increases is reflectedin all steel and steel based component purchases, we estimate our gross margin

 

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percentagesensitivity to be approximately 0.3% for each 1.0% increase in commodity steelcost without offsetting sales price increases. For example, if the price ofcommodity steel increases 1.0%, and the full impact of that increase isreflected in all raw material and component purchases, the net decrease in thegross margin percentage would be approximately 0.3%. Based on our statement ofincome for the quarter ended October 31, 2004, a 1% increase in commoditysteel costs without offsetting sales price increases would have decreasedconsolidated gross profit by approximately $260,000.

 

                To date we have been able tomitigate the effect of a portion of the steel cost increases on our grossmargins. This has been done through price increases and cost reductions. Weintend to continue our efforts in the coming months to mitigate the full impactof any additional steel cost increases. There may be some time lag between theabsorption of the steel cost increases and realizing the offsetting benefits ofthe mitigating measures. It should be noted that there is no assurance that wecan fully mitigate all future steel cost increases through price increases andother measures and actual cost increases from steel suppliers could differ fromcost increases that have been previously communicated.

 

                Manufacturing of our productsincludes the purchase of various raw materials and components. Certain of theseitems are provided worldwide by a limited number of suppliers. We are notcurrently experiencing shortages in obtaining the raw materials and components.However, certain steel products obtained in Europe are subject to allocationsfrom suppliers. At this time we believe the current allocation of theseproducts from suppliers is sufficient to meet planned production volumes.Nevertheless, there can be no assurance that these suppliers will be able tomeet our future requirements. An extended delay or interruption in the supplyof any components could have a material adverse effect on the Company’sbusiness, results of operations and financial condition. We are working toidentify alternative supplier sources for these products.

 

                Substantially all of our debt atOctober 31, 2004 has a fixed interest rate. Any additional payments to prepayscheduled amounts of debt are subject to penalties. At October 31, 2004,the penalties to retire all of our long-term debt were  $4.0million. A hypothetical immediate increase in market interest rates by 1% woulddecrease the fair value of our long-term debt outstanding atOctober 31, 2004 by $800,000.

 

**Item 4. Controls and Procedures**

 

As of October 31, 2004, the end of the period covered by this report,we reviewed and evaluated, under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief Financial Officer,the effectiveness of the design and operation of our ‘‘disclosure controls andprocedures’’ (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) of theSecurities and Exchange Act of 1934 (Exchange Act).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that the disclosure controlsand procedures are effective in ensuring that information required to bedisclosed by the Company in reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

October 1, 2004, we continued our company-wide deployment of anenterprise-wide resource planning (ERP) software system by implementing thesystem at our manufacturing facilities located in Findlay, Ohio and Guelph,Ontario, Canada.  This implementationinvolved the modification of internal controls over financial reporting atthose facilities in order to align them with our other manufacturing facilitiesin North America.  During the closingprocess for these facilities at October 31, 2004, we noted certain deficienciesin internal controls arising from the implementation.  These deficiencies involved instances wheresome of our employees failed to follow policies, processes and procedures inprocessing inventory transactions and practices of our employees with respectto which we had not adopted procedures. We have completed additional controls and procedures, including monthlyphysical inventory observations, in connection with the implementation toevaluate the financial information used in its financial reporting processes atOctober 31, 2004.  We have devotedsubstantial resources to correct the deficiencies.  We believe that the steps taken will addressthe deficiencies that are affecting our controls and procedures.  However, there is a risk that these steps maynot be adequate to reduce or eliminate the deficiencies to the degree necessaryto demonstrate that our internal controls over financial reporting areoperating effectively at January 31, 2005. Except for these modifications, there were no changes in our internalcontrols over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

Beginning with the yearending January 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 willrequire us to include an internal control report of management with our annualreport on Form 10-K.  The internal control report must

 

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contain (1) a statement of management’sresponsibility for establishing and maintaining adequate internal controls overfinancial reporting for our company, (2) a statement identifying the frameworkused by management to conduct the required evaluation of the effectiveness ofour internal controls over financial reporting, (3) management’s assessment ofthe effectiveness of our internal controls over financial reporting as of theend of our most recent fiscal year, including a statement as to whether or notour internal controls over financial reporting are effective, and (4) astatement that our independent registered public accounting firm has issued anattestation report on management’s assessment of our internal controls overfinancial reporting.

 

                Management has developed acomprehensive plan in order to achieve compliance with Section 404 within theprescribed period and to review, evaluate and improve the design andeffectiveness of our controls and procedures on an on-going basis.  Thecomprehensive compliance plan includes (1) documentation and assessment of theadequacy of our internal controls over financial reporting, (2) remediation ofcontrol weaknesses, (3) validation through testing that controls arefunctioning as documented and (4) implementation of a continuous reporting andimprovement process for internal controls over financial reporting.  As aresult of this initiative, we have made and will continue to make changes fromtime to time in our internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

                None

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

 

                None

 

**Item 3. Defaults Upon Senior Securities**

 

                None

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

**                None**

 

**Item 5. Other Information**

 

                None

 

**Item 6. Exhibits**

 
| 31.1 | Certification  of Chief Executive Officer of Cascade Corporation.                                          |
|------|------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification  of Chief Financial Officer of Cascade Corporation.                                          |
| 32   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350. |

 

 

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**SIGNATURES**

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|               | CASCADE  CORPORATION                                                                               |
|--------------------|----------------------------------------------------------------------------------------------------|
| December  10, 2004 |                                                                                               |
|               |                                                                                               |
|               | /s/ RICHARD S. ANDERSON                                                                            |
|               | Richard S. Anderson                                                                                |
|               | *Senior Vice President and  Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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