**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549FORM 10-K**

**{X}**            Annual report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2004.

**OR**

**{  }**               Transition reportpursuant to section 13 or 15(d) of the securities exchange act of 1934

**Commission file number 001-11549**

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrantas specified in its charter)

|                 Delaware                                                           |                 63  0780521                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (State or other  jurisdiction of  Incorporation or organization)                                                                                                                                                                                        | (I.R.S.Employer  Identification  No.)                                                                                                                                                                  |
| 4909  SE International Way                 Portland,  Oregon                  |                 97222-4679                  |
| (Address of  principal executive offices)                                                                                                                                                                                                               | (Zip Code)                                                                                                                                                                                                  |

 

Registrant’s telephonenumber, including area code:  (503)653-8881

Securitiesregistered pursuant to Section 12(b) of the Act:

| Title of each class           | **Name of each exchange  on which registered** |
|-------------------------------|------------------------------------------------|
| Common Stock,  $.01 par value | New York Stock  Exchange                       |

 

Securitiesregistered pursuant to Section 12(g) of the Act:  None

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

|  | Yes {X} |   | No |
|--|---------|--------|----|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934).

|  | Yes {  } |   | No {X} |
|--|---------------|--------|--------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K, or any amendment to this Form 10-K.{  }

At June 30, 2004, theaggregate market value of the voting and non-voting common stock held bynon-affiliates, computed by reference to the last sales price ($12.73) asreported by the New York Stock Exchange, was $55,446,050.

The number of sharesoutstanding of $0.01 par value common stock as of February 18, 2005 was45,109,198 shares.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Proxy Statement for the Annual Meeting of stockholders to be held on April 19,2005, are incorporated by reference in Part III.

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**Table of Contents**
|                                                                                                            | **Page** |
|------------------------------------------------------------------------------------------------------------|----------|
| Part I                                                                                                |     |
| Item 1.  Business                                                                                     | 4        |
| Outdoor Products Segment                                                                                   |     |
| Industrial and Power  Equipment Segment                                                                    |     |
| Lawnmower Segment                                                                                          |     |
| Capacity Utilization                                                                                       |     |
| Backlog                                                                                                    |     |
| Employees                                                                                                  |     |
| Environmental Matters                                                                                      |     |
| Financial Information about  Industrial Segments and Foreign and Domestic Operations                       |     |
| Seasonality                                                                                                |     |
| Available Information                                                                                      |     |
| Item 2.  Properties                                                                                   | 8        |
| Item 3.  Legal Proceedings                                                                            | 9        |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                        | 9        |
| Part II                                                                                               |     |
| Item  5.  Market for Registrant’s Common  Equity and Related Stockholder Matters                 | 10       |
| Item  6.  Selected Consolidated Financial Data                                                        | 11       |
| Item  7.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 12       |
| Overview                                                                                                   |     |
| Operating Results                                                                                          |     |
| Financial Condition,  Liquidity, and Capital Resources                                                     |     |
| Off Balance Sheet Arrangements                                                                             |     |
| Market Risk                                                                                                |     |
| Critical Accounting Policies  and Estimates                                                                |     |
| Recent Accounting  Pronouncements                                                                          |     |
| Related Party Transactions                                                                                 |     |
| Forward Looking Statements                                                                                 |     |
| Item  7A.  Quantitative and Qualitative  Disclosures about Market Risk                                | 30       |
| Item  8. Financial Statements and Supplementary Data                                                       | 31       |
| Management Responsibility                                                                                  |     |
| Report of Independent  Registered Public Accounting Firm                                                   |     |
| Consolidated Statements of  Income (Loss)                                                                  |     |
| Consolidated Balance Sheets                                                                                |     |
| Consolidated Statements of  Cash Flows                                                                     |     |
| Consolidated Statements of  Changes in Stockholders’ Equity (Deficit)                                 |     |
| Notes to Consolidated  Financial Statements                                                                |     |

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| Item 9.  Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure             | 68     |
|-----------------------------------------------------------------------------------------------------------------|--------|
| Item  9A.  Controls and Procedures                                                                         | 69     |
| Part III                                                                                                   |   |
| Item  10.  Directors, Executive Officers,  Promoters and Control Persons of the Registrant                 | 69     |
| Item  11.  Executive Compensation                                                                          | 69     |
| Item  12.  Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters | 69     |
| Item  13.  Certain Relationships and Related  Transactions                                                 | 69     |
| Item  14.  Independent Registered Public  Accounting Firm Fees and Services                                | 70     |
| Part IV.                                                                                                   |   |
| Item  15.  Exhibits, Financial Statement  Schedules and Reports on Form 8-K                           | 70     |
| Signatures                                                                                                      | 75     |

 

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**PART I**

**ITEM 1.**   BUSINESS

Blount International, Inc. (“Blount” or the “Company”)is an international industrial company with three business segments: OutdoorProducts, Industrial and Power Equipment (“IPEG”) and Lawnmower. Our productsare sold in over 100 countries.

Oregon, ICS, Hydro-Ax,Prentice, Dixon, Fabtek, IZT, EZT, RAM, ZTR and CTR are registered or pendingtrademarks of Blount and its subsidiaries. Timberking is a registered trademarkof Caterpillar Inc., used under the authority of a licensing agreement.

**Outdoor Products Segment**

***Overview.  ***Ourlargest segment, Outdoor Products, accounted for 61% of our sales in 2004. Thissegment manufactures and markets chainsaw chain, guide bars, sprockets andaccessories for chainsaw use, concrete cutting equipment and lawnmower blades,parts and accessories. The segment’s products are sold to original equipmentmanufacturers (“OEM”s) for use on new chainsaws and landscaping equipment, andto the retail replacement market through distributors, dealers and massmerchants. During 2004 approximately 26% of the segment’s sales were to OEMs,with the remaining 74% sold into the replacement market. Approximately 61% ofthe segment’s sales were outside of the United States in 2004. 

Marketing personnel are located throughout the UnitedStates and in a number of foreign countries. We manufacture our products inMilwaukie, Oregon; Milan, Tennessee; Guelph, Ontario Canada; Curitiba, Parana,Brazil; and in Kansas City, Missouri. We are also nearing completion of a newmanufacturing facility in Fuzhou, Fujian Province, People’s Republic of China (“China”).A portion of our accessories and spare parts, as well as our concrete cuttingsaws, are sourced from vendors in various locations around the world.

***Oregon Products.  ***TheOregon product line includes a broad range of cutting chain, chainsaw guidebars, cutting chain drive sprockets and maintenance tools used primarily onportable gasoline and electric chainsaws and mechanical timber harvestingequipment. The Oregon product line also includes various cutting attachmentsand spare parts to service the lawn and garden industry. These lawn and gardenequipment parts include lawnmower blades to fit a variety of machines andcutting conditions, as well as replacement parts that meet the requirements ofOEMs.

***Windsor Products.  ***TheWindsor product line includes guide bars, cutting chain and sprockets forchainsaws, as well as products to support mechanical harvesting equipment. 

***ICS Products.  ***TheICS brand product line provides specialized concrete cutting equipment forconstruction markets. The principal product in the ICS line-up is a proprietarydiamond-segmented chain, which is used on gasoline and hydraulic powered sawsand equipment. ICS also distributes gasoline and hydraulic powered saws to itscustomers. These saws are manufactured through an agreement with a third party.

***Industry Overview.  ***Webelieve that we are the world leader in the production of cutting chain. Oregonand Windsor branded cutting chain and related products are used primarily byprofessional loggers, farmers, arborists and homeowners. Additionally, theOregon line of lawnmower-related parts and accessories has an extensivefollowing among commercial landscape companies and homeowners. Our ICS productsare used by rental contractors, general contractors and concrete cuttingspecialists. 

We sell our products to wholesale distributors,independent dealers and mass merchandisers serving the retail replacementmarket. In addition, Oregon brand chainsaw cutting chain and guide bars andother items are currently sold to more than 35 chainsaw OEMs. Many ofthese products are privately branded for OEM customers. 

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Due to the high level of technical expertise andcapital investment required to manufacture cutting chain and guide bars, webelieve that we are able to produce durable, high-quality cutting chain andguide bars more efficiently than most of our competitors. The use of Oregonbrand cutting chain as original equipment on chainsaws is also promoted throughcooperation with OEMs in improving the design and specifications of chain andsaws. 

Weather influences our sales cycle. For example,severe weather patterns and events such as hurricanes, tornadoes or ice stormsgenerally result in greater chainsaw use, and therefore, stronger sales of sawchain and guide bars. Seasonal rainfall plays a role in demand for ourlawnmower blades and garden-related products. Above-average rainfall drivesgreater demand for products in this category. 

This segment’s profitability is affected by changes incurrency exchange rates, changes in economic and political conditions in thevarious markets in which we operate and changes in the regulatory environmentin various jurisdictions. 

A small number of other cutting chain and guide barmanufacturers, as well as a small number of chainsaw manufacturers, competeagainst our Oregon and Windsor brands. We also supply products or components tosome of our competitors.

This segment’s principalraw material, cold-rolled strip steel, is purchased from multiple intermediatesteel processors and can be obtained from other sources.

**Industrialand Power Equipment Segment**

***Overview.  ***OurIndustrial and Power Equipment segment accounted for 32% of our sales in 2004.This segment manufactures and markets timber harvesting equipment, industrialtractors and loaders, mobile equipment rotational systems. Major users of theseproducts include logging contractors, harvesters, land reclamation companies,utility contractors, building materials distributors and original equipmentmanufacturers of hydraulic equipment. Sales are made through a distributionnetwork to customers in the timber harvesting, material handling, construction,land reclamation and utility businesses, as well as to pulp and lumber mills,contractors and scrap yard operators. The segment’s customer base isconcentrated in the Southeastern United States with international salesamounting to 11% of segment sales in 2004. 

Our Industrial and Power Equipment segment hasmanufacturing facilities in Menominee, Michigan; Owatonna, Minnesota; Prentice,Wisconsin; Tulsa, Oklahoma; and a parts warehouse in Zebulon, North Carolina. Amajority of the components used in our products are obtained from a number ofdomestic manufacturers. 

In March of 2003, the Industrial & PowerEquipment segment entered into marketing, trademark licensing and supplyagreements with Caterpillar Inc (“Caterpillar”). Under these agreements, we nowsell equipment manufactured by both Caterpillar and us under our Blount brandsthrough the Blount dealer network and under Caterpillar’s Timberking brandthrough the Caterpillar dealer network. The manufacture of the Timberking branded products occurs at both ourplants and Caterpillar’s plants, with distribution of the product being ourresponsibility in conjunction with the Caterpillar dealer network. 

***Timber HarvestingEquipment (Prentice, Hydro-Ax, Timberking, Fabtek and CTR).  ***We manufacture hydraulic timber harvestingequipment, which includes truck-mounted, trailer-mounted, stationary-mountedand self-propelled loaders under the Prentice brand name. We also manufacturerubber-tired feller bunchers and related attachments under the Hydro-Ax brandname and delimbers, slashers and skidders under the CTR brand name. Inaddition, we manufacture cut-to-length harvesting equipment, includingforwarders, harvesters, and harvester heads under the Fabtek brand. We alsomanufacture products sold under Caterpillar’s Timberking brand through theCaterpillar dealer network. 

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***Gear Products.  ***Our primary products are bearings, winches andswing drives used in heavy equipment for the forestry, construction andutilities industries. Due to extreme wear-and-tear on such products, we sellthem in the replacement parts market in addition to our sales to OEMs.

***Industry Overview.  ***Webelieve we are a leader in the manufacture of hydraulic timber harvestingequipment, crawler feller bunchers, rubber-tired feller bunchers and relatedattachments, delimbers, slashers, skidders and cut-to-length harvestingequipment, including forwarders, harvesters, and harvester heads. We alsomanufacture mobile equipment rotational systems for the forestry, constructionand utility sectors. 

The timber harvesting equipment market facescyclicality due to its reliance on customers in the lumber, pulp and papermarkets. In the past, as pulp prices have dropped and inventory levels haveincreased, our customers have postponed purchases of new timber harvestingequipment since their existing machinery provided them sufficient capacity tomeet near-term demand. 

Competition in marketsserved by the Industrial and Power Equipment segment is based largely onquality, brand recognition, price and product support. The segment’s primarycompetition in timber harvesting equipment includes John Deere, which alsomarkets the Timberjack brand, Komatsu, which markets the Timbco and Valmetbrands, and numerous smaller manufacturers, including Barko, Tigercat, Hood andSerco. Gear Products’ competitors in the fragmented gear industry include SKF,Avon, Kaydon, Rotec, Fairfield, Auburn, Tulsa Winch, Funk and Braden. 

**Lawnmower Segment**

***Overview.  ***TheCompany’s Lawnmower segment accounted for 7% of our sales in 2004. This segmentis comprised of Dixon Industries, Inc. (“Dixon”). Dixon, located inCoffeyville, Kansas, has manufactured zero-turning-radius (ZTR) lawnmowers andrelated attachments since 1974. Dixon pioneered the development of ZTR andoffers a full line of ZTR lawnmowers for both homeowner and commercialapplications. International sales were 7% of total segment sales in 2004.

In 2004 Dixon focused on the growing high-endresidential and low-end commercial zero turning riding mower market segments byintroducing 15 new all-steel models and eliminating five plastic bodied modelsdesigned for the low-end residential market. Dixon also offers an array ofoptions for its products, including attachments for grass collection, mulchingand snow removal. Dixon sells its products through distribution channelscomprised of full-service dealers, domestic distributors and exportdistributors. 

Dixon produces these products in a singlemanufacturing facility in Coffeyville, Kansas. 

***Industry Overview.  ***Webelieve Dixon is a leading manufacturer of residential zero-turn ridinglawnmowers. Dixon’s competitors include general and zero-turn riding lawnmowermanufacturers such as John Deere, Ariens, Simplicity, Toro, MTD, Cadet,Electrolux and Yardman. 

**Capacity Utilization**

Basedon a five-day, three-shift work week, capacity utilization for the year ended December 31,2004 by segment was as follows: 
| ** **                      | ** ** | **% of Capacity** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| Outdoor Products                |       |                        | 112        | % |   |
| Industrial and  Power Equipment |       |                        | 67         | % |   |
| Lawnmower                       |       |                        | 66         | % |   |

 

To meet the increaseddemand for its products, the Outdoor Products segment is currently operating ona 7 day work week basis. Expansion of capacity for this segment is underwaywith the new manufacturing 

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plant in Fuzhou, FujianProvince, China, and planned expansion of the manufacturing plant in Curitiba,Parana, Brazil, as well as planned investments in certain new machinery for themanufacturing plants in Portland, Oregon and Guelph, Ontario Canada.

**Backlog**

Thebacklog for each of our business segments as of the end of the reportingperiods was as follows: 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Outdoor Products                                |       |                  | $          | 77.4 |   |   |   | $ | 66.7 |   |   |   | $ | 42.9 |   |   |
| Industrial and  Power Equipment                 |       |                  | 63.7       |   |   |   | 47.7 |   |   |   | 10.3 |   |   |
| Lawnmower                                       |       |                  | 9.2        |   |   |   | 4.9 |   |   |   | 3.1 |   |   |
| Total backlog                                   |       |                  | $          | 150.3 |   |   |   | $ | 119.3 |   |   |   | $ | 56.3 |   |   |

 

The total backlog as of December 31,2004 is expected to be completed and shipped within twelve months. 

**Employees**

At December 31, 2004,we employed approximately 3,700 individuals. None of our domestic employeesbelongs to a union. The number of foreign employees who belong to unions is notsignificant. We believe our relations with our employees are satisfactory. Wehave not experienced any work stoppages in the last three years.

**Environmental Matters**

For additional information regarding certainenvironmental matters, see Note 8 of Notes to Consolidated FinancialStatements.

The Company’s operations are subject to comprehensiveU.S. and foreign laws and regulations relating to the protection of the environment,including those governing discharges of pollutants into the air and water, themanagement and disposal of hazardous substances and the cleanup of contaminatedsites. Permits and environmental controls are required for certain of thoseoperations, including those required to prevent or reduce air and waterpollution, and our permits are subject to modification, renewal and revocationby issuing authorities. 

On an ongoing basis, we incur capital and operatingcosts to comply with environmental laws and regulations. In 2004 we spentapproximately $1.8 million on environmental compliance, including approximately$0.4 million in capital expenditures. We expect to spend approximately $1.6million per year in capital and operating costs in years 2005 through 2007 onenvironmental compliance. Environmental laws and regulations generally havebecome stricter in recent years, and the cost to comply with new laws andregulations may be greater than these estimated amounts. 

Some of our manufacturing facilities are located onproperties with a long history of industrial use, including the use ofhazardous substances. We have identified soil and groundwater contaminationfrom these historical activities at certain of our facilities, which we arecurrently investigating, monitoring or remediating. Management believes thatcosts incurred to investigate, monitor and remediate known contamination atthese sites will not have a material adverse effect on our business, financialcondition, results of operations or cash flow. We cannot be sure, however, thatwe have identified all existing contamination on our properties or that ouroperations will not cause contamination in the future. As a result, we couldincur material costs to clean up contamination.

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From time to time we maybe identified as a potentially responsible party under the U.S. ComprehensiveEnvironmental Response, Compensation and Liability Act (commonly known as theSuperfund law) or similar state statutes with respect to sites at which we mayhave disposed of wastes. The United States Environmental Protection Agency (oran equivalent state agency) can either (a) allow such parties to conductand pay for a remedial investigation and feasibility study and remedial actionor (b) conduct the remedial investigation and action on its own and thenseek reimbursement from the parties. Each party can be held liable for all ofthe costs, but the parties can then bring contribution actions against otherpotentially responsible or third parties. As a result, we may be required toexpend amounts on such remedial investigations and actions, which amountscannot be determined at the present time but may ultimately prove to bematerial to the consolidated financial statements. 

**FinancialInformation About Industry Segments And Foreign And Domestic Operations**

For information aboutindustry segments and foreign and domestic operations, see “Management’sDiscussion and Analysis of Results of Operations and Financial Condition” inItem 7 and Note 11 of Notes to Consolidated Financial Statements. 

**Seasonality**

The Company’s threeoperating segments are somewhat seasonal in nature and quarter to quarteroperating results are impacted by economic and business trends within therespective industries in which they compete.

**Available Information**

Our website address is **www.blount.com**.You may obtain free electronic copies of our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, allamendments to those reports and other SEC filings by accessing the investorrelations section of the Company’s website under the heading “E.D.G.A.R.Financial Information About Blount”. These reports are available on ourinvestor relations website as soon as reasonably practicable after weelectronically file them with the Securities and Exchange Commission (“SEC”).

Once filed with the SEC,such documents may be read and/or copied at the SEC’s Public Reference Room at450 Fifth Street, N.W. Washington, D.C. 20549. Information on the operation ofthe Public Reference Room may be obtained by calling the SEC at1-800-SEC-0330. In addition, the SEC maintains an internet site that containsreports, proxy and information statements, and other information regardingissuers, including Blount, that electronically file with the SEC at **www.sec.gov**.

**ITEM 2.   PropertIES**

Our corporate headquarters occupy executive offices at4909 SE International Way, Portland, Oregon 97222-4679.

The other principal properties of the Company and itssubsidiaries are as follows:

Cutting chain and accessories manufacturing plants arelocated in Portland, Oregon; Milan, Tennessee; Guelph, Ontario Canada; andCuritiba, Parana, Brazil. Sales and distribution offices are located in Europe,Japan and Russia. Lawnmower blades are manufactured in Kansas City, Missouri,and lawnmowers are manufactured in Coffeyville, Kansas. Log loaders, fellerbunchers, harvesters, forwarders and accessories for automated forestryequipment are manufactured at plants in Prentice, Wisconsin; Owatonna,Minnesota and Menominee, Michigan. Rotation bearings and mechanical powertransmission components are manufactured in Tulsa, Oklahoma. The Company alsomaintains leased space for administrative offices in Zebulon, North Carolinaand for record retention in Montgomery, Alabama.

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All of these facilities are in good condition, arecurrently in normal operation and are generally suitable and adequate for thebusiness activity conducted therein.

Approximatesquare footage of principal properties by segment is as follows:
| ** **                      | ** ** | **Area in Square Feet** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Owned**                              | ** ** | **Leased** | ** ** |
| Outdoor Products                |       |                                   | 997,747    |   |   |   | 256,389 |   |   |
| Industrial and  Power Equipment |       |                                   | 738,740    |   |   |   | 0 |   |   |
| Lawnmower                       |       |                                   | 161,000    |   |   |   | 0 |   |   |
| Corporate                       |       |                                   | 75,214     |   |   |   | 12,400 |   |   |
| Total                           |       |                                   | 1,972,701  |   |   |   | 268,789 |   |   |

 

In addition, the Companyis constructing an administrative and manufacturing facility in Fuzhou, FujianProvince, China. The table above does not include 124,000 owned square feet forthis facility which is expected to become operational in 2005.

**ITEM 3.   LEGAL PROCEEDINGS**

For information regardinglegal proceedings see Note 8 of Notes to Consolidated Financial Statements.

**ITEM4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of ourshareholders during the quarter ended December 31, 2004.

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**PART II**

**ITEM5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

TheCompany’s common stock is traded on the New York Stock Exchange (ticker “BLT”).The following table presents the quarterly high and low closing prices for theCompany’s common stock for the last two years. Cash dividends have not beendeclared for the Company’s common stock in the last five years. The Company hadapproximately 6,150 stockholders as of February 18, 2005.
| ** **                               | ** ** | **Common Stock** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **High**              | ** ** | **Low** | ** ** |
| ***Year  Ended December 31, 2004*** |       |                  |       |   |   |   |   |   |   |
| First quarter                            |       |                  | $          | 10.75 |   |   |   | $ | 7.77 |   |   |
| Second quarter                           |       |                  | 12.76      |   |   |   | 9.54 |   |   |
| Third quarter                            |       |                  | 13.10      |   |   |   | 10.40 |   |   |
| Fourth quarter                           |       |                  | 18.31      |   |   |   | 13.44 |   |   |
| ***Year Ended December 31,  2003*** |       |                  |       |   |   |   |   |   |   |
| First quarter                            |       |                  | $          | 6.43 |   |   |   | $ | 3.87 |   |   |
| Second quarter                           |       |                  | 7.87       |   |   |   | 5.44 |   |   |
| Third quarter                            |       |                  | 5.83       |   |   |   | 4.25 |   |   |
| Fourth quarter                           |       |                  | 7.87       |   |   |   | 4.75 |   |   |

 

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**ITEM6.   SELECTED CONSOLIDATED FINANCIAL DATA**
| ** **                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(Dollar amounts in millions except per  share  data)** | ** ** | **2004 (3)**                          | ** ** | **2003 (3)** | ** ** | **2002 (3)** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Statements of Income Data:**                                                         | ** ** |                                       |       |   |   |   |   |   |   |   |   |
| Operating Results  (1):                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Sales                                                                                  |       | $                                          | 692.6      |   | $ | 559.1 |   | $ | 479.5 |   | $ | 468.7 |   | $ | 513.9 |   |
| Operating income                                                                       |       | 114.3                                      |       | 83.8 |   | 62.5 |   | 44.7 |   | 71.8 |   |
| Interest expense, net of  interest income                                              |       | 59.0                                       |       | 65.4 |   | 71.1 |   | 94.5 |   | 98.2 |   |
| Income (loss) from  continuing operations before taxes                                 |       | 15.4                                       |       | 14.8 |   | (9.3 | ) | (58.9 | ) | (19.8 | ) |
| Income (loss) from  continuing operations                                              |       | 6.3                                        |       | (30.1 | ) | (4.8 | ) | (37.6 | ) | (11.7 | ) |
| Net income (loss)                                                                      |       | 6.3                                        |       | (30.1 | ) | (5.7 | ) | (43.6 | ) | 10.8 |   |
| Earnings per share:                                                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic:                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                                              |       | 0.17                                       |       | (0.98 | ) | (0.16 | ) | (1.22 | ) | (0.38 | ) |
| Net income (loss)                                                                      |       | 0.17                                       |       | (0.98 | ) | (0.19 | ) | (1.42 | ) | 0.35 |   |
| Diluted:                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                                              |       | 0.16                                       |       | (0.98 | ) | (0.16 | ) | (1.22 | ) | (0.38 | ) |
| Net income (loss)                                                                      |       | 0.16                                       |       | (0.98 | ) | (0.19 | ) | (1.42 | ) | 0.35 |   |
| Shares used in  earnings per share computations (in millions):                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                                                  |       | 36.4                                       |       | 30.8 |   | 30.8 |   | 30.8 |   | 30.8 |   |
| Diluted                                                                                |       | 38.5                                       |       | 30.8 |   | 30.8 |   | 30.8 |   | 30.8 |   |
| **Balance Sheet Data:**                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                             |       | $                                          | 48.6       |   | $ | 35.2 |   | $ | 26.4 |   | $ | 47.6 |   | $ | 4.8 |   |
| Working capital                                                                        |       | 98.0                                       |       | 87.0 |   | 91.0 |   | 82.7 |   | 191.8 |   |
| Property, plant  and equipment, net (2)                                                |       | 97.9                                       |       | 92.0 |   | 90.7 |   | 96.2 |   | 177.4 |   |
| Total assets                                                                           |       | 424.7                                      |       | 404.0 |   | 428.0 |   | 444.8 |   | 703.9 |   |
| Long-term debt                                                                         |       | 491.0                                      |       | 603.9 |   | 624.1 |   | 632.5 |   | 824.5 |   |
| Total debt                                                                             |       | 494.2                                      |       | 610.5 |   | 627.5 |   | 641.0 |   | 833.0 |   |
| Stockholders’ deficit                                                             |       | (256.2                                     | )          | (393.7 | ) | (368.9 | ) | (349.9 | ) | (312.2 | ) |
|                                                                                   |       |                                       |       |   |   |   |   |   |   |   |   |

 

(1)          Gives effect to the saleof the Company’s Sporting Equipment Group on December 7, 2001 andtreatment as discontinued operations for 2002, 2001 and 2000.

(2)          Includes property, plantand equipment of acquired companies at date of purchase of $11.3 million as of December 31,2000. Also includes property, plant and equipment purchases by the SportingEquipment Group which was sold on December 7, 2001 for all years prior to2001.

(3)          In 2002, the Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland other Intangible Assets”. As a result of the adoption of SFAS No. 142,results for the years 2002, 2003 and 2004 do not include amortization ofgoodwill included in prior years’ financial results. Goodwill amortization in2001 and 2000 was $3.1 million and $2.5 million, respectively.

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**ITEM7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

The following discussionand analysis should be read in conjunction with our consolidated financialstatements included elsewhere in this report, as well as the information inItem 6 “Selected Consolidated Financial Data”.

**Overview**

We are an international industrial company with threebusiness segments: Outdoor Products, Industrial and Power Equipment (“IPEG”)and Lawnmower. Operating independently from one another, these segments focuson the manufacture and marketing of branded products to industrial companiesand consumers. Our products are sold in over 100 countries. We believe we are aglobal leader in the sale of cutting chain and chainsaw accessories and a leadingprovider of timber harvesting equipment and zero-turn riding lawnmowers to theNorth American markets.

Our largest segment, Outdoor Products, accounted for61% of our revenue in 2004. This segment manufactures and markets chainsawchain, guide bars, sprockets and accessories for chainsaw use, concrete cuttingequipment, and lawnmower blades and accessories for outdoor care. The segment’sproducts are sold to OEMs for use on new chainsaws and landscaping equipment,and to the retail replacement market through distributors, dealers and massmerchants. During 2004 approximately 26% of the segment’s sales were to OEMs,with the remaining 74% sold into the replacement market. Approximately 61% ofthe segment’s sales were outside of the United States in 2004. The OutdoorProducts segment’s performance can be impacted by trends in the forestryindustry, weather patterns, including natural disasters, foreign currencyfluctuations and general economic conditions. The segment faces competitiveprice pressure from competitors on a worldwide basis. The efficient manufactureof the segment’s products is critical to ensure that it is competitive with itsselling prices, as is successful marketing of newly developed products such asour concrete cutting saws and replacement chain and bars. This segment hasthree manufacturing plants in the United States, one in Canada and one inBrazil, all of which are focused on continuous cost improvement. In the firstquarter of 2005 we will be completing construction on the first phase of aproduction facility in China. In 2005 we will also complete an expansion of ourBrazilian plant. Timely capital investment into these plants for added capacityand cost reductions, as well as effectively sourcing critical raw materials atfavorable prices, is required to remain competitive.

The IPEG segment manufactures and markets timberharvesting equipment, industrial tractors and loaders, rotational bearings andmechanical power transmission units. Sales in this segment accounted for 32% ofour total sales in 2004. Sales are made through a distribution network tocustomers in the timber harvesting, material handling, construction, landreclamation and utility businesses, as well as to pulp and lumber mills,contractors and scrap yard operators. The segment’s customer base isconcentrated in the Southeastern United States, with international salesamounting to 11% of segment sales in 2004. In March 2003, we entered intosupply and marketing agreements with Caterpillar Inc. (“Caterpillar”) to distributea line of purpose-built forestry equipment to Caterpillar dealers with thebrand name of “Timberking”. Under these agreements, some of the models of boththe Blount and the Timberking product line are manufactured at our facilitiesand the others at Caterpillar’s facilities. We are responsible for themarketing of both lines of products, and these arrangements have increased thesegment’s sales in both domestic and international markets and increased theutilization of the segment’s manufacturing plants. The performance of IPEG isaligned with overall trends in the forestry industry, including theimport/export balance of wood products, the utilization of lumber and papermill capacity in the United States and the level of logging production. The cyclicalnature of the forestry industry can significantly impact the operating incomeand cash flow of IPEG from year to year. To react to such trends, the segmentmust consistently manage its four United States manufacturing plants on a leanbasis, tightly control the discounting of its products and minimize workingcapital.

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The Lawnmower segment represented 7% of our sales in2004. This segment manufactures and markets zero-turn riding lawnmowers andrelated accessories under the Dixon brand name. Dixon was the pioneer inzero-turning technology. This technology allows for more efficient grasscutting compared to conventional “tractor style” riding lawnmowers. The segment’sproducts are sold through full-service dealers and distributors. Internationalsales were 7% of total segment sales in 2004. The performance of the Lawnmowersegment is impacted by domestic economic conditions, seasonal weather patternsand changes in competitive offerings. Operating income and cash flow in thissegment are dependent on providing quality products at competitive prices.Critical to the success of the segment is the offering of enhancements toexisting models on an annual basis and the periodic introduction of newproducts in response to market demand. The Lawnmower segment operates a singleUnited States facility for the manufacture and distribution of its products.

We maintain a corporate staff at our headquarterslocated in Portland, Oregon. In addition to providing management oversight forthe three business segments, the corporate staff manages our capital structure,administers various health and welfare plans and supervises compliance andlegal matters.

Our capital structure hasundergone noteworthy changes in 2004. We began the year with a significantamount of debt outstanding and a concentration of common stock ownership byaffiliates of Lehman Brothers Holdings Inc., including a wholly-ownedsubsidiary of Lehman Brothers Merchant Banking Partners II, L.P. (“LehmanMerchant Banking”) that owned approximately 85% of our stock outstanding. In August of2004 we executed several refinancing transactions, and in December LehmanMerchant Banking reduced its holdings to approximately 33% through a secondarypublic offering of our stock. As a result of these transactions, at the end of2004, our capital structure has a reduced, though still significant, amount ofdebt outstanding, and an ownership structure that no longer has a 50% orgreater shareholder. Even with these changes, however, our capital structurerequires the conservation of cash in order to reduce debt and increaseshareholder value. In order to conserve cash, we place a high priority onminimizing working capital, appropriately allocating capital spending to higherreturn projects and leveraging existing assets for additional product output.

**Operating Results**

**Yearended December 31, 2004 compared to year ended December 31, 2003**

Sales for 2004 were $692.6 million compared to $559.1million in 2003. Operating income increased to $114.3 million from $83.8million in 2003. Net income in 2004 was $6.3 million ($0.16 per diluted share)compared to a net loss of $30.1 million ($0.98 per diluted share) in 2003.

Our sales in 2004increased by $133.5 million, or 24%, from 2003. In addition to an improvedeconomic climate, our sales increased during 2004 for the following reasons:

·       An increase in sales volume within theOutdoor Products segment, which yielded $55.9 million, or 16%, in additionalsales in 2004. This increase is attributable to several factors, including:

·       The relative weakness of the U.S. dollarprovided a more competitive selling price for our products. The segment’sinternational sales increased by 20%, or $43.0 million, in 2004.

·       The effects of natural disasters had anunusually large impact on demand for our products in the United Statesreplacement market, and also contributed to the international sales growth.

·       The sale of new chainsaws by OEMsincreased by a faster rate than normal. Contributing factors include lowerprice points for consumers through growing mass merchant distribution, higheroil costs resulting in increased use of wood as heating fuel, and the increasein natural disasters within the United States and elsewhere in the world.

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·       The impact of a weaker U.S. dollarresulted in increased sales of $7.4 million due to the effects of foreigncurrency translation.

·       Expansion of the Timberking line oftimber harvesting equipment in conjunction with the 2003 marketing and supplyagreements with Caterpillar generated $31.7 million in incremental sales.

·       An increase in the number of Blountbranded timber harvesting equipment units resulted in a $10.3 million increasein sales as the United States forestry market continued to improve from acyclical downturn that began in 1999 and ended in 2002.

·       Higher average selling prices in ourtimber harvesting equipment business added $8.3 million. This was primarily dueto increases in net prices, including a reduction of competitive discounts.

·       The introduction of a new Dixon lawnmowerproduct line featuring all steel bodies helped increase Lawnmower segment salesby $14.0 million, or 39%.

Operatingincome increased by $30.5 million, or 36%, from 2003 to 2004. The improvementis primarily due to a year-over-year gross profit increase of $43.5 million, or23%, partially offset by a $13.2 million, or 12%, increase in selling, generaland administrative expense (“SG&A”). The year-over-year change in grossprofit, due primarily to the increase in sales volume with an estimated effectof $39.1 million, is presented in the following table (in millions):
| 2003 Gross Profit            |   |   | $      | 189.7  |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
| Increase (Decrease)          |   |   |   |   |   |
| Sales Volume                 |   |   | 39.1   |   |   |
| Selling Price and Mix        |   |   | 11.5   |   |   |
| Foreign Exchange Translation |   |   | 3.8    |   |   |
| Product Cost and Mix         |   |   | (10.9  | )      |   |
| 2004 Gross Profit            |   |   | $      | 233.2  |   |   |

 

Gross profit from sales of our timber harvestingequipment increased by $8.3 million due to an increase in selling prices,driven by an increase in market demand and reduced competitive discounting. Thenet foreign exchange benefit was $3.8 million, representing the favorableeffect of the weaker U.S. dollar on sales, partially offset by the impact onmanufacturing costs of a stronger Canadian dollar. Changes in product mix andincreases in product cost inputs added $10.9 million, or 3.0%, to our cost of salesas higher raw materials costs, employee wage increases and benefit costs werepartially offset by productivity gains in our plants. The year-over-year effectof higher steel prices on product costs is estimated at $16.3 million, offsetpartially by net selling price increases, which include the reduction incompetitive discounting, estimated at $8.8 million. We instituted an average 3%wage increase during 2004 and going forward, we expect to continue to provideour employees with wage increases and benefit levels that are marketcompetitive.

SG&A increased $13.2 million, or 12%, even asworldwide headcount in the SG&A area decreased slightly, by almost 1%, to752 people during the year. SG&A expense as a percent of sales decreased to17.2% in 2004 compared to 18.9% in 2003, demonstrating improved leverage onexisting selling and administrative capacity. The increase in total expenseincludes higher compensation expense, which increased by $3.3 million, half ofwhich is due to the 3% increase in base compensation and the balance which isdue to increased performance-based compensation and stock compensation expense.International operating expenses increased $2.5 million compared to the prioryear due to the weaker U.S. dollar. Increases in professional services, toensure compliance with the Sarbanes-Oxley Act and for legal expenses, were $2.3million. The Outdoor Products segment incurred SG&A increases from lastyear associated with the new enterprise resource planning system, which wasactivated in the fourth quarter of 

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2003, of $4.2 million due to higher depreciation,increased costs for outside service providers and an increase in headcount. Advertisingexpense increased from last year by $1.3 million as the Company increased itsbrand awareness programs. These increases are offset partially by a $0.3million decrease in insurance expense. Restructuring expense of $0.2 millionwas incurred in the first quarter of 2003 for severance associated with therelocation of a production process within the Outdoor Products segment.

Net income for 2004was $6.3 million, or $0.16 per diluted share, compared to a net loss of $30.1million, or $0.98 per diluted share, in 2003. The changes in net income are dueprimarily to the following:

·       An increase in operating income of $30.5million primarily from growth in sales volume.

·       A decrease in interest expense of $8.5million reflecting decreases in average outstanding debt balances and averageborrowing costs associated with changes in our capital structure, partiallyoffset by a $4.2 million non-recurring charge for interest expense incurredduring the 30 day notice period involving the redemption of public debt.

·       A decrease in interest income of $2.1million. Interest income of $2.3 million for 2004 includes $1.4 million relatedto an income tax refund received in the fourth quarter of 2004. Interest incomefor 2003 of $4.4 million includes an accrual of $3.6 million related to theincome tax refund.

·       An increase in other expense of $36.3million, which reflects a $42.8 million charge taken in the third quarter of2004 associated with our August refinancing transactions. This amount wascomposed of $27.1 million for prepayment premiums, a $10.3 million write-off ofdeferred financing costs related to the extinguishment of debt, $5.3 million towrite off unamortized discount relating to the extinguished debt, and $0.1million miscellaneous fees related to extinguishment of debt. In the fourthquarter of 2004 we realized income of $3.9 million related to a legal settlementfor one of our segments. Other expense in 2003 includes $2.8 million for debtextinguishment costs incurred in the second quarter.

·       A decrease of $35.8 million in provisionfor income taxes due primarily to a $39.7 million charge taken in 2003 to establisha valuation allowance on the Company’s deferred tax assets.

Thefollowing table reflects segment sales and operating income for 2004 and 2003:
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **2004 as % of 2003** | ** ** |
| Sales:                                          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                |       |                                                                 | $          | 422.9 |   |   |   | $ | 358.8 |   |   |   | 118 | % |   |
| Industrial and Power Equipment                  |       |                                                                 | 221.0      |   |   |   | 165.0 |   |   |   | 134 | % |   |
| Lawnmower                                       |       |                                                                 | 49.7       |   |   |   | 35.7 |   |   |   | 139 | % |   |
| Inter-Segment Elimination                       |       |                                                                 | (1.0       | ) |   |   | (0.4 | ) |   |   | 250 | % |   |
| Total sales                                     |       |                                                                 | $          | 692.6 |   |   |   | $ | 559.1 |   |   |   | 124 | % |   |
| Operating income  (loss)                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                |       |                                                                 | $          | 104.4 |   |   |   | $ | 86.2 |   |   |   | 121 | % |   |
| Industrial and Power Equipment                  |       |                                                                 | 21.5       |   |   |   | 11.7 |   |   |   | 184 | % |   |
| Lawnmower                                       |       |                                                                 | 3.0        |   |   |   | (1.2 | ) |   |   | N/A |   |   |
| Contribution from segments                      |       |                                                                 | 128.9      |   |   |   | 96.7 |   |   |   | 133 | % |   |
| Corporate expense                               |       |                                                                 | (14.6      | ) |   |   | (12.7 | ) |   |   | 115 | % |   |
| Restructuring  expense                          |       |                                                                 | —     |   |   |   | (0.2 | ) |   |   | N/A |   |   |
| Operating income                                |       |                                                                 | $          | 114.3 |   |   |   | $ | 83.8 |   |   |   | 136 | % |   |

 

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The principalreasons for these results and the status of our financial condition are setforth below.

***Outdoor Products Segment.  ***Salesfor the Outdoor Products segment in 2004 were $422.9 million compared to $358.8million in 2003, an 18% increase. Segment contribution to operating income in2004 was $104.4 million compared to $86.2 million in 2003, a 21% increase.

The $64.1 million increasein sales occurred across all product lines but was particularly strong forchainsaw parts and accessories and the products related to concrete cutting.The continued weakening of the U.S. dollar during 2004 provided a bettercompetitive selling price and demand surged, in part due to an increase insevere weather events. This increase included $55.9 million due to volume alone.Foreign currency translation provided an additional $7.4 million.Geographically, most major markets experienced improved demand, withinternational sales increasing by 20% from 2003 to $257 million. From a channelstandpoint, sales to OEMs and replacement sales grew by 29% and 14%,respectively. The higher growth rate in sales to OEMs relates to industrygrowth in sales of chainsaws by chainsaw producers due to improvement ingeneral economic conditions, the increase in natural disasters, and higher oilcosts which result in more woodcutting for use as fuel.

The segment’s contributionto operating income increased by $18.2 million in 2004 due to a $28.2 million,or 19%, increase in gross profit, partially offset by a $10.0 million, or 16%,increase in SG&A expenses. The improvement in gross profit reflects highersales volume amounting to $24.3 million and the net favorable impact of foreigncurrency of $3.8 million. Included in the sales volume impact are the favorableeffects of increasing the utilization of the segment’s manufacturing facilitiesto 112% (based upon a five day, three shift work week), which resulted in additionaloperating cost leverage. The net translation impact of currency is primarilyfrom a stronger euro, partially offset by the effect of a stronger Canadiandollar on our Canadian manufacturing plant. SG&A costs increased due to theeffects of currency translation on the international operations amounting to$2.5 million, an increase of $1.0 million for advertising targeted toward brandawareness programs, and higher costs of $4.2 million related to a newenterprise resource planning system that was activated in the fourth quarter of2003. This includes higher depreciation, increased costs for outside serviceproviders and an increase in headcount. SG&A expense as a percent of salesdecreased to 16.8% in 2004 compared to 17.0% in 2003.

***Industrial and Power EquipmentSegment.  ***Sales for the Industrial and PowerEquipment segment in 2004 were $221.0 million compared to $165.0 million in2003, a 34% increase. Segment contribution to operating income in 2004 was$21.5 million compared to $11.7 million in 2003, an increase of 84%. Improvementin demand for our products yielded a 33%, or $50.3 million, increase in timberharvesting equipment sales. Increased volume accounted for $42.0 million of theincrease, with the effects of higher average net selling prices and product mixadding an additional $8.3 million. Included in the increased volume was $31.7million of incremental sales related to our joint marketing agreement withCaterpillar. This segment is a cyclical, capital goods business whose resultsare closely linked to the performance of the forestry industry in general,particularly in our most important market (the Southeastern United States).During 2004, industry conditions in North America continued to improve, withincreases in pulp and lumber pricing, continued strong housing construction anda decline in imports of wood products due to the weakening of the U.S. dollar.Furthermore, sales of mobile equipment rotational systems increased by 38%, or$6.2 million, reflecting improved demand in this business as well.

The segment’s contributionto operating income increased by $9.8 million from 2003 largely due to theincrease in sales volume. Gross profit increased $11.6 million, or 34%, asincreased sales volume contributed $10.9 million. Gross profit as a percent ofsales held even at 20.6%. Operating leverage achieved through an increase incapacity utilization, to 67% in 2004 compared to 48% in 2003 was countered bydownward pressure in unit margins due primarily to product mix. Steel costsincreased by an estimated $7.5 million, or 5.7%, compared to 2003. Thisincrease in steel costs has been partially offset by increases in net sellingprices and mix of products sold. SG&A costs increased by $1.8 million, or8%, primarily due to incremental marketing costs targeted toward growth ofinternational sales.

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***Lawnmower Segment.  ***Salesfor the Lawnmower segment were $49.7 million in 2004 compared to $35.7 millionin 2003, a 39% increase. Segment contribution to operating income in 2004 was$3.0 million compared to a loss of $1.2 million in 2003. The increase in salesreflected a 40% increase in unit volume, accounting for $12.2 million of the2004 increase. During the 2004 model year, which began late in 2003, weintroduced a new series under the RAM name. This model is the segment’s firstall-steel body residential mower and was targeted for the growing high-endresidential and low-end commercial zero turn riding mower market segments. In2004, Dixon continued with this focus, introducing additional all-steel modelsfor the 2005 model year. The successful introduction of these changes hasresulted in a 7% increase in average unit selling prices even with the effectof our shift in marketing strategy towards distributors, where average pricesare lower than through the dealer channel.

The $4.2 million increase in Lawnmower segment contributionto operating income in 2004 from 2003 was primarily due to the $3.9 millionincrease in gross profit generated by the increase in unit sales. The segment’splant operated at approximately 66% of capacity in 2004 compared to 49% in2003, helping offset other upward pressures in average production costs. Thecombination of product cost and mix added an estimated $2.0 million to cost ofsales from the prior year. Included are $1.0 million attributed to increases insteel prices, with the balance due to product mix and other operating costincreases.

***Corporate Expense.  ***Corporateexpenses for 2004 increased to $14.6 million from $12.7 million in 2003. The$1.9 million, or 15%, increase includes an increase of $1.0 million foradditional expense related to Sarbanes-Oxley compliance requirements andinternal audit, $1.0 million for legal expenses, $1.0 million for additionalperformance related compensation, partially offset by reductions in otherareas, including insurance.

Net interest expense was $59.0 million in 2004compared to $65.4 in 2003. The lower interest expense was due to a combinationof lower average debt outstanding and lower interest rates on our term loans.The resulting decrease in 2004 includes additional non-recurring net interestexpense of $4.2 million related to the redemption of public debt in the thirdquarter, and a $2.2 million decrease in interest income related to an incometax refund received in 2004.

Other expense of$39.9 in 2004 compares to $3.6 million in 2003. Included in these amounts arethe following significant items:

·       The $42.8 million of other expense in2004 was associated with the August refinancing transactions. This amountwas composed of $27.1 million for prepayment premiums, a $10.3 millionwrite-off of deferred financing costs related to the extinguishment of debt,$5.3 million as a write-off of unamortized discount relating to theextinguished debt and $0.1 million in miscellaneous fees related to thetransactions. For the year 2003, other expense included $2.8 million in debtextinguishment costs incurred in the second quarter.

·       The $3.9 million of other income in 2004related to a legal settlement for one of our segments.

Our effective income taxrate was 59.1% in 2004 compared to 303.4% in 2003. This significant decreasewas primarily due to the recognition of a deferred tax asset valuationallowance of $39.7 million during the third quarter of 2003. We determined atthat time that it was more likely than not that all of our deferred tax assetwould not be utilized.

**Yearended December 31, 2003 compared to year ended December 31, 2002**

Sales for 2003 were $559.1 million compared to $479.5million in 2002. Operating income increased to $83.8 million from $62.5 millionin 2002. Net loss in 2003 was $30.1 million ($0.98 per diluted share) comparedto a net loss of $5.7 million ($0.19 per diluted share) in 2002.

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Our sales in 2003increased by $79.6 million, or 16.6%, from 2002. In addition to an improvedeconomic climate, our sales results increased during 2003 for the followingreasons:

·                    Theintroduction of the Timberking line of timber harvesting equipment in conjunctionwith new marketing and supply agreements with Caterpillar Inc. generated $14.0million in incremental sales.

·                    Anincrease in the number of Blount branded timber harvesting equipment unitsresulted in a $16.4 million increase in sales as the United States forestrymarket continued to improve from a cyclical downturn that began in 1999.

·                    Theimpact of a weaker U.S. dollar resulted in increased sales of $9.3 million dueto the effects of foreign currency translation.

·                    Anincrease in sales volume within the Outdoor Products segment, which yielded$40.6 million in additional sales in 2003. This increase is attributable toseveral factors, including:

·                     Therelative weakness of the U.S. dollar provided a more competitive selling price.The segment’s international sales increased by 19.9%, or $35.5 million, in2003.

·                     Theeffects of hurricane Isabel, forest fires and the northeast power outagecreated increased demand for chainsaw products.

·                     Thesale of chainsaws increased by an estimated 4% during 2003.

·                     Salesin our outdoor care product line increased by $8.6 million, or 17.7%, asdistribution was expanded through the use of the Oregon brand name on suchproducts.

Operatingincome increased by $21.3 million, or 34.1%, from 2002 to 2003. The improvementin operating income reflects a year-over-year gross profit increase of $28.5million, or 17.7%, and reduced restructuring expenses, not withstandingincreased SG&A expenses. The year-over-year impact to gross profit fromhigher sales volume is $23.7 million, representing the predominant reason forthe improvement (in millions):
| 2002 Gross Profit            |   |   | $      | 161.2  |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
| Increase (Decrease)          |   |   |   |   |   |
| Sales Volume                 |   |   | 23.7   |   |   |
| Selling Price and Mix        |   |   | 4.9    |   |   |
| Foreign Exchange Translation |   |   | 5.1    |   |   |
| Product Cost and Mix         |   |   | (5.2   | )      |   |
| 2003 Gross Profit            |   |   | $      | 189.7  |   |   |

 

Gross profit for our timber harvesting equipmentincreased by $3.1 million due to an increase in selling prices driven by anincrease in market demand and reduced competitive discounting. The net foreignexchange benefit was $5.1 million, representing the favorable effect of theweaker U.S. dollar on sales, partially offset by the impact on manufacturingcosts due to the stronger Canadian dollar. Product cost and mix increased by$5.2 million, or 1.6%, as higher raw materials costs, employee wage increasesand benefit costs were partially offset by productivity gains in our plants. Weinstituted an average 3% wage increase during 2003 and experienced higherbenefit costs due to rising medical cost trends and increased pension expense,which was caused by reduced investment returns within the pension fund duringrecent years.

A $14.2 million, or 15.5%, increase in SG&A coststempered some of the gross profit increase. The majority of this increase canbe attributed to higher staffing levels to meet the needs of the growth insales. Worldwide headcount in the SG&A area increased by 6% to 757 peopleduring the year. Higher benefit 

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and wage costs were also incurred as scheduled salaryincreases of 3% were implemented, medical cost trend rates were unfavorable andincentive compensation costs increased by 49%, or $1.8 million, as ourfinancial performance generated above target awards for management. The amountof incentive compensation varies from year to year depending on our performanceagainst financial targets. The weaker U.S. dollar had a negative effect ofapproximately $3.8 million on SG&A costs in 2003 as compared to 2002.

Restructuring expenses decreased from $7.2 million in2002 to $0.2 million in 2003 as we completed our 2001 and 2002 restructuringprograms.

Our net loss increased by $24.4 million in 2003 as thehigher income from continuing operations before taxes was more than offset by a$49.4 million increase in income tax expense. Much of the higher income taxexpense involved the recognition of a deferred income tax asset valuationallowance of $39.7 million.

Thefollowing table reflects segment sales and operating income for 2003 and 2002:
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** | **2003 as % of 2002** | ** ** |
| **Sales:**                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                |       |                                                                 | $          | 358.8 |   |   |   | $ | 307.4 |   |   |   | 117 | % |   |
| Industrial and Power Equipment                  |       |                                                                 | 165.0      |   |   |   | 131.7 |   |   |   | 125 | % |   |
| Lawnmower                                       |       |                                                                 | 35.7       |   |   |   | 41.4 |   |   |   | 86 | % |   |
| Inter-Segment Elimination                       |       |                                                                 | (0.4       | ) |   |   | (1.0 | ) |   |   | 40 | % |   |
| Total Sales                                     |       |                                                                 | $          | 559.1 |   |   |   | $ | 479.5 |   |   |   | 117 | % |   |
| **Operating  income (loss):**                   |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                |       |                                                                 | $          | 86.2 |   |   |   | $ | 67.7 |   |   |   | 127 | % |   |
| Industrial and Power Equipment                  |       |                                                                 | 11.7       |   |   |   | 5.2 |   |   |   | 225 | % |   |
| Lawnmower                                       |       |                                                                 | (1.2       | ) |   |   | 2.7 |   |   |   | N/A |   |   |
| Inter-Segment Elimination                       |       |                                                                 |       |   |   |   | 0.3 |   |   |   | N/A |   |   |
| Contribution from segments                      |       |                                                                 | 96.7       |   |   |   | 75.9 |   |   |   | 127 | % |   |
| Corporate office  expense                       |       |                                                                 | (12.7      | ) |   |   | (6.2 | ) |   |   | 205 | % |   |
| Restructuring  expense                          |       |                                                                 | (0.2       | ) |   |   | (7.2 | ) |   |   | 3 | % |   |
| Operating Income                                |       |                                                                 | $          | 83.8 |   |   |   | $ | 62.5 |   |   |   | 134 | % |   |

 

The principal reasons for these results by segment areset forth below.

***Outdoor Products Segment.  ***Salesfor the Outdoor Products segment for 2003 were $358.8 million compared to$307.4 million in 2002, a 17% increase. Segment contribution to operatingincome in 2003 was $86.2 million compared to $67.7 million in 2002, a 27%increase. The increase in sales was driven by stronger demand for chainsawproducts and outdoor care equipment. Sales for our products increased in 2003as the effects of a weaker U.S. dollar provided a better competitive sellingprice and demand surged, in part due to a hurricane, forest fires in the UnitedStates and increased tree limb cutting that resulted from the northeast poweroutage in August. Additionally, the sales of our outdoor care products wereexpanded through increased use of the Oregon brand name to gain newdistribution. Prior to 2002, many of these products were not marketed under theOregon brand name.

The Outdoor Products segment’s sales increased by$51.4 million in 2003. Volume accounted for $40.6 million of this increase,with foreign currency translation amounting to $9.3 million. Geographically,most major markets experienced improved demand, with international salesincreasing by 19.9% from 2002 to $214.3 million. From a channel standpoint,sales to OEMs and replacement sales grew by 21% and 16%, respectively. Thehigher growth rate in sales to OEMs reflects weaker results in 2002, which werenegatively impacted by higher customer inventory levels.

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Segment contribution to operating income increased by$18.5 million in 2003 due to a $24.3 million, or 20%, increase in gross profit,partially offset by a $5.8 million, or 10%, increase in SG&A expenses. Theimprovement in gross profit reflects higher sales volume of $18.3 million andthe net favorable impact of foreign currency of $5.1 million. Included in thesales volume impact are the favorable effects of increasing the utilization ofthe segment’s manufacturing facilities to 96%, which resulted in additionaloperating cost leverage. The net translation impact of currency is primarilyfrom a stronger euro, partially offset by the effect of a stronger Canadiandollar on our Canadian manufacturing plant. SG&A costs increased due to theeffects of currency translation on the international operations, amounting to$3.8 million, and higher incentive compensation costs of $0.9 million due toachievement of above target performance. These increases were partially offsetby a $2.8 million cost reduction involving the transfer of individuals to thecorporate office at the start of 2003.

***Industrial and Power EquipmentSegment.  ***Sales for the Industrial and PowerEquipment segment for 2003 were $165.0 million compared to $131.7 million in2002, a 25% increase. Segment contribution to operating income in 2003 was$11.7 million compared to $5.2 million in 2002, a 125% increase. This segmentis a cyclical, capital goods business whose results are closely linked to theperformance of the forestry industry in general, particularly in our mostimportant market, the Southeastern United States. During 2003, the industryconditions in North America trended upward as pulp and lumber pricing improved,housing construction remained strong and imports of wood products declined dueto the weakening of the U.S. dollar. The resulting improvement in demand forour products yielded a 31%, or $35.7 million, increase in timber harvestingequipment sales. Increased volume accounted for $32.6 million of the increase,with higher average selling prices adding an additional $3.1 million. Includedin the increased volume was $14.0 million in sales related to the jointmarketing agreement with Caterpillar initiated during 2003. Offsetting some ofthe gain in timber harvesting sales was a 9.9%, or $1.8 million, decline in thesales of power transmission components from 2002 as improvements in the utilityand construction markets that are served by the segment lagged behind therecovery generally experienced in the forestry industry. The majority, or 89%,of this decline was volume related, but average selling prices also declinedslightly due to competitive pricing.

Segment contribution to operating income in 2003increased by $6.5 million compared to 2002. The increase in profitability wasthe result of higher sales levels and increases in selling prices. Gross profitincreased $8.4 million, or 33%, as increased sales contributed $9.8 million.The higher average selling price accounted for $2.9 million of this increase.Included in the volume impact is the favorable result of increasing plantutilization to 48% in 2003 from 44% in 2002. Cost of sales increased 4%, or$4.3 million, due to higher costs of raw materials, product liability and ahigher inventory valuation allowance. SG&A costs increased by $1.8 million,or 9%, due to incremental marketing costs from the Caterpillar agreement andhigher benefit costs.

***Lawnmower Segment.  ***Salesin the Lawnmower segment declined $5.7 million in 2003 to $35.7 million from$41.4 million in 2002. The segment had a contribution loss of $1.2 million in2003 compared to a segment contribution of $2.7 million in 2002. The decline insales was primarily due to a 16.8% reduction in unit volume, accounting for$6.2 million of the decrease, as increased competition reduced our 2003 marketshare in the zero-turn riding mower market. In addition to the increase incompetition, we experienced a weaker than normal spring selling season due tounfavorable weather conditions.

The $3.9 million reduction in Lawnmower segmentcontribution in 2003 from 2002 was primarily due to the $4.1 million negativeimpact from unit volume decline. The segment’s plant operated at approximately49% of capacity in 2003, resulting in higher average production costs.Additionally, manufacturing costs were negatively impacted by higher healthcare trends and other benefit costs. During 2003 we incurred an above averagenumber of medical and workers compensation claims that are not expected tocontinue at the same rate in the future.

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***Corporate Expense.  ***Corporateexpenses for 2003 increased to $12.7 million from $6.2 million in 2002. Theincrease in expense was due, in part, to the reassignment of certain functionsfrom the Outdoor Products segment to corporate during 2003. The impact of thisreassignment was approximately $2.8 million. These costs relate to completionof the relocation of our headquarters in late 2002, and reflect wages andbenefits of employees that were transferred from the Outdoor Products segmentto the corporate staff at the start of 2003. Additional increases were incurredin 2003 for pension and post retirement expenses of $0.7 million, accruedincentive compensation of $0.8 million, legal costs of $0.8 million, compliancecosts of $0.2 million, and increased insurance costs of $0.2 million.Restructuring expense in 2003 of $0.2 million was related to severance benefitsin conjunction with the movement of Company assets between manufacturingfacilities. During 2002 we incurred $1.4 million in restructuring expense forthe movement of manufacturing assets and $5.8 million for the relocation of ourheadquarters from Montgomery, Alabama to Portland, Oregon (see Note 18 of theNotes to the Consolidated Financial Statements).

Net interest expense in 2003 was $65.4 million incomparison to $71.1 million in 2002. The lower interest expense was due to acombination of lower average debt outstanding and lower interest rates on ourterm loans, as well as an increase in interest income of $3.6 million relatingto income tax refunds.

Other expense for 2003 was $3.6 million and includedan expense of $2.8 million related to the early retirement of debt inconjunction with the extinguishment of our prior term loan and revolverfacility (see Note 3 of Notes to Consolidated Financial Statements). Otherexpense for 2002 was $0.7 million and included a $1.6 million loss on the saleof our former corporate headquarters in Montgomery, Alabama and a fractionalinterest in an aircraft, $0.5 million for the write-off of unamortized deferredfinancing costs, together with prepayment penalties related to the earlypayment of debt from the net proceeds generated from the sale of assets and a$0.5 million loss on an executive benefit trust, offset by $2.1 million inincome from life insurance proceeds.

Our effectiveincome tax rate in 2003 was 303.4% compared to 48.4% in 2002. This significantincrease was primarily due to the recognition of a deferred tax asset valuationallowance of $39.7 million during the third quarter of the year. We determinedat that time that it was more likely than not that all of our deferred taxasset would not be utilized. We made this determination based on the followingavailable evidence:

·                    Withthe completion of the 2002 federal income tax return in September 2003, weexhausted our ability to carry back operating losses to prior years.

·                    Inconjunction with the filing of the 2002 federal income tax return, we submitteda refund claim in the amount of $13.6 million for taxes paid in 1997.

·                    Accumulatedoperating losses can only be used to offset future domestic operating income.

·                    Wehad not recorded domestic operating income since 2000 and were projecting adomestic operating loss for the 2003 fiscal year.

·                    Ourhigh leverage and associated domestic-based interest expense were projected tolimit our ability to become profitable in the United States in the foreseeablefuture despite recent improvements in market conditions.

·                    Our2003 operating income was due to profitable international operations partiallyoffset by domestic operating losses.

·                    Wehad valid tax planning strategies available (including a potential debt buybackstrategy for our outstanding bonds that had been trading at a substantialdiscount) to utilize the benefit of accumulated net operating losses as of theend of 2002 that dissipated during the first nine months of 2003.

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See Note 2 of Notes to Consolidated FinancialStatements.

We did not record anyincome from discontinued operations for the year ended December 31, 2003.Net income from discontinued operations in 2002 of $0.5 million was primarilydue to proceeds on a settlement of a claim involving our former constructionbusiness.

**FinancialCondition, Liquidity And Capital Resources**

At December 31, 2004, as a result of the 1999merger and recapitalization transactions (see Note 1 of Notes to ConsolidatedFinancial Statements) (the “Merger and Recapitalization”), we had significantamounts of debt, with interest payments on notes and interest and principalpayments under the credit facility representing significant obligations for us.

In the last two years we have initiated certainactions to reduce our debt and related interest expense. In 2003 we enteredinto a new senior credit facility to replace a previous credit facility. Thiscredit facility consisted of a $67.0 million revolving credit facility, a TermA loan of up to $32.0 million, a Term B loan of up to $85.0 million and aCanadian Term loan of up to $6.0 million.

On August 9,2004, we executed a series of refinancing transactions. These transactions,referred to as the “2004 Refinancing Transactions”, included:

·                    Theissuance of 13,800,000 shares of Company common stock, which generated grossproceeds of $138.0 million;

·                    Theissuance of new 8 7/8% Senior Subordinated Notes due in 2012 that generatedgross proceeds of $175.0 million; and,

·                    Theamendment and restatement of our existing senior credit facilities, includingan increase in amounts available, with the total amounts drawn increasing by$246.6 million.

We then used thenet proceeds of these financing transactions as follows:

·                    Theredemption of our 7% Senior Notes with $150.0 million principal outstanding;

·                    Theredemption of our 13% Senior Subordinated Notes with $323.2 million principaloutstanding;

·                    Therepayment of our 12% Convertible Preferred Equivalent Security for $29.6million principal and accrued payment-in-kind interest outstanding; and,

·                    Thepayment of related fees and expenses of $27.1 million.

On December 1, 2004, we again amended our seniorcredit facilities to, among other things, provide repayment of the $50.0million Second Collateral Institutional Loan, established in August 2004,with the proceeds from a new Incremental Term Loan B of a like amount, andotherwise to achieve a lower borrowing rate and to amend certain financialcovenants.

Total debt at December 31, 2004 was $494.2million compared with total debt at December 31, 2003 of $610.5 million. Ourterm loans are subject to certain reporting and financial covenant compliancerequirements and we were in compliance with all debt covenants as of December 31,2004. Non-compliance with these covenants could result in severe limitations toour overall liquidity. The term loan lenders could require actions forimmediate repayment of outstanding amounts, including the potential sale of ourassets. Our debt is not subject to any triggers that would require earlypayment of debt due to any adverse change in our credit rating, although ourcredit ratings can result in increases or decreases to our borrowing rate. Outstandingdebt as of December 31, 2004 consisted of term loans of $319.2 million and8 7/8% Senior Subordinated Notes of $175.0 million, with a weighted averageinterest rate of 6.42%.

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The Company and all of our domestic subsidiaries otherthan Blount, Inc. guarantee Blount, Inc.’s obligations under thesenior credit facilities. The obligations under the senior credit facilitiesare collateralized by a first priority security interest in substantially allof the assets of Blount, Inc. and its domestic subsidiaries, as well as apledge of all of Blount, Inc.’s capital stock. In addition, Blount, Inc.has pledged 65% of the stock of its non-domestic subsidiaries as furthercollateral.

Interest and principal payment obligations have beenreduced as a result of these changes to our debt structure and the Company isnow benefiting from lower interest expense. Interest expense was $9.2 millionin the fourth quarter of 2004 compared to $17.1 million for the same period in2003.  Interest expense has been reducedprimarily due to a reduction in our average borrowing rate, and to a lesserextent the reduction in long term debt. Our annual interest expense may vary inthe future due to the fact that the senior credit facility interest rates arevariable. Cash interest paid to our lenders in 2004 was $61.3 million,excluding $4.0 million cash interest related to the 30 day notice period forthe redemption transactions, compared to $61.4 million in 2003. The $7.9million, or 46%, decrease in interest expense during the fourth quarter of 2004will continue into 2005, and will result in reduced cash interest paymentsduring 2005. Principal payments have also been affected by the new debtstructure, and most significantly, a $150.0 million payment required to redeemour former 7% Senior Notes by June of 2005 has been satisfied.

The Company’s debtcontinues to be significant and interest and principal payments continue torepresent substantial obligations. This degree of leverage may adversely affectour operations and could have important consequences, including the following:

·                    Asubstantial portion of cash flows available from operations continue to berequired for the payment of interest expense and principal, which reduces thefunds that would otherwise be available for operations and investment in futurebusiness opportunities;

·                    Asubstantial decrease in net income and cash flows or an increase in expensesmay make it difficult to meet debt service requirements or force us to modifyoperations;

·                    Theamount of leverage continues to make us more vulnerable to economic downturnsand competitive pressure; and

·                    Theability to obtain additional financing to fund our operational needs may beimpaired or may not be available on favorable terms.

We intend to fund working capital, capitalexpenditures and debt service requirements for the next twelve months throughexpected cash flows generated from operations. Interest on loan and creditfacilities is payable in arrears according to varying interest rates andperiods. The Company expects its remaining resources will be sufficient tocover any additional increases in working capital and capital expenditures. Therecan be no assurance, however, that this will be the case. We may also considerother options available to us in connection with future liquidity needs.

The revolving credit facility, previously withavailability of up to $67.0 million, has been amended and restated andincreased to $100.0 million as part of the 2004 Refinancing Transactions, asdiscussed in Note 3 of Notes to Consolidated Financial Statements. Theamount available to be drawn on the revolving credit facility could berestricted by our leverage ratio and First Lien Credit Facilities leverageratio. Under the amended and restated agreement, availability is determined byadjusting for outstanding letters of credit issued under the facility. At December 31,2004, the Company had no amount drawn down on this facility and had borrowingavailability of $92.2 million. This compares to December 31, 2003 when theCompany had no amount drawn down and $43.8 million available.

Cash balances at December 31, 2004 were $48.6million compared to $35.2 million at December 31, 2003. The increase of$13.4 million in cash balance for 2004 compares to an increase of $8.8 millionin 2003.

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Cash generated by operatingactivities in 2004 was $75.8 million compared to $55.8 million for 2003. The$20.0 million increase in generated cash reflects the following:

·                    Year-over-yearincrease in earnings before taxes of $44.8 million, after adjusting for theexpenses associated with the early extinguishment of debt;

·                    $25.2million of tax refund and related interest income recorded in 2003 was receivedduring 2004;

·                    Effectof increase in business activity on working capital accounts used an additional$22.7 million as follows: additional usage of $4.5 million for accountsreceivable, $10.5 million for inventories, and $13.0 million for accruedexpenses offset buy $5.3 million additional source due to the growth inaccounts payable;

·                    Year-over-yearincrease in contributions to funded pension plans of $8.9 million; and,

·                    Cashgeneration during 2003 included the release of $25.0 million previously held inescrow in connection with the disposition of assets in a prior year.

The net increase in accounts receivable, due primarilyto the increase in sales, also includes a reduction in allowance for doubtfulaccounts of $0.6 million to $2.4 million at December 31, 2004 from $3.0million reported on December 31, 2003. The decrease in the allowancereflects the combination of actual amounts written off and reduction inspecific concerns included in the December 31, 2003 balance, offsetpartially by an increase in trade receivables.

As a result of the decline in asset values of ourCompany-sponsored defined benefit plan during 2001 and 2002, annual cashcontributions to the pension fund increased in 2003 and further increased in2004. The decline in asset value is due to overall weakness in the stock andbond markets prior to 2003. Cash contributions for all funded plans were $14.5 millionfor 2004 and $5.6 million for 2003. We did not make any contributions to ourother post-retirement benefit plans in 2004. The Company will makecontributions to our funded pension plans in 2005, estimated at $7.5 million,and we believe that cash flow from operations and amounts available under ourrevolving credit agreement will be sufficient to cover the planned pensioncontribution levels. Furthermore, we have adjusted our minimum pensionliability in accordance with SFAS No. 87 “Employers’ Accounting forPensions.” The adjustment resulted in a non-cash increase of shareholders’equity of $1.0 million in 2004 compared to a non-cash increase of $2.5 millionin 2003.

Net cash used for investing activities for 2004 was$21.5 million compared to $17.1 million for 2003. Purchases for property, plantand equipment during these periods were $21.7 million and $16.5 million,respectively, for 2004 and 2003. In 2004, the Company spent $3.7 million on amanufacturing plant in China. We expect to utilize approximately $27.5 millionin available cash for capital expenditures in 2005.  The results for 2003 also included $0.6million for payments associated with the 2002 sale of an office building inMontgomery, Alabama.

Cash used infinancing activities in 2004 was $40.9 million compared to $29.9 million in2003. The 2004 results include third quarter refinancing transactions and othertransactions as follows:

·       Net proceeds of $128.6 million from theissuance of common stock. The Company issued 13.8 million shares of commonstock at $10.00 per share, which provided gross proceeds of $138.0 million. TheCompany also paid $9.4 million in fees and expenses associated with the issuanceof these shares;

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·                    Extinguishmentof $526.4 million of debt in the third quarter as follows:  $150.0 million to redeem the 7% Senior Notes,$323.2 million to redeem 13% Senior Subordinated Notes, $29.6 million to repaythe 12% Convertible Preferred Equivalent Security and $23.6 million to pay offthe balance of the Term A loan as part of the amended and restated creditagreement;

·                    Issuanceof $435.5 million new debt as follows: $175.0 million for new 8 7/8% Senior Subordinated Notes due in 2012,$235.0 million increase in the amended Term B loan (including $50.0 million forthe new Second Collateral Institutional Loan (“SCIL”) that was subsequentlyreplaced by an addition to the Term B loan, in the same amount with the Decemberamendment), and a net drawdown of $25.5 million on the revolver at the end ofthe third quarter;

·                    Principalpayments that included scheduled payments of $5.2 million, an excess cash flowpayment of $2.4 million and the payment of $25.5 million to repay the netamount drawn down on the revolver during the third quarter refinancingactivities;

·                    Debtissuance costs of $16.0 million;

·                    Cashfees and expenses related to the debt extinguishment of $31.2 million asfollows: $27.1 million for premiums on redemption of debt instruments, $4.0million net cash interest expense incurred during the 30 day notice period onthe redemption of public debt, and $0.1 million for legal fees related to theredemption of the public debt; and

·                    Stockoptions exercised that provided additional capital of $1.7 million.

This compares tothe results for 2003 that included a second quarter refinancing as follows:

·                    Debtreduction of $138.3 million that included $133.5 million to pay off theremaining balance of previous credit facilities extinguished in the secondquarter as well as scheduled and excess cash flow related payments;

·                    Debtissuance of $118.0 million in the second quarter;

·                    Debtissuance costs of $9.7 million related to the issuance of new debt in thesecond quarter; and

·                    Stockoption exercises that provided additional capital of $0.2 million.

With the amendment of our senior credit facilities in2004, the term of the revolving credit facility is five years, and the term ofthe Canadian term loan facility and Term B loan facility are each six yearsfrom August 9, 2004. Scheduled quarterly payments under the amended andrestated credit facilities are as follows: the Canadian term loan facilityrequires quarterly payments of US $12,212, with a final payment of $4.6 milliondue on the maturity date; and the Term B loan facility (as amended in December 2004)requires quarterly payments of $0.8 million, with a final payment of $296.2million due on the maturity date. The amended and restated senior creditfacilities may be prepaid at any time.

We maintain arrangements with third party financecompanies by which certain customers of our Industrial and Power Equipmentsegment and Dixon may finance the purchase of equipment. As part of thesearrangements, we may be required to repurchase certain equipment from the thirdparty financing companies should a customer default on payment. As of December 31,2004, the maximum repurchase obligation was $3.3 million. Additionally, underour agreement, another third party financing company may require us toreimburse the third party financing company for its net loss. The maximumexposure with respect to this net loss position is $0.7 million. Thesearrangements have not had a material effect on our operating results in thepast since, with respect to the repurchase obligations, any equipmentrepurchased has historically been resold with minimal, if any, loss recognized.We do not expect to incur any material charges related to these agreements infuture periods.

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As of December 31, 2004 our contractualobligations, including payments due by period, are as follows (in millions):
| **(Dollar amounts in millions)** | ** ** | **   Total   ** | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Debt Obligations                                |       |                                          | $          | 494.2    |       |          |       | $             | 3.2        |           |       |   | $ | 6.4 |   |   |   | $ | 6.4 |   |   |   | $ | 478.2 |   |   |
| Estimated  Interest Payments (1)                |       |                                          | 264.9      |     |       |          | 30.7       |          |       |           | 78.3       |   |   |   | 86.7 |   |   |   | 69.2 |   |   |
| Purchase  Commitments (2)                       |       |                                          | 42.7       |     |       |          | 42.7       |          |       |           |       |   |   |   |   |   |   |   |   |   |   |
| Operating Lease  Obligations                    |       |                                          | 4.4        |     |       |          | 1.7        |          |       |           | 1.9        |   |   |   | 0.6 |   |   |   | 0.2 |   |   |
| Other Long Term  Liabilities (3)                |       |                                          | 8.0        |     |       |          | 7.5        |          |       |           | 0.5        |   |   |   |   |   |   |   |   |   |   |
| Total Contractual  Obligations                  |       |                                          | $          | 814.2    |       |          |       | $             | 85.8       |           |       |   | $ | 87.1 |   |   |   | $ | 93.7 |   |   |   | $ | 547.6 |   |   |

 

(1) Expected futureinterest payments based on existing debt. Variable interest rate debt paymentsbased on assumed interest rate increases.

(2) Primarilyrelated to the receipt of various goods and services as of December 31,2004.

(3) Advisory andconsulting fees for certain current and former officers and directors of theCompany and the 2005 expected contribution to the funded pension plan.

We expect cash flow fromoperations and the amounts available under our revolving credit agreement willbe sufficient to cover any additional increases in working capital. While therecan be no assurance, management believes we will comply with all financialperformance covenants during the next twelve months. Should we not comply withthe covenants, additional significant actions will be required. These actionsmay include, among others, an attempt to renegotiate our debt facilities, salesof assets, restructuring and reductions in capital expenditures.

**Off Balance Sheet Arrangements**

In January 2003, theFASB issued Financial Accounting Standards Board Interpretation No. 46, “Consolidationof Variable Interest Entities.” We do not have any variable interest entitiesor off balance sheet arrangements as defined by this pronouncement.

**Market Risk**

We are exposed to market risk from changes in interestrates, foreign currency exchange rates and commodity prices. We manage ourexposure to these market risks through our regular operating and financingactivities, and, when deemed appropriate, through the use of derivatives. Whenutilized, derivatives are used as risk management tools and not for trading orspeculative purposes. See Interest Rate Risk and Commodity Price Risk below fordiscussion of our expectations as regards to future use of interest rate andcommodity price derivatives.

***Interest Rate Risk.  ***Wemanage our ratio of fixed to variable rate debt with the objective of achievinga mix that management believes is appropriate. Historically, we have, onoccasion, entered into interest rate swap agreements to exchange fixed andvariable interest rates based on agreed upon notional amounts and we haveentered into interest rate lock contracts to hedge the interest rate of ananticipated debt issue. At December 31, 2004 and 2003, no derivativefinancial instruments were outstanding to hedge interest rate risk. Ahypothetical 10% increase in interest rates would decrease the fair value ofour fixed rate long-term debt outstanding by $7.6 million. A hypothetical 10%increase in the interest rates on our variable rate long-term debt for aduration of one year would increase interest expense by approximately $1.5million in 2005.

***ForeignCurrency Exchange Risk.  ***Approximately 39% of theOutdoor Products segment’s sales and 57% of its operating costs and expenseswere transacted in foreign currencies in 2004. As a result, fluctuations 

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in exchange ratesimpact the amount of the Outdoor Products segment’s reported sales andoperating income. Historically, our principal exposures have been related tolocal currency operating costs and expenses in Canada and Brazil, and localcurrency sales and expenses in Europe (principally France and Germany). Duringthe past three years, we have not used derivatives to manage any foreigncurrency exchange risk and, at December 31, 2004, no foreign currencyexchange derivatives were outstanding. The table below illustrates theestimated effect of a hypothetical immediate 10% change in major currencies(defined for us as the euro, Canadian dollar and Brazilian real):
| ** **                                      | ** ** | **Effect of 10% Weaker U.S. Dollar** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **   Sales   **                 | ** ** | **  Cost of Sales  ** | ** ** | **Operating  Income** | ** ** |
| Euro                                            |       |                                                          | $          | 4.3 |   |   |   | $ | (0.7 | ) |   |   | $ | 3.1 |   |   |
| Canadian Dollar                                 |       |                                                          | 1.4        |   |   |   | (4.5 | ) |   |   | (2.8 | ) |   |
| Brazilian Real                                  |       |                                                          | 0.2        |   |   |   | (0.6 | ) |   |   | (0.7 | ) |   |

 

***Commodity Price Risk.  ***Wesecure raw materials through purchasing functions at each of our operatingdivisions. These functions are staffed by professionals who determine thesourcing of materials by assessing quality, availability, price and service ofpotential vendors. When possible, multiple vendors are utilized to ensurecompetitive prices and to minimize risk of lack of availability of materials.Some of these raw materials are subject to price volatility over time. We havenot hedged against the price volatility of any raw materials within ouroperating segments by using any derivative instruments during 2004, 2003 or2002.

Our largest sourcedcommodity is steel, purchases of which in the year ended December 31, 2004amounted to approximately $72 million. A hypothetical immediate 10% change inthe price of steel would have an estimated $7.2 million effect on pre-taxincome in 2005. We utilize multiple suppliers to purchase steel. Raw materialprice volatility has not been significant in recent years, with the exceptionof steel pricing, which has risen sharply in the past year. We estimate theimpact of this increase resulted in our cost of purchased steel to be $16.3million higher in 2004 than in 2003. Partially to offset this cost increase,some selling prices to our customers have been increased. We source many of ouroutdoor care products from Asia through brokers and we anticipate expandingthis practice in our other divisions. For example, we believe that we cansource both timber harvesting and lawnmower components at a lower cost frominternational locations. Historically, we have not incurred any issues ofsignificance in sourcing internationally, in part due to the fact that thereare multiple suppliers for the products we purchase.

**CriticalAccounting Policies and Estimates**

Management’s discussion and analysis of our financialcondition and results of operations is based on the Company’s consolidatedfinancial statements that have been prepared in accordance with accountingprinciples generally accepted in the United States of America.

The preparation of these financial statements requiresus to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. We base our estimates on historicalexperience and various other assumptions that are believed to be reasonable andconsistent with industry practice. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates in the preparation of our consolidated financial statements.

We record reductions to selling prices as products areshipped. These reductions are based on competitive and market conditions, inaddition to specific customer contracts in some instances. These reductions areestimated and recorded at the time of shipment either through a reduction toinvoice or the establishment of an accrual for payment at a later date. Theamount accrued may increase or decrease prior to payment due to customerperformance and market conditions.

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We maintain an allowance for doubtful accounts forestimated losses resulting from the inability of our customers to makepayments. Such allowance is based on an ongoing review of customer paymentsagainst terms and a review of customers’ financial statements and conditionsthrough monitoring services. Based on these reviews, additional allowances maybe required and are recorded in the appropriate period.

Specific industry market conditions can significantly increaseor decrease the level of inventory on hand in any of our business units. Weadjust for changes in demand by reducing or increasing production levels. Weestimate the required inventory reserves for excess or obsolete inventory byassessing inventory turns and market selling prices on a product by productbasis. We maintain such reserves until a product is sold or market conditionsrequire an increase in the reserves.

We offer certain warranties with the sale of ourproducts. The warranty obligation is recorded as a charge to cost of goods soldand as a liability on the balance sheet and is estimated based upon historiccustomer claims, supplier performance and new product reliability analysis.Should a change in trend occur in customer claims, an increase or decrease inthe warranty liability may be necessary.

We incur expenses in connection with product liabilityclaims as a result of alleged product malfunctions or defects. We maintaininsurance for a portion of this exposure and record a liability for ournon-insured obligations. We estimate our product liability obligations on acase by case basis, in addition to a review of product performance trends.These estimated obligations may be increased or decreased as more informationon specific cases becomes available or performance trends change.

We determine our post-retirement obligations on anactuarial basis that requires management to make certain assumptions. Theseassumptions include the long-term rate of return on plan assets, the discountrate to be used in calculating the applicable benefit obligation and theanticipated trend in health care costs. These assumptions are reviewed on anannual basis and consideration is given to market conditions, as well as to therequirements of Statement of Financial Accounting Standards No. 87,Employers’ Accounting for Pensions, and No. 106, Employers’Accounting forPost-Retirement Costs other than Pensions. The assumed rate of return on planassets was 8.9% for 2004 and we anticipate the same rate to be utilized in2005. We believe this rate is reasonable, given the asset composition andlong-term historic trends. We lowered our discount rate assumption to 5.8% todetermine our plan liabilities at December 31, 2004 from 6.1% in theprevious year due to the market declines in benchmark interest rates. Weassumed that health care costs in 2004 would increase by 10% per year andfuture increases would decline by 1% per year until 5% is reached. Our annualpost-retirement expenses can be impacted by changes in these assumptions. A 1%change in the return on assets would change annual pension expense by $0.8million. A 1% decrease in the discount rate as of December 31, 2004 wouldresult in $2.1 million in increased pension expenses in 2005 and a 1% increasein the discount rate as of December 31, 2004 would decrease pensionexpense in 2005 by $1.8 million. A 1% change in the health care cost trendassumption for 2005 and beyond would change annual post-retirement medicalcosts by approximately $0.5 million a year.

On December 8, 2003, the President signed theMedicare Prescription Drug, Improvement and Modernization Act of 2003. This Actintroduces a federal subsidy to employers whose prescription drug benefits areactuarially equivalent to the new Medicare Part D. The Company believesits Post-Retirement Medical Plan is actuarially equivalent to Part D andas such is reflecting a reduction in the annual net periodic postretirementbenefit cost of $0.5 million, on account of the expected subsidy from Medicare Part D.The reduction of the net periodic postretirement benefit cost is comprised of a$0.2 million reduction in the accumulated post-retirement benefit obligationattributed to past service, a $0.2 million reduction in actuarial losses, and a$0.1 million reduction in the current period’s service cost.

In accordance with SFAS No. 109,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to 

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be recovered or settled.The effect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Valuationallowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. As of December 31, 2004 we have adeferred tax asset valuation allowance of $57.9 million.

**Recent Accounting Pronouncements**

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Financial Accounting Standards BoardInterpretation No. 46, “Consolidation of Variable Interest Entities.” FIN46 clarifies the application of Accounting Research Bulletin (“ARB”) No. 51,“Consolidated Financial Statements,” to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. We adopted this interpretation in March 2004. We have notidentified any variable interest entities for which we are the primarybeneficiary or have significant involvement.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43,Chapter 4.”**Thisstatement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Paragraph 5 of ARB No. 43,Chapter 4, previously stated that “...under some circumstances, items suchas idle facility expense, excessive spoilage, double freight, and re-handlingcosts may be so abnormal as to require treatment as current period charges...”SFAS No. 151 requires that those items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. The provisions of SFAS 151 shall be applied prospectively and areeffective for inventory costs incurred during fiscal years beginning after June 15,2005, with earlier application permitted for inventory costs incurred duringfiscal years beginning after the date this Statement was issued. The adoptionof SFAS No. 151 is not expected to have a material impact on our financialposition and results of operations.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), ‘‘Share-Based Payment’’,which is a revision of SFAS No. 123 and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period. Pro forma disclosure of the income statement effectsof share-based payments is no longer an alternative. SFAS No. 123(R) iseffective for all stock-based awards granted on or after July 1, 2005. Inaddition, companies must also recognize compensation expense related to anyawards that are not fully vested as of the effective date. Compensation expensefor the unvested awards will be measured based on the fair value of the awardspreviously calculated in developing the pro forma disclosures in accordancewith the provisions of SFAS No. 123. We are currently evaluating SFAS No. 123(R),including the method of adoption, and expect its adoption will result inincreased compensation expense in the future.

In December 2004, theFASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29.” Theguidance in APB Opinion No. 29, Accountingfor Nonmonetary Transactions, is based on the principle that exchangesof nonmonetary assets should be measured based on the fair value of assetsexchanged. The guidance in that opinion, however, included certain exceptionsto that principle. This Statement amends APB No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets that do nothave commercial substance. A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS No. 153 is effective for nonmonetaryexchanges occurring in fiscal periods beginning after June 15, 2005. Theadoption of SFAS No. 153 is not expected to have a material impact on ourfinancial position and results of operations.

29

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**Related Party Transactions**

As of December 31, 2003 Lehman Brothers MerchantBanking Partners II L.P. and its affiliates (“Lehman Brothers”) owned 26.3million shares, or approximately 85%, of our outstanding common stock. Inaddition Lehman Brothers held 1.0 million warrants, plus a 12% ConvertiblePreferred Equivalent Security with a principal amount of $20 million andinterest payable in payments-in-kind (“PIKs”). Messrs. James and Shutzer,each being one of our directors, are investors in the Lehman Brothers MerchantBanking Fund. Mr. Shutzer, who is no longer a director since his resignationon December 9, 2004 for personal reasons, was a consultant to, and Mr. Jamesis a Managing Director of, Lehman Brothers.

Since the August 1999 Merger andRecapitalization, Lehman Brothers has performed various advisory and financialservices for us. Through the end of 2003, Lehman Brothers has charged us feestotaling $9.3 million ($5.0 million in underwriting fees relating to the saleof Alliant Techsystems, Inc. (“ATK”) stock received in the sale of oursporting equipment group segment (“SEG”), $2.6 million in advisory feesrelating to the sale of SEG to ATK, and $0.7 million in commitment fees paidthrough the administrative agent relating to the refinancing of our creditfacility in 2003).

In 2004 additional amounts were paid to LehmanBrothers and certain affiliates. In the early part of 2004 payment of $1.0million was made relating to the refinancing of our credit facility in 2003. InAugust, 2004 we executed a series of refinancing transactions that included thepayment to Lehman Brothers of $2.9 million in underwriting fees for theissuance of our 8 7/8% Senior Subordinated Notes, $3.3 million in underwritingfees for the issuance of 13.8 million shares of our common stock, and $30.1million as repayment of our 12% Convertible Preferred Equivalent Security(composed of $20.0 million principal, the prepayment premium of $0.5 million,or 2.4% of the principal amount, plus $9.6 million accrued and unpaid PIKinterest). These payments were made using a portion of the net proceeds fromthe refinancing transactions. Additionally, $3.2 million in advisory fees wasaccrued for the 2004 refinancing activities.

In December, 2004 LehmanBrothers sold approximately 11.3 million shares through a secondary publicoffering, reducing their common stock ownership to 15.0 million shares, orapproximately 33%, plus the 1.0 million warrants. One of the two new directorsthat the Company elected in January 2005, Mr. Collins, is a principalof Lehman Brothers Merchant Banking Fund.

**Forward Looking Statements**

Forward looking statementsin this report, including without limitation management’s “outlook,” “guidance,”expectations,”  “beliefs,” “plans,” “indications,”“estimates,” “anticipations,” and their variants, as defined by the PrivateSecurities Litigation Reform Act of 1995, are based upon available informationand upon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future. Thesespecific areas involving certain estimates and assumptions are foreign currencyexchange rates, the cost to the Company of commodities in general, and of steelin particular, and the anticipated level of applicable interest rates. To theextent that these, or any other such assumptions are not realized goingforward, or other unforeseen factors arise, actual results for the periodssubsequent to the date of this report may differ materially.

**ITEM7A.**   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

See “Management’s Discussion and Analysis of Resultsof Operations and Financial Condition – Market Risk” included elsewhere in thisreport.

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**ITEM8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**MANAGEMENTRESPONSIBILITY**

All information contained in the consolidatedfinancial statements of Blount International, Inc., has been prepared bymanagement, which is responsible for the accuracy and internal consistency ofthe information. Generally accepted accounting principles in the United Statesof America have been followed. Reasonable judgments and estimates have beenmade where necessary.

Management is responsible for establishing andmaintaining a system of internal accounting controls designed to providereasonable assurance as to the integrity and reliability of financial reporting.The system of internal accounting controls is tested by the independentregistered public accounting firm to the extent deemed necessary in accordancewith generally accepted auditing standards. Management believes the system ofinternal controls has been effective during the Company’s most recent fiscalyear and that no matters have arisen which indicate a material weakness in thesystem. Management follows the policy of responding to the recommendationsconcerning the system of internal controls made by the independent registeredpublic accounting firm and by the internal audit function, that is performed onan outsourcing basis by an independent public accounting firm other than ourexternal auditors. Management implements those recommendations that it believeswould improve the system of internal controls and be cost justified.

Three directors of the Company, not members ofmanagement, serve as the Audit Committee of the Board and are the principalmeans through which the Board discharges its financial reporting responsibility.The Audit Committee meets with management personnel and the Company’sindependent registered public accounting firm each year to consider the resultsof external audits of the Company and to discuss internal accounting control,auditing and financial reporting matters. At these meetings, the AuditCommittee also meets privately with the independent registered publicaccounting firm of the Company to ensure free access by the independentregistered public accounting firm to the committee.

TheCompany’s independent registered public accounting firm, PricewaterhouseCoopersLLP, audited the financial statements prepared by the Company. Their opinion onthese statements appears herein.
| JAMES S. OSTERMAN       | CALVIN E. JENNESS         |
|-------------------------|---------------------------|
| President and           | Senior Vice President and |
| Chief Executive Officer | Chief Financial Officer   |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and ShareholdersofBlount International, Inc.:

In our opinion, the consolidated financial statementslisted in the accompanying index under item 15(A) (1) presentfairly, in all material respects, the financial position of BlountInternational, Inc. and its subsidiaries at December 31, 2004 and2003, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2004 in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index under item 15(A) (2) presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits. We conductedour audits of these statements and schedule in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

PricewaterhouseCoopersLLPPortland,OregonMarch 4,2005

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**CONSOLIDATEDSTATEMENTS OF INCOME (LOSS)**Blount International, Inc. and Subsidiaries
| ** **                                                                                 | ** ** | **Year Ended December 31,**               | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(Dollar amounts in millions, except per share data)** | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Sales                                                                                      |       |                                                     | $          | 692.6 |   |   |   | $ | 559.1 |   |   |   | $ | 479.5 |   |   |
| Cost of sales                                                                              |       |                                                     | 459.4      |   |   |   | 369.4 |   |   |   | 318.3 |   |   |
| Gross profit                                                                               |       |                                                     | 233.2      |   |   |   | 189.7 |   |   |   | 161.2 |   |   |
| Selling, general  and administrative expenses                                              |       |                                                     | 118.9      |   |   |   | 105.7 |   |   |   | 91.5 |   |   |
| Restructuring expenses                                                                     |       |                                                     |       |   |   |   | 0.2 |   |   |   | 7.2 |   |   |
| Operating income                                                                           |       |                                                     | 114.3      |   |   |   | 83.8 |   |   |   | 62.5 |   |   |
| Interest expense                                                                           |       |                                                     | (61.3      | ) |   |   | (69.8 | ) |   |   | (72.2 | ) |   |
| Interest income                                                                            |       |                                                     | 2.3        |   |   |   | 4.4 |   |   |   | 1.1 |   |   |
| Other expense, net                                                                         |       |                                                     | (39.9      | ) |   |   | (3.6 | ) |   |   | (0.7 | ) |   |
| Income (loss) from  continuing operations before income taxes                              |       |                                                     | 15.4       |   |   |   | 14.8 |   |   |   | (9.3 | ) |   |
| Provision  (benefit) for income taxes                                                      |       |                                                     | 9.1        |   |   |   | 44.9 |   |   |   | (4.5 | ) |   |
| Income (loss) from  continuing operations                                                  |       |                                                     | 6.3        |   |   |   | (30.1 | ) |   |   | (4.8 | ) |   |
| Discontinued  operations:                                                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net income from  operations, net of taxes of $0.3                                          |       |                                                     |       |   |   |   |   |   |   |   | 0.5 |   |   |
| Loss on disposal,  net of taxes of $0.9                                                    |       |                                                     |       |   |   |   |   |   |   |   | (1.4 | ) |   |
| Net income (loss)                                                                          |       |                                                     | $          | 6.3 |   |   |   | $ | (30.1 | ) |   |   | $ | (5.7 | ) |   |
| Basic income  (loss) per share:                                                            |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                     |       |                                                     | $          | 0.17 |   |   |   | $ | (0.98 | ) |   |   | $ | (0.16 | ) |   |
| Discontinued  operations                                                                   |       |                                                     |       |   |   |   |   |   |   |   | (0.03 | ) |   |
| Net income (loss)                                                                          |       |                                                     | $          | 0.17 |   |   |   | $ | (0.98 | ) |   |   | $ | (0.19 | ) |   |
| Diluted income (loss)  per share:                                                          |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                     |       |                                                     | $          | 0.16 |   |   |   | $ | (0.98 | ) |   |   | $ | (0.16 | ) |   |
| Discontinued  operations                                                                   |       |                                                     |       |   |   |   |   |   |   |   | (0.03 | ) |   |
| Net (income) loss                                                                          |       |                                                     | $          | 0.16 |   |   |   | $ | (0.98 | ) |   |   | $ | (0.19 | ) |   |

 

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

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**CONSOLIDATEDBALANCE SHEETS**Blount International, Inc. and Subsidiaries
| ** **                                                                                                      | ** ** | **December 31,**                                                                        | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(Dollar amounts in millions, except share and per share data)**  | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| **Assets**                                                                                                      | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current assets:                                                                                                 |       |                                                                                         |       | ** ** |   |   |   | ** ** |   |
| Cash and cash  equivalents                                                                                      |       |                                                                                         | $          | 48.6 | ** ** |   |   | $ | 35.2 | ** ** |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2.4 and $3.0,  respectively                    |       |                                                                                         | 75.0       | ** ** |   |   | 64.4 | ** ** |   |
| Inventories                                                                                                     |       |                                                                                         | 81.1       | ** ** |   |   | 67.7 | ** ** |   |
| Other current  assets                                                                                           |       |                                                                                         | 4.6        | ** ** |   |   | 29.7 | ** ** |   |
| Total current  assets                                                                                           |       |                                                                                         | 209.3      | ** ** |   |   | 197.0 | ** ** |   |
| Property, plant and  equipment, net                                                                             |       |                                                                                         | 97.9       | ** ** |   |   | 92.0 | ** ** |   |
| Goodwill                                                                                                        |       |                                                                                         | 76.9       | ** ** |   |   | 76.9 | ** ** |   |
| Deferred financing costs                                                                                        |       |                                                                                         | 23.9       | ** ** |   |   | 21.5 | ** ** |   |
| Other assets                                                                                                    |       |                                                                                         | 16.7       | ** ** |   |   | 16.6 | ** ** |   |
| Total Assets                                                                                                    |       |                                                                                         | $          | 424.7 | ** ** |   |   | $ | 404.0 | ** ** |   |
| **Liabilities  and Stockholders’ Deficit**                                                                 | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current  liabilities:                                                                                           |       |                                                                                         |       | ** ** |   |   |   | ** ** |   |
| Current  maturities of long-term debt                                                                           |       |                                                                                         | $          | 3.2 | ** ** |   |   | $ | 6.6 | ** ** |   |
| Accounts payable                                                                                                |       |                                                                                         | 39.3       | ** ** |   |   | 29.7 | ** ** |   |
| Accrued expenses                                                                                                |       |                                                                                         | 68.8       | ** ** |   |   | 73.7 | ** ** |   |
| Total current  liabilities                                                                                      |       |                                                                                         | 111.3      | ** ** |   |   | 110.0 | ** ** |   |
| Long-term debt,  exclusive of current maturities                                                                |       |                                                                                         | 491.0      | ** ** |   |   | 603.9 | ** ** |   |
| Deferred income taxes                                                                                           |       |                                                                                         | 4.9        | ** ** |   |   | 2.8 | ** ** |   |
| Employee benefits                                                                                               |       |                                                                                         | 62.2       | ** ** |   |   | 66.5 | ** ** |   |
| Other liabilities                                                                                               |       |                                                                                         | 11.5       | ** ** |   |   | 14.5 | ** ** |   |
| Total liabilities                                                                                               |       |                                                                                         | 680.9      | ** ** |   |   | 797.7 | ** ** |   |
| Commitments and  contingent liabilities                                                                         |       |                                                                                         |       | ** ** |   |   |   | ** ** |   |
| Stockholders’ equity  (deficit):                                                                           |       |                                                                                         |       | ** ** |   |   |   | ** ** |   |
| Common stock: par  value $0.01 per share, 100,000,000 shares authorized, 44,969,886 and  30,827,738 outstanding |       |                                                                                         | 0.5        | ** ** |   |   | 0.3 | ** ** |   |
| Capital in excess  of par value of stock                                                                        |       |                                                                                         | 553.6      | ** ** |   |   | 424.6 | ** ** |   |
| Accumulated  deficit                                                                                            |       |                                                                                         | (810.1     | ) |   |   | (816.4 | ) |   |
| Accumulated other  comprehensive income                                                                         |       |                                                                                         | (0.2       | ) |   |   | (2.2 | ) |   |
| Total  stockholders’ deficit                                                                               |       |                                                                                         | (256.2     | ) |   |   | (393.7 | ) |   |
| Total Liabilities and Stockholders’ Deficit                                                                |       |                                                                                         | $          | 424.7 | ** ** |   |   | $ | 404.0 | ** ** |   |

 

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

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**Blount International, Inc. and Subsidiaries
| **(Dollar amounts in millions)**                                           | ** ** | **Year Ended December 31,**               | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Cash flows from operating activities:**                             | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Net income (loss)                                                                         |       |                                                     | $          | 6.3 |   |   |   | $ | (30.1 | ) |   |   | $ | (5.7 | ) |   |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations                                                        |       |                                                     |       |   |   |   |   |   |   |   | 0.9 |   |   |
| Early  extinguishment of debt                                                             |       |                                                     | 47.0       |   |   |   | 2.8 |   |   |   | 0.5 |   |   |
| Depreciation,  amortization and other non-cash charges                                    |       |                                                     | 22.4       |   |   |   | 21.6 |   |   |   | 22.2 |   |   |
| Deferred income  taxes                                                                    |       |                                                     | 2.1        |   |   |   | 43.1 |   |   |   | (10.8 | ) |   |
| Loss on disposal  of property, plant and equipment                                        |       |                                                     | 0.4        |   |   |   | 0.8 |   |   |   | 1.6 |   |   |
| Changes in assets  and liabilities:                                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| (Increase)  decrease in accounts receivable                                               |       |                                                     | (10.5      | ) |   |   | (6.0 | ) |   |   | (1.6 | ) |   |
| (Increase)  decrease in inventories                                                       |       |                                                     | (13.4      | ) |   |   | (2.9 | ) |   |   | 3.3 |   |   |
| (Increase)  decrease in other assets                                                      |       |                                                     | 25.3       |   |   |   | 4.6 |   |   |   | 3.2 |   |   |
| Increase  (decrease) in accounts payable                                                  |       |                                                     | 9.6        |   |   |   | 4.3 |   |   |   | 5.8 |   |   |
| Increase  (decrease) in accrued expenses                                                  |       |                                                     | (8.7       | ) |   |   | 4.3 |   |   |   | (1.5 | ) |   |
| Increase  (decrease) in other liabilities                                                 |       |                                                     | (4.7       | ) |   |   | 13.3 |   |   |   | 9.7 |   |   |
| Net cash provided  by continuing operations                                               |       |                                                     | 75.8       |   |   |   | 55.8 |   |   |   | 27.6 |   |   |
| Net cash provided  by discontinued operations                                             |       |                                                     |       |   |   |   |   |   |   |   | 1.2 |   |   |
| Net cash provided  by operating activities                                                |       |                                                     | 75.8       |   |   |   | 55.8 |   |   |   | 28.8 |   |   |
| **Cash flows from investing  activities:**                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Payments for (proceeds  from) sales of property, plant and equipment                      |       |                                                     | 0.2        |   |   |   | (0.6 | ) |   |   | 8.0 |   |   |
| Purchases of property,  plant and equipment                                               |       |                                                     | (21.7      | ) |   |   | (16.5 | ) |   |   | (17.1 | ) |   |
| Net cash used in  continuing operations                                                   |       |                                                     | (21.5      | ) |   |   | (17.1 | ) |   |   | (9.1 | ) |   |
| Net cash used in  discontinued operations                                                 |       |                                                     |       |   |   |   |   |   |   |   | (23.8 | ) |   |
| Net cash used in  investing activities                                                    |       |                                                     | (21.5      | ) |   |   | (17.1 | ) |   |   | (32.9 | ) |   |
| **Cash flows from financing  activities:**                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net decrease in  short-term borrowings                                                    |       |                                                     |       |   |   |   |   |   |   |   | (5.1 | ) |   |
| Issuance of long-term  debt                                                               |       |                                                     | 435.5      |   |   |   | 118.0 |   |   |   |   |   |   |
| Debt issuance costs                                                                       |       |                                                     | (16.0      | ) |   |   | (9.7 | ) |   |   |   |   |   |
| Reduction of long-term  debt                                                              |       |                                                     | (559.5     | ) |   |   | (138.3 | ) |   |   | (11.8 | ) |   |
| Debt redemption costs                                                                     |       |                                                     | (31.2      | ) |   |   | (0.1 | ) |   |   | (0.2 | ) |   |
| Gross proceeds from sale  of stock                                                        |       |                                                     | 138.0      |   |   |   |   |   |   |   |   |   |   |
| Issuance costs related  to sale of stock                                                  |       |                                                     | (9.4       | ) |   |   |   |   |   |   |   |   |   |
| Exercise of stock  options                                                                |       |                                                     | 1.7        |   |   |   | 0.2 |   |   |   |   |   |   |
| Net cash used in  financing activities                                                    |       |                                                     | (40.9      | ) |   |   | (29.9 | ) |   |   | (17.1 | ) |   |
| Net increase (decrease)  in cash and cash equivalents                                     |       |                                                     | 13.4       |   |   |   | 8.8 |   |   |   | (21.2 | ) |   |
| Cash and cash  equivalents at beginning of period                                         |       |                                                     | 35.2       |   |   |   | 26.4 |   |   |   | 47.6 |   |   |
| Cash and cash equivalents at end of period                                                |       |                                                     | $          | 48.6 |   |   |   | $ | 35.2 |   |   |   | $ | 26.4 |   |   |
|                                                                                      |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |

 

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

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**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**BlountInternational, Inc. and Subsidiaries
| **(Dollar amounts in millions)** | ** ** | **Shares     (in 000’s)   ** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Retained  Earnings  Deficit** | ** ** | **Accumulated  Other    Comprehensive     Income** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------|------------|------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------|------------|
| Balance December 31,  2001                 |       |                                                                 | 30,796     |              |       |                                     | $          | 0.3                             |       |                                                                        |       | $         | 424.3      |   |   |   | $ | (780.6 | ) |   |   | $ | 6.1 |   |   | $ | (349.9 | ) |
| Net loss                                        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   | (5.7 | ) |   |   |   |   |   | (5.7 | ) |
| Other comprehensive  income (loss):             |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustment        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 1.5 |   |   | 1.5 |   |
| Unrealized losses                               |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | (0.6 | ) |   | (0.6 | ) |
| Minimum pension  liability adjustment           |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | (14.2 | ) |   | (14.2 | ) |
| Comprehensive  loss, net                        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   | (19.0 | ) |
| Balance December 31,  2002                 |       |                                                                 | 30,796     |              |       |                                     | 0.3        |                            |       |                                                                        | 424.3      |      |       |   | (786.3 | ) |   |   | (7.2 | ) |   | (368.9 | ) |
| Net loss                                        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   | (30.1 | ) |   |   |   |   |   | (30.1 | ) |
| Other comprehensive  income (loss):             |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustment        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 2.1 |   |   | 2.1 |   |
| Unrealized losses                               |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 0.4 |   |   | 0.4 |   |
| Minimum pension  liability adjustment           |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 2.5 |   |   | 2.5 |   |
| Comprehensive  loss, net                        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   | (25.1 | ) |
| Exercise of stock options                       |       |                                                                 | 32         |              |       |                                     |       |                            |       |                                                                        | 0.2        |      |       |   |   |   |   |   |   |   |   | 0.2 |   |
| Stock compensation                              |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        | 0.1        |      |       |   |   |   |   |   |   |   |   | 0.1 |   |
| Balance December 31,  2003                 |       |                                                                 | 30,828     |              |       |                                     | 0.3        |                            |       |                                                                        | 424.6      |      |       |   | (816.4 | ) |   |   | (2.2 | ) |   | (393.7 | ) |
| Net income                                      |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   | 6.3 |   |   |   |   |   |   | 6.3 |   |
| Other comprehensive  income (loss):             |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustment        |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 1.3 |   |   | 1.3 |   |
| Unrealized losses                               |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | (0.3 | ) |   | (0.3 | ) |
| Minimum pension  liability adjustment           |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   | 1.0 |   |   | 1.0 |   |
| Comprehensive  income, net                      |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        |       |      |       |   |   |   |   |   |   |   |   | 8.3 |   |
| Proceeds from sale of  stock                    |       |                                                                 | 13,800     |              |       |                                     | 0.2        |                            |       |                                                                        | 127.0      |      |       |   |   |   |   |   |   |   |   | 127.2 |   |
| Exercise of stock options                       |       |                                                                 | 342        |              |       |                                     |       |                            |       |                                                                        | 1.7        |      |       |   |   |   |   |   |   |   |   | 1.7 |   |
| Stock compensation                              |       |                                                                 |       |              |       |                                     |       |                            |       |                                                                        | 0.3        |      |       |   |   |   |   |   |   |   |   | 0.3 |   |
| Balance December 31, 2004                  |       |                                                                 | 44,970     |              |       |                                     | $          | 0.5                             |       |                                                                        |       | $         | 553.6      |   |   |   | $ | (810.1 | ) |   |   | $ | (0.2 | ) |   | $ | (256.2 | ) |

 

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

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE1:   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Business.  ***Headquarteredin Portland, Oregon, Blount International, Inc. and its subsidiaries (the “Company”)is a manufacturer of equipment, accessories and replacement parts to the globalforestry, yard care and general contractor industries. The Company manufacturesand markets branded products in focused end markets, serving professionalloggers, construction workers, homeowners, equipment dealers and distributorsand original equipment manufacturers (“OEMs”). The Company’s products includecutting chain, guide bars, sprockets and accessories for chainsaws, concretecutting equipment, lawnmower blades and accessories for outdoor care, timberharvesting equipment, industrial tractors and loaders, rotation bearings,mechanical power transmission units and zero-turn riding lawnmowers. TheCompany maintains manufacturing facilities in the United States, Canada andBrazil and is establishing a manufacturing facility in The People’s Republic ofChina.

***Consolidation.  ***Theconsolidated financial statements include the accounts of the Company and itssubsidiaries and are prepared in conformity with accounting principlesgenerally accepted in the United States of America. All significantintercompany balances and transactions have been eliminated.

***Merger and Recapitalization.  ***OnAugust 19, 1999, Blount International, Inc., a Delaware corporation,merged with Red Dog Acquisition, Corp., a Delaware corporation and awholly-owned subsidiary of Lehman Brothers Merchant Banking Partners II, L.P. (“LehmanMerchant Banking”). This transaction was accounted for as a recapitalizationunder generally accepted accounting principles. Accordingly, the historicalbasis of the Company’s assets and liabilities was not impacted by the transaction.

As a result of the proration and stock electionprocedures related to the merger, approximately 1.5 million shares of BlountInternational’s pre-merger outstanding Class A and Class B commonstock were retained by existing shareholders and exchanged, on a two-for-onebasis, for 3.0 million shares of post-merger outstanding common stock of asingle class. Lehman Merchant Banking and certain of its affiliates and certainmembers of Company management made a capital contribution of $417.5 million andreceived 27.8 million shares of post-merger outstanding common stock. LehmanMerchant Banking and its affiliates controlled 85.2% of the 30.8 million sharesoutstanding following the merger and maintained a controlling ownershipinterest in the Company until December 2004. Following a public offeringof the Company’s stock by the Company in August 2004, and a secondarypublic offering of the Company’s stock by Lehman Merchant Banking in December 2004,Lehman Merchant Banking and its affiliates controlled 33.4% of the Company’soutstanding common stock as of December 31, 2004.

The 1999 merger was financed by the equitycontribution of $417.5 million, senior term loans of $400 million and seniorsubordinated notes of $325 million issued by Blount, Inc., a wholly-ownedsubsidiary of the Company. On May 15, 2003 a new credit facility wasestablished and the existing term loan facility was extinguished. In August 2004,the Company completed a series of refinancing transactions. On August 9,2004 and December 1, 2004 the senior credit facilities were again amended.For additional information on the Company’s credit agreements see Note 3 to theConsolidated Financial Statements. See also Note 7 to the ConsolidatedFinancial Statements.

***Basis of Presentation.  ***Inthe opinion of management, the consolidated financial statements contain alladjustments (consisting of only normal recurring adjustments) necessary topresent fairly the financial position at December 31, 2004 and 2003 andthe results of operations and cash flows for each of the three years ended December 31,2004. These financial statements must be read in conjunction with the Notes toConsolidated Financial Statements.

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The Company has realigned its business segmentseffective January 1, 2003 and now reports results in three segments:Outdoor Products, Industrial and Power Equipment and Lawnmower.

***Use of Estimates.  ***Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the dates of the financial statements,as well as the reported amounts of revenues and expenses during the reportingperiods. Estimates are used when accounting for the allowance for doubtfulaccounts, inventory obsolescence, goodwill and other long-lived assets, productwarranties, casualty insurance costs, product liabilities and related expenses,other legal proceedings, employee benefit plans, income taxes, discontinuedoperations and contingencies. It is reasonably possible that actual resultscould differ materially from those estimates and significant changes toestimates could occur in the near term.

***Cash and Cash Equivalents.  ***TheCompany considers all highly liquid temporary cash investments that are readilyconvertible to known amounts of cash and present minimal risk of changes invalue because of changes in interest rates to be cash equivalents.

***Inventories.  ***Inventoriesare valued at the lower of cost or market. The Company determines the cost ofmost raw materials, work in process and finished goods inventories by the firstin, first out (“FIFO”) or average cost methods. The Company writes down itsinventories for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions.

***Property, Plant and Equipment.  ***Theseassets are stated at cost and are depreciated principally on the straight-linemethod over the estimated useful lives of the individual assets. The principalranges of estimated useful lives for depreciation purposes are as follows:buildings and improvements – 5 to 45 years; machinery and equipment – 3 to 10years; furniture, fixtures and office equipment – 3 to 10 years; software –3 to 5 years; and transportation equipment – 3 to 15 years. Gains or losses ondisposal are reflected in income. Property, plant and equipment under capitallease is capitalized with the related obligations stated at the principalportion of future lease payments. Depreciation charged to continuing operationswas $15.3 million, $13.4 million and $13.7 million in 2004, 2003 and 2002respectively.

Interest cost incurred during the period ofconstruction of plant and equipment is capitalized. No material amounts ofinterest were capitalized on plant and equipment during the three years ended December 31,2004.

***Goodwill.  ***TheCompany adopted the provisions of SFAS No. 142, effective January 1,2002, and under this new standard the Company no longer amortizes goodwill.Accumulated amortization was $34.7 million as of December 31, 2001 and theeffect of adopting SFAS No. 142 reduced amortization expense by $3.1million annually.

Under the provisions of SFAS No. 142, the Companyperforms an annual review for impairment at the reporting unit level. The testsare performed by determining the fair values of the reporting units using a discountedcash flow model and comparing those fair values to the carrying values of thereporting units, including goodwill. If the fair value of a reporting unit isless than its carrying value, the Company then allocates the fair value of theunit to all the assets and liabilities of that unit, including any unrecognizedintangible assets, as if the reporting unit’s fair value was the price toacquire the reporting unit. The excess of the fair value of the reporting unitover the amounts assigned to its assets and liabilities is the implied fairvalue of the goodwill. If the carrying amount of the reporting unit’s goodwillexceeds the implied fair value of that goodwill, an impairment loss isrecognized in an amount equal to that excess. Events or changes incircumstances may occur that could create underperformance relative toprojected future cash flows which would create further future impairments. Nogoodwill impairments have been recognized in 2004, 2003 or 2002.

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***Deferred Financing Costs.  ***TheCompany capitalizes costs incurred in connection with borrowings orestablishment of credit facilities. These costs are amortized as an adjustmentto interest expense over the life of the borrowing or life of the creditfacility using the interest method. In the case of early debt repayments , theCompany adjusts the value of the corresponding deferred financing costs with acharge to other expense.

***Impaired Assets.  ***TheCompany evaluates the carrying value of long-lived assets to be held and used,including finite lived intangible assets, whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Thecarrying value of a long-lived asset is considered impaired when the totalprojected undiscounted cash flows from such asset are separately identifiableand are less than its carrying value. In that event, a loss is recognized basedon the amount by which the carrying value exceeds fair value of the long-livedasset. Fair value is determined primarily using the projected cash flowsdiscounted at a rate commensurate with the risk involved. Losses on long-livedassets to be disposed of are determined in a similar manner, except that fairvalues are reduced for disposal costs. No impairment charges for long-livedassets have been recognized in 2004, 2003 or 2002.

***Insurance Accruals.  ***Itis the Company’s policy to retain a portion of expected losses related togeneral and product liability, workers’ compensation and vehicle liabilitylosses through retentions or deductibles under its insurance programs. Provisionsfor losses expected under these programs are recorded based on estimates of theundiscounted aggregate liabilities for claims incurred.

***Warranty.  ***TheCompany offers certain warranties with the sale of its products. An estimate ofwarranty costs is recognized at the time the related revenue is recognized andthe warranty obligation is recorded as a liability on the balance sheet. Warrantycost is estimated using historic customer claims, supplier performance and newproduct performance. Should a change in trend occur in customer claims orsupplier and new product performance, an increase or decrease in the warrantyliability may be necessary.

***Product Liability.  ***TheCompany monitors claims that relate to the malfunction or defects of itsproducts that may result in an injury to the equipment operator or others. TheCompany records an accrual for its estimated obligation as claims are incurredand evaluated. The accrual may increase or decrease as additional informationregarding claims is developed.

***Income Taxes.  ***Inaccordance with SFAS No. 109, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date. Valuation allowancesare established when necessary to reduce deferred tax assets to the amountsexpected to be realized. The American Jobs Creation Act of 2004 includes adeduction of up to 9 percent (when fully phased-in) of “qualified productionactivities income,” as defined in the new law and subject to certain limitations.The benefit of this new deduction, if any, will be accounted for as a specialdeduction when realized in accordance with FASB Staff Position No. 109-1.

***Foreign Currency.  ***Forforeign subsidiaries whose operations are principally conducted in U.S.dollars, monetary assets and liabilities are translated into U.S. dollars atthe current exchange rate, while other assets (principally property, plant andequipment and inventories) and related costs and expenses are generallytranslated at historic exchange rates. Sales and other costs and expenses aretranslated at the average exchange rate for the period and the resultingforeign exchange adjustments are recognized in income. Assets and liabilitiesof the remaining foreign operations are translated to U.S. dollars at thecurrent exchange rate and their statements of income are translated at theaverage exchange rate for the period. Gains and losses resulting fromtranslation of the financial statements of these operations are reflected as “othercomprehensive income” in stockholders’ equity (deficit). The amount of incometaxes 

39

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allocated to this translation adjustment is notsignificant. Foreign exchange adjustments to pretax income were not material in2004, 2003 and 2002.

***Derivative Financial Instruments.  ***TheCompany accounts for any derivative financial instruments in accordance withSFAS 133, as amended by SFAS 138 and SFAS 149, “Accounting for DerivativeInstruments and Hedging Activities”. This adoption has not had a materialimpact on the results of operations. As of December 31, 2004, the Companydid not have any material derivative contracts outstanding.

***Guarantees.  ***EffectiveJanuary 1, 2003, the Company’s method of accounting for initialrecognition and measurement of guarantees changed as a result of the adoptionof FASB Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”   Theinterpretation expands on the accounting guidance of FASB Statements No. 5,57 and 107 and incorporates without change the provisions of FASBInterpretation No. 34, which was superseded by FIN 45. Under theprovisions of FIN 45, at the time a guarantee is issued, the Company recognizesan initial liability for the fair value or market value of the obligation itassumes.

***Revenue Recognition.  ***Revenueis recognized when persuasive evidence of an arrangement exists, title haspassed, the price to the customer is fixed or determinable and collectibilityis reasonably assured, which has historically been upon the date of shipment ofproduct. There are an insignificant amount of shipments with FOB destinationterms, for which revenue is not recognized until delivery has occurred.

***Shipping and Handling costs.  ***TheCompany incurs expenses for the delivery of incoming goods and services and theshipment of goods to customers. These expenses are recognized in the period inwhich they occur and are classified as gross revenues if billed and cost ofgoods sold if incurred by the Company in accordance with the Emerging IssuesTask Force’s Issue (EITF) 00-10, “Accounting for Shipping and Handling Fees andCosts”.

***Sales Incentives.  ***TheCompany provides various sales incentives to customers in the form of coupons,rebates, discounts, free product and advertising allowances. The cost of suchexpenses is recorded at the time of sale and revenue recognition and recordedas a reduction to revenue, with the exception that free product is recorded ascost of sales, in accordance with EITF 01-9, “Accounting for ConsiderationGiven by a Vendor to a Customer”.

***Advertising.  ***Advertisingcosts are expensed as incurred except for cooperative advertising, which isaccrued over the period the revenues are recognized, and sales materials, suchas brochures and catalogs, which are accounted for as prepaid supplies andexpensed over the period used. Advertising costs from continuing operationswere $8.2 million, $7.4 million and $6.7 million for 2004, 2003 and 2002respectively.

***Research and Development.  ***Expendituresfor research and development are expensed as incurred. These costs were $2.9million, $2.9 million and $3.0 million for 2004, 2003, and 2002 respectively.

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***Stock-BasedCompensation.  ***As permitted by SFAS No. 123 “Accountingfor Stock-Based Compensation,” The Company continues to apply intrinsic valueaccounting for its stock option plans. Compensation cost for stock options, ifany, is measured as the excess of the quoted market price of the stock at thedate of grant or modification over the amount an employee must pay to acquirethe stock. The Company has adopted the disclosure-only provisions of SFAS No. 123and SFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure-an Amendment of FASB Statement No. 123”. If the Company hadelected to recognize compensation expense based upon the fair value at thegrant dates for awards under these plans, the Company’s net earnings (loss) andnet earnings (loss) per share would have been as follows:
| ** **                                                                                                                                     | ** ** | **Year Ended December 31,**                           | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions, except per share amounts)**                                                  | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| Net income (loss)  as reported                                                                                                                 |       |                                                                 | $          | 6.3 |   |   |   | $ | (30.1 | ) |   |   | $ | (5.7 | ) |   |
| Add: stock-based  employee compensation cost, net of tax, included in the reported results                                                     |       |                                                                 | 0.2        |   |   |   | 0.1 |   |   |   |   |   |   |
| Deduct: total  stock-based employee compensation cost, net of tax, that would have been  included in net income (loss) under fair value method |       |                                                                 | (2.0       | ) |   |   | (1.1 | ) |   |   | (1.2 | ) |   |
| Pro forma net  income (loss)                                                                                                                   |       |                                                                 | $          | 4.5 |   |   |   | $ | (31.1 | ) |   |   | $ | (6.9 | ) |   |
| Basic earnings (loss) per share as reported                                                                                                    |       |                                                                 | $          | 0.17 |   |   |   | $ | (0.98 | ) |   |   | $ | (0.19 | ) |   |
| Pro forma                                                                                                                                      |       |                                                                 | 0.12       |   |   |   | (1.01 | ) |   |   | (0.22 | ) |   |
| Diluted earnings  (loss) per share as reported                                                                                                 |       |                                                                 | 0.16       |   |   |   | (0.98 | ) |   |   | (0.19 | ) |   |
| Pro forma                                                                                                                                      |       |                                                                 | 0.12       |   |   |   | (1.01 | ) |   |   | (0.22 | ) |   |

 

Forpurposes of computing the pro forma amounts, the Black-Scholes option-pricingmodel was used with the following weighted-average assumptions:
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| Estimated lives  of plan options                |       |                                                                 | 5 yea      | rs |   |   | 5 yea | rs |   |   | 5 yea | rs |   |
| Risk-free  interest rate                        |       |                                                                 | 3.5        | % |   |   | 3.3 | % |   |   | 3.4 | % |   |
| Expected  volatility                            |       |                                                                 | 42.5       | % |   |   | 38.0 | % |   |   | 36.0 | % |   |
| Dividend Yield                                  |       |                                                                 | 0.0        | % |   |   | 0.0 | % |   |   | 0.0 | % |   |

 

The weighted averageestimated fair value of options granted during 2004, 2003 and 2002 was $6.30,$2.06 and $1.34, respectively.

***Supplemental CashFlows Information.***
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| Interest paid                                   |       |                                                                 | $          | 66.2 |   |   |   | $ | 63.9 |   |   |   | $ | 64.9 |   |   |
| Income taxes paid  (refunded), net              |       |                                                                 | (12.3      | ) |   |   | 9.0 |   |   |   | 5.2 |   |   |

 

***Reclassifications.  ***Certainamounts in the prior years’ financial statements have been reclassified to conformto the current year presentation. Such reclassifications had no impact on netloss or net stockholders’ equity.

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**NOTE 2:   INCOME TAXES**

Income (loss) fromcontinuing operations before provision (benefit) for income taxes was asfollows:
| ** **                                                     | ** ** | **Year Ended December 31,**                           | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)**                | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| Income (loss)  from continuing operations before income taxes: |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                                       |       |                                                                 | $          | (12.5 | ) |   |   | $ | (9.9 | ) |   |   | $ | (29.2 | ) |   |
| Foreign                                                        |       |                                                                 | 27.9       |   |   |   | 24.7 |   |   |   | 19.9 |   |   |
| Total                                                          |       |                                                                 | $          | 15.4 |   |   |   | $ | 14.8 |   |   |   | $ | (9.3 | ) |   |

 

Theprovision (benefit) for income taxes attributable to income (loss) fromcontinuing operations is as follows:
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| Current                                         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal                                         |       |                                                                 |       |   |   |   | $ | (26.1 | ) |   |   | $ | (13.3 | ) |   |
| State                                           |       |                                                                 | $          | 0.3 |   |   |   | 0.1 |   |   |   | 1.0 |   |   |
| Foreign                                         |       |                                                                 | 10.0       |   |   |   | 14.3 |   |   |   | 6.5 |   |   |
| Deferred                                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal                                         |       |                                                                 |       |   |   |   | 57.4 |   |   |   | 1.3 |   |   |
| State                                           |       |                                                                 |       |   |   |   | (3.0 | ) |   |   | 0.1 |   |   |
| Foreign                                         |       |                                                                 | (1.2       | ) |   |   | 2.2 |   |   |   | (0.1 | ) |   |
| Provision (benefit) for  income taxes           |       |                                                                 | $          | 9.1 |   |   |   | $ | 44.9 |   |   |   | $ | (4.5 | ) |   |

 

In 2004 and 2003 there were no other tax provisionsincluded in the financial statements. In 2002, the Company also recorded anincome tax benefit of $8.7 million for the recognition of a minimum pensionliability adjustment that was recorded as other comprehensive income, and a$0.6 million benefit related to discontinued operations.

Areconciliation of the provision (benefit) for income taxes to the amountcomputed by applying the statutory federal income tax rate to income (loss)from continuing operations before income taxes is as follows:
| ** **                                            | ** ** | **% of income (loss) before tax** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                            | ** ** | **    2004    **   | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Statutory tax rate                                    |       |                                                       | 35.0       | % |   |   | 35.0 | % |   |   | (35.0 | )% |   |
| Impact of earnings of  foreign operations             |       |                                                       | (5.9       | ) |   |   | 9.3 |   |   |   | (8.5 | ) |   |
| Resolution of Canadian  Competent Authority issues    |       |                                                       | (9.2       | ) |   |   | (10.4 | ) |   |   |   |   |   |
| Reduction of previously  accrued foreign taxes        |       |                                                       |       |   |   |   | (16.1 | ) |   |   |   |   |   |
| State income taxes, net  of federal tax benefit       |       |                                                       | (1.4       | ) |   |   | (19.2 | ) |   |   | 9.5 |   |   |
| Permanent differences                                 |       |                                                       | (1.8       | ) |   |   | 2.7 |   |   |   | 1.3 |   |   |
| Change in estimated  contingency                      |       |                                                       | (19.6      | ) |   |   | (17.5 | ) |   |   | (15.7 | ) |   |
| Effective income tax  rate before valuation allowance |       |                                                       | (2.9       | ) |   |   | (16.2 | ) |   |   | (48.4 | ) |   |
| Valuation allowance                                   |       |                                                       | 62.0       |   |   |   | 319.6 |   |   |   |   |   |   |
| Effective income tax rate after valuation allowance   |       |                                                       | 59.1       | % |   |   | 303.4 | % |   |   | (48.4 | )% |   |

 

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The effective income tax rate decreased in 2004 to59.1% from 303.4% in 2003 primarily as a result of the lower valuationallowance recognized in 2004 compared to 2003. The valuation allowance in 2003offset all accumulated deferred tax assets whereas the 2004 valuation allowanceoffset only the 2004 increase in deferred tax assets.

The effective tax rate increased to 303.4% in 2003from a benefit rate of 48.4% in 2002. This change in the effective rate wascaused primarily by the creation of a valuation allowance to reduce deferredtax assets, the beneficial impact of activities associated with foreignoperations and an adjustment to the estimated tax contingency.

Thecomponents of deferred income tax assets (liabilities) applicable to temporaryand permanent differences at December 31, 2004 and 2003 are as follows: 
| ** **                                         | ** ** | **December 31,**                                                | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)**    | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| **Deferred tax assets:**                           | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Employee benefits                                  |       |                                                                 | $          | 28.1 | ** ** |   |   | $ | 30.4 | ** ** |   |
| Other accrued expenses                             |       |                                                                 | 14.8       | ** ** |   |   | 13.9 | ** ** |   |
| Net operating loss and  capital loss carryforwards |       |                                                                 | 24.1       | ** ** |   |   | 12.5 | ** ** |   |
| Other – net                                   |       |                                                                 | 2.5        | ** ** |   |   | 2.5 | ** ** |   |
| Sub-total before  valuation allowance              |       |                                                                 | 69.5       | ** ** |   |   | 59.3 | ** ** |   |
| Less valuation allowance                           |       |                                                                 | (57.9      | ) |   |   | (47.3 | ) |   |
| Net deferred tax assets                            |       |                                                                 | 11.6       | ** ** |   |   | 12.0 | ** ** |   |
| **Deferred  tax liabilities:**                     |       |                                                                 |       | ** ** |   |   |   | ** ** |   |
| Property, Plant and  Equipment basis differences   |       |                                                                 | (14.0      | ) |   |   | (11.1 | ) |   |
| Other accrued expenses                             |       |                                                                 | (0.6       | ) |   |   | (0.9 | ) |   |
| Foreign – net                                 |       |                                                                 | (1.9       | ) |   |   | (2.8 | ) |   |
| Net deferred tax  liabilities                      |       |                                                                 | (16.5      | ) |   |   | (14.8 | ) |   |
| Net deferred tax position                          |       |                                                                 | $          | (4.9 | ) |   |   | $ | (2.8 | ) |   |

 

In 2003, the Company recorded a valuation allowanceagainst its deferred tax assets in the United States. The deferred tax assetsare comprised principally of domestic net operating loss carryforwardsgenerated during 2001 and 2003, state net operating loss carryforwardsgenerated from 1998 forward, a domestic capital loss carryforward from 2001 andother expenses not currently deductible for tax. Subsequent to 2003, additionaldeferred tax assets and valuation allowances were recorded for net operatinglosses and other expenses not currently deductible for tax. The ultimaterealization of these deferred tax assets is dependent upon the generation offuture taxable income before these items expire. Although managementanticipates future sustained profitability, SFAS No. 109 requires thatrecent historical operating losses must weigh heavily in assessing therealizability of deferred tax assets.

As of December 31, 2003, the Company hadapproximately $21.6 million in federal income taxes receivable relating todomestic net operating loss carrybacks and income tax refund claims associatedwith the Competent Authority process between the United States of America andCanada for the years 1994 through 1999. This receivable was included on theConsolidated Balance Sheets in other current assets as of December 31,2003. This refund was received in the fourth quarter of 2004.

As of December 31, 2004, the Company had domesticnet operating loss carryforwards of $52.9 million and state net operating losscarryforwards of $84.7 million that expire at various dates from 2007 through2025. These net operating loss carryforwards include $2.4 million of deductionsdue to stock option exercises for which the tax benefits, if realized, will berecorded to equity and not to results of operations. Additionally, the Companyhas a domestic capital loss carryforward of $0.5 million that expires in 2007and foreign tax 

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credit carryforwards of $1.4 million that expire by2009. Utilization of federal and state carryforwards is limited when there hasbeen an ownership change as defined in the Internal Revenue Code of 1986. Sucha change occurred in December 2004 as a result of the secondary publicoffering of the Company’s common stock by Lehman Merchant Banking. Utilizationof the federal net operating loss will be limited to approximately $27.0million annually, although any unused limitation in a given year can be carriedforward to the next year.

United States income taxes have not been provided onundistributed earnings of international subsidiaries. Management’s intention isto reinvest these earnings and repatriate the earnings only when it is taxefficient to do so. As of December 31, 2004, undistributed earnings ofinternational subsidiaries were $87.9 million. The American Jobs Creation Actof 2004, signed into law October 22, 2004, includes a one-time election todeduct 85 percent of certain foreign earnings that are repatriated, as definedin the act. The Company is evaluating the effects of repatriating a portion ofits undistributed earnings of foreign subsidiaries but cannot yet reasonablyestimate the tax effects of such potential repatriation. The Company expects tocomplete its evaluation during 2005.

The Company has settledits issues with the Internal Revenue Service through the 1998 fiscal year withno material adverse effect. The periods from fiscal 2001 through 2004 are stillopen for review. As of December 31, 2004, the Canada Revenue Agency hasinitiated an examination of tax years 2000, 2001 and 2002.

**NOTE 3:   DEBT AND FINANCING AGREEMENTS**

Long-termdebt consisted of the following:
| ** **                                      | ** ** | **December 31,**                                                | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Term Loans                                      |       |                                                                 | $          | 319.2 |   |   |   | $ | 115.5 |   |   |
| 8 7/8% Senior  subordinated notes               |       |                                                                 | 175.0      |   |   |   |   |   |   |
| 13% Senior subordinated  notes                  |       |                                                                 |       |   |   |   | 323.2 |   |   |
| 7% Senior notes                                 |       |                                                                 |       |   |   |   | 149.7 |   |   |
| 12% Preferred equivalent  security              |       |                                                                 |       |   |   |   | 22.1 |   |   |
| Revolving credit  facility                      |       |                                                                 |       |   |   |   |   |   |   |
| Total Debt                                      |       |                                                                 | 494.2      |   |   |   | 610.5 |   |   |
| Less current maturities                         |       |                                                                 | (3.2       | ) |   |   | (6.6 | ) |   |
| Total long-term debt                            |       |                                                                 | $          | 491.0 |   |   |   | $ | 603.9 |   |   |

 

Minimumprincipal payments required are as follows:
| **(Dollar amounts in millions)** | ** ** | **  Payments  ** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| 2005                                            |       |                                 | $          | 3.2 |   |   |
| 2006                                            |       |                                 | 3.2        |   |   |
| 2007                                            |       |                                 | 3.2        |   |   |
| 2008                                            |       |                                 | 3.2        |   |   |
| 2009 and beyond                                 |       |                                 | 481.4      |   |   |
| Total Debt                                      |       |                                 | $          | 494.2 |   |   |

 

As of December 31, 2004 the Company did not haveany material capital leases.

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The debt position as of December 31, 2004reflects the effects of several significant refinancing transactions that haveoccurred during 2004 and that have affected all of the long term debtoutstanding at December 31, 2003 as described below.

***Debt and Financing Agreements asof December 31, 2003.  ***In June 1998,Blount issued senior notes (“the 7% Senior Notes”) with a stated interest rateof 7% in the principal amount of $150 million maturing on June 15, 2005.

In August 1999, Blount issued senior subordinatednotes with an interest rate of 13% (“the 13% Senior Subordinated Notes”) in theprincipal amount of $325 million. The 13% Senior Subordinated Notes providedfor a premium for the redemption of an aggregate of 35% of the seniorsubordinated notes until August 1, 2002, and for redemption at a premiumof all or part of the 13% Senior Subordinated Notes after August 1, 2004until August 1, 2007, when the 13% Senior Subordinated Notes wereredeemable at par. Blount, Inc. also entered into a senior credit facilitywith an aggregate principal amount of $500.0 million.

On March 2, 2001, an affiliate of Lehman MerchantBanking, the Company’s controlling shareholder at that time, invested $20million in the form of a preferred equivalent security, together with warrantsto acquire 1,000,000 shares of Blount International common stock (orapproximately 3% of Blount International’s outstanding shares at the time) thatare exercisable immediately at a price of $0.01 a share. The security had a 12%annual interest rate that was compounded annually and was paid inpayments-in-kind (“PIK”) for the first five years of the term. The securitycould be converted into convertible preferred stock at the option of theholder. The Company recorded the fair value of the warrants at $7.0 million asa credit to additional paid-in capital and a debt discount to the $20 millionsecurity, and the balance increased through accretion of the discount and theaccrual of interest.

On May 15, 2003 the Company entered into a newcredit facility in the amount of $190.0 million to extinguish the previoussenior credit facility. The Company utilized $149.9 million of the newfacility, including $31.9 million on a revolving credit facility, to repay theprevious credit facility of $133.5, pay $7.7 million towards fees and expensesfor the loan agent and others, and provide $7.7 million cash to temporarilycollateralize outstanding letters of credit. Prior to the end of the secondquarter of 2003, the Company paid off the revolving credit facility balance infull by, among other sources, using the $25.0 million returned to the Companythat was previously held in escrow as part of the sale of the Company’sSporting Equipment segment in 2001.

The 2003 credit facility consisted of a $67.0 millionrevolving credit facility (none outstanding as of December 31, 2003), aterm A loan of up to $32.0 million ($29.9 million outstanding as of December 31,2003), a term B loan of up $85.0 million ($80.0 million outstanding as of December 31,2003) and a Canadian term loan of up to $6.0 million ($5.6 million outstandingas of December 31, 2003). The term of the credit facility was for fiveyears with scheduled quarterly repayments.

**2004 Refinancing Transactions.  **OnAugust 9, 2004, the Company executed a series of refinancing transactions.These three transactions, referred to as the “2004 Refinancing Transactions”,included:

·                    Issuanceof 13,800,000 shares of common stock, which generated gross proceeds of $138.0million;

·                    Theissuance of new 8 7/8% senior subordinated notes due in 2012 (the “8 7/8%Senior Subordinated Notes”), which generated gross proceeds of $175.0 million;and

·                    Theamendment and restatement of the Company’s existing senior credit facilities,including an increase in amounts available, with the total amounts drawnincreasing by $246.6 million.

The amendment and restatement of the senior creditfacilities included, among other things, a reduction in interest rates,revisions to financial compliance ratios, the addition of maximum leverageratios and revised 

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repayment terms. The amended and restated creditfacilities consisted of a revolving credit facility of up to $100.0 million andterm loans that include a $4.9 million Canadian term loan facility, a $265.0million Term B loan facility and a $50.0 million Second CollateralInstitutional Loan (‘‘SCIL’’) facility.

The Company usedthe net proceeds of the 2004 Refinancing Transactions to do the following:

·                    Redeemits 7% Senior Notes with $150.0 million principal outstanding;

·                    Redeemits 13% Senior Subordinated Notes with $323.2 million principal outstanding;

·                    Repayits 12% Convertible Preferred Equivalent Security for $29.6 million principaland accrued interest outstanding; and

·                    Payrelated fees and expenses of $27.1 million.

The Company recorded nonrecurring charges of $47.0million in 2004 resulting from the 2004 Refinancing Transactions, whichincluded other expense of $42.8 million associated with the write-off of debtissuance costs, unamortized discounts and redemption premiums which wereincurred and incremental net interest expense of $4.2 million that was incurredduring the 30 day notice period applicable to the redemption of the Company’sformer notes.

On December 1, 2004, the Company again amendedits senior credit facilities to, among other things, provide repayment of the$50.0 million SCIL established in August 2004 with the proceeds from anincrease in the Term Loan B limit, adjust certain financial covenants andotherwise to achieve a lower borrowing rate.

With the amendment and restatement of the seniorcredit facilities, the terms of the revolving credit facility are five years,and the terms of the Canadian term loan facility and Term B loan facility aresix years, in each case, from the date of the completion of the refinancingtransactions on August 9, 2004. Scheduled quarterly payments under theamended and restated credit facilities are as follows: the Canadian term loanfacility requires quarterly payments of US $12,212, with a final payment of$4.6 million due on the maturity date; the Term B loan facility requires quarterlypayments of $787,500, with a final payment of $296.2 million due on thematurity date.

The amended and restated senior credit facilities maybe prepaid at any time. There can also be additional mandatory repaymentamounts related to the sale of Company assets under certain circumstances, theissuance of stock and upon the Company’s annual generation of excess cash flowas determined by the credit agreement. The credit facility provides for termloan interest rate margins to vary based on the Company’s credit facilityleverage ratio. The credit facility leverage ratio is defined as the ratio oftotal outstanding debt under the credit facility (including outstanding lettersof credit) to adjusted earnings before interest, taxes, depreciation and amortization(“Adjusted EBITDA”). Interest rates also change based upon changes in LIBORand/or prime rates and changes in ratings by rating agencies. The amountavailable on the revolving credit facility is reduced by outstanding letters ofcredit.

The Company and all of the Company’s domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’sobligations under the senior credit facilities. The obligations under thesenior credit facilities are collateralized by a first priority securityinterest in substantially all of the assets of Blount, Inc. and itsdomestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock. In addition, Blount, Inc. has pledged 65% of the stock ofits non-domestic subsidiaries as further collateral.

The amended and restated credit facility containsfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenants inareas such as investments, loans and advances, indebtedness, and the sale ofstock and assets. The Company was in compliance with all debt covenantsthroughout 2004.

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The amount available to be drawn on the revolvingcredit facility is further restricted by our leverage ratio and First LienCredit Facilities leverage ratio. As of December 31,2004 the Company had the ability to borrow $92.2 million under the terms of therevolving credit agreement.

As a result of the 2004Refinancing Transactions, the Company has one registered debt security, the 8 7/8%Senior Subordinated Notes that are due August 1, 2012. These notes arefully and unconditionally, jointly and severally, guaranteed by BlountInternational, Inc. and all of the Company’s domestic subsidiaries (“guarantorsubsidiaries”). All guarantor subsidiaries of these 8 7/8% Senior SubordinatedNotes are 100% owned, directly or indirectly, by the Company. While BlountInternational and all of the Company’s domestic subsidiaries guarantee these 87/8% Senior Subordinated Notes, none of Blount’s existing foreign subsidiaries(“non-guarantor subsidiaries”) guarantee these notes.

**NOTE 4:   INVENTORIES**

Inventoriesconsisted of the following:
| ** **                                      | ** ** | **December 31,**                                                | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Raw materials and  supplies                     |       |                                                                 | $          | 38.5 |   |   |   | $ | 22.2 |   |   |
| Work in progress                                |       |                                                                 | 13.7       |   |   |   | 10.7 |   |   |
| Finished Goods                                  |       |                                                                 | 28.9       |   |   |   | 34.8 |   |   |
| Total inventories                               |       |                                                                 | $          | 81.1 |   |   |   | $ | 67.7 |   |   |

 

**NOTE 5:   PROPERTY, PLANT AND EQUIPMENT**

Property,plant and equipment consisted of the following:
| ** **                                      | ** ** | **December 31,**                                                | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Land                                            |       |                                                                 | $          | 4.9 |   |   |   | $ | 4.8 |   |   |
| Buildings and  improvements                     |       |                                                                 | 65.4       |   |   |   | 64.9 |   |   |
| Machinery and equipment                         |       |                                                                 | 182.6      |   |   |   | 173.5 |   |   |
| Furniture, fixtures and  office equipment       |       |                                                                 | 31.3       |   |   |   | 32.7 |   |   |
| Transportation equipment                        |       |                                                                 | 1.0        |   |   |   | 1.3 |   |   |
| Construction in progress                        |       |                                                                 | 15.2       |   |   |   | 5.9 |   |   |
| Accumulated depreciation                        |       |                                                                 | (202.5     | ) |   |   | (191.1 | ) |   |
| Total property, plant and equipment, net        |       |                                                                 | $          | 97.9 |   |   |   | $ | 92.0 |   |   |

 

**NOTE6:**   CAPITAL STOCK, STOCK OPTIONS ANDEARNINGS PER SHARE DATA

Thenumber of shares used in the denominators of the basic and diluted earnings(loss) per share computations were as follows:
| ** **                                                                                              | ** ** | **Year Ended December 31,**                           | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(In thousands)**                                                                                 | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002    ** | ** ** |
| Shares for basic income  (loss) per share computation – weighted average common shares outstanding |       |                                                                 | 36,413     |   |   |   | 30,809 |   |   |   | 30,796 |   |   |
| Dilutive effect of stock  options and warrants                                                          |       |                                                                 | 2,061      |   |   |   |   |   |   |   |   |   |   |
| Shares for diluted income (loss) per share computation                                                  |       |                                                                 | 38,474     |   |   |   | 30,809 |   |   |   | 30,796 |   |   |

 

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No adjustment was required to reported amounts forinclusion in the numerators of the per share computations. For 2003 and 2002,outstanding stock options, as well as the outstanding warrants held by anaffiliate of Lehman Merchant Banking, have been excluded from the computationof diluted EPS because the effect would be anti-dilutive.

In August 2004, the Company issued 13,800,000 newshares of common stock. The shares were sold at $10.00 per share in a publicstock offering that generated $138.0 million in gross proceeds. The Companyreceived $127.2 million net of related issuance fees and costs, includingunderwriting and other fees of $4.7 million to Lehman Merchant Banking andcertain of its affiliates. In December 2004, Lehman Merchant Banking andcertain of its affiliates sold 11,225,492 shares of the Company’s common stockin a secondary public stock offering. The Company did not receive any proceedsfrom the December 2004 stock sale.

During 1999 and 2000, the Company’s Board of Directorsadopted new stock option plans under which options, either incentive stockoptions or non-qualified stock options, to purchase the Company’s common stockmay be granted to employees, directors and other persons who perform servicesfor the Company. The number of shares which may be issued under these plans maynot exceed an aggregate of 5,875,000 shares. The option price per share forincentive stock options may not be less than 100% of fair value, generallycalculated as the average of the closing sale prices for ten consecutivetrading days ended on the trading day immediately prior to the date of grant.The option price for each grant of a non-qualified stock option is establishedon the date of grant and may be less than the fair market value on the date ofgrant. As of December 31, 2004, options for 1,318,252 shares wereavailable for grant.

Asummary of the Company’s stock option plan activity is presented in thefollowing table:
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                          | ** ** | **Shares  (in ‘000’s)**     | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares  (in ‘000’s)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares  (in ‘000’s)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at beginning  of period |       |                                       | 4,064      |   |   |   | $ | 7.66 |   |   |   | 3,468 |   |   |   | $ | 8.17 |   |   |   | 2,141 |   |   |   | $ | 12.30 |   |   |
| Granted                             |       |                                       | 633        |   |   |   | 14.94 |   |   |   | 665 |   |   |   | 5.01 |   |   |   | 1,578 |   |   |   | 3.60 |   |   |
| Exercised                           |       |                                       | (342       | ) |   |   | 4.94 |   |   |   | (32 | ) |   |   | 3.54 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                           |       |                                       | (172       | ) |   |   | 6.38 |   |   |   | (37 | ) |   |   | 10.19 |   |   |   | (251 | ) |   |   | 14.82 |   |   |
| Outstanding at end of  period       |       |                                       | 4,183      |   |   |   | $ | 9.04 |   |   |   | 4,064 |   |   |   | $ | 7.66 |   |   |   | 3,468 |   |   |   | $ | 8.17 |   |   |
| Options exercisable end of period   |       |                                       | 3,651      |   |   |   | $ | 7.93 |   |   |   | 2,233 |   |   |   | $ | 8.50 |   |   |   | 1,587 |   |   |   | $ | 9.50 |   |   |

 

Additionalinformation regarding options outstanding as of December 31, 2004 is asfollows:
| ** **                             | ** ** | **Options Outstanding**                                | ** ** | **Options Exercisable**           | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Stock  Options  Outstanding  (in ‘000’s)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Stock  Options  Exercisable  (in ‘000’s)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $2.85 - $5.00                          |       |                                                        | 1,734      |                                   |       |   | $ | 3.97 |   |   |   | 7.2 |   |   |   | 1,734 |   |   |   | $ | 3.97 |   |   |
| $5.05 - $8.43                          |       |                                                        | 702        |                                   |       |   | 5.52 |   |   |   | 8.6 |   |   |   | 702 |   |   |   | 5.52 |   |   |
| $13.34 - $16.62                        |       |                                                        | 1,747      |                                   |       |   | 15.49 |   |   |   | 6.3 |   |   |   | 1,215 |   |   |   | 14.99 |   |   |
| Total                                  |       |                                                        | 4,183      |                                   |       |   | $ | 9.04 |   |   |   | 7.0 |   |   |   | 3,651 |   |   |   | $ | 7.93 |   |   |

 

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Options outstanding at December 31, 2004 vestover a three year period. In December 2004, 787,660 stock options becamefully vested ahead of their scheduled vesting dates because the change ofcontrol feature of the stock option agreements was triggered by the reductionin ownership of the Company by Lehman Merchant Banking to less than 50%. Alsoin December 2004, the Company’s Board of Directors approved theacceleration of vesting on 292,270 stock options that were originally scheduledto vest in 2005 and 2006, in order to make these options consistent with theaccelerated vesting of the other options triggered by the change in control andto reduce the net compensation expense recognized.

An affiliate of LehmanMerchant Banking holds warrants to acquire 1,000,000 shares of BlountInternational common stock that are exercisable immediately at $0.01 a sharethrough March 2, 2013.

**NOTE7:   PENSION AND POST-RETIREMENT BENEFIT PLANS**

**FundedDefined Benefit Pension and Other Post-Retirement Benefit Plans**

TheCompany sponsors defined benefit pension plans and other post-retirementmedical and life benefit plans covering substantially all of its employees inthe United States and Canada. The changes in benefit obligations, changes inplan assets and funded status of these funded plans for the years ended December 31,2004 and 2003, were as follows:
| ** **                                      | ** ** | **Pension Benefits**                                                                    | ** ** | **Other Post-retirement  Benefits**                                                     | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| **Change in Benefit Obligation:**               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Benefit Obligation at  beginning of year        |       |                                                                                         | $          | (144.0                                                                                       | )          |   |   | $ | (122.5 | ) |   |   | $ | (3.0 | ) |   |   | $ | (3.1 | ) |   |
| Service cost                                    |       |                                                                                         | (5.4       | )                                                                                            |       |   | (4.6 | ) |   |   |   |   |   |   |   |   |   |
| Interest cost                                   |       |                                                                                         | (8.6       | )                                                                                            |       |   | (8.0 | ) |   |   | (0.2 | ) |   |   | (0.2 | ) |   |
| Plan participants’  contributions          |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   | (0.1 | ) |   |   | (0.1 | ) |   |
| Actuarial gains (losses)                        |       |                                                                                         | (8.6       | )                                                                                            |       |   | (14.7 | ) |   |   | (0.4 | ) |   |   |   |   |   |
| Benefits and plan expenses  paid                |       |                                                                                         | 5.6        |                                                                                         |       |   | 5.8 |   |   |   | 0.4 |   |   |   | 0.4 |   |   |
| Benefit obligation at  end of year              |       |                                                                                         | (161.0     | )                                                                                            |       |   | (144.0 | ) |   |   | (3.3 | ) |   |   | (3.0 | ) |   |
| **Change  in Plan Assets:**                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of plan  assets at beginning of year |       |                                                                                         | $          | 86.4                                                                                         |       |   |   | $ | 69.7 |   |   |   | $ | 0.9 |   |   |   | $ | 1.1 |   |   |
| Actual return on plan  assets                   |       |                                                                                         | 11.7       |                                                                                         |       |   | 16.9 |   |   |   | 0.1 |   |   |   | 0.1 |   |   |
| Company contributions                           |       |                                                                                         | 14.5       |                                                                                         |       |   | 5.6 |   |   |   |   |   |   |   |   |   |   |
| Plan participants’  contributions          |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   | 0.1 |   |   |   | 0.1 |   |   |
| Benefits and plan  expenses paid                |       |                                                                                         | (5.6       | )                                                                                            |       |   | (5.8 | ) |   |   | (0.4 | ) |   |   | (0.4 | ) |   |
| Fair value of plan  assets at end of year       |       |                                                                                         | 107.0      |                                                                                         |       |   | 86.4 |   |   |   | 0.7 |   |   |   | 0.9 |   |   |
| Net funded status                               |       |                                                                                         | (54.0      | )                                                                                            |       |   | (57.6 | ) |   |   | (2.6 | ) |   |   | (2.1 | ) |   |
| Unrecognized actuarial  (gains) losses          |       |                                                                                         | 45.8       |                                                                                         |       |   | 42.9 |   |   |   | 1.9 |   |   |   | 1.7 |   |   |
| Unrecognized prior  service cost                |       |                                                                                         | 3.7        |                                                                                         |       |   | 4.1 |   |   |   |   |   |   |   |   |   |   |
| Net amount recognized                           |       |                                                                                         | $          | (4.5                                                                                         | )          |   |   | $ | (10.6 | ) |   |   | $ | (0.7 | ) |   |   | $ | (0.4 | ) |   |
| **Net  amount recognized:**                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Prepaid benefits                                |       |                                                                                         | $          | 6.0                                                                                          |       |   |   | $ | 4.8 |   |   |   |   |   |   |   |   |   |   |
| Accrued benefits                                |       |                                                                                         | (32.9      | )                                                                                            |       |   | (39.0 | ) |   |   | $ | (0.7 | ) |   |   | $ | (0.4 | ) |   |
| Accumulated other  comprehensive income         |       |                                                                                         | 18.6       |                                                                                         |       |   | 19.5 |   |   |   |   |   |   |   |   |   |   |
| Intangible asset                                |       |                                                                                         | 3.8        |                                                                                         |       |   | 4.1 |   |   |   |   |   |   |   |   |   |   |
| Net amount recognized                           |       |                                                                                         | $          | (4.5                                                                                         | )          |   |   | $ | (10.6 | ) |   |   | $ | (0.7 | ) |   |   | $ | (0.4 | ) |   |

 

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***Domestic Benefit Plans.  ***Includedin the pension benefits columns of the preceding tables are amounts pertainingto the Company’s domestic defined benefit pension plan. As of December 31,2004, the asset value of this domestic plan was $75.7 million. The otherpost-retirement benefits columns of the preceding tables reflects apost-retirement medical plan related to a discontinued business. The expectedlong-term rate of return on these assets was chosen from the range of likelyresults of compound average annual returns over a twenty year time horizonbased on the plan’s current investment policy. The expected return andvolatility for each asset class was based on historical equity, bond and cashreturns during the period 1926 to 2003. While this approach gives appropriateconsideration to recent fund performance and historical returns, the assumptionis primarily a long-term, prospective rate. Based on this analysis, theexpected long-term return assumption for the domestic funded pension plan andthe post retirement medical plan is 9.0%.

The Company maintainstarget allocation percentages among various asset classes based on aninvestment policy established for the domestic pension plan and thepost-retirement medical plan. The target allocation is designed to achieve longterm objectives of return, while mitigating against downside risk andconsidering expected cash flows. The current weighted-average target assetallocation for the domestic pension plan and the post-retirement plan is asfollows: equity securities 60%, debt securities 35%, real estate 0% and other5%.

The Company expects tocontribute approximately $7.5 million to its domestic pension plan in 2005 anddoes not expect to make any contributions to the post-retirement medical planduring 2005.

**UnfundedSupplemental Non-Qualified Plans**

TheCompany sponsors certain supplemental non-qualified pension plans coveringcertain employees in the United States which are reflected in the followingtable under the pension benefits columns. Two rabbi trusts, whose assets arenot included in the table below, have been established to fund part of thesenon-qualified benefits, as well as certain other executive benefits. These tworabbi trusts require the funding of certain executive benefits upon a change incontrol or threatened change in control. At December 31, 2004 and 2003,approximately $3.4 million and $4.6 million, respectively, were held in thesetrusts and these amounts are included in other assets in the ConsolidatedBalance Sheets. The company also sponsors various supplemental retirement andpost-retirement medical programs which are reflected in the following tableunder the other post-retirement benefits columns.
| ** **                                      | ** ** | **Pension Benefits**                                                                    | ** ** | **Other Post-retirement  Benefits**                                                     | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| **Change in Benefit Obligation:**               | ** ** |                                                                                         | ** ** |                                                                                         |       |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Benefit obligation at beginning of year         |       |                                                                                         | $          | (6.7                                                                                         | )          |   |   | $ | (6.5 | ) |   |   | $ | (31.5 | ) |   |   | $ | (26.9 | ) |   |
| Service cost                                    |       |                                                                                         | (0.1       | )                                                                                            |       |   | (0.1 | ) |   |   | (0.4 | ) |   |   | (0.4 | ) |   |
| Interest cost                                   |       |                                                                                         | (0.4       | )                                                                                            |       |   | (0.4 | ) |   |   | (1.7 | ) |   |   | (1.8 | ) |   |
| Plan participants’ contributions           |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   | (1.0 | ) |   |   | (1.3 | ) |   |
| Actuarial gains (losses)                        |       |                                                                                         | 0.2        |                                                                                         |       |   | (0.3 | ) |   |   | (2.1 | ) |   |   | (4.5 | ) |   |
| Benefits and plan expenses paid                 |       |                                                                                         | 0.6        |                                                                                         |       |   | 0.6 |   |   |   | 2.6 |   |   |   | 3.4 |   |   |
| Benefit obligation at end of year               |       |                                                                                         | (6.4       | )                                                                                            |       |   | (6.7 | ) |   |   | (34.1 | ) |   |   | (31.5 | ) |   |
| Unrecognized actuarial (gains) losses           |       |                                                                                         | 1.3        |                                                                                         |       |   | 1.3 |   |   |   | 15.2 |   |   |   | 13.8 |   |   |
| Unrecognized prior service cost                 |       |                                                                                         | (0.2       | )                                                                                            |       |   | (0.1 | ) |   |   |   |   |   |   |   |   |   |
| Net amount recognized                           |       |                                                                                         | $          | (5.3                                                                                         | )          |   |   | $ | (5.5 | ) |   |   | $ | (18.9 | ) |   |   | $ | (17.7 | ) |   |
| **Net amount recognized:**                      |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accrued benefits                                |       |                                                                                         | $          | (6.0                                                                                         | )          |   |   | $ | (6.4 | ) |   |   | $ | (18.9 | ) |   |   | $ | (17.7 | ) |   |
| Accumulated other comprehensive Income          |       |                                                                                         | 0.7        |                                                                                         |       |   | 0.8 |   |   |   |   |   |   |   |   |   |   |
| Intangible asset                                |       |                                                                                         |       |                                                                                         |       |   | 0.1 |   |   |   |   |   |   |   |   |   |   |
| Net amount  recognized                          |       |                                                                                         | $          | (5.3                                                                                         | )          |   |   | $ | (5.5 | ) |   |   | $ | (18.9 | ) |   |   | $ | (17.7 | ) |   |

 

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**Periodic Benefit Costs**

The components of net periodic benefit cost and theweighted average assumptions used in accounting for funded and unfunded pensionand other post-retirement benefits follow:
| ** **                                      | ** ** | **Pension Benefits  Year Ended December 31,** | ** ** | **Other Post-Retirement Benefits  Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **    2004    **          | ** ** | **    2003    **                             | ** ** | **    2002    ** | ** ** | **     2004     ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| **Components of net periodic  benefit cost:**   |       |                                                              |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                    |       |                                                              | $          | 5.5                                                                                  |       |   |   | $ | 4.7 |   |   |   | $ | 4.1 |   |   |   | $ | 0.4 |   |   |   | $ | 0.4 |   |   |   | $ | 0.3 |   |   |
| Interest cost                                   |       |                                                              | 9.0        |                                                                                 |       |   | 8.4 |   |   |   | 8.1 |   |   |   | 1.9 |   |   |   | 2.0 |   |   |   | 1.9 |   |   |
| Expected return on plan  assets                 |       |                                                              | (8.0       | )                                                                                    |       |   | (6.4 | ) |   |   | (7.2 | ) |   |   | (0.1 | ) |   |   | (0.1 | ) |   |   | (0.1 | ) |   |
| Amortization of  actuarial losses               |       |                                                              | 2.4        |                                                                                 |       |   | 2.3 |   |   |   | 0.5 |   |   |   | 0.8 |   |   |   | 0.9 |   |   |   | 0.5 |   |   |
| Amortization of  transition asset               |       |                                                              |       |                                                                                 |       |   |   |   |   |   | (0.1 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of prior  service cost             |       |                                                              | 0.4        |                                                                                 |       |   | 0.4 |   |   |   | 1.3 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Curtailment and  settlement loss                |       |                                                              |       |                                                                                 |       |   |   |   |   |   | 2.4 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total net periodic  benefit cost                |       |                                                              | $          | 9.3                                                                                  |       |   |   | $ | 9.4 |   |   |   | $ | 9.1 |   |   |   | $ | 3.0 |   |   |   | $ | 3.2 |   |   |   | $ | 2.6 |   |   |
| **Weighted  average assumptions:**              |       |                                                              |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                   |       |                                                              | 5.8        | %                                                                                    |       |   | 6.1 | % |   |   | 6.5 | % |   |   | 5.8 | % |   |   | 6.0 | % |   |   | 6.5 | % |   |
| Expected return on plan  assets                 |       |                                                              | 8.9        | %                                                                                    |       |   | 8.9 | % |   |   | 8.9 | % |   |   | 9.0 | % |   |   | 9.0 | % |   |   | 9.0 | % |   |
| Rate of compensation increase                   |       |                                                              | 3.3        | %                                                                                    |       |   | 3.4 | % |   |   | 3.6 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The curtailment and settlement loss for 2002 relatedto the payment of obligations to certain of our current and former executivesduring 2002.

Primarily due to a decline in the market value ofassets held in our defined benefit pension plans, we were required to recordminimum pension liability adjustments. The amounts recorded as an increase toequity and other comprehensive income were $1.0 million in 2004 and $2.5million in 2003.

A 10.0% annual rate of increase in the cost of healthcare benefits was assumed for 2004; the rate was assumed to decrease 1.0% peryear until 5.0% is reached. A 1% change in assumed health care cost trend rateswould have had the following effects for 2004:
| **(Dollar amounts in millions)**     | ** ** | **1% Increase** | ** ** | **1% Decrease** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Effect on service and  interest cost components     |       |                 | $          | 0.3                  |       |   |   | $ | (0.2 | ) |   |
| Effect on other post-retirement benefit obligations |       |                 | 3.7        |                 |       |   | (3.0 | ) |   |

 

On December 8, 2003,the President signed the Medicare Prescription Drug, Improvement andModernization Act of 2003. This Act introduces a federal subsidy to employerswhose prescription drug benefits are actuarially equivalent to the new MedicarePart D. The Company believes its Post-Retirement Medical Plan isactuarially equivalent to Part D and as such is reflecting a reduction inthe annual net periodic postretirement benefit cost of $0.5 million, on accountof the expected subsidy from Medicare Part D. The reduction of the netperiodic postretirement benefit cost is comprised of a $0.2 million reductionin the accumulated post-retirement benefit obligation attributed to pastservice, a $0.2 million reduction in actuarial losses, and a $0.1 millionreduction in the current period’s service cost.

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**Defined Contribution Plan**

The Company also sponsorsa defined contribution 401(k) plan covering substantially all UnitedStates employees and matches a portion of employee contributions. The expensefor the match was $2.6 million, $2.4 million and $2.4 million in2004, 2003 and 2002, respectively.

**NOTE8:**   COMMITMENTS AND CONTINGENT LIABILITIES

The Company leases office space and equipment underoperating leases expiring in one to five years. Most leases include renewaloptions and some contain purchase options and escalation clauses. Futureminimum rental commitments required under operating leases having initial orremaining non-cancelable lease terms in excess of one year as of December 31,2004, are as follows (in millions): 2005 - $1.7; 2006 - $1.1; 2007 - $0.8; 2008- $0.3; 2009 - $0.3; 2010 and beyond - $0.2. Rentals charged to continuingoperations costs and expenses under cancelable and non-cancelable leasearrangements were $2.1 million, $2.3 million and $2.5 million for 2004, 2003and 2002, respectively. Certain customers of our Industrial Power Equipment andLawnmower segments finance their purchases through third party financecompanies. Under the terms of these financing arrangements, the Company may berequired to repurchase certain equipment from the finance companies orreimburse them for any financial loss incurred. The aggregate repurchase amountincluded in the agreements outstanding as of both December 31, 2004 and2003 is $4.0 million. These arrangements have not had a material adverse effecton the Company’s operating results in the past. The Company does not expect toincur any material charges related to these agreements in future periods, sinceany repurchased equipment will likely be resold for approximately the samevalue.

Guaranteesand other commercial commitments are summarized in the following table:
| **(Dollar amounts in millions)**    | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| Product warranty                                   |       |                                             | $          | 4.9 |   |   |
| Letters of credit  outstanding                     |       |                                             | 7.9        |   |   |
| Third party  financing projections (1)             |       |                                             | 4.0        |   |   |
| Accounts  receivable securitization (2)            |       |                                             | 0.4        |   |   |
| Total guarantees and  other commercial commitments |       |                                             | $          | 17.2 |   |   |

 

(1)   Applicableto the third party financing agreements for customer equipment purchases.

(2)   Includesguarantees to a third party financing company of certain accounts receivable.

In addition to these amounts, Blount Internationalalso guarantees certain debt of its subsidiaries (see Note 14 to theConsolidated Financial Statements).

Changesin our warranty reserve are as follows:
| ** **                                      | ** ** | **Year Ended December 31,**   | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** | **   2002   ** | ** ** |
| Balance at  beginning of period                 |       |                                         | $          | 4.1 |   |   |   | $ | 3.3 |   |   |   | $ | 3.3 |   |   |
| Accrued                                         |       |                                         | 5.9        |   |   |   | 3.6 |   |   |   | 5.7 |   |   |
| Payments made (in  cash or in-kind)             |       |                                         | (5.1       | ) |   |   | (2.8 | ) |   |   | (5.7 | ) |   |
| Balance at end of period                        |       |                                         | $          | 4.9 |   |   |   | $ | 4.1 |   |   |   | $ | 3.3 |   |   |

 

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Other guarantees and claims arise during the ordinarycourse of business from relationships with suppliers, customers andnon-consolidated affiliates when we undertake an obligation to guarantee theperformance of others if specified triggering events occur. Nonperformance of acontract could trigger an obligation of the Company. In addition, certainguarantees relate to contractual indemnification provisions in connection withtransactions involving the purchase or sale of stock or assets. These claimsinclude actions based upon intellectual property, environmental, productliability and other indemnification matters. The ultimate effect on futurefinancial results is not subject to reasonable estimation because considerableuncertainty exists as to the occurrence or, if triggered, final outcome ofthese claims. However, while the ultimate liabilities resulting from suchclaims may be potentially significant to results of operations in the periodrecognized, management does not anticipate they will have a material adverseeffect on the Company’s consolidated financial position or liquidity.

The Company reserves for product liability,environmental remediation and other legal matters as management becomes awareof such matters. A portion of these claims or lawsuits may be covered byinsurance policies that generally contain both deductible and coverage limits.Management monitors the progress of each legal matter to ensure that theappropriate reserve for its obligation has been recognized and disclosed in thefinancial statements. Management also monitors trends in case types todetermine if there are any specific issues that relate to the Company that mayresult in additional future exposure on an aggregate basis. As of December 31,2004 and December 31, 2003, management believes the Company hasappropriately recorded and disclosed all material costs for its obligations inregard to known matters. Management believes that the recoverability of thecosts of claims from insurance companies will continue in the future.Management periodically assesses these insurance companies to monitor theirability to pay such claims.

The Company was named a potentially liable person (“PLP”)by the Washington State Department of Ecology (“WDOE”) in connection with thePasco Sanitary Landfill Site (“Site”). This Site has been monitored by WDOEsince 1988. From available records, the Company believes that it sent 26 drumsof chromic hydroxide sludge in a non-toxic, trivalent state to the Site. TheCompany further believes that the Site contains more than 50,000 drums in totaland millions of gallons of additional wastes, some potentially highly toxic innature. Accordingly, based both on volume and on the nature of the waste, theCompany believes that it is a de minimis contributor.

The current on-site monitoring program is beingconducted and funded by certain PLPs, excluding the Company and several otherPLPs, under the supervision of WDOE. Dependingupon the results of this study, further studies or remediation could berequired. The Company may or may not be required to pay a share of the currentstudy, or to contribute costs of subsequent studies or remediation, if any. TheCompany is unable to estimate such costs, or the likelihood of being assessedany portion thereof. However, during the most recent negotiations with thosePLPs that are funding the work at the Site, the Company’s potential shareranged from approximately $20,000 to $250,000.

The Company has accrued$75,000 at December 31, 2004 and 2003 for the potential costs of anyclean-up at the Site. The Company spent zero in 2004 and 2003 and $5,600 in2002 to administer compliance in regards to the Site, primarily for the cost ofoutside counsel to provide updates on the Site status.

In July 2001, the Company’sformer Federal Cartridge Company subsidiary (“Federal”) received notice fromthe Region V Office of the United States Environmental Protection Agency (“EPA”)that it intended to file an administrative proceeding for civil penalties inconnection with alleged violations of applicable statutes, rules, andregulations or permit conditions at Federal’s Anoka, Minnesota ammunitionmanufacturing plant. The alleged violations included (i) un-permittedtreatment of hazardous wastes, (ii) improper management of hazardous wastes,(iii) permit violations and (iv) improper training of certainresponsible personnel. The Company retained the liability for this matter underthe terms of the sale of Federal in 2001.

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In March 2002, EPA servedan Administrative Complaint and Compliance Order (“Complaint”) on Federal. TheComplaint proposed civil penalties in the amount of $258,593. Federal answeredthe Complaint, denied liability and opposed the proposed penalties. On December 6,2002, in response to several preliminary cross motions, the assignedAdministrative Law Judge (“ALJ”) held Federal liable for $6,270 in civilpenalties and stated that the remaining issues of liability and proposedpenalties totaling $252,323 would be ruled on after an administrative hearing.This hearing was held in January  2003.

On September 3, 2004, theALJ issued a decision assessing $225,000 in civil penalties against Federal. TheCompany paid this fine in November of 2004, and is pursuing partialindemnification of the amount paid and related attorney fees against a priorowner of Federal. The amount assessed was within the amount the Company hadreserved for this matter, and the payment did not have a material adverseaffect on the Company’s consolidated financial position, operating results orcash flows.

On September 12, 2003, the Company received aGeneral Notice Letter as a Potentially Responsible De Minimis Party fromRegion IX of the EPA regarding the Operating Industries, Inc. SuperfundSite in Monterey Park, California. The notice stated that the EPA would submitan offer to settle and an explanation as to why it believes the Company or apredecessor unit is a de minimis participant at the site. The Company wassubsequently informed by the EPA that its report would be delayed, and on September 17,2004, was notified of further delay in the process until late 2004 at theearliest. The EPA has indicated that its de minimis settlement offer will bebased on volume of waste at a uniform per gallon price among all de minimisparties. The site was operated as a landfill from 1948 to 1984, and receivedwastes from over 4,000 generators. At the present time, the Company has noknowledge of which of its units, if any, was involved at the site, or theamounts, if any, sent there. However, based upon its current knowledge, and itsalleged status as a Potentially Responsible De Minimis Party, the Company doesnot believe that any settlement or participation in any remediation will have amaterial adverse effect on its consolidated financial position, operating resultsor cash flows. The Company has received no further notice or explanation fromRegion IX of the EPA as of December 31, 2004.

On December 3, 2003, the Company’s Oregon CuttingSystems facility in Milwaukie, Oregon underwent a Resource Conservation and RecoveryAct (“RCRA”) hazardous waste management inspection by the Oregon Department ofEnvironmental Quality (“DEQ”). On February 10, 2004, the Company receiveda Notice of Non-Compliance from the DEQ regarding alleged violations of stateand federal hazardous waste management regulations. None of the allegedviolations concern a release or discharge into the environment. In response tothe Notice, the Company took certain corrective actions and asked for furtherexplanation of some of the alleged violations. After considering the Company’svarious responses, on September 28, 2004, DEQ issued a Notice of Violationand Assessment of Civil Penalty in the amount of $13,400 in the aggregate. TheCompany did not contest this decision, and has paid the fine.

The Company is a defendant in a number of productliability lawsuits, some of which seek significant or unspecified damages,involving serious personal injuries for which there are retentions ordeductible amounts under the Company’s insurance policies. One such suitresulted in the Company paying its self-insured retention of $1.0 millionduring the second quarter of 2003. In addition, the Company is a party to anumber of other suits arising out of the normal course of its business. Whilethere can be no assurance as to their ultimate outcome, management does notbelieve these lawsuits will have a material adverse effect on the Company’sconsolidated financial position, operating results or cash flows.

The Company accrues, by acharge to income, an amount related to a matter deemed by management and itscounsel as a probable loss contingency in light of all of the then knowncircumstances. The Company does not accrue a charge to income for a matterdeemed by management and its counsel to be a reasonably possible losscontingency in light of all of the current circumstances.

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**NOTE9:**   FINANCIAL INSTRUMENTS AND CREDIT RISKCONCENTRATION

The Company has manufacturing or distributionoperations in Brazil, Canada, Europe, Japan, Russia and the United States. Itis also in the process of opening a manufacturing facility in China. The Companysells to customers in these locations and other countries throughout the world.At December 31, 2004, approximately 53.5% of trade accounts receivablewere from customers within the United States. Trade accounts receivable areprincipally from service and dealer groups, distributors, mass merchants,chainsaw and other OEMs, and are normally not collateralized. See Note 8 for adiscussion of the Company’s guarantees under third-party financingarrangements.

Theestimated fair values of certain financial instruments at December 31,2004 and 2003, are as follows:
| ** **                                                  | ** ** | **2004**             | ** ** | **2003**            | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| **(Dollar amounts in millions)**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Other assets (restricted  trust funds and notes receivable) |       |                 | $          | 3.4                 |       |   |   | $ | 3.4 |   |   |   | $ | 4.6 |   |   | $ | 4.6 |   |
| Notes payable and long-term debt (see Note 3)               |       |                 | $          | 494.2               |       |   |   | $ | 510.0 |   |   |   | $ | 610.5 |   |   | $ | 633.9 |   |

 

The carrying amount of cash and cash equivalentsapproximates fair value because of the short maturity of those instruments. Thefair value of notes receivable is estimated based on the discounted value ofestimated future cash flows. The fair value of restricted trust fundsapproximates the carrying amount for short-term instruments and is estimated byobtaining market quotes for longer term instruments. The fair value oflong-term debt is estimated based on recent market transaction prices or oncurrent rates available for debt with similar terms and maturities.

One customer accounted for10.8% and 10.2% at December 31, 2004 and 2003, respectively, of theconsolidated accounts receivable balance.

**NOTE 10:**   DEFERREDFINANCING COSTS

Thebalance of deferred financing costs was $21.5 million at December 31, 2003.As a result of the 2004 Refinancing Transactions, deferred financing costs of$10.3 million related to the old debt were written off to other expense and$17.2 million of new financing costs were capitalized. Amortization of deferredfinancing costs for 2004 was $4.5 million, and the ending balance of deferredfinancing costs at December 31, 2004 was $23.9 million. Scheduledamortization for future years is as follows:
| **(Dollar amounts in millions)** | ** ** | **Estimated  Annual  Amortization** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                            |       |                                | $          | 3.6 |   |   |
| 2006                                            |       |                                | 3.7        |   |   |
| 2007                                            |       |                                | 3.9        |   |   |
| 2008                                            |       |                                | 4.1        |   |   |
| 2009 and beyond                                 |       |                                | 8.6        |   |   |
| Total amortization                              |       |                                | $          | 23.9 |   |   |

 

Deferred financing costs,and the related amortization expense, will be adjusted if any pre-payments ofprincipal are made to the related outstanding debt. During 2004, the Companyaccrued $4.7 million in fees to Lehman Merchant Banking and certain of itsaffiliates related to 2004 refinancing activities.  These fees are included in deferred financingcosts.

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**NOTE 11:**   SEGMENTINFORMATION

We identify operating segments based on managementresponsibility. We have three reportable segments: Outdoor Products, Industrialand Power Equipment and Lawnmower. Outdoor Products manufactures and marketschain, bars, sprockets, and accessories for chainsaw use, concrete cuttingequipment, and lawnmower blades and accessories for outdoor care. Industrialand Power Equipment manufactures and markets timber harvesting equipment,industrial tractors and loaders, rotation bearings and mechanical powertransmission units. The Lawnmower segment manufactures and markets ridinglawnmowers and related accessories.

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.

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| ** **                                                    | ** ** | **Year Ended December 31,**                           | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)**               | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| **Sales:**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                              |       |                                                                 | $          | 422.9 |   |   |   | $ | 358.8 |   |   |   | $ | 307.4 |   |   |
| Industrial and  Power Equipment                               |       |                                                                 | 221.0      |   |   |   | 165.0 |   |   |   | 131.7 |   |   |
| Lawnmower                                                     |       |                                                                 | 49.7       |   |   |   | 35.7 |   |   |   | 41.4 |   |   |
| Inter Segment  Elimination                                    |       |                                                                 | (1.0       | ) |   |   | (0.4 | ) |   |   | (1.0 | ) |   |
| Total Sales                                                   |       |                                                                 | $          | 692.6 |   |   |   | $ | 559.1 |   |   |   | $ | 479.5 |   |   |
| **Operating  income (loss):**                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                              |       |                                                                 | $          | 104.4 |   |   |   | $ | 86.2 |   |   |   | $ | 67.7 |   |   |
| Industrial and  Power Equipment                               |       |                                                                 | 21.5       |   |   |   | 11.7 |   |   |   | 5.2 |   |   |
| Lawnmower                                                     |       |                                                                 | 3.0        |   |   |   | (1.2 | ) |   |   | 2.7 |   |   |
| Inter Segment  Elimination                                    |       |                                                                 |       |   |   |   |   |   |   |   | 0.3 |   |   |
| Contribution from  segments                                   |       |                                                                 | 128.9      |   |   |   | 96.7 |   |   |   | 75.9 |   |   |
| Corporate  expenses                                           |       |                                                                 | (14.6      | ) |   |   | (12.7 | ) |   |   | (6.2 | ) |   |
| Restructuring  expenses                                       |       |                                                                 |       |   |   |   | (0.2 | ) |   |   | (7.2 | ) |   |
| Operating income                                              |       |                                                                 | 114.3      |   |   |   | 83.8 |   |   |   | 62.5 |   |   |
| Interest expense                                              |       |                                                                 | (61.3      | ) |   |   | (69.8 | ) |   |   | (72.2 | ) |   |
| Interest income                                               |       |                                                                 | 2.3        |   |   |   | 4.4 |   |   |   | 1.1 |   |   |
| Other income  (expense), net                                  |       |                                                                 | (39.9      | ) |   |   | (3.6 | ) |   |   | (0.7 | ) |   |
| Income (loss)  from continuing operations before income taxes |       |                                                                 | $          | 15.4 |   |   |   | $ | 14.8 |   |   |   | $ | (9.3 | ) |   |
| **Depreciation  and amortization:**                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                              |       |                                                                 | $          | 11.5 |   |   |   | $ | 9.5 |   |   |   | $ | 9.6 |   |   |
| Industrial and  Power Equipment                               |       |                                                                 | 3.2        |   |   |   | 3.3 |   |   |   | 3.3 |   |   |
| Lawnmower                                                     |       |                                                                 | 0.7        |   |   |   | 0.7 |   |   |   | 0.8 |   |   |
| Corporate office                                              |       |                                                                 | 5.0        |   |   |   | 5.2 |   |   |   | 5.2 |   |   |
| Total depreciation and  amortization                          |       |                                                                 | $          | 20.4 |   |   |   | $ | 18.7 |   |   |   | $ | 18.9 |   |   |
| **Capital  expenditures:**                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Outdoor Products                                              |       |                                                                 | $          | 18.6 |   |   |   | $ | 15.0 |   |   |   | $ | 15.3 |   |   |
| Industrial and  Power Equipment                               |       |                                                                 | 2.5        |   |   |   | 0.9 |   |   |   | 1.4 |   |   |
| Lawnmower                                                     |       |                                                                 | 0.6        |   |   |   | 0.6 |   |   |   | 0.4 |   |   |
| Total capital  expenditures                                   |       |                                                                 | $          | 21.7 |   |   |   | $ | 16.5 |   |   |   | $ | 17.1 |   |   |
| **Sales  by major product line:**                             |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Chainsaw  components and accessories                          |       |                                                                 | $          | 335.8 |   |   |   | $ | 283.0 |   |   |   | $ | 243.0 |   |   |
| Timber harvesting  and loading equipment                      |       |                                                                 | 201.9      |   |   |   | 151.7 |   |   |   | 115.9 |   |   |
| Outdoor care  parts and accessories                           |       |                                                                 | 65.6       |   |   |   | 57.5 |   |   |   | 48.9 |   |   |
| Lawnmowers                                                    |       |                                                                 | 49.7       |   |   |   | 35.7 |   |   |   | 40.9 |   |   |
| All others, less  than 5% each                                |       |                                                                 | 39.6       |   |   |   | 31.2 |   |   |   | 30.8 |   |   |
| Total Sales                                                   |       |                                                                 | $          | 692.6 |   |   |   | $ | 559.1 |   |   |   | $ | 479.5 |   |   |

 

57

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| ** **                                      | ** ** | **December 31,**                                                | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| **Identifiable assets:**                        |       |                                                                 |       |   |   |   |   |   |   |
| Outdoor Products                                |       |                                                                 | $          | 262.2 |   |   |   | $ | 227.1 |   |   |
| Industrial and  Power Equipment                 |       |                                                                 | 87.5       |   |   |   | 83.4 |   |   |
| Lawnmower                                       |       |                                                                 | 19.3       |   |   |   | 18.7 |   |   |
| Corporate and  elimination                      |       |                                                                 | 55.7       |   |   |   | 74.8 |   |   |
| Total assets                                    |       |                                                                 | $          | 424.7 |   |   |   | $ | 404.0 |   |   |

 

**Information onGeographic Areas**
| ** **                                      | ** ** | **Year Ended December 31,**                           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| **Sales:**                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| United States                                   |       |                                                                 | $          | 407.6 |   |   |   | $ | 331.3 |   |   |   | $ | 289.4 |   |   |
| European Union                                  |       |                                                                 | 124.0      |   |   |   | 108.7 |   |   |   | 91.3 |   |   |
| Canada                                          |       |                                                                 | 37.4       |   |   |   | 23.1 |   |   |   | 21.9 |   |   |
| Brazil                                          |       |                                                                 | 20.1       |   |   |   | 17.1 |   |   |   | 13.8 |   |   |
| All others, less  than 3% each                  |       |                                                                 | 103.5      |   |   |   | 78.9 |   |   |   | 63.1 |   |   |
| Total Sales                                     |       |                                                                 | $          | 692.6 |   |   |   | $ | 559.1 |   |   |   | $ | 479.5 |   |   |

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Property,  plant and equipment – net:**  |       |                  |       |   |   |   |   |   |   |
| United States                                   |       |                  | $          | 60.0 |   |   |   | $ | 61.1 |   |   |
| Canada                                          |       |                  | 21.0       |   |   |   | 19.1 |   |   |
| Brazil                                          |       |                  | 10.0       |   |   |   | 7.9 |   |   |
| European Union                                  |       |                  | 3.9        |   |   |   | 3.7 |   |   |
| China                                           |       |                  | 2.8        |   |   |   |   |   |   |
| All others, less than 1% each                   |       |                  | 0.2        |   |   |   | 0.2 |   |   |
| Property, plant  and equipment – net       |       |                  | $          | 97.9 |   |   |   | $ | 92.0 |   |   |

 

The geographic salesinformation is by country of destination. Property, plant and equipment is netof accumulated depreciation. One customer, The Electrolux Group, accounted forapproximately 10% of consolidated sales in 2003 and 2002 and less than 10% of consolidated sales in 2004. While weexpect this business relationship to continue, the loss of this customer couldaffect the operations of the Outdoor Products segment. Each of our segmentspurchases certain important materials from a limited number of suppliers thatmeet quality criteria. Although alternative sources of supply are available,the sudden elimination of certain suppliers could result in manufacturingdelays, a reduction in product quality and a possible loss of sales in the nearterm.

58

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**NOTE 12:   OTHER INFORMATION**

Thefollowing balance sheet captions are comprised of the items specified below:
| ** **                                      | ** ** | **December 31,**                                                | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollar amounts in millions)** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| **Other current assets:**                       |       |                                                                 |       |   |   |   |   |   |   |
| Refund of income  taxes receivable              |       |                                                                 |       |   |   |   | $ | 21.6 |   |   |
| Interest on  income tax refund receivable       |       |                                                                 |       |   |   |   | 3.6 |   |   |
| Other                                           |       |                                                                 | $          | 4.6 |   |   |   | 4.5 |   |   |
| Total other current  assets                     |       |                                                                 | $          | 4.6 |   |   |   | $ | 29.7 |   |   |
| **Accrued  expenses:**                          |       |                                                                 |       |   |   |   |   |   |   |
| Salaries, wages  and related withholdings       |       |                                                                 | $          | 25.0 |   |   |   | $ | 22.7 |   |   |
| Employee benefits                               |       |                                                                 | 6.8        |   |   |   | 8.1 |   |   |
| Product liability  costs                        |       |                                                                 | 4.7        |   |   |   | 4.0 |   |   |
| Accrued interest                                |       |                                                                 | 7.0        |   |   |   | 19.9 |   |   |
| Accrued customer  incentives                    |       |                                                                 | 6.3        |   |   |   | 2.6 |   |   |
| Warranty reserve                                |       |                                                                 | 4.9        |   |   |   | 4.1 |   |   |
| Accrued taxes                                   |       |                                                                 | 4.2        |   |   |   | 3.1 |   |   |
| Other                                           |       |                                                                 | 9.9        |   |   |   | 9.2 |   |   |
| Total accrued expenses                          |       |                                                                 | $          | 68.8 |   |   |   | $ | 73.7 |   |   |

 

**NOTE 13:   RESTRUCTURING**

During the first quarter of 2001, we incurred arestructuring charge of $16.2 million related to the closure of a manufacturingfacility in Zebulon, North Carolina, the modification of certain employeebenefit plans and a reduction in headcount and expenses principally at thecorporate headquarters. The manufacturing facility closure directly impacted 39hourly employees and three salaried employees, and the corporate actionimpacted five employees.

In the first quarter of 2002, we incurred arestructuring charge related to the closure and relocation of our headquartersfrom Montgomery, Alabama to Portland, Oregon. An initial charge of $5.6 millionwas recorded and we incurred an additional $0.7 million in transition expensesduring the year. Eighteen corporate employees were impacted by thisrestructuring action.

In the fourth quarter of 2002, we recorded a $1.4million charge related to the closure of a portion of a facility and relocationof that equipment between our plants within the Outdoor Products segment. Inthe first quarter of 2003 an additional charge of $0.2 million for thisrelocation project was incurred for severance expense affecting 19 hourlyemployees and 4 salaried employees.

59

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The following table outlines the original expenses,the subsequent charges against the restructuring liability and adjustments tothe liability for changes in estimates pertaining to each of these threerestructuring actions:
| **(Dollar amounts in millions)** | ** ** | **   Plant Closure/     Headcount  reduction/  Benefit  Modification  Q1/2001** | ** ** | **   Corporate Office     Relocation  Q1/2002** | ** ** | **   Asset Relocation     Q4/2002** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Severance                                       |       |                                                                                                               |       |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| Corporate  employees                            |       |                                                                                                               | $          | 8.0                                                                                |       |                                                                   |       | $ | 5.6 |   |   |   |   |   |   |
| Manufacturing  facility                         |       |                                                                                                               | 0.5        |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| Benefits                                        |       |                                                                                                               | 4.0        |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| Facility closure                                |       |                                                                                                               | 0.2        |                                                                               |       |                                                                   |       |   |   |   | $ | 1.4 |   |   |
| Professional fees                               |       |                                                                                                               | 1.4        |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| All other                                       |       |                                                                                                               | 2.1        |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| Total original expense                          |       |                                                                                                               | $          | 16.2                                                                               |       |                                                                   |       | $ | 5.6 |   |   |   | $ | 1.4 |   |   |
| **Charges  against liability:**                 |       |                                                                                                               |       |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| 2001                                            |       |                                                                                                               | (13.1      | )                                                                                  |       |                                                                   |       |   |   |   |   |   |   |
| 2002                                            |       |                                                                                                               | (2.0       | )                                                                                  |       |                                                                   | (4.7       | ) |   |   |   |   |   |
| 2003                                            |       |                                                                                                               | (0.6       | )                                                                                  |       |                                                                   | (0.4       | ) |   |   | (1.1 | ) |   |
| 2004                                            |       |                                                                                                               | (0.4       | )                                                                                  |       |                                                                   | (0.1       | ) |   |   | (0.3 | ) |   |
| **Adjustments to liability:**                   |       |                                                                                                               |       |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| 2001                                            |       |                                                                                                               |       |                                                                               |       |                                                                   |       |   |   |   |   |   |   |
| 2002                                            |       |                                                                                                               |       |                                                                               |       |                                                                   | (0.5       | ) |   |   |   |   |   |
| 2003                                            |       |                                                                                                               | (0.1       | )                                                                                  |       |                                                                   | 0.1        |   |   |   |   |   |   |
| Balance at December 31, 2004               |       |                                                                                                               | $          | 0.0                                                                                |       |                                                                   |       | $ | 0.0 |   |   |   | $ | 0.0 |   |   |
|                                                 |            |                                                                                                                    |            |                                                                                    |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**NOTE14:   CONSOLIDATING FINANCIAL INFORMATION**

As a result of the 2004 Refinancing Transactions, theCompany has one registered debt security with a guarantee, the 8 7/8% SeniorSubordinated Notes that are due August 1, 2012. These notes were issued bythe Company’s wholly-owned subsidiary, Blount, Inc., and are fully andunconditionally, jointly and severally, guaranteed by Blount International andall of the Company’s domestic subsidiaries (“guarantor subsidiaries”). Allguarantor subsidiaries of these 8 7/8% Senior Subordinated Notes are 100%owned, directly or indirectly, by the Company. While Blount International andall of the Company’s domestic subsidiaries guarantee these 8 7/8% SeniorSubordinated Notes, none of the Company’s existing foreign subsidiaries (“non-guarantorsubsidiaries”) guarantee these notes.

The following consolidating financial information setsforth condensed consolidating financial information, statements of operationsand the balance sheets and cash flows of Blount International, Inc.,Blount, Inc., the guarantor subsidiaries and the non-guarantorsubsidiaries.

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**               | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Statement of Operations  Information**                      |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **For the  Year Ended December 31, 2004**                |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                         |       |                             |       |                  |       |                        | $          | 457.6                             |       |             |       | $                | 162.9      |   |   |   | $ | 231.3 |   |   |   | $ | (159.2 | ) |   |   | $ | 692.6 |   |   |
| Cost of sales                                                 |       |                             |       |                  |       |                        | 326.7      |                              |       |             | 127.8      |             |       |   | 169.7 |   |   |   | (164.8 | ) |   |   | 459.4 |   |   |
| Gross profit                                                  |       |                             |       |                  |       |                        | 130.9      |                              |       |             | 35.1       |             |       |   | 61.6 |   |   |   | 5.6 |   |   |   | 233.2 |   |   |
| Selling, general and  administrative expenses                 |       |                             |       |                  |       |                        | 72.1       |                              |       |             | 17.0       |             |       |   | 29.8 |   |   |   |   |   |   |   | 118.9 |   |   |
| Operating income (loss)                                       |       |                             |       |                  |       |                        | 58.8       |                              |       |             | 18.1       |             |       |   | 31.8 |   |   |   | 5.6 |   |   |   | 114.3 |   |   |
| Interest expense                                              |       |                             | $          | (20.5                 | )          |                        |       | (38.9                             | )          |             |       | (0.1             | )          |   |   | (1.8 | ) |   |   |   |   |   |   | (61.3 | ) |   |
| Interest Income                                               |       |                             |       |                  |       |                        | 1.7        |                              |       |             | 0.1        |             |       |   | 0.5 |   |   |   |   |   |   |   | 2.3 |   |   |
| Other income (expense),  net                                  |       |                             | (5.6       | )                     |       |                        | (29.2      | )                                 |       |             | (3.7       | )                |       |   | (1.4 | ) |   |   |   |   |   |   | (39.9 | ) |   |
| Income (loss) from  continuing operations before income taxes |       |                             | (26.1      | )                     |       |                        | (7.6       | )                                 |       |             | 14.4       |             |       |   | 29.1 |   |   |   | 5.6 |   |   |   | 15.4 |   |   |
| Provision (benefit) for  income taxes                         |       |                             |       |                  |       |                        | (0.6       | )                                 |       |             | 0.9        |             |       |   | 8.8 |   |   |   |   |   |   |   | 9.1 |   |   |
| Income (loss) from  continuing operations                     |       |                             | (26.1      | )                     |       |                        | (7.0       | )                                 |       |             | 13.5       |             |       |   | 20.3 |   |   |   | 5.6 |   |   |   | 6.3 |   |   |
| Equity in earnings  (losses) of affiliated companies, net     |       |                             | 32.4       |                  |       |                        | 39.4       |                              |       |             |       |             |       |   |   |   |   |   | (71.8 | ) |   |   |   |   |   |
| Net income (loss)                                             |       |                             | $          | 6.3                   |       |                        |       | $                                 | 32.4       |             |       |             | $          | 13.5 |   |   |   | $ | 20.3 |   |   |   | $ | (66.2 | ) |   |   | $ | 6.3 |   |   |
| **For the  Year Ended December 31, 2003**                |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                         |       |                             |       |                  |       |                        | $          | 364.6                             |       |             |       | $                | 127.3      |   |   |   | $ | 201.4 |   |   |   | $ | (134.2 | ) |   |   | $ | 559.1 |   |   |
| Cost of sales                                                 |       |                             |       |                  |       |                        | 258.6      |                              |       |             | 100.5      |             |       |   | 148.2 |   |   |   | (137.9 | ) |   |   | 369.4 |   |   |
| Gross profit                                                  |       |                             |       |                  |       |                        | 106.0      |                              |       |             | 26.8       |             |       |   | 53.2 |   |   |   | 3.7 |   |   |   | 189.7 |   |   |
| Selling, general and  administrative expenses                 |       |                             |       |                  |       |                        | 64.1       |                              |       |             | 16.7       |             |       |   | 24.9 |   |   |   |   |   |   |   | 105.7 |   |   |
| Restructuring expenses                                        |       |                             |       |                  |       |                        |       |                              |       |             | 0.2        |             |       |   |   |   |   |   |   |   |   |   | 0.2 |   |   |
| Operating income (loss)                                       |       |                             |       |                  |       |                        | 41.9       |                              |       |             | 9.9        |             |       |   | 28.3 |   |   |   | 3.7 |   |   |   | 83.8 |   |   |
| Interest expense                                              |       |                             | $          | (19.7                 | )          |                        |       | (46.2                             | )          |             |       | (0.4             | )          |   |   | (3.5 | ) |   |   |   |   |   |   | (69.8 | ) |   |
| Interest Income                                               |       |                             |       |                  |       |                        | 4.0        |                              |       |             |       |             |       |   | 0.4 |   |   |   |   |   |   |   | 4.4 |   |   |
| Other income (expense),  net                                  |       |                             |       |                  |       |                        | 0.7        |                              |       |             | (3.1       | )                |       |   | (1.2 | ) |   |   |   |   |   |   | (3.6 | ) |   |
| Income (loss) from  continuing operations before income taxes |       |                             | (19.7      | )                     |       |                        | 0.4        |                              |       |             | 6.4        |             |       |   | 24.0 |   |   |   | 3.7 |   |   |   | 14.8 |   |   |
| Provision (benefit) for  income taxes                         |       |                             |       |                  |       |                        | 26.8       |                              |       |             | 3.5        |             |       |   | 14.6 |   |   |   |   |   |   |   | 44.9 |   |   |
| Income (loss) from  continuing operations                     |       |                             | (19.7      | )                     |       |                        | (26.4      | )                                 |       |             | 2.9        |             |       |   | 9.4 |   |   |   | 3.7 |   |   |   | (30.1 | ) |   |
| Equity in earnings  (losses) of affiliated companies, net     |       |                             | (10.4      | )                     |       |                        | 16.0       |                              |       |             | 0.2        |             |       |   |   |   |   |   | (5.8 | ) |   |   |   |   |   |
| Net income (loss)                                             |       |                             | $          | (30.1                 | )          |                        |       | $                                 | (10.4      | )                |       |             | $          | 3.1 |   |   |   | $ | 9.4 |   |   |   | $ | (2.1 | ) |   |   | $ | (30.1 | ) |   |

 

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Statement of Operations Information**                         | ** ** |                             | ** ** | ** **            |       |                        | ** ** | ** **                        |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **For the Year Ended December 31, 2002**                   | ** ** |                             | ** ** |                  |       |                        | ** ** | ** **                        |       |             | ** ** | ** **       |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** | ** ** |   |
| Sales                                                           |       |                             |       |                  |       |                        | $          | 305.4                             |       |             |       | $                | 121.5      |   |   |   | $ | 167.8 |   |   |   | $ | (115.2 | ) |   |   | $ | 479.5 | ** ** |   |
| Cost of sales                                                   |       |                             |       |                  |       |                        | 209.4      |                              |       |             | 94.4       |             |       |   | 128.8 |   |   |   | (114.3 | ) |   |   | 318.3 | ** ** |   |
| Gross profit                                                    |       |                             |       |                  |       |                        | 96.0       |                              |       |             | 27.1       |             |       |   | 39.0 |   |   |   | (0.9 | ) |   |   | 161.2 | ** ** |   |
| Selling, general and administrative expenses                    |       |                             | $          | 0.5                   |       |                        |       | 53.2                              |       |             |       | 17.1             |       |   |   | 20.7 |   |   |   |   |   |   |   | 91.5 | ** ** |   |
| Restructuring expenses                                          |       |                             |       |                  |       |                        | 7.2        |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   | 7.2 | ** ** |   |
| Operating income (loss)                                         |       |                             | (0.5       | )                     |       |                        | 35.6       |                              |       |             | 10.0       |             |       |   | 18.3 |   |   |   | (0.9 | ) |   |   | 62.5 | ** ** |   |
| Interest expense                                                |       |                             | (21.0      | )                     |       |                        | (50.4      | )                                 |       |             | (0.4       | )                |       |   | (0.4 | ) |   |   |   |   |   |   | (72.2 | **)** |   |
| Interest income                                                 |       |                             |       |                  |       |                        | 0.6        |                              |       |             |       |             |       |   | 0.5 |   |   |   |   |   |   |   | 1.1 | ** ** |   |
| Other income (expense), net                                     |       |                             |       |                  |       |                        | 0.1        |                              |       |             |       |             |       |   | (0.8 | ) |   |   |   |   |   |   | (0.7 | **)** |   |
| Income (loss) from continuing operations before  income taxes   |       |                             | (21.5      | )                     |       |                        | (14.1      | )                                 |       |             | 9.6        |             |       |   | 17.6 |   |   |   | (0.9 | ) |   |   | (9.3 | **)** |   |
| Provision (benefit) for income taxes                            |       |                             | (10.7      | )                     |       |                        | (3.9       | )                                 |       |             | 3.7        |             |       |   | 6.4 |   |   |   |   |   |   |   | (4.5 | **)** |   |
| Income (loss) from continuing operations                        |       |                             | (10.8      | )                     |       |                        | (10.2      | )                                 |       |             | 5.9        |             |       |   | 11.2 |   |   |   | (0.9 | ) |   |   | (4.8 | **)** |   |
| Discontinued operations:                                        |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Net income (loss) from  operations                              |       |                             |       |                  |       |                        | 0.5        |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   | 0.5 | ** ** |   |
| Income (loss) on  disposal, net                                 |       |                             |       |                  |       |                        | (1.4       | )                                 |       |             |       |             |       |   |   |   |   |   |   |   |   |   | (1.4 | **)** |   |
| Income (loss) before earnings (losses) Of affiliated  companies |       |                             | (10.8      | )                     |       |                        | (11.1      | )                                 |       |             | 5.9        |             |       |   | 11.2 |   |   |   | (0.9 | ) |   |   | (5.7 | **)** |   |
| Equity in earnings (losses) of Affiliated companies,  net       |       |                             | 5.1        |                  |       |                        | 15.1       |                              |       |             | 0.1        |             |       |   |   |   |   |   | (20.3 | ) |   |   |   | ** ** |   |
| Net income (loss)                                               |       |                             | $          | (5.7                  | )          |                        |       | $                                 | 4.0        |             |       |             | $          | 6.0 |   |   |   | $ | 11.2 |   |   |   | $ | (21.2 | ) |   |   | $ | (5.7 | **)** |   |

 

62

----

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**     | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Balance Sheet Information**                       |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **December 31, 2004**                          |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Assets**                                          |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                     |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                           |       |                             |       |                  |       |                        | $          | 17.3                              |       |             |       | $                | (2.5       | ) |   |   | $ | 33.8 |   |   |   |   |   |   |   | $ | 48.6 |   |   |
| Accounts receivable, net                            |       |                             |       |                  |       |                        | 42.9       |                              |       |             | 13.7       |             |       |   | 18.4 |   |   |   |   |   |   |   | 75.0 |   |   |
| Intercompany receivables                            |       |                             |       |                  |       |                        | 176.1      |                              |       |             | 64.0       |             |       |   | 13.6 |   |   |   | $ | (253.7 | ) |   |   |   |   |   |
| Inventories                                         |       |                             |       |                  |       |                        | 33.0       |                              |       |             | 25.9       |             |       |   | 22.2 |   |   |   |   |   |   |   | 81.1 |   |   |
| Other current assets                                |       |                             |       |                  |       |                        | 2.4        |                              |       |             | 0.6        |             |       |   | 1.6 |   |   |   |   |   |   |   | 4.6 |   |   |
| Total current assets                                |       |                             |       |                  |       |                        | 271.7      |                              |       |             | 101.7      |             |       |   | 89.6 |   |   |   | (253.7 | ) |   |   | 209.3 |   |   |
| Investments in affiliated companies                 |       |                             | $          | (0.3                  | )          |                        |       | 253.3                             |       |             |       |             |       |   |   | 0.3 |   |   |   | (253.3 | ) |   |   |   |   |   |
| Property, plant and equipment, net                  |       |                             |       |                  |       |                        | 27.0       |                              |       |             | 33.1       |             |       |   | 37.8 |   |   |   |   |   |   |   | 97.9 |   |   |
| Goodwill                                            |       |                             |       |                  |       |                        | 39.7       |                              |       |             | 30.7       |             |       |   | 6.5 |   |   |   |   |   |   |   | 76.9 |   |   |
| Other assets                                        |       |                             |       |                  |       |                        | 33.4       |                              |       |             | 1.3        |             |       |   | 5.9 |   |   |   |   |   |   |   | 40.6 |   |   |
| Total Assets                                        |       |                             | $          | (0.3                  | )          |                        |       | $                                 | 625.1      |             |       |             | $          | 166.8 |   |   |   | $ | 140.1 |   |   |   | $ | (507.0 | ) |   |   | $ | 424.7 |   |   |
| **Liabilities and Stockholders’ Deficit**      |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long-term debt                |       |                             |       |                  |       |                        | $          | 3.1                               |       |             |       |             |       |   |   | $ | 0.1 |   |   |   |   |   |   |   | $ | 3.2 |   |   |
| Accounts payable                                    |       |                             |       |                  |       |                        | 21.7       |                              |       |             | $          | 8.5              |       |   |   | 9.1 |   |   |   |   |   |   |   | 39.3 |   |   |
| Intercompany payables                               |       |                             | $          | 253.7                 |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   | $ | (253.7 | ) |   |   |   |   |   |
| Accrued expenses                                    |       |                             |       |                  |       |                        | 46.3       |                              |       |             | 9.0        |             |       |   | 13.5 |   |   |   |   |   |   |   | 68.8 |   |   |
| Total current liabilities                           |       |                             | 253.7      |                  |       |                        | 71.1       |                              |       |             | 17.5       |             |       |   | 22.7 |   |   |   | (253.7 | ) |   |   | 111.3 |   |   |
| Long-term debt, exclusive of current maturities     |       |                             |       |                  |       |                        | 486.2      |                              |       |             |       |             |       |   | 4.8 |   |   |   |   |   |   |   | 491.0 |   |   |
| Deferred income taxes                               |       |                             |       |                  |       |                        | 2.9        |                              |       |             |       |             |       |   | 2.0 |   |   |   |   |   |   |   | 4.9 |   |   |
| Other liabilities                                   |       |                             | 2.2        |                  |       |                        | 65.2       |                              |       |             | 4.0        |             |       |   | 2.3 |   |   |   |   |   |   |   | 73.7 |   |   |
| Total liabilities                                   |       |                             | 255.9      |                  |       |                        | 625.4      |                              |       |             | 21.5       |             |       |   | 31.8 |   |   |   | (253.7 | ) |   |   | 680.9 |   |   |
| Stockholders deficit                                |       |                             | (256.2     | )                     |       |                        | (0.3       | )                                 |       |             | 145.3      |             |       |   | 108.3 |   |   |   | (253.3 | ) |   |   | (256.2 | ) |   |
| Total Liabilities  and Stockholders’ (Deficit) |       |                             | $          | (0.3                  | )          |                        |       | $                                 | 625.1      |             |       |             | $          | 166.8 |   |   |   | $ | 140.1 |   |   |   | $ | (507.0 | ) |   |   | $ | 424.7 |   |   |

63

----

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**  | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Balance Sheet Information**                    | ** ** |                             | ** ** |                  |       |                        | ** ** |                              |       |             | ** ** |             |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| **December 31,  2003**                      | ** ** |                             | ** ** |                  |       |                        | ** ** |                              |       |             | ** ** |             |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| **Assets**                                       |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       |                             |       |                  |       |                        | $          | 13.7                              |       |             |       | $                | (0.6       | ) |   |   | $ | 22.1 |   |   |   |   |   |   |   | $ | 35.2 |   |   |
| Accounts receivable, net                         |       |                             |       |                  |       |                        | 36.4       |                              |       |             | 10.0       |             |       |   | 18.0 |   |   |   |   |   |   |   | 64.4 |   |   |
| Intercompany receivables                         |       |                             |       |                  |       |                        | 289.7      |                              |       |             | 37.6       |             |       |   | 10.6 |   |   |   | $ | (337.9 | ) |   |   |   |   |   |
| Inventories                                      |       |                             |       |                  |       |                        | 28.4       |                              |       |             | 21.1       |             |       |   | 18.2 |   |   |   |   |   |   |   | 67.7 |   |   |
| Other current assets                             |       |                             |       |                  |       |                        | 28.1       |                              |       |             | 0.6        |             |       |   | 1.2 |   |   |   | (0.2 | ) |   |   | 29.7 |   |   |
| Total current assets                             |       |                             |       |                  |       |                        | 396.3      |                              |       |             | 68.7       |             |       |   | 70.1 |   |   |   | (338.1 | ) |   |   | 197.0 |   |   |
| Investments in affiliated  companies             |       |                             | $          | (31.0                 | )          |                        |       | 201.0                             |       |             |       |             |       |   |   | 0.2 |   |   |   | (170.2 | ) |   |   |   |   |   |
| Property, plant and  equipment, net              |       |                             |       |                  |       |                        | 27.6       |                              |       |             | 33.5       |             |       |   | 30.9 |   |   |   |   |   |   |   | 92.0 |   |   |
| Goodwill                                         |       |                             |       |                  |       |                        | 39.7       |                              |       |             | 30.7       |             |       |   | 6.5 |   |   |   |   |   |   |   | 76.9 |   |   |
| Other assets                                     |       |                             |       |                  |       |                        | 33.0       |                              |       |             |       |             |       |   | 5.1 |   |   |   |   |   |   |   | 38.1 |   |   |
| Total Assets                                     |       |                             | $          | (31.0                 | )          |                        |       | $                                 | 697.6      |             |       |             | $          | 132.9 |   |   |   | $ | 112.8 |   |   |   | $ | (508.3 | ) |   |   | $ | 404.0 |   |   |
| **Liabilities  and Stockholder’s Deficit**  |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                             |       |                  |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of  long-term debt            |       |                             |       |                  |       |                        | $          | 5.6                               |       |             |       |             |       |   |   | $ | 1.0 |   |   |   |   |   |   |   | $ | 6.6 |   |   |
| Accounts payable                                 |       |                             |       |                  |       |                        | 17.0       |                              |       |             | $          | 5.8              |       |   |   | 6.9 |   |   |   |   |   |   |   | 29.7 |   |   |
| Intercompany payables                            |       |                             | $          | 337.9                 |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   | $ | (337.9 | ) |   |   |   |   |   |
| Accrued expenses                                 |       |                             |       |                  |       |                        | 54.0       |                              |       |             | 8.1        |             |       |   | 11.8 |   |   |   | (0.2 | ) |   |   | 73.7 |   |   |
| Total current liabilities                        |       |                             | 337.9      |                  |       |                        | 76.6       |                              |       |             | 13.9       |             |       |   | 19.7 |   |   |   | (338.1 | ) |   |   | 110.0 |   |   |
| Long-term debt, exclusive  of current maturities |       |                             | 22.2       |                  |       |                        | 581.7      |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |   | 603.9 |   |   |
| Deferred income taxes                            |       |                             |       |                  |       |                        | 0.4        |                              |       |             |       |             |       |   | 2.4 |   |   |   |   |   |   |   | 2.8 |   |   |
| Other liabilities                                |       |                             | 2.6        |                  |       |                        | 70.0       |                              |       |             | 2.9        |             |       |   | 5.5 |   |   |   |   |   |   |   | 81.0 |   |   |
| Total liabilities                                |       |                             | 362.7      |                  |       |                        | 728.7      |                              |       |             | 16.8       |             |       |   | 27.6 |   |   |   | (338.1 | ) |   |   | 797.7 |   |   |
| Stockholders deficit                             |       |                             | (393.7     | )                     |       |                        | (31.1      | )                                 |       |             | 116.1      |             |       |   | 85.2 |   |   |   | (170.2 | ) |   |   | (393.7 | ) |   |
| Total Liabilities and Stockholders’Deficit  |       |                             | $          | (31.0                 | )          |                        |       | $                                 | 697.6      |             |       |             | $          | 132.9 |   |   |   | $ | 112.8 |   |   |   | $ | (508.3 | ) |   |   | $ | 404.0 |   |   |

 

64

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**                      | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **Cash Flows Information**                                           |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| **For the Year Ended December 31, 2004**                        |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                  |       |                             | $          | (16.4                 | )          |                        |       | $                               | 66.6       |             |       |             | $          | 0.8 |   |   |   | $ | 24.8 |   |   |   |   |   | $ | 75.8 |   |   |
| **Cash flows from investing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from sales of  property, plant and equipment                |       |                             |       |                  |       |                        | 0.1        |                            |       |             |       |             |       |   | 0.1 |   |   |   |   |   | 0.2 |   |   |
| Purchases of property,  plant and equipment                          |       |                             |       |                  |       |                        | (6.5       | )                               |       |             | (2.7       | )                |       |   | (12.5 | ) |   |   |   |   | (21.7 | ) |   |
| Net cash used in investing activities                                |       |                             |       |                  |       |                        | (6.4       | )                               |       |             | (2.7       | )                |       |   | (12.4 | ) |   |   |   |   | (21.5 | ) |   |
| **Cash flows from financing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Issuance of long-term  debt                                          |       |                             |       |                  |       |                        | 435.5      |                            |       |             |       |             |       |   |   |   |   |   |   |   | 435.5 |   |   |
| Reduction of long-term  debt                                         |       |                             | (24.4      | )                     |       |                        | (534.4     | )                               |       |             |       |             |       |   | (0.7 | ) |   |   |   |   | (559.5 | ) |   |
| Advances from (to)  affiliated companies                             |       |                             | (83.9      | )                     |       |                        | 83.9       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Gross proceeds from  issuance of stock                               |       |                             | 138.0      |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   | 138.0 |   |   |
| Other                                                                |       |                             | (13.3      | )                     |       |                        | (41.6      | )                               |       |             |       |             |       |   |   |   |   |   |   |   | (54.9 | ) |   |
| Net cash provided by (used in) financing activities                  |       |                             | 16.4       |                  |       |                        | (56.6      | )                               |       |             |       |             |       |   | (0.7 | ) |   |   |   |   | (40.9 | ) |   |
| Net increase (decrease) in cash and cash equivalents                 |       |                             |       |                  |       |                        | 3.6        |                            |       |             | (1.9       | )                |       |   | 11.7 |   |   |   |   |   | 13.4 |   |   |
| Cash and cash equivalents at beginning of year                       |       |                             |       |                  |       |                        | 13.7       |                            |       |             | (0.6       | )                |       |   | 22.1 |   |   |   |   |   | 35.2 |   |   |
| Cash and cash equivalents at end of year                             |       |                             | $          | 0.0                   |       |                        |       | $                               | 17.3       |             |       |             | $          | (2.5 | ) |   |   | $ | 33.8 |   |   |   |   |   | $ | 48.6 |   |   |
| **For the Year Ended December 31, 2003**                        |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                  |       |                             | $          | (16.6                 | )          |                        |       | $                               | 56.8       |             |       |             | $          | 2.2 |   |   |   | $ | 13.4 |   |   |   |   |   | $ | 55.8 |   |   |
| **Cash flows from investing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| (Payments for) proceeds  from sales of property, plant and equipment |       |                             |       |                  |       |                        | (0.7       | )                               |       |             |       |             |       |   | 0.1 |   |   |   |   |   | (0.6 | ) |   |
| Purchases of property,  plant and equipment                          |       |                             |       |                  |       |                        | (7.1       | )                               |       |             | (2.2       | )                |       |   | (7.2 | ) |   |   |   |   | (16.5 | ) |   |
| Net cash used in  continuing operations                              |       |                             |       |                  |       |                        | (7.8       | )                               |       |             | (2.2       | )                |       |   | (7.1 | ) |   |   |   |   | (17.1 | ) |   |
| Net cash used in investing activities                                |       |                             |       |                  |       |                        | (7.8       | )                               |       |             | (2.2       | )                |       |   | (7.1 | ) |   |   |   |   | (17.1 | ) |   |
| **Cash flows from financing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Issuance of long-term  debt                                          |       |                             |       |                  |       |                        | 112.0      |                            |       |             |       |             |       |   | 6.0 |   |   |   |   |   | 118.0 |   |   |
| Reduction of long-term  debt                                         |       |                             |       |                  |       |                        | (137.9     | )                               |       |             |       |             |       |   | (0.4 | ) |   |   |   |   | (138.3 | ) |   |
| Advances from (to)  affiliated companies                             |       |                             | 16.6       |                  |       |                        | (16.1      | )                               |       |             | (0.5       | )                |       |   |   |   |   |   |   |   |   |   |   |
| Other                                                                |       |                             |       |                  |       |                        | (9.6       | )                               |       |             |       |             |       |   |   |   |   |   |   |   | (9.6 | ) |   |
| Net cash provided by (used in) financing activities                  |       |                             | 16.6       |                  |       |                        | (51.6      | )                               |       |             | (0.5       | )                |       |   | 5.6 |   |   |   |   |   | (29.9 | ) |   |
| Net increase (decrease) in cash and cash equivalents                 |       |                             |       |                  |       |                        | (2.6       | )                               |       |             | (0.5       | )                |       |   | 11.9 |   |   |   |   |   | 8.8 |   |   |
| Cash and cash equivalents at beginning of year                       |       |                             |       |                  |       |                        | 16.3       |                            |       |             | (0.1       | )                |       |   | 10.2 |   |   |   |   |   | 26.4 |   |   |
| Cash and cash equivalents at end of year                             |       |                             | $          | 0.0                   |       |                        |       | $                               | 13.7       |             |       |             | $          | (0.6 | ) |   |   | $ | 22.1 |   |   |   |   |   | $ | 35.2 |   |   |

** **

65

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED FINANCIAL INFORMATION**
| **(Dollar amounts in millions)**                      | ** ** | **Blount  International,  Inc.** | ** ** | **Blount, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **Cash Flows Information**                                           | ** ** | ** **                       | ** ** |                  | ** ** | ** **                  | ** ** |                            | ** ** | ** **       | ** ** |             | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| **For the Year Ended December 31, 2002**                        | ** ** | ** **                       | ** ** |                  | ** ** | ** **                  | ** ** |                            | ** ** | ** **       | ** ** |             | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |
| Net cash provided by (used in) operating activities                  |       |                             | $          | (4.5                  | )          |                        |       | $                               | 11.4       |             |       |             | $          | 3.9 |   |   |   | $ | 16.8 |   |   |   |   |   | $ | 27.6 |   |   |
| Net cash provided by discontinued operations:                        |       |                             |       |                  |       |                        | 1.2        |                            |       |             |       |             |       |   |   |   |   |   |   |   | 1.2 |   |   |
| Net cash provided by (used in) operating activities                  |       |                             | (4.5       | )                     |       |                        | 12.6       |                            |       |             | 3.9        |             |       |   | 16.8 |   |   |   |   |   | 28.8 |   |   |
| **Cash flows from investing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| (Payments for) proceeds  from sales of property, plant and equipment |       |                             |       |                  |       |                        | 8.0        |                            |       |             |       |             |       |   |   |   |   |   |   |   | 8.0 |   |   |
| Purchases of property,  plant and equipment                          |       |                             |       |                  |       |                        | (8.4       | )                               |       |             | (2.4       | )                |       |   | (6.3 | ) |   |   |   |   | (17.1 | ) |   |
| Net cash used in continuing operations                               |       |                             |       |                  |       |                        | (0.4       | )                               |       |             | (2.4       | )                |       |   | (6.3 | ) |   |   |   |   | (9.1 | ) |   |
| Net cash used in discontinued operations                             |       |                             |       |                  |       |                        | (23.8      | )                               |       |             |       |             |       |   |   |   |   |   |   |   | (23.8 | ) |   |
| Net cash used in investing activities                                |       |                             |       |                  |       |                        | (24.2      | )                               |       |             | (2.4       | )                |       |   | (6.3 | ) |   |   |   |   | (32.9 | ) |   |
| **Cash flows from financing activities:**                            |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Increase in short-term  borrowings                                   |       |                             |       |                  |       |                        |       |                            |       |             |       |             |       |   | (5.1 | ) |   |   |   |   | (5.1 | ) |   |
| Reduction of long-term  debt                                         |       |                             |       |                  |       |                        | (11.8      | )                               |       |             |       |             |       |   |   |   |   |   |   |   | (11.8 | ) |   |
| Advances from (to)  affiliated companies                             |       |                             | 4.5        |                  |       |                        | (4.0       | )                               |       |             | (0.5       | )                |       |   |   |   |   |   |   |   |   |   |   |
| Other                                                                |       |                             |       |                  |       |                        | (0.2       | )                               |       |             |       |             |       |   |   |   |   |   |   |   | (0.2 | ) |   |
| Net cash provided by (used in) financing activities                  |       |                             | 4.5        |                  |       |                        | (16.0      | )                               |       |             | (0.5       | )                |       |   | (5.1 | ) |   |   |   |   | (17.1 | ) |   |
| Net increase (decrease) in cash and cash equivalents                 |       |                             |       |                  |       |                        | (27.6      | )                               |       |             | 1.0        |             |       |   | 5.4 |   |   |   |   |   | (21.2 | ) |   |
| Cash and cash equivalents at beginning of year                       |       |                             |       |                  |       |                        | 43.9       |                            |       |             | (1.1       | )                |       |   | 4.8 |   |   |   |   |   | 47.6 |   |   |
| Cash and cash  equivalents at end of year                            |       |                             | $          | 0.0                   |       |                        |       | $                               | 16.3       |             |       |             | $          | (0.1 | ) |   |   | $ | 10.2 |   |   |   |   |   | $ | 26.4 |   |   |

 

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**NOTE15:**   RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities.” FIN 46 clarifies the application of AccountingResearch Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The Company adopted this interpretation on January 1,2004. The Company has not identified any variable interest entities for whichit is the primary beneficiary or has significant involvement.

In November 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”**This statement amends the guidancein ARB No. 43, Chapter 4, InventoryPricing, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage).Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “...undersome circumstances, items such as idle facility expense, excessive spoilage,double freight, and re-handling costs may be so abnormal as to requiretreatment as current period charges...” SFAS No. 151 requires that thoseitems be recognized as current-period charges regardless of whether they meetthe criterion of “so abnormal.” In addition, this statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The provisions of SFAS 151shall be applied prospectively and are effective for inventory costs incurredduring fiscal years beginning after June 15, 2005, with earlierapplication permitted for inventory costs incurred during fiscal yearsbeginning after the date this Statement was issued. The adoption of SFAS No. 151is not expected to have a material impact on our financial position and resultsof operations.

In December 2004, the FASB issued SFAS No. 123(R),‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 andsupersedes Accounting Principles Board (“APB”) Opinion No. 25. SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be valued at fair value on the date of grant, and to be expensedover the applicable vesting period. Pro forma disclosure of the incomestatement effects of share-based payments is no longer an alternative. SFAS No. 123(R) iseffective for all stock-based awards granted on or after July 1, 2005. Inaddition, companies must also recognize compensation expense related to anyawards that are not fully vested as of the effective date. Compensation expensefor the unvested awards will be measured based on the fair value of the awardspreviously calculated in developing the pro forma disclosures in accordancewith the provisions of SFAS No. 123. The Company is currently evaluatingSFAS No. 123(R), including the method of adoption, and expects itsadoption will result in increased compensation expense in the future.

In December 2004, theFASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29.” Theguidance in APB Opinion No. 29, Accountingfor Nonmonetary Transactions, is based on the principle that exchangesof nonmonetary assets should be measured based on the fair value of assetsexchanged. The guidance in that opinion, however, included certain exceptionsto that principle. This Statement amends APB No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets that do nothave commercial substance. A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS No. 153 is effective for nonmonetaryexchanges occurring in fiscal periods beginning after June 15, 2005. Theadoption of SFAS No. 153 is not expected to have a material impact on ourfinancial position and results of operations.

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**SUPPLEMENTARY DATA**QUARTERLY RESULTS OF OPERATIONS(Unaudited)

Thefollowing tables set forth a summary of the unaudited quarterly results ofoperations for 2004 and 2003. For 2004 results were as follows:
| **(Dollar amounts in millions  except per share data)** | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** | **Total 2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|
| Sales                                                                                 |       |                 | $          | 165.6                |       |                 |       | $                    | 169.2      |                |       |   | $ | 173.7 |   |   |   | $ | 184.1 |   |   |   | $ | 692.6 |   |   |
| Gross profit                                                                          |       |                 | 57.0       |                 |       |                 | 58.3       |                 |       |                | 60.2       |   |   |   | 57.7 |   |   |   | 233.2 |   |   |
| Net income (loss)                                                                     |       |                 | 7.6        |                 |       |                 | 8.4        |                 |       |                | (31.8      | ) |   |   | 22.1 |   |   |   | 6.3 |   |   |
| Earnings (loss)  per share:                                                           |       |                 |       |                 |       |                 |       |                 |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                 |       |                 | $          | 0.25                 |       |                 |       | $                    | 0.27       |                |       |   | $ | (0.79 | ) |   |   | $ | 0.49 |   |   |   | $ | 0.17 |   |   |
| Diluted                                                                               |       |                 | 0.23       |                 |       |                 | 0.25       |                 |       |                | (0.79      | ) |   |   | 0.47 |   |   |   | 0.16 |   |   |

 

The third quarter includes $47.0 million innon-recurring charges, $42.8 million against other expense and $4.2 million ininterest expense, related to a series of refinancing transactions. The fourthquarter reflects the benefits of lower interest due to refinancing transactionsof the third quarter as well as $3.9 million of other income related to a legalsettlement for one of the Company’s segments.

For2003 results were as follows:
| **(Dollar amounts in millions  except per share data)** | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** | **Total 2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|
| Sales                                                                                 |       |                 | $          | 122.9                |       |                 |       | $                    | 131.2      |                |       |   | $ | 145.8 |   |   |   | $ | 159.2 |   |   |   | $ | 559.1 |   |   |
| Gross profit                                                                          |       |                 | 42.8       |                 |       |                 | 44.7       |                 |       |                | 50.2       |   |   |   | 52.0 |   |   |   | 189.7 |   |   |
| Net income (loss)                                                                     |       |                 | 0.5        |                 |       |                 | 1.3        |                 |       |                | (36.2      | ) |   |   | 4.3 |   |   |   | (30.1 | ) |   |
| Earnings (loss)  per share:                                                           |       |                 |       |                 |       |                 |       |                 |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                 |       |                 | $          | 0.02                 |       |                 |       | $                    | 0.04       |                |       |   | $ | (1.17 | ) |   |   | $ | 0.14 |   |   |   | $ | (0.98 | ) |   |
| Diluted                                                                               |       |                 | 0.01       |                 |       |                 | 0.04       |                 |       |                | (1.17      | ) |   |   | 0.13 |   |   |   | (0.98 | ) |   |

 

The first quarter includesrestructuring expense of $0.2 million associated with the relocation of certainmanufacturing assets and production among the Company’s Outdoor Productsfacilities. The second quarter includes other expense of $2.8 million relatedto the early extinguishment of debt in conjunction with the Company’srefinancing in May, but offset by interest income of $3.3 million on income taxrefund receivables. The third quarter includes a $39.7 million valuationallowance taken against the Company’s deferred tax assets.

**ITEM9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

There has been no changein the Company’s independent registered public accounting firm during the pasttwo fiscal years. There have been no disagreements with the Company’sindependent registered public accounting firm on our accounting or financialreporting or auditing scope of procedures that would require the Company’sindependent registered public accounting firm to make reference to suchdisagreement in their report on our consolidated financial statements andfinancials statement schedules, or otherwise require disclosure in this AnnualReport on Form 10-K.

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**ITEM 9A.   CONTROLS AND PROCEDURES**

Under the supervision and with the participation ofits management, including the Chief Executive Officer and the Chief FinancialOfficer, the Company has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-14(e)), and has concluded that, as of December 31, 2004, theCompany’s disclosure controls and procedures were adequate and effective toensure that material information relating to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities.

On November 2, 2004 the Company announced that itdetermined it was necessary to restate certain Financial Statements in 2003 and2004 relating to interest received in October of 2004 for income taxrefunds. Management of the Company has evaluated this matter relative to itscurrent and past internal controls and disclosure controls and procedures. Managementof the Company was aware of the potential for interest on its income taxrefunds; however in 2003 it was the Company’s judgment not to accrue intereston the tax refunds that had been applied for. After receiving the refunds andthe related interest thereon, and especially considering the amount of theinterest that the Company ultimately collected, it was determined that it wasprudent to reassess the accounting judgment that was made in 2003. Aftercompletion of this reassessment, the Company and the Audit Committee concludedthat the interest should have been accrued beginning in 2003. While it has beenconcluded that this is an accounting error that was corrected retroactively, itis not believed that the occurrence of this error represents a breakdown in theinternal control structure since management of the Company was aware of thisinterest potential dating back to 2003.

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and proceduressubsequent to the date of their evaluation, nor were there any significantdeficiencies or material weaknesses in the Company’s internal controls. As aresult, no corrective actions were required or undertaken.

**PART III**

**ITEM10.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THEREGISTRANT**

See the “Election ofDirectors”, “Executive Officers”, “Audit Committee Disclosure” and “FilingDisclosure” sections of our Proxy Statement for the Annual Meeting ofStockholders, which sections are incorporated herein by reference.

**ITEM 11.   EXECUTIVE COMPENSATION**

See the “ExecutiveCompensation”, “Compensation of Directors”, “Compensation Committee Interlocksand Insider Participation” and “Employment Contracts” sections of our ProxyStatement for the Annual Meeting of Stockholders, which sections areincorporated herein by reference.

**ITEM12.**   SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

See the “PrincipalStockholders” and “Equity Compensation Plan Information” sections of our ProxyStatement for the Annual Meeting of Stockholders, which sections areincorporated herein by reference.

**ITEM13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

See the “CertainTransactions and Other Matters” section of our Proxy Statement for the AnnualMeeting of Stockholders, which section is incorporated herein by reference.

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**ITEM14.   INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES**

See the “Ratify theAppointment of Independent Auditors” section of our Proxy Statement for theAnnual Meeting of Stockholders, which section is incorporated herein byreference.

**PART IV**

**ITEM15.**   EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K
|                                                                                                                                                    | ** ** | **Page  Reference** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                                         | ** ** | ** **          | ** ** |
| (A)   Certain documents filed as part of  Form 10-K                                                                                 |       |                |       |
|   (1) Financial Statements and  Supplementary Data                                                                                       |       |                |       |
|   Report of Independent  Registered Public Accounting Firm                                                                                    |       | 32                  |       |
|   Consolidated Statements of  Income (Loss) for the years ended  December 31, 2004, 2003 and 2002                                   |       | 33                  |       |
|   Consolidated  Balance Sheets as of December 31, 2004 and 2003                                                                          |       | 34                  |       |
|   Consolidated Statements of  Cash Flows for the years ended  December 31, 2004, 2003 and 2002                                      |       | 35                  |       |
|   Consolidated Statements of  Changes in Stockholders’ Equity (Deficit) for  the years ended December 31,  2004, 2003 and 2002 |       | 36                  |       |
|   Notes to Consolidated Financial Statements                                                                                                  |       | 37                  |       |
|   Supplementary  Data                                                                                                                         |       | 68                  |       |
|   (2) Financial Statement Schedules                                                                                                      |       |                |       |
|   Schedule II –  Valuation and qualifying accounts for the years ended  December 31, 2004, 2003 and  2002                 |       |     76    |       |

 

All other schedules havebeen omitted because they are not required or because the informationis presented in the Notes to Consolidated Financial Statements.

(B)   Reports on Form 8-Kin the Fourth Quarter of 2004

The Company furnished a Form 8-Kdated November 2, 2004 regarding its financial results and public releasefor the quarter ended September 30, 2004.

The Company furnished a Form 8-Kdated November 12, 2004 regarding the availability of certain datapresented by one of its executive officers at the Lehman Brothers AnnualMeeting in New York, New York on November 11, 2004.

The Company furnished a Form 8-Kdated December 1, 2004 regarding the completion of the First Amendment tothe Amended and Restated Senior Credit Amendment.

The Company filed a Form 8-Kdated December 7, 2004 regarding its public release announcing a secondaryoffering of common stock as well as the company’s sales, operating income andnet income outlook for the fourth quarter and fiscal year ended December 31,2004.

The Company furnished a Form 8-Kdated December 14, 2004 announcing the resignation of William A. Shutzeras a member of the Board of Directors.

The Company filed a Form 8-Kdated December 16, 2004 regarding the sale of common stock by a principalshareholder through a secondary offering.

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(C)   Exhibitsrequired by Item 601 of Regulation S-K:

*2(a)  Stock PurchaseAgreement, dated November 4, 1997, by and among Blount, Inc., HoffmanEnclosures, Inc., Pentair, Inc., and Federal-Hoffman, Inc. whichwas filed as Exhibit No. 2 to the Form 8-K filed by BlountInternational, Inc. on November 19, 1997 (Commission File No. 001-11549).

*2(b)  Agreement andPlan of Merger and Recapitalization, dated as of April 18, 1999, betweenBlount International, Inc., and Red Dog Acquisition, Corp. (included asAppendix A to the Proxy Statement-Prospectus which forms a part of theRegistration Statement) previously filed on July 15, 1999, by BlountInternational, Inc. (Reg. No. 333-82973).

*3(a)  Post-MergerRestated Certificate of Incorporation of Blount International, Inc.(included as Exhibit A to the Agreement and Plan of Merger andRecapitalization which is Exhibit 2.1) filed as part of the ProxyStatement-Prospectus which forms a part of the Registration Statement on Form S-4(Reg. No. 333-82973) previously filed on July 15, 1999, byBlount International, Inc.

*3(b)  Post-MergerBylaws of Blount International, Inc. (included as Exhibit B to theAgreement and Plan of Merger and Recapitalization which is Exhibit 2.1)filed as part of the Proxy Statement-Prospectus which forms a part of theRegistration Statement on Form S-4 (Reg. No. 333-82973).

*4(a)  RegistrationRights and Stock Transfer Restriction agreement filed as part of RegistrationStatement on Form S-4 (Reg. No. 33-63141) of BlountInternational, Inc., including amendments and exhibits, which becameeffective on October 4, 1995 (Commission File No. 33-63141).

*4(b)  RegistrationStatement on Form S-3 (Reg. Nos. 333-42481 and 333-42481-01),with respect to the 7% $150 million Senior Notes due 2005 of Blount, Inc.which are guaranteed by Blount International, Inc., including amendmentsand exhibits, which became effective on June 17, 1998.

*4(c)  Form ofstock certificate of New Blount common stock filed as part of the ProxyStatement-Prospectus which forms a part of the previously filed on July 15,1999, by Blount International, Inc., Registration Statement on Form S-4(Reg. No. 333-82973).

*4(d)  Indenturebetween Blount, Inc., as issuer, Blount International, Inc., BIHoldings Corp., Benjamin F. Shaw Company, BI, L.L.C., Blount Development Corp.,Omark Properties, Inc., 4520 Corp., Inc., Gear Products, Inc.,Dixon Industries, Inc., Frederick Manufacturing Corporation, FederalCartridge Company, Simmons Outdoor Corporation, Mocenplaza Development Corp.,and CTR Manufacturing, Inc., as Guarantors, and United States TrustCompany of New York, dated as of August 19, 1999, (including exhibits)which was filed as Exhibit 4.1 to the report on Form 10-Q forthe third quarter ended September 30, 1999.

*4(e)  RegistrationRight Agreement by and among Blount, Inc., Blount International, Inc.,BI Holdings Corp., Benjamin F. Shaw Company, BI. L.L.C., Blount DevelopmentCorp., Omark Properties, Inc., Gear Products, Inc., Dixon Industries, Inc.,Frederick Manufacturing Corporation, Federal Cartridge Company, Simmons OutdoorCorporation, Mocenplaza Development Corp., CTR Manufacturing, Inc., andLehman Brothers, Inc. dated as of August 19, 1999, filed as Exhibit 4.2to the report on Form 10-Q for the third quarter ended September 30,1999.

*4(f)  RegistrationStatement on Form S-4 (Reg. No. 333-92481) which respectto the 13% $325 million Senior Subordinated Notes of Blount, Inc.guaranteed by Blount International, Inc., including amendments andexhibits, effective on January 19, 2000.

*4(g)  PurchaseAgreement between Blount International, Inc., and an affiliate of LehmanBrothers Merchant Banking Partners II, L.P. for sale of $20,000,000 of aconvertible preferred 

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equivalent security,together with warrants for common stock, as filed on Form 8-K on March 13,2001.

*4(h)  CreditAgreement, dated as of May 15, 2003 among Blount, Inc., the otherparties named therein as credit parties, the several banks and financialinstitutions or entities named therein as lenders, General Electric CapitalCanada, Inc., as Canadian agent, and General Electric Capital Corporation,as agent and collateral agent, which was filed as Exhibit 99.2 to thereport on Form 8-K filed by Blount International, Inc., on May 19,2003.

*4(i)  Amended andRestated Credit Agreement dated as of August 9, 2004 among Blount Inc.,Dixon Industries, Inc., Fabtek Corporation, Frederick ManufacturingCorporation, Gear Products, Inc., Omark Properties, Inc., and WindsorForestry Tools LLC, as US Borrowers, Blount Canada Ltd., as Canadian Borrower,the other credit parties signatory thereto, as Credit Parties, from time totime, as Lenders, General Electric Capital Corporation, as Administrative Agentand US Lender, and General Electric Capital Canada Inc., as Canadian AdministrativeAgent and Canadian Lender, GECC Capital Markets Group Inc., as Lead Arrangerand Book Runner and BNP PARIBAS, as Syndication Agent, which was filed as Exhibit 99.1to Form 10-Q for the quarter ended September 30, 2004.

*4(j)  Amendment No. 1dated as of December 1, 2004 to the Amended and Restated Senior CreditAmendment dated August 9, 2004 among Blount Inc., Dixon Industries, Inc.,Fabtek Corporation, Frederick Manufacturing Corporation, Gear Products, Inc.,Omark Properties, Inc., and Windsor Forestry Tools LLC, as US Borrowers,Blount Canada Ltd., as Canadian Borrower, the other credit parties signatorythereto, as Credit Parties, from time to time, as Lenders, General ElectricCapital Corporation, as Administrative Agent and US Lender, and GeneralElectric Capital Canada Inc., as Canadian Administrative Agent and CanadianLender, GECC Capital Markets Group Inc., as Lead Arranger and Book Runner andBNP PARIBAS, as Syndication Agent, which was filed as Exhibit 99.1 to thereport on Form 8-K filed by Blount International, Inc., on December 3,2004.

*4(k)  RegistrationStatement on Form S-1 (Reg. No. 333-114840) with respectto the 8 7/8% Senior Subordinated Notes of Blount, Inc. which areguaranteed by BI, LLC, Omark Properties, Inc., 4520 Corp., Inc., GearProducts, Inc., Dixon Industries, Inc., Frederick ManufacturingCorporation, Fabtek Corporation and Windsor Forestry Tools LLC and 10,000,000shares of common stock of Blount International, Inc. including amendmentsand exhibits, which became effective on August 3, 2004

*4(l)  RegistrationStatement on Form S-3 (Reg. No. 333-120661) with respectto 18,000,000 shares of common stock of Blount International, Inc., whichbecame effective on December 6, 2004.

*9(a)  StockholderAgreement, dated as of April 18, 1999, between Red Dog Acquisition, corp.,a Delaware corporation and a wholly-owned subsidiary of Lehman BrothersMerchant Banking Partners II L.P., a Delaware limited partnership, and TheBlount Holding Company, L.P., a Delaware limited partnership which was filed asExhibit 9 to the Form 8-K/A filed April 20, 1999.

*10(a)  SupplementalRetirement and Disability Plan of Blount, Inc. which was filed as Exhibit 10(e) tothe Annual Report of Blount, Inc., on Form 10-K for the fiscalyear ended February 29, 1992 (Commission File No. 1-7002).

*10(b)  Writtendescription of the Executive Management Annual Incentive Plan of BlountInternational, Inc., Effective as of January 1, 2000, which wasincluded within the Proxy Statement of Blount, International, Inc. for theAnnual Meeting of Stockholders held April 17, 2000 (Commission File No. 1-11549).

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*10(c)  SupplementalRetirement Savings Plan of Blount, Inc. which was filed as Exhibit 10(i) tothe Annual Report of Blount, Inc. on Form 10-K for the fiscalyear ended February 29, 1992 (Commission File No. 1-7002).

*10(d)  Blount, Inc.Executive Benefit Plans Trust Agreement and Amendment to and Assumption ofBlount, Inc. Executive Benefit Plans Trust which were filed as Exhibits10(x)(i) and 10(x)(ii) to the Annual Report of Blount International, Inc.on Form 10-K for the fiscal year ended February 29, 1996(Commission File No. 001-11549).

*10(e)  Blount, Inc.Benefits Protection Trust Agreement and Amendment To ad Assumption of Blount, Inc.Benefits Protection Trust which were filed as Exhibits 10(y)(i) and 10(y)(ii) tothe Annual Report of Blount International, Inc. on Form 10-Kfor the fiscal year ended February 29, 1996 (Commission File No. 001-11549).

*10(f)  1999 StockIncentive Plan of Blount International, Inc. filed as Exhibit B toProxy Statement of Blount, International, Inc. for the Annual Meeting ofStockholders held April 17, 2000 (Commission File No. 1-11549).

*10(g)  2000 StockIncentive Plan of Blount International, Inc. filed as Exhibit C toProxy Statement of Blount, International, Inc. for the Annual Meeting ofStockholders held April 17, 2000 (Commission File No. 1-11549).

*10(h)  The BlountDeferred Compensation Plan which was filed as Exhibit 10(cc) to the AnnualReport of Blount International, Inc. on Form 10-K for the yearended December 31, 1998 (Commission File No. 001-11549).

*10(i)  EmploymentAgreement, dated as of April 18, 1999, between Blount International, Inc.and Richard H. Irving filed as part of Registration Statement on Form S-4(Reg. No. 333-92481) of Blount International, Inc., includingamendments and exhibits, which became effective January 19, 2000.

*10(j)  EmploymentAgreement, dated as of April 18, 1999, between Blount International, Inc.and Harold E. Layman filed as part of Registration Statement on Form S-4(Reg. No. 333-92481) of Blount International, Inc., includingamendments and exhibits, which became effective January 19, 2000.

*10(k)  EmployeeStockholder Agreement dated as of August 19, 1999, among Blount International, Inc.,Lehman Brothers Merchant Banking Partners II L.P. and Certain EmployeeStockholders.

*10(l)  Amendment toHarold E. Layman Employment Agreement dated February 3, 2000, as filed as Exhibit 10(t) tothe Report on Form 10-Q for the second quarter ended June 30,2000.

*10(m)  EmploymentAgreement, effective as of August 15, 2000, between Blount International, Inc.and Dennis E. Eagan and filed as Exhibit 10(s) on Form 10K forthe year ended December 31, 2001.

*10(n)  Amendment toEmployment Agreement between Blount International, Inc. and Harold E.Layman dated July 2, 2002 and filed as Exhibit 10(v ) on Form 10Qfor the quarter ended June 30, 2002.

*10(o)  1999 StockIncentive Plan and 2000 Stock Incentive Plan of Blount International, Inc.filed as part of Registration Statement on Form S-8 (Reg. No. 333-913-90)exhibits, which became effective June 27, 2002.

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*10(p)  Amendment toEmployment Agreement between Blount Inc. and Kenneth O. Saito dated August 16,2002.

*10(q)  Amendment toEmployment Agreement between Blount International and Richard H. Irving, IIIdated February 14, 2002.

*10(r)  Amendment toEmployment Agreement between Blount International and Richard H. Irving, IIIdated August 19, 2002.

*10(s)  EmploymentAgreement between Blount, Inc. and Kenneth O. Saito dated June 1,1999.

**10(t)  Amended andRestated Employment Agreement between Blount International, Inc. and JamesS. Osterman dated February 2, 2004.

**10(u)  Amended andRestated Employment Agreement between Blount International, Inc. andCalvin E. Jenness dated March 1, 2004.

**14  Code of Ethics for Covered Officers asapproved by Audit Committee on February 2, 2004.

21  A list of the significant subsidiaries ofBlount International, Inc. included herein on page 72.

23  Consent of Independent Registered PublicAccounting Firm included herein on page 73.

**31.1  Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by James O. Osterman, Chief Executive Officer.

**31.2  Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by Calvin E. Jenness Chief Financial Officer.

**32.1  Certification pursuant to section 906 of theSarbanes-Oxley Act of 2002 by James O. Osterman, Chief Executive Officer.

**32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002by Calvin E. Jenness Chief Financial Officer.

*    Incorporated by reference

**   Filed electronically herewith. Copies ofsuch exhibits may be obtained upon written request from:
|  | Blount International, Inc.  P.O. Box 22127  Portland, Oregon 97269-2127 |
|--|-----------------------------------------------------------------------------------|

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant had duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| BLOUNT INTERNATIONAL, INC.                                            |   |
|-----------------------------------------------------------------------|--------|
| By:  /s/ Calvin E. Jenness                                            |   |   |   |
| Calvin E. Jenness  Senior Vice President and  Chief Financial Officer |   |   | ** ** |
| Dated:  March 7, 2005                                       |   |   | * * |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report issigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| Dated:  March 7, 2005               |   |                    |
|----------------------------------------------------|--------|-------------------------|
| /s/ Eliot M. Fried                                 |   | /s/ Joshua L. Collins   |
| Eliot M. Fried                                     |   | Joshua L. Collins       |
| Chairman of the Board and Director                 |   | Director                |
| /s/ Harold E. Layman                               |   | /s/ E. Daniel James     |
| Harold E. Layman                                   |   | E. Daniel James         |
| Director                                           |   | Director                |
| /s/ R. Eugene Cartledge                            |   | /s/ Thomas J. Fruechtel |
| R. Eugene Cartledge                                |   | Thomas J. Fruechtel     |
| Director                                           |   | Director                |
| /s/ James S. Osterman                              |   | /s/ Robert D. Kennedy   |
| James S. Osterman                                  |   | Robert D. Kennedy       |
| President and Chief Executive Officer and Director |   | Director                |

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIESSCHEDULE IICONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS**
| **(Dollar amounts in millions)** | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **        | ** ** | ** **                               | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|------------------------------------------|------------|
| **Column A**                               | ** ** | **Column B**                              | ** ** | **Column C**                            | ** ** | **Column D** | ** ** | **Column E**                        | ** ** |
| ** **                                      | ** ** | ** **                                     | ** ** | **Additions**                                | ** ** | ** **        | ** ** | ** **                               | ** ** |
| **Description**                                 | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Deductions**    | ** ** | **Balance at  End of  Period** | ** ** |
| **Year Ended December 31,  2004:**         |       |                                           |       |                                         |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts receivable     |       |                                           | $          | 3.0                                          |       |              |       | $                                        | (0.1       | ) |   |   | $ | 0.5 |   |   |   | $ | 2.4 |   |   |
| Allowance for  valuation of deferred tax assets |       |                                           | $          | 47.3                                         |       |              |       | $                                        | 10.6       |   |   |   | $ | 0.0 |   |   |   | $ | 57.9 |   |   |
| **Year  Ended December 31, 2003:**         |       |                                           |       |                                         |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts receivable     |       |                                           | $          | 4.3                                          |       |              |       | $                                        | 0.6        |   |   |   | $ | 1.9 |   |   |   | $ | 3.0 |   |   |
| Allowance for  valuation of deferred tax assets |       |                                           | $          | 0.0                                          |       |              |       | $                                        | 47.3       |   |   |   | $ | 0.0 |   |   |   | $ | 47.3 |   |   |
| **Year  Ended December 31, 2002:**         |       |                                           |       |                                         |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts receivable      |       |                                           | $          | 3.5                                          |       |              |       | $                                        | 1.5        |   |   |   | $ | 0.7 |   |   |   | $ | 4.3 |   |   |

 

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