**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For the  quarterly period ended September 30, 2005.**                                             |
|       |       |                                                                                                     |
| **OR**     |
|       |       |                                                                                                     |
| **o**      | ** ** | **Transition  report pursuant to section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

**Commission file number 001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

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

 

**(503) 653-8881**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether theregistrant (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  ý                                                                                                                                                          No  o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).

 

Yes  o                                                                                                                                                          No  ý

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o                                                                                                                                                          No  ý

 

Indicate the number of sharesoutstanding of each of the issued classes of common stock, as of the latestpracticable date.

 

| **Class of Common Stock** | ** ** | **Outstanding at October 31, 2005** |
|--------------------------------|------------|------------------------------------------|
| $0.01 Par Value                |       | 47,004,292 shares.                       |

 

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| Part I         Financial Information                                                        |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                           |   |
| Item  1. Consolidated Financial Statements                                                                                     |   |
|                                                                                                                           |   |
| Unaudited  Consolidated Statements of Income  Three and nine months ended September 30, 2005 and September 30,  2004 |   |
|                                                                                                                           |   |
| Unaudited  Consolidated Balance Sheets  September 30, 2005 and December 31, 2004                                     |   |
|                                                                                                                           |   |
| Unaudited  Consolidated Statements of Cash Flows  Nine months ended September 30, 2005 and September 30, 2004        |   |
|                                                                                                                           |   |
| Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit)  Nine months ended September 30, 2005 |   |
|                                                                                                                           |   |
| Notes  to Unaudited Consolidated Financial Statements                                                                          |   |
|                                                                                                                           |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                           |   |
|                                                                                                                           |   |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                                            |   |
|                                                                                                                           |   |
| Item 4. Controls  and Procedures                                                                                               |   |
|                                                                                                                           |   |
| Part II     Other  Information                                                                        |   |
|                                                                                                                           |   |
| Item  6. Exhibits                                                                                                              |   |
|                                                                                                                           |   |
| Signature                                                                                                                      |   |

 

2

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**PART I**** ****FINANCIAL INFORMATION**

 

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTSOF INCOME**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands, except  per share data)** | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| Sales                                              |       | $                                          | 186,690    |                                      | $          | 173,662 |   | $ | 565,697 |   | $ | 508,499 |   |
| Cost of sales                                      |       | 127,701                                    |       | 113,492                                   |       | 386,132 |   | 333,020 |   |
| Gross profit                                       |       | 58,989                                     |       | 60,170                                    |       | 179,565 |   | 175,479 |   |
| Selling, general and administrative expenses       |       | 28,977                                     |       | 29,114                                    |       | 89,493 |   | 88,703 |   |
| Operating income                                   |       | 30,012                                     |       | 31,056                                    |       | 90,072 |   | 86,776 |   |
| Interest expense                                   |       | (9,353                                     | )          | (17,397                                   | )          | (28,006 | ) | (52,065 | ) |
| Interest income                                    |       | 120                                        |       | 750                                       |       | 531 |   | 2,086 |   |
| Other income (expense), net                        |       | (1,342                                     | )          | (43,647                                   | )          | (1,812 | ) | (43,676 | ) |
| Income (loss) before income taxes                  |       | 19,437                                     |       | (29,238                                   | )          | 60,785 |   | (6,879 | ) |
| Provision for income taxes                         |       | 3,413                                      |       | 2,518                                     |       | 10,359 |   | 8,872 |   |
| Net income (loss)                                  |       | $                                          | 16,024     |                                      | $          | (31,756 | ) | $ | 50,426 |   | $ | (15,751 | ) |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| Basic net income (loss) per share                  |       | $                                          | 0.34       |                                      | $          | (0.79 | ) | $ | 1.10 |   | $ | (0.46 | ) |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| Diluted net income (loss) per share                |       | $                                          | 0.34       |                                      | $          | (0.79 | ) | $ | 1.06 |   | $ | (0.46 | ) |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| Shares used in per share calculations:             |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                              |       | 46,610                                     |       | 40,180                                    |       | 45,801 |   | 33,992 |   |
| Diluted                                            |       | 47,602                                     |       | 40,180                                    |       | 47,445 |   | 33,992 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

3

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**UNAUDITED CONSOLIDATED BALANCESHEETS**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except  share data)**                                                                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                                                                                                          |       |                   |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                          |       |                   |       |                  |       |
| Current assets:                                                                                                               |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                      | 25,778     |                  | $          | 48,570 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,276 and $2,371,  respectively                              |       | 90,201                 |       | 74,975                |       |
| Inventories                                                                                                                   |       | 91,291                 |       | 81,098                |       |
| Other current  assets                                                                                                         |       | 5,121                  |       | 4,693                 |       |
| Total current  assets                                                                                                         |       | 212,391                |       | 209,336               |       |
| Property, plant and equipment, net                                                                                            |       | 100,037                |       | 97,929                |       |
| Goodwill                                                                                                                      |       | 76,891                 |       | 76,891                |       |
| Deferred financing costs                                                                                                      |       | 19,729                 |       | 23,883                |       |
| Other assets                                                                                                                  |       | 17,901                 |       | 16,703                |       |
| Total Assets                                                                                                                  |       | $                      | 426,949    |                  | $          | 424,742 |   |
|                                                                                                                          |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Deficit**                                                                                | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                          |       |                   |       |                  |       |
| Current liabilities:                                                                                                          |       |                   |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                      | 2,744      |                  | $          | 3,199 |   |
| Accounts payable                                                                                                              |       | 38,711                 |       | 39,309                |       |
| Accrued expenses                                                                                                              |       | 61,248                 |       | 68,842                |       |
| Total current  liabilities                                                                                                    |       | 102,703                |       | 111,350               |       |
| Long-term debt, excluding current maturities                                                                                  |       | 443,675                |       | 491,012               |       |
| Deferred income taxes                                                                                                         |       | 5,528                  |       | 4,913                 |       |
| Employee benefits                                                                                                             |       | 66,008                 |       | 62,248                |       |
| Other liabilities                                                                                                             |       | 10,463                 |       | 11,373                |       |
| Total liabilities                                                                                                             |       | 628,377                |       | 680,896               |       |
| Commitments and contingent liabilities                                                                                        |       |                   |       |                  |       |
| Stockholders’ equity (deficit):                                                                                          |       |                   |       |                  |       |
| Common stock:  par value $0.01 per share, 100,000,000 shares authorized, 46,819,139 and  44,969,886 outstanding, respectively |       | 468                    |       | 450                   |       |
| Capital in  excess of par value of stock                                                                                      |       | 560,266                |       | 553,640               |       |
| Accumulated  deficit                                                                                                          |       | (759,739               | )          | (810,165              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (2,423                 | )          | (79                   | )          |
| Total stockholders’ (deficit)                                                                                            |       | (201,428               | )          | (256,154              | )          |
| Total Liabilities and Stockholders’ Deficit                                                                              |       | $                      | 426,949    |                  | $          | 424,742 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

4

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**UNAUDITED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                                                                | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                     |       |   |   |
| Net income (loss)                                                                         |       | $                                        | 50,426     |   | $ | (15,751 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                     |       |   |   |
| Early  extinguishment of debt                                                             |       | 1,696                                    |       | 47,045 |   |
| Depreciation,  amortization and other non-cash charges                                    |       | 14,473                                   |       | 17,518 |   |
| Deferred income  taxes                                                                    |       | 137                                      |       | 27 |   |
| (Gain) loss on  disposals of property, plant, and equipment                               |       | (433                                     | )          | 397 |   |
| Changes in  assets and liabilities:                                                       |       |                                     |       |   |   |
| (Increase)  decrease in accounts receivable                                               |       | (15,226                                  | )          | (13,982 | ) |
| (Increase)  decrease in inventories                                                       |       | (10,193                                  | )          | (13,825 | ) |
| (Increase)  decrease in other assets                                                      |       | (1,694                                   | )          | (1,003 | ) |
| Increase  (decrease) in accounts payable                                                  |       | (598                                     | )          | 5,142 |   |
| Increase  (decrease) in accrued expenses                                                  |       | (3,778                                   | )          | (8,624 | ) |
| Increase  (decrease) in other liabilities                                                 |       | 806                                      |       | (5,803 | ) |
| Net cash  provided by operating activities                                                |       | 35,616                                   |       | 11,141 |   |
|                                                                                      |       |                                     |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                     |       |   |   |
| Proceeds from sale of property, plant and equipment                                       |       | 947                                      |       | 82 |   |
| Purchases of property, plant and equipment                                                |       | (14,160                                  | )          | (11,967 | ) |
| Net cash used in  investing activities                                                    |       | (13,213                                  | )          | (11,885 | ) |
|                                                                                      |       |                                     |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                     |       |   |   |
| Issuance of long-term debt                                                                |       |                                     |       | 435,500 |   |
| Reduction of long-term debt                                                               |       | (47,792                                  | )          | (533,360 | ) |
| Issuance costs related to debt                                                            |       | (2,554                                   | )          | (10,891 | ) |
| Debt redemption costs                                                                     |       |                                     |       | (31,402 | ) |
| Issuance costs related to stock                                                           |       | (1,425                                   | )          | (11,259 | ) |
| Proceeds from issuance of stock                                                           |       | 6,123                                    |       | 138,000 |   |
| Purchase of treasury stock                                                                |       | (6,123                                   | )          |   |   |
| Proceeds from exercise of stock options and warrants                                      |       | 6,576                                    |       | 645 |   |
| Net cash used in  financing activities                                                    |       | (45,195                                  | )          | (12,767 | ) |
|                                                                                      |       |                                     |       |   |   |
| Net decrease in cash and cash equivalents                                                 |       | (22,792                                  | )          | (13,511 | ) |
| Cash and cash equivalents at beginning of period                                          |       | 48,570                                   |       | 35,194 |   |
| Cash and cash equivalents at end of period                                                |       | $                                        | 25,778     |   | $ | 21,683 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**UNAUDITED CONSOLIDATED STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**Blount International, Inc.and Subsidiaries**

 
| **(Amounts in thousands)**               | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value  of Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------|------------|-------------------|------------|------------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                     |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Balance  December 31, 2004          |       | 44,970     |       | $                 | 450        |                                           | $          | 553,640                  |       | $                                           | (810,165   | )         | $          | (79 | ) | $ | (256,154 | ) |
|                                     |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Net income                               |       |       |       |              |       |                                           |       | 50,426                   |       |                                        |       | 50,426    |       |
| Other  comprehensive income (loss):      |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Foreign currency  translation adjustment |       |       |       |              |       |                                           |       |                     |       | (2,124                                      | )          | (2,124    | )          |
| Unrealized  losses                       |       |       |       |              |       |                                           |       |                     |       | (220                                        | )          | (220      | )          |
| Comprehensive  income, net               |       |       |       |              |       |                                           |       |                     |       |                                        |       | 48,082    |       |
| Issuance of  common stock                |       | 382        |       | 4                 |       | 6,119                                          |       |                     |       |                                        |       | 6,123     |       |
| Purchase of  treasury stock              |       | (382       | )          | (4                | )          | (6,119                                         | )          |                     |       |                                        |       | (6,123    | )          |
| Exercise of  stock options               |       | 849        |       | 8                 |       | 6,558                                          |       |                     |       |                                        |       | 6,566     |       |
| Exercise of  stock warrants              |       | 1,000      |       | 10                |       |                                           |       |                     |       |                                        |       | 10        |       |
| Stock  compensation expense              |       |       |       |              |       | 68                                             |       |                     |       |                                        |       | 68        |       |
| Balance  September 30, 2005         |       | 46,819     |       | $                 | 468        |                                           | $          | 560,266                  |       | $                                           | (759,739   | )         | $          | (2,423 | ) | $ | (201,428 | ) |

 

Other comprehensive loss forthe three and nine months ended September 30, 2005 was $0.1 million and$2.3 million, respectively.  Other comprehensiveincome for the three months ended September 30, 2004 was $34thousand.  Other comprehensive loss forthe nine months ended September 30, 2004 was $0.5 million.

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**BLOUNT INTERNATIONAL, INC. ANDSUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

***Basis of Presentation.***  The unaudited consolidated financialstatements include the accounts of Blount International, Inc. and itssubsidiaries (“Blount” or the “Company”) and are prepared in conformity withaccounting principles generally accepted in the United States of America.  All significant intercompany balances andtransactions have been eliminated.  Inthe opinion of management, the consolidated financial statements contain alladjustments (consisting of only normal recurring adjustments) necessary for a fairstatement of the financial position at September 30, 2005 and December 31,2004 and the results of operations, cash flows and changes in stockholders’equity for the periods presented.

 

The accompanying financial data as of September 30,2005 and for the three and nine months ended September 30, 2005 and September 30,2004 has been prepared by the Company, without audit, pursuant to the rules andregulations of the United States Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been condensed or omitted pursuant to such rules andregulations. The December 31, 2004 Consolidated Balance Sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States.These Consolidated Financial Statements should be read in conjunction with theConsolidated Financial Statements and the notes thereto, included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2004.

 

***Use of Estimates.******* The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires that management make certain estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the dates of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting periods.  It isreasonably possible that actual results could differ materially from thoseestimates and significant changes to estimates could occur in the near term.

 

***Income Taxes.***  United States income tax expense has not beenrecognized on undistributed earnings of international subsidiaries. Management’sintention is to reinvest these earnings and to repatriate the earnings onlywhen it is tax efficient to do so.   TheAmerican Jobs Creation Act of 2004 (the “Act”), signed into law October 22,2004, includes a one-time election to deduct 85% of certain foreign earningsthat are repatriated, as defined in the Act. Any repatriation of foreign earnings must be completed by December 31,2005.  The Company intends to repatriate between$15.0 million and $25.0 million of its undistributed earnings of foreignsubsidiaries during the fourth quarter of 2005.

 

Accordingly, the Company recognized $0.6million of income tax expense in the three and nine months ended September 30,2005, representing the estimated income tax effect of repatriation of $15.0million of foreign earnings.  The Companyestimates that potential additional tax expense up to $1.2 million may berecognized in the fourth quarter as the repatriation plan is completed.

 

The Company’s income tax provisionprimarily consists of foreign, state and local taxes.  The Company has a domestic net operating losscarryforward, as well as other deferred tax assets, which are fully reserved bya valuation allowance as of December 31, 2004 and September 30, 2005.

 

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation.  Such reclassifications hadno effect on previously reported net income or net stockholders’ deficit.

 

7

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**NOTE 2:  INVENTORIES**

 

Inventories consisted of the following:

 
| ** **                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Raw materials and supplies |       | $                      | 29,530     |                  | $          | 28,914 |   |
| Work in progress           |       | 16,042                 |       | 13,708                |       |
| Finished goods             |       | 45,719                 |       | 38,476                |       |
| Total inventories          |       | $                      | 91,291     |                  | $          | 81,098 |   |

 

**NOTE 3:  PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipment consistedof the following:

 
| ** **                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Land                                     |       | $                      | 5,781      |                  | $          | 4,939 |   |
| Buildings and improvements               |       | 68,750                 |       | 65,411                |       |
| Machinery and equipment                  |       | 191,036                |       | 182,626               |       |
| Furniture, fixtures and office equipment |       | 32,054                 |       | 31,264                |       |
| Transportation equipment                 |       | 973                    |       | 967                   |       |
| Construction in progress                 |       | 11,020                 |       | 15,243                |       |
| Accumulated depreciation                 |       | (209,577               | )          | (202,521              | )          |
| Total property, plant and equipment, net |       | $                      | 100,037    |                  | $          | 97,929 |   |

 

**NOTE 4:  DEFERRED FINANCING COSTS**

 

Deferred financing costs represent costsincurred in conjunction with the Company’s debt refinancing activities and areamortized over the term of the related debt instruments.  Deferred financing costs, and the related amortizationexpense, are adjusted if anypre-payments of principal are made to the related outstanding debt.   During the nine months ended September 30,2005, the following occurred:

 
| **(Amounts in thousands)**                                | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|
| Balance at December 31, 2004                         |       | $          | 23,883     |   |
| Financing costs deferred                                  |       | 173        |       |
| Write off during period due to pre-payments of  principal |       | (1,696     | )          |
| Amortization during period                                |       | (2,631     | )          |
| Balance at September 30, 2005                        |       | $          | 19,729     |   |

 

8

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**NOTE 5:  ACCRUED EXPENSES**

 

Accrued expenses consisted of thefollowing: 

 
| ** **                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Payroll, payroll taxes and employee benefits |       | $                      | 27,407     |                  | $          | 34,135 |   |
| Accrued interest                             |       | 5,621                  |       | 7,001                 |       |
| Warranty reserve                             |       | 5,369                  |       | 4,923                 |       |
| Accrued taxes                                |       | 5,952                  |       | 4,036                 |       |
| Other                                        |       | 16,899                 |       | 18,747                |       |
| Total accrued expenses                       |       | $                      | 61,248     |                  | $          | 68,842 |   |

 

**NOTE 6:  DEBT AND FINANCING AGREEMENTS**

 

Long-term debt consisted of thefollowing:

 
| ** **                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**       | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Term loans                       |       | $                      | 271,419    |                  | $          | 319,211 |   |
| 8 7/8% senior subordinated notes |       | 175,000                |       | 175,000               |       |
| Total debt                       |       | 446,419                |       | 494,211               |       |
| Less current maturities          |       | (2,744                 | )          | (3,199                | )          |
| Long-term debt                   |       | $                      | 443,675    |                  | $          | 491,012 |   |

 

The weighted average interest rate onoutstanding debt as of September 30, 2005 was 7.20%.

 

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

 

•                  The issuance of13,800,000 shares of common stock, which generated net proceeds to the Companyof $127.2 million;

 

•                  The issuance of 8 7/8%senior subordinated notes due in 2012 (the “8 7/8% Senior Subordinated Notes”),which generated net proceeds to the Company of $167.1 million; and

 

•                  The amendment andrestatement of the Company’s existing senior credit facilities, including anincrease in amounts available, with the total amounts drawn increasing by $246.6million.

 

The amendment and restatement of the seniorcredit facilities included, among other things, a reduction in interest rates,revisions to financial covenant ratios, the addition of maximum leverage ratiosand the revision of certain repayment terms. The amended and restated credit facilities consisted of a revolvingcredit facility of up to $100.0 million and term loans that included a $4.9million Canadian term loan facility, a $265.0 million term B loan facility anda $50.0 million second collateral institutional loan (‘‘SCIL’’) facility.

 

The Company used the net proceeds of the2004 Refinancing Transactions as follows:

 

•                  The redemption of its7% senior notes with $150.0 million principal outstanding;

 

•                  The redemption of its13% senior subordinated notes with $323.2 million principal outstanding;

 

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•                  The repayment of its12% convertible preferred equivalent security principal and accrued interest inthe aggregate amount of $29.6 million; and

 

•                  The payment of relatedpremiums of $27.1 million.

 

On December 1, 2004, the Companyagain amended its senior credit facilities to provide, among other things, forthe repayment and elimination of the $50.0 million SCIL established in August 2004with the proceeds from an increase in the term B loan limit, an adjustment to certainfinancial covenants and a lower borrowing rate.

 

With the amendment and restatement ofthe senior credit facilities, the term of the revolving credit facility is fiveyears, and the terms of the Canadian term loan facility and term B loanfacility are six years, in each case from August 9, 2004.   As of September 30, 2005, the term Bloan facility requires quarterly payments of $0.7 million, with a final paymentof $253.3 million due on the maturity date. As of September 30, 2005, theCanadian term loan facility requires quarterly payments of $12 thousand, with afinal payment of $4.4 million due on the maturity date.  Once repaid, principal under the term loanfacilities may not be re-borrowed by the Company.

 

The amended and restatedsenior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment amounts related to the sale of Company assets under certaincircumstances, the issuance of stock and upon the Company’s annual generationof excess cash flow as determined under the credit agreement. The creditfacility provides for term loan interest rate margins to vary based on theCompany’s credit facility leverage ratio. The credit facility leverage ratio isdefined as the ratio of total outstanding debt under the credit facility(including outstanding letters of credit) to adjusted earnings before interest,taxes, depreciation and amortization (“Adjusted EBITDA”). Interest rates alsochange based upon changes in LIBOR or prime rates and changes in ratings byrating agencies. The amount available on the revolving credit facility isreduced by outstanding letters of credit and is further restricted by aspecific leverage ratio and first lien credit facilities leverage ratio. As of September 30,2005, the Company had the ability to borrow $92.3 million under the terms ofthe revolving credit agreement.

 

The Company and all of its domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’sobligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized bya first priority security interest in substantially all of the assets of Blount, Inc.and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock held by Blount International, Inc. and all of the stock ofdomestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its non-domesticsubsidiaries as additional collateral.

 

The amended and restated senior creditfacilities contain financial covenant calculations relating to maximum capitalexpenditures, minimum fixed charge coverage ratio, maximum leverage ratio andmaximum first lien credit facilities leverage ratio.  In addition, there are covenants relating,among other categories, to investments, loans and advances, indebtedness, andthe sale of stock or assets.  The Companywas in compliance with all debt covenants as of September 30, 2005.

 

As a result of the 2004 RefinancingTransactions, the Company has one registered debt security, the 8 7/8% SeniorSubordinated Notes. These notes are issued by Blount, Inc., are fully andunconditionally, jointly and severally, guaranteed by the Company and all of itsdomestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8%Senior Subordinated Notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all of itsdomestic subsidiaries guarantee these 8 7/8% Senior Subordinated Notes, none ofBlount’s existing foreign subsidiaries (“non-guarantor subsidiaries”) guaranteethese notes.  See also Note 13.

 

10

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**NOTE 7:  SHARE AND EARNINGS PER SHARE DATA**

 

The numberof shares used in the denominators of the basic and diluted earnings per sharecomputations was as follows: 

 
| ** **                                                                                       | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Shares in thousands)**                                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Shares for basic  income per share computation – weighted average common shares outstanding |       | 46,610                                     |       | 40,180                                    |       | 45,801 |   | 33,992 |   |
| Dilutive effect of stock options and warrants                                                    |       | 992                                        |       |                                      |       | 1,644 |   |   |   |
| Shares for diluted income per share computation                                                  |       | 47,602                                     |       | 40,180                                    |       | 47,445 |   | 33,992 |   |
|                                                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Options and  warrants excluded from computation as anti-dilutive                                 |       | 7                                          |       | 4,825                                     |       | 9 |   | 4,825 |   |

 

In August 2004, the Company issued13,800,000 shares of common stock and received $127.2 million net of relatedissuance fees and costs.  In December 2004,Lehman Brothers Merchant Banking Partners II, L.P. and certain of itsaffiliates (“Lehman Brothers”) sold 11,225,492 shares of the Company’s commonstock in a secondary public stock offering for which the Company did notreceive any proceeds.

 

In June 2005 the Company andcertain of its stockholders sold 7,500,000 shares of the Company’s common stockin a public offering.  The Companyretained cumulative net proceeds of $10 thousand for the following transactions:

•                  Lehman Brothers sold7,117,620 shares of the Company’s common stock. The Company did not receive any proceeds from this sale.

•                  The Company issued382,380 shares of common stock and received net proceeds of $6.1 million.

•                  The Company purchased382,380 shares of common stock from certain stockholders for $6.1 million.  These shares are held as treasury stock.  The Company has accounted for the treasurystock as constructively retired in the consolidated financial statements.

•                  Lehman Brothersexercised warrants for 1,000,000 shares of common stock at $0.01 a share withnet proceeds of $10 thousand received by the Company.  Lehman Brothers retained ownership of theseshares and as of September 30, 2005 held approximately 8.9 million sharesof the Company’s common stock.

 

**NOTE 8:  STOCK-BASED COMPENSATION**

 

As permitted by Statement of Financial AccountingStandards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFASNo. 123”), the Company continues to apply intrinsic value accounting forits stock option plans. Compensation cost for stock options, if any, ismeasured as the excess of the quoted market price of the stock at the date ofgrant or modification over the amount an employee must pay to acquire thestock.  The Company has adopted thedisclosure-only provisions of SFAS No. 123 and SFAS No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure – an Amendment of FASBStatement No. 123”.  If the Companyhad elected to recognize compensation expense based upon the fair value at thegrant dates for awards under these plans, the Company’s net income and net incomeper share would have been as follows:

 

11

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| ** **                                                                                                                              | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands, except  per share amounts)**                                                                                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                           |       | $                                          | 16,024     |                                      | $          | (31,756 | ) | $ | 50,426 |   | $ | (15,751 | ) |
| Add: stock-based  employee compensation cost, net of tax, included in the reported results                                              |       |                                       |       |                                      |       | 56 |   | 125 |   |
| Deduct: total  stock-based employee compensation cost, net of tax, that would have been included  in net income under fair value method |       | (191                                       | )          | (163                                      | )          | (587 | ) | (745 | ) |
| Pro forma net income (loss)                                                                                                             |       | $                                          | 15,833     |                                      | $          | (31,919 | ) | $ | 49,895 |   | $ | (16,371 | ) |
|                                                                                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Basic earnings (loss) per share as reported                                                                                             |       | $                                          | 0.34       |                                      | $          | (0.79 | ) | $ | 1.10 |   | $ | (0.46 | ) |
| Pro forma basic earnings (loss) per share                                                                                               |       | $                                          | 0.34       |                                      | $          | (0.79 | ) | $ | 1.09 |   | $ | (0.48 | ) |
| Diluted earnings (loss) per share as reported                                                                                           |       | $                                          | 0.34       |                                      | $          | (0.79 | ) | $ | 1.06 |   | $ | (0.46 | ) |
| Pro forma diluted earnings (loss) per share                                                                                             |       | $                                          | 0.33       |                                      | $          | (0.79 | ) | $ | 1.05 |   | $ | (0.48 | ) |

 

The measurement of stock-based employeecompensation cost under the fair value method in the preceding table reflectsthe historical volatility method.  Thevolatility factors used range from 32% to 44%, with a weighted averagevolatility factor of 36%.

 

**NOTE 9:  PENSION AND POST-RETIREMENT BENEFIT PLANS**

 

The components of netperiodic benefit cost for funded and unfunded pension and other post-retirementbenefits are as follows: 

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Pension Benefits**                      | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**          | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       | $                                         | 1,460      |   | $ | 1,230 |   | $ | 112 |   | $ | 90 |   |
| Interest cost                       |       | 2,392                                     |       | 2,119 |   | 572 |   | 472 |   |
| Expected return  on plan assets     |       | (2,404                                    | )          | (1,819 | ) | (11 | ) | (17 | ) |
| Amortization of  prior service cost |       | 93                                        |       | 93 |   | 2 |   | 2 |   |
| Amortization of  net loss           |       | 648                                       |       | 576 |   | 332 |   | 204 |   |
| Total net  periodic benefit cost    |       | $                                         | 2,189      |   | $ | 2,199 |   | $ | 1,007 |   | $ | 751 |   |

 
| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **Pension Benefits**                     | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**          | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       | $                                        | 4,378      |   | $ | 3,690 |   | $ | 337 |   | $ | 269 |   |
| Interest cost                       |       | 7,176                                    |       | 6,356 |   | 1,715 |   | 1,416 |   |
| Expected return  on plan assets     |       | (7,211                                   | )          | (5,458 | ) | (33 | ) | (50 | ) |
| Amortization of  prior service cost |       | 279                                      |       | 279 |   | 7 |   | 7 |   |
| Amortization of  net loss           |       | 1,944                                    |       | 1,728 |   | 995 |   | 613 |   |
| Total net  periodic benefit cost    |       | $                                        | 6,566      |   | $ | 6,595 |   | $ | 3,021 |   | $ | 2,255 |   |

 

The Company expects to contributeapproximately $10.0 million to its funded pension plans during 2005 and doesnot expect to make any contributions to the post-retirement medical plan during2005.

 

12

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**NOTE 10:  COMMITMENTS AND CONTINGENT LIABILITIES**

 

Guarantees and other commercialcommitments are summarized in the following table: 

 
| ** **                                        | ** ** | **September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| **(Amounts in thousands)**                        | ** ** | **2005**               | ** ** |
| Warranty reserve                                  |       | $                      | 5,369      |   |
| Letters of credit outstanding                     |       | 7,739                  |       |
| Third party financing agreements (1)              |       | 3,102                  |       |
| Accounts receivable securitization (2)            |       | 353                    |       |
| Total guarantees and other commercial commitments |       | $                      | 16,563     |   |

 

----

(1)  Applicable to third partyfinancing agreements for customer equipment purchases.

 

(2)  Includes guarantees to a thirdparty financing company of certain accounts receivable.

 

The warranty reserve is included inaccrued expenses on the consolidated balance sheet.  In addition to these amounts, the Companyalso guarantees certain debt of its subsidiaries (see Note 6).

 

Changes in the warranty reserve are asfollows:  

 
| ** **                                    | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Balance as of December 31, 2004 and 2003 |       | $                                        | 4,923      |   | $ | 4,120 |   |
| Accrued warranty expense                      |       | 3,492                                    |       | 4,824 |   |
| Payments made (in cash or in-kind)            |       | (3,046                                   | )          | (3,758 | ) |
| Balance at end of period                      |       | $                                        | 5,369      |   | $ | 5,186 |   |

 

The Company was named a potentiallyliable person (“PLP”) by the Washington State Department of Ecology (“WDOE”) inconnection with the Pasco Sanitary Landfill Site (“Site”). This Site has beenmonitored by WDOE since 1988. From available records, the Company believes thatit sent 26 drums of chromic hydroxide sludge in a non-toxic, trivalent state tothe Site.  The Company further believesthat the Site contains more than 50,000 drums in total and millions of gallonsof additional wastes, some potentially highly toxic in nature.  Accordingly, based both on volume and on thenature of the waste, the Company believes that it is a de minimis contributor.

 

The current on-sitemonitoring program is being conducted and funded by certain PLPs, excluding theCompany and several other PLPs, under the supervision of WDOE. Depending uponthe results of this study, further studies or remediation could be required.The Company may or may not be required to pay a share of the current study, orto contribute to the cost 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 share ofthe estimated cost ranged from approximately $20 thousand to $0.3 million.

 

As of September 30,2005 and December 31, 2004, the Company had accrued $0.1 million for thepotential costs of any clean-up at the Site. The Company incurred no costs duringthe nine month periods ended September 30, 2005 and 2004 in connectionwith the remediation efforts at the Site.

 

On September 12, 2003, the Companyreceived a General Notice Letter as a Potentially Responsible De Minimis Partyfrom Region IX of the EPA regarding the Operating Industries, Inc.Superfund Site in Monterey Park, California. The notice stated that the EPAwould submit an offer to settle and an explanation as to why it believes theCompany or a predecessor unit is a de minimis participant at the site.  The Company was subsequently informed by theEPA that its report would be delayed, and on September 17, 2004, wasnotified of further delay in the process. The EPA has indicated that its de minimis settlement offer will be basedon volume of waste at a uniform per gallon

 

13

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price among all de minimis parties.  The site was operated as a landfill from 1948to 1984, and received wastes from over 4,000 generators. At the present time,the Company has no knowledge of which of its units, if any, was involved at thesite, or the amounts, if any, that were sent there. However, based upon itscurrent knowledge of the site, and its alleged status as a PotentiallyResponsible De Minimis Party, the Company does not believe that any settlementor participation in any remediation will have a materially adverse effect onits consolidated financial position, operating results or cash flows.  The Company has received no further notice orexplanation from Region IX of the EPA as of September 30, 2005.

 

On June 30, 2005,the Company was served with a “notice of meeting” on behalf of Williams Control, Inc.(“WCI”) in connection with WCI’s agreement with the State of Oregon Departmentof Environmental Quality (“DEQ”) to enter into the voluntary cleanup program(the “Program”) relating to WCI’s facility located near Portland, Oregon (the “WCISite”).

 

The notice alleges thatBlount, Inc. is responsible for some portion of any required cleanup orremediation related to the Program as a successor in interest to OmarkIndustries, Inc. (“Omark”) through Omark’s alleged operations at the WCI Sitefrom 1968 through 1973. The Company understands that one or more other prioroperators of the business, including the entity from which WCI purchased thebusiness, and the landowner of the WCI Site, have also been served with thenotice.

 

WCI alleges that a plumeof chlorinated solvents, primarily TCE, is contained in groundwater at the Siteand has migrated onto neighboring properties. At this time, the Company doesnot know the number of locations or the extent of contamination, if any, thatmay be involved.

 

At this early stage, theCompany does not have a sufficient basis to determine whether it has anyliability in this matter or, if it does, what its share of any costs ofremediation would be; however, based upon estimates of remediation costs andapportionments furnished by WCI, the Company does not believe that any cost toit will have a materially adverse effect on its consolidated financialposition, results of operations or cash flows. The Company has reserved all ofits rights in this matter and is investigating further.

 

The Company is a defendant in a numberof product liability lawsuits, some of which seek significant or unspecifieddamages, involving serious personal injuries for which there are retentions ordeductible amounts under the Company’s insurance policies. In addition, theCompany is a party to a number of other suits arising out of the normal courseof its business. While there can be no assurance as to their ultimate outcome,management does not believe these lawsuits will have a material adverse effecton the Company’s consolidated financial position, operating results or cashflows.

 

The Company accrues, by a charge toincome, an amount representing management’s best estimate of probable loss relatedto any matter deemed by management and its counsel as a probable losscontingency in light of all of the then known circumstances. The Company doesnot accrue a charge to income for a matter deemed by management and its counselto be a reasonably possible loss contingency in light of all of the currentcircumstances.

 

**NOTE 11:  SEGMENT INFORMATION**

 

The Company identifies operatingsegments primarily based on management responsibility. The Company has threereportable segments: Outdoor Products, Industrial and Power Equipment andLawnmower. Outdoor Products manufactures and markets cutting chain, bars,sprockets and accessories for chainsaw use, concrete cutting equipment, andlawnmower blades and accessories for outdoor care. Industrial and PowerEquipment manufactures and markets timber harvesting equipment, industrialtractors and loaders, rotation bearings and mechanical power transmissionunits. The Lawnmower segment manufactures and markets riding lawnmowers andrelated accessories.

 

14

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Certain financial information by segmentis presented in the table below: 

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales:**                        |       |                                       |       |                                      |       |   |   |   |   |
| Outdoor Products                  |       | $                                          | 108,855    |                                      | $          | 109,836 |   | $ | 339,748 |   | $ | 314,115 |   |
| Industrial and  Power Equipment   |       | 66,659                                     |       | 52,664                                    |       | 186,362 |   | 159,781 |   |
| Lawnmower                         |       | 11,513                                     |       | 11,472                                    |       | 40,391 |   | 35,289 |   |
| Inter-Segment  Elimination        |       | (337                                       | )          | (310                                      | )          | (804 | ) | (686 | ) |
| Total Sales                       |       | $                                          | 186,690    |                                      | $          | 173,662 |   | $ | 565,697 |   | $ | 508,499 |   |
|                              |       |                                       |       |                                      |       |   |   |   |   |
| **Operating income:**             |       |                                       |       |                                      |       |   |   |   |   |
| Outdoor Products                  |       | $                                          | 25,244     |                                      | $          | 27,988 |   | $ | 80,527 |   | $ | 80,408 |   |
| Industrial and  Power Equipment   |       | 8,187                                      |       | 5,945                                     |       | 19,373 |   | 15,571 |   |
| Lawnmower                         |       | 405                                        |       | 637                                       |       | 2,091 |   | 1,899 |   |
| Inter-Segment  Elimination        |       | 10                                         |       | (3                                        | )          | (20 | ) | 4 |   |
| Contribution from segments        |       | 33,846                                     |       | 34,567                                    |       | 101,971 |   | 97,882 |   |
| Corporate expenses                |       | (3,834                                     | )          | (3,511                                    | )          | (11,899 | ) | (11,106 | ) |
| Operating income                  |       | 30,012                                     |       | 31,056                                    |       | 90,072 |   | 86,776 |   |
| Interest expense                  |       | (9,353                                     | )          | (17,397                                   | )          | (28,006 | ) | (52,065 | ) |
| Interest income                   |       | 120                                        |       | 750                                       |       | 531 |   | 2,086 |   |
| Other income (expense), net       |       | (1,342                                     | )          | (43,647                                   | )          | (1,812 | ) | (43,676 | ) |
| Income (loss) before income taxes |       | $                                          | 19,437     |                                      | $          | (29,238 | ) | $ | 60,785 |   | $ | (6,879 | ) |

 

**NOTE 12:  SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Interest paid              |       | $                                        | 25,737     |   | $ | 60,671 |   |
| Income taxes paid, net     |       | $                                        | 9,569      |   | $ | 6,838 |   |

 

**NOTE 13:  CONSOLIDATING FINANCIAL INFORMATION**

 

See Note 6 for a discussion of theCompany’s guarantor subsidiaries.  Thefollowing consolidating financial information sets forth condensedconsolidating statements of operations, balance sheets and statements of cashflows of Blount International, Inc., Blount, Inc., the guarantorsubsidiaries and the non-guarantor subsidiaries.

 

15

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**Condensed Consolidating Statementof Operations Information**

 
| **(Amounts  in thousands)**                             | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Three Months Ended September 30, 2005** | ** ** | ** **                       |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                   |       |                             |       | $                 | 126,716    |                        | $          | 42,506                            |       | $                | 65,663     |             | $          | (48,195 | ) | $ | 186,690 |   |
| Cost of sales                                           |       |                             |       | 95,154            |       | 30,222                      |       | 50,513                            |       | (48,188          | )          | 127,701          |       |
| Gross profit                                            |       |                             |       | 31,562            |       | 12,284                      |       | 15,150                            |       | (7               | )          | 58,989           |       |
| Selling, general and administrative expenses            |       |                             |       | 14,200            |       | 7,383                       |       | 7,394                             |       |             |       | 28,977           |       |
| Operating income                                        |       |                             |       | 17,362            |       | 4,901                       |       | 7,756                             |       | (7               | )          | 30,012           |       |
| Other, net                                              |       | $                                | (4,800     | )                 | (5,646     | )                           | 31         |                              | (160       | )                |       |             | (10,575    | ) |
| Income (loss) before income taxes                       |       | (4,800                           | )          | 11,716            |       | 4,932                       |       | 7,596                             |       | (7               | )          | 19,437           |       |
| Provision (benefit) for income taxes                    |       | (714                             | )          | 1,389             |       | 246                         |       | 2,492                             |       |             |       | 3,413            |       |
| Income (loss)                                           |       | (4,086                           | )          | 10,327            |       | 4,686                       |       | 5,104                             |       | (7               | )          | 16,024           |       |
| Equity in earnings of affiliated companies, net         |       | 20,110                           |       | 9,783             |       | 113                         |       |                              |       | (30,006          | )          |             |       |
| Net income                                              |       | $                                | 16,024     |              | $          | 20,110                      |       | $                                 | 4,799      |             | $          | 5,104            |       | $ | (30,013 | ) | $ | 16,024 |   |
|                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Nine Months Ended September 30, 2005**  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                   |       |                             |       | $                 | 376,095    |                        | $          | 129,880                           |       | $                | 205,374    |             | $          | (145,652 | ) | $ | 565,697 |   |
| Cost of sales                                           |       |                             |       | 275,340           |       | 100,909                     |       | 153,579                           |       | (143,696         | )          | 386,132          |       |
| Gross profit                                            |       |                             |       | 100,755           |       | 28,971                      |       | 51,795                            |       | (1,956           | )          | 179,565          |       |
| Selling, general and administrative expenses            |       |                             |       | 50,825            |       | 15,265                      |       | 23,403                            |       |             |       | 89,493           |       |
| Operating income                                        |       |                             |       | 49,930            |       | 13,706                      |       | 28,392                            |       | (1,956           | )          | 90,072           |       |
| Other, net                                              |       | $                                | (13,266    | )                 | (15,668    | )                           | 44         |                              | (397       | )                |       |             | (29,287    | ) |
| Income (loss) before income taxes                       |       | (13,266                          | )          | 34,262            |       | 13,750                      |       | 27,995                            |       | (1,956           | )          | 60,785           |       |
| Provision (benefit) for income taxes                    |       | (2,136                           | )          | 2,041             |       | 687                         |       | 9,767                             |       |             |       | 10,359           |       |
| Income (loss)                                           |       | (11,130                          | )          | 32,221            |       | 13,063                      |       | 18,228                            |       | (1,956           | )          | 50,426           |       |
| Equity in earnings of affiliated companies, net         |       | 61,556                           |       | 29,335            |       | 247                         |       |                              |       | (91,138          | )          |             |       |
| Net income                                              |       | $                                | 50,426     |              | $          | 61,556                      |       | $                                 | 13,310     |             | $          | 18,228           |       | $ | (93,094 | ) | $ | 50,426 |   |

 

16

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| **(Amounts  in thousands)**                               | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Three Months Ended September 30, 2004**   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                     |       |                             |       | $                 | 110,449    |                        | $          | 38,218                            |       | $                | 60,774     |             | $          | (35,779 | ) | $ | 173,662 |   |
| Cost of sales                                             |       |                             |       | 74,195            |       | 30,892                      |       | 44,603                            |       | (36,198          | )          | 113,492          |       |
| Gross profit                                              |       |                             |       | 36,254            |       | 7,326                       |       | 16,171                            |       | 419              |       | 60,170           |       |
| Selling, general and administrative expenses              |       |                             |       | 17,768            |       | 4,080                       |       | 7,266                             |       |             |       | 29,114           |       |
| Operating income                                          |       |                             |       | 18,486            |       | 3,246                       |       | 8,905                             |       | 419              |       | 31,056           |       |
| Other, net                                                |       | $                                | (10,706    | )                 | (48,535    | )                           | (95        | )                                 | (958       | )                |       |             | (60,294    | ) |
| Income (loss) before income taxes                         |       | (10,706                          | )          | (30,049           | )          | 3,151                       |       | 7,947                             |       | 419              |       | (29,238          | )          |
| Provision (benefit) for income taxes                      |       |                             |       | (7                | )          | 157                         |       | 2,368                             |       |             |       | 2,518            |       |
| Income (loss)                                             |       | (10,706                          | )          | (30,042           | )          | 2,994                       |       | 5,579                             |       | 419              |       | (31,756          | )          |
| Equity in  earnings (losses) of affiliated companies, net |       | (21,050                          | )          | 8,992             |       | 13                          |       |                              |       | 12,045           |       |             |       |
| Net income (loss)                                         |       | $                                | (31,756    | )                 | $          | (21,050                     | )          | $                                 | 3,007      |             | $          | 5,579            |       | $ | 12,464 |   | $ | (31,756 | ) |
|                                                      |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Nine Months Ended September 30, 2004**    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                     |       |                             |       | $                 | 339,286    |                        | $          | 115,650                           |       | $                | 173,160    |             | $          | (119,597 | ) | $ | 508,499 |   |
| Cost of sales                                             |       |                             |       | 242,024           |       | 91,792                      |       | 124,015                           |       | (124,811         | )          | 333,020          |       |
| Gross profit                                              |       |                             |       | 97,262            |       | 23,858                      |       | 49,145                            |       | 5,214            |       | 175,479          |       |
| Selling, general and administrative expenses              |       |                             |       | 54,225            |       | 13,138                      |       | 21,340                            |       |             |       | 88,703           |       |
| Operating income                                          |       |                             |       | 43,037            |       | 10,720                      |       | 27,805                            |       | 5,214            |       | 86,776           |       |
| Other, net                                                |       | $                                | (21,009    | )                 | (70,367    | )                           | (282       | )                                 | (1,997     | )                |       |             | (93,655    | ) |
| Income (loss) before income taxes                         |       | (21,009                          | )          | (27,330           | )          | 10,438                      |       | 25,808                            |       | 5,214            |       | (6,879           | )          |
| Provision (benefit) for income taxes                      |       |                             |       | (59               | )          | 522                         |       | 8,409                             |       |             |       | 8,872            |       |
| Income (loss)                                             |       | (21,009                          | )          | (27,271           | )          | 9,916                       |       | 17,399                            |       | 5,214            |       | (15,751          | )          |
| Equity in earnings of affiliated companies, net           |       | 5,258                            |       | 32,529            |       | 81                          |       |                              |       | (37,868          | )          |             |       |
| Net income (loss)                                         |       | $                                | (15,751    | )                 | $          | 5,258                       |       | $                                 | 9,997      |             | $          | 17,399           |       | $ | (32,654 | ) | $ | (15,751 | ) |

 

17

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**Condensed Consolidating BalanceSheet Information**

 
| **(Amounts  in thousands)**                                | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **September 30, 2005**                                | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
| Cash and cash equivalents                                  |       |                             |       |              |       |                        |       | $                                | 27,922     |             | $          | (2,144           | )          | $ | 25,778 |   |
| Accounts receivable, net                                   |       |                             |       | $                 | 51,678     |                        | $          | 11,642                           |       | 26,881           |       |             |       | 90,201 |   |
| Intercompany receivables                                   |       |                             |       | 169,467           |       | 73,384                      |       | 15,981                           |       | (258,832         | )          |             |       |
| Inventories                                                |       |                             |       | 32,386            |       | 27,119                      |       | 31,786                           |       |             |       | 91,291           |       |
| Other current assets                                       |       |                             |       | 2,343             |       | 395                         |       | 2,383                            |       |             |       | 5,121            |       |
| Total current  assets                                      |       |                             |       | 255,874           |       | 112,540                     |       | 104,953                          |       | (260,976         | )          | 212,391          |       |
| Investments in affiliated companies                        |       | $                                | 58,931     |              | 285,913    |                        | 235        |                             | 248        |             | (345,327   | )                |       |   |
| Property, plant and equipment, net                         |       |                             |       | 25,772            |       | 32,432                      |       | 41,833                           |       |             |       | 100,037          |       |
| Goodwill and other assets                                  |       |                             |       | 70,642            |       | 30,710                      |       | 13,169                           |       |             |       | 114,521          |       |
| Total Assets                                               |       | $                                | 58,931     |              | $          | 638,201                     |       | $                                | 175,917    |             | $          | 160,203          |       | $ | (606,303 | ) | $ | 426,949 |   |
|                                                       |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit)**    |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                             |       |             |       |             |       |
| Current maturities of long-term debt                       |       |                             |       | $                 | 4,841      |                        |       |                             | $          | 47               |       | $                | (2,144     | ) | $ | 2,744 |   |
| Accounts payable                                           |       |                             |       | 21,972            |       | $                           | 9,213      |                             | 7,526      |             |       |             | 38,711     |   |
| Intercompany payables                                      |       | $                                | 258,832    |              |       |                        |       |                             |       |             | (258,832   | )                |       |   |
| Accrued expenses                                           |       |                             |       | 38,006            |       | 7,414                       |       | 15,828                           |       |             |       | 61,248           |       |
| Total current  liabilities                                 |       | 258,832                          |       | 64,819            |       | 16,627                      |       | 23,401                           |       | (260,976         | )          | 102,703          |       |
| Long-term debt, excluding current maturities               |       |                             |       | 439,057           |       |                        |       | 4,618                            |       |             |       | 443,675          |       |
| Other liabilities                                          |       | 1,527                            |       | 75,394            |       |                        |       | 5,078                            |       |             |       | 81,999           |       |
| Total liabilities                                          |       | 260,359                          |       | 579,270           |       | 16,627                      |       | 33,097                           |       | (260,976         | )          | 628,377          |       |
| Stockholders equity (deficit)                              |       | (201,428                         | )          | 58,931            |       | 159,290                     |       | 127,106                          |       | (345,327         | )          | (201,428         | )          |
| Total Liabilities  and Stockholders’ Equity (Deficit) |       | $                                | 58,931     |              | $          | 638,201                     |       | $                                | 175,917    |             | $          | 160,203          |       | $ | (606,303 | ) | $ | 426,949 |   |

 

18

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| **(Amounts  in thousands)**                                | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **December 31, 2004**                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                  |       |                             |       | $                 | 17,229     |                        |       |                              | $          | 33,801           |       | $                | (2,460     | ) | $ | 48,570 |   |
| Accounts receivable, net                                   |       |                             |       | 42,878            |       | $                           | 13,730     |                              | 18,367     |             |       |             | 74,975     |   |
| Intercompany receivables                                   |       |                             |       | 176,120           |       | 64,016                      |       | 13,532                            |       | (253,668         | )          |             |       |
| Inventories                                                |       |                             |       | 33,037            |       | 25,858                      |       | 22,203                            |       |             |       | 81,098           |       |
| Other current assets                                       |       |                             |       | 2,485             |       | 589                         |       | 1,619                             |       |             |       | 4,693            |       |
| Total current  assets                                      |       |                             |       | 271,749           |       | 104,193                     |       | 89,522                            |       | (256,128         | )          | 209,336          |       |
| Investments in affiliated companies                        |       | $                                | (283       | )                 | 253,348    |                        |       |                              | 248        |             | (253,313   | )                |       |   |
| Property, plant and equipment, net                         |       |                             |       | 27,010            |       | 33,071                      |       | 37,848                            |       |             |       | 97,929           |       |
| Goodwill and other assets                                  |       |                             |       | 73,038            |       | 31,961                      |       | 12,478                            |       |             |       | 117,477          |       |
| Total Assets                                               |       | $                                | (283       | )                 | $          | 625,145                     |       | $                                 | 169,225    |             | $          | 140,096          |       | $ | (509,441 | ) | $ | 424,742 |   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit)**    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Current maturities of long-term debt                       |       |                             |       | $                 | 3,150      |                        |       |                              | $          | 49               |       |             |       | $ | 3,199 |   |
| Accounts payable                                           |       |                             |       | 21,710            |       | $                           | 10,977     |                              | 9,082      |             | $          | (2,460           | )          | 39,309 |   |
| Intercompany payables                                      |       | $                                | 253,668    |              |       |                        |       |                              |       |             | (253,668   | )                |       |   |
| Accrued expenses                                           |       |                             |       | 46,371            |       | 8,964                       |       | 13,507                            |       |             |       | 68,842           |       |
| Total current  liabilities                                 |       | 253,668                          |       | 71,231            |       | 19,941                      |       | 22,638                            |       | (256,128         | )          | 111,350          |       |
| Long-term debt, excluding current maturities               |       |                             |       | 486,188           |       |                        |       | 4,824                             |       |             |       | 491,012          |       |
| Other liabilities                                          |       | 2,203                            |       | 68,009            |       | 3,979                       |       | 4,343                             |       |             |       | 78,534           |       |
| Total liabilities                                          |       | 255,871                          |       | 625,428           |       | 23,920                      |       | 31,805                            |       | (256,128         | )          | 680,896          |       |
| Stockholders equity (deficit)                              |       | (256,154                         | )          | (283              | )          | 145,305                     |       | 108,291                           |       | (253,313         | )          | (256,154         | )          |
| Total Liabilities  and Stockholders’ Equity (Deficit) |       | $                                | (283       | )                 | $          | 625,145                     |       | $                                 | 169,225    |             | $          | 140,096          |       | $ | (509,441 | ) | $ | 424,742 |   |

 

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**Condensed Consolidating CashFlows Information**

 
| **(Amounts  in thousands)**                            | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the  Nine Months Ended September 30, 2005** |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided  by (used in) operating activities   |       | $                                | (10,315    | )                 | $          | 41,090                      |       | $                                 | 1,989      |             | $          | 2,536            |       | $ | 316 |   | $ | 35,616 |   |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in investing activities                  |       |                             |       | (3,018            | )          | (1,989                      | )          | (8,206                            | )          |             |       | (13,213          | )          |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash flows from financing activities:**              |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Reduction of  long-term debt                           |       |                             |       | (47,583           | )          |                        |       | (209                              | )          |             |       | (47,792          | )          |
| Issuance costs  related to debt                        |       |                             |       | (2,554            | )          |                        |       |                              |       |             |       | (2,554           | )          |
| Issuance costs  related to stock                       |       | (1,425                           | )          |              |       |                        |       |                              |       |             |       | (1,425           | )          |
| Proceeds from  issuance of stock                       |       | 6,123                            |       |              |       |                        |       |                              |       |             |       | 6,123            |       |
| Purchase of  treasury stock                            |       | (6,123                           | )          |              |       |                        |       |                              |       |             |       | (6,123           | )          |
| Exercise of stock  options and warrants                |       | 6,576                            |       |              |       |                        |       |                              |       |             |       | 6,576            |       |
| Advances from  (to) affiliates                         |       | 5,164                            |       | (5,164            | )          |                        |       |                              |       |             |       |             |       |
| Net cash provided  by (used in) financing activities   |       | 10,315                           |       | (55,301           | )          |                        |       | (209                              | )          |             |       | (45,195          | )          |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents  |       |                             |       | (17,229           | )          |                        |       | (5,879                            | )          | 316              |       | (22,792          | )          |
| Cash and cash equivalents at beginning of period       |       |                             |       | 17,229            |       |                        |       | 33,801                            |       | (2,460           | )          | 48,570           |       |
| Cash and cash equivalents at end of period             |       | $                                | 0          |              | $          | 0                           |       | $                                 | 0          |             | $          | 27,922           |       | $ | (2,144 | ) | $ | 25,778 |   |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Nine Months Ended September 30, 2004** |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided  by (used in) operating activities   |       | $                                | (16,651    | )                 | $          | 16,841                      |       | $                                 | 1,631      |             | $          | 9,320            |       |   |   | $ | 11,141 |   |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in investing activities                  |       |                             |       | (3,466            | )          | (1,634                      | )          | (6,785                            | )          |             |       | (11,885          | )          |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash flows from financing activities:**              |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Issuance of long-term debt                             |       |                             |       | 435,500           |       |                        |       |                              |       |             |       | 435,500          |       |
| Reduction of long-term debt                            |       | (24,450                          | )          | (508,190          | )          |                        |       | (720                              | )          |             |       | (533,360         | )          |
| Capital contribution - net                             |       | 126,741                          |       |              |       |                        |       |                              |       |             |       | 126,741          |       |
| Exercise of stock options                              |       | 645                              |       |              |       |                        |       |                              |       |             |       | 645              |       |
| Debt refinancing costs                                 |       | (5,599                           | )          | (36,694           | )          |                        |       |                              |       |             |       | (42,293          | )          |
| Advances from (to) affiliates                          |       | (80,686                          | )          | 80,686            |       |                        |       |                              |       |             |       |             |       |
| Net cash provided  by (used in) financing activities   |       | 16,651                           |       | (28,698           | )          |                        |       | (720                              | )          |             |       | (12,767          | )          |
|                                                   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents  |       |                             |       | (15,323           | )          | (3                          | )          | 1,815                             |       |             |       | (13,511          | )          |
| Cash and cash equivalents at beginning of period       |       |                             |       | 13,667            |       | (556                        | )          | 22,083                            |       |             |       | 35,194           |       |
| Cash and cash equivalents at end of period             |       | $                                | 0          |              | $          | (1,656                      | )          | $                                 | (559       | )                | $          | 23,898           |       |   |   | $ | 21,683 |   |

 

20

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**NOTE 14:  RECENT ACCOUNTING PRONOUNCEMENTS**

 

In November 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFASNo. 151”).**Thisstatement amends the guidance in Accounting Research Bulletin No. 43,Chapter 4, Inventory Pricing,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage).  The provisions of SFAS No. 151 are to beapplied prospectively and are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005, with earlier applicationpermitted. The adoption of SFAS No. 151 is not expected to have a materialimpact on the Company’s financial position and results of operations.  The Company will adopt SFAS No. 151 on January 1,2006.

 

In December 2004, the FASB issuedSFAS No. 123(R), ‘‘Share-Based Payment’’ (“SFAS No. 123(R)”), whichis a revision of SFAS No. 123 and supersedes Accounting Principles Board (“APB”)Opinion No. 25. SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be valued at fairvalue on the date of grant, and to be expensed over the applicable vestingperiod. Under SFAS No. 123(R), pro forma disclosure of the incomestatement effects of share-based payments will no longer be analternative.  On March 29, 2005, theSEC issued Staff Accounting Bulletin No. 107 (SAB 107), whichprovides the Staff’s views regarding interactions between SFAS No. 123(R)and certain SEC rules and regulations and provides interpretations of thevaluation of share-based payments for public companies.  The Company is currently evaluating SFAS No. 123(R)and SAB 107 to determine the fair value method to measure compensation expense,the appropriate assumptions to include in the fair value model and thetransition method to use upon adoption. The impact of the adoption ofSFAS No. 123(R) is not known at this time due to these factors aswell as the unknown level of share-based payments to be granted in futureyears.  The Company expects the adoptionof SFAS No. 123(R) will result in the recognition of increasedcompensation expense in future periods. The Securities and Exchange Commission has delayed the implementationdate for SFAS No. 123(R) for public companies until the first interimreporting period of the first fiscal year beginning after June 15,2005.  The Company will adopt SFAS No. 123(R)on January 1, 2006.

 

The effect on results of operations of expensingstock options using the Black-Scholes model is presented in Note 8.  Under certain conditions, stock optionsgranted by the Company are eligible for continued vesting upon the retirementof the employee. The FASB clarified in SFAS No. 123(R) that the fairvalue of such stock options should be expensed based on an accelerated vesting schedule orimmediately, rather than ratably over the vesting period stated in the grant.The pro forma disclosure currently reflects the expense of such options ratablyover the stated vesting period, expensing all unvested shares upon actualretirement. The SEC has recentlyclarified that companies should continue to follow the vesting method they havebeen using until adoption of SFAS No. 123(R), and then apply theaccelerated amortization schedule to all subsequent grants to thoseemployees that became eligible for retirement within the vesting period. Hadthe Company been accounting for such stock options using the acceleratedamortization schedule for those employees that became eligible forretirement within the vesting period, the effect on stock-based compensationexpense in the pro forma disclosure of the effect of expensing stock optionspresented in Note 8 would be immaterial for all periods presented.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29” (“SFAS No. 153”). 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. TheCompany adopted SFAS No. 153 on July 1, 2005.  The adoption of SFAS No. 153 did nothave a material impact on the Company’s financial position and results ofoperations.

 

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 changesthe requirements for the

 

21

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accounting for and reporting of a change inaccounting principle. This Statement applies to all voluntary changes inaccounting principle. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The adoption of SFAS No. 154is not expected to have a material effect on the Company’s results ofoperations or financial position.  TheCompany will adopt SFAS No. 154 on January 1, 2006.

 

**NOTE 15:  RELATED PARTY TRANSACTIONS**

 

In March 2005, $3.2 million waspaid to Lehman Brothers for previously accrued advisory fees relating to the2004 Refinancing Transactions.  In May 2005,Lehman Brothers paid $0.3 million for previously accrued costs incurred by theCompany in conjunction with the secondary public offering that occurred in December 2004.  In June 2005, as part of a secondary stockoffering, the Company incurred $0.1 million in expenses that will be reimbursedby Lehman Brothers.  In June 2005,Lehman Brothers paid the Company $10 thousand to exercise 1,000,000 previouslyissued warrants and received 1,000,000 shares of our common stock.

 

**ITEM 2.**  **MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysisshould be read in conjunction with our unaudited consolidated financialstatements included elsewhere in this report.

 

**Results of Operations**

 

**Three months and nine monthsended September 30, 2005 compared to three months and nine months ended September 30,2004 (unaudited).**

 

On a consolidated basis, we continue toexperience year over year growth in sales and in net income.  These increases are related to businessgrowth and to the benefits of refinancing activities completed during thesecond half of 2004.  However, the rateof sales growth slowed somewhat in the third quarter of 2005 compared to thefirst half of 2005 for certain of our business segments.

 

Sales for the third quarter ended September 30,2005 were $186.7 million compared to $173.7 million in the third quarter of2004.  Operating income in the quarterdecreased to $30.0 million in 2005 from $31.1 million in 2004. Net income forthe third quarter of 2005 was $16.0 million ($0.34 per diluted share) comparedto a net loss of $31.8 million ($0.79 per diluted share) for the same period in2004.

 

Sales for the nine months ended September 30,2005 were $565.7 million compared to $508.5 million for the same period in2004. Operating income for the nine months ended September 30, 2005increased to $90.1 million from $86.8 million in 2004. Net income for the ninemonths ended September 30, 2005 was $50.4 million ($1.06 per dilutedshare) compared to a net loss of $15.8 million ($0.46 per diluted share) in2004.

 

Sales in the third quarter increased by$13.0 million, or 8%, from the third quarter of 2004.  The increase in sales is primarily due to theIndustrial and Power Equipment segment, while our other segments wererelatively flat on a comparable basis.  Sales in the Industrial and Power Equipment segment grew $14.0 million,or 27%, from the same period in 2004. Growth of international sales in this segment accounted for $3.7 millionof this year over year increase, an 84% increase in international sales forthis business segment over the prior year’s comparable period, while domesticsales grew $10.3 million, or 21%, over the prior year results.

 

Sales for the nine months ended September 30,2005 increased by $57.2 million, or 11%, from the same period in 2004.  The increase in sales is primarilyattributable to the following:

 

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•                  An increase ininternational sales for the Outdoor Products segment of $27.5 million, or 14%,due to the relative weakness of the U.S. dollar and continued stronginternational demand for our products;

 

•                  Industrial and PowerEquipment segment sales grew $26.6 million, or 17%, for the periods reported,due primarily to increased unit volume and higher selling prices; and,

 

•                  Market acceptance ofour new lineup of Dixon lawnmowers, introduced in 2004 and featuring all steelbodies, as well as new distribution arrangements, helped increase year to dateLawnmower segment sales by $5.1 million, or 14%.

 

Consolidated order backlog for the thirdquarter ended September 30, 2005 was $139.4 million, a decrease from$150.3 million at December 31, 2004 and $151.2 million at September 30,2004.

 

Operating income decreased by $1.0million during the third quarter of 2005 compared to 2004, and was 16.1% ofsales compared to 17.9% last year.  Thedecrease is primarily due to a year over year gross profit decrease of $1.2million, or 2%, partially offset by a $0.1 million decrease in selling, generaland administrative (“SG&A”) expense. Operating income increased by $3.3million for the nine months ended September 30, 2005 compared to lastyear.  The improvement is primarily dueto a year over year gross profit increase of $4.1 million, or 2%, partiallyoffset by a $0.8 million, or 1%, increase in SG&A expense.

 

The comparison of operating income forthe quarter and nine months ended September 30, 2005 to the same periodsin 2004 reflects the following:

 

•                  The effect of salesvolume for the quarter was unfavorable, but for the nine months was favorable;

 

•                  Businesses with loweroperating margins grew faster than our businesses with higher operatingmargins;

 

•                  The unfavorable neteffect of currency exchange rates, due to a weak US dollar relative to theCanadian dollar and the Brazilian real;

 

•                  The unfavorable effectof higher steel costs; and

 

•                  Higher administrativecosts required to comply with the Sarbanes-Oxley Act of 2002, partially offsetby lower spending in other types of SG&A expense.

 

The year over year change in grossprofit is presented in the following table:

 
| **(Amounts in millions)**    | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| 2004 Gross  profit           |       | $                                         | 60.2       |                                     | $          | 175.5 |   |
| Increase (decrease)          |       |                                      |       |                                     |       |
| Sales volume                 |       | (1.8                                      | )          | 7.8                                      |       |
| Selling price and mix        |       | 6.2                                       |       | 17.0                                     |       |
| Product cost and mix         |       | (4.7                                      | )          | (19.3                                    | )          |
| Foreign currency translation |       | (0.9                                      | )          | (1.4                                     | )          |
| 2005 Gross  profit           |       | $                                         | 59.0       |                                     | $          | 179.6 |   |

 

As a percent of sales, gross profitdecreased to 31.6% in the third quarter of 2005 compared to 34.6% for the sameperiod in 2004.  Year over year increasesin raw material costs are partially offset by increases in net selling pricesimplemented in late 2004 and during 2005 for many of our products.  Increases in product cost include the yearover year effect of higher steel costs, which are estimated to have increased$2.0 million for the third quarter and $11.7 million for the nine months.

 

SG&A decreased slightly to $29.0million in the third quarter of 2005 from $29.1 million in the same period of2004.  For the nine months year to date,SG&A expense was $89.5 million compared to $88.7 million last year.  As a

 

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percent of sales, SG&A decreased to 15.5%in the current quarter from 16.8% in the third quarter of 2004.  For the nine months ended September 30,2005, SG&A decreased to 15.8% of sales from 17.4% in for the same period of2004.

 

The year over year comparison ofSG&A expense includes higher expenses from the following factors: theeffect of exchange rates on expenses at our foreign offices, which amounted to$0.2 million and $1.2 million for the three month and nine month periods,respectively; and higher compliance-related expenditures associated with theSarbanes-Oxley Act of $0.6 million and $1.9 million, respectively.  Higher year over year spending in these areasis expected to continue for the remainder of 2005.  These increases were largely offset, however,by decreases in several other areas including: pension and employee benefitsexpense of $0.1 million and $0.7 million, respectively; and advertising of $0.3million and $0.8 million, respectively.

 

Net income for the third quarter of 2005was $16.0 million, or $0.34 per diluted share, compared to a net loss of $31.8million, or $0.79 per share, in 2004. Net income for the nine months ended September 30,2005 was $50.4 million, or $1.06 per diluted share, compared to a net loss of$15.8 million, or $0.46 per share, in 2004. The change in net income isprimarily due to the following:

 

•                  A decrease inoperating income of $1.0 million for the third quarter, and an increase inoperating income of $3.3 million during the nine month period;

 

•                  A decrease in interestexpense of $8.0 million and $24.1 million, respectively, reflecting decreasesin average outstanding debt balances and average interest rates associated withchanges in our capital structure.  Also,for the quarter and nine month period of 2004, a $4.5 million non-recurringcharge to interest expense was incurred during the 30 day notice periodrequired for the redemption of public debt during our 2004 refinancingtransactions, which are discussed further under Financial Condition, Liquidityand Capital Resources;

 

•                  A decrease in interestincome of $0.6 million and $1.6 million, respectively, including $0.3 millionand $1.4 million, respectively, related to interest accrued on an income taxrefund received in the fourth quarter of 2004. Also, for the quarter and nine month period, a decrease of $0.3 millionfor non-recurring interest income earned in 2004 during the 30 day noticeperiod required for the redemption of public debt during the 2004 refinancingtransactions; and,

 

•                  A decrease in otherexpense of $42.3 million and $41.9 million, respectively, due primarily to the$42.8 million in charges recorded during the third quarter of 2004 associatedwith the 2004 refinancing transactions. In 2005, charges of $1.3 million and $1.7 million, respectively for thethird quarter and nine month period, have been recorded to write off deferredfinancing costs resulting from the pre-payment of debt principal.

 

Our effective income tax rate was 17.6%and 17.0%, respectively, in the third quarter and for the nine months ended September 30,2005.  In 2005 and 2004, for all periodsreported, our tax provision is primarily the result of our foreign taxliability, with a portion also for state and local taxes.  The domestic taxable income in 2005 comparesto a domestic taxable loss in 2004 and is offset by utilization of domestic netoperating loss carry forwards.  Ourdomestic net operating loss carryforwards and other deferred tax assets arefully reserved with a valuation allowance as of September 30, 2005 and December 31,2004.  This valuation allowance wasestablished in 2003.  Accordingly, wehave recognized no net federal domestic tax expense on our domestic incomeduring 2004 or 2005, except for $0.6 million recognized in the third quarter of2005 for estimated incremental taxes on planned repatriation of foreignearnings.  The increase in year over yearincome tax expense reflects increased foreign income and the incremental taxrecognized on our planned repatriation of foreign earnings.

 

United States income tax expense hasgenerally not been recognized on undistributed earnings of internationalsubsidiaries. Management’s intention is to reinvest these earnings and torepatriate the earnings only when it is tax efficient to do so.   The American Jobs Creation Act of 2004 (the “Act”),signed into law October 22, 2004, includes a one-time election to deduct85% of certain foreign earnings that are repatriated, as defined in theAct.  Any

 

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repatriation of foreign earnings must becompleted by December 31, 2005.  Weintend to repatriate between $15.0 million and $25.0 million of ourundistributed earnings of foreign subsidiaries during the fourth quarter of2005.

 

Therefore, we recognized $0.6 million ofincome tax expense in the three and nine months ended September 30, 2005,representing the estimated income tax effect of repatriation of $15.0 millionof foreign earnings.  We estimate thatpotential additional tax expense up to $1.2 million may be recognized in thefourth quarter as the repatriation plan is completed.

 

The following table reflects segmentsales and contribution to operating income for the three months and nine monthsended September 30, 2005 and 2004:

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales:**                     |       |                                       |       |                                      |       |   |   |   |   |
| Outdoor Products               |       | $                                          | 108,855    |                                      | $          | 109,836 |   | $ | 339,748 |   | $ | 314,115 |   |
| Industrial and Power Equipment |       | 66,659                                     |       | 52,664                                    |       | 186,362 |   | 159,781 |   |
| Lawnmower                      |       | 11,513                                     |       | 11,472                                    |       | 40,391 |   | 35,289 |   |
| Inter-Segment Elimination      |       | (337                                       | )          | (310                                      | )          | (804 | ) | (686 | ) |
| Total Sales                    |       | $                                          | 186,690    |                                      | $          | 173,662 |   | $ | 565,697 |   | $ | 508,499 |   |
|                           |       |                                       |       |                                      |       |   |   |   |   |
| **Operating  income:**         |       |                                       |       |                                      |       |   |   |   |   |
| Outdoor Products               |       | $                                          | 25,244     |                                      | $          | 27,988 |   | $ | 80,527 |   | $ | 80,408 |   |
| Industrial and Power Equipment |       | 8,187                                      |       | 5,945                                     |       | 19,373 |   | 15,571 |   |
| Lawnmower                      |       | 405                                        |       | 637                                       |       | 2,091 |   | 1,899 |   |
| Inter-Segment Elimination      |       | 10                                         |       | (3                                        | )          | (20 | ) | 4 |   |
| Contribution  from segments    |       | 33,846                                     |       | 34,567                                    |       | 101,971 |   | 97,882 |   |
| Corporate  expenses            |       | (3,834                                     | )          | (3,511                                    | )          | (11,899 | ) | (11,106 | ) |
| Operating  income              |       | $                                          | 30,012     |                                      | $          | 31,056 |   | $ | 90,072 |   | $ | 86,776 |   |

 

***Outdoor Products Segment.***** **Sales for the OutdoorProducts segment in the third quarter of 2005 decreased $1.0 million, or 1%,compared to the same period of 2004, and sales for the nine month period increased$25.6 million, or 8%, compared to last year. The year over year effect of volume caused an estimated decrease of $3.3million for the quarter, but an increase of $19.5 million for the nine months.   The combination of price and mix resulted inan increase of $1.9 million for the quarter and $2.7 million for the ninemonths compared to the same periods in 2004. The effect of foreign currency translation on sales during the thirdquarter compared to last year was an increase of $0.4 million.  For the nine months, the effect was anestimated increase of $3.4 million. Order backlog decreased to $70.0 millioncompared to $77.4 million at December 31, 2004, and $79.4 million at September 30,2004.  Some of the reduction in backlogreflects the recognition by our customers that, as new capacity has come online, order lead time is reduced.

 

The decrease in sales during the thirdquarter reflects a 1% reduction in sales of our chain saw parts andaccessories, offset partially by an 8% increase in sales of outdoor care partsand accessories, and a 12% increase in sales of our concrete cuttingproducts.  Geographically, reduced salesin U. S. domestic markets, which were down 5% compared to the prior yearquarter, were offset partially by a modest increase in internationalsales.  Sales in domestic markets havebeen affected by reductions in certain customer inventory levels with possiblefurther reductions in customer inventory expected in the fourth quarter.  International sales for the third quarterincreased 1% over last year as exchange rates continue to provide favorableselling market conditions.

 

Sales for the nine months ended September 30,2005, compared to the same period of 2004, reflect a similar geographic patternto the quarterly comparison, with a 2% decrease in sales to domestic markets,more than offset by a 14% increase in sales to international markets acrossmost geographical regions.  Product lineresults include a

 

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26% increase in concrete cuttingproducts, an 8% increase in chainsaw parts and accessories, and a 2% increasein outdoor care parts and accessories.

 

Third quarter segment contribution tooperating income was $25.2 million compared to $28.0 million for 2004, or 23.2%of sales compared to 25.5% of sales last year. Segment contribution to operating income for the nine months ended September 30,2005 was $80.5 million compared to $80.4 million, or 23.7% of sales compared to25.6% last year.

 

The change in unit volume is estimatedto have negatively impacted operating income by $2.1 million for the thirdquarter, but positively impacted operating income by $8.6 million for the ninemonths when compared to 2004 unit volumes. Steel prices and currency translation exchange rates have both hadunfavorable effects on contribution to operating income, with higher steelcosts estimated at an increase of $1.5 million for the quarter and $6.3 millionfor the nine month period compared to last year.  We estimate the net unfavorable effect ofexchange rates at $1.1 million and $2.6 million, respectively, for the thirdquarter and nine months ended September 30, 2005 compared to the sameperiods in 2004.  The effect of foreigncurrency exchange rates are due to the U.S. dollar weakening against currencieswhere product is sourced.  In particular,the effects of the Canadian dollar and the Brazilian real on the costs ofproduction and SG&A expenses in those foreign locations exceeded theadditional translation income on sales. These overall unfavorable foreigncurrency effects have been partially offset by selling price increasesimplemented in certain of our markets, and controlled spending in SG&A.

 

***Industrial and PowerEquipment Segment.***** **Sales forthe Industrial and Power Equipment segment in the third quarter of 2005 were$66.7 million compared to $52.6 million in the same period of 2004, a 27%increase. For the year to date periods, sales were $186.4 million compared to$159.8 million last year, a 17% increase. Order backlog for the segment was $60.3 million at September 30,2005 compared to $74.4 million at June 30, 2005, $63.7 million at the endof 2004 and $59.8 million at September 30, 2004.  Backlog decreased from this year’s secondquarter level as some production related bottlenecks were improved.

 

The growth in sales reflected anincrease in sales volume, as well as an increase in average prices, over thesame periods in 2004.  Higher unit volumecontributed an estimated $10.5 million for the quarter and $14.4 million forthe nine months ended September 30, 2005 compared to the same periods in2004, driven, primarily, by incremental unit sales of timber harvestingequipment.  Increases to selling prices,implemented during 2004 and in 2005, combined with the effect of changes inproduct mix, provided an additional $3.5 million of revenue for the quartercompared to 2004, and $12.2 million for the nine months ended September 30,2005 compared to 2004.

 

Geographically, international sales grew$3.7 million in the third quarter of 2005 compared to the same period in 2004and by $11.3 million for the nine months ended September 30.  International sales represented 14% of totalsegment sales for the nine months ended September 30, 2005 compared to 9%for the same period of 2004, accounting for 42% of our growth world-wide.  This international growth is primarily aresult of our manufacturing and marketing agreements with Caterpillar, whichhave increased our penetration in global markets.  Domestically, sales of timber harvestingequipment increased 21% for the third quarter and 10% for the nine months,compared to last year.  Sales of ourrotational bearings and mechanical power transmission products, which are soldprimarily in domestic markets, were up $1.4 million, or 28%, compared to lastyear’s third quarter, and $2.6 million, or 19%, for the nine months ended September 30,primarily due to increases to unit prices implemented in January 2005 andimproved product mix.

 

Third quarter segment contribution tooperating income was $8.2 million compared to $5.9 million in 2004, or 12.3% ofsales compared to 11.3% of sales last year. Segment contribution to operating income for the nine months ended September 30,2005 was $19.4 million, or 10.4% of sales, compared to $15.6 million, or 9.7%last year.

 

Increases in selling prices provided anadditional $3.1 million of contribution for the third quarter and $11.2 millionfor the nine month period as compared to 2004. These price increases have offset the effects of higher steel prices,which had an estimated unfavorable effect of $0.5 million, or 0.8% of sales,for the quarter and $4.9 million, or 2.8% of sales for the nine monthperiod.  The effect of higher unit volumewas largely offset by a shift in product mix, resulting in a net decrease of$0.1 million in contribution to operating income for the third quarter and an

 

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estimated net decrease of $3.2 millionfor the nine months.  SG&A expenseincreased $0.3 million for the quarter, but decreased $0.7 million for the ninemonths.  As a percent of sales, SG&Aimproved year over year for both the quarter and nine month periods.

 

***Lawnmower Segment.***** **Sales for theLawnmower segment were $11.5 million in the third quarter of 2005, comparableto our sales in the third quarter of 2004. For the nine months ended September 30, sales were $40.4 million in2005 compared to $35.3 million last year, an increase of 14%.

 

The results for the third quarterreflect higher average prices due to price increases, new products and improvedproduct mix, compared to last year, resulting in $0.7 million of increasedsales, but were offset by a 3% decrease in unit volume. For the nine monthsended September 30, the $5.1 million, or 14%, increase in segment salesincludes $2.1 million favorable effect of price and mix, and $3.0 million fromthe 13% increase in units sold compared to last year.  Order backlog was $9.1 million at September 30,2005, increasing seasonally compared to $0.5 million at June 30,2005.  Backlog for this segment was $9.2million at December 31, 2004 and $12.0 million at September 30,2004.  U.S. dealer inventories arereported to be high due to summer drought conditions in the central U.S. and adampening effect on sales is expected in the fourth quarter. Growth ofinternational sales continues to be a point of focus, and international salesrepresented 11% of total segment sales for the nine months ended September 30,2005 compared to 5% for the same period of 2004.

 

Third quarter segment contribution to operatingincome was $0.4 million compared to $0.6 million for 2004, or 3.5% of salescompared to 5.6% of sales last year. Segment contribution to operating income for the nine months ended September 30,2005 was $2.1 million compared to $1.9 million, or 5.2% of sales compared to5.4% last year.  For the third quarter,the effect of lower unit volume, estimated at $0.6 million, was only partiallyoffset by the favorable effect of price and mix and lower SG&Aexpense.  For the nine months, theeffects of higher volume, price increases and lower SG&A spending werepartially offset by higher production costs.

 

***Corporate Expense.***  The $0.3 million, or 9% increase in corporateexpense for the third quarter, and the $0.8, or 7% increase for the nine monthsended September 30, includes $0.6 million and $1.9 million, respectively,for incremental costs required to comply with Sarbanes-Oxley.  These expenses represent costs for theinternal audit function and external audit fees.  These increases are partially offset bydecreases in compensation costs, a reduction in benefit expenses and areduction in legal fees.  We expect fullyear 2005 corporate expense to be higher than in 2004 due primarily to the costto comply with Sarbanes-Oxley, estimated at approximately $2.8 million for theyear.  This cost increase is expected tobe partially offset by savings in other areas.

 

**Financial Condition, Liquidityand Capital Resources**

 

Total debt at September 30, 2005was $446.4 million compared to $494.2 million at December 31, 2004.  As of September 30, 2005, outstandingdebt consisted of term loans of $271.4 million and 8 7/8% Senior SubordinatedNotes of $175.0 million.

 

In August 2004, we completed thefollowing refinancing transactions (the “2004 Refinancing Transactions”):

 

•                  The issuance of13,800,000 shares of common stock, which generated net proceeds of $127.2million;

 

•                  The issuance of new 87/8% Senior Subordinated Notes due in 2012 that generated net proceeds of$167.1 million; and,

 

•                  The amendment andrestatement of our existing senior credit facilities (which were amended againin December 2004), including an increase in amounts available, reductionin interest rates, the modification of financial covenants and an increase intotal amounts drawn to $246.6 million.

 

We used the net proceeds of theserefinancing transactions as follows:

 

•                  The redemption of our7% senior notes with $150.0 million principal outstanding;

 

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•                  The redemption of our13% senior subordinated notes with $323.2 million principal outstanding;

 

•                  The repayment of our12% convertible preferred equivalent security principal and accrued interest inthe aggregate amount of $29.6 million; and

 

•                  The payment of relatedpremiums of $27.1 million.

 

Interest and principal paymentobligations have been reduced as a result of these changes to our debtstructure and the Company is now benefiting from lower interest expense.   Interest expense was $28.0 million in thefirst nine months of 2005 compared to $52.1 million for the same period in2004.  Although the 2004 amount includes$4.5 million of non-recurring interest expense incurred during the 30 daynotice period required for the redemption of public debt, the Company’sinterest expense has been reduced primarily from a reduction in our averageborrowing rate and by the reduction in the principal amount of long termdebt.  Our annual interest expense mayvary in the future because the senior credit facility interest rates arevariable.  Interest rates have risenthroughout 2005 and our weighted average interest rate on all debt hasincreased from 6.42% as of December 31, 2004 to 7.20% as of September 30,2005.  Cash paid for interest in thefirst nine months of 2005 was $25.7 million compared to $60.7 million for thesame period in 2004.

 

Our debt continues to be significant,and future debt service payments continue to represent substantialobligations.  This degree of leverage mayadversely affect our operations and could have important consequences, includingthe following:

 

•                  A substantial portionof our cash flows continue to be required for debt service payments, whichreduces the funds that would otherwise be available for operations andinvestment in future business opportunities;

 

•                  A substantial decreasein net income and cash flows or an increase in expenses may make it difficultto meet debt service requirements or force us to modify operations;

 

•                  The amount of leveragecontinues to make us more vulnerable to economic downturns and competitivepressure; and

 

•                  The ability to obtainadditional financing to fund our operational needs may be impaired or may notbe available on favorable terms.

 

For the nine months ended September 30,2005, we made $45.0 million of voluntary pre-payments of principal on our termloans.  These principal pre-payments willfurther reduce our future interest expense, and we intend to make subsequentvoluntary pre-payments of principal on our term loans from time to time duringthe remainder of 2005.

 

We intend to fund working capital,capital expenditures and debt service requirements for the next twelve monthsthrough expected cash flows generated from operations.  Interest on loan and credit facilities ispayable in arrears according to varying interest rates and periods.  We expect our remaining resources will besufficient to cover any additional increases in working capital and capitalexpenditures.  There can be no assurance,however, that these resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs.

 

Under the amended and restated seniorcredit agreement, the amount available to be drawn on our $100.0 millionrevolving credit facility could be restricted by our leverage ratio and first liencredit facilities leverage ratio. Availability is further reduced for any outstanding letters of creditissued under the facility.  At September 30,2005 and at December 31, 2004, the Company had no amount drawn down onthis facility and had borrowing availability of $92.3 million and $92.2million, respectively.

 

The Company and all of its domesticsubsidiaries other than Blount, Inc. guarantee the obligations of Blount, Inc.under the senior credit facilities.  Theobligations under the senior credit facilities are collateralized by a firstpriority security interest in substantially all of the assets of Blount, Inc.and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock held by Blount International, Inc. and pledges of all of thestock of domestic

 

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subsidiaries held by Blount, Inc.  In addition, Blount, Inc. has pledged65% of the stock of its non-domestic subsidiaries as additional collateral.

 

Our senior credit facilities are subjectto certain reporting and financial covenant compliance requirements. We were incompliance with all debt covenants as of September 30, 2005.** **Non-compliance withthese covenants could result in severe limitations to our overall liquidity,and the term loan lenders could require actions for immediate repayment ofoutstanding amounts, potentially requiring sale of our assets.  Our debt is not subject to any triggers thatwould require early payment of debt due to any adverse change in our creditrating, although our credit ratings can result in increases or decreases to ourborrowing rate.  In June 2005, ourcredit rating was upgraded by a rating agency, resulting in a 0.25% reductionto the variable interest rates on our term loans.

 

With the amendment and restatement ofour senior credit facilities, the term of the revolving credit facility is fiveyears, and the terms of the Canadian term loan facility and term B loanfacility are six years, in each case, from August 9, 2004.   Required principal payments are adjustedafter each voluntary pre-payment of principal we make on the term loans.  As of September 30, 2005, the term Bloan facility requires quarterly payments of $0.7 million, with a final paymentof $253.3 million due on the maturity date. As of September 30, 2005, theCanadian term loan facility requires quarterly payments of $12 thousand, with afinal payment of $4.4 million due on the maturity date.  Once repaid, principal amounts under the termloan facilities may not be re-borrowed by the Company.

 

Cash and cash equivalents at September 30,2005 were $25.8 million compared to $48.6 million at December 31,2004.  The $22.8 million decrease in ourcash balance during the first nine months of 2005 compares to a decrease of$13.5 million in the same period of 2004.

 

Cash provided by operating activitieswas $35.6 million for the nine months ended September 30, 2005 compared to$11.1 million in the same period of 2004. The $24.5 million increase in cashprovided by operating activities reflects the following:

 

•                  An increase in netincome of $66.2 million;

 

•                  A decrease in non-cashadjustments of $45.3 million.  Thesenon-cash items include depreciation, amortization and other non-cash charges,including deferred income taxes, and non-cash gains and losses, reflected innet income.  The significant decrease innon-cash charges is primarily due to non-cash charges incurred last yearassociated with the 2004 refinancing transactions;

 

•                  The effect ofincreased sales activity resulted in additional accounts receivable of $15.2million and additional inventories of $10.2 million.  The use of cash to support this businessgrowth was $1.2 million greater than that needed in the prior year forreceivables, offset by a $3.6 million decrease in cash needed for inventory;

 

•                  A combined use of cashfor accounts payable and accrued expenses of $4.4 million compared to the $3.5million use of cash for this purpose in the same period in 2004.  Included in the 2005 period was $3.7 millionfor payment of the 2004 debt and equity issuance costs accrued at December 31,2004; and,

 

•                  A use of cash of $0.9million for other assets and liabilities compared to a use of cash of $6.8million for similar purposes in the same period for 2004, which included $4.9 millionof additional pension plan contribution and $1.4 million of accrued interestreceivable related to an income tax refund.

 

Accounts receivable increased during thefirst nine months of 2005 by $15.2 million from the end of 2004.  The increase in receivables reflects anincrease in sales, as well as sales programs in certain of our segments.  The allowance for doubtful accounts remainedcomparable at $2.3 million and $2.4 million at both September 30, 2005 andDecember 31, 2004.  Most of thegrowth in receivables from December 31, 2004 to September 30, 2005was in the current aging categories.

 

Net cash used for investingactivities in the first nine months of 2005 was $13.2 million compared to $11.9million for the same period in 2004. Included in the current period are proceeds of $0.9 million from thesale of a surplus manufacturing plant and warehouse at our Zebulon, NorthCarolina facility.   Purchases forproperty, plant and

 

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equipment increased $2.2 million duringthe first nine months of 2005 compared to 2004. The additional spending reflects continued investment in a new facilityin China, with spending of $3.1 million during the first nine months of 2005compared to $1.5 million of spending during the same period last year, amulti-phase project to increase capacity at our Brazilian plant and otherinvestments in manufacturing capacity at our domestic plants.  We expect to utilize between $20.0 million and$22.0 million in available cash for capital expenditures during 2005.

 

Cash used in financing activities in thefirst nine months of 2005 was $45.2 million compared to $12.8 million in thecomparable period of 2004.  During thecurrent year, the most significant use of cash for financing activities hasbeen the voluntary pre-payment of principal on our term debt.  In the prior year, the primary activityinvolved the 2004 Refinancing Transactions, which had a significant effect onour capital structure.

 

In the first nine months of 2005, we used$47.8 million for principal payments on our term debt, including $45.0 millionof voluntary principal pre-payments.  Theadditional $2.8 million represents scheduled payments and amounts required as aresult of asset sales.

 

In June 2005, the Company andcertain of our stockholders sold 7.5 million shares of our common stock in apublic offering.  The shares were offeredpursuant to an effective shelf registration statement that was previously filedwith the Securities and Exchange Commission. We retained cumulative net proceeds of $10 thousand for the followingtransactions:

 

•                  Lehman Brothers sold7,117,620 shares of our common stock.  Wedid not receive any proceeds from this sale;

 

•                  We issued 382,380shares of common stock and received net proceeds of $6.1 million;

 

•                  We purchased 382,380shares of common stock from certain stockholders for $6.1 million.  These shares are held as treasury stock.  We have accounted for this treasury stock asconstructively retired in the consolidated financial statements; and

 

•                  Lehman Brothersexercised warrants for 1,000,000 shares of common stock at $0.01 a share withnet proceeds of $10 thousand received by the Company.  Lehman Brothers retained ownership of theseshares and as of September 30, 2005 held approximately 8.9 million shares,or 19%, of our outstanding common stock.

 

In the first nine months of 2004, werepaid all of our outstanding debt with payment of $533.4 million in principal,partially financed by the issuance of $435.5 million in new long term debt.  We also paid $42.3 million in debt redemptionand issuance costs.  The 2004 RefinancingTransactions also included $138.0 million in proceeds from the issuance ofstock, less $11.3 million in cash that was used for stock issuance costs.  During 2005, additional disbursements of $2.6million and $1.4 million, respectively, were made for accrued debt and stockissuance costs related to the 2004 Refinancing Transactions.

 

Proceeds from the exercise of stockoptions and warrants were $6.6 million during the nine months ended September 30,2005, compared to $0.6 million in proceeds during the same period last year.

 

Of the amounts disbursed for debt andequity issuance costs in the first nine months of 2005, $3.2 million was paidto Lehman Brothers, which previously controlled more than 50% of ouroutstanding common stock.  In addition,we have received $0.3 million from Lehman Brothers related to costs incurred byus in conjunction with the December 2004 secondary stock offering wherebyLehman Brothers sold a portion of its Blount holdings.  In June 2005, as part of a secondarystock offering, we incurred $0.1 million in expenses that will be reimbursed byLehman Brothers.  In June 2005,Lehman Brothers paid the Company $10 thousand to exercise 1,000,000 previouslyissued warrants and received 1,000,000 shares of our common stock.

 

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**Recent Accounting Pronouncements**

 

In November 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFASNo. 151”).**Thisstatement amends the guidance in Accounting Research Bulletin No. 43,Chapter 4, Inventory Pricing,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage).  The provisions of SFAS No. 151 are to beapplied prospectively and are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005, with earlier applicationpermitted. The adoption of SFAS No. 151 is not expected to have a materialimpact on our financial position and results of operations.  We will adopt SFAS No. 151 on January 1,2006.

 

In December 2004, the FASB issuedSFAS No. 123(R), ‘‘Share-Based Payment’’ (“SFAS No. 123(R)”), whichis a revision of SFAS No. 123 and supersedes Accounting Principles Board (“APB”)Opinion No. 25. SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be valued at fairvalue on the date of grant, and to be expensed over the applicable vestingperiod. Under SFAS No. 123(R), pro forma disclosure of the incomestatement effects of share-based payments will no longer be analternative.  On March 29, 2005, theSEC issued Staff Accounting Bulletin No. 107 (SAB 107), whichprovides the Staff’s views regarding interactions between SFAS No. 123(R)and certain SEC rules and regulations and provides interpretations of thevaluation of share-based payments for public companies.  We are currently evaluating SFAS No. 123(R)and SAB 107 to determine the fair value method to measure compensation expense,the appropriate assumptions to include in the fair value model and thetransition method to use upon adoption. The impact of the adoption ofSFAS No. 123(R) is not known at this time due to these factors aswell as the unknown level of share-based payments to be granted in futureyears.  We expect the adoption of SFAS No. 123(R)will result in the recognition of increased compensation expense in futureperiods.  The Securities and ExchangeCommission has delayed the implementation date for SFAS No. 123(R) forpublic companies until the first interim reporting period of the first fiscalyear beginning after June 15, 2005. We will adopt SFAS No. 123(R) on January 1, 2006.

 

The effect on results of operations of expensingstock options using the Black-Scholes model is presented in Note 8.  Under certain conditions, stock optionsgranted by us are eligible for continued vesting upon the retirement of theemployee. The FASB clarified in SFAS No. 123(R) that the fair valueof such stock options should be expensed based on an accelerated vesting schedule orimmediately, rather than ratably over the vesting period stated in the grant.The pro forma disclosure currently reflects the expense of such options ratablyover the stated vesting period, expensing all unvested shares upon actualretirement. The SEC has recentlyclarified that companies should continue to follow the vesting method they havebeen using until adoption of SFAS No. 123(R), and then apply theaccelerated amortization schedule to all subsequent grants to thoseemployees that became eligible for retirement within the vesting period. Had webeen accounting for such stock options using the accelerated amortization schedule forthose employees that became eligible for retirement within the vesting period,the effect on stock-based compensation expense in the pro forma disclosure ofthe effect of expensing stock options presented in Note 8 would be immaterialfor all periods presented.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29” (“SFAS No. 153”). 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. Weadopted SFAS No. 153 on July 1, 2005. The adoption of SFAS No. 153 did not have a material impact on ourfinancial position and results of operations.

 

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 changesthe requirements for the accounting for and reporting of a change in accountingprinciple. This Statement applies to all voluntary changes in accountingprinciple. It also applies to changes required by an accounting pronouncementin the unusual instance

 

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that the pronouncement does not include specifictransition provisions. When a pronouncement includes specific transitionprovisions, those provisions should be followed. SFAS No. 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The adoption of SFAS No. 154 is not expectedto have a material effect on our results of operations or financialposition.  We will adopt SFAS No. 154on January 1, 2006.

 

**Forward Looking Statements**

 

“Forward looking statements,” as definedby the Private Securities Litigation Reform Act of 1995, used in this report,including without limitation our “outlook,” “guidance,” expectations,”  “beliefs,” “plans,” “indications,” “estimates,”“anticipations,” and their variants, are based upon available information andupon 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.Specifically, issues concerning foreign currency exchange rates, the cost tothe Company of commodities in general, and of steel in particular, and theanticipated level of applicable interest rates involve certain estimates andassumptions. To the extent that these, or any other such assumptions, are notrealized going forward, or other unforeseen factors arise, actual results forthe periods subsequent to the date of this report may differ materially.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

We are exposed to market risk fromchanges in interest rates, foreign currency exchange rates and commodityprices, including raw materials such as steel. We manage our exposure to thesemarket risks through our regular operating and financing activities, and, whendeemed appropriate, through the use of derivatives. When utilized, derivativesare used as risk management tools and not for trading or speculative purposes.See Market Risk section of Management’s Discussion and Analysis of FinancialCondition and Results of Operations in our most recent Form 10-K forfurther discussion of market risk.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Under the supervision and with theparticipation of its management, including the Chief Executive Officer and theChief Financial Officer, the Company has evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-14(e)), and has concluded that, as of September 30, 2005, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its consolidated subsidiarieswould be made known to the Chief Executive Officer and the Chief FinancialOfficer by others within those entities.

 

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**PART II********OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 

**(a) Exhibits:**

 

**31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of2002 by James S. Osterman, Chairman of the Board and Chief Executive Officer.

 

**31.2 Certification pursuant to section 302of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice Presidentand Chief Financial Officer.

 

**32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of2002 by James S. Osterman, Chairman of the Board and Chief Executive Officer.

 

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

 

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**  Filed electronically herewith. Copies of such exhibits may be obtained upon written request from:

 

Blount International, Inc.

P.O. Box 22127

Portland, Oregon  97269-2127

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
| BLOUNT INTERNATIONAL, INC.   |   |
|------------------------------|--------|
| Registrant                   |   |
|                         |
|                         |
| /s/ Calvin E. Jenness        |   |
| Calvin E. Jenness            |
| Senior Vice President and    |
| Chief Financial Officer      |
|                         |
| Dated: November 4, 2005 |
|                              |        |  |

 

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