**SECURITIES 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 **March 31, 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)

 

Securities registered pursuant to Section 12(b) of the Act:

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

 

Securities registered pursuant to Section 12(g) of theAct:  None

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

| Yes ý |   | No o |
|------------|--------|------|

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).

| Yes o |   | No ý |
|-------|--------|-----------|

 

Indicate the number of shares outstanding of each of theissued classes of common stock, as of the latest practicable date.

 

| Class of Common Stock | Outstanding at May 2, 2005 |
|-----------------------|----------------------------|
| $0.01 Par Value       | 45,308,235 shares.         |

 

1

----

 

**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

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

 

2

----

 

**PART I**

 

**ITEM 1.****  CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                         | ** ** | **Three  Months  Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands, except per share data)** | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                               |       |                               |       |   |   |
| Sales                                              |       | $                                  | 185,254    |   | $ | 165,573 |   |
| Cost of sales                                      |       | 125,285                            |       | 108,619 |   |
| Gross profit                                       |       | 59,969                             |       | 56,954 |   |
| Selling, general and administrative expenses       |       | 30,396                             |       | 29,786 |   |
| Operating income                                   |       | 29,573                             |       | 27,168 |   |
| Interest expense                                   |       | (9,148                             | )          | (17,413 | ) |
| Interest income                                    |       | 241                                |       | 775 |   |
| Other income (expense), net                        |       | (31                                | )          | 113 |   |
| Income before income taxes                         |       | 20,635                             |       | 10,643 |   |
| Provision for income taxes                         |       | 3,405                              |       | 3,021 |   |
| Net income                                         |       | $                                  | 17,230     |   | $ | 7,622 |   |
|                                               |       |                               |       |   |   |
| Basic net income per share                         |       | $                                  | 0.38       |   | $ | 0.25 |   |
|                                               |       |                               |       |   |   |
| Diluted net income per share                       |       | $                                  | 0.36       |   | $ | 0.23 |   |
|                                               |       |                               |       |   |   |
| Shares used in per share calculations:             |       |                               |       |   |   |
| Basic                                              |       | 45,102                             |       | 30,860 |   |
| Diluted                                            |       | 47,292                             |       | 32,803 |   |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

----

 

**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                                                                                     | ** ** | **March  31,** | ** ** | **December  31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|
| **(Amounts  in thousands, except share data)**                                                                 | ** ** | **2005**       | ** ** | **2004**          | ** ** |
|                                                                                                           |       |           |       |              |       |
| **Assets**                                                                                                     | ** ** | ** **     | ** ** | ** **        | ** ** |
|                                                                                                           |       |           |       |              |       |
| Current assets:                                                                                                |       |           |       |              |       |
| Cash and cash equivalents                                                                                      |       | $              | 26,266     |              | $          | 48,570 |   |
| Accounts receivable, net of allowance for doubtful accounts of $2,460  and $2,371, respectively                |       | 96,022         |       | 74,975            |       |
| Inventories                                                                                                    |       | 90,294         |       | 81,098            |       |
| Other current assets                                                                                           |       | 5,233          |       | 4,693             |       |
| Total current assets                                                                                           |       | 217,815        |       | 209,336           |       |
| Property, plant and equipment, net                                                                             |       | 99,093         |       | 97,929            |       |
| Goodwill                                                                                                       |       | 76,891         |       | 76,891            |       |
| Deferred financing costs                                                                                       |       | 23,176         |       | 23,883            |       |
| Other assets                                                                                                   |       | 16,556         |       | 16,703            |       |
| Total Assets                                                                                                   |       | $              | 433,531    |              | $          | 424,742 |   |
|                                                                                                           |       |           |       |              |       |
| **Liabilities and Stockholders’ Deficit**                                                                 | ** ** | ** **     | ** ** | ** **        | ** ** |
|                                                                                                           |       |           |       |              |       |
| Current liabilities:                                                                                           |       |           |       |              |       |
| Current maturities of long-term debt                                                                           |       | $              | 3,199      |              | $          | 3,199 |   |
| Accounts payable                                                                                               |       | 40,881         |       | 39,309            |       |
| Accrued expenses                                                                                               |       | 58,486         |       | 68,842            |       |
| Total current liabilities                                                                                      |       | 102,566        |       | 111,350           |       |
| Long-term debt, exclusive of current maturities                                                                |       | 490,212        |       | 491,012           |       |
| Deferred income taxes                                                                                          |       | 5,182          |       | 4,913             |       |
| Employee benefits                                                                                              |       | 62,386         |       | 62,248            |       |
| Other liabilities                                                                                              |       | 11,335         |       | 11,373            |       |
| Total liabilities                                                                                              |       | 671,681        |       | 680,896           |       |
| Commitments and contingent liabilities                                                                         |       |           |       |              |       |
| Stockholders’ equity (deficit):                                                                           |       |           |       |              |       |
| Common stock: par value $0.01 per share, 100,000,000 shares  authorized, 45,195,102 and 44,969,886 outstanding |       | 452            |       | 450               |       |
| Capital in excess of par value of stock                                                                        |       | 555,419        |       | 553,640           |       |
| Accumulated deficit                                                                                            |       | (792,935       | )          | (810,165          | )          |
| Accumulated other comprehensive loss                                                                           |       | (1,086         | )          | (79               | )          |
| Total stockholders’ deficit                                                                               |       | (238,150       | )          | (256,154          | )          |
| Total Liabilities and Stockholders’ Deficit                                                               |       | $              | 433,531    |              | $          | 424,742 |   |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

4

----

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**BlountInternational, Inc. and Subsidiaries**
| **(Amounts  in thousands)**                                                    | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                      |       |                                   |       |   |   |
| Net income                                                                     |       | $                                      | 17,230     |   | $ | 7,622 |   |
| Adjustments to reconcile net income to net cash Used in operating  activities: |       |                                   |       |   |   |
| Depreciation, amortization and other non-cash charges                          |       | 4,706                                  |       | 6,164 |   |
| Deferred income taxes                                                          |       | 302                                    |       | (34 | ) |
| Changes in assets and liabilities:                                             |       |                                   |       |   |   |
| (Increase) decrease in accounts receivable                                     |       | (21,047                                | )          | (17,123 | ) |
| (Increase) decrease in inventories                                             |       | (9,196                                 | )          | (6,247 | ) |
| (Increase) decrease in other assets                                            |       | (612                                   | )          | (637 | ) |
| Increase (decrease) in accounts payable                                        |       | 1,572                                  |       | 7,041 |   |
| Increase (decrease) in accrued expenses                                        |       | (6,545                                 | )          | (9,670 | ) |
| Increase (decrease) in other liabilities                                       |       | (681                                   | )          | 767 |   |
| Net cash used in operating activities                                          |       | (14,271                                | )          | (12,117 | ) |
|                                                                           |       |                                   |       |   |   |
| **Cash flows from investing activities:**                                      |       |                                   |       |   |   |
| Proceeds from sale of property, plant and equipment                            |       | 21                                     |       | 5 |   |
| Purchases of property, plant and equipment                                     |       | (5,038                                 | )          | (3,488 | ) |
| Net cash used in investing activities                                          |       | (5,017                                 | )          | (3,483 | ) |
|                                                                           |       |                                   |       |   |   |
| **Cash flows from financing activities:**                                      |       |                                   |       |   |   |
| Reduction of long-term debt                                                    |       | (800                                   | )          | (1,250 | ) |
| Issuance costs related to debt                                                 |       | (2,536                                 | )          | (110 | ) |
| Issuance costs related to stock                                                |       | (1,425                                 | )          |   |   |
| Exercise of stock options                                                      |       | 1,745                                  |       | 213 |   |
| Net cash used in financing activities                                          |       | (3,016                                 | )          | (1,147 | ) |
|                                                                           |       |                                   |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (22,304                                | )          | (16,747 | ) |
| Cash and cash equivalents at beginning of period                               |       | 48,570                                 |       | 35,194 |   |
| Cash and cash equivalents at end of period                                     |       | $                                      | 26,266     |   | $ | 18,447 |   |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

----

 

**UNAUDITEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**BlountInternational, Inc. and Subsidiaries**

** **
| **(Amounts  in thousands)**             | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital  in Excess of Par** | ** ** | **Retained  Earnings Deficit** | ** ** | **Accumulated  Other Compre-hensive Loss** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------|------------|-------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|-----------|------------|
|                                    |       |       |       |              |       |                          |       |                           |       |                                       |       |      |       |
| Balance December 31, 2004               |       | 44,970     |       | $                 | 450        |                          | $          | 553,640                        |       | $                                          | (810,165   | )         | $          | (79 | ) | $ | (256,154 | ) |
|                                    |       |       |       |              |       |                          |       |                           |       |                                       |       |      |       |
| Net income                              |       |       |       |              |       |                          |       | 17,230                         |       |                                       |       | 17,230    |       |
| Other comprehensive income (loss):      |       |       |       |              |       |                          |       |                           |       |                                       |       |      |       |
| Foreign currency translation Adjustment |       |       |       |              |       |                          |       |                           |       | (826                                       | )          | (826      | )          |
| Unrealized losses                       |       |       |       |              |       |                          |       |                           |       | (181                                       | )          | (181      | )          |
| Comprehensive income, net               |       |       |       |              |       |                          |       |                           |       |                                       |       | 16,223    |       |
| Exercise of stock options               |       | 225        |       | 2                 |       | 1,743                         |       |                           |       |                                       |       | 1,745     |       |
| Stock compensation expense              |       |       |       |              |       | 36                            |       |                           |       |                                       |       | 36        |       |
| Balance March 31, 2005                  |       | 45,195     |       | $                 | 452        |                          | $          | 555,419                        |       | $                                          | (792,935   | )         | $          | (1,086 | ) | $ | (238,150 | ) |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

6

----

 

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1:  BASIS OF PRESENTATION**

 

***Basis of Presentation.***  The unaudited consolidated financialstatements include the accounts of Blount International, Inc. (“Blount” or the “Company”)and its subsidiaries and are prepared in conformity with accounting principlesgenerally 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 afair statement of the financial position at March 31, 2005 and December 31,2004 and the results of operations, cash flows and changes in stockholders’equity for the three months ended March 31, 2005 and 2004.

 

Theaccompanying financial data as of March 31, 2005 and for the three months endedMarch 31, 2005 and March 31, 2004 has been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations. The December 31, 2004 Consolidated Balance Sheetwas derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates. However, the Company believes that the disclosures are adequate to makethe information presented not misleading. These Consolidated FinancialStatements should be read in conjunction with the Consolidated FinancialStatements and the notes thereto, included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.

 

***Use of Estimates.******* The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at thedates of the financial statements, as well as the reported amounts of revenuesand expenses during the reporting periods. It is reasonably possible that actual results could differ materiallyfrom those estimates and significant changes to estimates could occur in thenear term.

 

***Income Taxes.***  United States income taxes have not beenprovided on undistributed earnings of international subsidiaries. Management’sintention is to reinvest these earnings and repatriate the earnings only whenit 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 percent of certain foreignearnings that are repatriated, as defined in the act.  Any repatriation of foreign earnings must becompleted by December 31, 2005.  TheCompany is evaluating the effects of repatriating a portion of itsundistributed earnings of foreign subsidiaries and is awaiting furtherregulatory guidance concerning the Act. Accordingly, the Company cannot yet reasonably estimate the tax effectsof such potential repatriation.  TheCompany expects to complete its evaluation during 2005.

 

The Company’sincome tax provision primarily consists of foreign, state and local taxes.  The Company has a domestic net operating losscarryforward which is fully reserved with a valuation allowance as of December31, 2004 and March 31, 2005.

 

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

 

7

----

 

**NOTE2:  INVENTORIES**

 

Inventoriesconsisted of the following:

 
| ** **                  | ** ** | **March  31,** | ** ** | **December  31,** | ** ** |
|-----------------------------|------------|----------------|------------|-------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2005**       | ** ** | **2004**          | ** ** |
| Raw materials and supplies  |       | $              | 33,313     |              | $          | 28,914 |   |
| Work in progress            |       | 12,414         |       | 13,708            |       |
| Finished Goods              |       | 44,567         |       | 38,476            |       |
| Total inventories           |       | $              | 90,294     |              | $          | 81,098 |   |

 

 

**NOTE3:  PROPERTY, PLANT AND EQUIPMENT**

 

Property,plant and equipment consisted of the following:
| ** **                               | ** ** | **March  31,** | ** ** | **December  31,** | ** ** |
|------------------------------------------|------------|----------------|------------|-------------------|------------|
| **(Amounts  in thousands)**              | ** ** | **2005**       | ** ** | **2004**          | ** ** |
| Land                                     |       | $              | 5,316      |              | $          | 4,939 |   |
| Buildings and improvements               |       | 65,736         |       | 65,411            |       |
| Machinery and equipment                  |       | 185,193        |       | 182,626           |       |
| Furniture, fixtures and office equipment |       | 30,817         |       | 31,264            |       |
| Transportation equipment                 |       | 964            |       | 967               |       |
| Construction in progress                 |       | 16,765         |       | 15,243            |       |
| Accumulated depreciation                 |       | (205,698       | )          | (202,521          | )          |
| Total property, plant and equipment, net |       | $              | 99,093     |              | $          | 97,929 |   |

 

 

**NOTE4:  ACCRUED EXPENSES**

 

Accruedexpenses consisted of the following:

** **
| ** **                               | ** ** | **March  31,** | ** ** | **December  31,** | ** ** |
|------------------------------------------|------------|----------------|------------|-------------------|------------|
| **(Amounts  in thousands)**              | ** ** | **2005**       | ** ** | **2004**          | ** ** |
| Salaries, wages and related withholdings |       | $              | 26,298     |              | $          | 34,135 |   |
| Accrued interest                         |       | 6,775          |       | 7,001             |       |
| Warranty reserve                         |       | 5,117          |       | 4,923             |       |
| Accrued taxes                            |       | 2,730          |       | 4,036             |       |
| Other                                    |       | 17,566         |       | 18,747            |       |
| Total accrued expenses                   |       | $              | 58,486     |              | $          | 68,842 |   |

 

8

----

 

**NOTE5:  DEBT AND FINANCING AGREEMENTS**

 

Long-termdebt consisted of the following:
| ** **                       | ** ** | **March  31,** | ** ** | **December  31,** | ** ** |
|----------------------------------|------------|----------------|------------|-------------------|------------|
| **(Amounts  in thousands)**      | ** ** | **2005**       | ** ** | **2004**          | ** ** |
| Term loans                       |       | $              | 318,411    |              | $          | 319,211 |   |
| 8 7/8% Senior subordinated notes |       | 175,000        |       | 175,000           |       |
| Total debt                       |       | 493,411        |       | 494,211           |       |
| Less current maturities          |       | (3,199         | )          | (3,199            | )          |
| Total long-term debt             |       | $              | 490,212    |              | $          | 491,012 |   |

 

Theweighted average interest rate on outstanding debt as of March 31, 2005 was6.57%, exclusive of the effect of amortization expense for deferred financingcosts.

 

**2004 Refinancing Transactions.**** **On August 9, 2004, the Company executed a series ofrefinancing transactions.  These threetransactions, referred to as the “2004 Refinancing Transactions,” included:

 

•                  The issuance of 13,800,000 shares of commonstock, which generated gross proceeds of $138.0 million and net proceeds to theCompany of $127.2 million;

 

•                  The issuance of 8 7/8% senior subordinatednotes due in 2012 (the “8 7/8% Senior Subordinated Notes”), which generatedgross proceeds of $175.0 million and net proceeds to the Company of $167.1million; and

 

•                  The amendment and restatement of theCompany’s existing senior credit facilities, including an increase in amountsavailable, with the total amounts drawn increasing by $246.6 million.

 

Theamendment and restatement of the senior credit facilities included, among otherthings, a reduction in interest rates, revisions to financial complianceratios, the addition of maximum leverage ratios and the revision of certainrepayment terms.  The amended andrestated credit facilities consisted of a revolving credit facility of up to$100.0 million and term loans that included a $4.9 million Canadian term loanfacility, a $265.0 million Term B loan facility and a $50.0 million SecondCollateral Institutional Loan (‘‘SCIL’’) facility.

 

TheCompany used the net proceeds of the 2004 Refinancing Transactions as follows:

 

•                  The redemption of its 7% Senior Notes with $150.0 millionprincipal outstanding;

 

•                  The redemption of its 13% Senior Subordinated Notes with$323.2 million principal outstanding;

 

•                  The repayment of its 12% Convertible Preferred EquivalentSecurity principal and premium in the amount of $29.6 million plus accruedinterest outstanding; and

 

•                  The payment of related fees and expenses of $27.1 million.

 

OnDecember 1, 2004, the Company again amended its senior credit facilities to,among other things, provide for the repayment and elimination of the $50.0million SCIL established in August 2004 with the proceeds from an increase inthe Term Loan B limit, an adjustment to certain financial covenants and a lowerborrowing rate.

 

Withthe amendment and restatement of the senior credit facilities, the term of therevolving credit facility is five years, and the terms of the Canadian termloan facility and Term B loan facility are six years, in each case, from August9, 2004.   The Term B loan facilityrequires quarterly payments of $0.8 million, with a final payment of $296.2million due on the maturity date. The Canadian term loan facility requiresquarterly payments of 

 

9

----

 

$12 thousand,with a final payment of $4.6 million due on the maturity date.  Once repaid, principal under the Term loanfacilities may not be re-borrowed by the Company.

 

The amended and restated senior creditfacilities may be prepaid at any time. There can also be additional mandatory repayment amounts related to thesale of Company assets under certain circumstances, the issuance of stock andupon the Company’s annual generation of excess cash flow as determined underthe credit agreement. The credit facility provides for term loan interest ratemargins to vary based on the Company’s credit facility leverage ratio. Thecredit facility leverage ratio is defined as the ratio of total outstandingdebt under the credit facility (including outstanding letters of credit) toadjusted earnings before interest, taxes, depreciation and amortization (“AdjustedEBITDA”). Interest rates also change based upon changes in LIBOR or prime ratesand changes in ratings by rating agencies. The amount available on therevolving credit facility is reduced by outstanding letters of credit and isfurther restricted by a specific leverage ratio and first lien creditfacilities leverage ratio. As of March31, 2005, the Company had the ability to borrow $92.2 million under the termsof the revolving credit agreement.

 

TheCompany and all of its domestic subsidiaries other than Blount, Inc. guaranteeBlount, Inc.’s obligations under the senior credit facilities.  The obligations under the senior creditfacilities are collateralized by a first priority security interest insubstantially all of the assets of Blount, Inc. and its domestic subsidiaries,as well as a pledge of all of Blount, Inc.’s capital stock held by BlountInternational, Inc. and all of the stock of domestic subsidiaries held byBlount, Inc.  In addition, Blount, Inc.has pledged 65% of the stock of its non-domestic subsidiaries as furthercollateral.

 

Theamended and restated senior credit facilities contain financial covenantcalculations relating to maximum capital expenditures, minimum fixed chargecoverage ratio, maximum leverage ratio and maximum first lien credit facilitiesleverage ratio.  In addition, there arecovenants in areas such as investments, loans and advances, indebtedness, andthe sale of stock and assets.  TheCompany was in compliance with all debt covenants as of March 31, 2005.

 

As aresult of the 2004 Refinancing Transactions, the Company has one registereddebt security, the 8 7/8% Senior Subordinated Notes. These notes are fully andunconditionally, jointly and severally, guaranteed by the Company and all ofits domestic subsidiaries (“guarantor subsidiaries”).  All guarantor subsidiaries of these 8 7/8%Senior Subordinated Notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all ofits domestic subsidiaries guarantee these 8 7/8% Senior Subordinated Notes,none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”)guarantee these notes.  See also Note 12.

 

 

**NOTE6:  EARNINGS PER SHARE DATA**

Thenumber of shares used in the denominators of the basic and diluted earnings pershare computations was as follows: 
| ** **                                                                                       | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Shares  in thousands)**                                                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Shares for basic income per share computation — weighted average  common shares outstanding |       | 45,102                             |       | 30,860 |   |
| Dilutive effect of stock options and warrants                                                    |       | 2,190                              |       | 1,943 |   |
| Shares for diluted income per share computation                                                  |       | 47,292                             |       | 32,803 |   |
|                                                                                             |       |                               |       |   |   |
| Options excluded from computation as anti-dilutive                                               |       | 7                                  |       | 1,255 |   |

 

InAugust 2004, the Company issued 13,800,000 new shares of common stock andreceived $127.2 million net of related issuance fees and costs.  In December 2004, Lehman Brothers MerchantBanking Partners II L.P. and certain of its affiliates (“Lehman Brothers”) sold11,225,492 shares of the Company’s common stock in a secondary public stockoffering for which the Company did not receive any proceeds.

 

10

----

 

 

Anaffiliate of Lehman Brothers holds warrants to acquire 1,000,000 shares ofBlount common stock that are exercisable immediately at $0.01 a share throughMarch 2, 2013.

 

 

**NOTE7:  STOCK-BASED COMPENSATION**

 

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accountingfor Stock-Based Compensation,” the Company continues to apply intrinsic valueaccounting for its stock option plans. Compensation cost for stock options, ifany, is measured as the excess of the quoted market price of the stock at thedate of grant or modification over the amount an employee must pay to acquirethe stock.  The Company has adopted thedisclosure-only provisions of SFAS No. 123 and SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure — an Amendment of FASBStatement No. 123”.  If the Company hadelected to recognize compensation expense based upon the fair value at thegrant dates for awards under these plans, the Company’s net income and netincome per share would have been as follows:

 
| ** **                                                                                                                             | ** ** | **Three  Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(Amounts  in thousands, except per share amounts)**                                                                                  | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                 |       | $                                       | 17,230     |   | $ | 7,622 |   |
| Add: stock-based employee compensation cost, netof tax, included in  the reported results                                              |       | 30                                      |       | 125 |   |
| Deduct: total stock-based employee compensation cost, net of tax,  that would have been included in net income under fair value method |       | (198                                    | )          | (296 | ) |
| Pro forma net income                                                                                                                   |       | $                                       | 17,062     |   | $ | 7,451 |   |
|                                                                                                                                   |       |                                    |       |   |   |
| Basic earnings per share as reported                                                                                                   |       | $                                       | 0.38       |   | $ | 0.25 |   |
| Pro forma basic earnings per share                                                                                                     |       | $                                       | 0.38       |   | $ | 0.24 |   |
| Diluted earnings per share as reported                                                                                                 |       | $                                       | 0.36       |   | $ | 0.23 |   |
| Pro forma diluted earnings per share                                                                                                   |       | $                                       | 0.36       |   | $ | 0.23 |   |

 

 

**NOTE8:  PENSION AND POST-RETIREMENT BENEFITPLANS**

 

The components of netperiodic benefit cost for funded and unfunded pension and other post-retirementbenefits for the quarter ended March 31 are as follows:

 
| ** **                         | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **Pension  Benefits**             | ** ** | **Other  Post-Retirement Benefits** | ** ** |
| **(Amounts  in thousands)**        | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                       |       | $                                 | 1,483      |   | $ | 1,167 |   | $ | 107 |   | $ | 103 |   |
| Interest cost                      |       | 2,394                             |       | 2,083 |   | 514 |   | 498 |   |
| Expected return on plan assets     |       | (2,419                            | )          | (1,815 | ) | (11 | ) |   |   |
| Amortization of prior service cost |       | 93                                |       | 100 |   | 2 |   | 2 |   |
| Amortization of net loss           |       | 652                               |       | 542 |   | 271 |   | 232 |   |
| Total net periodic benefit cost    |       | $                                 | 2,203      |   | $ | 2,077 |   | $ | 883 |   | $ | 835 |   |

 

TheCompany expects to contribute approximately $10.1 million to its funded pensionplans in 2005 and does not expect to make any contributions to thepost-retirement medical plan during 2005.

 

11

----

 

**NOTE9:  COMMITMENTS AND CONTINGENTLIABILITIES**

 

Guaranteesand other commercial commitments are summarized in the following table:

 
| ** **                                        | ** ** | **March  31,** | ** ** |
|---------------------------------------------------|------------|----------------|------------|
| **(Amounts  in thousands)**                       | ** ** | **2005**       | ** ** |
| Warranty reserve                                  |       | $              | 5,117      |   |
| Letters of credit outstanding                     |       | 7,752          |       |
| Third party financing agreements(1)               |       | 4,000          |       |
| Accounts receivable securitization(2)             |       | 365            |       |
| Total guarantees and other commercial commitments |       | $              | 17,234     |   |

 

(1)  Applicable to thirdparty financing agreements for customer equipment purchases.

 

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

 

Thewarranty reserve is included in accrued expenses on the consolidated balancesheet.  In addition to these amounts, theCompany also guarantees certain debt of its subsidiaries (see Note 5 toUnaudited Consolidated Financial Statements).

 

Changesin the warranty reserve are as follows:

 
| **(Amounts  in thousands)**        | ** ** | **Warranty  Reserve** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| Balance at beginning of period     |       | $                     | 4,923      |   |
| Accrued                            |       | 1,593                 |       |
| Payments made (in cash or in-kind) |       | (1,399                | )          |
| Balance at end of period           |       | $                     | 5,117      |   |

 

TheCompany was named a potentially liable person (“PLP”) by the Washington StateDepartment of Ecology (“WDOE”) in connection with the Pasco Sanitary LandfillSite (“Site”). This Site has been monitored by WDOE since 1988. From availablerecords, the Company believes that it sent 26 drums of chromic hydroxide sludgein a non-toxic, trivalent state to the Site. The Company further believes that the Site contains more than 50,000drums in total and millions of gallons of additional wastes, some potentiallyhighly toxic in nature.  Accordingly,based both on volume and on the nature of the waste, the Company believes thatit is a de minimis contributor.

 

The current on-site monitoring program isbeing conducted and funded by certain PLPs, excluding the Company and severalother PLPs, under the supervision of WDOE. Dependingupon the results of this study, further studies or remediation could berequired. The Company may or may not be required to pay a share of the currentstudy, or to contribute costs of subsequent studies or remediation, if any. TheCompany is unable to estimate such costs, or the likelihood of being assessedany portion thereof. However, during the most recent negotiations with thosePLPs that are funding the work at the Site, the Company’s potential share ofthe estimated cost ranged from approximately $20 thousand to $0.3 million.

 

The Company hasaccrued $0.1 million at March 31, 2005 and December 31, 2004 for the potentialcosts of any clean-up at the Site. The Company spent zero during the threemonths ended March 31, 2005 and 2004 to administer compliance in regards to theSite.

 

OnSeptember 12, 2003, the Company received a General Notice Letter as aPotentially Responsible De Minimis Party from Region IX of the EPA regardingthe Operating Industries, Inc. Superfund Site in Monterey Park, California. Thenotice stated that the EPA would submit an offer to settle and an explanationas to why it believes the

 

12

----

 

Companyor 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, was notifiedof further delay in the process until late 2004 at the earliest.  The EPA has indicated that its de minimissettlement offer will be based on volume of waste at a uniform per gallon priceamong all de minimis parties.  The sitewas operated as a landfill from 1948 to 1984, and received wastes from over4,000 generators. At the present time, the Company has no knowledge of which ofits units, if any, was involved at the site, or the amounts, if any, that weresent there. However, based upon its current knowledge, and its alleged statusas a Potentially Responsible De Minimis Party, the Company does not believethat any settlement or participation in any remediation will have a materialadverse effect on its consolidated financial position, operating results orcash flows.  The Company has received nofurther notice or explanation from Region IX of the EPA as of March 31, 2005.

 

TheCompany is a defendant in a number of product liability lawsuits, some of whichseek significant or unspecified damages, involving serious personal injuriesfor which there are retentions or deductible amounts under the Company’sinsurance policies. In addition, the Company is a party to a number of othersuits arising out of the normal course of its business. While there can be noassurance as to their ultimate outcome, management does not believe theselawsuits will have a material adverse effect on the Company’s consolidatedfinancial position, operating results or cash flows.

 

TheCompany accrues, by a charge to income, an amount related to a matter deemed bymanagement and its counsel as a probable loss contingency in light of all ofthe then known circumstances. The Company does not accrue a charge to incomefor a matter deemed by management and its counsel to be a reasonably possibleloss contingency in light of all of the current circumstances.

 

13

----

 

**NOTE10:  SEGMENT INFORMATION**

 

TheCompany identifies operating segments primarily based on managementresponsibility. The Company has three reportable segments: Outdoor Products,Industrial and Power Equipment and Lawnmower. Outdoor Products manufactures andmarkets cutting chain, bars, sprockets and accessories for chainsaw use,concrete cutting equipment, and lawnmower blades and accessories for outdoorcare. Industrial and Power Equipment manufactures and markets timber harvestingequipment, industrial tractors and loaders, rotation bearings and mechanicalpower transmission units. The Lawnmower segment manufactures and markets ridinglawnmowers and related accessories.

 

Certainfinancial information by segment is presented in the table below:

 
| ** **                     | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)**    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **Sales:**                     | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Outdoor Products               |       | $                                  | 116,801    |   | $ | 102,101 |   |
| Industrial and Power Equipment |       | 56,016                             |       | 54,024 |   |
| Lawnmower                      |       | 12,742                             |       | 9,619 |   |
| Inter-Segment Elimination      |       | (305                               | )          | (171 | ) |
| Total Sales                    |       | $                                  | 185,254    |   | $ | 165,573 |   |
|                           |       |                               |       |   |   |
| **Operating income (loss):**   |       |                               |       |   |   |
| Outdoor Products               |       | $                                  | 28,486     |   | $ | 26,321 |   |
| Industrial and Power Equipment |       | 4,747                              |       | 4,741 |   |
| Lawnmower                      |       | 241                                |       | (227 | ) |
| Inter-Segment Elimination      |       | (39                                | )          | 3 |   |
| Contribution from segments     |       | 33,435                             |       | 30,838 |   |
| Corporate expenses             |       | (3,862                             | )          | (3,670 | ) |
| Operating income               |       | 29,573                             |       | 27,168 |   |
| Interest expense               |       | (9,148                             | )          | (17,413 | ) |
| Interest income                |       | 241                                |       | 775 |   |
| Other income (expense), net    |       | (31                                | )          | 113 |   |
| Income before income taxes     |       | $                                  | 20,635     |   | $ | 10,643 |   |

 

 

**NOTE11:  SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                  | ** ** | **Three  Months Ended  March 31,** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Interest paid               |       | $                                  | 8,459      |   | $ | 22,822 |   |
| Income taxes paid, net      |       | 4,798                              |       | 1,525 |   |
|                             |            |                                    |            |  |  |  |  |

 

 

**NOTE12:  CONSOLIDATING FINANCIAL INFORMATION**

 

SeeNote 5 to Unaudited Consolidated Financial Statements for a discussion of theCompany’s guarantor subsidiaries.  The followingconsolidating financial information sets forth condensed consolidatingfinancial information, statements of operations and the balance sheets and cashflows of Blount International, Inc., Blount, Inc., the guarantor subsidiariesand the non-guarantor subsidiaries.

 

14

----

 

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED FINANCIAL INFORMATION**

 

**Statementof Operations Information**

 
| **(Amounts  in thousands)**                               | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Three Months Ended March 31, 2005**            | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                     |       |                             |       | $                 | 121,931    |                        | $          | 42,000                            |       | $                | 71,688     |             | $          | (50,365 | ) | $ | 185,254 |   |
| Cost of sales                                             |       |                             |       | 92,439            |       | 34,253                      |       | 51,343                            |       | (52,750          | )          | 125,285          |       |
| Gross profit                                              |       |                             |       | 29,492            |       | 7,747                       |       | 20,345                            |       | 2,385            |       | 59,969           |       |
| Selling, general  and administrative expenses             |       |                             |       | 18,129            |       | 4,024                       |       | 8,243                             |       |             |       | 30,396           |       |
| Operating income                                          |       |                             |       | 11,363            |       | 3,723                       |       | 12,102                            |       | 2,385            |       | 29,573           |       |
| Other, net                                                |       | $                                | (4,032     | )                 | (4,777     | )                           | (131       | )                                 | 2          |             |       |             | (8,938     | ) |
| Income (loss)  before income taxes                        |       | (4,032                           | )          | 6,586             |       | 3,592                       |       | 12,104                            |       | 2,385            |       | 20,635           |       |
| Provision  (benefit) for income taxes                     |       | (665                             | )          | (726              | )          | 180                         |       | 4,616                             |       |             |       | 3,405            |       |
| Income (loss)                                             |       | (3,367                           | )          | 7,312             |       | 3,412                       |       | 7,488                             |       | 2,385            |       | 17,230           |       |
| Equity in  earnings (losses) of affiliated companies, net |       | 20,597                           |       | 13,285            |       | 69                          |       |                              |       | (33,951          | )          |             |       |
| Net income (loss)                                         |       | $                                | 17,230     |              | $          | 20,597                      |       | $                                 | 3,481      |             | $          | 7,488            |       | $ | (31,566 | ) | $ | 17,230 |   |
| ** **                                                | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the  Three Months Ended March 31, 2004**            | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                     |       |                             |       | $                 | 113,434    |                        | $          | 36,893                            |       | $                | 57,880     |             | $          | (42,634 | ) | $ | 165,573 |   |
| Cost of sales                                             |       |                             |       | 81,555            |       | 29,044                      |       |                              | 42,284     |             | (44,264    | )                | 108,619    |   |
| Gross profit                                              |       |                             |       | 31,879            |       | 7,849                       |       | 15,596                            |       | 1,630            |       | 56,954           |       |
| Selling, general  and administrative Expenses             |       |                             |       | 17,886            |       | 4,764                       |       | 7,136                             |       |             |       | 29,786           |       |
| Operating income                                          |       |                             |       | 13,993            |       | 3,085                       |       | 8,460                             |       | 1,630            |       | 27,168           |       |
| Other, net                                                |       | $                                | (5,119     | )                 | (11,038    | )                           | (103       | )                                 | (265       | )                |       |             | (16,525    | ) |
| Income (loss)  before income taxes                        |       | (5,119                           | )          | 2,955             |       | 2,982                       |       | 8,195                             |       | 1,630            |       | 10,643           |       |
| Provision for  income taxes                               |       |                             |       | 14                |       | 149                         |       | 2,858                             |       |             |       | 3,021            |       |
| Income (loss)                                             |       | (5,119                           | )          | 2,941             |       | 2,833                       |       | 5,337                             |       | 1,630            |       | 7,622            |       |
| Equity in  earnings (losses) of affiliated companies, net |       | 12,741                           |       | 9,800             |       | 36                          |       |                              |       | (22,577          | )          |             |       |
| Net income (loss)                                         |       | $                                | 7,622      |              | $          | 12,741                      |       | $                                 | 2,869      |             | $          | 5,337            |       | $ | (20,947 | ) | $ | 7,622 |   |

 

15

----

 

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED FINANCIAL INFORMATION**

 

**BalanceSheet Information**

 
| **(Amounts  in thousands)**                                | ** ** | **Blount  International, Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **March  31, 2005**                                        | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                 |       |                            |       | $                 | 3,283      |                        |       |                              | $          | 22,983           |       |             |       | $ | 26,266 |   |
| Accounts  receivable, net                                  |       |                            |       | 48,594            |       | $                           | 21,371     |                              | 26,057     |             |       |             | 96,022     |   |
| Intercompany  receivables                                  |       |                            |       | 180,864           |       | 56,583                      |       | 17,822                            |       | $                | (255,269   | )                |       |   |
| Inventories                                                |       |                            |       | 33,993            |       | 30,100                      |       | 26,201                            |       |             |       | 90,294           |       |
| Other current  assets                                      |       |                            |       | 2,771             |       | 584                         |       | 1,878                             |       |             |       | 5,233            |       |
| Total current  assets                                      |       |                            |       | 269,505           |       | 108,638                     |       | 94,941                            |       | (255,269         | )          | 217,815          |       |
| Investments in  affiliated companies                       |       | $                               | 19,309     |              | 265,535    |                        |       |                              | (1,110     | )                | (283,734   | )                |       |   |
| Property, plant  and equipment, net                        |       |                            |       | 26,758            |       | 32,779                      |       | 39,556                            |       |             |       | 99,093           |       |
| Goodwill and other  assets                                 |       |                            |       | 72,504            |       | 31,461                      |       | 12,658                            |       |             |       | 116,623          |       |
| Total Assets                                               |       | $                               | 19,309     |              | $          | 634,302                     |       | $                                 | 172,878    |             | $          | 146,045          |       | $ | (539,003 | ) | $ | 433,531 |   |
|                                                       |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Current  maturities of long-term debt                      |       |                            |       | $                 | 3,150      |                        |       |                              | $          | 49               |       |             |       | $ | 3,199 |   |
| Accounts payable                                           |       |                            |       | 21,591            |       | $                           | 9,942      |                              | 9,348      |             |       |             | 40,881     |   |
| Intercompany  payables                                     |       | $                               | 255,269    |              |       |                        |       |                              |       |             | $          | (255,269         | )          |   |   |
| Accrued expenses                                           |       |                            |       | 35,730            |       | 9,685                       |       | 13,071                            |       |             |       | 58,486           |       |
| Total current  liabilities                                 |       | 255,269                         |       | 60,471            |       | 19,627                      |       | 22,468                            |       | (255,269         | )          | 102,566          |       |
| Long-term debt,  excluding current portion                 |       |                            |       | 484,363           |       |                        |       | 5,849                             |       |             |       | 490,212          |       |
| Other liabilities                                          |       | 2,190                           |       | 70,159            |       | 4,233                       |       | 2,321                             |       |             |       | 78,903           |       |
| Total liabilities                                          |       | 257,459                         |       | 614,993           |       | 23,860                      |       | 30,638                            |       | (255,269         | )          | 671,681          |       |
| Stockholders  equity (deficit)                             |       | (238,150                        | )          | 19,309            |       | 149,018                     |       | 115,407                           |       | (283,734         | )          | (238,150         | )          |
| Total Liabilities  and Stockholders’ Equity (Deficit) |       | $                               | 19,309     |              | $          | 634,302                     |       | $                                 | 172,878    |             | $          | 146,045          |       | $ | (539,003 | ) | $ | 433,531 |   |

 

16

----

 

**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED FINANCIAL INFORMATION**

 

**BalanceSheet Information**
| **(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     |                        | $          | (2,460                          | )          | $                | 33,801     |             |       |   | $ | 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           |       | 101,733                     |       | 89,522                          |       | (253,668         | )          | 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                     |       | $                               | 166,765    |             | $          | 140,096          |       | $ | (506,981 | ) | $ | 424,742 |   |
|                                                       |       |                            |       |              |       |                        |       |                            |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                            |       |              |       |                        |       |                            |       |             |       |             |       |
| Current  maturities of long-term debt                      |       |                            |       | $                 | 3,150      |                        |       |                            | $          | 49               |       |             |       | $ | 3,199 |   |
| Accounts payable                                           |       |                            |       | 21,710            |       | $                           | 8,517      |                            | 9,082      |             |       |             | 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            |       | 17,481                      |       | 22,638                          |       | (253,668         | )          | 111,350          |       |
| Long-term debt,  excluding current portion                 |       |                            |       | 486,188           |       |                        |       | 4,824                           |       |             |       | 491,012          |       |
| Other liabilities                                          |       | 2,203                           |       | 68,009            |       | 3,979                       |       | 4,343                           |       |             |       | 78,534           |       |
| Total liabilities                                          |       | 255,871                         |       | 625,428           |       | 21,460                      |       | 31,805                          |       | (253,668         | )          | 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                     |       | $                               | 166,765    |             | $          | 140,096          |       | $ | (506,981 | ) | $ | 424,742 |   |

 

17

----

 

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED FINANCIAL INFORMATION**

 

**CashFlows Information**
| **(Amounts  in thousands)**                           | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the Three  Months Ended March 31, 2005**        | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net cash provide  by (used in) operating activities   |       | $                                | (1,921     | )                 | $          | (7,770                      | )          | $                                 | 2,902      |             | $          | (7,482           | )          |   |   | $ | (14,271 | ) |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in  investing activities                |       |                             |       | (1,251            | )          | (442                        | )          | (3,324                            | )          |             |       | (5,017           | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash  flows from financing activities:**            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Reduction of  long-term debt, net                     |       |                             |       | (788              | )          |                        |       | (12                               | )          |             |       | (800             | )          |
| Issuance costs  related to debt                       |       |                             |       | (2,536            | )          |                        |       |                              |       |             |       | (2,536           | )          |
| Advances from  (to) affiliates                        |       | 1,601                            |       | (1,601            | )          |                        |       |                              |       |             |       |             |       |
| Issuance costs  related to stock                      |       | (1,425                           | )          |              |       |                        |       |                              |       |             |       | (1,425           | )          |
| Exercise of stock  option                             |       | 1,745                            |       |              |       |                        |       |                              |       |             |       | 1,745            |       |
| Net cash provided  by (used in) financing activities  |       | 1,921                            |       | (4,925            | )          |                        |       | (12                               | )          |             |       | (3,016           | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase (decrease)  in cash and cash equivalents |       |                             |       | (13,946           | )          | 2,460                       |       | (10,818                           | )          |             |       | (22,304          | )          |
| Cash and cash  equivalents at beginning of period     |       |                             |       | 17,229            |       | (2,460                      | )          | 33,801                            |       |             |       | 48,570           |       |
| Cash and cash  equivalents at end of period           |       | $                                | 0          |              | $          | 3,283                       |       | $                                 | 0          |             | $          | 22,983           |       |   |   | $ | 26,266 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Three Months Ended March 31, 2004**        |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided  by (used in) operating activities  |       | $                                | (184       | )                 | $          | (10,786                     | )          | $                                 | 661        |             | $          | (1,808           | )          |   |   | $ | (12,117 | ) |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in  investing activities                |       |                             |       | (780              | )          | (430                        | )          | (2,273                            | )          |             |       | (3,483           | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash  flows from financing activities:**            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Reduction of  long-term debt                          |       |                             |       | (1,053            | )          |                        |       | (197                              | )          |             |       | (1,250           | )          |
| Advances from  (to) affiliates                        |       | (29                              | )          | 29                |       |                        |       |                              |       |             |       |             |       |
| Issuance costs  related to debt                       |       |                             |       | (110              | )          |                        |       |                              |       |             |       | (110             | )          |
| Exercise of stock  options                            |       | 213                              |       |              |       |                        |       |                              |       |             |       | 213              |       |
| Net cash provided  by (used in) financing activities  |       | 184                              |       | (1,134            | )          |                        |       | (197                              | )          |             |       | (1,147           | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       |                             |       | (12,700           | )          | 231                         |       | (4,278                            | )          |             |       | (16,747          | )          |
| Cash and cash  equivalents at beginning of period     |       |                             |       | 13,650            |       | (600                        | )          | 22,144                            |       |             |       | 35,194           |       |
| Cash and cash  equivalents at end of period           |       | $                                | 0          |              | $          | 950                         |       | $                                 | (369       | )                | $          | 17,866           |       |   |   | $ | 18,447 |   |

 

18

----

 

 

**NOTE13:  RECENT ACCOUNTING PRONOUNCEMENTS**

 

In November 2004, the FASB issued SFASNo. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4.”**This statement amends the guidance in ARB 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 151 are to be appliedprospectively and are effective for inventory costs incurred during fiscalyears beginning after June 15, 2005, with earlier application permitted.The adoption of SFAS No. 151 is not expected to have a material impact onthe Company’s financial position and results of operations.

 

InDecember 2004, the FASB issued SFAS No. 123(R), ‘‘Share-Based Payment’’, 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 to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the applicable vesting period. Pro formadisclosure of the income statement effects of share-based payments is no longeran alternative.  The Company is currentlyevaluating SFAS No. 123(R), including the method of adoption, and expects itsadoption will result in increased compensation expense in the future.  The Securities and Exchange Commission hasdelayed the implementation date for SFAS No. 123(R) for public companies untilthe first interim reporting period of the first fiscal year beginning afterJune 15, 2005.  The Company expects toadopt SFAS No. 123(R) on January 1, 2006.

 

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

 

 

**NOTE14:  RELATED PARTY TRANSACTIONS**

 

InMarch 2005, $3.2 million was paid to Lehman Brothers for advisory fees relatingto the 2004 Refinancing Transactions. Also in March 2005, Lehman Brothers was billed $0.3 million for costsincurred by the Company in conjunction with the secondary public offering thatoccurred in December 2004.

 

19

----

 

**ITEM 2.**  **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements included elsewhere in this report.

 

**OperatingResults**

 

**Threemonths ended March 31, 2005 compared to three months ended March 31, 2004**

 

Salesfor the first quarter of $185.3 million compared to $165.6 million in 2004.Operating income increased to $29.6 million from $27.2 million in 2004. Netincome for the first quarter of 2005 was $17.2 million ($0.36 per diluted share)compared to $7.6 million ($0.23 per diluted share) in 2004.

 

Oursales in the first quarter of 2005 increased by $19.7 million, or 12%, from thesame period in 2004. The growth in sales is primarily attributable to thefollowing:

 

•                  An increase in international sales for the Outdoor Productssegment of $14.4 million, or 23%, due to the relative weakness of the U.S.dollar and continued strong demand for our products.

•                  The continued rollout of our new lineup ofDixon lawnmowers featuring all steel bodies helped increase Lawnmower segmentsales by $3.1 million, or 32%.

 

•                  Our Industrial and Power Equipment segmentgrew $2.0 million in sales, primarily due to selling price increases.

 

Salesbacklog at March 31, 2005 was $161.9 million, compared to $150.3 million atDecember 31, 2004 and $124.4 million at March 31, 2004.

 

Operatingincome increased by $2.4 million, or 9%, during the first quarter from 2004 to2005. The improvement is primarily due to a year-over-year gross profitincrease of $3.0 million, or 5%, partially offset by a $0.6 million, or 2%,increase in selling, general and administrative expense (“SG&A”). Theyear-over-year change in gross profit is presented in the following table (inmillions):

 

| First Quarter 2004 Gross Profit |   | $      | 57.0   |   |
|---------------------------------|--------|--------|--------|--------|
| Increase (Decrease)             |   |   |   |
| Sales Volume                    |   | 4.1    |   |
| Selling Price and Mix           |   | 6.9    |   |
| Product Cost and Mix            |   | (7.5   | )      |
| Foreign Currency Translation    |   | (0.5   | )      |
| First Quarter 2005 Gross Profit |   | $      | 60.0   |   |

 

As apercent of sales, gross profit decreased to 32.4% in the first quarter of 2005compared to 34.4% for the same period in 2004. The decrease in gross margin reflects year-over-year increases in rawmaterial costs, partially offset by increases in net selling prices implementedin late 2004 and early 2005 for many of our products.  Increases in raw material costs include theeffect of higher steel costs of $5.7 million. A stronger Canadian dollar and Brazilian real and a relatively weakerU.S. dollar produced a net negative effect from foreign currency as increasednet costs were partially offset by higher sales revenue. Changes in product mixand distribution channels were also factors for certain of our businesses.

 

SG&Aincreased $0.6 million, or 2%, to $30.4 million in the first quarter of 2005from $29.8 million in the same period of 2004. As a percent of sales, SG&A decreased to 16.4% in the current yearfrom 18.0% in the first quarter of 2004. Included in the year-over-year dollar increase is the effect of exchangerates resulting in an additional expense of $0.5 million due primarily to theweaker U.S. dollar.

 

20

----

 

Netincome for the first quarter of 2005 was $17.2 million, or $0.36 per dilutedshare, compared to net income of $7.6 million, or $0.23 per diluted share, in2004. The change in net income is primarily due to the following:

 

•                  An increase in operating income of $2.4 million primarilyfrom growth in sales volume.

•                  A decrease in interest expense of $8.3 million reflectingdecreases in average outstanding debt balances and average interest ratesassociated with changes in our capital structure.

•                  A decrease in interest income of $0.5 million.  Interest income of $0.2 million for 2005 isprimarily the result of cash and cash equivalent balances held at foreign locations.  Interest income of $0.8 million for 2004includes $0.7 million related to an income tax refund received in the fourthquarter of 2004.

Oureffective income tax rate was 16.5% in 2005 compared to 28.4% in 2004.  This decrease in effective tax rate reflectsa higher proportion of domestic taxable income compared to foreign taxableincome in 2005 compared to 2004, and the related utilization of domestic netoperating loss carryforwards.

 

Thefollowing table reflects segment sales and operating income for 2005 and 2004:

 
| ** **                         | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| **(Dollar  amounts in thousands)** | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005 as  % of 2004** | ** ** |
| Sales:                             |       |                              |       |   |   |   |   |
| Outdoor Products                   |       | $                                 | 116,801    |   | $ | 102,101 |   | 114 | % |
| Industrial and Power Equipment     |       | 56,016                            |       | 54,024 |   | 104 | % |
| Lawnmower                          |       | 12,742                            |       | 9,619 |   | 132 | % |
| Inter-Segment Elimination          |       | (305                              | )          | (171 | ) | (178 | )% |
| Total sales                        |       | 185,254                           |       | 165,573 |   | 112 | % |
| Operating income (loss)            |       |                              |       |   |   |   |   |
| Outdoor Products                   |       | 28,486                            |       | 26,321 |   | 108 | % |
| Industrial and Power Equipment     |       | 4,747                             |       | 4,741 |   | 100 | % |
| Lawnmower                          |       | 241                               |       | (227 | ) | N/A |   |
| Inter-Segment Elimination          |       | (39                               | )          | 3 |   | N/A |   |
| Contribution from segments         |       | 33,435                            |       | 30,838 |   | 108 | % |
| Corporate expense                  |       | (3,862                            | )          | (3,670 | ) | (105 | )% |
| Operating income                   |       | $                                 | 29,573     |   | $ | 27,168 |   | 109 | % |

 

Theprincipal reasons for these results are set forth below:

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment in the first quarterof 2005 were $116.8 million compared to $102.1 million in the same period of2004, an increase of 14%. Segment contribution to operating income was $28.5 millioncompared to $26.3 million for the same two periods, respectively, an increaseof 8%.

 

The$14.7 million increase in sales was primarily attributable to increases amongour chainsaw components and accessories, which were up 16%, and concretecutting products, which were up 43%, on a year-over-year basis.  These increases were partially offset by a 2%decrease in our outdoor care parts and accessories.  The further weakening of the U.S. dollarcompared to the first quarter of 2004 continued to provide a more competitiveselling price for our products. International sales increased $14.4 million, or 23%, while sales wererelatively flat within US markets.  Theincrease in unit volume contributed an estimated $11.1 million to the totalyear-over-year increase.  Foreigncurrency translation provided an additional $1.6 million, and the combinationof selling price increases and

 

21

----

 

mixcontributed another $2.0 million.  Salesbacklog increased to $90.8 million compared to $77.4 million at December 31,2004, and $73.0 million at March 31, 2004.

 

Thesegment’s contribution to operating income increased by $2.2 million in thefirst quarter of 2005. The increase in unit volume is estimated to have yieldedan additional $4.5 million when compared to the results from the unit volumessold in the first quarter of 2004.  Thisvolume increase was partially offset by increases in product cost that includean estimated $3.0 million related to higher steel costs.  We estimate the net effect of exchange rateswas $1.0 million unfavorable for the first quarter of 2005 compared to thefirst quarter of 2004. The weaker US dollar negatively impacts the costs ofproduction, costs for products purchased internationally for re-sale andSG&A expenses in most of our foreign locations. Increases to our productcosts and SG&A along with changes in our product mix, have been partiallyoffset by selling price increases implemented as of January 1, 2005 in certainof our markets.

 

***Industrial and Power Equipment Segment.***** **Sales for the Industrial and Power Equipment segment in thefirst quarter of 2005 were $56.0 million compared to $54.0 million in the sameperiod of 2004, a 4% increase. Segment contribution to operating income was$4.7 million for each three month period. Increases to selling prices implemented in 2004 and January 2005,combined with the effect of changes in product mix, provided an additional $3.7million of revenue. Lower unit volume had a negative effect on sales of $1.7million.  International sales of theCompany’s timber harvesting equipment grew by 30%, or $1.8 million from thefirst quarter of 2004.  Sales of ourrotational bearings and mechanical power transmission products grew 20%, or$1.0 million, over the prior year period through increases to unit pricesimplemented in January 2005, as well as increases in unit volume.  Sales backlog for the segment of $69.8million at March 31, 2005 compared to $63.7 million at the end of 2004 and$49.5 million at March 31, 2004.

 

Thesegment’s contribution to operating income during the first quarter of 2005 wascomparable to the same period in 2004. Increases in selling prices and a decrease in SG&A expense togetheradded $4.4 million, but were offset by higher product costs and weaker mix withan estimated negative effect of $3.6 million combined.  In addition, lower unit volume resulted in ayear-over-year decrease of $0.8 million. The increase in product costs includes higher steel prices with anestimated effect of $2.5 million.

 

***Lawnmower Segment.***** **Sales for the Lawnmower segment were $12.7 million in thefirst quarter of 2005 compared to $9.6 million in the first quarter of 2004, a32% increase. Segment contribution to operating income in the first quarter of2005 was $0.2 million compared to a loss of $0.2 million in the previousyear.  The increase in sales reflected a22% increase in unit volume, accounting for $1.9 million of the increase overthe prior year.  Average prices were up11% due primarily to the shift in sales mix towards higher priced modelscompared to the prior year and contributed an additional $1.2 million to thesegment’s revenue growth. Export sales increased to 14% of total sales comparedto 8% in the first quarter of last year, which resulted in a $1.0 millionyear-over-year increase.  Sales backlogat March 31, 2005 of $1.3 million was seasonally low and compares to $9.2million at December 31, 2004 and $1.9 million at March 31, 2004.

 

TheLawnmower segment contribution to operating income increased by $0.5 millionthe first quarter of 2005 compared to the previous year.  The increase in unit volume contributed $0.3million, but was offset by mix and product costs that included higher steelcosts with an estimated negative effect of $0.3 million.  These factors were more than offset by areduction in selling expense which resulted in the improved contribution tooperating income.

 

***Corporate Expense.***  Corporate expense in the first quarter of2005 increased to $3.9 million from $3.7 million in the comparable quarter of2004. This $0.2 million, or 5%, increase is primarily related to incrementalcosts to prepare for Sarbanes-Oxley compliance and our shift from being agreater than 50% controlled corporation that occurred with the secondary publicstock offering by Lehman Brothers in December 2004.  These cost increases include $0.3 million foraudit related professional services, $0.3 million for additional compensationand benefits for accounting staff and $0.2 million for income tax consultingfees.  We expect 2005 corporate expenseto be higher than in 2004 due to the requirements of Sarbanes-Oxley and ourindependent ownership status.  Inaddition, a $0.3 million severance expense was incurred in the first quarter of2004 and there was no such charge in the first quarter of 2005.

 

22

----

 

**FinancialCondition, Liquidity and Capital Resources**

 

Totaldebt at March 31, 2005 was $493.4 million compared to $494.2 million atDecember 31, 2004.  As of March 31, 2005,outstanding debt consisted of term loans of $318.4 million and 8 7/8% SeniorSubordinated Notes of $175.0 million with a weighted average interest rate of6.57%.

 

InAugust 2004, we completed the following refinancing transactions:

 

•                  The issuance of 13,800,000 shares of Company common stock,which generated gross proceeds of $138.0 million;

•                  The issuance of new 8 7/8% Senior Subordinated Notes due in2012 that generated gross proceeds of $175.0 million; and,

•                  The amendment and restatement of our existing senior creditfacilities (which were amended again in December 2004), including an increasein amounts available, reduction of interest rates and modification of financialcovenants.

We usedthe net proceeds of these refinancing transactions as follows:

 

•                  The redemption of our 7% Senior Notes with $150.0 millionprincipal outstanding;

 

•                  The redemption of our 13% Senior Subordinated Notes with$323.2 million principal outstanding;

 

•                  The repayment of our 12% Convertible Preferred EquivalentSecurity principal and premium in the amount of $29.6 million plus accruedinterest outstanding; and

 

•                  The payment of related fees and expenses of $27.1 million.

 

Interestand principal payment obligations have been reduced as a result of thesechanges to our debt structure and the Company is now benefiting from lowerinterest expense.  Interest expense was$9.1 million in the first quarter of 2005 compared to $17.4 million for thesame period in 2004.   Interest expensehas been reduced primarily from a reduction in our average borrowing rate, andto a lesser extent by the reduction in long term debt.  Our annual interest expense may vary in thefuture because the senior credit facility interest rates are variable.  Cash interest paid in the first quarter of2005 was $8.5 million, compared to $22.8 million for the same period in 2004.

 

TheCompany’s debt continues to be significant, and debt service payments continueto represent substantial obligations. This degree of leverage may adversely affect our operations and couldhave important consequences, including the following:

 

•                  A substantial portion of our cash flows continue to berequired for debt service payments, which reduces the funds that wouldotherwise be available for operations and investment in future businessopportunities;

•                  A substantial decrease in net income and cash flows or anincrease in expenses may make it difficult to meet debt service requirements orforce us to modify operations;

•                  The amount of leverage continues to make us more vulnerableto economic downturns and competitive pressure; and

•                  The ability to obtain additional financing to fund ouroperational needs may be impaired or may not be available on favorable terms.

 

Weintend to fund working capital, capital expenditures and debt servicerequirements for the next twelve months through expected cash flows generatedfrom operations.  Interest on loan andcredit facilities is payable in arrears according to varying interest rates andperiods.  The Company expects itsremaining resources will be sufficient to cover any additional increases inworking capital and capital expenditures. There can be no assurance, however, that

 

23

----

 

theseresources will be sufficient to meet our needs. We may also consider other options available to us in connection withfuture liquidity needs.

 

Underthe amended and restated agreement, the amount available to be drawn on our$100.0 million revolving credit facility could be restricted by our leverageratio and first lien credit facilities leverage ratio.  Availability is further reduced for anyoutstanding letters of credit issued under the facility.  At March 31, 2005 and at December 31, 2004,the Company had no amount drawn down on this facility and at both points intime had borrowing availability of $92.2 million.

 

TheCompany and all of our domestic subsidiaries other than Blount, Inc. guaranteeBlount, Inc.’s obligations under the senior credit facilities.  The obligations under the senior creditfacilities are collateralized by a first priority security interest insubstantially all of the assets of Blount, Inc. and its domestic subsidiaries,as well as a pledge of all of Blount, Inc.’s capital stock held by BlountInternational, Inc. and pledges of all of the stock of domestic subsidiariesheld by Blount, Inc.  In addition,Blount, Inc. has pledged 65% of the stock of its non-domestic subsidiaries asfurther collateral.

 

Oursenior credit facilities are subject to certain reporting and financialcovenant compliance requirements. We were in compliance with all debt covenantsas of March 31, 2005.** **Non-compliance with thesecovenants could result in severe limitations to our overall liquidity, and theterm loan lenders could require actions for immediate repayment of outstandingamounts, including the potential 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.

 

Withthe amendment and restatement of our senior credit facilities in 2004, the termof the revolving credit facility is five years, and the terms of the Canadianterm loan facility and Term B loan facility are each six years from August 9,2004. The Canadian term loan facility requires quarterly payments of $12thousand, with a final payment of $4.6 million due on the maturity date.  The Term B loan facility requires quarterlypayments of $0.8 million, with a final payment of $296.2 million due on thematurity date. The amended and restated senior credit facilities may be prepaidat any time.  However, once paid,principal may not be re-borrowed on the term loans.

 

Cashand cash equivalents at March 31, 2005 were $26.3 million compared to $48.6million at December 31, 2004.  Thedecrease in cash balance of $22.3 million in the first quarter of 2005 comparesto a decrease of $16.7 million in the same period of 2004.

 

Cashused in operating activities was $14.3 million in the first quarter of 2005compared to $12.1 million in the first quarter of 2004. The $2.2 millionincrease in cash used in operations reflects the following:

 

•                  Year-over-year increase in net income of $9.6 million.

•                  A decrease of $1.1 million in depreciation, amortization andother non-cash charges, including deferred income taxes, reflected in netincome.  The decrease in non-cash chargesis primarily due to a reduction in amortization expense on deferred financingcosts related to our debt.

•                  The effect of increased sales activity used an additional$3.9 million for accounts receivable and $2.9 million for inventories.

•                  A reduction in the source of cash of $5.5 million in accountspayable was partially offset by $1.7 million of reduced usage for accrued expensesand other liabilities.

Accountsreceivable increased during the first quarter of 2005 by $21.0 million from theend of 2004.  The increase in receivablesis due to the increase in sales as well as sales programs in certain of oursegments which also contributed to the increase in accounts receivable balancescompared to December 31, 2004.  Theallowance for doubtful accounts was $2.5 million at March 31, 2005 compared to$2.4 million on December 31, 2004.

 

Netcash used for investing activities in the first quarter of 2005 was $5.0million compared to $3.5 million for 2004. The increase is due to additional purchases for property, plant andequipment during these periods.  Theadditional

 

24

----

 

spendingreflects continued spending on a new facility in China and a multi-phaseproject to increase capacity at our Brazilian plant.  We expect to utilize between $27.0 millionand $29.0 million in available cash for capital expenditures during 2005.

 

Cashused in financing activities in 2005 was $3.0 million compared to $1.1 millionin 2004.  In the first quarter of 2005 weused $0.8 million for scheduled principal payments on our term debt, comparedto $1.3 million for scheduled payments during the same period in 2004.  In the first quarter of 2005, we alsodisbursed $2.5 million and $1.4 million for costs related to the issuance ofdebt and additional stock in 2004. Proceeds from the exercise of employee stock options were $1.7 millionin the first quarter of 2005 compared to $0.2 million during the same periodlast year.

 

Of theamounts disbursed for debt and equity issuance costs in the first quarter of2005, $3.2 million was paid to Lehman Brothers, which previously controlledmore than 50% of our outstanding common stock and at March 31, 2005 ownedapproximately 15.0 million shares, or 33% of our outstanding common stock.  In addition, the Company has invoiced LehmanBrothers $0.3 million related to costs incurred by us in conjunction with theDecember 2004 secondary stock offering whereby Lehman Brothers sold a portionof its Blount holdings.

 

**RecentAccounting Pronouncements**

 

In November 2004, the FASB issued SFASNo. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4.”**This statement amends the guidance in ARB 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 SFAS151 shall be applied prospectively and are effective for inventory costsincurred during fiscal years beginning after June 15, 2005, with earlierapplication permitted for inventory costs incurred during fiscal yearsbeginning after the date this Statement was issued. The adoption of SFASNo. 151 is not expected to have a material impact on our financialposition and results of operations.

 

InDecember 2004, the FASB issued SFAS No. 123(R), ‘‘Share-Based Payment’’, 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 to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the applicable vesting period. Pro formadisclosure of the income statement effects of share-based payments is no longeran alternative.  The Company is currentlyevaluating SFAS No. 123(R), including the method of adoption, and expects itsadoption will result in increased compensation expense in the future.  The Securities and Exchange Commission hasdelayed the implementation date for SFAS No. 123(R) for public companies untilthe first interim reporting period of the first fiscal year beginning afterJune 15, 2005.  We expect to adopt SFASNo. 123(R) on January 1, 2006.

 

In December 2004, the FASB issued SFASNo. 153, “Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29.” Theguidance in APB Opinion No. 29, Accountingfor Nonmonetary Transactions, is based on the principle that exchangesof nonmonetary assets should be measured based on the fair value of assetsexchanged. The guidance in that opinion, however, included certain exceptionsto that principle. This Statement amends APB No. 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS No. 153 is effective for nonmonetary exchangesoccurring in fiscal periods beginning after June 15, 2005. The adoption ofSFAS No. 153 is not expected to have a material impact on our financialposition and results of operations.

 

**ForwardLooking Statements**

 

Forwardlooking statements in this report, including without limitation our “outlook,” “guidance,”expectations,”  “beliefs,” “plans,” “indications,”“estimates,” “anticipations,” and their variants, as defined by the PrivateSecurities Litigation Reform Act of 1995, are based upon available informationand upon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning

 

25

----

 

foreigncurrency exchange rates, the cost to the Company of commodities in general, andof steel in particular, and the anticipated level of applicable interest ratesinvolve certain estimates and assumptions. To the extent that these, or anyother such assumptions, are not realized going forward, or other unforeseenfactors arise, actual results for the periods subsequent to the date of thisreport may differ materially.

 

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We areexposed to market risk from changes in interest rates, foreign currencyexchange rates and commodity prices. We manage our exposure to these marketrisks through our regular operating and financing activities, and, when deemedappropriate, through the use of derivatives. When utilized, derivatives areused as risk management tools and not for trading or speculative purposes. SeeMarket Risk section of Management’s Discussion and Analysis of FinancialCondition and Results of Operations in our most recent Form 10-K for furtherdiscussion of market risk.

 

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Underthe supervision and with the participation of its management, including theChief Executive Officer and the Chief Financial Officer, the Company hasevaluated the effectiveness of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-14(e)), and has concludedthat, as of December 31, 2004, the Company’s disclosure controls and procedureswere adequate and effective to ensure that material information relating to theCompany and its consolidated subsidiaries would be made known to the ChiefExecutive Officer and the Chief Financial Officer by others within those entities.

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s disclosure controls andprocedures subsequent to the date of their evaluation, nor were there anysignificant deficiencies or material weaknesses in the Company’s internalcontrols.  As a result, no correctiveactions were required or undertaken.

 

26

----

 

**PART II**

 

**ITEM 6. EXHIBITS**

 

**(a) Exhibits:**

 

**31.1  Certificationpursuant to section 302 of the Sarbanes-Oxley Act of 2002 by James S. Osterman,Chairman of the Board and Chief Executive Officer.

 

**31.2 Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President and ChiefFinancial Officer.

 

**32.1  Certificationpursuant to section 906 of the Sarbanes-Oxley Act of 2002 by James S. Osterman,Chairman of the Board and Chief Executive Officer.

 

**32.2 Certification pursuant to section 906 of theSarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President andChief Financial Officer.

 

 

 

**   Filedelectronically herewith.  Copies of suchexhibits may be obtained upon written request from:

 

                                BlountInternational, Inc.

                                P.O. Box 22127

                                Portland,Oregon  97269-2127

 

27

----

 

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be 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:  May 10, 2005        |   |
|                             |        |        |  |

 

28

----