**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 June 30, 2005.**                                                 |
|       |                                                                                                    |
| ** ** | **OR**                                                                                                  |
|       |                                                                                                    |
| **o**      | **Transition report pursuant to section 13 or 15(d) of the  Securities Exchange Act of 1934** |

 

**Commission file number****001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

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

 

**(503) 653-8881**

(Registrant’stelephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe 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) ofthe Act:  **None**

 

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

 

Yes ý                                                                                                                                         No o

 

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

 

Yes o                                                                                                                                         No ý

 

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

 
| **Class of Common Stock** | ** ** | **Outstanding at July 27,  2005** |
|--------------------------------|------------|----------------------------------------|
| $0.01 Par Value                |       | 46,540,547 shares.                     |

 

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| Part I   Consolidated  Financial Information                                                         |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                     |   |
| Item 1. Consolidated Financial  Statements                                                                               |   |
|                                                                                                                     |   |
| Unaudited  Consolidated Statements of Income  Three and six months ended June 30, 2005 and June 30, 2004       |   |
|                                                                                                                     |   |
| Unaudited  Consolidated Balance Sheets  June 30, 2005 and December 31, 2004                                    |   |
|                                                                                                                     |   |
| Unaudited  Consolidated Statements of Cash Flows  Six months ended June 30, 2005 and June 30, 2004             |   |
|                                                                                                                     |   |
| Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit)  Six months ended June 30, 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 4. Submission of Matters to a Vote of Security  Holders                                                             |   |
|                                                                                                                     |   |
| Item 6. Exhibits                                                                                                         |   |
|                                                                                                                     |   |
| Signature                                                                                                                |   |

 

2

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**PART I**

 

**ITEM 1.  CONSOLIDATED FINANCIALSTATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTSOF INCOME**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                         | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands, except  per share data)** | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Sales                                              |       | $                                     | 193,753    |                                | $          | 169,264 |   | $ | 379,007 |   | $ | 334,837 |   |
| Cost of sales                                      |       | 133,146                               |       | 110,909                             |       | 258,431 |   | 219,528 |   |
| Gross profit                                       |       | 60,607                                |       | 58,355                              |       | 120,576 |   | 115,309 |   |
| Selling, general and administrative expenses       |       | 30,120                                |       | 29,803                              |       | 60,516 |   | 59,589 |   |
| Operating income                                   |       | 30,487                                |       | 28,552                              |       | 60,060 |   | 55,720 |   |
| Interest expense                                   |       | (9,505                                | )          | (17,255                             | )          | (18,653 | ) | (34,668 | ) |
| Interest income                                    |       | 170                                   |       | 561                                 |       | 411 |   | 1,336 |   |
| Other income (expense), net                        |       | (439                                  | )          | (142                                | )          | (470 | ) | (29 | ) |
| Income before income taxes                         |       | 20,713                                |       | 11,716                              |       | 41,348 |   | 22,359 |   |
| Provision for income taxes                         |       | 3,541                                 |       | 3,333                               |       | 6,946 |   | 6,354 |   |
| Net income                                         |       | $                                     | 17,172     |                                | $          | 8,383 |   | $ | 34,402 |   | $ | 16,005 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic net income per share                         |       | $                                     | 0.38       |                                | $          | 0.27 |   | $ | 0.76 |   | $ | 0.52 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Diluted net income per share                       |       | $                                     | 0.36       |                                | $          | 0.25 |   | $ | 0.73 |   | $ | 0.49 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Shares used in per share calculations:             |       |                                  |       |                                |       |   |   |   |   |
| Basic                                              |       | 45,692                                |       | 30,936                              |       | 45,397 |   | 30,898 |   |
| Diluted                                            |       | 47,464                                |       | 32,973                              |       | 47,373 |   | 32,888 |   |

 

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

 

3

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**UNAUDITED CONSOLIDATED BALANCESHEETS**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except  share data)**                                                                               | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                                         |       |              |       |                  |       |
| **Assets**                                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                         |       |              |       |                  |       |
| Current assets:                                                                                                              |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                    |       | $                 | 54,322     |                  | $          | 48,570 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $2,425 and $2,371, respectively                              |       | 82,073            |       | 74,975                |       |
| Inventories                                                                                                                  |       | 89,069            |       | 81,098                |       |
| Other current assets                                                                                                         |       | 4,228             |       | 4,693                 |       |
| Total current assets                                                                                                         |       | 229,692           |       | 209,336               |       |
| Property, plant and equipment, net                                                                                           |       | 100,474           |       | 97,929                |       |
| Goodwill                                                                                                                     |       | 76,891            |       | 76,891                |       |
| Deferred financing costs                                                                                                     |       | 21,876            |       | 23,883                |       |
| Other assets                                                                                                                 |       | 16,679            |       | 16,703                |       |
| Total Assets                                                                                                                 |       | $                 | 445,612    |                  | $          | 424,742 |   |
|                                                                                                                         |       |              |       |                  |       |
| **Liabilities and Stockholders’ Deficit**                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                         |       |              |       |                  |       |
| Current liabilities:                                                                                                         |       |              |       |                  |       |
| Current maturities of long-term debt                                                                                         |       | $                 | 3,100      |                  | $          | 3,199 |   |
| Accounts payable                                                                                                             |       | 38,305            |       | 39,309                |       |
| Accrued expenses                                                                                                             |       | 62,230            |       | 68,842                |       |
| Total current liabilities                                                                                                    |       | 103,635           |       | 111,350               |       |
| Long-term debt, excluding current maturities                                                                                 |       | 479,123           |       | 491,012               |       |
| Deferred income taxes                                                                                                        |       | 5,126             |       | 4,913                 |       |
| Employee benefits                                                                                                            |       | 66,822            |       | 62,248                |       |
| Other liabilities                                                                                                            |       | 11,339            |       | 11,373                |       |
| Total liabilities                                                                                                            |       | 666,045           |       | 680,896               |       |
| Commitments and contingent liabilities                                                                                       |       |              |       |                  |       |
| Stockholders’ equity (deficit):                                                                                         |       |              |       |                  |       |
| Common stock: par value $0.01 per share, 100,000,000  shares authorized, 46,515,747 and 44,969,886 outstanding, respectively |       | 465               |       | 450                   |       |
| Capital in excess of par value of stock                                                                                      |       | 557,140           |       | 553,640               |       |
| Accumulated deficit                                                                                                          |       | (775,763          | )          | (810,165              | )          |
| Accumulated other comprehensive loss                                                                                         |       | (2,275            | )          | (79                   | )          |
| Total stockholders’ (deficit)                                                                                           |       | (220,433          | )          | (256,154              | )          |
| Total Liabilities and Stockholders’ Deficit                                                                             |       | $                 | 445,612    |                  | $          | 424,742 |   |

 

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

 

4

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**UNAUDITED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Blount International, Inc.and Subsidiaries**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                          |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 34,402     |   | $ | 16,005 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                               |       |   |   |
| Depreciation, amortization and other non-cash  charges                             |       | 9,937                              |       | 12,163 |   |
| Deferred income taxes                                                              |       | 55                                 |       | (155 | ) |
| (Gain) loss on disposals of property, plant, and  equipment                        |       | (428                               | )          | 17 |   |
| Changes in assets and liabilities:                                                 |       |                               |       |   |   |
| (Increase) decrease in accounts receivable                                         |       | (7,098                             | )          | (9,480 | ) |
| (Increase) decrease in inventories                                                 |       | (7,971                             | )          | (10,614 | ) |
| (Increase) decrease in other assets                                                |       | 145                                |       | (1,169 | ) |
| Increase (decrease) in accounts payable                                            |       | (1,004                             | )          | 4,531 |   |
| Increase (decrease) in accrued expenses                                            |       | (2,798                             | )          | 4,411 |   |
| Increase (decrease) in other liabilities                                           |       | 2,634                              |       | (343 | ) |
| Net cash provided by operating activities                                          |       | 27,874                             |       | 15,366 |   |
|                                                                               |       |                               |       |   |   |
| **Cash flows from investing activities:**                                          |       |                               |       |   |   |
| Proceeds from sale of property, plant and equipment                                |       | 932                                |       | 48 |   |
| Purchases of property, plant and equipment                                         |       | (10,534                            | )          | (8,419 | ) |
| Net cash used in investing activities                                              |       | (9,602                             | )          | (8,371 | ) |
|                                                                               |       |                               |       |   |   |
| **Cash flows from financing activities:**                                          |       |                               |       |   |   |
| Reduction of long-term debt                                                        |       | (11,988                            | )          | (4,876 | ) |
| Issuance costs related to debt                                                     |       | (2,554                             | )          |   |   |
| Issuance costs related to stock                                                    |       | (1,425                             | )          | (1,110 | ) |
| Proceeds from issuance of stock                                                    |       | 6,123                              |       |   |   |
| Purchase of treasury stock                                                         |       | (6,123                             | )          |   |   |
| Proceeds from exercise of stock options and warrants                               |       | 3,447                              |       | 471 |   |
| Net cash used in financing activities                                              |       | (12,520                            | )          | (5,515 | ) |
|                                                                               |       |                               |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 5,752                              |       | 1,480 |   |
| Cash and cash equivalents at beginning of period                                   |       | 48,570                             |       | 35,194 |   |
| Cash and cash equivalents at end of period                                         |       | $                                  | 54,322     |   | $ | 36,674 |   |

 

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

 

5

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

**Blount International, Inc.and Subsidiaries**

 
| **(Amounts in thousands)**              | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value  of Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------|------------|------------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                    |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Balance December 31, 2004          |       | 44,970     |       | $                 | 450        |                                           | $          | 553,640                  |       | $                                           | (810,165   | )         | $          | (79 | ) | $ | (256,154 | ) |
|                                    |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Net income                              |       |       |       |              |       |                                           |       | 34,402                   |       |                                        |       | 34,402    |       |
| Other comprehensive income (loss):      |       |       |       |              |       |                                           |       |                     |       |                                        |       |      |       |
| Foreign currency translation adjustment |       |       |       |              |       |                                           |       |                     |       | (2,017                                      | )          | (2,017    | )          |
| Unrealized losses                       |       |       |       |              |       |                                           |       |                     |       | (179                                        | )          | (179      | )          |
| Comprehensive income, net               |       |       |       |              |       |                                           |       |                     |       |                                        |       | 32,206    |       |
| Issuance of common stock                |       | 382        |       | 4                 |       | 6,119                                          |       |                     |       |                                        |       | 6,123     |       |
| Purchase of treasury stock              |       | (382       | )          | (4                | )          | (6,119                                         | )          |                     |       |                                        |       | (6,123    | )          |
| Exercise of stock options               |       | 546        |       | 5                 |       | 3,432                                          |       |                     |       |                                        |       | 3,437     |       |
| Exercise of stock warrants              |       | 1,000      |       | 10                |       |                                           |       |                     |       |                                        |       | 10        |       |
| Stock compensation expense              |       |       |       |              |       | 68                                             |       |                     |       |                                        |       | 68        |       |
| Balance June 30, 2005              |       | 46,516     |       | $                 | 465        |                                           | $          | 557,140                  |       | $                                           | (775,763   | )         | $          | (2,275 | ) | $ | (220,433 | ) |

 

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

 

6

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**BLOUNT INTERNATIONAL, INC. ANDSUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

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

 

The accompanying financial data as of June 30,2005 and for the three and six months ended June 30, 2005 and June 30,2004 has been prepared by the Company, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations. TheDecember 31, 2004 Consolidated Balance Sheet was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States. TheseConsolidated Financial Statements should be read in conjunction with theConsolidated Financial Statements and the notes thereto, included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2004.

 

***Use of Estimates.******* The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the dates of the financial statements, as well as thereported amounts of revenues and expenses during the reporting periods.  It is reasonably possible that actual resultscould differ materially from those estimates and significant changes to estimatescould occur in the near 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% of certain foreign earningsthat are repatriated, as defined in the Act. Any repatriation of foreign earnings must be completed by December 31,2005.  The Company is evaluating theeffects of repatriating a portion of its undistributed earnings of foreignsubsidiaries and cannot yet reasonably estimate the tax effects of suchpotential repatriation.  The Company intendsto complete its evaluation during the second half of 2005.

 

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

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**NOTE 2:  INVENTORIES**

 

Inventories consisted of the following:

 
| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Raw materials and supplies |       | $                 | 30,091     |                  | $          | 28,914 |   |
| Work in progress           |       | 13,918            |       | 13,708                |       |
| Finished goods             |       | 45,060            |       | 38,476                |       |
| Total inventories          |       | $                 | 89,069     |                  | $          | 81,098 |   |

 

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

 

Property, plant and equipment consistedof the following:

 
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Land                                     |       | $                 | 5,730      |                  | $          | 4,939 |   |
| Buildings and improvements               |       | 67,881            |       | 65,411                |       |
| Machinery and equipment                  |       | 187,802           |       | 182,626               |       |
| Furniture, fixtures and office equipment |       | 30,412            |       | 31,264                |       |
| Transportation equipment                 |       | 992               |       | 967                   |       |
| Construction in progress                 |       | 13,708            |       | 15,243                |       |
| Accumulated depreciation                 |       | (206,051          | )          | (202,521              | )          |
| Total property, plant and equipment, net |       | $                 | 100,474    |                  | $          | 97,929 |   |

 

**NOTE 4:  DEFERRED FINANCING COSTS**

 

Deferred financing costs represent costsincurred in conjunction with the Company’s refinancing activities and areamortized over the term of the related debt instruments.  Deferred financing costs, and the relatedamortization expense, are adjusted if any pre-payments of principal are made tothe related outstanding debt.   Duringthe six months ended June 30, 2005, the following occurred:

 
| **(Dollar amounts in thousands)**                         | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|
| Balance at December 31, 2004                         |       | $          | 23,883     |   |
| Financing costs deferred                                  |       | 173        |       |
| Write off during period due to pre-payments of  principal |       | (411       | )          |
| Amortization during period                                |       | (1,769     | )          |
| Balance at June 30, 2005                             |       | $          | 21,876     |   |

 

8

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**NOTE 5:  ACCRUED EXPENSES**

 

Accrued expenses consisted of thefollowing: 

 
| ** **                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Payroll, payroll taxes and employee benefits |       | $                 | 24,852     |                  | $          | 34,135 |   |
| Accrued interest                             |       | 10,899            |       | 7,001                 |       |
| Warranty reserve                             |       | 5,426             |       | 4,923                 |       |
| Accrued taxes                                |       | 3,959             |       | 4,036                 |       |
| Other                                        |       | 17,094            |       | 18,747                |       |
| Total accrued expenses                       |       | $                 | 62,230     |                  | $          | 68,842 |   |

 

**NOTE 6:  DEBT AND FINANCING AGREEMENTS**

 

Long-term debt consisted of thefollowing:

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**       | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Term loans                       |       | $                 | 307,223    |                  | $          | 319,211 |   |
| 8 7/8% senior subordinated notes |       | 175,000           |       | 175,000               |       |
| Total debt                       |       | 482,223           |       | 494,211               |       |
| Less current maturities          |       | (3,100            | )          | (3,199                | )          |
| Total long-term debt             |       | $                 | 479,123    |                  | $          | 491,012 |   |

 

The weighted average interest rate onoutstanding debt as of June 30, 2005 was 6.80%,exclusive of the effect of amortization expense for deferred financing costs.

 

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

 

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

 

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

 

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

 

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

 

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

 

•                  The redemption of its7% Senior Notes with $150.0 million principal outstanding;

 

•                  The redemption of its13% Senior Subordinated Notes with $323.2 million principal outstanding;

 

9

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•                  The repayment of its12% Convertible Preferred Equivalent Security principal and accrued interest inthe aggregate amount of $29.6 million; and

 

•                  The payment of relatedpremiums of $27.1 million.

 

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

 

With the amendment and restatement ofthe senior credit facilities, the term of the revolving credit facility is fiveyears, and the terms of the Canadian term loan facility and Term B loanfacility are six years, in each case from August 9, 2004.   As of June 30, 2005, the Term B loanfacility requires quarterly payments of $0.8 million, with a final payment of$286.9 million due on the maturity date. As of June 30, 2005, the Canadianterm loan facility requires quarterly payments of $12 thousand, with a finalpayment of $4.5 million due on the maturity date.  Once repaid, principal under the Term loanfacilities may not be re-borrowed by the Company.

 

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

 

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

 

The amended and restated senior creditfacilities contain financial covenant calculations relating to maximum capitalexpenditures, minimum fixed charge coverage ratio, maximum leverage ratio andmaximum first lien credit facilities leverage ratio.  In addition, there are covenants in areassuch as investments, loans and advances, indebtedness, and the sale of stockand assets.  The Company was incompliance with all debt covenants as of June 30, 2005.

 

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

 

10

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

 

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

 
| ** **                                                                                       | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Shares in thousands)**                                                                        | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shares for basic income per share computation –  weighted average common shares outstanding |       | 45,692                                |       | 30,936                              |       | 45,397 |   | 30,898 |   |
| Dilutive effect of stock options and warrants                                                    |       | 1,772                                 |       | 2,037                               |       | 1,976 |   | 1,990 |   |
| Shares for diluted income per share computation                                                  |       | 47,464                                |       | 32,973                              |       | 47,373 |   | 32,888 |   |
|                                                                                             |       |                                  |       |                                |       |   |   |   |   |
| Options excluded from computation as anti-dilutive                                               |       | 537                                   |       | 1,255                               |       | 9 |   | 1,255 |   |

 

In August 2004, the Company issued13,800,000 shares of common stock and received $127.2 million net of relatedissuance fees and costs.  In December 2004,Lehman Brothers Merchant Banking Partners II L.P. and certain of its affiliates(“Lehman Brothers”) sold 11,225,492 shares of the Company’s common stock in asecondary public stock offering for which the Company did not receive anyproceeds.

 

In June 2005 the Company andcertain of its stockholders sold 7,500,000 shares of the Company’s common stockin a public offering.  The shares wereoffered pursuant to an effective shelf registration statement that waspreviously filed with the Securities and Exchange Commission.  The Company retained cumulative net proceedsof $10 thousand for the following transactions:

 

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

 

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

 

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

 

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

 

**NOTE 8:  STOCK-BASED COMPENSATION**

 

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

 

11

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| ** **                                                                                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands, except  per share amounts)**                                                                                   | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                  |       | $                                     | 17,172     |                                | $          | 8,383 |   | $ | 34,402 |   | $ | 16,005 |   |
| Add: stock-based employee compensation cost, net of  tax, included in the reported results                                              |       | 26                                    |       |                                |       | 56 |   | 125 |   |
| Deduct: total stock-based employee compensation  cost, net of tax, that would have been included in net income under fair  value method |       | (198                                  | )          | (286                                | )          | (396 | ) | (582 | ) |
| Pro forma net income                                                                                                                    |       | $                                     | 17,000     |                                | $          | 8,097 |   | $ | 34,062 |   | $ | 15,548 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Basic earnings per share as reported                                                                                                    |       | $                                     | 0.38       |                                | $          | 0.27 |   | $ | 0.76 |   | $ | 0.52 |   |
| Pro forma basic earnings per share                                                                                                      |       | $                                     | 0.37       |                                | $          | 0.26 |   | $ | 0.75 |   | $ | 0.50 |   |
| Diluted earnings per share as reported                                                                                                  |       | $                                     | 0.36       |                                | $          | 0.25 |   | $ | 0.73 |   | $ | 0.49 |   |
| Pro forma diluted earnings per share                                                                                                    |       | $                                     | 0.36       |                                | $          | 0.25 |   | $ | 0.72 |   | $ | 0.47 |   |

 

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

 

The components of netperiodic benefit cost for funded and unfunded pension and other post-retirementbenefits for the three months ended June 30 are as follows: 

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **Pension Benefits**                  | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                       |       | $                                     | 1,460      |   | $ | 1,230 |   | $ | 112 |   | $ | 110 |   |
| Interest cost                      |       | 2,392                                 |       | 2,119 |   | 572 |   | 524 |   |
| Expected return on plan assets     |       | (2,404                                | )          | (1,819 | ) | (11 | ) | (17 | ) |
| Amortization of prior service cost |       | 93                                    |       | 93 |   | 2 |   | 2 |   |
| Amortization of net loss           |       | 648                                   |       | 576 |   | 332 |   | 262 |   |
| Total net periodic benefit cost    |       | $                                     | 2,189      |   | $ | 2,199 |   | $ | 1,007 |   | $ | 881 |   |

 

The components of netperiodic benefit cost for funded and unfunded pension and other post-retirementbenefits for the six months ended June 30 are as follows: 

 
| ** **                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **Pension Benefits**               | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**         | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                       |       | $                                  | 2,919      |   | $ | 2,460 |   | $ | 225 |   | $ | 220 |   |
| Interest cost                      |       | 4,784                              |       | 4,237 |   | 1,144 |   | 1,048 |   |
| Expected return on plan assets     |       | (4,807                             | )          | (3,639 | ) | (22 | ) | (33 | ) |
| Amortization of prior service cost |       | 186                                |       | 186 |   | 4 |   | 4 |   |
| Amortization of net loss           |       | 1,296                              |       | 1,152 |   | 663 |   | 523 |   |
| Total net periodic benefit cost    |       | $                                  | 4,378      |   | $ | 4,396 |   | $ | 2,014 |   | $ | 1,762 |   |

 

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

 

12

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**NOTE 10:  COMMITMENTS AND CONTINGENT LIABILITIES**

 

Guarantees and other commercialcommitments are summarized in the following table: 

 
| ** **                                        | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**                        | ** ** | **2005**          | ** ** |
| Warranty reserve                                  |       | $                 | 5,426      |   |
| Letters of credit outstanding                     |       | 7,751             |       |
| Third party financing agreements (1)              |       | 2,910             |       |
| Accounts receivable securitization (2)            |       | 353               |       |
| Total guarantees and other commercial commitments |       | $                 | 16,440     |   |

 

----

(1)  Applicable to third party financingagreements for customer equipment purchases.

 

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

 

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

 

Changes in the warranty reserve are asfollows:  

 
| ** **                                    | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Balance as of December 31, 2004 and 2003 |       | $                                  | 4,923      |   | $ | 4,120 |   |
| Accrued warranty expense                      |       | 2,433                              |       | 3,476 |   |
| Payments made (in cash or in-kind)            |       | (1,930                             | )          | (2,765 | ) |
| Balance at end of period                      |       | $                                  | 5,426      |   | $ | 4,831 |   |

 

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

 

The current on-sitemonitoring program is being conducted and funded by certain PLPs, excluding theCompany and several other PLPs, under the supervision of WDOE. Depending uponthe results of this study, further studies or remediation could be required.The Company may or may not be required to pay a share of the current study, orto contribute costs of subsequent studies or remediation, if any. The Companyis unable to estimate such costs, or the likelihood of being assessed anyportion thereof. However, during the most recent negotiations with those PLPsthat are funding the work at the Site, the Company’s potential share of theestimated cost ranged from approximately $20 thousand to $0.3 million.

 

The Company has accrued $0.1million at June 30, 2005 and December 31, 2004 for the potentialcosts of any clean-up at the Site. The Company incurred no costs during the sixmonth periods ended June 30, 2005 and 2004 to administer compliance inregards to the Site.

 

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

 

13

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

 

On June 30, 2005,the Company was served with a “notice of meeting” on behalf of Williams Control, Inc.(“WCI”) in connection with WCI’s agreement with the State of Oregon Departmentof Environmental Quality (“DEQ”) to enter into the voluntary cleanup program(the “Program”) relating to WCI’s facility located at 14100 SW 72ndAvenue in Portland, Oregon (the “Site”).

 

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

 

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

 

A meeting of allegedPotentially-Responsible Parties is scheduled for early September 2005. Nodemand for any specific monetary amount has been made.  At this early stage, the Company does nothave a sufficient basis to determine whether it has any liability in this matteror, if it does, what its share of any costs of remediation would be.  The Company has reserved all of its rights inthis matter and is investigating further.

 

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

 

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

 

**NOTE 11:  SEGMENT INFORMATION**

 

The Company identifies operatingsegments primarily based on management responsibility. The Company has three reportablesegments: Outdoor Products, Industrial and Power Equipment and Lawnmower.Outdoor Products manufactures and markets cutting chain, bars, sprockets andaccessories for chainsaw use, concrete cutting equipment, and lawnmower bladesand accessories for outdoor care. Industrial and Power Equipment manufactures andmarkets timber harvesting equipment, industrial tractors and loaders, rotationbearings and mechanical power transmission units. The Lawnmower segmentmanufactures and markets riding lawnmowers and related accessories.

 

14

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Certain financial information by segmentis presented in the table below:

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales:**                     |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products               |       | $                                     | 114,092    |                                | $          | 102,178 |   | $ | 230,893 |   | $ | 204,279 |   |
| Industrial and Power Equipment |       | 63,687                                |       | 53,093                              |       | 119,703 |   | 107,117 |   |
| Lawnmower                      |       | 16,136                                |       | 14,198                              |       | 28,878 |   | 23,817 |   |
| Inter-Segment Elimination      |       | (162                                  | )          | (205                                | )          | (467 | ) | (376 | ) |
| Total Sales                    |       | $                                     | 193,753    |                                | $          | 169,264 |   | $ | 379,007 |   | $ | 334,837 |   |
|                           |       |                                  |       |                                |       |   |   |   |   |
| **Operating income:**          |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products               |       | $                                     | 26,797     |                                | $          | 26,099 |   | $ | 55,283 |   | $ | 52,420 |   |
| Industrial and Power Equipment |       | 6,439                                 |       | 4,885                               |       | 11,186 |   | 9,626 |   |
| Lawnmower                      |       | 1,445                                 |       | 1,489                               |       | 1,686 |   | 1,262 |   |
| Inter-Segment Elimination      |       | 9                                     |       | 4                                   |       | (30 | ) | 7 |   |
| Contribution from segments     |       | 34,690                                |       | 32,477                              |       | 68,125 |   | 63,315 |   |
| Corporate expenses             |       | (4,203                                | )          | (3,925                              | )          | (8,065 | ) | (7,595 | ) |
| Operating income               |       | 30,487                                |       | 28,552                              |       | 60,060 |   | 55,720 |   |
| Interest expense               |       | (9,505                                | )          | (17,255                             | )          | (18,653 | ) | (34,668 | ) |
| Interest income                |       | 170                                   |       | 561                                 |       | 411 |   | 1,336 |   |
| Other income (expense), net    |       | (439                                  | )          | (142                                | )          | (470 | ) | (29 | ) |
| Income before income taxes     |       | $                                     | 20,713     |                                | $          | 11,716 |   | $ | 41,348 |   | $ | 22,359 |   |

 

**NOTE 12:  SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Interest paid              |       | $                                  | 12,713     |   | $ | 29,878 |   |
| Income taxes paid, net     |       | $                                  | 7,056      |   | $ | 5,768 |   |

 

**NOTE 13:  CONSOLIDATING FINANCIAL INFORMATION**

 

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

 

15

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**CONDENSED CONSOLIDATING FINANCIALINFORMATION**

 

**Statement of OperationsInformation**

 
| **(Amounts in thousands)**                                | ** ** | **Blount International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the Three Months Ended June 30, 2005**         |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                     |       |                            |       | $                 | 127,448    |                        | $          | 45,374                            |       | $                | 68,023     |             | $          | (47,092 | ) | $ | 193,753 |   |
| Cost of sales                                             |       |                            |       | 87,747            |       | 36,434                      |       | 51,723                            |       | (42,758          | )          | 133,146          |       |
| Gross profit                                              |       |                            |       | 39,701            |       | 8,940                       |       | 16,300                            |       | (4,334           | )          | 60,607           |       |
| Selling, general and administrative expenses              |       |                            |       | 18,496            |       | 3,858                       |       | 7,766                             |       |             |       | 30,120           |       |
| Operating income                                          |       |                            |       | 21,205            |       | 5,082                       |       | 8,534                             |       | (4,334           | )          | 30,487           |       |
| Other, net                                                |       | $                               | (4,434     | )                 | (5,245     | )                           | 144        |                              | (239       | )                |       |             | (9,774     | ) |
| Income (loss) before income taxes                         |       | (4,434                          | )          | 15,960            |       | 5,226                       |       | 8,295                             |       | (4,334           | )          | 20,713           |       |
| Provision (benefit) for income taxes                      |       | (757                            | )          | 1,378             |       | 261                         |       | 2,659                             |       |             |       | 3,541            |       |
| Income (loss)                                             |       | (3,677                          | )          | 14,582            |       | 4,965                       |       | 5,636                             |       | (4,334           | )          | 17,172           |       |
| Equity in earnings (losses) of affiliated companies,  net |       | 20,849                          |       | 6,267             |       | 65                          |       |                              |       | (27,181          | )          |             |       |
| Net income (loss)                                         |       | $                               | 17,172     |              | $          | 20,849                      |       | $                                 | 5,030      |             | $          | 5,636            |       | $ | (31,515 | ) | $ | 17,172 |   |
|                                                      |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |
| **For the Six Months Ended June 30, 2005**           | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                     |       |                            |       | $                 | 249,379    |                        | $          | 87,374                            |       | $                | 139,711    |             | $          | (97,457 | ) | $ | 379,007 |   |
| Cost of sales                                             |       |                            |       | 180,186           |       | 70,687                      |       | 103,066                           |       | (95,508          | )          | 258,431          |       |
| Gross profit                                              |       |                            |       | 69,193            |       | 16,687                      |       | 36,645                            |       | (1,949           | )          | 120,576          |       |
| Selling, general and administrative expenses              |       |                            |       | 36,625            |       | 7,882                       |       | 16,009                            |       |             |       | 60,516           |       |
| Operating income                                          |       |                            |       | 32,568            |       | 8,805                       |       | 20,636                            |       | (1,949           | )          | 60,060           |       |
| Other, net                                                |       | $                               | (8,466     | )                 | (10,022    | )                           | 13         |                              | (237       | )                |       |             | (18,712    | ) |
| Income (loss) before income taxes                         |       | (8,466                          | )          | 22,546            |       | 8,818                       |       | 20,399                            |       | (1,949           | )          | 41,348           |       |
| Provision for income taxes                                |       | (1,422                          | )          | 652               |       | 441                         |       | 7,275                             |       |             |       | 6,946            |       |
| Income (loss)                                             |       | (7,044                          | )          | 21,894            |       | 8,377                       |       | 13,124                            |       | (1,949           | )          | 34,402           |       |
| Equity in earnings (losses) of affiliated companies,  net |       | 41,446                          |       | 19,552            |       | 134                         |       |                              |       | (61,132          | )          |             |       |
| Net income (loss)                                         |       | $                               | 34,402     |              | $          | 41,446                      |       | $                                 | 8,511      |             | $          | 13,124           |       | $ | (63,081 | ) | $ | 34,402 |   |

 

16

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**Statement of OperationsInformation**

 
| **(Amounts in thousands)**                                | ** ** | **Blount International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the Three Months Ended June 30, 2004**         |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                     |       |                            |       | $                 | 115,403    |                        | $          | 40,539                            |       | $                | 54,506     |             | $          | (41,184 | ) | $ | 169,264 |   |
| Cost of sales                                             |       |                            |       | 86,274            |       | 31,856                      |       | 37,128                            |       | (44,349          | )          | 110,909          |       |
| Gross profit                                              |       |                            |       | 29,129            |       | 8,683                       |       | 17,378                            |       | 3,165            |       | 58,355           |       |
| Selling, general  and administrative expenses             |       |                            |       | 18,571            |       | 4,294                       |       | 6,938                             |       |             |       | 29,803           |       |
| Operating income                                          |       |                            |       | 10,558            |       | 4,389                       |       | 10,440                            |       | 3,165            |       | 28,552           |       |
| Other, net                                                |       | $                               | (5,184     | )                 | (10,794    | )                           | (84        | )                                 | (774       | )                |       |             | (16,836    | ) |
| Income (loss) before income taxes                         |       | (5,184                          | )          | (236              | )          | 4,305                       |       | 9,666                             |       | 3,165            |       | 11,716           |       |
| Provision for income taxes                                |       |                            |       | (66               | )          | 216                         |       | 3,183                             |       |             |       | 3,333            |       |
| Income (loss)                                             |       | (5,184                          | )          | (170              | )          | 4,089                       |       | 6,483                             |       | 3,165            |       | 8,383            |       |
| Equity in earnings (losses) of affiliated companies,  net |       | 13,567                          |       | 13,737            |       | 32                          |       |                              |       | (27,336          | )          |             |       |
| Net income (loss)                                         |       | $                               | 8,383      |              | $          | 13,567                      |       | $                                 | 4,121      |             | $          | 6,483            |       | $ | (24,171 | ) | $ | 8,383 |   |
| ** **                                                | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the Six Months Ended June 30, 2004**           | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                     |       |                            |       | $                 | 228,837    |                        | $          | 77,432                            |       | $                | 112,386    |             | $          | (83,818 | ) | $ | 334,837 |   |
| Cost of sales                                             |       |                            |       | 167,829           |       | 60,900                      |       | 79,412                            |       | (88,613          | )          | 219,528          |       |
| Gross profit                                              |       |                            |       | 61,008            |       | 16,532                      |       | 32,974                            |       | 4,795            |       | 115,309          |       |
| Selling, general and administrative expenses              |       |                            |       | 36,457            |       | 9,058                       |       | 14,074                            |       |             |       | 59,589           |       |
| Operating income                                          |       |                            |       | 24,551            |       | 7,474                       |       | 18,900                            |       | 4,795            |       | 55,720           |       |
| Other, net                                                |       | $                               | (10,303    | )                 | (21,832    | )                           | (187       | )                                 | (1,039     | )                |       |             | (33,361    | ) |
| Income (loss) before income taxes                         |       | (10,303                         | )          | 2,719             |       | 7,287                       |       | 17,861                            |       | 4,795            |       | 22,359           |       |
| Provision (benefit) for income taxes                      |       |                            |       | (52               | )          | 365                         |       | 6,041                             |       |             |       | 6,354            |       |
| Income (loss)                                             |       | (10,303                         | )          | 2,771             |       | 6,922                       |       | 11,820                            |       | 4,795            |       | 16,005           |       |
| Equity in earnings (losses) of affiliated companies,  net |       | 26,308                          |       | 23,537            |       | 68                          |       |                              |       | (49,913          | )          |             |       |
| Net income (loss)                                         |       | $                               | 16,005     |              | $          | 26,308                      |       | $                                 | 6,990      |             | $          | 11,820           |       | $ | (45,118 | ) | $ | 16,005 |   |

 

17

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**Balance Sheet Information**

 
| **(Amounts in thousands)**                                | ** ** | **Blount International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **June 30, 2005**                                    | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                |       |                            |       | $                 | 29,951     |                        |       |                              | $          | 24,371           |       |             |       | $ | 54,322 |   |
| Accounts  receivable, net                                 |       |                            |       | 45,855            |       | $                           | 12,224     |                              | 23,994     |             |       |             | 82,073     |   |
| Intercompany  receivables                                 |       |                            |       | 171,714           |       | 65,331                      |       | 20,324                            |       | $                | (257,369   | )                |       |   |
| Inventories                                               |       |                            |       | 35,650            |       | 27,411                      |       | 26,008                            |       |             |       | 89,069           |       |
| Other current  assets                                     |       |                            |       | 1,264             |       | 681                         |       | 2,283                             |       |             |       | 4,228            |       |
| Total current assets                                      |       |                            |       | 284,434           |       | 105,647                     |       | 96,980                            |       | (257,369         | )          | 229,692          |       |
| Investments in affiliated companies                       |       | $                               | 38,968     |              | 272,686    |                        | 122        |                              | 248        |             | (312,024   | )                |       |   |
| Property, plant and equipment, net                        |       |                            |       | 26,053            |       | 32,804                      |       | 41,617                            |       |             |       | 100,474          |       |
| Goodwill and other assets                                 |       |                            |       | 73,391            |       | 30,961                      |       | 11,094                            |       |             |       | 115,446          |       |
| Total Assets                                              |       | $                               | 38,968     |              | $          | 656,564                     |       | $                                 | 169,534    |             | $          | 149,939          |       | $ | (569,393 | ) | $ | 445,612 |   |
|                                                      |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit)**   |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Current  maturities of long-term debt                     |       |                            |       | $                 | 3,051      |                        |       |                              | $          | 49               |       |             |       | $ | 3,100 |   |
| Accounts payable                                          |       |                            |       | 20,070            |       | $                           | 8,092      |                              | 10,143     |             |       |             | 38,305     |   |
| Intercompany  payables                                    |       | $                               | 257,369    |              |       |                        |       |                              |       |             | $          | (257,369         | )          |   |   |
| Accrued expenses                                          |       |                            |       | 41,787            |       | 7,313                       |       | 13,130                            |       |             |       | 62,230           |       |
| Total current liabilities                                 |       | 257,369                         |       | 64,908            |       | 15,405                      |       | 23,322                            |       | (257,369         | )          | 103,635          |       |
| Long-term debt, excluding current maturities              |       |                            |       | 474,476           |       |                        |       | 4,647                             |       |             |       | 479,123          |       |
| Other liabilities                                         |       | 2,032                           |       | 78,212            |       | (115                        | )          | 3,158                             |       |             |       | 83,287           |       |
| Total liabilities                                         |       | 259,401                         |       | 617,596           |       | 15,290                      |       | 31,127                            |       | (257,369         | )          | 666,045          |       |
| Stockholders equity (deficit)                             |       | (220,433                        | )          | 38,968            |       | 154,244                     |       | 118,812                           |       | (312,024         | )          | (220,433         | )          |
| Total Liabilities and Stockholders’ Equity (Deficit) |       | $                               | 38,968     |              | $          | 656,564                     |       | $                                 | 169,534    |             | $          | 149,939          |       | $ | (569,393 | ) | $ | 445,612 |   |

 

18

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| **(Amounts in thousands)**                                | ** ** | **Blount International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **December 31, 2004**                                | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                |       |                            |       | $                 | 17,229     |                        | $          | (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 maturities              |       |                            |       | 486,188           |       |                        |       | 4,824                             |       |             |       | 491,012          |       |
| Other liabilities                                         |       | 2,203                           |       | 68,009            |       | 3,979                       |       | 4,343                             |       |             |       | 78,534           |       |
| Total liabilities                                         |       | 255,871                         |       | 625,428           |       | 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 |   |

 

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**Cash Flows Information**

 
| **(Amounts in thousands)**                           | ** ** | **Blount International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the Six Months Ended June 30, 2005**      |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) operating activities  |       | $                               | (5,723     | )                 | $          | 32,475                      |       | $                                 | 4,012      |             | $          | (2,890           | )          |   |   | $ | 27,874 |   |
| ** **                                           |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in investing activities                |       |                            |       | (1,687            | )          | (1,552                      | )          | (6,363                            | )          |             |       | (9,602           | )          |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash flows from financing activities:**            |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Reduction of long-term debt                          |       |                            |       | (11,811           | )          |                        |       | (177                              | )          |             |       | (11,988          | )          |
| Issuance costs related to debt                       |       |                            |       | (2,554            | )          |                        |       |                              |       |             |       | (2,554           | )          |
| Issuance costs related to stock                      |       | (1,425                          | )          |              |       |                        |       |                              |       |             |       | (1,425           | )          |
| Proceeds from issuance of stock                      |       | 6,123                           |       |              |       |                        |       |                              |       |             |       | 6,123            |       |
| Purchase of treasury stock                           |       | (6,123                          | )          |              |       |                        |       |                              |       |             |       | (6,123           | )          |
| Exercise of stock options and warrants               |       | 3,447                           |       |              |       |                        |       |                              |       |             |       | 3,447            |       |
| Advances from (to) affiliates                        |       | 3,701                           |       | (3,701            | )          |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) financing activities  |       | 5,723                           |       | (18,066           | )          |                        |       | (177                              | )          |             |       | (12,520          | )          |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase (decrease) in cash and cash equivalents |       |                            |       | 12,722            |       | 2,460                       |       | (9,430                            | )          |             |       | 5,752            |       |
| 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          |              | $          | 29,951                      |       | $                                 | 0          |             | $          | 24,371           |       |   |   | $ | 54,322 |   |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the Six Months Ended June 30, 2004**      |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) operating activities  |       | $                               | (11,594    | )                 | $          | 22,148                      |       | $                                 | 1,160      |             | $          | 3,652            |       |   |   | $ | 15,366 |   |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in investing activities                |       |                            |       | (2,293            | )          | (1,093                      | )          | (4,985                            | )          |             |       | (8,371           | )          |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| **Cash flows from financing activities:**            |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Reduction of long-term debt                          |       |                            |       | (4,481            | )          |                        |       | (395                              | )          |             |       | (4,876           | )          |
| Exercise of stock options                            |       | 471                             |       |              |       |                        |       |                              |       |             |       | 471              |       |
| Advances from (to) affiliates                        |       | 11,123                          |       | (11,123           | )          |                        |       |                              |       |             |       |             |       |
| Other financing activities                           |       |                            |       | (1,110            | )          |                        |       |                              |       |             |       | (1,110           | )          |
| Net cash provided by (used in) financing activities  |       | 11,594                          |       | (16,714           | )          |                        |       | (395                              | )          |             |       | (5,515           | )          |
|                                                 |       |                            |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase (decrease) in cash and cash equivalents |       |                            |       | 3,140             |       | 68                          |       | (1,728                            | )          |             |       | 1,480            |       |
| Cash and cash equivalents at beginning of period     |       |                            |       | 13,667            |       | (556                        | )          | 22,083                            |       |             |       | 35,194           |       |
| Cash and cash equivalents at end of period           |       | $                               | 0          |              | $          | 16,807                      |       | $                                 | (488       | )                | $          | 20,355           |       |   |   | $ | 36,674 |   |

 

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**NOTE 14:  RECENT ACCOUNTING PRONOUNCEMENTS**

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”**This statement amends the guidancein ARB No. 43, Chapter 4, InventoryPricing, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material (spoilage).  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.  The Company expects to adopt SFASNo. 151 on January 1, 2006.

 

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

 

Theeffect on results of operations of expensing stock options using theBlack-Scholes model is presented in Note 8. Under certain conditions, stock options granted by the Company areeligible for continued vesting upon the retirement of the employee. The FASBclarified in FAS 123(R) that the fair value of such stock options shouldbe expensed based on an accelerated vesting schedule or immediately,rather than ratably over the vesting period stated in the grant. The pro formadisclosure currently reflects the expense of such options ratably over thestated vesting period, expensing all unvested shares upon actual retirement. The SEC has recently clarified that companiesshould continue to follow the vesting method they have been using untiladoption of FAS 123(R), and then apply the accelerated vestingschedule to all subsequent grants to those employees eligible foraccelerated vesting upon retirement. Had the Company been accounting for suchstock options using the accelerated vesting schedule for those employeeseligible for accelerated vesting upon retirement, the effect on stock-basedcompensation expense in the pro forma disclosure of the effect of expensingstock options presented in Note 8 would be immaterial for all periodspresented.

 

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB OpinionNo. 29.” The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions,is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of assets exchanged. The guidance in thatopinion, however, included certain exceptions to that principle. This Statementamends APB No. 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. SFAS No. 153is effective for nonmonetary exchanges occurring in fiscal periods beginningafter June 15, 2005. The adoption of SFAS No. 153 is not expected tohave a material impact on the Company’s financial position and results ofoperations.  The Company expects to adoptSFAS No. 153 on January 1, 2006.

 

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**NOTE 15:  RELATED PARTY TRANSACTIONS**

 

In March 2005, $3.2 million waspaid to Lehman Brothers for advisory fees relating to the 2004 RefinancingTransactions.  In May 2005, LehmanBrothers paid $0.3 million for costs incurred by the Company in conjunctionwith the secondary public offering that occurred in December 2004.  In June 2005, as part of a secondarystock offering, the Company incurred $0.1 million in expenses that will bereimbursed by Lehman Brothers.  InJune 2005, Lehman Brothers paid the Company $10 thousand to exercise 1,000,000previously issued warrants and received 1,000,000 shares of our common stock.

 

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

 

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

 

**Results of Operations**

 

**Three months and six months endedJune 30, 2005 compared to three months and six months ended June 30,2004 (unaudited).**

 

We continue to experience year-over-yeargrowth in sales and net income related to business growth and the benefits ofrefinancing activities completed during the second half of 2004.

 

Sales for the second quarter endedJune 30, 2005 were $193.8 million compared to $169.3 million in the secondquarter of 2004.  Operating income in thequarter increased to $30.5 million in 2005 from $28.6 million in 2004. Netincome for the second quarter of 2005 was $17.2 million ($0.36 per dilutedshare) compared to $8.4 million ($0.25 per diluted share) in 2004.

 

Sales for the six months endedJune 30, 2005 were $379.0 million compared to $334.8 million in the firsthalf of 2004. Operating income increased to $60.1 million in the first half of2005 from $55.7 million in the first half of 2004. Net income for the sixmonths ended June 30, 2005 was $34.4 million ($0.73 per diluted share)compared to $16.0 million ($0.49 per diluted share) in 2004.

 

Our sales in the second quarter and sixmonths ended June 30, 2005 increased by $24.5 million, or 14%, and $44.2million, or 13%, respectively, from the same periods in 2004.  The increase in sales is primarilyattributable to the following:

 

•                  An increase ininternational sales for the Outdoor Products segment of $13.0 million, or 21%,and $27.1 million, or 22%, respectively, for the periods reported due to therelative weakness of the U.S. dollar and continued strong international demandfor our products.

 

•                  Our Industrial andPower Equipment segment sales grew $10.6 million, or 20%, and $12.6 million, or12%, respectively, for the periods reported due primarily to increased unitvolume and higher selling prices.

 

•                  The continued marketacceptance of our new lineup of Dixon lawnmowers featuring all steel bodies, aswell as new distribution arrangements, helped increase Lawnmower segment salesby $1.9 million, or 14%, and $5.1 million, or 21%, respectively for the periodsreported.

 

Sales backlog for the second quarterended June 30, 2005 was $157.5 million, a decrease from $161.9 million atMarch 31, 2005, but an increase from $150.3 million at December 31,2004 and $130.4 million at June 30, 2004. Over the past year, backlog growth has been strongest in our Industrialand Power Equipment segment.  The OutdoorProducts Group has also experienced an increase in backlog sinceDecember 31, 2004.

 

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Operating income increased by $1.9million, or 7%, during the second quarter of 2005 compared to 2004. Theimprovement is primarily due to a year-over-year gross profit increase of $2.3million, or 4%, partially offset by a $0.3 million, or 1%, increase in selling,general and administrative (“SG&A”) expense. Operating income increased by$4.3 million, or 8%, for the six months ended June 30, 2005 from the comparableperiod of 2004. The improvement is primarily due to a year-over-year grossprofit increase of $5.3 million, or 5%, partially offset by a $0.9 million, or2%, increase in SG&A expense.

 

The comparison of operating income forthe quarter and six months ended June 30, 2005 to the same periods in 2004reflects the following:

 

•                  The favorable effectof increased unit sales, led by growth of international sales for all threesegments;

 

•                  The unfavorable neteffect of currency exchange rates, due to the recent weakening of the US dollaragainst the Canadian Dollar and the Brazilian Real;

 

•                  The unfavorable effectof steel price increases, which have also recently shown more stable trends inmid-2005; and

 

•                  The unfavorableadministrative cost increase to comply with the Sarbanes-Oxley Act of 2002.

 

The year-over-year change in grossprofit is presented in the following table (in millions):

 
| ** **                   | ** ** | **Three Months  Ended June 30** | ** ** | **Six Months  Ended June 30** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| 2004 Gross Profit            |       | $                                    | 58.4       |                               | $          | 115.3 |   |
| Increase (Decrease)          |       |                                 |       |                               |       |
| Sales Volume                 |       | 5.7                                  |       | 9.7                                |       |
| Selling Price and Mix        |       | 4.2                                  |       | 11.0                               |       |
| Product Cost and Mix         |       | (7.6                                 | )          | (15.1                              | )          |
| Foreign Currency Translation |       | (0.1                                 | )          | (0.3                               | )          |
| 2005 Gross Profit            |       | $                                    | 60.6       |                               | $          | 120.6 |   |

 

As a percent of sales, gross profitdecreased to 31.3% in the second quarter of 2005 compared to 34.5% for the sameperiod in 2004.  The decrease in grossmargin reflects year-over-year increases in raw material costs, partiallyoffset by increases in net selling prices implemented in late 2004 and early2005 for many of our products.  Increasesin product cost include the effect of higher steel costs estimated at $1.4million for the second quarter and $7.2 million for the six months.  Changes in product mix and distributionchannels were also factors for certain of our businesses.  The comparative growth rate between segmentswas also a factor for the three month period ended June 30, 2005, with alarger proportion of the Company’s year over year sales growth coming fromsegments that generate lower gross margins. A stronger Canadian Dollar and Brazilian Real and a relatively weakerU.S. dollar produced a net negative effect from foreign currency for the sixmonths ended June 30, 2005 compared to the corresponding period in 2004 asincreased net costs were partially offset by higher sales revenue.

 

SG&A increased to $30.1 million inthe second quarter of 2005 from $29.8 million in the same period of 2004.  For the six months year to date, SG&Aexpense was $60.5 million compared to $59.6 million last year.  As a percent of sales, the Company achievedadditional leverage with SG&A decreasing to 15.5% in the current quarterfrom 17.6% in the second quarter of 2004. For the six months ended June 30, 2005, SG&A decreased to 16.0%of sales from 17.8% in for the same period of 2004.

 

The year-over-year comparison ofexpenditures includes the adverse affect of exchange rates on expenses of ourforeign offices compared to the same periods of 2004, which amounted to $0.5million for the second quarter and $0.9 million for the six months endedJune 30, 2005.  Compliance-relatedexpenditures associated with the Sarbanes-Oxley Act increased $0.9 million forthe quarter and $1.3 million for the six months. This trend is expected tocontinue for the remainder of 2005.  Theprovision for bad debts on trade receivables increased by $0.2 million for boththe quarter and six months year-to-date compared to the same periods last year,primarily due to the overall increase in sales during the same periods.  These increases have been partially offset bya decrease in advertising expenses of $0.5 million and $0.6 million during thequarter and six month periods respectively. Also, expenditures

 

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for compensation and benefits havedecreased by $0.9 million and $0.8 million respectively for the quarter and sixmonths compared to the same periods in 2004, primarily due to reductions toincentive compensation and employee benefits expenses.

 

Net income for the second quarter of2005 was $17.2 million, or $0.36 per diluted share, compared to net income of$8.4 million, or $0.25 per diluted share, in 2004. Net income for the sixmonths ended June 30, 2005 was $34.4 million, or $0.73 per diluted share,compared to net income of $16.0 million, or $0.49 per diluted share, in 2004.The change in net income is primarily due to the following:

 

•                  An increase inoperating income of $1.9 million and $4.3 million, respectively, during thesecond quarter and six months, primarily from growth in sales volume.

 

•                  A decrease in interestexpense of $7.8 million and $16.0 million, respectively, reflecting decreasesin average outstanding debt balances and average interest rates associated withchanges in our capital structure.

 

•                  A decrease in interestincome of $0.4 million and $0.9 million, respectively.  This decrease included $0.4 million and $1.1million, respectively, related to interest on an income tax refund received inthe fourth quarter of 2004, partially offset in the six month period by anincrease of $0.2 million related to increased cash and cash equivalent balancesheld at foreign locations.

 

•                  An increase in otherexpense of $0.3 million and $0.4 million, respectively.  This increase is due primarily to the $0.4million charge recorded in the second quarter of 2005 to write off deferredfinancing costs resulting from the pre-payment of debt principal.

 

Our effective income tax rate was 17.1%and 16.8%, respectively, in the second quarter and for the six months endedJune 30, 2005 compared to 28.4% in both comparable periods of 2004.  This decrease in the effective tax rate for2005 reflects a higher proportion of domestic taxable income to foreign taxableincome when compared to 2004, and the related utilization of domestic net operatingloss carryforwards.

 

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 lawOctober 22, 2004, includes a one-time election to deduct 85% of certainforeign earnings that are repatriated, as defined in the Act.  Any repatriation of foreign earnings must be completedby December 31, 2005.  Management isevaluating the effects of repatriating a portion of the Company’s undistributedearnings of foreign subsidiaries and cannot yet reasonably estimate the taxeffects of such potential repatriation. We intend to complete our evaluation during the second half of 2005.

 

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

 

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales:**                     |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products               |       | $                                     | 114,092    |                                | $          | 102,178 |   | $ | 230,893 |   | $ | 204,279 |   |
| Industrial and Power Equipment |       | 63,687                                |       | 53,093                              |       | 119,703 |   | 107,117 |   |
| Lawnmower                      |       | 16,136                                |       | 14,198                              |       | 28,878 |   | 23,817 |   |
| Inter-Segment Elimination      |       | (162                                  | )          | (205                                | )          | (467 | ) | (376 | ) |
| Total Sales                    |       | $                                     | 193,753    |                                | $          | 169,264 |   | $ | 379,007 |   | $ | 334,837 |   |
|                           |       |                                  |       |                                |       |   |   |   |   |
| **Operating income:**          |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products               |       | $                                     | 26,797     |                                | $          | 26,099 |   | $ | 55,283 |   | $ | 52,420 |   |
| Industrial and Power Equipment |       | 6,439                                 |       | 4,885                               |       | 11,186 |   | 9,626 |   |
| Lawnmower                      |       | 1,445                                 |       | 1,489                               |       | 1,686 |   | 1,262 |   |
| Inter-Segment Elimination      |       | 9                                     |       | 4                                   |       | (30 | ) | 7 |   |
| Contribution from segments     |       | 34,690                                |       | 32,477                              |       | 68,125 |   | 63,315 |   |
| Corporate expenses             |       | (4,203                                | )          | (3,925                              | )          | (8,065 | ) | (7,595 | ) |
| Operating income               |       | $                                     | 30,487     |                                | $          | 28,552 |   | $ | 60,060 |   | $ | 55,720 |   |

 

***Outdoor Products Segment.***** **Sales for the OutdoorProducts segment in the second quarter of 2005 were $114.1 million compared to$102.2 million in the same period of 2004, an increase of 12%.  For the six month period, sales were $230.9million compared to $204.3 million last year.

 

The increases in sales of $11.9 millionand $26.6 million for the quarter and six months ended June 30, 2005,compared to the same periods in 2004, reflect a 21% and 22% growth rate,respectively, in international sales, offset partially by a decline in sales inthe United States.  For the quarter,sales of chainsaw components and accessories increased 12%, and concretecutting products increased 25%, on a year-over-year basis.  The effect of these product line growth ratesis partially diminished by slower growth rates for outdoor care parts andaccessories which grew at the rate of 2% for the quarter, attributed to relativelyunfavorable weather conditions in our domestic markets.  For the six months ended June 30, 2005,sales of chainsaw components and accessories increased 14%, and concretecutting products increased 33%, on a year-over-year basis, while the outdoorcare parts and accessories held constant compared to the previous year.

 

The increase in sales is primarilyattributed to the effects of higher volume, estimated at $11.2 million for thesecond quarter and $22.3 million for the six month period.  The combination of price and mix had an unfavorableeffect on sales of $0.6 million for the quarter but a favorable effect of $1.3million for the six month period.  Theestimated effect of foreign currency translation on sales was an increase of$1.3 million and $3.1 million for the two periods, respectively.  Sales backlog increased to $82.6 millioncompared to $77.4 million at December 31, 2004, and $77.3 million atJune 30, 2004.

 

Second quarter segment contribution tooperating income was $26.8 million compared to $26.1 million for 2004, anincrease of 3%.  Segment contribution tooperating income for the six months ended June 30, 2005 was $55.3 millioncompared to $52.4 million for the same period last year, an increase of 5%.  The increase in unit volume is estimated tohave yielded an additional $5.8 million and $10.3 million, respectively, whencompared to the results from the unit volumes sold in the second quarter andfirst six months of 2004.  These volumeincreases were partially offset by increases in product costs that includehigher steel costs estimated at $1.9 million for the quarter and $4.8 millionfor the six month period compared to last year. We estimate the net unfavorable effect of exchange rates at $0.5 millionand $1.3 million, respectively, for the second quarter and six months endedJune 30, 2005 compared to the same periods in 2004.  The weaker US dollar negatively impacted thecosts of production, costs for

 

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products purchased internationally forre-sale and SG&A expenses in most of our foreign locations. Increases toour product costs and SG&A, along with changes in our channel mix, havebeen partially offset by selling price increases implemented as ofJanuary 1, 2005 in certain of our markets.

 

***Industrial and PowerEquipment Segment.***** **Sales forthe Industrial and Power Equipment segment in the second quarter of 2005 were$63.7 million compared to $53.1 million in the same period of 2004, a 20%increase. For the year to date periods, sales were $119.7 million compared to$107.1 million last year, a 12% increase.

 

The growth in sales reflected anincrease in sales volume, as well as an increase in average prices over thesame periods in 2004.  Higher unit volumecontributed an estimated $5.9 million for the quarter and $4.3 million for thesix months ended June 30, 2005 compared to the same periods in 2004.  For our forestry and industrial relatedproducts, international sales grew $5.7 million in the second quarter of 2005compared to the same period in 2004, and for the six months ended June 30,international sales grew by $7.6 million compared to the same period in2004.  International sales represented16% of total forestry and industrial related product sales for the six monthsended June 30, 2005 compared to 10% for the first half of 2004.  Domestically, forestry and industrial relatedproduct sales have also increased reflecting good industry conditions for ourproducts in the US market as well.  Increasesto selling prices implemented during 2004 and in January 2005, combinedwith the effect of changes in product mix, provided an additional $4.1 millionof revenue from forestry and industrial products for the quarter, compared to2004, and $6.9 million for the six months ended June 30, 2005, compared to2004.  Sales of our rotational bearingsand mechanical power transmission products were comparable to last year’ssecond quarter results, and for the six months ended June 30 were 9%, or$0.9 million higher than the prior year period, primarily due to increases tounit prices implemented in January 2005. Sales backlog for the segment was $74.4 million at June 30, 2005compared to $69.8 million at March 31, 2005, $63.7 million at the end of2004 and $52.8 million at June 30, 2004.

 

Second quarter segment contribution tooperating income was $6.4 million compared to $4.9 million in 2004, an increaseof 32%.  Segment contribution tooperating income for the six months ended June 30, 2005 was $11.2 millioncompared to $9.6 million for the same period last year, an increase of 16%.  Increases in selling prices provided anadditional $4.7 million for the quarter and $8.3 million for the six monthperiod.  A decrease in SG&A expenseadded $0.3 million for the quarter, and $1.0 million for the six months endedJune 30.  These increases toprofitability were partially offset by higher product costs and unfavorableproduct mix with an estimated negative effect of $3.4 million and $7.8 million,combined, for the second quarter and six months ended June 30,respectively.  Last year’s significantincrease in steel prices affected this segment beginning with the secondquarter of 2004.  For the second quarter,product costs included an estimated favorable impact of $0.4 million from lowersteel prices compared to the second quarter of 2004. However, the effect ofsteel prices is estimated at $2.1 million unfavorable for the six months endedJune 30, 2005 compared to the same period in 2004.

 

***Lawnmower Segment.***** **Sales for theLawnmower segment were $16.1 million in the second quarter of 2005 compared to$14.2 million in the second quarter of 2004, a 14% increase. For the six monthsended June 30, sales were $28.9 million in 2005 compared to $23.8 millionlast year, an increase of 21%.

 

The increase in sales reflected a 15%increase in unit volume for the second quarter and 18% increase for the sixmonths ending June 30, accounting for $1.7 million and $3.7 million of theincrease, respectively, compared to the comparable periods last year.  The effect of selling price and product mixis negligible for the second quarter compared to last year; however, for thesix months ended June 30, 2005, the combination of selling price andproduct mix contributed an additional $1.4 million to the segment’s revenuegrowth.  Growth of international salescontinues to be a point of focus with the year-over-year increase of 254% and179% for the second quarter and six month period, respectively, compared to thesame periods in 2004.  Internationalsales represented 12% of total segment sales for the six months ended June 30,2005 compared to 5% for the first half of 2004. Sales backlog at June 30, 2005 of $0.5 million was seasonally lowand compares to $9.2 million at December 31, 2004 and $0.2 million at June 30,2004.

 

Segment contribution to operating incomein the second quarter was comparable to the same period in 2004, and for thesix months ended June 30, the current year’s results were $0.4 millionhigher than the same period in 2004.  In

 

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the 2005 reporting periods, higher unitvolume and sales revenue and lower SG&A expense was partially offset bylower gross margins, primarily due to a higher proportion of sales throughdistributors than in the comparable periods of 2004.

 

***Corporate Expense.***  Corporate expense in the second quarter of2005 increased to $4.2 million from $3.9 million in the comparable quarter of2004.  Year to date, corporate expensewas $8.1 million compared to $7.6 million for the same period in 2004.  The $0.3 million, or 7%, increase for thesecond quarter, and the $0.5, or 6%, increase for the six months endedJune 30, includes $0.9 million and $1.3 million, respectively, forincremental costs to prepare for Sarbanes-Oxley compliance.  These increases are partially offset bydecreases in incentive and other compensation and severance costs, a reductionin benefits expense and a reduction in legal fees.  We expect full year 2005 corporate expense tobe higher than in 2004 due to the requirements of Sarbanes-Oxley.

 

**Financial Condition, Liquidityand Capital Resources**

 

Total debt at June 30, 2005 was$482.2 million compared to $494.2 million at December 31, 2004.  As of June 30, 2005, outstanding debtconsisted of term loans of $307.2 million and 8 7/8% Senior Subordinated Notesof $175.0 million with a weighted average interest rate of 6.80%.

 

In August 2004, we completed thefollowing refinancing transactions:

 

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

 

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

 

•                  The amendment andrestatement of our existing senior credit facilities (which were amended againin December 2004), including an increase in amounts available, reductionof interest rates and modification of financial covenants.

 

We used the net proceeds of theserefinancing transactions as follows:

 

•                  The redemption of our7% Senior Notes with $150.0 million principal outstanding;

 

•                  The redemption of our13% Senior Subordinated Notes with $323.2 million principal outstanding;

 

•                  The repayment of our12% Convertible Preferred Equivalent Security principal and accrued interest inthe aggregate amount of $29.6 million; and

 

•                  The payment of relatedpremiums of $27.1 million.

 

Interest and principal paymentobligations have been reduced as a result of these changes to our debtstructure and the Company is now benefiting from lower interest expense.  Interest expense was $18.7 million in thefirst six months of 2005 compared to $34.7 million for the same period in 2004.  Interest expense has been reduced primarilyfrom a reduction in our average borrowing rate and by the reduction in theprincipal amount of long term debt.  Ourannual interest expense may vary in the future because the senior creditfacility interest rates are variable. Cash interest paid in the first six months of 2005 was $12.7 million,compared to $29.9 million for the same period in 2004.

 

Our debt continues to be significant,and debt service payments continue to represent substantial obligations.  This degree of leverage may adversely affectour operations and could have important consequences, including the following:

 

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

 

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

 

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

 

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

 

In June 2005, we made a $10.0million voluntary pre-payment of principal on our term loans.  We also made additional voluntarypre-payments of principal on our term loans totaling $25.0 million during themonth of July 2005.  These principalpre-payments will further reduce our future interest expense, and we anticipatewe will be able to make subsequent voluntary pre-payments of principal on ourterm loans from time to time during the remainder of 2005.

 

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

 

Under the amended and restated seniorcredit agreement, the amount available to be drawn on our $100.0 million revolvingcredit facility could be restricted by our leverage ratio and first lien creditfacilities leverage ratio.  Availabilityis further reduced for any outstanding letters of credit issued under thefacility.  At June 30, 2005 and atDecember 31, 2004, the Company had no amount drawn down on this facilityand had borrowing availability of $92.3 million and $92.2 million,respectively.

 

The Company and all of our domesticsubsidiaries other than Blount, Inc. guarantee the obligations ofBlount, Inc. 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 domesticsubsidiaries held by Blount, Inc. In addition, Blount, Inc. has pledged 65% of the stock of itsnon-domestic subsidiaries as further collateral.

 

Our senior credit facilities are subjectto certain reporting and financial covenant compliance requirements. We were incompliance with all debt covenants as of June 30, 2005.** **Non-compliance withthese covenants could result in severe limitations to our overall liquidity,and the term loan lenders could require actions for immediate repayment ofoutstanding amounts, 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.  In June 2005, ourcredit rating was upgraded by a rating agency, resulting in a 0.25% reductionto the variable interest rates on our term loans.

 

With the amendment and restatement ofour senior credit facilities, the term of the revolving credit facility is fiveyears, and the terms of the Canadian term loan facility and Term B loanfacility are six years, in each case, from August 9, 2004.  Required principal payments are adjustedafter each voluntary pre-payment of principal we make on the term loans.  The Term B loan facility requires quarterlypayments of $0.8 million, with a final payment of $286.9 million due on thematurity date. The Canadian term loan facility requires quarterly payments of$12 thousand, with a final payment of $4.5 million due on the maturitydate.  Once repaid, principal under theTerm loan facilities may not be re-borrowed by the Company.

 

Cash and cash equivalents atJune 30, 2005 were $54.3 million compared to $48.6 million atDecember 31, 2004.  The increase inthe cash balance of $5.8 million in the first six months of 2005 compares to anincrease of $1.5 million in the same period of 2004.

 

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Cash provided by operating activitieswas $27.9 million in the first six months of 2005 compared to $15.4 million inthe same period of 2004. The $12.5 million increase in cash provided byoperating activities reflects the following:

 

•                  Year-over-yearincrease in net income of $18.4 million.

 

•                  A $2.5 milliondecrease in depreciation, amortization and other non-cash charges, includingdeferred income taxes, and non-cash gains and losses, reflected in netincome.  The decrease in non-cash chargesis primarily due to a reduction in amortization of debt discount and deferredfinancing costs.

 

•                  The effect ofincreased sales activity resulted in additional accounts receivable of $7.1million and inventories of $8.0 million. However the use of cash to support this business growth was $2.4 millionand $2.6 million less, respectively, than that needed in the prior year.

 

•                  A combined use of cashfor accounts payable and accrued expenses of $3.8 million compared to the $8.9million source of cash for the same period in 2004.  Included in the 2005 period was $3.7 millionfor payment of the 2004 debt and equity issuance costs accrued atDecember 31, 2004.

 

•                  A source of cash of$2.8 million for other assets and liabilities, due primarily to non-cashincreases in the long term benefits liability accounts, compared to a use ofcash of $1.5 million in the same period for 2004, which included $1.1 millionof accrued interest receivable related to an income tax refund.

 

Accounts receivable increased during thefirst six months of 2005 by $7.1 million from the end of 2004.  The increase in receivables reflects anincrease in sales, as well as sales programs in certain of our segments.  The allowance for doubtful accounts remainedcomparable at $2.4 million at both June 30, 2005 and December 31,2004.

 

Net cash used for investing activitiesin the first six months of 2005 was $9.6 million compared to $8.4 million forthe same period in 2004.  Included in thecurrent period are proceeds of $0.9 million from the sale of a surplusmanufacturing plant and warehouse at our Zebulon, North Carolina facility.  Purchases for property, plant and equipmentincreased $2.1 million during the first six months of 2005 compared to 2004,and the additional spending reflects continued investment in a new facility inChina and a multi-phase project to increase capacity at our Brazilianplant.  We expect to utilize between$23.0 million and $25.0 million in available cash for capital expendituresduring 2005.

 

Cash used in financing activities in2005 was $12.5 million compared to $5.5 million in 2004.  In the first six months of 2005, we used$12.0 million for principal payments on our term debt compared to $4.9 millionduring the same period in 2004.  In thefirst six months of 2005, we also disbursed $2.6 million and $1.4 million,respectively, for previously accrued costs related to the 2004 issuance of debtand additional stock.  Proceeds from theexercise of employee stock options were $3.4 million in the first six months of2005 compared to $0.5 million during the same period last year.

 

In June 2005 we and certain of ourstockholders sold 7.5 million shares of our common stock in a publicoffering.  The shares were offeredpursuant to an effective shelf registration statement that was previously filedwith the Securities and Exchange Commission. We retained cumulative net proceeds of $10 thousand for the followingtransactions:

 

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

 

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

 

•                  We purchased 382,380shares of common stock from certain stockholders for $6.1 million.  These shares are classified as treasurystock.  We have accounted for thistreasury stock as constructively retired in the consolidated financialstatements.

 

•                  Lehman Brothersexercised warrants for 1,000,000 shares of common stock at $0.01 a share withnet proceeds of $10 thousand received by the Company.  Lehman Brothers retained ownership of theseshares and as of June 30, 2005 held approximately 8.9 million shares, or19% of our outstanding common stock.

 

Of the amounts disbursed for debt andequity issuance costs in the first six months of 2005, $3.2 million was paid toLehman Brothers, which previously controlled more than 50% of our outstandingcommon stock.  In addition, the 

 

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Company has received $0.3 million fromLehman Brothers related to costs incurred by us in conjunction with theDecember 2004 secondary stock offering whereby Lehman Brothers sold aportion of its Blount holdings.

 

**Recent Accounting Pronouncements**

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”**This statement amends the guidancein ARB No. 43, Chapter 4, InventoryPricing, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material (spoilage).  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 onour financial position and results of operations.  We expect to adopt SFAS No. 151 onJanuary 1, 2006.

 

In December 2004, the FASB issuedSFAS No. 123(R), ‘‘Share-Based Payment’’, which is a revision of SFASNo. 123 and supersedes Accounting Principles Board (“APB”) OpinionNo. 25. SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be valued at fairvalue on the date of grant, and to be expensed over the applicable vestingperiod. Pro forma disclosure of the income statement effects of share-basedpayments is no longer an alternative.  OnMarch 29, 2005, the SEC issued Staff Accounting Bulletin No. 107(SAB 107), which provides the Staff’s views regarding interactions betweenFAS 123R and certain SEC rules and regulations and providesinterpretations of the valuation of share-based payments for publiccompanies.  We are currently evaluatingSFAS No. 123(R) and SAB 107 to determine the fair value method to measure compensationexpense, the appropriate assumptions to include in the fair value model and thetransition method to use upon adoption. The impact of the adoption ofFAS 123R is not known at this time due to these factors as well as theunknown level of share-based payments granted in future years. We expect theadoption of SFAS No. 123(R) will result in increased compensation expensein the future.  The Securities andExchange Commission has delayed the implementation date for SFASNo. 123(R) for public companies until the first interim reporting periodof the first fiscal year beginning after June 15, 2005.  We expect to adopt SFAS No. 123(R) onJanuary 1, 2006.

 

Theeffect on results of operations of expensing stock options using theBlack-Scholes model is presented in Note 8. Under certain conditions, stock options granted by the Company areeligible for continued vesting upon the retirement of the employee. The FASBclarified in FAS 123(R) that the fair value of such stock options shouldbe expensed based on an accelerated vesting schedule or immediately,rather than ratably over the vesting period stated in the grant. The pro formadisclosure currently reflects the expense of such options ratably over thestated vesting period, expensing all unvested shares upon actual retirement. The SEC has recently clarified that companiesshould continue to follow the vesting method they have been using untiladoption of FAS 123(R), and then apply the accelerated vestingschedule to all subsequent grants to those employees eligible foraccelerated vesting upon retirement. Had we been accounting for such stockoptions using the accelerated vesting schedule for those employeeseligible for accelerated vesting upon retirement, the effect on stock-basedcompensation expense in the pro forma disclosure of the effect of expensingstock options presented in Note 8 would be immaterial for all periodspresented.

 

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB OpinionNo. 29.” The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions,is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of assets exchanged. The guidance in thatopinion, however, included certain exceptions to that principle. This Statementamends APB No. 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. SFAS No. 153is effective for nonmonetary exchanges occurring in fiscal periods beginningafter June 15, 2005. The adoption of SFAS No. 153 is not expected tohave a material impact on our financial position and results ofoperations.  We expect to adopt SFASNo. 153 on January 1, 2006.

 

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**Forward Looking Statements**

 

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

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Under the supervision and with theparticipation of its management, including the Chief Executive Officer and theChief Financial Officer, the Company has evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-14(e)), and has concluded that, as ofJune 30, 2005, the Company’s disclosure controls and procedures wereadequate 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 thoseentities.

 

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**PART II**

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

The following actions were taken at ourannual meeting of stockholders, which was held on April 19, 2005:

 

1. The stockholders elected the eight nominees for director to our Board ofDirectors.  The eight directors elected,along with the voting results, are as follows:

 
| ** **          | ** ** | **No. of Shares** | ** ** | **No. of Shares** | ** ** |
|---------------------|------------|------------------------|------------|------------------------|------------|
| **Name**            | ** ** | **Voting For**         | ** ** | **Withheld Voting**    | ** ** |
| R. Eugene Cartledge |       | 39,976,692             |       | 1,465,303              |       |
| Joshua L. Collins   |       | 34,878,085             |       | 6,563,910              |       |
| Eliot M. Fried      |       | 40,177,181             |       | 1,264,814              |       |
| Thomas J. Fruechtel |       | 39,979,087             |       | 1,462,908              |       |
| E. Daniel James     |       | 34,802,604             |       | 6,639,391              |       |
| Robert D. Kennedy   |       | 40,333,885             |       | 1,108,110              |       |
| Harold E. Layman    |       | 35,890,727             |       | 5,551,268              |       |
| James S. Osterman   |       | 35,875,253             |       | 5,566,742              |       |

 

2. The stockholders ratified the appointment by our Audit Committee ofPricewaterhouseCoopers LLP as the Corporation’s independent auditors.  The vote was as follows:

 
| For     |   | 39,051,138 |   |
|---------|--------|------------|--------|
| Against |   | 2,382,699  |   |
| Abstain |   | 8,158      |   |

 

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

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

 

**31.2 Certification pursuant tosection 302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, SeniorVice President and Chief Financial Officer.

 

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

 

**32.2 Certification pursuant tosection 906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, SeniorVice President and Chief Financial Officer.

 

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

 

Blount International, Inc.

P.O. Box 22127

Portland, Oregon  97269-2127

 

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**SIGNATURE**

 

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

 

BLOUNT INTERNATIONAL, INC.

Registrant

 

 
| /s/ Calvin E. Jenness |   |
|-----------------------|--------|

Calvin E. Jenness

Senior Vice President and

Chief Financial Officer

 

Dated: August 4, 2005

 

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