<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
                                                        OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
               For the transition period from ............. to .................

                        Commission file number 333-62759

                             SIMONDS INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)

                      Delaware                                   05-0484518     
           (State or other jurisdiction of                    (I.R.S. Employer  
           incorporation or organization)                    Identification No.)
                                                                               
          135 Intervale Road, Fitchburg, MA                         01420       
(Address of registrant's principal executive offices)            (Zip Code)     
                                                            

       Registrant's telephone number, including area code: (978) 343-3731

        Securities registered pursuant to Section 12(b) of the Act: None
        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x].

Aggregate market value of the voting and non-voting common equity held by
non-affiliated area of the registrant: 0

Number of shares outstanding of the registrant's voting and non-voting common
stock, as of March 15, 1999: 68,435.10 and 7,897.45, respectively.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


<PAGE>   2


                                     PART I

ITEM 1.  BUSINESS.

RECENT DEVELOPMENTS

         In July 1998, Simonds Industries Inc. ("Simonds" or the "Company")
issued $100 million of 10-1/4% Senior Subordinated Notes due 2008 (the "Notes").
Proceeds from the Notes were primarily used for the repayment of indebtedness,
the acquisition of treasury stock, and the buyout of all outstanding stock
options and warrants. The Company concurrently entered into a new Senior Credit
Facility with a commercial lender that provides $30 million availability.
Borrowings under the Senior Credit Facility are available for permitted
acquisitions and working capital, including letters of credit. The Senior Credit
Facility is secured by first priority liens on all tangible and intangible
personal property and real property assets of the Company and its subsidiaries.
All of the foregoing transactions are herein referred to collectively as the
"Recapitalization." For additional information with respect to this
Recapitalization, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 13. Certain Relationships and
Related Transactions.

GENERAL

         Simonds is a leading global manufacturer and marketer of high quality
industrial cutting tools. With facilities in North America and Europe, the
Company sells its products into three end user markets: metal (51% of 1998 net
sales), wood (42%), and paper (7%). Management believes the Company holds a
number one, two or three share position in each of the markets it serves. See
Note 10 to the Consolidated Financial Statements included in Item 8 for
financial information with respect to the Company's industry segments and
foreign and domestic operations and export sales.

         The Company manufactures saw blades, files, knives and steel rule that,
when mounted on industrial machinery, cut, shape, bend and perforate metal, wood
and paper. In addition, the Company manufactures and distributes machinery,
including a complete line of filing room equipment used primarily in saw mills.
The Company's more than 25,000 products are used in a wide variety of industrial
applications. The products are consumable and require replacement many times per
year. More than 85% of the Company's net sales are derived from sales of
replacement products for use in the aftermarket.

PRODUCTS AND MARKET

         Simonds produces an array of world-class industrial cutting tools for a
wide variety of end user markets.


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         Metal Cutting Products

         The Company's metal cutting products primarily include metal band saw
blades and files for use in industrial/commercial applications. In addition, the
Company manufactures and markets other products for similar applications.

         BAND SAW BLADES. Management believes that Simonds is the second largest
manufacturer of metal band saw blades both globally and in North America.
Management believes the Company markets the world's most technologically
advanced and complete metal band saw blade product line with three broad
varieties distributed for portable and stationary band saws. The three varieties
include bi-metal, carbide tip and carbon blades sold under brand names including
EPIC(R), Si-Clone(R), Bundle Band(R), Si-Namic(R) and XL. These products are
used on a variety of OEM vertical and horizontal machines which are generally
used in cut off, profile/contour and friction cutting applications. In cut-off
applications, the Company's products cut steel and non-ferrous bars from long to
shorter lengths which are ultimately used in finished steel products. This type
of cutting is most often found in steel mills, steel warehouses and
manufacturing plants. Profile/contour cutting involves the Company's narrower
width blades, usually one-half inch or less, which are used to saw arcs or
curves in a wide variety of materials ranging from sheet metal to tool steel,
plastics and wood. Friction cutting is a method of removing seams and other size
overages created by metal casting using a silicon carbon steel bandsaw blade,
running at extremely high speeds.

         The Company's metal band products have a large number of industrial
applications. The largest consumers of these products include the automotive,
construction, home appliance and aerospace industries. Other important end user
markets, particularly in the United States, include specialty manufacturers,
maintenance shops, tool and die shops, machine shops, metal fabricators,
aluminum foundries and steel service centers. Purchasing criteria vary by end
user market but generally center around performance, durability and speed,
resulting in effective cost per cut. Management believes the Company provides
the highest quality products resulting in the most effective cost per cut.

         FILE PRODUCTS. Management believes that Simonds is the second largest
manufacturer of industrial file products in North America and the third largest
worldwide. The Company's files are precision hand tools made from forged,
hardened steel, and are generally used to debur and shape metals and wood. These
files are also used to sharpen many types of cutting blades. In general, the
Company sells its file products under various brand names, including Red
Tang(R), Black Maxi-Sharp(R), Ralston and SI. The Company believes the Simond's
name itself is widely recognized by industrial/commercial users as a leader in
the manufacture of high quality files.

         The Company's files are sold into two primary end user markets:
industrial and consumer. Industrial end users include machinists, millwrights,
welders, gunsmiths, plumbers, electricians, tool and die makers, watchmakers,
automobile body repair and manufacturing as well as many non-ferrous end user
applications such as filing copper, brass and aluminum. The consumer end user
market, a growing area for the Company, primarily consists of do-it-yourself
users. The Company manufactures a rapidly expanding line of files which are sold
to retail chains and specialty suppliers under private label brand names. In
addition, there are several niche commercial markets, such as the farrier and
formica markets, that are also important to the Company. Purchasing criteria
vary by 


                                     - 3 -
<PAGE>   4

end user market but generally center around product availability, design,
performance, durability, and price.

         Wood Cutting Products

         The Company believes it is the North American leader in the manufacture
of wood cutting products. The Company offers a broad array of wood cutting
tools, including bandsaw blades, wood cutting knives, bits and shanks for
inserted tooth saws, and large diameter circular saws. The Company's products
are generally used to cut and shape logs into dimensional lumber and chip lumber
for the pulp and paper industry. In addition, the Company manufactures and sells
a complete line of filing room equipment used primarily in saw mills.

         The Company markets its cutting and sawing tools and associated
products to the primary wood industry, including saw mills, pulp mills, wood
pallet producers and plywood, wafer board, and particle board plants. Purchasing
criteria vary by end user market but generally center around performance,
durability, and effective costs per cut.

         Paper Products

         The Company is a leading producer of precision steel rules used
primarily in the die making and packaging industries. Manufactured from hardened
and beveled steel, rule products are used to fold, cut and perforate paper,
cardboard and other packaging materials in addition to stamping and bending
various types and grades of sheet metal. The Company's paper products include
flat, rotary and perforated steel rule. Rule products purchasing criteria vary
by end user but generally center around performance, durability and cost.

MARKETING, SALES AND DISTRIBUTION

         The Company's products are marketed and sold worldwide through an
extensive distributor base serviced by its subsidiaries located in the United
States, Canada, Germany, Spain and the United Kingdom. More than 85% of the
Company's sales are through its extensive independent distributor base. Direct
end user shipments and agent channels are also employed by the Company as
dictated by private label programs, specific geographic markets, industry
practice and competition. The Company employs separate independent distributors
for its metal, wood and paper products in North America and internationally. The
Company's marketing and sales functions are divided geographically between North
America and the rest of the world.

         The Company's distribution effort is comprised of three major
components: (i) independent distributors, (ii) the Company's field sales force,
and (iii) the Company's customer service representatives.

         The Company's sales and distribution network encompasses approximately
3,800 metal products, 1,300 wood products and 200 paper products distributors in
North America and 1,300 metal products, 150 wood products and 200 paper products
distributors internationally. These distributors include mill supply houses, saw
shops, catalog houses, OEMs, welding suppliers and 


                                     - 4 -
<PAGE>   5

other manufacturers. The Company offers extensive training, service, and
technical support to its distributors.

         The Company's independent distributors are supported by 33 metal
product and 32 wood product representatives in North America and 21 and two,
respectively, internationally. The Company's field sales professionals provide
technical service, in-house formal training and on-going field training to both
distributors and end users.

         The Company's 23 customer service representatives in North America and
eight internationally are a critical element of the Company's distribution
network and service leadership. By responding to and processing many orders from
different points and providing tailored, real-time service, this group provides
a user-friendly interface with the network of distributors and end users. Each
distributor and field sales professional is assigned a customer service
representative who is trained in service techniques and product knowledge.

         Steel rule products are marketed through the direct sales force of the
Company's subsidiary, W. Notting Limited ("Notting"), independent specialized
distributors and Meyersco Limited, an independent representative agency. In
addition to this effort, the Company maintains a team of customer service
representatives to market the rule products to smaller accounts.

         The Company distributes private label products directly to retailers
and industrial products marketers through a dedicated private label sales
manager, supported by the Company's customer service organization.

         The Company distributes certain industrial products through its wholly
owned subsidiary, Strongridge Limited, ("Strongridge") located in Brampton,
Ontario, Canada. Since its acquisition in 1996, Strongridge has been operating
as a separate division with a separate identity in the industrial market place.
The primary focus of Strongridge has been to sell metal products to the small
and mid-size industrial and contractor distributors. Weld centers and warehouse
locations in Ontario, Canada, Texas, Ohio, California, North Carolina and
Georgia provide local service support to these distributors.

RAW MATERIALS

         The primary raw material for the Company's products is specialty steel.
The Company does not believe it is substantially dependent on any single
supplier. However, Theis Precision Steel Corporation provides approximately 50%
of the Company's domestic metal bandsaw steels. The Company's agreements with
its suppliers generally are for a period of one year, with prices, in some
instances, subject to adjustment.

         In order to take advantage of volume price discounts, the Company
pursues a "primary" sourcing strategy through which most of the Company's strip
steel is purchased. Designated "primary" sources of steel inventory are
supported by identified secondary sources of raw materials. Each production
facility is responsible for coordinating and executing the materials for their
respective inventory needs. A purchasing manager at each facility oversees these
purchases.


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<PAGE>   6

EMPLOYEES

         At January 2, 1999, the Company had 918 full-time employees. Of such
employees, 713 were located in the United States, 48 were located in Canada, 89
were located in Germany, 10 were located in Spain and 58 were located in the
United Kingdom. The Company considers its relations with these employees to be
good.

         The Fitchburg and Newcomerstown facilities employ members of the United
Steel Workers of America ("USWA") Union. Their contracts with the USWA expire in
2000 and 2001, respectively. The Company considers its relations with the unions
to be good.

COMPETITION

         The cutting tool market is highly fragmented with numerous
participants. The Company is a leader in the global cutting tools market and is
consistently among the top three competitors in metal cutting saw blade, file,
wood cutting product and rule product market. Competition is principally on the
basis of price, service, delivery, quality and technical expertise. The
Company's competitors vary in each of the market sectors it serves. There is no
one company which competes with the Company in all three of the market sectors
served by the Company and there is no one company which is dominant in any of
such market sectors. The Company believes that its reputation over its long
history for quality products, extensive sales and service network and its
in-depth product knowledge provide it with a competitive advantage in all of the
market sectors it services.

ENVIRONMENTAL MATTERS

         As with most industrial companies, the Company's facilities and
operations are required to comply with and are subject to a wide variety of
federal, state, local and foreign environment and worker health and safety laws,
regulations and ordinances, including those related to air emissions, wastewater
discharges and chemical and hazardous waste management and disposal
("Environmental Laws"). Certain of these Environmental Laws hold owners or
operators of land or businesses liable for their own and for previous owners' or
operators' releases of hazardous or toxic substances, materials or wastes,
pollutants or contaminants, including petroleum and petroleum products.
Compliance with Environmental Laws also may require the acquisition of permits
or other authorizations for certain activities and compliance with various
standards or procedural requirements. The nature of the Company's operations,
the long history of industrial uses at some of its current or former facilities,
and the operations of predecessor owners or operators of certain of the
businesses expose the Company to risk of liabilities or claims with respect to
environmental and worker health and safety matters. There can be no assurance
that material costs or liabilities will not be incurred in connection with such
liabilities or claims.

         In 1992, the Company's property in Ashburnham, Massachusetts, was
identified as having groundwater contamination. The Company has been indemnified
from such liability by prior owners and there is currently $2.7 million held in
escrow to cover such liability. Based on current estimates, management believes
that the amounts held in escrow will be sufficient to cover these environmental
liabilities, although there can be no assurance that such amounts will be
sufficient. In addition, environmental issues were previously identified at the
Company's Fitchburg, Massachusetts, and 


                                     - 6 -
<PAGE>   7

Newcomerstown, Ohio, properties which have since been remediated. However, the
state of Ohio has not yet issued its certification to that effect with respect
to the Newcomerstown site. The prior owner has agreed to indemnify the Company
for any post-closure care expenses at the Newcomerstown site.

ITEM 2.  PROPERTIES.

         The following table provides information on the Company's facilities
and the products produced at these locations.

<TABLE>
<CAPTION>
                                   PRODUCT                                       OWNED/        SIZE
       LOCATION                    GROUP         PRODUCT TYPES                   LEASED        (SQ. FT)
       ------------------------------------------------------------------------------------------------
<S>                                <C>           <C>                             <C>           <C>
       FITCHBURG, MA               Metal         * Weld Edged Bandsaw  Blades    Owned         401,000
                                                 * Carbide Tipped Bandsaw
                                                    Blades
                                                 * Carbon Bandsaw Blades

                                   Wood          * Bits & Shanks
                                                 * Red Streak(R) Bandsaw Blade

                                   Paper         * Perforating
                                                 * Flat
                                                 * Rotary

       BIG RAPIDS, MI              Wood          * Circular Saws                 Owned         127,500
                                                 * Knives
                                                 * Inserted Tooth Saws

       NEWCOMERSTOWN, OH           Metal         * Files                         Owned         208,000

       SPRINGFIELD, OR             Wood          * Wide Bandsaw Blades           Owned         28,400

       PORTLAND,  OR               Wood          * Filing Room Equipment         Owned         40,000

       RIVERSIDE, CA               Paper         * Perforating                   Leased        19,200

       TOTTENHAM, UK               Paper         * Flat                          Owned         30,000
                                                 * Perforating

       BARCELONA, SPAIN            Paper         * Rule                          Leased        4,040

       SPANGENBERG, GERMANY        Metal         * Carbon Bandsaw Blades         Owned         57,000
                                                 * Bi-Metal Bandsaw Blades
                                                 * Hacksaw Blades
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is party to a lawsuit that was litigated in China involving
a Chinese joint venture established by the Company's predecessor. Management
believes the lawsuit to be without merit. In addition, the Company is a party to
other lawsuits arising in the normal course of business. In the opinion of
management, the final resolutions of these lawsuits are not expected to
materially affect the financial condition or results of operations of the
Company.



                                     - 7 -
<PAGE>   8

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.


                                     - 8 -
<PAGE>   9

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         There is no established public trading market for the Company's common
stock. The Company's voting common stock is held by approximately 40 holders and
its non-voting common stock is held by approximately 2 holders.

         The Company has not paid any dividends on its capital stock since its
inception. The Company currently intends to retain future earnings, if any, for
use in the operation and expansion of its business. The Company does not
anticipate paying any cash dividends in the foreseeable future. Both the
Indenture pursuant to which the Notes were issued (the "Indenture") and the
Senior Credit Facility restrict the ability of the Company and certain of its
subsidiaries to pay dividends.

ITEM 6.  SELECTED FINANCIAL DATA.

         The selected consolidated operating and balance sheet data for and as
of the years ended December 28, 1996, December 27, 1997 and January 2, 1999 are
derived from the Company's audited consolidated financial statements included
elsewhere herein. The selected consolidated operating and balance sheet data as
of and for the year ended December 31, 1994, the five months ended May 26, 1995,
and the seven months ended December 30, 1995 are derived from the Predecessor's
or the Company's audited consolidated financial statements, as applicable. The
following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto (see Item 8.
Financial Statements and Supplementary Data) and the information contained in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.


                                     - 9 -
<PAGE>   10

<TABLE>
<CAPTION>
                                                                                 (In Thousands)
                                                          Predecessor                              Company
                                                     ---------------------      ------------------------------------------------
                                                                                         
                                                      Year       5 Months       7 Months        Year        Year          Year
                                                      Ended        Ended          Ended        Ended        Ended        Ended
                                                      1994        5/26/95       12/30/95        1996        1997          1998
                                                     -------     ---------      --------      -------     --------      --------
<S>                                                  <C>           <C>           <C>          <C>         <C>           <C>     
OPERATING DATA:                                                                          
         Net sales                                   $95,284       $42,212       $58,932      $98,661     $114,182      $126,296
         Cost of goods sold                           68,537        30,102        41,353       69,828       78,798        86,750
                                                     --------    ---------       -------      -------     --------      --------
                  Gross profit                        26,747        12,110        17,579       28,833       35,384        39,546
         Selling, general and administrative expense  17,028         7,418        10,176       17,135       21,149        24,230
         Special compensation expense                    ---         7,920           ---          ---          ---         4,541
                                                     -------     ---------       -------      -------     --------      --------
                  Operating income (loss)              9,719        (3,228)        7,403       11,698       14,235        10,775
         Interest expense                              1,623           650         2,880        4,399        4,963         7,900
         Other expense (income) net                    (432)          (276)         (208)         245          520           554
                                                     -------     ---------       -------      -------     --------      --------
                  Income (loss) before income taxes    8,528        (3,602)        4,731        7,054        8,752         2,321
         Income taxes                                  3,491        (1,387)        1,856        3,071        3,751           955
                                                     -------     ---------       -------      -------     --------      --------
                  Net income (loss) before                                               
                  extraordinary item                  $5,037      $ (2,215)      $ 2,875       $3,983     $  5,001      $  1,366
         Extraordinary item-Write-off of deferred                                        
         financing cost related to refinanced                                            
         indebtedness, net of tax benefit of $374         --            --            --           --           --          (529)
                                                     -------      --------       -------      -------     --------      --------
                  Net income (loss)                  $ 5,037      $ (2,215)      $ 2,875      $ 3,983     $  5,001          $837
                                                     =======      ========       =======      =======     ========      ========

OTHER DATA:
         EBITDA from operations(1)                   $12,964        $6,109       $ 8,673      $14,026     $ 17,299      $ 19,187
         Depreciation and amortization                 3,307         1,498         1,500        2,712        3,459         5,176
         Capital expenditures                          2,377           745         1,895        3,638        3,708         4,348
         Ratio of income to fixed charges(2)            5.7x            --          2.6x         2.5x         2.7x          1.3x

BALANCE SHEET DATA:
         Working capital                             $17,753       $16,033       $21,786      $22,209     $ 21,651       $35,796
         Total assets                                 56,931        62,413        77,728       82,620       95,343       118,239
         Total debt                                   16,278        14,899        46,809       46,175       51,692       104,010
         Shareholders' equity (deficit)               24,986        24,608        13,185       17,198       21,615       (12,680)
</TABLE>

(1)      EBITDA is defined as operating income plus depreciation, amortization
         (other than amortization of debt discount and deferred financing costs)
         and special compensation expense. The Company believes that EBITDA
         provides additional information for determining its ability to meet
         debt service requirements. EBITDA does not represent and should not be
         considered as an alternative to net income or cash flow from operations
         as determined by generally accepted accounting principles, and EBITDA
         does not necessarily indicate whether cash flow will be sufficient to
         meet cash requirements.

(2)      For purposes of calculating this ratio, "income" consists of income
         before provision for income taxes and fixed charges. "Fixed charges"
         consists of interest expense and the estimated interest portion of
         rental payments on operating leases. Such income was insufficient to
         cover fixed charges by approximately $2,100 for the five months ended
         May 26, 1995.




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

                             (Dollars in Thousands)

         The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto, as well as the selected
financial information, all appearing elsewhere herein.

GENERAL

         Simonds has been in continuous operation selling cutting tools for over
166 years. Since 1995, the Company has completed four acquisitions, including
Strongridge in October 1996, the bit and shank product line of Pacific Hoe
Company in January 1997, Armstrong Manufacturing 


                                     - 10 -
<PAGE>   11

Company ("Armstrong") in August 1997, and Notting on May 5, 1998. The Company's
results of operations for the periods 1996-1998 reflect the impact of all of the
above mentioned acquisitions. In particular, the Company benefited from three
months in 1996 and a full year in 1997 of operations of Strongridge and five
months of operations of Armstrong in 1997 and a full year of 1998, and eight 
months of Notting operations in 1998.

RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                           Percentage of Net Sales
                                                          ------------------------
                                                             Year Ended December
                                                          ------------------------
                                                           1996     1997      1998
                                                          -----    -----     -----
<S>                                                       <C>      <C>       <C>   

Net sales                                                 100.0%   100.0%    100.0%
Cost of goods sold                                         70.8     69.0      68.7
                                                          -----    -----     -----

           Gross profit                                    29.2     31.0      31.3
Selling, general and administrative expense                17.4     18.5      22.8
                                                          -----    -----     -----

           Operating income                                11.8     12.5       8.5

Interest expense                                            4.5      4.3       6.3
Other expense, net                                          0.2      0.5       0.4
                                                          -----    -----     -----
         Income before income taxes                         7.1      7.7       1.8

Income taxes                                                3.1      3.3       0.7
                                                          -----    -----     -----

           Net income                                       4.0      4.4       1.1
Extraordinary item-
    Write-off of deferred financing cost related to
      refinanced indebtedness, net of tax benefit
      of $374                                               0.0      0.0      (0.4)
                                                          -----    -----     -----

         Net Income                                         4.0%     4.4%      0.7%
                                                          =====    =====     =====
</TABLE>

Year Ended January 2, 1999 Compared To Year Ended December 27, 1997

         Net Sales: Net sales for the year ended January 2, 1999 were $126,296,
or a 10.6% increase from 1997 net sales of $114,182. The increase in net sales
was primarily attributable to the inclusion of Notting and Armstrong. U.S.
operations were up 2.7%, which was mostly offset by lower sales from Canadian
operations due in large part to a significantly weaker Canadian dollar in 1998.

         Gross Profit Margin: The cost of sales increased by $7,952 as a result
of higher sales volume. Gross profit margin improved .3% to 31.3% in 1998
primarily as a result of favorable raw material prices for Red Streak(R) bands,
carbide tips, and the majority of the Company's knife steel along with higher
production levels without significant increases in fixed expenses.

         Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales were 22.8% for 1998 and 18.5%
in 1997. The higher level of expenses in 1998 as compared to 1997 was primarily
due to the addition of Armstrong and Notting in 1998 and a one time compensation
charge in July 1998 of $4,541 from the repurchase of options relating to the
Recapitalization.


                                     - 11 -
<PAGE>   12

         Operating Income: As a result of the foregoing, operating income
decreased $3,460 in 1998 from the prior year.

         Interest Expense: Interest expense was higher in 1998 due to the
Recapitalization of the Company in July. The Recapitalization constituted
retiring most of the Company's debt and replacing it with $100,000 of notes
bearing an annual interest rate of 10.25%.

         Income Taxes: The Company's effective tax rate decreased to 41.2% for
1998 from 42.9% in 1997. The effective tax rates differed from the statutory
U.S. rate primarily due to state income tax provisions and nondeductible
amortization.

         Extraordinary Item: As part of the debt retirement in 1998, deferred
financing costs of $903 were written off with a related tax benefit of $374,
which resulted in an extraordinary loss of $529.

         Net Income: As a result of the aforementioned factors, net income
decreased 83.3% to $837 for 1998 from $5,001 for 1997.

Year Ended December 27, 1997 Compared To Year Ended December 28, 1996

         Net Sales: Net sales increased 15.7% to $114,182 for 1997 from $98,661
for 1996. Of this increase, $3,457 resulted from the contribution of five months
of Armstrong and $4,647 from a full year of results of Strongridge in 1997 as
compared to three months in 1996. In addition, the Company benefited from the
acquisition of the bit and shank business from Pacific Hoe Corporation. The
remaining increase in net sales was due to increased demand from the wood and
metal markets in the United States and Canada, which was reflected in increased
sales of levelers and tensioners, Red Streak(R) and waferized knives as well as
increased sales of metal band saws and files.

         Gross Profit Margin: Gross profit as a percentage of net sales
increased to 31.0% in 1997 compared to 29.2% in 1996. This increase was
primarily due to lower costs of raw materials, other manufacturing efficiencies
and the addition of higher gross profit margin products at Armstrong.

         Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased as a percent of net sales to 18.5% in 1997
from 17.4% in 1996. This is partly due to additional bonus accruals,
commissions, and marketing incentive plans resulting from the Company exceeding
incentive targets. In addition, the increase resulted from the inclusion of
Strongridge and Armstrong, which have higher percentages of selling, general and
administrative expenses to net sales than the Company.

         Operating Income: As a result of the aforementioned factors, operating
income increased 21.7% to $14,235 or 12.5% of net sales in 1997 from $11,698 or
11.9% in 1996.

         Interest Expense: Interest expense increased $4,963 in 1997 from $4,399
in 1996 as a result of borrowings to finance acquisitions.

         Income Taxes: The Company's effective tax rate decreased to 42.9% in
1997 from 43.5% in 1996. The income tax rates principally differed from the
statutory U.S. rate of 34% as a result of 


                                     - 12 -
<PAGE>   13

state income tax provisions, nondeductible amortization expense (for tax
purposes), the change in tax valuation reserves and the effect of foreign income
tax on foreign source income.

         Net Income: As a result of the foregoing, net income increased 25.6% to
$5,001 in 1997 from $3,983 in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal capital requirements are to fund working
capital needs, meet required debt payments, and to complete planned maintenance
and manufacturing improvements.

         During 1996, 1997 and 1998, net cash provided by operations was $6,665,
$13,046 and $9,113, respectively. During 1996, 1997 and 1998, net cash used in
investing activities was $4,788, $17,304 and $9,747, respectively, consisting
primarily of capital expenditures and acquisitions. In 1997, approximately
$13,700 was used for the acquisitions of Armstrong and the bit and shank product
line of Pacific Hoe Company. In 1998, roughly $5,500 was used to acquire
Notting, a manufacturer of rule products. During 1996, 1997 and 1998, net cash
provided (used) by financing activities was ($2,526), $4,299 and $8,978,
respectively.

         The Company's Senior Credit Facility provides a $30,000 line of credit
to meet acquisition and expansion needs as well as seasonal working capital and
general corporate requirements. This credit line is undrawn as of January 2,
1999. Borrowings under the Senior Credit Facility bear interest at a fluctuating
rate based on, at the Company's option, either the lender's alternate base rate,
as defined or LIBOR plus the applicable margin. A commitment fee calculated
based upon the unused portion of the revolving credit facility is payable
quarterly in arrears.

         The Company believes that future cash flows from operations, together
with the borrowings available under the Senior Credit Facility will provide the
Company with sufficient liquidity and financial resources to finance its growth
and satisfy its working capital requirements for the foreseeable future. The
Company may not be able to generate sufficient cash flows from operations to pay
the entire principal amount of the Notes when due in 2008. In such event, the
Company would be required to refinance the Notes. However, there can be no
assurance that the Company will be able to obtain financing on acceptable terms.

SEASONALITY

         Historically, the Company's business has not been subject to
seasonality in any material respect. The Company's third quarter, which includes
July through September, is typically lower due to customers' and plant vacation
shutdowns.

INFLATION

         Certain of the Company's expenses, such as wages and benefits,
occupancy costs and equipment repair and replacement, are subject to normal
inflationary pressures. Although the Company to date has been able to offset
inflationary cost increases through operating efficiencies, 


                                     - 13 -
<PAGE>   14

there can be no assurance that the Company will be able to offset any future
inflationary cost increases through similar efficiencies.


TRANSITION TO THE EURO

         Although the Euro was successfully introduced on January 1, 1999, the
legacy currencies of those countries participating will continue to be used as
legal tender through January 1, 2002. Thereafter, the legacy currencies will be
cancelled and Euro bills and coins will be used in the 11 participating
countries.

         Transition to the Euro creates a number of issues for the Company.
Business issues that must be addressed include product pricing policies and
ensuring the continuity of business and financial contracts. Finance and
accounting issues include the conversion of accounting systems, statutory
records, tax books and payroll systems to the Euro, as well as conversion of
bank accounts and other treasury and cash management activities.

         The Company continues to address these transition issues and does not
expect the transition to the Euro to have a material effect on the results of
operations or financial condition of the Company.


YEAR 2000

         The Company has a formal Year 2000 Compliance Plan which it began to
implement in 1996 to ensure that its hardware, operating systems and software
will function properly with respect to dates in the year 2000 and thereafter.


         The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company has initiated formal communications
with all of its significant suppliers and large customers to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 issues. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected. The Company is in the process of preparing appropriate
contingency plans in the event that a significant internal or external exposure
is identified.

FORWARD LOOKING STATEMENTS; RISKS AND UNCERTAINTIES

         Statements contained in this Form 10-K that are not historical facts
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results for fiscal 1999 and beyond to
differ materially from 


                                     - 14 -
<PAGE>   15

those expressed in any forward-looking statements made by or on behalf of the
Company. Such statements contain a number of risks and uncertainties including,
but not limited to, the Company's substantial leverage, the restrictions imposed
by the terms of its indebtedness, the subordination provisions of the Notes and
the related guarantees, the risks of international operations, the Company's
dependence on specialty steels, its reliance on limited sources of supply and
certain industries, its acquisition strategy and environmental matters. The
Company cannot assure that it will be able to anticipate or respond timely to
changes which could adversely affect its operating results in one or more fiscal
quarters. Results of operations in any past period should not be considered
indicative of results to be expected in future periods.

         The above risks and uncertainties inherent in the Company's business
are set forth in detail below. However, this section does not discuss all
possible risks and uncertainties to which the Company is subject, nor can it be
assumed necessarily that there are no other risks and uncertainties which may be
more significant to the Company.


         SUBSTANTIAL LEVERAGE

         As of January 2, 1999, the Company had $104,010 of consolidated
indebtedness and consolidated stockholders' deficit of $12,680.

         The Company's indebtedness has several important consequences
including, but not limited to, the following: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service
requirements on its indebtedness and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, refinancing other
indebtedness or general corporate purposes may be impaired; (iii) the Company's
leverage may increase its vulnerability to economic downturns and limit its
ability to withstand competitive pressures; and (iv) the Company's ability to
capitalize on significant business opportunities may be limited.

         The Company's ability to make payments with respect to the Notes and to
satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. The Company believes, based on current circumstances, that the
Company's cash flow, together with available borrowings under the Senior Credit
Facility, will be sufficient to permit the Company to meet its operating
expenses and to service its debt requirements as they become due. Significant
assumptions underlie this belief, including, among other things, that the
Company will succeed in implementing its business strategy and there will be no
material adverse developments in the business, liquidity or capital requirements
of the Company. If the Company is unable to service its indebtedness, it will be
forced to adopt an alternative strategy that may include actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all.


                                     - 15 -
<PAGE>   16

         RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS

         The Indenture restricts the ability of the Company and certain of its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments or investments, consummate
certain asset sales, enter into certain transactions with affiliates, incur
liens, or merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of their assets.
In addition, the Senior Credit Facility contains other and more restrictive
covenants. The Senior Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests may be affected by events beyond its
control, and there can be no assurance that the Company will meet such tests. A
breach of any of these covenants could result in an event of default under the
Senior Credit Facility. In an event of default under the Senior Credit Facility,
the lenders thereunder could elect to declare all amounts borrowed, together
with accrued interest, to be immediately due and payable and the lenders under
the Senior Credit Facility could terminate all commitments thereunder. If such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay such indebtedness and the Notes.

         SUBORDINATION OF NOTES AND GUARANTEES

         The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes is subordinated to the prior payment in
full of all existing and future Senior Debt of the Company, including all
amounts owing or guaranteed under the Senior Credit Facility. The Guarantees of
the Notes by certain subsidiaries are similarly subordinated to Guarantor Senior
Debt. Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company or a Guarantor,
assets of the Company or such Guarantor will be available to pay obligations on
the Notes or Guarantees only after all Senior Debt of the Company or Guarantor
Senior Debt of such Guarantor, as applicable, has been paid in full, and there
can be no assurance that there will be sufficient assets to pay amounts due on
any or all of the Notes. In addition, neither the Company nor any Guarantor may
pay principal, premium, interest or other amounts on account of the Notes or any
Guarantee in the event of a payment default (or, with respect to a non-payment
default on Designated Senior Debt (as defined), for a specified period) in
respect of Senior Debt. As of January 2, 1999, the Company and the Guarantors
had $100,000 of Senior Debt and Guarantor Senior Debt outstanding. In addition,
the Notes are effectively subordinated in right of payment to all liabilities,
including indebtedness, of subsidiaries of the Company which are not Guarantors.
As of January 2, 1999, such subsidiaries had approximately $23,100 of total
liabilities, including approximately $4,000 of indebtedness.

         RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

         The Company operates manufacturing, sales and service facilities in
Germany, the United Kingdom, Spain and Canada. In 1998, sales of its products in
foreign countries accounted for approximately 34% of the Company's net sales. As
a result, the Company is subject to risks associated with operation in foreign
countries, including fluctuations in currency exchange rates, imposition of
limitations on conversion of foreign currencies into dollars or remittance of
dividends and other payments by foreign subsidiaries, imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries, hyperinflation in certain foreign countries 


                                     - 16 -
<PAGE>   17

and imposition or increase of investment, subjection to certain foreign labor
laws and other restrictions by foreign governments. Fluctuations in currency
exchange rates have had an impact on the Company's operations in the past, and
historically the Company has hedged some of its foreign currency risks. No
assurance can be given that the risks associated with operating in foreign
countries will not have a material adverse effect on the Company in the future.

         DEPENDENCE ON SPECIALTY STEELS; RELIANCE ON LIMITED SOURCES OF SUPPLY

         The principal raw material used by the Company is specialty steels. The
Company relies on limited sources for its supply of specialty steels. The loss
of any such source, or any major disruption in such source's business or failure
by it to meet the Company's needs on a timely basis could cause shortages in the
Company's supply of specialty steels that could have a material adverse effect
on the Company's business and financial condition.

         The steel industry is highly cyclical in nature and steel prices are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, labor costs, molybdenum and chrome costs,
competition, import duties, tariffs and currency exchange rates. If the Company
is unable to pass some or all of future steel price increases to its customers,
the Company could be materially and adversely affected.


         RELIANCE ON METAL PROCESSING AND WOOD INDUSTRIES

         Demand for the Company's metal and wood products generally follows
movements in the metal processing and primary wood industries. The metal
processing and primary wood industries are both cyclical in nature and are
affected by global and national economic conditions. A material change in either
industry or general economic conditions could have a material adverse effect on
the Company's business and financial condition.

         ACQUISITION STRATEGY

         The Company has pursued and intends to continue to pursue acquisitions
as an important component of its strategy. No assurance can be given that in the
future other suitable acquisition candidates can be acquired on acceptable terms
or that future acquisitions, if completed, will be successful. Future
acquisitions by the Company could result in the incurrence of additional debt
and contingent liabilities which could materially adversely affect the Company's
business, operating results and financial condition. The success of any
completed acquisition will depend on the Company's ability to integrate
effectively the acquired business into the Company's. The process of integrating
acquired businesses may involve numerous risks, including difficulties in the
assimilation of operations and products, the diversion of management's attention
from other business concerns and the potential loss of key employees of the
acquired businesses.

         ENVIRONMENTAL MATTERS

         The Company's operations are subject to federal, state, local and
foreign laws and regulations relating to the storage, handling, generation,
treatment, emission, release, discharge and disposal of certain substances and
waste materials. While the Company believes that it is currently 


                                     - 17 -
<PAGE>   18

in material compliance with those laws and regulations, there can be no
assurance that the Company will not incur significant costs to remediate
violations thereof or to comply with changes in existing laws and regulations
(or the enforcement thereof). Such costs could have a material adverse effect on
the Company's business, financial condition or results of operations.

         CHANGE OF CONTROL

         Upon the occurrence of a Change of Control (as defined in the
Indenture), each holder of Notes will have the right to require the Company to
repurchase all or a portion of such holder's Notes at a price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. However, the Company's ability to
repurchase the Notes upon a Change of Control may be limited by the terms of
then existing contractual obligations of the Company and its subsidiaries. In
addition, the occurrence of a Change of Control will constitute an Event of
Default under the Senior Credit Facility. The Senior Credit Facility will
prohibit the purchase of the Notes unless and until such time as the
indebtedness under the Senior Credit Facility is paid in full. There can be no
assurance that the Company will have the financial resources to repay amounts
due under the Senior Credit Facility, or to repurchase or redeem the Notes. If
the Company fails to repurchase all of the Notes tendered for purchase upon the
occurrence of a Change of Control, such failure will constitute an Event of
Default under the Indenture.


         FRAUDULENT CONVEYANCE CONSIDERATIONS

         Under the applicable provisions of the federal bankruptcy law or
comparable provisions of state fraudulent transfer law, if the Company or any
Guarantor, at the time it issues the Notes or incurs a Guarantee, as the case
may be, (a)(i) was or is insolvent or rendered insolvent by reason of such
issuance or incurrence, as the case may be, (ii) was or is engaged in a business
or transaction for which the assets remaining with the Company or such
Guarantor, as the case may be, constituted unreasonably small capital or (iii)
intended or intends to incur, or believed or believes that it would incur, debt
beyond its ability to pay such debts as they mature and (b) received or receives
less than reasonably equivalent value or fair consideration, the obligations of
the Company under the Notes or such Guarantor under its Guarantee, as the case
may be, could be avoided or claims in respect of the Notes or such Guarantee, as
the case may be, could be subordinated to all other debts of the Company or such
Guarantor, as the case may be. Among other things, a legal challenge of the
Notes or a Guarantee, as the case may be, on fraudulent conveyance grounds may
focus on the benefits, if any, realized by the Company or such Guarantor, as the
case may be, as a result of the issuance of the Notes or the incurrence of a
Guarantee, as the case may be. To the extent that the Notes or any Guarantee was
a fraudulent conveyance or held unenforceable for any other reason, the holders
of the Notes would cease to have any claim in respect of the Company, in the
case of the Notes, or in respect of a Guarantor whose Guarantee was avoided or
held unenforceable. In such event, the claims of the holders of the Notes would
be subject to the prior payment of all liabilities of the Company, in the case
of the Notes, or the Guarantor whose Guarantee was avoided. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portion of the Notes or a Guarantee.


                                     - 18 -
<PAGE>   19

         Each Guarantor has agreed, jointly and severally with the other
Guarantors, to contribute to the obligation of any Guarantor under a Guarantee
of the Notes. Further, the Guarantee of each Guarantor provides that it is
limited to an amount that would not render the Guarantor thereunder insolvent.
The Company believes that it and the Guarantors received equivalent value at the
time the indebtedness was incurred under the Notes and the Guarantees. In
addition, the Company believes that neither it nor any of the Guarantors was or
will be insolvent or was or will be engaged in a business or transaction for
which its remaining assets constitute unreasonably small capital and that
neither it nor any of the Guarantors intended or will intend to incur debts
beyond its ability to pay such debts as they mature. Since each of the
components of the question of whether the Notes or a Guarantee is a fraudulent
conveyance is inherently fact based and fact specific, there can be no assurance
that a court passing on such questions would agree with the Company.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company is exposed to market risk from changes in foreign currency
exchange rates, as the Company entered into foreign forward exchange contracts
effective for fiscal year 1999. The Company did not enter into these contracts
for trading purposes. They were entered into to manage and reduce the impact of
changes in foreign currency exchange rates although a portion of these contracts
does not qualify for hedge accounting. Accordingly, the contracts will be marked
to market at the end of each accounting period with a resulting gain or loss.
(See Note 12 to the Consolidated Financial Statements.)



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial information required by Item 8 is included elsewhere in this
Report (see Part IV, Item 14).



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE.

         Not applicable.


                                     - 19 -
<PAGE>   20

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The following table sets forth certain information with respect to the
directors and executive officers of the Company. Directors serve for a term of
one year or until their successors are elected and qualified.
Officers serve at the discretion of the Board of Directors.

<TABLE>
<CAPTION>
NAME                              AGE              POSITION
----------------------------      -------------    ---------------------------------------------------------------

<S>                               <C>              <C>                                                            
Ross B. George                    66               President, Chief Executive Officer and Director

Joseph L. Sylvia                  53               Executive Vice President, Chief Financial Officer and Director

Robert Deedrick                   56               Vice President - Manufacturing

Roland Richard                    57               Vice President - Sales and Marketing, Wood Products

James Palmer                      57               Vice President - Sales and Marketing, Metal Products

Harry Rogers                      57               Vice President - International and Rule Products

Peter Hopper                      48               Vice President - Product Development

Ron Owens                         54               Senior Vice President - Manufacturing

Habib Y. Gorgi                    42               Director

Bernard Y. Buonanno               32               Director
</TABLE>


         Ross George: Mr. George has been President, Chief Operating Officer and
member of the Board of Directors since 1988 and was made Chief Executive Officer
in 1995. Mr. George previously served as acting President and Vice President of
Operations at Simonds Cutting Tools - Division of Household Manufacturing. Mr.
George joined Simonds in 1983. From 1980 to 1983, he was Vice President and
General Manager of the New England Carbide division of Wallace Murray Corp.
Prior to 1980 he held various positions at Johnson & Johnson and Texas
Instruments.

         Joseph Sylvia: Mr. Sylvia has been Chief Financial Officer since 1988
and is a member of the Board of Directors of Simonds. He was promoted to
Executive Vice President in 1995. Mr. Sylvia formerly held the position of
Division Controller of Simonds Cutting Tools - Division of Household
Manufacturing. He joined Simonds in 1970 as Senior Programmer Analyst and held
various management positions in Information Services from 1972 to 1982. From
1982 to 1987, Mr. Sylvia was Director of Finance and Information Services.

         Robert Deedrick: Mr. Deedrick has been Vice President of Manufacturing
since 1991. He managed the Fitchburg plant from 1984 to 1991 and the
Newcomerstown operations form 1981 to 


                                     - 20 -
<PAGE>   21

1984. Mr. Deedrick joined Simonds in 1973 as an Engineer, progressing through
Production and Inventory Control and Production Management positions.

         Roland Richard: Mr. Richard has been Vice President of Sales and
Marketing - Wood Products since 1991. He previously held the position of
Director of Corporate Development from 1989 to 1991 and was Corporate Sales
Manager of the acquired Michigan Knife Company from 1987 to 1989. Mr. Richard
originally joined Simonds in 1961, progressing through sales, sales management,
product management, and became a Strategic Business Unit Manager in 1980.

         James Palmer: Mr. Palmer has been Vice President of Sales and Marketing
for Metal Products since 1995. He was Vice President of Sales of Milford
Products for 10 years. Mr. Palmer joined Milford Products in 1982. Prior to
1982, Mr. Palmer held various sales and management positions with a variety of
companies in the machine tool and cutting tool industries over a period of
approximately 16 years.

         Harry Rogers: Mr. Rogers has been Vice President of International and
Rule Products since 1990. He previously held the position of General Sales
Manager. Since joining Simonds in 1971 as a salesman, he has held key positions
in sales and marketing management.

         Peter Hopper: Mr. Hopper has been Vice President of Product Development
since 1996. He has held positions of increasing responsibility with Crucible
Specialty Metals from 1976 to 1983. He held research, metallurgy and quality
control positions with Milford Products Corporation from 1983 to 1991. From 1991
to 1996 he served in various product development and design positions with
Milwaukee Electric Tool Corporation.

         Ron Owens: Mr. Owens joined Simonds in 1998 as Vice President of
Business Development and was promoted to Senior Vice President of Manufacturing
in November of 1998. In 1990 Mr. Owens formed "SAWELL, INC.", a manufacturing
business that produced jigsaw and recip blades for their own brands, as well as
private label product for all major brands. Black and Decker purchased "SAWELL,
INC." in late 1994 and Mr. Owens was President of the subsidiary until October
1996. Mr. Owens was Vice President of Operations at Allen Industrial from 1965
to 1978; Executive Vice President of Mid State Industrial from 1978 to 1982; and
owned a sales rep agency in Tampa, Florida prior to starting "SAWELL, INC."

         Habib Gorgi: Mr. Gorgi has been a member of the Board of Directors
since 1995. Since 1995, Mr. Gorgi has been President of each of (i) Fleet
Ventures Resources, Inc., (ii) Fleet Growth Resources II, Inc., a general
partner of Fleet Equity Partners VI, L.P., and (iii) Silverado III, Corp., the
general partner of Silverado III, L.P., the general partner of Chisholm Partners
III, L.P. Mr. Gorgi is also managing general partner of Kennedy Plaza Partners.
Since 1986, Mr. Gorgi has held various management positions with Fleet Equity
Partners and its affiliates. Prior to 1986, he had worked in the Mergers,
Acquisitions and Leveraged Buyouts Group of BankAmerica. Mr. Gorgi serves on the
Board of Directors of several Fleet Equity Partners' portfolio companies.

         Bernard Buonanno: Mr. Buonanno has been a member of the Board of
Directors since 1995. Since 1998, Mr. Buonanno has been Senior Vice President of
each of (i) Fleet Venture Resources, Inc., (ii) Fleet Growth Resources, Inc., a
general partner of Fleet Equity Partners VI, L.P., and (iii) 


                                     - 21 -
<PAGE>   22

Silverado III, Corp., the general partner of Silverado III, L.P., the general
partner of Chisholm Partners III, L.P. Mr. Buonanno is also general partner of
Kennedy Plaza Partners. Mr. Buonanno has held various positions with Fleet
Equity Partners and its affiliates since 1993. Prior to joining Fleet Equity
Partners in 1993, Mr. Buonanno worked in the Mergers and Acquisitions Department
of Prudential-Bache Capital Funding. Mr. Buonanno serves on the Board of
Directors of several Fleet Equity Partners' portfolio companies.

ITEM 11.  EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

         The following table sets forth all cash compensation earned in 1998 and
1997 by the Company's Chief Executive Officer and each of the four most highly
compensated executive officers whose remuneration exceeded $100,000 (the "Named
Executives").

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                    LONG
                                                                                                    TERM
                                                             ANNUAL COMPENSATION                COMPENSATION
                                                     ----------------------------------  -------------------------

                                                                                         SECURITIES
                                                                                            UNDER           ALL
                                                                                            -LYING         OTHER
                                                                                           OPTIONS/       COMPEN-
                                              YEAR    SALARY       BONUS       OTHER(1)      SARS        SATION(2)
                                              ----   --------     --------     --------  -----------     ---------
<S>                                           <C>    <C>                <C>     <C>         <C>           <C>     


Ross George                                   1998   $272,580           --      $28,774     351.13        $753,256
Chief Executive Officer, President            1997   $262,080     $262,080      $20,895         --        $ 17,102
                                             
Joseph Sylvia                                 1998   $185,820           --      $30,026     222.45        $493,120
Executive Vice President, CFO                 1997   $178,605     $142,884      $16,958         --        $ 11,324
                                             
Robert Deedrick                               1998   $130,598           --      $14,841                   $133,118
Vice President -                              1997   $126,200     $ 75,720      $ 8,206                   $  8,683
Manufacturing                                                                  
                                             
James Palmer                                  1998   $129,260     $  1,759      $12,809                   $347,834
Vice President - Sales, Metal Products        1997   $120,935     $ 47,013      $ 7,553                   $  8,829
                                                         
                                                                               
Roland Richard                                1998   $121,518     $ 13,853      $12,809                   $132,863
Vice President - Sales & Marketing,           1997   $116,844     $ 70,106      $ 7,617                   $  8,667
Wood Products                                        
</TABLE>

(1)      Consists of amounts reimbursed during the year for the payment of taxes
         relating to company vehicles, tax preparation and club memberships.

(2)      Consists of the Company's contributions to (1) the 401(k) Plan in 1997
         (Messrs. George and Sylvia, $4,750; Mr. Deedrick, $3,786; Mr. Palmer,
         $3,628; and Mr. Richard, $3,505) and 1998 ($5,000 each for all
         executives listed above); (2) the Profit Sharing Plan in 1997 (Messrs.
         George and Sylvia, $4,800; Mr. Deedrick, $3,786; Mr. Palmer, $3,628;
         and Mr. Richard, $3,505) and 1998 ($4,800 each for all executives
         listed above); (3) group insurance payments in 1997 (Mr. George,
         $7,552; Mr. Sylvia, $1,774; Mr. Deedrick, $1,111; Mr. Palmer, $1,573;
         and Mr. Richard, $1,657) and 1998 (Mr. George, $23,583; Mr. Sylvia,
         $3,399; Mr. Deedrick, $3,339; Mr. Palmer, $2,945; and Mr. Richard,
         $3,084);and (4) buyout of options in 1998 (Mr. George $719,873; Mr.
         Sylvia $479,921; Mr. Deedrick $119,979; Mr. Palmer $335,089; and Mr.
         Richard $119,979).


                                     - 22 -
<PAGE>   23

Options

         The following table sets forth certain information relating to option
grants in the year ended January 2, 1999 to the individuals named in the Summary
Compensation Table above.

<TABLE>
<CAPTION>
                                                         Option/SAR Grants in Last Fiscal Year
                                                                              Individual Grants
                                      ------------------------------------------------------------------------------
                                        Number of        
                                       Securities         % of Total                                                
                                       Underlying        Options/SARs      Exercise                                 
                                      Options/SARs        Granted to       or Base                        Grant Date
                                         granted         Employees in        Price        Expiration       Present  
              Name                       (1)(2)          Fiscal Year         ($/Sh)          Date         Value (3) 
---------------------------------     ------------      -------------      ---------      ----------      ----------

<S>                                          <C>                 <C>           <C>         <C>              <C>    
Ross George                                  351.13              61.2%         458.52      7/7/2008         $109.37

Joseph Sylvia                                222.45              38.8%         458.52      7/7/2008         $109.37

Robert Deedrick                                  --                --              --            --              --

James Palmer                                     --                --              --            --              --

Roland Richard                                   --                --              --            --              --
</TABLE>

(1)      None of the options granted were options with tandem SARs and no
free-standing SARs were granted.

(2)      All options granted to the named executives were granted on July 7,
1998. 218.09 shares are immediately vested for both Mr. George and Mr. Sylvia.
On January 1, 1999 the remaining 133.04 and 4.36 became exercisable for Mr.
George and Mr. Sylvia, respectively.

(3)      Based on the Black-Scholes option pricing model. The use of this model
should not be construed as an endorsement of its accuracy at valuing options.
The actual value, if any, an executive may realize will depend on the excess of
the stock price over the exercise price on the date the option is exercised, so
there is no assurance the actual value realized will be at or near the value
estimated by the Black-Scholes model. The estimated values under that model are
based on the following assumptions:

                  Stock price                                 $458.52
                  Exercise price                              $458.52
                  Expected option term                        5 years
                  Stock price volatility                      0
                  Dividend yield                              0
                  Risk-free interest rate                     5.45%


         The following table sets forth certain information with respect to
unexercised options to purchase the Company's Common Stock granted to the
individuals named in the Summary Compensation Table above. No options were
exercised in 1998 by such individuals.




                                     - 23 -
<PAGE>   24

                             FY - END OPTION VALUES

<TABLE>
<CAPTION>
                              NO. OF SECURITIES UNDERLYING                      VALUE OF UNEXERCISED IN-THE-MONEY
                              UNEXERCISED OPTIONS AT FY-END                            OPTIONS AT FY-END (1)
                            ---------------------------------                 ------------------------------------
NAME                        EXERCISABLE         UNEXERCISABLE                 EXERCISABLE            UNEXERCISABLE
                            -----------         -------------                 -----------            -------------
<S>                           <C>                   <C>                        <C>                     <C>      

Ross George                   218.09                133.04                     $1,919.19               $1,170.75

Joseph Sylvia                 218.09                  4.36                     $1,919.19               $   38.37

Robert Deedrick                   --                    --                            --                      --

James Palmer                      --                    --                            --                      --

Roland Richard                    --                    --                            --                      --
</TABLE>

(1)      Based on the difference between the fair market value of the securities
underlying the options and the exercise or base price of the options at fiscal
year-end.

         Employment Contracts

         Messrs. George and Sylvia each entered into employment agreements with
the Company which expire May 26, 2000, subject to extension. The employment
agreements provide for base salaries and bonuses as determined by the Board of
Directors. In addition, the agreements provide that in the event of termination
of employment by the Company for any reason other than cause, the officer is
entitled to receive all salary and bonuses earned through the termination date
plus the remaining base salary through the expiration of the agreement.

         Messrs. Deedrick, Palmer and Richard have also entered into employment
agreements with the Company which provide for one year's notice of termination
from the Company, and 90 days notice of termination from the employee, except in
the case of cause, in which event the agreement is terminable on 30 days notice
from the Company. The agreements provide that the officers' base salary and
bonuses will be determined by the Board. Each of these agreements contains a
covenant not to compete for two years after termination of employment.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock (i) by each person known to
the Company to own more than 5% of the Company's Common Stock and (ii) by each
director of the Company, each of the executive officers of the Company listed
under "Management" and the directors and executive officers of the Company as a
group.

<TABLE>
<CAPTION>
                                                                        Shares Beneficially Owned (1)
                                                                        -----------------------------
                                                                      Number of  Shares      % of Class
                                                                      -----------------      ----------
<S>                                                                           <C>            <C> 

Fleet Venture Resources, Inc. (2)                                             22,073.18      31.0
Fleet Equity Partners VI, L.P. (2)                                             9,459.93      13.3
Chisholm Partners III, L.P. (2)                                                7,998.35      11.2
Kennedy Plaza Partners                                                           460.25      *
The Private Market Fund, L.P.                                                  8,723.72      12.3
Ross George                                                                    6,348.69      8.9
Joseph Sylvia                                                                  4,039.08      5.7
Robert Deedrick                                                                  436.19      *
Roland Richard                                                                 1,090.46      1.5
James Palmer                                                                     381.66      *
Harry Rogers                                                                   1,090.46      1.5
Peter Hopper                                                                     163.57      *
</TABLE>


                                     - 24 -
<PAGE>   25

<TABLE>
<S>                                                                           <C>            <C> 
F.A. DeVilling                                                                   218.09      *
Ron Owens                                                                           ---      ---
Habib Gorgi                                                                   39,991.71      56.2
Bernard Buonanno                                                              39,991.71      56.2

All directors and executive officers as a group,
   including the above named persons                                          53,759.91      75.5
</TABLE>

*Less than 1%

(1) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of, a security or the sole or shared power
    to dispose, or direct the disposition of, a security, and includes options
    and warrants exercisable within 60 days.

(2) Fleet Venture Resources, Inc. ("FVR"), Fleet Equity Partners VI, L.P.
    ("FEP"), Chisholm Partners III ("Chisholm") and Kennedy Plaza Partners
    ("Kennedy") are affiliated entities. As a result, they may be deemed to have
    shared voting and investment power of the shares held by each of the other
    entities. FVR and FEP are also affiliates of Fleet Financial Group, Inc.
    ("FFG"). As a result, FFG may be deemed to have shared voting and investment
    power of the shares held by such entities. Mr. Gorgi is President of FVR and
    of the corporate general partners of FEP and Chisholm, and a general partner
    of Kennedy. As a result, he may be deemed to have shared voting and
    investment power of the shares held by such entities. Mr. Buonanno is Senior
    Vice President of FVR and of the corporate general partners of FEP and
    Chisholm, and a general partner of Kennedy. As a result, he may be deemed to
    have shared voting and investment power of the shares held by such entities.
    Messrs. Gorgi and Buonanno disclaim beneficial ownership for all shares held
    directly by these entities.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Pursuant to the Recapitalization (i) the Company repurchased certain of
its outstanding equity securities for an aggregate purchase price of $58.3
million (or $458.52 per share of Common Stock and equivalents) (the
"Recapitalization Consideration"), (ii) the Company issued new shares of voting
and non-voting Common Stock to certain existing stockholders and new investors
with aggregate proceeds to the Company of $18.8 million (or $458.52 per share)
(the "New Shares"), (iii) the Company issued certain warrants and options to
certain existing stockholders and new investors, and (iv) certain of the
Company's existing stockholders retained voting Common Stock with an aggregate
value (based on per share value of $458.52) of approximately $16.2 million (the
"Retained Shares").

         Fleet (i) received approximately $39.0 million of the Recapitalization
Consideration, (ii) purchased approximately $7.8 million of the New Shares and
(iii) retained approximately $9.6 million of the Retained Shares. In addition,
Fleet received (a) warrants to purchase 2,180.93 shares of Common stock at a
price of $458.52 per share and (b) warrants to purchase 1,357.73 shares of
Common Stock at a price of $458.52 per share which will be exercisable in full
upon the occurrence of a sale of the Company or an initial public offering of
its stock ("Liquidity Events") if Fleet does not earn a specified return on its
cash investment in the Company.

         Management of the Company (i) received approximately $16.0 million of
the Recapitalization Consideration, (ii) purchased approximately $0.3 million of
the New Shares and (iii) retained approximately $6.4 million of the Retained
Shares. Messrs. George, Sylvia, Deedrick and Richard (or members of their
respective families) received approximately $6.7 million, $3.1 million, $0.9
million and $1.2 million, respectively, of such Recapitalization Consideration.
Mr. Palmer purchased approximately $0.2 million of such New Shares, and Messrs.
George, Sylvia, Deedrick and Richard retained approximately $3.8 million, $2.1
million, $0.2 million and $0.5 million, respectively, of such Retained Shares.
In addition, Messrs. George and Sylvia were granted options to purchase 351.13
and 222.45 shares, respectively, of Common Stock at a price of $458.52 per
share.


                                     - 25 -
<PAGE>   26

         First Union Investors, Inc., an affiliate of First Union Capital
Partners, one of the initial purchasers of the Notes, and First Union National
Bank, the principal lender under the Senior Credit Facility, acquired 3,373.75
voting and 7,530.90 non-voting New Shares for approximately $5 million and also
received warrants to purchase 391.57 shares of Common Stock at a price of
$458.52 per share which will be exercisable in full upon the occurrence of
certain Liquidity Events if the holder does not earn a specified return on its
cash investment in the Company. The Private Market Fund, L.P. received warrants
to purchase 313.26 shares of Common Stock at a price of $458.52 per share which
will be exercisable in full upon the occurrence of certain Liquidity Events if
the holder does not earn a specified return on its cash investment in the
Company.


                                     - 26 -
<PAGE>   27

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)      The consolidated balance sheets as of January 2, 1999 and December 27,
         1997 and the related consolidated statements of operations,
         shareholders' equity (deficit), cash flows and financial statement
         schedule for each of the three years in the period ended January 2,
         1999 are filed as part of this report:


(1)      Financial Statements


                                     - 27 -
<PAGE>   28

                             SIMONDS INDUSTRIES INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In Thousands, except share amounts)


<TABLE>
<CAPTION>
                                        ASSETS                              DECEMBER 27,  JANUARY 2,
                                                                                1997         1999
                                                                            ------------  ----------
<S>                                                                            <C>           <C>   

CURRENTS ASSETS:
     Cash                                                                      $1,255        $9,298
     Accounts receivable, net of reserves of $806 and $992 in 1997 and         16,185        16,250
     1998, respectively                                                                  
     Inventories (Note 3)                                                      22,576        27,226
     Other current assets                                                       3,160         3,208
     Refundable income taxes                                                      101         1,157
                                                                              -------      --------
           Total current assets                                                43,277        57,139
                                                                                         
PROPERTY, PLANT AND EQUIPMENT:                                                           
     Land                                                                       2,324         2,332
     Buildings and improvements                                                10,557        12,118
     Machinery and equipment                                                   21,735        27,009
     Construction-in-progress                                                     348         1,296
                                                                              -------      --------
                                                                               34,964        42,755
                                                                                         
     Less- Accumulated depreciation                                             5,308         8,370
                                                                              -------      --------
                                                                                         
           Net property, plant and equipment                                   29,656        34,385
                                                                                         
OTHER ASSETS:                                                                            
     Goodwill, net of accumulated amortization of $1,026 and $1,581 in 1997  
      and 1998, respectively                                                   20,613        21,765
     Deferred financing costs, net of accumulated amortization of                        
        $909 and $252 in 1997 and 1998, respectively                              880         4,389
     Other                                                                        917           561
                                                                              -------      --------
           Total other assets                                                  22,410        26,715
                                                                              -------      --------
                                                                                         
           Total assets                                                       $95,343      $118,239
                                                                              =======      ========
                                                                                         
                                                                                         
                         LIABILITIES AND SHAREHOLDERS' EQUITY                            
                                                                                         
CURRENT LIABILITIES:                                                                     
     Overdraft facilities                                                        $249          $149
     Revolving credit loans and notes payable                                   1,481         1,613
     Current portion of long-term debt                                          4,925            35
     Accounts payable                                                           4,797         6,783
     Accrued payroll and employee benefits                                      4,827         3,953
     Accrued interest                                                             704         5,011
     Other accrued liabilities                                                  1,987         1,351
     Currently deferred income taxes                                            2,656         2,448
                                                                              -------      --------
                                                                                         
        Total current liabilities                                              21,626        21,343
                                                                                         
LONG-TERM DEBT, net of current portion (Note 5)                                45,286       102,362
                                                                                         
DEFERRED INCOME TAXES                                                           4,321         4,939
                                                                                         
OTHER NONCURRENT LIABILITIES (Note 4)                                           2,495         2,275
                                                                                         
COMMITMENTS AND CONTINGENCIES (Note 6)                                              -             -
                                                                                         
SHAREHOLDERS' EQUITY (DEFICIT):                                                          
     Common stock, $.01 par value-                                                       
        Authorized - 200,000 shares                                                      
        Issued and outstanding - 148,371 and 76,333 in 1997 and 1998,         
        respectively                                                                1             1
     Capital in excess of par value                                            10,553       (24,405)
     Retained earnings                                                         11,859        12,696
     Accumulated other comprehensive loss                                       (798)          (907)
     Treasury stock, at cost                                                                    (65)
                                                                                         
                                                                              -------      --------  
           Total shareholders' equity (deficit)                                21,615       (12,680)
                                                                              -------      --------  
                                                                                         
           Total liabilities and shareholders' equity                         $95,343      $118,239
                                                                              =======      ========
</TABLE>

         The accompanying notes are an integral part of these consolidated
financial statements.


                                     - 28 -
<PAGE>   29

<TABLE>
<CAPTION>
                                                              SIMONDS INDUSTRIES INC.
                                                        CONSOLIDATED STATEMENT OF OPERATIONS
                                                                   (In Thousands)
                                                       ======================================

                                                                Year Ended December
                                                       --------------------------------------
                                                           1996         1997          1998
                                                       ----------    ----------    ----------
                                                       (52 Weeks)    (52 Weeks)    (53 Weeks)
<S>                                                      <C>          <C>           <C>     

Net sales                                                $98,661      $114,182      $126,296
Cost of goods sold                                        69,828        78,798        86,750
                                                         -------      --------      --------

           Gross profit                                   28,833        35,384        39,546
Selling, general and administrative expense               17,135        21,149        28,771
                                                         -------      --------      --------

           Operating income                               11,698        14,235        10,775

Interest expense                                           4,399         4,963         7,900
Other expense, net                                           245           520           554
                                                         -------      --------      --------
         Income before income taxes                        7,054         8,752         2,321

Income taxes                                               3,071         3,751           955
                                                         -------      --------      --------

           Income before extraordinary item                3,983         5,001         1,366
Extraordinary item-
    Write-off of deferred financing cost related to
      refinanced indebtedness, net of tax benefit
      of $374                                               --            --            (529)
                                                         -------      --------      --------

         Net Income                                      $ 3,983      $  5,001      $    837
                                                         =======      ========      ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                     - 29 -
<PAGE>   30

<TABLE>
<CAPTION>
                                                            SIMONDS INDUSTRIES INC.
                                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                 (In Thousands)


                                                   -----------------------------------------
                                                                  FISCAL YEAR
                                                      ENDED          ENDED         ENDED
                                                   DECEMBER 28,   DECEMBER 27,    JANUARY 2,
                                                       1996          1997           1999
                                                   =========================================
<S>                                                  <C>           <C>            <C>     

CASH FLOW FROM OPERATING ACTIVITIES:
  Net Income                                         $ 3,983       $  5,001       $    837
  Adjustment to reconcile net income to
    net cash provided by operating activities:
      Depreciation and amortization                    2,712          3,459          5,176
      Gain on asset sales                                (11)           (16)           (48)
      Provision for deferred
         income taxes                                  1,322            258            249
      Changes in assets & liabilities, net
        of acquisitions:
        Accounts receivable                             (350)          (927)         2,692
        Inventories                                      686          2,902           (952)
        Income tax refunds receivable                     --             40         (1,056)
        Other current and noncurrent assets             (818)           602            326
        Accounts payable                                 168           (346)           355
        Accrued expenses                                (979)         2,297          1,527
        Other non-current liabilities                    (48)          (224)             7
                                                     -------------------------------------

      Net cash provided by operating
        activities                                     6,665         13,046          9,113
                                                     -------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of property and equipment           35            107             72
   Purchases of equipment                             (3,638)        (3,708)        (4,348)
   Acquisition of Strongridge Limited                 (1,185)            --             --
   Acquisition of Pacific Hoe Company assets              --         (5,578)            --
   Acquisition of Armstrong Manufacturing,
      net of cash acquired of $875                        --         (8,125)            --
   Acquisition of W. Notting Ltd.,
      net of cash acquired of $51                         --             --         (5,471)
                                                     -------------------------------------

      Net cash (used in) investing activities         (4,788)       (17,304)        (9,747)
                                                     -------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net change in overdrafts                              319           (539)          (100)
   Net (uses) proceeds under revolving credit           (197)        (1,445)         3,789
   Proceeds from issuance of long-
      term debt-net of issuance costs                     --          7,700         98,063
   Principal payments of long-term debt               (2,530)        (1,312)       (57,751)
   Issuance of common stock                               --             33         18,833
   Stock redemption                                       --             --        (53,791)
   Purchase of treasury stock                             --             --            (65)
   Other                                                (118)          (138)            --
                                                     -------------------------------------

     Net cash provided by (used in) financing         
       activities                                     (2,526)         4,299          8,978
                                                     -------------------------------------

EFFECT OF EXCHANGE RATE ON CASH                          360            (41)          (301)
                                                     -------------------------------------

NET (DECREASE)  INCREASE IN CASH                        (289)            --          8,043

CASH AT BEGINNING OF PERIOD                            1,544          1,255          1,255
                                                     -------------------------------------

CASH AT END OF PERIOD                                $ 1,255       $  1,255       $  9,298
                                                     =====================================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                     - 30 -
<PAGE>   31

                             SIMONDS INDUSTRIES INC
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
   FOR THE YEARS ENDED DECEMBER 28,1996, DECEMBER 27,1997, AND JANUARY 2,1999
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                             ACCUMULATED
                                                        CAPITAL                 OTHER                     TOTAL
                                     COMMON    COMMON  IN EXCESS  RETAINED  COMPREHENSIVE  TREASURY    SHAREHOLDERS'   COMPREHENSIVE
                                     SHARES    STOCK     OF PAR   EARNINGS      LOSS        STOCK    EQUITY (DEFICIT)     INCOME
                                    --------   ------  ---------  --------  -------------  --------  ----------------  -------------
<S>                                  <C>        <C>     <C>        <C>         <C>           <C>        <C>                <C>     
                                                                                                                       
                                                                                                                       
Balance at December 30, 1995         148,037    $ 1     $ 10,520   $ 2,875     $(211)        $  0       $ 13,185               --
   Net Income                             --     --           --     3,983        --           --          3,983           $3,983
   Foreign Currency                                                                                                    
    Translation Adjustment                --     --           --        --        30           --             30               30
                                    --------    ---     --------   -------     -----         ----       --------           ------
Balance at December 28, 1996         148,037      1       10,520     6,858      (181)           0         17,198           $4,013
                                                                                                                           ======
   Exercise of stock options             334     --           33        --        --           --             33               --
   Net Income                             --     --           --     5,001        --           --          5,001           $5,001
   Foreign Currency                                                                                                    
    Translation Adjustment                --     --           --        --      (617)          --           (617)            (617)
                                                                                                                       
                                    --------    ---     --------   -------     -----         ----       --------           ------
Balance at December 27, 1997         148,371      1       10,553    11,859      (798)           0         21,615           $4,384
                                                                                                                           ======
   Issuance of Common Stock           41,073      1       18,832        --        --           --         18,833               --
   Net Income                             --     --           --       837        --           --            837           $  837
   Foreign Currency                                                                                                    
    Translation Adjustment                --     --           --        --      (109)          --           (109)            (109)
   Stock Redemption                 (112,777)    (1)     (53,790)       --        --           --        (53,791)              --
   Acquisition of Treasury Stock        (334)    --           --        --        --          (65)           (65)              --
                                                                                                                       
                                    --------    ---     --------   -------     -----         ----       --------           ------
Balance at January 2, 1999            76,333    $ 1     $(24,405)  $12,696     $(907)        $(65)      $(12,680)          $  728
                                    ========    ===     ========   =======     =====         ====       ========           ======
                                                                                                                      
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                     - 31 -
<PAGE>   32

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Effective June 11, 1998, SI Holding Corporation changed its name to
         Simonds Industries Inc., and merged with its wholly owned operating
         subsidiary, Simonds Industries Inc. (Simonds or the Company), a
         Delaware corporation which manufactures and is a worldwide distributor
         of industrial cutting tools. The primary products manufactured by
         Simonds include metal band and wood saws, industrial knives and rules,
         files and band saw equipment. Simonds' principal manufacturing
         operations are located in Fitchburg, Massachusetts; Newcomerstown,
         Ohio; Big Rapids, Michigan; Portland and Springfield, Oregon and
         Spangenberg, Germany. Simonds also has sales subsidiaries in the United
         Kingdom, Canada, and Spain.

         (a)      Principles of Consolidation

                  The accompanying consolidated financial statements include the
                  accounts of Simonds Industries Inc. and its subsidiaries. All
                  material intercompany transactions and balances have been
                  eliminated in consolidation.

         (b)      Disclosures About Fair Value of Financial Instruments

                  The carrying amounts of cash, accounts receivable and accounts
                  payable approximate fair value because of their short-term
                  nature. At January 2, 1999, the fair value of long-term
                  indebtedness was approximately $2,500,000 higher than the
                  amount on the Company's consolidated balance sheet based on
                  market quotations. (See Note 5.)

         (c)      Use of Estimates

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities and disclosure of contingent
                  assets and liabilities at the date of the financial statements
                  and the reported amounts of revenues and expenses during the
                  reporting periods. Actual results could differ from those
                  estimates.

         (d)      Fiscal Year

                  The Company's fiscal year ends on the Saturday closest to
                  December 31. As a result, the years ended December 28, 1996,
                  December 27, 1997, and January 2, 1999 include 52, 52, and 53
                  weeks, respectively.

         (e)      Inventories

                  Approximately 62% and 55% of inventories at December 27, 1997
                  and January 2, 1999, respectively, are valued at the lower of
                  cost (last-in, first-out (LIFO) method) or market. All other
                  inventories are valued at the lower of cost (first-in,
                  first-out (FIFO) method) or market. Inventory costs include
                  labor and manufacturing overhead. Obsolete, damaged and excess
                  inventories are carried at net realizable value, with
                  consideration given to obsolescence risks for excess stock.
                  Writedowns are charged to expense in the period in which the
                  conditions giving rise to writedowns are first recognized. The
                  Company did 


                                     - 32 -
<PAGE>   33

                  not incur material writedowns in any of the periods presented
                  in the accompanying consolidated financial statements

         (f)      Property, Plant and Equipment

                  Depreciation is computed using the straight-line method based
                  on the following estimated useful lives:

                                                                ESTIMATED USEFUL
                                                                     LIVES

                      Buildings and improvements                  20-40 years
                      Machinery and equipment                      3-12 years
                      Furniture and fixtures                        8 years

                  Maintenance and repairs are expensed as incurred. Depreciation
                  expense was approximately $2,000,000, $2,400,000 and
                  $3,100,000 for the years ended December 28, 1996, December 27,
                  1997, and January 2, 1999, respectively.

         (g)      Goodwill

                  Goodwill represents the cost in excess of fair value of the
                  net assets of companies acquired in purchase transactions.
                  Goodwill is being amortized on a straight-line method over 40
                  years. Amortization charged to operations amounted to
                  $335,000, $489,000, and $561,000 for years ended December 28,
                  1996, December 27, 1997, and January 2, 1999, respectively. At
                  each balance sheet date, the Company evaluates the
                  realizability of goodwill based on expectations of
                  non-discounted cash flows and operating income for each
                  subsidiary having a material goodwill balance. Based on its
                  most recent analysis, the Company believes that no material
                  impairment of goodwill exists at January 2, 1999.

         (h)      Foreign Currency Translation

                  The assets and liabilities of the Company's foreign
                  subsidiaries are translated at year-end rates of exchange, and
                  statement of operations accounts are translated at weighted
                  average rates of exchange. The resulting translation
                  adjustments are excluded from net income and are accumulated
                  as a separate component of shareholders' equity. Foreign
                  currency transaction gains and losses are included in income
                  or expense in the period in which the transaction occurs.

                  Foreign currency transaction losses included in the
                  determination of results for the periods ended December 28,
                  1996, December 27, 1997 and January 2, 1999 were approximately
                  $222,000, $537,000, and $682,000, respectively.

         (i)      Sales Recognition

                  The Company recognizes sales upon the shipment of its products
                  net of applicable provisions for discounts and allowances.
                  Estimated future warranty obligations related to certain
                  products are provided by charges to operations in the period
                  in which the 


                                     - 33 -
<PAGE>   34

                  related revenue is recognized. The Company did not incur
                  material warranty costs in any of the periods presented in the
                  accompanying financial statements.

         (j)      Income Taxes

                  The Company accounts for its income taxes under the provisions
                  of Statement of Financial Accounting Standards (SFAS) No. 109,
                  Accounting for Income Taxes. SFAS No. 109 utilizes the
                  liability method, and deferred taxes are determined based on
                  the estimated future tax effects of differences between the
                  financial statement and tax bases of assets and liabilities at
                  currently enacted tax laws and rates.

         (k)      Comprehensive Income

                  Effective January 1, 1998 the Company adopted the provisions
                  of SFAS No. 130, Reporting Comprehensive Income, which
                  establishes standards for the reporting and display of
                  comprehensive income and its components in the financial
                  statements. Comprehensive income includes all non-owner
                  related changes in a company's equity including, among other
                  things, foreign currency translation adjustments and
                  unrealized gains and losses on marketable securities
                  classified as available-for-sale. Because cumulative
                  translation adjustments are considered a component of
                  permanently invested unremitted earnings of subsidiaries
                  outside of the United States, no taxes are provided on such
                  amounts.


         (l)      Recent Accounting Pronouncements

                  In March 1998, The American Institute of Certified Public
                  Accountants (AICPA) issued Statement of Position (SOP) 98-1,
                  Accounting for the Costs of Computer Software Developed or
                  Obtained for Internal Use. SOP 98-1 requires computer software
                  costs associated with internal use software to be expensed as
                  incurred until certain capitalization criteria are met. The
                  adoption of SOP 98-1 did not have a material impact on the
                  Company's financial statements.

                  In April 1998, the AICPA issued SOP 98-5, Reporting on the
                  Costs of Start-up Activities. SOP 98-5 requires all costs
                  associated with pre-opening, pre-operating and organization
                  activities to be expensed as incurred. The Company will adopt
                  SOP 98-5 beginning January 3, 1999. The Company does not
                  believe that adoption of SOP 98-5 will have a material impact
                  on the Company's financial statements.

                  In June 1998, the Financial Accounting Standards Board (FASB)
                  issued SFAS No. 133, Accounting for Derivative Instruments and
                  Hedging Activities. This statement establishes accounting and
                  reporting standards requiring that every derivative instrument
                  (including certain derivative instruments embedded in other
                  contracts) be recorded in the balance sheet as either an asset
                  or liability measured at its fair value. The statement
                  requires that changes in the derivative's fair value be
                  recognized currently in earnings unless specific hedge
                  accounting criteria are met. Special accounting for qualifying
                  hedge allows a derivative's gains and losses to offset related
                  results on the hedged item in the income statement, and
                  requires that a company must formally document, designate 


                                     - 34 -
<PAGE>   35

                  and assess the effectiveness of transactions that receive
                  hedge accounting. SFAS No. 133 is effective for fiscal years
                  beginning after June 15, 1999. SFAS No. 133 cannot be applied
                  retroactively. SFAS No. 133 must be applied to (a) derivative
                  instruments and (b) certain derivative instruments embedded in
                  hybrid contracts that were issued, acquired or substantially
                  modified after December 31, 1997 (and, at the Company's
                  election, before January 1, 1998). The Company does not expect
                  that the adoption of this statement will have a material
                  impact on the Company's financial position or results of
                  operations.

(2)      ORGANIZATION AND ACQUISITIONS

         On October 1, 1996, the Company's wholly owned Canadian subsidiary
         acquired 100% of the outstanding stock of Strongridge, Ltd. (a Canadian
         company) for approximately $1,185,000. The acquisition has been
         accounted for as a purchase, with the purchase price in excess of the
         fair value of net assets acquired, $932,000, being amortized on a
         straight-line basis over 40 years. Results of operations of
         Strongridge, Ltd. are included in the accompanying consolidated
         financial statements subsequent to October 1, 1996.

         On January 27, 1997, the Company purchased certain assets, mainly
         inventory and equipment, for $5,578,000 from Pacific Hoe. Purchase
         price in excess of fair value of assets acquired, $3,831,000, is being
         amortized on a straight-line basis over 40 years.

         On August 1, 1997, the Company acquired 100% of the outstanding stock
         of Armstrong Manufacturing Company ("Armstrong," an Oregon corporation)
         for $9,000,000, which includes cash acquired of $875,000. The
         acquisition has been accounted for as a purchase, with the purchase
         price in excess of the fair value of net assets acquired, $3,601,000,
         being amortized on a straight-line basis over 40 years. Results of
         operations of Armstrong are included in the accompanying consolidated
         financial statements subsequent to August 1, 1997.

         On May 8, 1998, the Company acquired 100% of the outstanding stock of
         W. Notting Limited ("Notting") for approximately $6,718,000, of which
         $5,471,000 was paid in cash with additional financing from the
         Company's revolving credit facility; the balance was in the form of a
         term Promissory Note to the sellers bearing interest at 8.5% and
         repayable April 30, 1999. The acquisition was accounted for as a
         purchase and the purchase price has been allocated based on the fair
         market value of the underlying assets and liabilities. The purchase
         allocation is preliminary and subject to adjustment. Management's plans
         for reorganizing certain activities at Notting were not finalized as of
         January 2, 1999. The Company expects to finalize their plans by May 8,
         1999 and, accordingly, expects that additional liabilities will be
         recorded as adjustments to the final purchase price. Goodwill totaled
         $1,993,000 on this acquisition and will be amortized on a straight-line
         basis over 40 years. The consolidated financial statements include the
         results of operations of Notting subsequent to the date of acquisition.

         Proforma results for 1997 and 1998 have not been reported because they
         would not be materially different from the financial statements
         presented.

         In July 1998, the Company issued $100 million of 10-1/4% Senior
         Subordinated Notes due 2008 (the "Notes")(see Note 5). Proceeds from
         the Notes were primarily used for the repayment of indebtedness, the
         acquisition of treasury stock, and the buyout of all outstanding stock
         options and warrants. The buyout of stock options resulted in a pre-tax
         compensation charge of 


                                     - 35 -
<PAGE>   36

         approximately $4,500,000 recorded in July 1998, included in selling,
         general and administrative expense. The Company concurrently entered
         into a new Senior Credit Facility with a commercial lender that
         provides $30 million availability (see Note 5). All of the foregoing
         transactions are herein referred to collectively as the
         "Recapitalization."

         Pursuant to the Recapitalization (i) the Company repurchased certain of
         its outstanding equity securities for an aggregate purchase price of
         $58.3 million (or $458.52 per share of Common Stock and equivalents)
         (ii) the Company issued new shares of voting and non-voting Common
         Stock to certain existing stockholders and new investors with aggregate
         proceeds to the Company of $18.8 million (or $458.52 per share), (iii)
         the Company issued certain warrants and options to certain existing
         stockholders and new investors, and (iv) certain of the Company's
         existing stockholders retained voting Common Stock with an aggregate
         value (based on per share value of $458.52) of approximately $16.2
         million.

(3)      INVENTORIES

         Inventories at December 27, 1997 and January 2, 1999 were as follows
         (in thousands):

                                                 1997         1998

          Raw materials                        $ 4,176      $ 5,323
          Work-in-process                        6,740        7,341
          Finished goods                        11,660       14,562
                                               -------      -------

                   Total inventories           $22,576      $27,226
                                               =======      =======

       U.S. inventories of $14,190,000 and $15,153,000 at December 27, 1997 and
       January 2, 1999, respectively, were valued using the LIFO method. The
       replacement cost of these inventories would have been higher by
       approximately $704,000 and $527,000 in 1997 and 1998, respectively.

(4)    RETIREMENT PLANS

       The Company has a combined defined-contribution profit sharing and 401(k)
       retirement plan covering all domestic salaried and certain hourly
       employees. Contributions to the profit sharing plan are determined by the
       Board of Directors. The profit sharing cost of this plan was
       approximately $390,000, $399,000 and $436,000 for the fiscal years ended
       December 28, 1996, December 27, 1997 and January 2, 1999, respectively.
       In the 401(k) portion of the plan, the Company matches at a rate of 50%
       on the first 6% of an employee's salary contribution. Company 401(k)
       matching contributions amounted to approximately $283,000, $302,000 and
       $337,000 for the fiscal years ended December 28, 1996, December 27, 1997
       and January 2, 1999, respectively.

       Notting also had a defined contribution 401(k) retirement plan in effect
       during 1998. In this Plan the Company matches 100% for the first 4% of an
       employee's salary contribution. The Company's 401(k) matching
       contributions amounted to approximately $20,000 for the year ended
       January 2, 1999.

       Certain of the Company's hourly employees participate in a
       union-sponsored, multiemployer defined-benefit retirement plan. The cost
       of this plan was approximately $378,000, $392,000 and $418,000 for the
       fiscal years ended December 28, 1996, December 27, 1997 and January 2,
       1999, respectively. Contributions are based on wages earned and are paid
       monthly to the pension


                                     - 36 -
<PAGE>   37
       administrator.

       All other domestic hourly employees are covered by a defined-contribution
       plan. Contributions are based on a union contract as a percentage of
       wages earned and are paid annually. The cost of this plan was
       approximately $140,000, $151,000 and $154,000 for the fiscal years ended
       December 28, 1996, December 27, 1997 and January 2, 1999, respectively.

       In connection with the acquisition of Armstrong, the Company acquired a
       defined benefit plan to cover all employees of Armstrong. The defined
       benefit plan was frozen as of December 27, 1997. The fair value of plan
       assets exceeded the projected benefit obligation for services rendered as
       of December 27, 1997. The plan was effectively terminated on April 30,
       1998. On January 28, 1999 the plan received a favorable determination
       from the Internal Revenue Service (IRS) and Pension Benefit Guarantee
       Corporation (PBGC). All Participants of this plan were eligible to
       participate in the Company's 401(k) retirement plan, effective January 1,
       1998 and based on eligibility, as defined.

       In addition to the defined benefit plan, employees of Armstrong are also
       covered under a profit sharing plan. The plan merged with the Company's
       401(k) retirement plan effective January 1, 1998. Contributions to the
       Armstrong profit sharing plan are determined by the Board of Directors.
       The profit sharing cost of this plan was approximately $260,000 in 1997.

       Certain foreign employees are covered under defined-contribution plans.
       Total costs for these plans amounted to approximately $136,000, $148,000
       and $120,000 for the fiscal years ended December 28, 1996, December 27,
       1997 and January 2, 1999, respectively.

       Certain employees of one of Simonds' subsidiaries, Wespa
       Metallsagenfabrik Simonds Industries Gmbh ("Wespa"), are covered by an
       unfunded pension plan. In addition, certain employees of Notting are also
       covered by a defined benefit plan.

       The amount of accrued pension liability is included in the accompanying
       consolidated balance sheets in other noncurrent liabilities. The
       following table sets forth the funded status and the amount recognized
       for the defined benefit plans of the foreign subsidiaries Wespa and
       Notting, which was acquired May 5, 1998, in the Company's accompanying
       consolidated balance sheets at December 28, 1996, December 27, 1997, and
       January 2, 1999:

<TABLE>
<CAPTION>
                                                                PENSION
                                                                -------  
                                                                BENEFITS
                                                                -------- 
                                                  1996            1997            1998
                                               ----------      ----------      ----------
<S>                                            <C>             <C>             <C>       
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year        $1,837,787      $1,569,744      $1,356,705
Obligations from an acquisition                        --              --       1,823,976
                                                  
Service Cost                                       22,513          17,953          70,564
Interest Cost                                     102,508          87,755         166,124
Actuarial loss                                         --              --         582,450
Effect of the change in foreign currency
     exchange rates                              (308,817)       (240,451)         87,452
Benefits paid                                     (84,247)        (78,296)        (77,943)
                                               ----------      ----------      ----------
Benefit obligation at end of year               1,569,744       1,356,705       4,009,328
                                               ----------      ----------      ----------

CHANGE IN PLAN ASSETS
Fair value of plan assets at  beginning of
year                                                   --              --              --
Plan Assets from an acquisition                        --              --       1,827,760
Actual return on plan assets                           --              --          55,275
Plan participants' contribution                        --              --          10,725
</TABLE>


                                     - 37 -
<PAGE>   38

<TABLE>
<S>                                             <C>             <C>             <C>      
Effect of the change in foreign currency
     exchange rates                                    --              --          16,490
                                               ----------      ----------      ----------
Fair value of plan assets at end of year               --              --       1,910,250
                                               ----------      ----------      ----------

Funded Status                                   1,569,744       1,356,705       2,099,078
Unrecognized net actuarial gain (loss)            165,307         193,472        (395,196)
                                               ----------      ----------      ----------
Accrued pension liability                       1,735,051       1,550,177       1,703,882
                                               ==========      ==========      ==========
</TABLE>



         The following table breaks out the components of net expense for the
         years ending December 28, 1996, December 27, 1997 and January 2, 1999:

<TABLE>
<CAPTION>
                                                                PENSION
                                                                -------
                                                                BENEFITS
                                                                --------
                                                    1996           1997           1998
                                                 ---------      ---------      ---------
COMPONENTS OF NET PERIODIC PENSION EXPENSE
<S>                                              <C>            <C>            <C>      
Service Cost                                     $  22,513      $  17,953      $  70,564
Interest Cost                                      102,508         87,755        166,124
Expected return on plan assets                          --             --        (84,810)
Amortization of prior service cost                      --             --         (4,756)
Members contributions                                 (479)        (3,699)       (10,725)
                                                 ---------      ---------      ---------
Net periodic benefit cost                          124,542        102,009        136,397
                                                 =========      =========      =========
</TABLE>

         The primary assumptions used in determining related obligations of the
         plans are shown below:

<TABLE>
<CAPTION>
                                                                             PENSION
                                                                             -------
                                                                             BENEFITS
                                                                             --------
                                                           1996                1997                1998
                                                           ----                ----              --------
<S>                                                        <C>                 <C>               <C>  
       Weighted-average assumptions
       Discount rate                                       7.0%                6.5%              5.0-6.5%
       Expected return on plan assets                       --                  --                   6.5%
       Rate of compensation increase                       7.0%                6.5%              4.0-6.5%
</TABLE>



(5)    DEBT

Debt consists of the following at December 27, 1997 and January 2, 1999 (in
thousands):


<TABLE>
<CAPTION>
                                                                           1997             1998
                                                                         -------          --------

<S>                                                                      <C>              <C>     
Line of credit facility for German Subsidiary with First Union           $    --          $  2,362
National Bank up to  approximately  $3,300 interest payable
quarterly  at FIBOR  (3.0% at January 2, 1999) plus 1.25%
terminating on October 1, 2003.

Line of credit facilities for Notting with Banco Sabadell and                 --                62
Banco Popular of Spain up to approximately $91, bearing interest
at rates from 6.35% to 10%, terminating on April 1 and May 17,
1999, respectively.
</TABLE>


                                     - 38 -
<PAGE>   39

<TABLE>
<S>                                                                      <C>              <C>     
Three term loans  payable by Notting,  payable to National                    --               390
Westminster Bank on various dates between June 7, 1999 and August
1, 2000, bearing interest at varying rates.

Notes payable to Notting shareholders, issued May 8, 1998,                    --             1,196
interest payable semi-annually at 8.5%, maturing April 30, 1999,
secured by a guarantee of the Company.

Senior Subordinated Notes issued July 8, 1998, and maturing July              --           100,000
1, 2008, interest payable semi-annually at 10.25%.

Revolving credit facility with Heller Financial, Inc. up to               12,945                --
$20,000, interest payable at either prime rate (8.5% at December
27, 1997) plus 1% or the LIBOR rate (5.97% at December 27, 1997)
plus 2.5%.

Term note payable to Heller Financial Inc., interest payable at           33,375                --
either prime rate (8.5% at December 27, 1997) plus 1% or the
LIBOR rate (5.97% at December 27, 1997) plus 2.5%, quarterly
principal and interest payments due through June 30, 2003 in
varying amounts.

Term loan payable to First National Bank of Boston by German                 761                --
subsidiary, interest at FIBOR (3.7% at December 27, 1997) plus
2.5%,  quarterly payments of $85 plus interest due through
December 31, 1999.

Subordinated note payable to Massachusetts Capital Resource                3,130                --
Company, interest at 12% and principal payments of $413
payable quarterly beginning on September 30, 2000 continuing
through June 30, 2002.

Line of credit facility for German Subsidiary with First National          1,481                --
Bank of Boston up to approximately $3,100, interest payable on
demand by the bank at FIBOR plus 1.5%.

                                                                         -------          --------
                                                                          51,692           104,010
Less - current maturities                                                  6,406             1,648
                                                                         -------          --------
                                                                         $45,286          $102,362
                                                                         =======          ========
</TABLE>

       In July 1998, the Company issued $100,000,000 of Senior Subordinated
       Notes. The Notes are due in 2008, but may be redeemed on or after July 1,
       2003 at specified premium prices. Proceeds from the Notes were primarily
       used for the repayment of approximately $53.1 million of indebtedness,
       the acquisition of treasury stock, and the buyout of all outstanding
       stock options and warrants.


                                     - 39 -
<PAGE>   40

       The repayment of the indebtedness relating to the revolving credit
       facility loan, term notes payable, line of credit facility for German
       subsidiary, term loan payable by German subsidiary, and subordinated
       notes payable resulted in an extraordinary charge of approximately
       $500,000, net of tax benefit, recorded in July 1998 to write off
       unamortized debt discount and deferred financing costs.

       Financing costs relating to the issuance of the Notes was $4,190,000 and
       is being amortized over the term of the debt.

       The indenture governing the Notes restricts, among other things, the
       incurrence of additional indebtedness, the payment of dividends and the
       making of certain other restricted payments, mergers, consolidations and
       sale of assets (all as defined in the Indenture).

       Upon the occurrence of a Change of Control (as defined in the Indenture),
       each holder of Notes will have the right to require the Company to
       repurchase all or a portion of such holder's Notes at a price in cash
       equal to 101% of the aggregate principal amount thereof, plus accrued and
       unpaid interest, if any, to the date of repurchase. However, the
       Company's ability to repurchase the Notes upon a Change of Control may be
       limited by the terms of then existing contractual obligations of the
       Company and its subsidiaries. In addition, the occurrence of a Change of
       Control will constitute an event of default under the Senior Credit
       Facility. The Senior Credit Facility will prohibit the purchase of the
       Notes unless and until such time as the indebtedness under the Senior
       Credit Facility is paid in full. There can be no assurance that the
       Company will have the financial resources to repay amounts due under the
       Senior Credit Facility, or to repurchase or redeem the Notes. If the
       Company fails to repurchase all of the Notes tendered for purchase upon
       the occurrence of a Change of Control, such failure will constitute an
       Event of Default under the Indenture.

       The Company concurrently entered into a new Senior Credit Facility with a
       commercial lender, that provides $30,000,000 availability, undrawn as of
       January 2, 1999. Borrowings under the Senior Credit Facility are
       available for permitted acquisitions and working capital, including
       letters of credit.

       The Senior Credit Facility is secured by first priority liens on all
       tangible and intangible personal property and real property assets of the
       Company and its subsidiaries.

       The Senior Credit Facility expires in 2003, unless extended. The interest
       rate per annum applicable to the Senior Credit Facility is, at the
       Company's option, either LIBOR or the greater of the prime rate or the
       overnight federal funds rate plus 0.50%, in each case plus 0.125% to
       2.375% depending on the Company's financial leverage (the "Applicable
       Margin"). The Company is required to pay certain fees in connection with
       the Senior Credit Facility, including a commitment fee of 0.50% initially
       and thereafter at a per annum rate equal to the Applicable Margin on the
       unutilized portion of the facility.

       As part of the Senior Credit Facility the Company is required to comply
       with certain covenants. At January 2, 1999 the Company was required to
       maintain a fixed charge coverage ratio of greater or equal to 1.0 to 1.0,
       a net leverage ratio less than or equal to 5.5 to 1.0, and an interest
       coverage ratio of greater than or equal to 1.5 to 1.0. At January 2, 1999
       the Company was in compliance with all covenents.


                                     - 40 -
<PAGE>   41

              The following is a summary of maturities of all of the Company's
              debt obligations due after January 2, 1999 (in thousands):

                FISCAL YEAR                 AMOUNT

                1999                       $  1,648
                2000                             --
                2001                             --
                2002                             --
                2003                          2,362
                Thereafter                  100,000
                                           --------
                                           $104,010
                                           ========

(6)    COMMITMENTS AND CONTINGENCIES

       (a)    Commitments under Operating Leases

              Certain of the Company's operations are conducted from facilities
              rented under operating leases that expire over the next 10 years.
              The Company also has operating leases covering certain office
              equipment. Substantially all leases provide for the Company to pay
              operating expenses in addition to basic rent. Rent expense was
              approximately $676,000, $710,000, and $916,000 for the fiscal
              years ended December 28, 1996, December 27, 1997, and January 2,
              1999, respectively.

              Future minimum annual rentals on noncancelable leases in effect at
              January 2, 1999, which have initial or remaining terms of more
              than one year, are as follows:

                            FISCAL YEAR                AMOUNT
                     
                            1999                    $  366,000
                            2000                       240,000
                            2001                       149,000
                            2002                       118,000
                            2003                        63,000
                            Thereafter                 149,000
                                                    ----------
                                                    $1,085,000
                                                    ==========

       (b)    Litigation

              The Company is party to a lawsuit that was litigated in China
              involving a Chinese joint venture, established by the Company's
              predecessor. Company management believes the lawsuit to be without
              merit. In addition, the Company is a party to other lawsuits that
              arose in the normal course of business. In the opinion of
              management, the final resolutions of these lawsuits are not
              expected to materially affect the financial condition or results
              of operations of the Company.

              In 1992, the Company's property in Ashburnham, Massachusetts, was
              identified as having groundwater contamination. The Company has
              been indemnified from such liability by prior owners and there is
              currently $2.7 million held in escrow to cover such liability.
              Based on current estimates, management believes that the amounts
              held in escrow will be sufficient to 


                                     - 41 -
<PAGE>   42

              cover these environmental liabilities, although there can be no
              assurance that such amounts will be sufficient.

       (c)    Employment Contracts

              The Company has employment and non-competition agreements with two
              key officers. The employment agreements provide for an employment
              term through May 26, 2000. Should employment be terminated by the
              Company for any reason other than cause (as defined in the
              employment agreement), the officers shall be entitled to receive
              all salary and bonuses earned through the termination date, plus
              the remaining base salary for the period, through the expiration
              of the agreement. In addition, other key management have also
              entered into employment agreements with the Company which provide
              for one year's notice of termination from the Company, and 90 days
              notice of termination from the employee, except in the case of
              cause, in which event the agreement is terminable on 30 days
              notice from the Company. The agreements provide that the officers'
              base salary and bonuses will be determined by the Board. Each of
              these agreements contains a covenant not to compete for two years
              after termination of employment.



(7)    INCOME TAXES

       Components of income before income taxes are as follows (in thousands):

                                       YEAR           YEAR            YEAR
                                      ENDED           ENDED          ENDED
                                   DECEMBER 28,   DECEMBER 27,     JANUARY 2,
                                       1996           1997            1999

                Domestic              $5,254         $6,441          $  852
                Foreign                1,800          2,311           1,469
                                      ------         ------          ------
                                                                    
                         Total        $7,054         $8,752          $2,321
                                      ======         ======          ======
                                                             

       The provision for income taxes consists of the following components for
       the periods ended (in thousands):


                                             YEAR ENDED
                                          DECEMBER 28, 1996
                                          -----------------
                                   CURRENT     DEFERRED     TOTAL

          Domestic-
             Federal                $  889      $  876      $1,765
             State                     129         273         402
                                                           
          Foreign                      731         173         904
                                    ------      ------      ------
                                                           
                   Total            $1,749      $1,322      $3,071
                                    ======      ======      ======


                                     - 42 -
<PAGE>   43

                                             YEAR ENDED
                                          DECEMBER 27, 1997
                                          -----------------
                                   CURRENT     DEFERRED     TOTAL

          Domestic-                                        
             Federal                $2,153      $   57      $2,210
             State                     487          18         505
                                                           
          Foreign                      853         183       1,036
                                    ------      ------      ------
                                                           
                   Total            $3,493      $  258      $3,751
                                    ======      ======      ======
                                                           
                                                           
                                             YEAR ENDED
                                           JANUARY 2, 1999
                                           ---------------
                                   CURRENT     DEFERRED     TOTAL

          Domestic-                                        
             Federal                $  154      $  186      $  340
             State                      80          14          94
                                                           
          Foreign                      472          49         521
                                    ------      ------      ------
                                                           
                   Total            $  706      $  249      $  955
                                    ======      ======      ======
                                                        

       An income tax rate reconciliation of the difference between actual and
       statutory effective tax rates is as follows (in thousands):

<TABLE>
<CAPTION>
                                                YEAR          YEAR          YEAR
                                                ENDED         ENDED        ENDED
                                            DECEMBER 28,  DECEMBER 27,   JANUARY 2,
                                                1996          1997          1999
<S>                                            <C>           <C>           <C> 

                   Provision for income
                   taxes at the federal
                   statutory rate              $2,398        $2,976        $789

                   State taxes, net of
                   federal
                   tax effect                     445           552          62

                   Goodwill amortization not
                   deductible
                   for tax purposes               156           166         141

                   Foreign taxes                   70            89           6

                   Other, net                       2           (32)        (43)
                                               ------        -------       -----

                   Recorded provision          $3,071        $3,751        $955
                                               ======        ======        ====
</TABLE>

       Deferred taxes are recorded based on the differences between the
       financial statement and tax bases of assets and liabilities. The tax
       effect of the temporary differences that give rise to a significant
       portion of deferred tax liabilities is as follows at December 27, 1997
       and January 2, 1999 (in thousands):


                                     - 43 -
<PAGE>   44

<TABLE>
<CAPTION>
                                                                            1997         1998
<S>                                                                       <C>          <C>     
          Tax assets-
             Reserves and accruals not yet deductible for tax
               purposes                                                   $(1,383)     $(1,541)
                                                                          -------      -------
          Tax liabilities-
             Property-basis differences                                     4,523        4,958
             Inventory-basis differences                                    2,671        2,744
             Other current assets-basis differences                           863          865
             Other                                                            303          361
                                                                          -------      -------

                   Total tax liabilities                                    8,360        8,928
                                                                          -------      -------

                   Net tax liabilities                                    $ 6,977      $ 7,387
                                                                          =======      =======
</TABLE>

Net deferred tax liabilities are included in the accompanying consolidated
balance sheets in deferred income taxes and currently deferred income taxes.

(8)    STOCK OPTION PLANS

       On July 25, 1995, the Board of Directors of the Company approved the
       Stock Incentive Plan (the Plan) for key executives, management and
       employees. The Company has reserved 9,568 shares of the Company's common
       stock for issuance under the Plan. All stock options were exercised in
       July 1998 in conjunction with the issuance of the Notes. The buyout of
       stock options resulted in a pretax compensation charge of approximately
       $4,500,000 recorded in July 1998.

       In July 1998, the Company adopted the Amended and Restated 1998 Stock
       Incentive Plan pursuant to which key employees (including officers who
       are also directors of the Company) will be eligible for discretionary
       awards of stock options at the discretion of the Board of Directors. The
       terms and prices of options will be at the discretion of the Board. Key
       officers were granted options in July 1998 to purchase 351.13 and 222.45
       shares, respectively, of Common Stock at a price of $458.52 per share.

       Stock option activity for the period December 30, 1995 through January 2,
       1999 is summarized below:


<TABLE>
<CAPTION>
                                                           TOTAL SHARES        WEIGHTED         WEIGHTED
                                                                               AVERAGE        AVERAGE FAIR
                                                                            EXERCISE PRICE      VALUE OF
                                                                                             OPTIONS GRANTED

<S>                                                              <C>              <C>            <C>   
          Outstanding, December 30, 1995                      36,904.19          $333.34
            Granted                                              200.00           100.00         $ 56.84
                                                             ----------          -------

          Outstanding, December 28, 1996                      37,104.19          $332.08
            Granted                                              500.00           113.28         $ 59.06
            Canceled                                            (366.00)          100.00
            Exercised                                           (334.00)          100.00
                                                             ----------          -------
</TABLE>


                                     - 44 -
<PAGE>   45

<TABLE>
<S>                                                              <C>              <C>            <C>   
          Outstanding, December 27, 1997                      36,904.19          $333.52
            Canceled                                            (200.00)          100.00
            Purchased                                        (36,704.19)          334.79
            Granted                                              573.58           458.52         $109.37
                                                             ----------          -------

          Outstanding, January 2, 1999                           573.58          $458.52
                                                             ==========          =======

          Options exercisable                                    436.18          $458.52
                                                             ==========          =======
</TABLE>


       The Company has elected to account for its stock-based compensation plans
       under APB Opinion 25. No accounting recognition is given to stock options
       with exercise prices equal to fair market value on the grant date until
       the options are exercised, at which time the proceeds are credited to the
       shareholders' equity accounts. For options with an exercise price less
       than fair market value on the grant date, the amount that the fair market
       value exceeds the exercise price is charged to compensation expense over
       the period the options vest. Had compensation cost for these plans been
       determined consistent with SFAS No. 123, the Company's net income would
       not have been materially different from amounts reported.

       The weighted average grant date fair value of options granted was $56.84,
       $59.06 and $109.37 in 1996, 1997 and 1998, respectively. The fair value
       of each option grant is estimated on the date of the grant using the
       Black-Scholes option pricing model with the following assumptions used:

<TABLE>
<CAPTION>
                                                              1996 & 1997            1998
                                                              ---------------------------------
<S>                                                              <C>                <C>  
                           Risk-free interest rate               6.62%              5.45%
                           Expected life                         10 years           5 years
                           Expected volatility                   0%                 0%
                           Expected dividend yield               0%                 0%
</TABLE>

       In addition, in July 1998 the Company issued warrants to certain
       non-employee shareholders to purchase an aggregate of 4,377.81 share of
       common stock at a price of $458.52 per share. Warrants for 2,180.93
       shares are exercisable immediately. Warrants for 2,196.88 shares are
       exercisable only if the Company is either sold or closes an initial
       public offering of its common stock, and the warrant holders do not
       receive certain minimum returns on their investment in the Company's
       common stock.


(9)    SUPPLEMENTAL CASH FLOW DISCLOSURE

       Cash payments for interest and income taxes and certain noncash
       transactions were as follows for the following periods (in thousands):

<TABLE>
<CAPTION>
                                                YEAR          YEAR         YEAR
                                                ENDED         ENDED        ENDED
                                            DECEMBER 28,  DECEMBER 27,  JANUARY 2,
                                                1996          1997         1999


<S>                                            <C>           <C>          <C>   
       Interest paid                           $3,914        $4,429       $3,393
       
       Income taxes paid                        1,876         2,733        2,499
       
       Liabilities assumed in acquisitions      2,830         7,879        5,273
</TABLE>


                                     - 45 -
<PAGE>   46

(10)   OPERATING AND GEOGRAPHIC SEGMENT INFORMATION AND CONCENTRATION OF CREDIT
       RISK

On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the President,
Chief Executive Officer of the Company. The Company has identified its
reportable operating business segment as industrial cutting tools and related
machinery, based on how the business is strategically managed.

The Company's cutting tool business segment consists of metal (51% of 1998 net
sales), wood (42%), and paper (7%) cutting products. The cutting tool business
segment is managed as a single strategic unit which derives its revenues
primarily from sales to privately owned distributors throughout the world.

No single customer accounts for 10% or more of consolidated net sales. Foreign
net sales are attributed based on the location of the Company's subsidiary
responsible for the sale. The following information by geographic area is
presented for 1996, 1997 and 1998.

         For the year ended December 28, 1996 (in thousands):

                                            Transfers       Income
                              Net Sales to   between        Before
                              Unaffiliated  Geographic      Income    Long-Lived
                                Customers     Areas          Taxes      Assets
                              ------------  ----------     --------    -------
       Geographic areas:
         Domestic Operations     $65,824     $ 11,133      $  9,483    $20,197
         Canadian Operations      10,520          206           625        677
         German Operations        14,444          472         1,115      4,351
         UK Operations             7,873           --           475        432
                                 -------     --------      --------    -------
                                  98,661       11,811        11,698     25,657
         Unallocated                  --      (11,811)         (258)        --
         Interest Expense             --           --        (4,399)        --
         Interest Income              --           --            13         --
                                 -------     --------      --------    -------
       Consolidated Totals       $98,661     $     --      $  7,054    $25,657
                                 =======     ========      ========    =======


       For the year ended December 27, 1997 (in thousands):


                                     - 46 -
<PAGE>   47

<TABLE>
<CAPTION>
                                             Transfers       Income
                               Net Sales to    between       Before
                               Unaffiliated  Geographic      Income     Long-Lived
                                Customers       Areas        Taxes        Assets
                               ------------  ----------     --------    ----------
<S>                              <C>          <C>           <C>           <C>    
       Geographic areas:
         Domestic Operations     $ 75,903     $ 13,954      $ 11,538      $24,680
         Canadian Operations       17,172           74         1,151          624
         German Operations         13,831          474         1,155        4,037
         UK Operations              7,276           83           391          315
                                 --------     --------      --------      -------
                                  114,182       14,585        14,235       29,656
         Unallocated                   --      (14,585)         (544)          --
         Interest Expense              --           --        (4,963)          --
         Interest Income               --           --            24           --
                                 --------     --------      --------      -------
       Consolidated Totals       $114,182     $     --      $  8,752      $29,656
                                 ========     ========      ========      =======
</TABLE>


         For the year ended January 2, 1999 (in thousands):

<TABLE>
<CAPTION>
                                             Transfers       Income
                               Net Sales to    between       Before
                               Unaffiliated  Geographic      Income     Long-Lived
                                Customers       Areas        Taxes        Assets
                               ------------  ----------     --------    ----------
<S>                              <C>          <C>           <C>           <C>    
       Geographic areas:
         Domestic Operations     $ 85,089     $ 14,858      $  9,324      $27,435
         Canadian Operations       16,038          325           304          629
         German Operations         14,789          320           763        3,960
         UK Operations             10,380          640           384        2,361
                                 --------     --------      --------      -------
                                  126,296       16,143        10,775       34,385
         Unallocated                   --      (16,143)         (554)          --
         Interest Expense              --           --        (8,039)          --
         Interest Income               --           --           139           --
                                 --------     --------      --------      -------
       Consolidated Totals       $126,296     $     --      $  2,321      $34,385
                                 ========     ========      ========      =======
</TABLE>

(11)   SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS, AND
       NON-GUARANTORS

The Company's wholly-owned domestic subsidiaries guarantee, on a senior
subordinated basis, the Notes, jointly and severally. The guarantor subsidiaries
data below includes combining financial statements of Armstrong, which was
acquired in August 1997, and Simonds Holding Company. The non-guarantor
subsidiaries' data below includes combining financial statements of Wespa
(German Operations), Simonds Industries Ltd. and Simonds UK Holding Ltd. (UK
Operations), and Simonds Industries Inc. (Canadian Operations). Separate
financial statements of the guarantor subsidiaries have not been presented
because management believes that such financial statements are not material to
investors. In addition, the Senior Credit Facility is guaranteed on a full and
unconditional basis by all guarantors. The following data summarizes the
consolidating results of the Company on the equity method of accounting for the
following periods presented:


                                     - 47 -
<PAGE>   48

                             SIMONDS INDUSTRIES INC.
                                  BALANCE SHEET
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                      As of December 27, 1997
                                                 -----------------------------------------------------------------
                                                  Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                                 --------   ----------  --------------  ------------  ------------
<S>                                              <C>          <C>         <C>                  <C>     <C>    
        ASSETS                                                                           
CURRENTS ASSETS:                                                                         
    Cash ...................................     $     25     $   188     $ 1,042              --      $ 1,255
    Accounts receivable ....................        8,896         872       6,417              --       16,185
    Intercompany accounts receivable .......       20,929         285          --         (21,214)          --
    Inventories:                                                                         
      Raw Materials.........................        3,099         310         767              --        4,176
      Work in progress .....................        5,527         421         792              --        6,740
      Finished goods .......................        5,564         576       5,825            (305)      11,660
    Other current assets ...................        2,416         326         519              --        3,261
                                                 --------     -------     -------        --------      -------
        Total current assets ...............       46,456       2,978      15,362         (21,519)      43,277
                                                 --------     -------     -------        --------      -------
Net property, plant and equipment ..........       22,098       2,582       4,976              --       29,656
OTHER ASSETS:                                                                            
    Investment in subsidiaries .............       35,736       7,894          --         (43,630)          --
    Intercompany loan receivable ...........           --      17,050          --         (17,050)          --
    Other assets ...........................       17,130       4,367         913              --       22,410
                                                 --------     -------     -------        --------      -------
        Total assets .......................     $121,420     $34,871     $21,251        $(82,199)     $95,343
                                                 ========     =======     =======        ========      =======
                                                                                         
                                                                                         
        LIABILITIES AND SHAREHOLDERS' EQUITY                                             
CURRENT LIABILITIES ........................     $ 36,202     $   888     $ 5,751        $(21,215)     $21,626
LONG-TERM DEBT, net of current                                                           
    Portion ................................       44,863          --         423              --       45,286
INTERDIVISION LONG-TERM                                                                  
    DEBT ...................................       15,145          --       1,906         (17,051)          --
OTHER NONCURRENT                                                                         
    LIABILITIES ............................        3,595         638       2,583              --        6,816
SHAREHOLDERS' EQUITY .......................       21,615      33,345      10,588         (43,933)      21,615
                                                 --------     -------     -------        --------      -------
    Total liabilities and shareholders'                                                  
      equity ...............................     $121,420     $34,871     $21,251        $(82,199)     $95,343
                                                 ========     =======     =======        ========      =======
</TABLE>

                             SIMONDS INDUSTRIES INC.
                                  BALANCE SHEET
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                 As of January 2, 1999
                                                           -----------------------------------------------------------------
                                                            Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                                           --------   ----------  --------------  ------------  ------------
<S>                                                        <C>           <C>          <C>            <C>           <C>      
        ASSETS
CURRENTS ASSETS:
    Cash .............................................     $  8,602      $   209      $   487              --      $   9,298
    Accounts receivable ..............................        7,705          714        7,831              --         16,250
    Intercompany accounts receivable .................        2,015          626          383          (3,024)            --
    Inventories:                                                                                   
      Raw Materials ..................................        2,930          372        2,021              --          5,323
      Work in progress ...............................        5,614          289        1,438              --          7,341
      Finished goods .................................        5,316          758        8,835            (347)        14,562
    Other current assets .............................        3,464           78          823              --          4,365
                                                           --------      -------      -------        --------      ---------
        Total current assets .........................       35,646        3,046       21,818          (3,371)        57,139
                                                           --------      -------      -------        --------      ---------
Net property, plant and equipment ....................       23,896        2,527        7,962              --         34,385
                                                                                                   
OTHER ASSETS:                                                                                      
    Investment in subsidiaries .......................       40,817        7,555           --         (48,372)            --
    Intercompany loan receivable .....................           --       23,163           --         (23,163)            --
    Other assets .....................................       19,903        4,108        2,704              --         26,715
                                                           --------      -------      -------        --------      ---------
        Total assets .................................     $120,262      $40,399      $32,484        $(74,906)     $ 118,239
                                                           ========      =======      =======        ========      =========
                                                                                                   
        LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                             
CURRENT LIABILITIES ..................................     $ 14,301      $   464      $ 9,600        $ (3,022)     $  21,343
LONG-TERM DEBT, net of current                                                                     
    portion ..........................................      100,000           --        2,362              --        102,362
INTERDIVISION LONG-TERM                                                                            
    DEBT .............................................       15,145           --        8,018         (23,163)            --
OTHER NONCURRENT                                                                                   
    LIABILITIES ......................................        3,496          638        3,080              --          7,214
SHAREHOLDERS' EQUITY (DEFICIT) .......................      (12,680)      39,297        9,424         (48,721)       (12,680)
                                                           --------      -------      -------        --------      ---------
    Total liabilities and shareholders'                                                            
      equity (deficit) ...............................     $120,262      $40,399      $32,484        $(74,906)     $ 118,239
                                                           ========      =======      =======        ========      =========
</TABLE>


                                     - 48 -
<PAGE>   49

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                      Twelve Months ended December 28, 1996
                                          -----------------------------------------------------------------
                                           Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                          --------   ----------  --------------  ------------  ------------
<S>                                          <C>          <C>           <C>          <C>           <C>  


Net sales                                 $ 76,957           --      $ 33,515      ($11,811)     $98,661
Cost of goods sold                          55,224           --        26,318       (11,714)      69,828
                                          --------      -------      --------      --------      -------

           Gross profit                     21,733           --         7,197           (97)      28,833

Selling, general and administrative                                                                      
 expense                                    12,176           --         4,959            --       17,135
                                          --------      -------      --------      --------      -------

           Operating income                  9,557           --         2,238           (97)      11,698

Other expenses (income):
  Interest expense                           5,410           --           474        (1,485)       4,399
  Interest income                               --       (1,412)          (73)        1,485           --
  Other, net                                   237           35           (27)           --          245
  Equity in earnings of subsidiaries        (1,735)        (960)           --         2,695           --
                                          --------      -------      --------      --------      -------

           Income before income taxes        5,645        2,337         1,864        (2,792)       7,054

Provision for income taxes                   1,662          505           904            --        3,071
                                          --------      -------      --------      --------      -------

           Net income                     $  3,983      $ 1,832      $    960      ($ 2,792)     $ 3,983
                                          ========      =======      ========      ========      =======
</TABLE>

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                        Twelve Months ended December 27, 1997
                                          -----------------------------------------------------------------
                                           Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                          --------   ----------  --------------  ------------  ------------
<S>                                         <C>             <C>         <C>             <C>        <C>   


Net sales                                 $ 86,060      $ 3,797      $ 38,910      ($14,585)     $114,182
Cost of goods sold                          60,635        2,401        30,298       (14,536)       78,798
                                          --------      -------      --------      --------      --------

           Gross profit                     25,425        1,396         8,612           (49)       35,384

Selling, general and administrative         14,329          938         5,882            --        21,149
expense
                                          --------      -------      --------      --------      --------

           Operating income                 11,096          458         2,730           (49)       14,235

Other expenses (income):
  Interest expense                           6,140          205           739        (2,121)        4,963
  Interest income                               --       (1,826)         (295)        2,121            --
  Other, net                                   362          139            19            --           520
  Equity in earnings of subsidiaries        (2,402)      (1,231)           --         3,633            --
                                          --------      -------      --------      --------      --------

           Income before income taxes        6,996        3,171         2,267        (3,682)        8,752

Provision for income taxes                   1,995          720         1,036            --         3,751
                                          --------      -------      --------      --------      --------

           Net income                     $  5,001      $ 2,451      $  1,231      ($ 3,682)     $  5,001
                                          ========      =======      ========      ========      ========
</TABLE>


                                     - 49 -
<PAGE>   50

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                   Twelve Months ended January 2, 1999
                                                    -----------------------------------------------------------------
                                                     Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                                    --------   ----------  --------------  ------------  ------------


<S>                                                 <C>           <C>          <C>           <C>           <C>      
Net sales                                           $ 88,388      $ 9,532      $ 43,662      ($15,286)     $ 126,296
Cost of goods sold                                    61,223        6,361        34,410       (15,244)        86,750
                                                    --------      -------      --------      --------      ---------

           Gross profit                               27,165        3,171         9,252           (42)        39,546

Selling, general and administrative                                                                                  
 expense                                              18,667        2,504         7,600            --         28,771
                                                    --------      -------      --------      --------      ---------

           Operating income                            8,498          667         1,652           (42)        10,775

Other expenses (income):
  Interest expense                                     9,184          470         1,084        (2,699)         8,039
  Interest income                                       (120)      (2,426)         (292)        2,699           (139)
  Other, net                                             636          126          (208)           --            554
  Equity in earnings of subsidiaries                  (2,176)        (657)           --         2,833             --
                                                    --------      -------      --------      --------      ---------

           Income before income taxes                    974        3,154         1,068        (2,875)         2,321

Provision (benefit) for income taxes                    (392)         936           411            --            955
                                                    --------      -------      --------      --------      ---------

           Income before
                extraordinary item                     1,366        2,218           657        (2,875)         1,366

Extraordinary item-
   Write-off of deferred financing cost related
   to refinanced indebtedness, net of tax
   benefit of $374                                      (529)          --            --            --           (529)
                                                    --------      -------      --------      --------      ---------

           Net income                               $    837      $ 2,218      $    657      ($ 2,875)     $     837
                                                    ========      =======      ========      ========      =========
</TABLE>

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                        Twelve Months ended December 28, 1996
                                             -----------------------------------------------------------------
                                              Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                             --------   ----------  --------------  ------------  ------------
<S>                                          <C>          <C>          <C>          <C>          <C>    

Net cash (used in) provided by operating
  activities:                                $ 2,227      $ 1,204      ($1,540)     $ 4,774      $ 6,665

Cash flows from investing activities:
  Proceeds from asset sales                       20           --           15           --           35
  Purchase of equipment                       (3,168)          --         (470)          --       (3,638)
  Acquisitions                                (1,185)      (1,185)      (1,185)       2,370       (1,185)
                                             -------      -------      -------      -------      -------
      Net cash (used in) investing              
          activities                          (4,333)      (1,185)      (1,640)       2,370       (4,788)

Cash flows from financing activities:
  Change in overdraft                            266           --           53           --          319
  Net proceeds from revolving credit             
       facility                                   --           --         (197)          --         (197)
  Proceeds from issuance of long-term
       debt-net of issuance cost
  Principal payments of long-term debt           865           --          611       (4,006)      (2,530)
  Intercompany loans                              --       (2,125)       2,125           --           --
  Issuance of common stock                        --        3,100           37       (3,137)          --
  Purchase of treasury stock                      --           --           --           --           --
  Stock Redemption                                --           --           --           --           --
  Dividends (paid) received                      992         (992)          --           --           --
  Other                                         (118)          --           --           --         (118)
                                             -------      -------      -------      -------      -------

  Net cash (used in)/provided by               
      financing activities                     2,005          (17)       2,629       (7,143)      (2,526)

  Effect of Foreign Exchange                      --           --          361           (1)         360
                                             -------      -------      -------      -------      -------

Increase (decrease) in cash                     (101)           2         (190)          --         (289)

Cash at beginning of the period                  799            1          744           --        1,544
                                             -------      -------      -------      -------      -------

Cash at end of the period                    $   698      $     3      $   554           --      $ 1,255
                                             =======      =======      =======      =======      =======
</TABLE>


                                     - 50 -
<PAGE>   51

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                              Twelve Months ended December 27, 1997
                                                   -----------------------------------------------------------------
                                                    Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                                   --------   ----------  --------------  ------------  ------------
<S>                                                <C>           <C>          <C>          <C>          <C>     

Net cash provided by operating
  activities:                                      $  7,385      $ 1,644      $ 3,342      $   675      $ 13,046

Cash flows from investing activities:
  Proceeds from asset sales                              65           37            4            1           107
  Purchase of equipment                              (3,074)         (18)        (616)          --        (3,708)
  Acquisitions                                      (13,703)      (8,125)          --        8,125       (13,703)
                                                   --------      -------      -------      -------      --------
      Net cash (used in) investing                  
          activities                                (16,712)      (8,106)        (612)       8,126       (17,304)

Cash flows from financing activities:
  Change in overdraft                                  (488)          --          (51)          --          (539)
  Net proceeds from revolving credit facility            --         (536)        (909)          --        (1,445)
  Proceeds from issuance of long-term debt-
       net of issuance cost                           7,700           --           --           --         7,700
  Principal payments of long-term debt                 (722)          --         (733)         143        (1,312)
  Intercompany loans                                     --          452         (452)          --            --
  Issuance of common stock                               33        9,000           (1)      (8,999)           33
  Purchase of treasury stock
  Stock Redemption
  Dividends (paid) received                           2,269       (2,269)          --           --            --
  Other                                                (138)          --           --           --          (138)
                                                   --------      -------      -------      -------      --------

  Net cash (used in)/provided by
      financing activities                            8,654        6,647       (2,146)      (8,856)        4,299
  Effect of Foreign Exchange                             --           --          (96)          55           (41)
                                                   --------      -------      -------      -------      --------

Increase (decrease) in cash                            (673)         185          488           --            --

Cash at beginning of the period                         698            3          554           --         1,255
                                                   --------      -------      -------      -------      --------

Cash at end of the period                          $     25      $   188      $ 1,042           --      $  1,255
                                                   ========      =======      =======      =======      ========
</TABLE>


                                     - 51 -
<PAGE>   52

                             SIMONDS INDUSTRIES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                  Twelve Months ended January 2, 1999
                                                   -----------------------------------------------------------------
                                                    Parent    Guarantors  Non-Guarantors  Eliminations  Consolidated
                                                   --------   ----------  --------------  ------------  ------------
<S>                                                <C>           <C>          <C>          <C>          <C>     

Net cash provided by operating
  activities:                                      $  3,726      $ 1,569      $ 2,622      $  1,196      $  9,113

Cash flows from investing activities:
  Proceeds from asset sales                               4           --           68            --            72
  Purchase of equipment                              (3,899)        (168)        (281)           --        (4,348)
  Acquisitions                                       (5,471)      (5,471)      (5,471)       10,942        (5,471)
                                                   --------      -------      -------      --------      --------
      Net cash (used in) investing activities        (9,366)      (5,639)      (5,684)       10,942        (9,747)


Cash flows from financing activities:
  Change in overdraft                                  (246)          --          146            --          (100)
  Net  proceeds from revolving credit facility        7,065           --       (3,276)           --         3,789
  Proceeds from issuance of long-term debt-
       net of issuance cost                          95,420           --        2,643            --        98,063
  Principal payments of long-term debt              (56,684)          --       (1,067)           --       (57,751)
  Intercompany loans                                     --         (641)       6,112        (5,471)           --
  Issuance of common stock                           18,833        6,722           --        (6,722)       18,833
  Purchase of treasury stock                            (65)          --           --            --           (65)
  Stock Redemption                                  (53,791)          --           --            --       (53,791)
  Dividends (paid) received                           3,685       (1,990)      (1,695)           --            --

                                                   --------      -------      -------      --------      --------

  Net cash provided by
        financing activities                         14,217        4,091        2,863       (12,193)        8,978
  Effect of Foreign Exchange                             --           --         (356)           55          (301)
                                                   --------      -------      -------      --------      --------

Increase (decrease) in cash                           8,577           21         (555)           --         8,043

Cash at beginning of the period                          25          188        1,042            --         1,255
                                                   --------      -------      -------      --------      --------

Cash at end of the period                          $  8,602      $   209      $   487            --      $  9,298
                                                   ========      =======      =======      ========      ========
</TABLE>


(12)   FOREIGN EXCHANGE CONTRACTS

In order to reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future cash flows, the Company entered
into foreign currency forward contracts with a major bank effective from January
2, 1999 to December 31, 1999 to sell approximately $5.5 million denominated in
foreign currency. The majority of these contracts relate to intercompany
accounts receivable, with specified minimum amounts of foreign currency to be
sold on a monthly basis during 1999. These contracts qualify for hedge
accounting. However, a portion of the contracts do not qualify for hedge
accounting and will be marked to market at the end of each accounting period
with a resulting gain or loss. These financial instruments are not held for
trading purposes. They were entered into to manage and reduce the impact of
change in foreign currency rates. The fair value of the contracts at January 2,
1999 was immaterial.

(13)   SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

       (a) The following summarizes unaudited quarterly financial data for the
           years ended December 27, 1997 and January 2, 1999 (in thousands):


                                           1997
                                   For the Quarters Ended
                        -------------------------------------------
                        March 29    June 28     Sept. 27    Dec. 27
                        --------    -------     --------    -------

       Net Sales        $27,174     $28,202     $27,950     $30,856
       Gross Profit       8,291       8,838       8,668       9,587
       Net Income         1,151       1,497       1,068       1,285


                                     - 52 -
<PAGE>   53

                                                1998
                                        For the Quarters Ended
                             ----------------------------------------------
                             March 28    June 27     Oct. 3    Jan. 2, 1999
                             --------    -------     ------    ------------

       Net Sales             $30,546     $32,095     $33,170      $30,485
       Gross Profit            9,794      10,533      10,604        8,615
       Net Income (loss)       1,660       1,654      (2,527)          50


                                     - 53 -
<PAGE>   54

                                                                     SCHEDULE II

                             SIMONDS INDUSTRIES INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                            FOR THE THREE YEARS ENDED
            DECEMBER 28, 1996, DECEMBER 27, 1997, AND JANUARY 2, 1999
                                 (In Thousands)




<TABLE>
<CAPTION>
                                                                           ADDITIONS       CURRENCY
                                  BEGINNING                    WRITE-         FROM        TRANSLATION       ENDING
                                   BALANCE     PROVISIONS     OFFS (1)    ACQUISITIONS    ADJUSTMENTS      BALANCE
                                --------------------------------------------------------------------------------------

ALLOWANCE FOR DOUBTFUL
ACCOUNTS, CASH DISCOUNTS AND
CREDIT MEMOS

<S>                                  <C>          <C>          <C>            <C>             <C>            <C> 
Year Ended December 28, 1996         $748         $  849       $  (832)       $ 25            $  8           $798
Year Ended December 27, 1997         $798         $1,156       $(1,160)       $ 25            $(13)          $806
Year Ended January 2, 1999           $806         $1,155       $(1,089)       $126            $ (6)          $992
</TABLE>



(1) Write-Offs includes credit memos, cash discounts and write-offs.


                                     - 54 -
<PAGE>   55

                             SIMONDS INDUSTRIES INC.
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To The Shareholders and Board of Directors of Simonds Industries Inc.:

We have audited the accompanying consolidated balance sheets of Simonds
Industries Inc. (a Delaware corporation) and subsidiaries listed in Item 14 (a)
of this Form 10-K as of January 2, 1999 and December 27, 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended January 2, 1999. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simonds Industries Inc. and
subsidiaries as of January 2, 1999 and December 27, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 2, 1999 in conformity with generally accepted accounting
principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 (a) is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.




ARTHUR ANDERSEN LLP



Boston, Massachusetts
February 26, 1999


                                     - 55 -
<PAGE>   56

(b)      Reports on Form 8-K.

         None

(c)      Exhibits

EXHIBIT 
NUMBER                                 DESCRIPTION
-------  -----------------------------------------------------------------------

2.1      Stockholder Agreement dated as of July 7, 1998 among the Company and
         its stockholders*
2.2      Stock Purchase Agreement dated August 1, 1997 among Simonds Holding
         Company, Inc., Armstrong Manufacturing Company and Frederic B.
         Andrianoff*
2.3      Share Purchase Agreement dated May 7, 1998 among Time Eclipse Limited,
         SI Holding Corporation and the shareholders of W. Notting Limited*
3.1      Amended and Restated Certificate of Incorporation of Simonds*
3.2      By-laws of Simonds*
3.3      Certificate of Incorporation of Armstrong Manufacturing Company*
4.1      Indenture dated as of July 7, 1998 among the Company, the Guarantors
         and the Trustee*
4.3      Credit Agreement dated as of July 2, 1998 among the Company, certain of
         its Subsidiaries and First Union National Bank*
4.4      Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has 
         not filed herewith any instrument with respect to long-term debt which
         does not exceed 10% of the total assets of the registrant and its
         subsidiaries on a consolidated basis. The registrant hereby agrees to
         furnish a copy of any such instrument to the Securities and Exchange
         Commission upon request.
4.5      Promissory Notes of Simonds UK Holdings Ltd.*
10.1     Employment and Non-Competition Agreement between the Company and Ross
         George dated May 26, 1995, as amended July 7, 1998*
10.2     Employment and Non-Competition Agreement between the Company and Joseph
         Sylvia dated May 26, 1995, as amended July 7, 1998*
10.3     Employment agreement between the Company and Robert Deedrick dated June
         1, 1993*
10.4     Employment agreement between the Company and James Palmer dated March
         31, 1995*
10.5     Employment agreement between the Company and Roland Richard dated May
         7, 1992*
10.6     Employment agreement dated November 14, 1995 between the Company and
         F.A. DeVilling, III*
10.7     Employment Agreement dated March 31, 1998 between the Company and
         Ronald Owens*
10.8     Simonds Industries Inc. Amended and Restated 1998 Stock Incentive Plan*
10.9     Escrow Agreement dated May 26 1995 among SI Holding Corporation, the
         Company, Charles W. Doulton, the Massachusetts Capital Resource
         Company, the shareholders of Simonds Industries, Inc., the option
         holders of the Company and Fleet Bank of Massachusetts, N.A.*
10.10    Labor Agreement dated May 5, 1998 between the Company and Local 
         No. 7896 of the United Steel Workers of America*


                                     - 56 -
<PAGE>   57

10.11    Agreement dated April 6, 1998 between the Company and Local 2737-16 of
         the United Steelworkers of America, AFL-CIO*
10.12    Agreement dated April 6, 1998 between the Company and Local 2737-17 of
         the United Steelworkers of America, AFL-CIO*
10.13    Employment Agreement between the Company and Harry Rogers dated
         February 23, 1994*
12.1     Statement regarding computation of ratios
21.1     Subsidiaries
27.1     Financial Data Schedule

---------------
* The exhibits of the Company's Registration Statement on Form S-4, File No.
  333-62795, are hereby incorporated by reference.


                                     - 57 -
<PAGE>   58

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the ___ day of
March, 1999.

                                           Simonds Industries Inc.




                                           By: /s/ Ross George
                                               -----------------------------
                                               Ross George
                                               Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the ___day of March, 1999.


       SIGNATURES                               TITLE
       ----------                               -----



    /s/ Ross George        President, Chief Executive Officer and Director
------------------------   (principal executive officer) 
      Ross George          

   /s/ Joseph Sylvia       Executive Vice President, Chief Financial Officer and
------------------------   Director (principal financial and accounting officer)
     Joseph Sylvia         

    /s/ Habib Gorgi        Director
------------------------
      Habib Gorgi

/s/ Bernard Buonanno III   Director
------------------------
  Bernard Buonanno III  



                                     - 58 -