<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JLK DIRECT DISTRIBUTION INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 5084 APPLIED FOR
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
</TABLE>
STATE ROUTE 981 SOUTH
P.O. BOX 231
LATROBE, PA 15650-0231
(412) 539-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
MICHAEL W. RUPRICH
JLK DIRECT DISTRIBUTION INC.
STATE ROUTE 981 SOUTH
P.O. BOX 231
LATROBE, PA 15650-0231
(412) 539-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
LEWIS U. DAVIS, JR., ESQ.
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
20TH FLOOR, ONE OXFORD CENTRE
301 GRANT STREET
PITTSBURGH, PA 15219
(412) 562-8800
VINCENT PAGANO, JR., ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
(212) 455-2000
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
====================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value.......................... $100,000,000 $30,304
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 28, 1997
PROSPECTUS
SHARES
JLK DIRECT DISTRIBUTION INC.
CLASS A COMMON STOCK
------------------------
All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), offered hereby (the "Offering") are being offered by
JLK Direct Distribution Inc. (the "Company"), a wholly owned subsidiary of
Kennametal Inc. ("Kennametal").
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common Stock"),
entitles its holder to 10 votes. Upon completion of the Offering, Kennametal
will continue to own all of the shares of Class B Common Stock, which will
represent approximately % of the aggregate shares of Common Stock ( % if
the Underwriters' over-allotment option is exercised in full) and will entitle
Kennametal to cast approximately % of the votes ( % if the Underwriters'
over-allotment option is exercised in full) which may be cast at any meeting of
the shareholders of the Company. Accordingly, Kennametal will continue to
control the Company. See "Risk Factors--Control by Kennametal" and "--Conflicts
of Interest."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. Application will be made for listing of the Class A
Common Stock on the New York Stock Exchange under the symbol " ."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
======================================================================================================
</TABLE>
(1) The Company and Kennametal have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to additional
shares of Class A Common Stock solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Class A Common Stock offered hereby are offered by the
several Underwriters, subject to prior sale, when, as and if issued to and
accepted by them, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Class A Common Stock will
be made in New York, New York on or about , 1997.
------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[INSIDE COVER PHOTOGRAPHS]
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Class A Common
Stock. Such transactions may include stabilizing, the purchase of Class A Common
Stock to cover syndicate short positions and the imposition of penalty bids. For
a description of these activities, see "Underwriting."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. JLK Direct Distribution Inc., a recently
formed wholly owned subsidiary of Kennametal Inc. ("Kennametal"), will own,
operate and distribute the industrial supply products previously marketed, sold
and distributed by Kennametal through its integrated industrial supply programs
("Full Service Supply Programs") and its wholly owned J&L America, Inc.
subsidiary, which has and will continue to do business as "J&L Industrial
Supply" (together, the "Industrial Supply Business"). Except as otherwise noted
or unless the context otherwise requires, (i) the information in this Prospectus
gives effect to the contribution (the "Contribution") to the Company of the
Industrial Supply Business, (ii) the "Company" refers, with respect to any date
prior to the effective date of the Contribution, to the Industrial Supply
Business and, with respect to any date on or subsequent to the effective date of
the Contribution, to JLK Direct Distribution Inc. and its subsidiaries,
including J&L America, Inc., (iii) "Kennametal" refers to Kennametal and its
subsidiaries other than the Company, J&L America, Inc. and Kennametal's Full
Service Supply Programs, (iv) "fiscal" in connection with a year means the 12
months ended June 30 of the calendar year specified, (v) "active customers"
refers to direct-marketing customers which have purchased products from the
Company within the 12 months preceding the relevant period end and (vi) the
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option.
This Prospectus contains certain forward-looking statements (as such term
is defined in the Securities Act) concerning the Company's operations,
performance and financial condition, including, in particular, the likelihood of
the Company's success in developing and expanding its business. These statements
are based upon a number of assumptions and estimates which are inherently
subject to significant uncertainties and contingencies, many of which are beyond
the control of the Company. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
set forth in "Risk Factors."
THE COMPANY
The Company is one of the largest suppliers of a broad range of
metalworking consumables and related products to customers in the United States,
offering a full line of cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies. To meet the varying supply needs of small, medium and large-sized
customers, the Company offers: (i) a direct-marketing program, whereby the
Company supplies predominantly small and medium-sized customers through catalog
and showroom sales and (ii) integrated industrial supply programs, by which
large industrial manufacturers engage the Company to carry out all aspects of
complex metalworking supply processes, including needs assessment, cost
analysis, procurement planning, supplier selection, "just-in-time" restocking of
supplies and ongoing technical support. The Company also conducts its
direct-marketing program for small and medium-sized customers in the United
Kingdom.
The Company estimates the size of the United States market for metalworking
consumables and other related products in which the Company participates at
approximately $50.0 billion. The Company believes it has and will continue to
enjoy strong growth from two important trends now impacting the industrial
supply industry. First, the industrial supply industry is experiencing
consolidation of currently fragmented distribution channels, as customers seek
and technology makes possible the convenience, cost savings and economies of
scale associated with single sources of supplies. Second, to achieve even
greater cost savings and efficiencies, manufacturers are outsourcing complex
procurement and possession processes needed to supply metalworking products that
are critical to their manufacturing operations. As a market leader with a broad
range of products and services and proven capabilities, the Company is
well-positioned to continue to take advantage of these industry trends.
The direct-marketing program serves the needs of predominantly small and
medium-sized metalworking customers by offering 100,000 stock keeping units
("SKUs") through the Company's 1,465 page master catalog, monthly promotional
sales flyer (the "Advantage"), additional mailings and advertisements,
3
<PAGE> 5
telemarketing efforts, direct sales efforts and 24 showrooms. The Company offers
customers the advantages of (i) a single source of supply for all metalworking
consumables and related products, (ii) a tiered product offering (such as
"good," "better" and "best"), (iii) same-day pick-up for the most popular
products stocked at showrooms, (iv) same-day direct shipping and (v) a
state-of-the-art order entry system that tracks product availability and
pricing, provides technical product information and results in an order being
completed in an average time of two and one half minutes. In addition, the
Company has a dedicated sales force based in each showroom that actively calls
on targeted customers.
Full Service Supply Programs allow customers to achieve substantial cost
savings in metalworking consumables and overall manufacturing processes by
outsourcing the entire process of acquiring and possessing metalworking and
related products at manufacturing facilities. Customers, such as General Motors
Corporation, Allied Signal and Emerson Electric, use Full Service Supply
Programs at designated manufacturing facilities to (i) consolidate all of their
metalworking consumables and related product purchases with one vendor, (ii)
eliminate a significant portion of the administrative overhead burden associated
with the internal purchasing function, (iii) ensure appropriate technical
expertise in the selection and use of supplies for complex metalworking
processes and (iv) minimize the level of investment in tooling inventory,
thereby reducing inventory carrying costs. The Company's technical experts
customize and manage a comprehensive computerized product identification,
tracking and purchasing system that analyzes and optimizes supply usage, helps
select appropriate products and allows for "just in time" replacement of
inventory. To increase efficiency and maximize cost savings for its customers,
the Company also provides ongoing application assistance in the usage of
metalworking tools. The Company believes that its Full Service Supply Programs
typically reduce customers' costs of acquiring, possessing and using
metalworking products by approximately 5% to 20% per year.
The Company has grown rapidly due to geographic expansion, expanded product
offerings, increased direct mailings and an increased demand for both
single-source supply and integrated industrial supply programs such as its Full
Service Supply Programs. From fiscal 1993 through fiscal 1996, the Company's net
sales increased from $109.4 million to $244.0 million, representing a compound
annual growth rate ("CAGR") of 30.7%. Operating income during this period
increased from $5.0 million to $24.9 million, representing a CAGR of 70.4%.
During this same period, the Company's number of active direct-marketing
customers increased from 47,000 to 71,000 and the number of such customers who
purchased annually over $10,000 of products increased from 800 to 2,300.
Specific drivers of growth include:
- STRONG GROWTH IN EXISTING MARKETS. The Company has grown its net sales
84% from fiscal 1993 through fiscal 1996 in areas where it has had an
existing showroom as of the beginning of fiscal 1993 or which have been
served only through catalog sales. The Company did not add a showroom in
these areas during that period. The primary source of this growth has been
from areas where a showroom existed. In these areas, the Company gained
marketshare through targeted marketing to existing and prospective
customers.
- PENETRATION OF NEW MARKETS. From fiscal 1993 through fiscal 1996, net
sales have grown 233% in areas in which new showrooms have been added,
with 12 new showrooms in the United States and one in the United Kingdom
added during the period. Along with these showrooms, the Company uses a
focused sales call process to build sales.
- EXPANDED PRODUCT OFFERINGS. From the beginning of fiscal 1993 through
fiscal 1996, the Company added over 600 pages, including 40,000 new SKUs
and 165 product brand names and private labels, to its annual master
catalog.
- EXPANSION OF FULL SERVICE SUPPLY PROGRAMS. From the beginning of fiscal
1993 through fiscal 1996, the number of customers in Full Service Supply
Programs increased from nine to 42, with site locations increasing from 32
to 86.
The Company believes that a significant factor contributing to its growth
has been its ability to identify itself as an affiliate of Kennametal, the
largest North American provider of metalcutting tools and tooling systems. The
Company also relies upon and markets its access to Kennametal's research and
technical
4
<PAGE> 6
expertise in tooling products and supplies. See "Risk Factors--Control by
Kennametal." The Company was incorporated in Pennsylvania on April 28, 1997 to
be a holding company for the Industrial Supply Business.
BUSINESS STRATEGY
The Company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a "one-stop shop" for metalworking products for small and medium-sized
customers and by offering managed solutions for large customers. The Company
believes its market-leadership position results from the successful
implementation of its business strategy, the major elements of which include:
- BREADTH OF METALWORKING PRODUCTS AND METALWORKING FOCUS. As its
customers continue to consolidate their suppliers, the Company
differentiates itself through its breadth of metalworking products and
metalworking focus. The Company believes its ability to offer a broad
spectrum of metalworking products and a tiered product selection
alternative through which similar product offerings with varying degrees
of name recognition, quality and price are categorized, such as "good,"
"better" and "best," has been an important component in expanding direct
marketing sales to small and medium-sized customers. The Company's
metalworking focus also enables the Company to understand complex
industrial metalworking processes so as to provide valuable technical
advice that reduces costs to its Full Service Supply Program customers.
- EXCEPTIONAL CUSTOMER SERVICE. The Company emphasizes exceptional
customer service supported by sophisticated information systems and
ongoing employee training. The Company's telemarketing representatives,
utilizing sophisticated customer support software, inform catalog
customers on a real-time basis of the Company's product availability and
pricing, verify credit information, update customer information and
provide technical product information in calls lasting on average only two
and one-half minutes. For customers participating in its Full Service
Supply Programs, the Company provides continuous improvement specialists
to ensure quality service and low costs by assisting such customers in the
acquisition, possession and use of metalworking consumables and related
products.
- RAPID FULFILLMENT AND JUST-IN-TIME PRODUCT DELIVERY. The Company
believes that its ability to fulfill rapidly the orders of
convenience-driven customers and manage complex procurement processes for
large clients has been critical to its growth. The Company has developed
highly efficient inventory management and order fulfillment systems that
allow more than 99% of domestic orders received by 5:00 p.m. to be shipped
on the same day and delivered by low-cost ground carriers. In addition, in
its Full Service Supply Programs, the Company uses sophisticated systems
that permit "just-in-time" purchasing and delivery of products resulting
in low costs to its customers.
- COMMITMENT TO TECHNOLOGICAL INNOVATION. The Company uses technology to
benefit customers and to improve the Company's productivity and
efficiency. The Company's sophisticated customer support software tracks
all 100,000 SKUs, enabling its telemarketing representatives to inform
catalog customers on a real-time basis of the Company's product
availability and pricing, verify credit information, update customer
information and provide technical product information. The software for
Full Service Supply Programs allows the Company to manage and automate a
large customer's entire processes related to the acquisition, possession
and use of metalworking consumables and related products.
GROWTH STRATEGY
The Company's objective is to expand its leadership position as a preferred
supplier to small, medium and large customers for metalworking consumables and
related products. The major elements of the Company's growth strategy include:
- INCREASED PENETRATION OF EXISTING MARKETS. The Company intends to
increase sales to small and medium-sized consumers by (i) expanding
targeted direct-mail and related campaigns, (ii) increasing the number of
products, product lines, product brand names and private labels offered in
its master
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catalog and (iii) focusing the Company's sales force on marketing to these
consumers. The Company plans to build on its comprehensive marketing
approach, which includes special showroom events and targeted direct-mail
and ongoing product promotions. In markets in which the Company has had
showrooms for at least three years, such as the Detroit metropolitan area,
the Company intends to increase its market share by adding showrooms and
expanding the services it offers to its customers. The Company also plans
to build on its reputation with Full Service Supply Program customers to
expand into other facilities of such customers, while seeking new
customers.
- FURTHER EXPANSION INTO NORTH AMERICAN MARKETS. To continue expanding its
North American presence, the Company plans to increase distribution
capacity and operational efficiency, add new showrooms and increase the
customer base for its Full Service Supply Programs. The Company plans to
construct a new midwest distribution center with a portion of the proceeds
from the Offering. New showrooms have historically resulted in substantial
growth in sales in the surrounding territory. For example, when the
Company opened its showroom in Atlanta in September 1995, sales in that
market increased by over 200% in the following nine months. The Company
has showrooms in 19 of the top 50 industrial markets in the United States
and intends to have showrooms in 40 of such 50 markets over the next
several years. In connection with this expansion, the Company will
continue to consider strategic acquisitions of metalworking distributors,
such as its acquisition in April 1997 of the Strelinger Company
("Strelinger"), based in Troy, Michigan (the "Strelinger Acquisition").
The Company also intends to continue to leverage its relationship with
Kennametal to market its Full Service Supply Programs to large industrial
metalworking customers of Kennametal. The Company estimates that the
market for Full Service Supply Programs consists of 12,000 to 15,000 large
industrial manufacturing facilities in the United States. The Company also
intends to customize versions of its Full Service Supply Programs to meet
the needs of medium-sized industrial facilities.
- EXPANSION INTO INTERNATIONAL MARKETS. The Company believes that the
consolidation and outsourcing trends which provide growth opportunities in
the United States also offer comparable opportunities in international
markets. The Company entered the United Kingdom market in fiscal 1995 with
a 256-page catalog which included over 30,000 products. In April 1997, the
Company released an 800-page catalog which includes over 60,000 products.
The Company now has over 13,000 active customers in such market. Over the
next five years, the Company anticipates launching additional
direct-marketing efforts and opening showrooms in the United Kingdom,
Germany and certain other European countries and is considering direct
marketing in certain other countries. The Company is also planning to
introduce its Full Service Supply Programs into international markets,
such as the United Kingdom and Germany, by offering this service to
foreign manufacturing facilities of the Company's domestic Full Service
Supply Program customers and to Kennametal's foreign customers.
6
<PAGE> 8
THE OFFERING
Class A Common Stock
offered....................... shares
Common Stock outstanding after
the Offering:
Class A Common
Stock(1)(2)............ shares
Class B Common
Stock(1)............... shares
Total Common
Stock(2).......... shares
Use of proceeds............... The net proceeds from the Offering, after
deducting estimated underwriting discounts and
expenses are estimated to be approximately
$ million and will be used (i) to repay
$20.0 million of indebtedness related to a
dividend paid to Kennametal on April 28, 1997,
(ii) to repay amounts due to Kennametal
totaling approximately $19.0 million relating
to acquisitions, income taxes and employee
benefit obligations, (iii) to construct a new
midwest distribution center, (iv) to provide
working capital for new showrooms and Full
Service Supply Programs and (v) to fund
acquisitions which the Company is currently
considering. See "Use of Proceeds."
Voting rights................. The holders of Class A Common Stock generally
have rights, including as to dividends,
identical to those of holders of Class B Common
Stock, except that holders of Class A Common
Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to
10 votes per share. Holders of Class A Common
Stock and Class B Common Stock generally vote
together as a single class, except as otherwise
required by Pennsylvania law. See "Description
of Capital Stock--Common Stock--Voting Rights."
Under certain circumstances, Class B Common
Stock converts to Class A Common Stock. See
"Description of Capital Stock--Common
Stock--Conversion."
New York Stock Exchange
symbol........................ " ."
- ---------
(1) The shares of Class B Common Stock are convertible at any time into shares
of Class A Common Stock. See "Description of Capital Stock--Common
Stock--Conversion."
(2) Does not include 425,000 shares of Class A Common Stock issuable upon
exercise of stock options that will be granted to executive officers and
directors of the Company upon consummation of the Offering. Such options
will be subject to a one-year vesting period. See "Management--Executive
Compensation" and "--JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan."
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Class A Common Stock offered
hereby.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated income statement and balance sheet data for the
Company presented below are derived from the Company's Consolidated Financial
Statements. The Company's Consolidated Financial Statements as of and for the
fiscal years ended June 30, 1994, 1995 and 1996 have been audited by Arthur
Andersen LLP. The Consolidated Financial Statements as of and for the nine
months ended March 31, 1996 and 1997 are derived from the Company's unaudited
interim financial statements appearing elsewhere in this Prospectus, which in
the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary to state fairly the data included therein in
accordance with generally accepted accounting principles for interim financial
information. Results for the nine months ended March 31, 1997 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year. The financial information for the fiscal years ended 1992 and 1993
is derived from the Company's unaudited Consolidated Financial Statements. The
summary financial information presented below should be read in conjunction
with, and is qualified by reference to, the more detailed information in the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus, Management's Discussion and Analysis of Financial Condition and
Results of Operations and other financial information set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........... $88,560 $109,364 $144,933 $188,202 $243,969 $175,989 $ 225,195
Cost of goods
sold............. 60,833 75,823 100,672 127,917 166,326 120,017 152,339
------- -------- -------- -------- -------- -------- -----------
Gross profit........ 27,727 33,541 44,261 60,285 77,643 55,972 72,856
Operating
expenses......... 25,064 28,511 33,026 40,658 52,761 38,217 50,425
------- -------- -------- -------- -------- -------- -----------
Operating income.... 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Interest and
other............ -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- -----------
Income before income
taxes............ 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Provision for income
taxes............ 1,235 2,114 4,522 7,799 9,819 7,019 8,812
------- -------- -------- -------- -------- -------- -----------
Net income.......... $ 1,428 $ 2,916 $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======= ======== ======== ======== ======== ======== =========
Pro forma net income
per share(1).....
Pro forma weighted
average shares
outstanding(1)...
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
-----------------------
(IN THOUSANDS)
AS
ACTUAL ADJUSTED(2)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 85,640
Total assets......................................................... 138,132
Shareholders' equity(3).............................................. 111,378
</TABLE>
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS
------------------------------------------------------------------ ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Active direct
marketing
customers(4)(5)..... 41,000 47,000 48,000 59,000 71,000 81,000
Number of SKUs(5)..... 40,000 50,000 60,000 70,000 80,000 100,000
Number of publications
per year............ 5 6 6 9 13 11
Total number of
publications
mailed.............. 1,154,000 1,416,000 1,403,000 2,285,000 3,048,000 2,724,000
Direct-mail
costs(6)............ $1,354,000 $1,551,000 $1,401,000 $2,261,000 $3,622,000 $3,175,000
Showroom and
distribution
facilities(5)....... 5 6 7 12 19 24
Full Service Supply
Programs:
Customers(4)(5)..... 9 16 21 29 42 51
Site locations(5)... 32 46 54 69 86 104
</TABLE>
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(1) Gives effect to (i) the issuance on , 1997 of shares of Class
B Common Stock to Kennametal for all periods presented and (ii) the assumed
issuance for fiscal 1996 and the nine months ended March 31, 1997 of
shares of Class A Common Stock to fund the excess of dividends over net
income for the nine months ended March 31, 1997.
(2) As adjusted to reflect the sale of the shares of Class A Common Stock
offered hereby (assuming an initial public offering price of $ per
share, the mid-point of the range set forth on the cover page of this
Prospectus) and application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(3) During the periods presented, the Company paid no cash dividends.
(4) Number of customers that have purchased products from the Company within the
12 months preceding the relevant period end.
(5) Represents data at period end.
(6) Direct-mail costs include production and mailing costs.
9
<PAGE> 11
RISK FACTORS
Prospective investors should consider, in addition to the other information
set forth elsewhere in this Prospectus, the following matters in evaluating the
Company and the Class A Common Stock offered hereby.
CONTROL BY KENNAMETAL
Kennametal is currently the only shareholder of the Company. Upon
completion of the Offering, Kennametal will own 100% of the outstanding Class B
Common Stock of the Company (which Class B Common Stock entitles its holders to
10 votes per share on any matter submitted to a vote of the Company's
shareholders). The Class B Common Stock will represent approximately % of
the combined voting power of all classes of voting stock of the Company ( %
if the Underwriters' over-allotment option is exercised in full) and thus will
be able to direct the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business and affairs of
the Company, including any determinations with respect to mergers or other
business combinations, the acquisition or disposition of assets, the incurrence
of indebtedness, the issuance of any additional Common Stock or other equity
securities and the payment of dividends with respect to the Common Stock.
Similarly, Kennametal will have the power to determine matters submitted to a
vote of the Company's shareholders without the consent of the Company's other
shareholders, will have the power to prevent a change of control of the Company
and could take other actions that might be favorable to Kennametal. Kennametal
has advised the Company that its current intent is to continue to hold all of
its Class B Common Stock. There can be no assurance, however, concerning the
period of time during which Kennametal will maintain its beneficial ownership of
Common Stock. Pursuant to the Purchase Agreement (as defined herein), Kennametal
will agree, subject to certain exceptions, not to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock owned by it for a period of
180 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters. For so long as Kennametal maintains
beneficial ownership of at least 40% of the number of outstanding shares of
Common Stock, the Company may not act in a way which may reasonably be
anticipated to result in a contravention by Kennametal of Kennametal's Articles
of Incorporation or credit or other material agreement. Kennametal will have the
right upon any issuance of shares of Class A Common Stock to purchase additional
shares of Common Stock in order to maintain its ownership percentage. See
"Relationship with Kennametal--Corporate Agreement."
The Company's Board of Directors currently consists of six members, four of
whom serve concurrently as members of the Board of Directors of Kennametal,
including Robert L. McGeehan, President and Chief Executive Officer of
Kennametal. In light of its ownership of the Company's Class B Common Stock,
Kennametal will have the ability to change the size and composition of the
Company's Board of Directors and committees of the Board of Directors. See
"Relationship with Kennametal--General."
As of the date of this Prospectus, Kennametal has no current plan or
intention other than to hold its shares of Class B Common Stock for the
foreseeable future. After the date of the Offering, options which may be
considered by Kennametal regarding its interest in the Company include whether
to sell all or a portion of its shares of Common Stock to the public in a
subsequent public offering or to a strategic investor or to distribute pro rata
to its shareholders its remaining shares of Common Stock in a Tax-Free Spin-Off
(as defined herein). Kennametal also has the right to require the Company to
register for sale under applicable securities laws all of the shares of Common
Stock (including any shares of Class A Common Stock acquired by Kennametal upon
conversion of the Class B Common Stock) which Kennametal or its subsidiaries
hold. See "Relationship with Kennametal--Corporate Agreement."
NO ASSURANCE THAT GROWTH MAY BE SUSTAINED
The Company has grown rapidly over the past several years as a result of
the addition of distribution centers, warehouses and showrooms, expanded
metalworking product offerings in its master catalog, more effective marketing
campaigns and new customers and site locations for its Full Service Supply
Programs. The Company believes that part of its success has been due to the
metalworking focus of its catalog, which the Company intends to maintain. This
focus, however, could limit the ability of the Company to continue
10
<PAGE> 12
expanding its product offerings. Additionally, the Company believes that there
are numerous suitable locations for development of distribution centers,
warehouses and showrooms, although there can be no assurance that any new
facilities will result in increased sales. Similarly, no assurance can be given
that the Company's marketing campaigns will continue to result in increased
sales. The Company's growth has and will continue to place increasing demands on
the Company's management resources and on its need to attract and retain skilled
employees. The Company's future growth prospects are dependent upon a number of
these factors, many of which are not in the control of the Company. As a result,
there can be no assurance that the Company will be able to continue to grow
profitably.
LARGE CUSTOMERS
The Full Service Supply Programs are targeted at the needs of large
industrial customers who purchase large amounts of metalworking consumables and
related products for their manufacturing facilities. Consequently, a small
number of customers, utilizing Full Service Supply Programs at several or all of
their manufacturing facilities, could generate a substantial portion of the
Company's net sales. The Company's Full Service Supply Programs generally are
pursuant to arrangements without a stated term and, therefore, can be terminated
by either the Company or the customer on reasonable notice, subject to
negotiation of disengagement terms. As a result, although a majority of the
Company's Full Service Supply Programs have remained in effect from year to
year, there can be no assurance that the Company or the customer will not
terminate these agreements, which could have a material adverse effect on the
Company's financial condition and results of operations. For example, following
extensive negotiations in early 1997 with General Electric Corporation ("GE"),
during which the Company determined that it was not in its best interest to
accede to certain price concessions requested by GE, GE gave notice of
termination of its agreement with the Company under which the Company had net
sales of $36.5 million during the nine months ended March 31, 1997. No other
customer accounted for more than six percent of the Company's net sales during
that period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Termination of Large Contract."
CONFLICTS OF INTEREST
Various conflicts of interest between the Company and Kennametal may arise
in the future in a number of areas relating to their past and ongoing
relationships, including potential acquisitions of businesses or properties,
potential competitive business activities, the election of new or additional
directors, payment of dividends, incurrence of indebtedness, tax matters,
financial commitments, marketing functions, indemnity arrangements, registration
rights, administration of benefit plans, service arrangements, issuances of
capital stock of the Company, sales or distribution by Kennametal of its
remaining shares of Common Stock and the exercise by Kennametal of its ability
to control the management and affairs of the Company. In addition, there are
overlapping directors between the Company and Kennametal. Robert L. McGeehan, a
director of the Company, is a director and the Chief Executive Officer of
Kennametal, and the Company's Chairman of the Board, William R. Newlin, is also
the Chairman of the Board of Kennametal. In addition, Richard C. Alberding and
Aloysius T. McLaughlin, Jr., who are directors of the Company, are also
directors of Kennametal. See "Management." The Company has not instituted any
formal plan or arrangement to address potential conflicts of interest that may
arise between the Company and Kennametal. The Company's directors intend to
exercise reasonable judgment and take such steps as they deem necessary under
all of the circumstances in resolving any specific conflict of interest that may
occur and will determine what, if any, specific measures may be necessary or
appropriate in light of their fiduciary duties under state law, including
whether to have any specific matter approved by a majority vote of the
disinterested directors. There can be no assurance that any conflicts will be
resolved in favor of the Company.
The Company and Kennametal have entered into a number of agreements for the
purpose of defining the ongoing relationship between them. Pursuant to these
arrangements, Kennametal will provide benefits to the Company that it might not
provide to a third party, and there is no assurance that the terms and
conditions of any future arrangements between Kennametal and the Company will be
as favorable to the Company as in effect now. In addition, notwithstanding the
Tax Sharing Agreement (as defined herein), under the Employee
11
<PAGE> 13
Retirement Income Security Act of 1974, as amended ("ERISA"), and federal income
tax law, each member of a consolidated group (for federal income tax and ERISA
purposes) is also jointly and severally liable for the federal income tax
liability, benefit plan funding and termination liabilities, certain benefit
plan taxes and certain other liabilities of each other member of the
consolidated group. Similar rules may apply under state income tax laws. See
"Relationship with Kennametal."
In addition, to address the potential for conflicts between the Company and
Kennametal, the Company's articles of incorporation (the "Articles of
Incorporation" or "Articles") contain detailed provisions concerning the
business activities in which the Company is permitted to engage and prohibiting
the Company from competing with Kennametal until the day after the third annual
shareholder meeting held following the date upon which Kennametal and its
affiliates (other than the Company or its subsidiaries) no longer beneficially
own in the aggregate 40% or more of the Common Stock (such date upon which
Kennametal and such affiliates cease to own such percentage of Common Stock, the
"Control Termination Date"). The relevant provisions are intended to permit the
Company to continue all activities in which it currently engages, and to expand
into certain related distribution products and markets. The pertinent provisions
of the Articles of Incorporation are set forth under "Description of Capital
Stock--Limitations on the Company's Business Activities." These provisions
generally permit the Company to continue distributing metalworking consumables
and related products to industrial customers through direct marketing and
integrated supply programs and to continue to provide integrated supply
services. The Company may also engage in any other business with Kennametal's
consent or as authorized by a majority vote of Kennametal's shareholders. The
Articles further require the Company to purchase from Kennametal, unless
Kennametal otherwise consents, all of its direct marketing requirements for
metalworking tools, inserts and related products available from Kennametal. The
Company's Articles of Incorporation also provide that no opportunity,
transaction, agreement or other arrangement to which Kennametal, or an entity in
which Kennametal has an interest, is a party, may be a corporate opportunity of
the Company unless such opportunity, transaction, agreement or other arrangement
was initially offered to the Company before it is offered to Kennametal or such
other entity, and either (i) the Company has an enforceable contractual interest
in such opportunity, transaction, agreement or other arrangement or (ii) the
subject matter of such opportunity, transaction, agreement or other arrangement
is a constituent element of an activity in which the Company is then actively
engaged. Even if the foregoing conditions were met, such fact alone would not
conclusively render such opportunity the property of the Company.
Because of its controlling interest in the Company and the terms of the
tax-sharing agreement to be entered into between the Company and Kennametal (the
"Tax-Sharing Agreement"), Kennametal will effectively control all of the
Company's tax decisions. Under the Tax-Sharing Agreement, Kennametal will have
sole authority to respond to and conduct all tax proceedings (including tax
audits) relating to the Company and to file all returns on behalf of the
Company. The amount of the Company's liability to (or entitlement to payment
from) Kennametal under the Tax-Sharing Agreement will equal the amount of taxes
that the Company would owe (or refund that it would receive) had it prepared tax
returns on a stand-alone basis. See "Relationship with Kennametal--Tax-Sharing
Agreement." This arrangement may result in conflicts of interest between the
Company and Kennametal. For example, under the Tax-Sharing Agreement, Kennametal
may choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
Kennametal and detrimental to the Company. Each member of a consolidated group
is jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. Accordingly, although the Tax-Sharing
Agreement allocates tax liabilities between the Company and Kennametal, during
the period in which the Company is included in Kennametal's consolidated group,
the Company could be liable in the event that any federal tax liability is
incurred, but not discharged, by any other member of Kennametal's consolidated
group.
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S LENGTH NEGOTIATION
Kennametal and the Company have entered and intend to enter into certain
intercompany agreements relating to services that are material to the Company's
business. These agreements include the provision by Kennametal of various
services to the Company and the sale of Kennametal products, as well as the Tax-
12
<PAGE> 14
Sharing Agreement. Pursuant to the Services Agreement (as defined herein), the
relationship between Kennametal and the Company will continue in a manner
generally consistent with past practices. See "Relationship with Kennametal."
Because the Company is a wholly owned subsidiary of Kennametal, none of these
agreements will result from arm's length negotiations and, therefore, the prices
charged to the Company for services provided thereunder may be higher or lower
than prices that may be charged by third parties.
DEPENDENCE ON KENNAMETAL AND KENNAMETAL INFORMATION SYSTEMS
The Company believes that a significant factor contributing to its growth
has been its affiliation with Kennametal, the largest North American provider of
metalcutting tools and tooling systems. The Company also relies upon and markets
its access to Kennametal's research and technical expertise in tooling products
and supplies. In addition, the proprietary computer software programs of
Kennametal which the Company uses are an integral part of the Company's business
and growth strategies. The Company depends upon Kennametal's information systems
generally to process orders, to manage inventory and accounts receivable
collections, to purchase, sell and ship products efficiently and on a timely
basis, to maintain cost-effective "just-in-time" operations and to provide
reliable service to its customers. Although the Company has entered into various
service agreements with Kennametal, there can be no assurance of its continued
relationship with Kennametal or that a disruption will not occur in Kennametal's
information systems. Any such disruption could have a material adverse effect on
the Company's financial condition and results of operations, including as a
result of Kennametal's implementation of SAP/R3, a new client-server information
system. See "Relationship with Kennametal" and "Business--Information Systems."
INTERNATIONAL EXPANSION
The Company began its direct marketing operations in the United Kingdom in
fiscal 1995. The Company anticipates that it will launch additional
direct-marketing efforts and open showrooms in the United Kingdom, Germany and
certain other European countries over the next five years and is considering
direct marketing in certain other countries. Additionally, the Company is
planning to introduce its Full Service Supply Programs in the United Kingdom and
Germany. Expansion into international markets will involve risks relating to
currency exchange rates, new and different legal, tax, accounting and regulatory
requirements, difficulties in staffing and managing foreign operations,
operating difficulties and other factors.
COMPETITION
The metalworking supply industry is a large, fragmented industry that is
highly competitive. The Company faces competition (i) in the small and
medium-sized metalworking markets from traditional channels of distribution such
as retail outlets, small dealers, regional or national distributors utilizing
direct sales forces, and manufacturers' representatives and (ii) in the large
industrial metalworking market from large distributors and other companies which
offer varying degrees and types of integrated industrial supply programs. The
Company believes that sales of metalworking industrial supplies will become more
concentrated over the next few years, which may increase opportunities for the
Company to use its market leadership position to grow through expansion.
Consolidation, however, could increase the competitiveness of the industry in
ways that could harm the Company's profitability and growth prospects. Certain
of the Company's competitors offer a greater variety of products (including
nonmetalworking products) and have substantially greater financial and other
resources than the Company. See "Business--Competition."
INDUSTRY CYCLICALITY
Some of the primary markets for the products sold by the Company are
subject to cyclical fluctuations. Consequently, the demand for products has been
and may be influenced by many of the same national and regional factors which
affect demand for industrial and consumer durable goods, including consumer
confidence, interest rates and general economic conditions. Changes in economic
conditions resulting in a change in the current business cycle could have a
material adverse effect on the Company's results of operations and financial
condition.
13
<PAGE> 15
INTEGRATION OF ACQUISITIONS
On , 1997, the Company completed the Strelinger Acquisition. An
element of the Company's strategy is to make selected, strategic acquisitions
which complement its existing operations. The Company does not have a history of
completing and integrating acquisitions, including the Strelinger Acquisition.
There can be no assurance that the Company will be able to locate suitable
acquisition candidates successfully or complete and integrate such acquisitions.
In addition, acquisitions involve a number of special risks, including adverse
short-term effects on reported operating results, the diversion of management's
attention, the dependence on retention, hiring and training of key personnel,
the amortization of acquired intangible assets and risks associated with
unanticipated problems or legal liabilities, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on
its executive officers and other key members of management. There can be no
assurance that the Company will be able to retain its executive officers and key
personnel or attract additional qualified members of management in the future.
The loss of the services of any of the key managers could have a material
adverse effect upon the Company's business. The Company currently does not have
"key man" insurance on any of these individuals.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have shares of
Class A Common Stock issued and outstanding ( if the Underwriters'
over-allotment option is exercised in full) and shares of Class B Common
Stock issued and outstanding. The shares of Class A Common Stock being offered
hereby will be freely tradable (other than by an "affiliate" of the Company, as
such term is defined in the Securities Act) without restriction under the
Securities Act. Upon consummation of the Offering, Kennametal will own all
shares of Class B Common Stock outstanding, each of which is convertible,
under certain circumstances, into one share of Class A Common Stock. See
"Description of Capital Stock-- Common Stock--Conversion." The shares held by
Kennametal will be eligible for public sale if registered under the Securities
Act or otherwise sold in accordance with applicable securities laws, including
Rule 144. For a description of the requirements of Rule 144, including volume
and method of sale restrictions contained therein, see "Shares Eligible for
Future Sale." In connection with the Offering, the Company and Kennametal have
entered into certain "lockup" agreements for 180 days. See "Underwriting." In
addition, the Company has granted, upon consummation of the Offering, stock
options to purchase an aggregate of shares of Class A Common Stock which
generally are exercisable one year from the date of grant. The issuances of the
shares of Class A Common Stock underlying such options are expected to be
registered and, therefore, such shares will be freely tradable upon receipt. No
predictions can be made as to the effect, if any, that future sales of Common
Stock or the availability of such shares for sale will have on the prevailing
market prices of the Class A Common Stock following the Offering. Sales of
substantial amounts of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect prevailing market prices for
Class A Common Stock. See "Shares Eligible for Future Sale." In addition, the
Company has agreed to use its best efforts to effect the registration under
applicable federal and state securities laws of any of the Common Stock held by
Kennametal. See "Relationship with Kennametal--Corporate Agreement."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. There can be no assurance that an active trading market for the
Class A Common Stock will develop or be sustained. The initial public offering
price of the Class A Common Stock offered hereby will be determined by
negotiations between the Company and the Underwriters and may not be indicative
of the market price for the Class A Common Stock following the Offering. No
predictions can be made as to the effect, if any, that future market sales of
Class A Common Stock or the availability of Class A Common Stock for sale will
have on the prevailing market prices of the Class A Common Stock following the
Offering. For a discussion of the factors considered in determining the initial
public offering price, see "Underwriting."
14
<PAGE> 16
The market price for shares of the Class A Common Stock may be volatile and
may fluctuate based upon a number of factors including, without limitation, the
Company's operating performance, news announcements or changes in general
economic and market conditions. In addition, the stock market in recent years
has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations may adversely affect the market price of the Class A Common Stock.
ABSENCE OF DIVIDENDS
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience
immediate dilution of $ per share of Class A Common Stock in the net
tangible book value of their Class A Common Stock from the initial public
offering price (assuming an initial public offering price of $ per share,
the midpoint of the range set forth on the cover page of this Prospectus). Prior
to consummation of the Offering, the Company's net tangible book value per share
of Common Stock will be $ , whereas upon consummation of the Offering, it
will be $ . This will result in an increase in net tangible book value of
$ per share of Class B Common Stock that will be received by Kennametal
attributable to the Offering. See "Dilution."
USE OF PROCEEDS
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $ million (or
approximately $ million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million relating to
acquisitions, income taxes and employee benefit obligations, (iii) to construct
a new midwest distribution center, (iv) to provide working capital for new
showrooms and Full Service Supply Programs and (v) to fund acquisitions which
the Company is currently considering. Pending such uses, the net proceeds will
be loaned to Kennametal in exchange for a note bearing interest at a fluctuating
rate equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.75%. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all of
such loans upon demand by the Company. See "Relationship with Kennametal--
Intercompany Debt/Investment and Cash Management Agreement."
DIVIDEND POLICY
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to reflect the sale of the shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$ per share (the midpoint of the range set forth on the cover page of this
Prospectus) and the application of the net proceeds therefrom (assuming that the
Underwriters' over-allotment option is not exercised). See "Use of Proceeds."
The information set forth in this table should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short term note receivable from Kennametal(2)................ $ -- $
Capitalization:
Long-term debt(3)............................................ --
Shareholders' equity(4):
Preferred Stock, $.01 par value; 25,000,000 shares
authorized; no shares issued and outstanding............ --
Class A Common Stock, $.01 par value; 75,000,000 shares
authorized; shares issued and outstanding(5)..... --
Class B Common Stock, $.01 par value; 50,000,000 shares
authorized; shares issued and outstanding(6)..... --
Additional paid-in capital(6)(7)........................... --
Investments by and advances from Kennametal(6)............. 111,244
Translation adjustment..................................... 134
-------- ---------
Total shareholders' equity(5)......................... 111,378
-------- ---------
Total capitalization............................. $111,378 $
======== =========
</TABLE>
- ---------
(1) The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $ million
(or approximately $ million if the Underwriters' over-allotment option
is exercised in full) and will be used: (i) to repay $20.0 million of
indebtedness related to a dividend paid to Kennametal on April 28, 1997,
(ii) to repay amounts due to Kennametal totaling approximately $19.0 million
relating to acquisitions, income taxes and employee benefit obligations,
(iii) to construct a new midwest distribution center, (iv) to provide
working capital for new showrooms and Full Service Supply Programs and (v)
to fund acquisitions which the Company is currently considering. Pending
such uses, the net proceeds will be loaned to Kennametal. See "Use of
Proceeds."
(2) Pending the use of proceeds described above, the net proceeds will be loaned
to Kennametal in exchange for a note bearing interest at a fluctuating rate
equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.75%.
Kennametal will maintain unused lines of credit to enable it to repay any
portion or all of such loans upon demand by the Company. See "Use of
Proceeds."
(3) Does not include amounts borrowed on April 25, 1997 under J&L's line of
credit of $20.0 million to fund a dividend to Kennametal. Upon completion of
this Offering, a portion of the net proceeds will be used to repay the
borrowings under the line of credit.
(4) Before deducting estimated underwriting discounts and expenses of the
Offering payable by the Company.
(5) Does not include 425,000 shares of Class A Common Stock issuable upon
exercise of options that will be granted to executive officers and directors
of the Company upon consummation of the Offering. Such options will be
subject to a one-year vesting period. See "Management--Executive
Compensation" and "--JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan."
(6) Reflects the exchange of Investments by and advances from Kennametal for
shares of Class B Common Stock.
(7) Reflects a reduction of $20.0 million for the dividend to Kennametal on
April 28, 1997.
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<PAGE> 18
DILUTION
The net tangible book value of the Company as of March 31, 1997 would have
been $ million, or $ per share of Common Stock, based upon
shares of Class B Common Stock outstanding. Net tangible book value per share is
equal to the Company's total tangible assets less total liabilities, divided by
the number of shares of Common Stock outstanding. After giving effect to the
Offering (at an assumed initial public offering price of $ per share,
the midpoint of the range set forth on the cover page of this Prospectus and
less estimated underwriting discounts and expenses of $ million payable by
the Company in connection with the Offering), the net tangible book value of the
Company as of March 31, 1997 would have been $ million, or $ per
share of Common Stock. This represents an immediate increase in net tangible
book value of $ per share of Class B Common Stock to Kennametal and an
immediate dilution of $ per share to purchasers of the shares of Class
A Common Stock in the Offering ("New Investors"). "Dilution per share"
represents the difference between the price per share to be paid by New
Investors for the shares of Class A Common Stock issued in the Offering and the
net tangible book value per share as of March 31, 1997. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1).............. $
Net tangible book value per share of Common Stock before the
Offering(2)................................................ $
Increase per share attributable to New Investors..............
-------
Net tangible book value per share after the Offering(2).........
-------
Dilution per share to New Investors............................. $
=======
</TABLE>
The following table summarizes as of March 31, 1997 the differences between
Kennametal and the New Investors with respect to the number of shares held by,
the voting rights of the total investment in the Company of, and the average
cost per share paid by Kennametal and the New Investors purchasing shares of
Class A Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES HELD TOTAL INVESTMENT
---------------------------------- --------------------------------
PERCENTAGE VOTING PERCENTAGE AVERAGE
OF THE RIGHTS OF COST PER
NUMBER COMPANY PERCENTAGE AMOUNT INVESTMENT SHARE
------ ---------- ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Kennametal....................... % $ % $
New Investors.................... % $ % $
------ ------ ------ -----
Total(2)....................... 100.0% $ 100.0%
====== ===== ====== =====
</TABLE>
- ---------
(1) Before deducting estimated underwriting discounts and expenses of the
Offering payable by the Company.
(2) Does not include 425,000 shares of Class A Common Stock issuable upon
exercise of options that will be granted to executive officers and directors
of the Company upon consummation of the Offering. Such options will be
subject to a one-year vesting period. See "Management--JLK Direct
Distribution Inc. 1997 Stock Option and Incentive Plan."
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated income statement and balance sheet data for the
Company presented below are derived from the Company's Consolidated Financial
Statements. The Company's Consolidated Financial Statements as of and for the
fiscal years ended June 30, 1994, 1995 and 1996 have been audited by Arthur
Andersen LLP. The Consolidated Financial Statements as of and for the nine
months ended March 31, 1996 and 1997 are derived from the Company's unaudited
interim financial statements appearing elsewhere in this Prospectus, which in
the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary to state fairly the data included therein in
accordance with generally accepted accounting principles for interim financial
information. Results for the nine months ended March 31, 1997 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year. The financial information for the fiscal years ended 1992 and 1993
is derived from the Company's unaudited Consolidated Financial Statements. The
selected financial information presented below should be read in conjunction
with, and is qualified by reference to, the more detailed information in the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus, Management's Discussion and Analysis of Financial Condition and
Results of Operations and other financial information set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................. $88,560 $109,364 $144,933 $188,202 $243,969 $175,989 $225,195
Cost of goods sold........ 60,833 75,823 100,672 127,917 166,326 120,017 152,339
------- -------- -------- -------- -------- -------- --------
Gross profit.............. 27,727 33,541 44,261 60,285 77,643 55,972 72,856
Operating expenses........ 25,064 28,511 33,026 40,658 52,761 38,217 50,425
------- -------- -------- -------- -------- -------- --------
Operating income.......... 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Interest and other........ -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Provision for income
taxes.................. 1,235 2,114 4,522 7,799 9,819 7,019 8,812
------- -------- -------- -------- -------- -------- --------
Net income................ $ 1,428 $ 2,916 $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======= ======== ======== ======== ======== ======== ========
Pro forma net income per
share(1)...............
Pro forma weighted average
shares
outstanding(1).........
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
FISCAL YEAR ENDED JUNE 30, -----------------------
---------------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(2)
------- ------- ------- ------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $41,135 $44,394 $50,670 $51,945 $ 73,263 $ 85,640 $
Total assets........... 83,050 85,835 92,059 98,893 121,045 138,132
Shareholders'
equity(3)........... 73,283 73,815 76,807 76,722 97,991 111,378
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS
---------------------------------------------------------------- ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Active direct marketing
customers(4)(5).......... 41,000 47,000 48,000 59,000 71,000 81,000
Number of SKUs(5).......... 40,000 50,000 60,000 70,000 80,000 100,000
Number of publications per
year..................... 5 6 6 9 13 11
Total number of
publications mailed.... 1,154,000 1,416,000 1,403,000 2,285,000 3,048,000 2,724,000
Direct-mail costs(6)....... $1,354,000 $1,551,000 $1,401,000 $2,261,000 $3,622,000 $3,175,000
Showroom and distribution
facilities(5)............ 5 6 7 12 19 24
Full Service Supply
Programs:
Customers(4)(5).......... 9 16 21 29 42 51
Site locations(5)........ 32 46 54 69 86 104
</TABLE>
- ---------
(1) Gives effect to (i) the issuance on , 1997 of shares of Class
B Common Stock to Kennametal for all periods presented and (ii) the assumed
issuance for fiscal 1996 and the nine months ended March 31, 1997 of
shares of Class A Common Stock to fund the excess of dividends over
net income for the nine months ended March 31, 1997.
(2) As adjusted to reflect the sale of the shares of Class A Common Stock
offered hereby (assuming an initial public offering price of $ per
share, the mid-point of the range set forth on the cover page of this
Prospectus) and application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(3) During the periods presented, the Company paid no cash dividends.
(4) Number of customers that have purchased products from the Company within the
12 months preceding the relevant period end.
(5) Represents data at period end.
(6) Direct-mail costs include production and mailing costs.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The accompanying financial information of the Company includes the
operations of the direct-marketing industrial supply business, namely J&L
America, Inc. ("J&L"), a wholly owned subsidiary of Kennametal, and the
integrated industrial supply programs ("Full Service Supply Programs") business
of Kennametal prior to the Contribution. Prior to April 1, 1997, the Company had
no separate legal status or existence. Kennametal incorporated the Company as a
Pennsylvania corporation on April 28, 1997. Immediately prior to the Offering,
shares of Class B Common Stock will be issued to Kennametal in
exchange for its investment in the Company. The Company and Kennametal will
operate as separate companies.
The following discussion should be read in connection with the Consolidated
Financial Statements of the Company and the related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------
NINE MONTHS
FISCAL YEAR ENDED JUNE ENDED
30, MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 69.5 68.0 68.2 68.2 67.6
----- ----- ----- ----- -----
Gross profit................................... 30.5 32.0 31.8 31.8 32.4
Operating expenses............................. 22.8 21.6 21.6 21.7 22.4
----- ----- ----- ----- -----
Operating income............................... 7.7 10.4 10.2 10.1 10.0
Interest and other............................. -- -- -- -- --
----- ----- ----- ----- -----
Income before income taxes..................... 7.7 10.4 10.2 10.1 10.0
Provision for income taxes..................... 3.1 4.1 4.0 4.0 3.9
----- ----- ----- ----- -----
Net income..................................... 4.6% 6.3% 6.2% 6.1% 6.1%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales for the nine month period ended March 31, 1997 were
$225.2 million, an increase of 28% from $176.0 million for the nine month period
ended March 31, 1996. Net sales increased primarily because of the addition of
seven new showrooms, including a new distribution center, the addition of over
20,000 SKUs to the 1997 master catalog, which expanded the product offering to
100,000 SKUs and from the implementation of Full Service Supply Programs for 12
new customers covering 22 different facilities. Net sales also rose to a lesser
extent because of increased sales to new customers in the United Kingdom and the
continued ramp-up of existing Full Service Supply Programs. At March 31, 1997,
the Company operated a total of 24 showrooms, including six distribution centers
in the United States and one in the United Kingdom and provided Full Service
Supply Programs to 51 customers covering 104 different facilities, as compared
to 17 showrooms, including five distribution centers, in the United States and
one in the United Kingdom, and Full Service Supply Programs for 39 customers
covering 82 facilities at March 31, 1996.
Gross Profit. Gross profit for the nine month period ended March 31, 1997
was $72.9 million, an increase of 30.2% from $56.0 million for the nine month
period ended March 31, 1996. Gross margin for the nine month period ended March
31, 1997 was 32.4% compared to 31.8% for the nine month period ended March 31,
1996. The gross margin improved due to a higher percentage of metalworking
products rather than related products sold to Full Service Supply Program
customers. This was partly offset by more frequent product promotions and
limited introductory pricing on products related to the opening of seven new
showrooms.
20
<PAGE> 22
Operating Expenses. Operating expenses for the nine month period ended
March 31, 1997 were $50.4 million, an increase of 31.9% from $38.2 million for
the nine month period ended March 31, 1996. Operating expenses as a percentage
of net sales were 22.4% for the nine month period ended March 31, 1997, compared
to 21.7% in the same period in fiscal 1996. Operating expenses as a percentage
of net sales increased as a result of higher costs associated with the start-up
of seven new showrooms, including a new distribution center, and new Full
Service Supply Programs for customers covering 22 different facilities. Such
start-up costs included those for additional product promotions, increased
direct mail costs and new customer marketing campaigns. Total costs for these
items also rose due to increased sales volume. Also included in operating
expenses were charges from Kennametal for warehousing, administrative, financial
and management information systems services provided to the Company. Charges
from Kennametal were $4.7 million for the nine month period ended March 31,
1997, an increase of 15.9% from $4.1 million for the nine month period ended
March 31, 1996. Charges from Kennametal as a percentage of net sales were 2.1%
for the nine month period ended March 31, 1997 compared to 2.3% in the same
period in fiscal 1996. The increase in total charges from Kennametal resulted
partly from higher start-up costs associated with a new client-server
information system needed to support higher sales volume. Such charges are
expected to decline slightly as a percentage of net sales in coming years.
Charges from Kennametal could increase in the future due to the additional costs
associated with operating as a public company. However, any such future
increases are not expected to be material.
Income Taxes and Net Income. The effective tax rate was 39.3% for the nine
month period ended March 31, 1997 compared to 39.5% in the same period in fiscal
1996. Net income increased 26.9% to $13.6 million for the nine month period
ended March 31, 1997, as a result of higher sales and an improved gross margin,
offset by higher operating expenses.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Net Sales. Net sales for fiscal 1996 were $244.0 million, an increase of
29.6% from $188.2 million in fiscal 1995. Net sales primarily increased due to
the addition of seven new showrooms, the addition of over 10,000 SKUs to the
1996 master catalog, bringing the total number of SKUs therein to 80,000 and
from the implementation of Full Service Supply Programs for 13 new customers
covering 17 different facilities. Net sales also increased to a lesser extent
because of additional direct marketing campaigns, from increased sales to new
customers in the United Kingdom and the continued ramp-up of existing Full
Service Supply Programs. At June 30, 1996, the Company operated a total of 20
showrooms, including five distribution centers in the United States and one in
the United Kingdom and provided Full Service Supply Programs to 42 customers
covering 86 different facilities, as compared to 13 showrooms, including five
distribution centers, in the United States and one in the United Kingdom, and
Full Service Supply Programs for 29 customers covering 69 facilities at June 30,
1995.
Gross Profit. Gross profit for fiscal 1996 was $77.6 million, an increase
of 28.8% from $60.3 million in fiscal 1995. Gross margin for fiscal 1996 was
31.8% compared to 32.0% in fiscal 1995. The gross margin declined slightly as a
result of more frequent product promotions and limited introductory pricing on
products related to the opening of seven new showrooms. This decline was offset
in part by improved margins on Full Service Supply Programs due to a higher
percentage of sales of metalworking products rather than related products sold
to Full Service Supply Program customers in fiscal 1995.
Operating Expenses. Operating expenses for fiscal 1996 were $52.8 million,
an increase of 29.8%, from $40.7 million in fiscal 1995. Operating expenses as a
percentage of net sales were 21.6% in fiscal 1996, the same as in fiscal 1995.
Operating expenses increased partly as a result of higher costs associated with
the start-up of seven new showrooms and new Full Service Supply Programs for
customers covering 17 different facilities. Such start-up costs included those
for increased direct mail costs and new customer marketing campaigns. Costs for
these items also rose due to increased sales volume. Operating costs also
increased due to higher costs for more frequently issued catalogs in the United
Kingdom than in fiscal 1995. Operating expenses, however, benefited from the
elimination of amortization of a non-compete agreement related to the
acquisition of J&L which became fully amortized in fiscal 1995. Charges from
Kennametal were $5.7 million in fiscal 1996, an increase of 62.6% from $3.5
million in fiscal 1995. Charges from Kennametal as a percentage
21
<PAGE> 23
of net sales were 2.3%, compared to 1.8% in fiscal 1995. The increase in these
charges as a percentage of net sales was attributable to the implementation of a
new client-server information system which commenced in fiscal 1995 and other
costs necessary to support higher sales volumes.
Income Taxes and Net Income. The effective tax rate was 39.5% in fiscal
1996 compared to 39.7% in fiscal 1995. Net income increased 27.4% to $15.1
million in fiscal 1996 as a result of higher sales, offset by a slightly lower
gross margin.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Net Sales. Net sales for fiscal 1995 were $188.2 million, an increase of
29.9% from $144.9 million in fiscal 1994. Net sales primarily increased due to
the addition of four new showrooms, the addition of 10,000 SKUs to the 1995
master catalog, bringing the total number of SKUs therein to 70,000. Also,
during fiscal 1995, the Company launched its first catalog in the United Kingdom
which resulted in an increase in sales in that region. Net sales also rose to a
lesser extent because of the implementation of Full Service Supply Programs for
eight new customers covering 15 different facilities and from the continued
ramp-up of existing Full Service Supply Programs. At June 30, 1995, the Company
operated a total of 13 showrooms, including five distribution centers in the
United States and one in the United Kingdom and provided Full Service Supply
Programs to 29 customers covering 69 different facilities, as compared to seven
showrooms, including five distribution centers, in the United States and Full
Service Supply Programs for 21 customers covering 54 facilities at June 30,
1994.
Gross Profit. Gross profit for fiscal 1995 was $60.3 million, an increase
of 36.2%, from $44.3 million in fiscal 1994. Gross margin for fiscal 1995 was
32.0% compared to 30.5% in fiscal 1994. The gross margin improved due to a
higher percentage of sales of metalworking products rather than related products
sold in conjunction with Full Service Supply Programs in fiscal 1994 and from
increased sales to existing mail order customers.
Operating Expenses. Operating expenses for fiscal 1995 were $40.7 million,
an increase of 23.1% from $33.0 million in fiscal 1994. Operating expenses as a
percentage of net sales were 21.6% in fiscal 1995, compared to 22.8% in fiscal
1994. Operating expenses increased as a result of higher costs associated with
the start-up of four new showrooms, and new Full Service Supply Programs for
customers covering 15 different facilities. Such start-up costs included those
for increased direct mail costs. Costs for these items also rose due to
increased sales volume. Operating expenses also increased due to expenditures
necessary to begin direct marketing operations in the United Kingdom. Operating
expenses benefited from lower amortization expense of a non-compete agreement
related to the acquisition of J&L as compared to fiscal 1994. Charges from
Kennametal were $3.5 million in fiscal 1995, an increase of 1.3% from $3.4
million in fiscal 1994. Charges from Kennametal as a percentage of net sales
were 1.8% in fiscal 1995, compared to 2.4% in fiscal 1994. The decrease in these
costs as a percentage of net sales was attributable to lower management
information systems costs.
Income Taxes and Net Income. The effective tax rate was 39.7% in fiscal
1995 compared to 40.2% in fiscal 1994. Net income increased 76.2% to $11.8
million in fiscal 1995 as a result of higher sales and an improved gross margin,
offset by higher operating expenses.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table sets forth summary unaudited quarterly financial
information for fiscal 1995 and 1996 and the first three quarters of fiscal
1997. In the opinion of management, such information has been prepared on the
same basis as the Consolidated Financial Statements appearing elsewhere in this
Prospectus and reflects all necessary adjustments (consisting of only normal
recurring adjustments) for a fair presentation of such unaudited quarterly
results when read in conjunction with the Consolidated Financial Statements and
22
<PAGE> 24
notes thereto. The operating results are not necessarily indicative of results
for any future period as there can be no assurance that any trends reflected in
such results will continue in the future.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1995:
Net sales................................... $ 40,771 $42,349 $53,358 $51,724
Gross profit................................ 12,892 13,482 17,246 16,665
Net income.................................. 2,511 2,480 3,887 2,950
Pro forma net income per share.............. $ $ $ $
FISCAL 1996:
Net sales................................... $ 52,853 $56,520 $66,616 $67,980
Gross profit................................ 16,586 18,018 21,368 21,671
Net income.................................. 2,784 3,090 4,862 4,327
Pro forma net income per share.............. $ $ $ $
FISCAL 1997:
Net sales................................... $ 70,018 $70,744 $84,433
Gross profit................................ 21,945 23,110 27,801
Net income.................................. 3,970 3,947 5,702
Pro forma net income per share.............. $ $ $
</TABLE>
Seasonal variations do not have a major effect on the Company's business.
However, to varying degrees, traditional summer vacations and holidays often
affect the Company's sales levels during the first and second quarters of its
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, its showroom expansion program in
the United States, the addition of new products and Full Service Supply Programs
and its direct marketing activities in the United Kingdom. The Company's primary
sources of financing have been cash from operations and borrowings from
Kennametal. After completion of the Offering, the Company anticipates that its
cash flows from operations, coupled with available net proceeds from the
Offering, will be adequate to support its operations for the foreseeable future.
Net cash provided by (used in) operating activities was $12.8 million for
the nine month period ended March 31, 1997, $(3.3) million for the nine month
period ended March 31, 1996, and $(5.0) million, $18.2 million and $9.6 million
in fiscal 1996, 1995 and 1994, respectively. The increase in cash from
operations for the nine month period ended March 31, 1997 from the nine month
period ended March 31, 1996 resulted from higher net income and noncash
transactions for services provided by and paid for by Kennametal and from
improved utilization of working capital. The decrease in cash from operations
from fiscal 1995 to fiscal 1996 resulted from an increase in accounts receivable
and inventory related to additional SKUs, seven new showrooms and 13 new Full
Service Supply Programs, offset in part by higher net income and noncash
transactions for services provided by and paid for by Kennametal. The increase
in cash from operations from fiscal 1994 to fiscal 1995 was primarily due to
higher net income and noncash transactions for services provided by and paid for
by Kennametal, offset by increased working capital requirements due to increased
SKUs and the opening of four new showrooms and eight new Full Service Supply
Programs.
Net cash used in investing activities was $1.9 million for the nine month
period ended March 31, 1997 compared to $1.4 million for the nine month period
ended March 31, 1996 and $1.7 million, $0.9 million and $0.1 million in fiscal
1996, 1995 and 1994, respectively. These investments related primarily to
capital expenditures for improved information systems and office and computer
equipment to accommodate new product offerings and showroom openings.
23
<PAGE> 25
Net cash provided by (used in) financing activities was $(5.1) million for
the nine month period ended March 31, 1997 compared to $(1.5) million for the
nine month period ended March 31, 1996 and $0.6 million, $(15.4) million and
$(7.2) million in fiscal 1996, 1995 and 1994, respectively. The increase in net
cash payments to Kennametal for the nine month period ended March 31, 1997 from
the nine month period ended March 31, 1996 was due to repayments to Kennametal
for amounts previously advanced to the Company for working capital needs. The
decrease in net cash payments to Kennametal from fiscal 1995 to fiscal 1996 was
due to increased advances from Kennametal to the Company to fund its working
capital needs. The increase in net cash payments to Kennametal from fiscal 1994
to fiscal 1995 was due to repayments to Kennametal for amounts previously
advanced to the Company for working capital needs.
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses are estimated to be approximately $ million (or
approximately $ million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million relating to
acquisitions, income taxes and employee benefit obligations, (iii) to construct
a new midwest distribution center, (iv) to provide working capital for new
showrooms and Full Service Supply Programs and (v) to fund acquisitions which
the Company is currently considering. Pending such uses, the net proceeds will
be loaned to Kennametal in exchange for a note bearing interest at a fluctuating
rate equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.75%. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all of
such loans upon demand by the Company.
The Company anticipates that its accounts receivable will continue to
increase due to increased sales levels and that inventory levels will also
increase due to the addition of new products, showrooms and Full Service Supply
Programs. Full Service Supply Program sales will experience a gradual reduction
due to the termination of the GE contract. The Company, however, believes that
by redeploying its resources to existing Full Service Supply Program customers
and by offering Full Service Supply Programs to new customers, it will be able
to offset in part by fiscal 1997 and completely by fiscal 1998 the reduction in
net sales. The Company believes that cash flows from operations will be
sufficient to fund future growth coupled with the net proceeds to be received
from the Offering.
The Company also believes it will have adequate funds to meet planned
capital expenditure needs. However, if the Company were to make any material
acquisitions, the Company may be required to obtain debt or equity financing.
The Company is not currently engaged in any material acquisition negotiations.
However, no assurance can be given that the Company will not negotiate or
consummate acquisitions in the near future.
On April 25, 1997, the Company, through J&L, obtained a $25.0 million line
of credit with a bank and shortly thereafter borrowed $20.0 million under the
line of credit to fund a dividend to Kennametal. Upon completion of the
Offering, a portion of the net proceeds will be used to repay the borrowings
under the line of credit. Interest payable under the line of credit is based on
the LIBOR rate plus 25 basis points and is required to be repaid in full within
six months. Kennametal has guaranteed repayment of the line of credit in the
event of default by the Company. In addition, J&L has a separate credit facility
aggregating $2.0 million used to support letters of credit with foreign vendors.
No amounts were outstanding under the credit facility as of March 31, 1997.
On April 25, 1997, the Company entered into an agreement to acquire all of
the outstanding stock of Strelinger. Strelinger, with annualized sales of
approximately $30.0 million in 1996, is based in Troy, Michigan and is engaged
in the distribution of metalcutting tools and industrial supplies. The Company
will pay approximately $4.0 million in cash and will assume certain liabilities
totaling $7.0 million. The Company will initially borrow the necessary funds
from Kennametal to pay for this acquisition and will then use a portion of the
net proceeds of the Offering to repay Kennametal.
24
<PAGE> 26
TERMINATION OF LARGE CONTRACT
For the nine month period ended March 31, 1997, the Company had $225.2
million in net sales of which $36.5 million of net sales were related to a Full
Service Supply Program contract with GE for services provided at certain
metalworking manufacturing facilities within GE's Aircraft Engine Group (the "GE
Contract"). The operating margin related to the GE Contract was lower than the
Company's other Full Service Supply Program contracts. Many of the products
provided by the Company to GE under the GE Contract fell outside of the
Company's core focus on metalworking consumables and related products.
In April 1997, the Company conducted extensive negotiations with GE
relating to the continuation of the GE Contract. After careful evaluation, the
Company concluded that it was not in its best interest to accede to certain
price concessions requested by GE. As a result, GE served notice to the Company
that the GE Contract would not be renewed for a significant portion of the
manufacturing facilities served by the Company.
The Company is currently developing a plan of disengagement from those
manufacturing sites that are not being continued. Although such plan has not yet
been fully developed and reviewed with GE, the Company expects that it will
result in a gradual reduction in future sales to GE until the implementation of
this disengagement plan is completed, which is expected to occur by June 1998.
In fiscal 1998 in conjunction with such disengagement, the Company expects sales
to GE to amount to approximately 30% of the total amounts to be received by the
Company in fiscal 1997 under the GE Contract. Ongoing sales to GE for those
manufacturing sites that will continue to be served by the Full Service Supply
Programs are expected to amount to approximately 10% of the total amounts to be
received by the Company in fiscal 1997 under the GE Contract.
The Company is currently redeploying its resources related to the GE
Contract to take advantage of requests by certain current Full Service Supply
Program customers to ramp-up their existing programs at an increased rate as
well as to offer Full Service Supply Programs to new customers. However, there
can be no assurance that the Company will be able to replace the revenues
received from the GE Contract within the foreseeable future period or at all. No
other customer accounted for more than six percent of the Company's net sales or
for the nine months ended March 31, 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company adopted SFAS No. 121 on July 1, 1996 and the adoption of SFAS
No. 121 did not have an impact on the Consolidated Financial Statements as the
statement is consistent with existing Company policy.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the intrinsic-
value-based method. Companies electing to continue using the
intrinsic-value-based method must provide pro forma disclosure of net income and
earnings per share as if the fair-value-based method had been applied.
Management intends to account for stock-based compensation using the
intrinsic-value-based method and, as such, SFAS No. 123 will not have an impact
on the Company's results of operations or financial position. The required
disclosure will be provided in the Company's fiscal 1997 consolidated financial
statements.
The FASB also recently issued SFAS No. 128, "Earnings Per Share ("SFAS No.
128") and SFAS No. 129, "Disclosure of Information about Capital Structures"
("SFAS No. 129"). SFAS No. 128 was issued in February 1997 and is effective for
periods ending after December 15, 1997. This statement, upon adoption, will
require all prior period earnings per share ("EPS") data to be restated to
conform to the provisions of the statement. This statement's objective is to
simplify the computations of EPS and to make the U.S. standard for EPS
computations more compatible with that of the International Accounting Standards
Committee. The
25
<PAGE> 27
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure. SFAS
No. 129 will specify the disclosure for all companies, including descriptions of
their capital structure and the contractual rights of the holders of such
securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect
the Company's business. However, the Company does not believe that inflation has
had a material effect on its results of operations in recent years. The Company
strives to minimize the effects of inflation through cost containment and price
increases under highly competitive conditions.
26
<PAGE> 28
BUSINESS
THE COMPANY
The Company is one of the largest suppliers of a broad range of
metalworking consumables and related products to customers in the United States,
offering a full line of cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies. To meet the varying supply needs of small, medium and large-sized
customers, the Company offers: (i) a direct-marketing program, whereby the
Company supplies predominantly small and medium-sized customers through catalog
and showroom sales and (ii) integrated industrial supply programs, by which
large industrial manufacturers engage the Company to carry out all aspects of
complex metalworking supply processes, including needs assessment, cost
analysis, procurement planning, supplier selection, "just-in-time" restocking of
supplies and ongoing technical support. The Company also conducts its
direct-marketing program for small and medium-sized customers in the United
Kingdom.
The Company estimates the size of the United States market for metalworking
consumables and other related products in which the Company participates at
approximately $50.0 billion. The Company believes it has and will continue to
enjoy strong growth from two important trends now impacting the industrial
supply industry. First, the industrial supply industry is experiencing
consolidation of currently fragmented distribution channels, as customers seek
and technology makes possible, the convenience, cost savings and economies of
scale associated with single sources of supplies. Second, to achieve even
greater cost savings and efficiencies, manufacturers are outsourcing complex
procurement and possession processes needed to supply metalworking products that
are critical to their manufacturing operations. As a market leader with a broad
range of products and services and proven capabilities, the Company is
well-positioned to continue to take advantage of these industry trends.
The direct-marketing program serves the needs of predominantly small and
medium-sized metalworking customers by offering 100,000 SKUs through the
Company's 1,465 page master catalog, the Advantage, additional mailings and
advertisements, telemarketing efforts, direct sales efforts and 24 showrooms.
The Company offers customers the advantages of (i) a single source of supply for
all metalworking consumables and related products, (ii) a tiered product
offering (such as "good," "better" and "best"), (iii) same-day pick-up for the
most popular products stocked at showrooms, (iv) same-day direct shipping and
(v) a state-of-the-art order entry system that tracks product availability and
pricing, provides technical product information and results in an order being
completed in an average time of two and one half minutes. In addition, the
Company has a dedicated sales force based in each showroom that actively calls
on targeted customers.
Full Service Supply Programs allow customers to achieve substantial cost
savings in metalworking consumables and overall manufacturing processes by
outsourcing the entire process of acquiring and possessing metalworking and
related products at manufacturing facilities. Customers, such as General Motors
Corporation, Allied Signal and Emerson Electric, use Full Service Supply
Programs at designated manufacturing facilities to (i) consolidate all of their
metalworking consumables and related product purchases with one vendor, (ii)
eliminate a significant portion of the administrative overhead burden associated
with the internal purchasing function, (iii) ensure appropriate technical
expertise in the selection and use of supplies for complex metalworking
processes and (iv) minimize the level of investment in tooling inventory,
thereby reducing inventory carrying costs. The Company's technical experts
customize and manage a comprehensive computerized product identification,
tracking and purchasing system that analyzes and optimizes supply usage, helps
select appropriate products and allows for "just in time" replacement of
inventory. To increase efficiency and maximize cost savings for its customers,
the Company also provides ongoing application assistance in the usage of
metalworking tools. The Company believes that its Full Service Supply Programs
typically reduce customers' costs of acquiring, possessing and using
metalworking products by approximately 5% to 20% per year.
The Company has grown rapidly due to geographic expansion, expanded product
offerings, increased direct mailings and an increased demand for both
single-source supply and integrated industrial supply programs such as its Full
Service Supply Programs. From fiscal 1993 through fiscal 1996, the Company's net
sales increased from $109.4 million to $244.0 million, representing a CAGR of
30.7%. Operating income
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during this period increased from $5.0 million to $24.9 million, representing a
CAGR of 70.4%. During this same period, the Company's number of active
direct-marketing customers increased from 47,000 to 71,000 and the number of
such customers who purchase annually over $10,000 of products increased from 800
to 2,300. Specific drivers of growth include:
- STRONG GROWTH IN EXISTING MARKETS. The Company has grown its net sales
84% from fiscal 1993 through fiscal 1996 in areas where it has had an
existing showroom as of the beginning of fiscal 1993 or which have been
served only through catalog sales. The Company did not add a showroom in
these areas during that period. The primary source of this growth has been
from areas where a showroom existed. In these areas, the Company gained
marketshare through targeted marketing to existing and prospective
customers.
- PENETRATION OF NEW MARKETS. From fiscal 1993 through fiscal 1996, sales
have grown 233% in areas in which new showrooms have been added, with 12
new showrooms in the United States and one in the United Kingdom added
during the period. Along with these showrooms, the Company uses a focused
sales call process to build sales.
- EXPANDED PRODUCT OFFERINGS. From the beginning of fiscal 1993 through
fiscal 1996, the Company added over 600 pages, including 40,000 new SKUs
and 165 product brand names and private labels, to its annual master
catalog.
- EXPANSION OF FULL SERVICE SUPPLY PROGRAMS. From the beginning of fiscal
1993 through fiscal 1996, the number of customers in Full Service Supply
Programs increased from nine to 42, with site locations increasing from 32
to 86.
The Company believes that a significant factor contributing to its growth
has been its ability to identify itself as an affiliate of Kennametal, the
largest North American provider of metalcutting tools and tooling systems. The
Company also relies upon and markets its access to Kennametal's research and
technical expertise in tooling products and supplies. See "Risk Factors--Control
by Kennametal." The Company was incorporated in Pennsylvania on April 28, 1997
to be a holding company for the Industrial Supply Business.
The address of the Company's principal executive offices is State Route 981
South, P.O. Box 231, Latrobe, Pennsylvania 15650 and its telephone number is
(412) 539-5000.
INDUSTRY OVERVIEW
The Company operates in a large, fragmented industry characterized by
multiple channels of distribution. The Company estimates the size of the United
States market for metalworking consumables and related products in which the
Company participates at approximately $50.0 billion. The Company believes that
there are numerous small retailers, dealers and distributors, substantially all
of which have annual sales of less than $10 million, which supply a majority of
this market. The distribution channels in the metalworking consumables and
related products market include retail outlets, small dealers, regional and
national distributors, utilizing direct sales forces, and manufacturers'
representatives.
The Company believes that increasing numbers of industrial manufacturers
are searching for ways to reduce costs by eliminating the inefficiencies of
traditional industrial supply distribution. This growing recognition by
customers of the high costs and operational inefficiencies associated with
purchasing industrial supplies from traditional distributors has increased
demand for alternative methods of distribution, leading to the development of
programs which are generally referred to as "integrated supply." These programs
vary widely, but include such concepts as corporate purchasing cards, industrial
supply consortiums and direct-mail supply.
The traditional model for the distribution of industrial supplies is
burdened by both the duplication and the inefficient performance of multiple
functions. In the traditional model, the industrial distributor must (i) source
and absorb the freight costs for the item, (ii) receive, warehouse and account
for the item, (iii) invest in inventory and incur the associated carrying costs
and (iv) market and sell the item to the end user. Once the need for the item
arises, the manufacturing facility requiring the item must repeat many of
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these steps, including (i) sourcing and absorbing the freight costs for the
item, (ii) receiving, warehousing and accounting for the item, (iii) investing
in inventory and incurring the associated carrying costs and (iv) issuing the
item to the user in the manufacturing facility. Through the Company's integrated
Full Service Supply Programs, which focus on the acquisition, possession and use
of metalworking consumables and related products, each activity is performed
only once. The procurement of industrial supplies is generally outside the core
activity of most manufacturers. For example, industrial supplies are generally
purchased by personnel whose expertise in purchasing these items is limited. In
addition, supplies are typically stored in a number of locations within an
industrial facility, resulting in excess inventories and duplicate purchase
orders. Finally, the Company believes that industrial supplies are frequently
purchased by multiple personnel in uneconomic quantities, and a substantial
portion of most facilities' industrial supplies are one-time purchases which
entail higher per item prices and time-consuming administrative efforts. As a
result, the Company believes that there is often potential to manage the
industrial supply procurement process more efficiently and with greater cost
savings. The Company believes its Full Service Supply Programs eliminate the
duplication and waste inherent in the traditional industrial distribution model.
The Company streamlines the procurement process and generates system-wide
savings generally ranging from 5% to 20% of customers' annual acquisition,
possession and usage costs for such products.
In addition to the cost savings inherent in eliminating several steps in
the distribution process, the Company believes its expertise in the use of
metalworking products that it procures and delivers in its Full Service Supply
Programs also leads to ongoing operational improvements at the customers'
manufacturing facilities.
Despite the apparent inefficiencies of the traditional industrial supply
purchasing process, long-standing relationships with local retailers and
distributors have generally perpetuated the status quo. Due to limited capital
availability, high operating cost structures and smaller sales volumes,
suppliers to the industrial market are experiencing increasing pressure to
consolidate and curtail services and certain product lines in order to remain
competitive. Even large suppliers with extensive field sales forces are finding
it increasingly difficult to visit all buyers cost-effectively and to provide
the support necessary to satisfy their demands for cost containment and improved
efficiency. The Company believes that the relative inability of traditional
distribution channels to respond to these changing industry dynamics has created
a continuing opportunity for the growth of direct marketing and integrated
supply organizations such as the Company. As a result of these dynamics,
non-traditional distributors, such as the Company, have captured an increasing
share of sales by providing lower total purchasing costs, better product
selection and a higher level of service. As a leading non-traditional supplier
with proven capabilities both in direct marketing and integrated supply, the
Company believes it is well-positioned to continue to take advantage of present
market dynamics and enjoy continued growth in market share.
BUSINESS STRATEGY
The Company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a "one-stop shop" for metalworking products for small and medium-sized
customers and by offering managed solutions for large customers. The Company
believes its market-leadership position results from the successful
implementation of its business strategy, the major elements of which include:
- BREADTH OF METALWORKING PRODUCTS AND METALWORKING FOCUS. As its
customers continue to consolidate their suppliers, the Company
differentiates itself through its breadth of metalworking products and
metalworking focus. The Company believes its ability to offer a broad
spectrum of metalworking products and a tiered product selection
alternative through which similar product offerings with varying degrees
of name recognition, quality and price are categorized, such as "good,"
"better" and "best," has been an important component in expanding direct
marketing sales to small and medium-sized customers. The Company's
metalworking focus also enables the Company to understand complex
industrial metalworking processes so as to provide valuable technical
advice that reduces costs to its Full Service Supply Program customers.
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- EXCEPTIONAL CUSTOMER SERVICE. The Company emphasizes exceptional
customer service supported by sophisticated information systems and
ongoing employee training. The Company's telemarketing representatives,
utilizing sophisticated customer support software, inform catalog
customers on a real-time basis of the Company's product availability and
pricing, verify credit information, update customer information and
provide technical product information in calls lasting on average only two
and one-half minutes. For customers participating in its Full Service
Supply Programs, the Company provides continuous improvement specialists
to ensure quality service and low costs by assisting such customers in the
acquisition, possession and use of metalworking consumables and related
products.
- RAPID FULFILLMENT AND JUST-IN-TIME PRODUCT DELIVERY. The Company
believes that its ability to fulfill rapidly the orders of
convenience-driven customers and manage complex procurement processes for
large clients has been critical to its growth. The Company has developed
highly efficient inventory management and order fulfillment systems that
allow more than 99% of domestic orders received by 5:00 p.m. to be shipped
on the same day and delivered by low-cost ground carriers. In addition, in
its Full Service Supply Programs, the Company uses sophisticated systems
that permit "just-in-time" purchasing and delivery of products resulting
in low costs to its customers.
- COMMITMENT TO TECHNOLOGICAL INNOVATION. The Company uses technology to
benefit customers and to improve the Company's productivity and
efficiency. The Company's sophisticated customer support software tracks
all 100,000 SKUs, enabling its telemarketing representatives to inform
catalog customers on a real-time basis of the Company's product
availability and pricing, verify credit information, update customer
information and provide technical product information. The software for
Full Service Supply Programs allows the Company to manage and automate a
large customer's entire processes related to the acquisition, possession
and use of metalworking consumables and related products.
GROWTH STRATEGY
The Company's objective is to expand its leadership position as a preferred
supplier to small, medium and large customers for metalworking consumables and
related products. The major elements of the Company's growth strategy include:
- INCREASED PENETRATION OF EXISTING MARKETS. The Company intends to
increase sales to small and medium-sized consumers by (i) expanding
targeted direct-mail and related campaigns, (ii) increasing the number of
products, product lines, product brand names and private labels offered in
its master catalog and (iii) focusing the Company's sales force on
marketing to these consumers. The Company plans to build on its
comprehensive marketing approach, which includes special showroom events
and targeted direct-mail and ongoing product promotions. In markets in
which the Company has had showrooms for at least three years, such as the
Detroit metropolitan area, the Company intends to increase its market
share by adding showrooms and expanding the services it offers to its
customers. The Company also plans to build on its reputation with Full
Service Supply Program customers to expand into other facilities of such
customers, while seeking new customers.
- FURTHER EXPANSION INTO NORTH AMERICAN MARKETS. To continue expanding its
North American presence, the Company plans to increase distribution
capacity and operational efficiency, add new showrooms and increase the
customer base for its Full Service Supply Programs. The Company plans to
construct a new midwest distribution center with a portion of the proceeds
from the Offering. New showrooms have historically resulted in substantial
growth in sales in the surrounding territory. For example, when the
Company opened its showroom in Atlanta in September 1995, sales in that
market increased by over 200% in the following nine months. The Company
has showrooms in 19 of the top 50 industrial markets in the United States
and intends to have showrooms in 40 of such 50 markets over the next
several years. In connection with this expansion, the Company will
continue to consider strategic acquisitions of metalworking distributors,
such as the Strelinger Acquisition in April 1997. The Company also intends
to continue to leverage its relationship with Kennametal to market its
Full Service Supply Programs to large industrial metalworking customers of
Kennametal. The Company
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estimates that the market for Full Service Supply Programs consists of
12,000 to 15,000 large industrial manufacturing facilities in the United
States. The Company also intends to customize versions of its Full Service
Supply Programs to meet the needs of medium-sized industrial facilities.
- EXPANSION INTO INTERNATIONAL MARKETS. The Company believes that the
consolidation and outsourcing trends which provide growth opportunities in
the United States also offer comparable opportunities in international
markets. The Company entered the United Kingdom market in fiscal 1995 with
a 256-page catalog which included over 30,000 products. In April 1997, the
Company released an 800-page catalog which includes over 60,000 products.
The Company now has over 13,000 active customers in such market. Over the
next five years, the Company anticipates launching additional
direct-marketing efforts and opening showrooms in the United Kingdom,
Germany and certain other European countries and is considering direct
marketing in certain other countries. The Company is also planning to
introduce its Full Service Supply Programs into international markets,
such as the United Kingdom and Germany, by offering this service to
foreign manufacturing facilities of the Company's domestic Full Service
Supply Program customers and to Kennametal's foreign customers.
PRODUCTS AND MARKETING
The Company sells a full line of cutting tools, carbide and other tool
inserts, abrasives, drills, machine tool accessories, hand tools and other
industrial supplies through direct marketing and Full Service Supply Programs.
The Company had in excess of 81,000 active customers as of March 31, 1997,
ranging from small one-person machine shops to Fortune 500 companies. To serve
this market, the Company focuses its direct-marketing efforts on small and
medium-sized metalworking customers, while its Full Service Supply Programs are
targeted to large industrial manufacturers.
The Company intends to become the preferred supplier of metalworking
consumables and related products to the metalworking industry. The Company's
catalogs, flyers and other direct-marketing efforts are focused on small to
medium-sized metalworking customers, although catalog purchasers may include
large metalworking facilities that have an immediate need for a particular
metalworking product. These customers include machine shops, dealers,
institutions, such as vocational and technical schools, and home hobbyists.
The Company's direct-marketing efforts are multi-faceted, creating sales
growth in four ways, including through: (i) a dedicated sales force based in
each showroom that actively calls on targeted customers, (ii) showrooms which
have various promotional events, display high volume products, and provide the
ease of local pickup, (iii) a master catalog which facilitates sales through the
Company's highly efficient telemarketing sales process and (iv) direct mailings
of brochures and flyers, which provide a constant flow of promotional materials
to existing and prospective customers.
Each market that is served by a showroom has a sales representative
dedicated to calling on a specific, focused list of customers. These sales
representatives help build customer relationships to facilitate showroom and
catalog sales.
The showrooms serve several functions by providing promotional
opportunities, convenience of local pickup and personal service to its
customers. Each showroom has periodic promotional events, such as grand opening
events and customer appreciation days (barbecue luncheons and other such events)
that can attract as many as 900 customers. If a customer has an immediate need
for the Company's products, the showroom enables the customer to pick up any of
the Company's 12,000 to 15,000 most popular products. The showrooms provide the
Company another point of access to customers to build relationships and provide
personal service.
The Company utilizes an annual master catalog which currently offers
100,000 SKUs, a 100% increase in SKUs since fiscal 1993. The number of active
customers placing catalog orders during such period increased from 41,000 to
81,000. The average size of a catalog order received by the Company in fiscal
1996 was $130, and the number of customers who purchase annually over $10,000 of
products increased from 800 to 2,300 from fiscal 1993 through fiscal 1996. The
Company attributes a portion of this sales growth to the increased number of
SKUs offered in its catalogs. In this regard, the Company intends to continue to
add new
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metalworking product categories and increase the number of metalworking products
offered within existing categories in its efforts to gain new customers and
increase sales from existing customers.
The Company's master catalog and other mailings offer specific products
from over 600 vendors at different prices and quality levels which permits the
Company to offer a tiered product selection alternative. This alternative
provides the customer a choice among similar product offerings with varying
degrees of name recognition, quality and price, such as "good," "better" and
"best," thus permitting the customer to choose the appropriate product for a
specific task at the lowest cost. For example, if a customer requires a drill
bit to drill 10 holes, it would be inefficient to purchase the top-of-the-line
name brand drill bit which is capable of drilling 1,000 holes. The number of
publications mailed by the Company to customers has significantly increased from
approximately 1.4 million mailed in fiscal 1993 and is expected to reach
approximately 3.4 million in fiscal 1997. The Company's in-house staff designs
and produces the content of all of its catalogs, brochures and flyers. Each
publication is printed with photographs, contains detailed product descriptions
and includes a toll-free telephone number to be used by customers to place a
product order. In-house production of these marketing materials helps reduce
overall expense and shorten production time, allowing the Company the
flexibility to alter its product offerings and pricing and refine its catalog,
brochure and other formats more quickly.
The Company believes that its product alternative offerings and
knowledgeable customer service and support personnel result in significant
amounts of repeat business. On average, the Company annually has retained
approximately 97% of its customers who purchase over $2,000 of products.
The Company procures and delivers a broad range of metalworking consumables
and related products to large metalworking facilities through its Full Service
Supply Programs. These customers include automotive manufacturers such as
General Motors Corporation's Saturn division, suppliers to the automotive
industry such as Dana Corporation, aerospace industry manufacturers such as
Pratt & Whitney and Allied Signal, oil equipment suppliers such as Baker Hughes
and other major industrial suppliers and manufacturers who cut, form, shape,
grind, drill or machine metal or other hard materials. Large metalworking
facilities traditionally purchase substantial quantities of industrial supply
products from numerous vendors. In an effort to lower costs, managers of many of
these large facilities have been attempting to curtail the number of vendors
used and the administrative overhead costs devoted to the purchasing process as
well as to pursue inventory reduction programs. The Company believes that large
metalworking facilities often incur excess costs for the acquisition, possession
and use of industrial supply products because these items are frequently stored
in and ordered by multiple locations, resulting in excess inventories,
obsolescence, duplicative purchase orders and time-consuming administrative
efforts by multiple plant personnel who lack product knowledge.
To address the needs of such large metalworking customers, the Company
offers various tiers of integrated supply services ranging from programs that
supply only metalworking cutting tools and inserts to those which supply all
metalworking and other related products. In a Full Service Supply Program, the
Company replaces a customer's product purchasing system at a manufacturing
facility with the Company's comprehensive proprietary computerized
identification, product tracking and purchasing systems. The Company creates for
each type of metalworking product used by the customer a proprietary
identification of the type and manufacturer of such product. At the customer's
facility, the Company organizes the customer's storage of metalworking products
into one or more tool cribs and places into compartments in each tool crib
sealed boxes containing a specified quantity or lot of each type of product. A
proprietary inventory control card (a "Kanban" card) is attached to each box
which contains in barcoding the product identification information, the quantity
of products within the box, the relevant tool crib and other information. When a
customer's employee needs a product, the employee removes the relevant box from
the tool crib, detaches the Kanban card and places it in a separate container
and uses the needed product. The detached Kanban cards are collected daily from
all of the tool cribs and transmitted either electronically or by facsimile to
the Company which enters the information contained on the Kanban card into the
Company's computerized product tracking and purchasing systems. The Company's
systems use this information to manage on a "just-in-time" basis the timing of
the sale and delivery to the customer's tool cribs of all of the metalworking
consumables and other products which the customer needs in its manufacturing
processes at that facility.
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The Company believes that its Full Service Supply Programs typically reduce
by 5% to 20% annually the cost to its customers of acquiring, possessing and
using metalworking products. Such programs reduce the quantity of such
consumables which the customer must maintain in its tool cribs through the
Company's "just-in-time" system, assure delivery to the correct location within
the customer's facility of the proper metalworking products, perform the quality
assurance function for the customer and furnish technical assistance to the
customer. The Company also provides various levels of electronic data
interchange ("EDI") with Full Service Supply Program customers to enhance their
cost reduction efforts. The Company can use EDI with a customer for invoicing,
funds transfer, ordering, shipping and acknowledgment. The Company also provides
independent testing and evaluation of competing manufacturer's products.
The Company intends to continue to leverage its relationship with
Kennametal to market its Full Service Supply Programs to large industrial
metalworking customers of Kennametal, which include a significant portion of all
metalworking manufacturers in North America, and to leverage its relationship
with existing Full Service Supply Program customers in order to introduce its
integrated supply programs in multiple facilities of such customers. The Company
also intends to customize versions of its Full Service Supply Programs to meet
the needs of medium-sized industrial facilities.
A significant number of the Company's products are carried in stock at the
Company's 13 distribution centers and warehouses, seven of which are shared with
Kennametal. See "Relationship with Kennametal-- Shared Facilities Agreements."
Most orders are filled from these distribution centers and warehouses. The
distribution centers range in size from 1,500 to 100,000 square feet and
typically include a showroom. The Company currently has six distribution centers
in the United States located in Charlotte, North Carolina; Chicago, Illinois;
Dallas, Texas; Detroit, Michigan; Hartford, Connecticut; and Los Angeles,
California.
CUSTOMER SERVICE
The Company believes that customer service and support are critical
components of its success. For small and medium-sized customers, one of the
Company's goals is to make purchasing its products as convenient as possible.
Since a majority of these orders are placed by telephone, the efficient handling
of calls is an extremely important aspect of the Company's business. Order entry
and fulfillment occurs at each of the Company's distribution centers and
warehouses. Calls are received by one of the Company's 85 inbound telemarketing
representatives who utilize on-line terminals to enter customer orders into
computerized order processing systems. The Company's telephone ordering system
is flexible and, in the event of a local or regional breakdown, can be rerouted
to alternative locations. These inside sales representatives are highly trained
individuals who respond to customer inquiries and process and update customer
account profiles in the Company's information system databases in a call which
usually lasts an average of two and one-half minutes. While taking an order,
these sales representatives are able to inform catalog customers on a real-time
basis of the Company's product availability and pricing, verify credit
information, update customer information and provide technical product
information. The Company also maintains a separate technical support group
available to all customers by telephone dedicated to answering specific customer
inquiries and assisting customers with the operation of products and finding
low-cost solutions to manufacturing problems. The Company provides several weeks
of training to new sales representatives concerning its extensive product
offering, the use of its sophisticated customer support software and the
Company's approach to customer service. The Company also sponsors the attendance
by a number of its employees at vocational metalworking training programs to
familiarize them better with the selection, application and use of the Company's
products.
When a direct-marketed order is entered into the system, a credit check is
performed and, if the credit is approved, the order is electronically
transmitted to the distribution center, warehouse or showroom closest to the
customer and a packing slip is printed for order fulfillment. Most of the orders
placed with the Company are shipped by United Parcel Service ("UPS") and, to a
limited extent, by various other freight lines and local carriers. Air freight
is also used when appropriate. The Company is not dependent on any one carrier
and believes that alternative shipping arrangements can be made with minimal
disruption to operations in the event of the loss of UPS as the Company's
primary carrier. The Company believes that its relationships with all of its
carriers are excellent. The Company guarantees same-day shipping if the order is
received prior to
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5:00 p.m. local time, with most customers receiving orders (other than custom
items and large industrial items shipped directly by the manufacturer) within
one or two business days of the order date. Customers are invoiced for
merchandise, shipping and handling charges promptly after shipment. Back order
levels are immaterial.
The Company currently operates 23 domestic showrooms at which customers may
purchase products or pick-up products which have been ordered. Showrooms serve
as beacons in geographic areas in which the Company attempts to establish
relationships with and provide personal service to customers in those areas.
Each showroom has approximately 6,000 to 10,000 square feet of space and
consists of a small area in which the Company stocks the most frequently ordered
products and kiosks at which products are ordered and customer information is
obtained or updated. The Company selects showroom location sites based upon its
assessment of potential customers in a geographic area and their proximity to a
distribution center.
For customers participating in its Full Service Supply Programs, the
Company provides continuous improvement specialists to assist such customers,
assume responsibility for quality certification programs for vendors' tooling
products, provide independent test results of competing tooling vendors'
products, negotiate discounts with tooling vendors and implement EDI ordering,
billing and payment. In addition, the Company's continuous improvement
specialists assist Full Service Supply Program customers in the acquisition,
possession and use of industrial supplies.
INFORMATION SYSTEMS
The sophisticated information systems used by the Company allow centralized
management of key functions, including communication links between distribution
centers, inventory and accounts receivable management, purchasing, pricing,
sales and distribution, and the preparation of daily operating control reports
that provide concise and timely information regarding key aspects of its
business. These information systems enable the Company to ship to customers on a
same-day basis, respond quickly to order changes and provide a high level of
customer service. These systems enable the Company to achieve cost savings,
deliver exceptional customer service, manage its operations centrally and manage
its Full Service Supply Programs. Certain of the Company's information systems
operate over a wide area network and represent real-time information systems
that allow each distribution center to share information and monitor daily
progress relating to sales activity, credit approval, inventory levels, stock
balancing, vendor returns, order fulfillment and other performance measures. The
Company also maintains a sophisticated buying and inventory management system
that monitors substantially all of its SKUs and automatically purchases
inventory from vendors for replenishment based on projected customer ordering
models. The Company has invested significant resources in developing an
extensive customer and prospect database which includes detailed information,
including customer size, industry of operation, various demographic and
geographic characteristics and purchase histories of Company products. The
Company also provides EDI invoicing, funds transfer, ordering, shipping and
acknowledgment to large customers. As the Company's growth continues, the
Company expects to continue to improve and upgrade its information systems and
intends to implement Kennametal's SAP R/3, a new client-server information
system.
SUPPLIERS
The Company purchases substantially all of its products for its direct
marketing and Full Service Supply Programs from approximately 600 vendors. In
fiscal 1996 and for the nine months ended March 31, 1997, approximately 7% and
15%, respectively, of the Company's sales were of Kennametal products. Other
than Kennametal, the Company is not materially dependent on any one supplier or
small group of suppliers. If a Full Service Supply Program customer desires to
continue ordering a particular brand of metalworking tool or obtains or has a
contract providing for more favorable pricing than the Company generally
obtains, the Company will assume that contract or enter into a similar contract
for the limited purpose of supplying such product to that customer. Other than
Kennametal, no single supplier accounted for more than 5% of the Company's total
purchases in fiscal 1996. See "Relationship with Kennametal."
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ACQUISITIONS
In April 1997, the Company acquired Strelinger, a distributor of
metalcutting tools and supplies based in Troy, Michigan with annual sales of
approximately $30.0 million. The Company believes Strelinger's customer base and
service capabilities will enhance the Company's ability to serve medium-sized
customers better and strengthen further the Company's market presence in
southeastern Michigan.
As the industrial supply industry continues to consolidate, the Company is
actively considering acquisitions as part of its growth strategy if
opportunities arise. From time to time, the Company has engaged in and will
continue to engage in preliminary discussions with respect to potential
acquisitions. The Company is not currently a party to any oral or written
acquisition agreement or engaged in any negotiations with respect to any
material acquisition candidate.
COMPETITION
The metalworking supply industry is a large, fragmented industry that is
highly competitive. The Company faces competition (i) in the small and
medium-sized metalworking markets from traditional channels of distribution such
as retail outlets, small dealers, regional or national distributors utilizing
direct sales forces, and manufacturers' representatives and (ii) in the large
industrial metalworking market from large distributors and other companies which
offer varying degrees and types of integrated industrial supply programs. The
Company believes that sales of metalworking products will become more
concentrated over the next few years, which may make the industry more
competitive. Certain of the Company's competitors offer a greater variety of
products (including nonmetalworking products) and have substantially greater
financial and other resources than the Company. The Company believes that
customer purchasing decisions are primarily based on one or more of the
following criteria: product price, product selection, product availability,
superior customer service, total cost of acquisition, possession and use of
products and convenience. The Company seeks to distinguish itself from other
direct marketers and distributors of industrial supplies through its national
presence and metalworking focus, its application of information technology and
its attractive, modern showrooms.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 600 employees,
none of whom is represented by a labor union. The Company considers its
relationships with employees to be good and has experienced no work stoppages.
PROPERTIES
The Company's distribution centers, warehouses, showrooms and executive
offices, all of which are leased, are as follows:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION LEASE EXPIRATION APPROXIMATE SQUARE FEET
- ---------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C>
Albuquerque, NM Warehouse 06/31/98 8,000
Alsip, IL Showroom 03/31/98 6,400
Atlanta, GA Showroom 07/31/00 7,900
Charlotte, NC* Distribution Center 04/29/07 10,000
Chicago, IL Showroom 08/31/01 6,200
Cincinnati, OH Showroom 10/15/98 7,200
Cleveland, OH Showroom 06/30/00 9,000
Clinton Township, MI Showroom 06/30/99 6,000
Dallas, TX* Distribution Center 03/30/01 5,200
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
LOCATION DESCRIPTION LEASE EXPIRATION APPROXIMATE SQUARE FEET
- ---------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C>
Dayton, OH Showroom 11/30/01 10,000
Grand Rapids, MI Showroom 09/30/00 9,800
Gurnee, IL Warehouse 06/30/00 6,600
Hartford, CT* Distribution Center 06/31/00 1,500
Houston, TX Showroom 12/31/02 7,200
Indianapolis, IN Showroom 04/01/05 6,600
Kingswinford, UK Distribution Center 04/29/07 6,000
Latrobe, PA* Executive Headquarters 04/29/07 1,500
Livonia, MI* Distribution Center 12/31/00 100,000
Livonia, MI Warehouse 08/31/99 46,000
Los Angeles, CA* Distribution Center 04/29/07 7,000
Milwaukee, WI Showroom 09/30/99 6,400
Minneapolis, MN Showroom 11/30/99 10,400
Mount Prospect, IL Distribution Center 12/31/98 40,000
Nashville, TN Warehouse 04/19/00 6,200
Orange County, CA Showroom 08/31/01 6,800
Phoenix, AZ Warehouse 03/31/01 7,700
Salem, NH Warehouse 09/30/98 10,000
San Jose, CA Showroom 08/31/00 9,000
Sterling Heights, MI Showroom 08/31/01 6,700
St. Louis, MO Showroom 04/30/01 7,000
Tempe, AZ Showroom 01/30/01 6,800
</TABLE>
- ---------
* Shared with Kennametal.
LEGAL MATTERS
There are no material legal proceedings pending against the Company.
36
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the directors
and executive officers of the Company. The directors and executive officers of
the Company were elected to the positions listed on April 28, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ---------------------------------------------
<S> <C> <C>
Michael W. Ruprich............ 41 President and Director
Kenneth M. McHenry............ 41 Vice President--Sales and Marketing
Roland E. Lazzaro............. 38 Vice President--Operations
Michael J. Mussog............. 33 Vice President and Chief Financial Officer
Richard C. Alberding.......... 66 Director
Irwin L. Elson................ 58 Director
Aloysius T. McLaughlin, Jr.... 62 Director
Robert L. McGeehan............ 60 Director
William R. Newlin............. 56 Chairman of the Board
</TABLE>
Mr. Ruprich has served as President of the Company since April 1997 and as
Director of Global Marketing and Sales of Kennametal since July 1996. He was
elected a Kennametal Vice President in 1994. He served from 1994 to 1996 as
President of J&L, from 1992 to 1993 as General Manager of J&L and prior thereto,
as General Manager--East Coast Region of J&L. He will resign his positions with
Kennametal upon consummation of the Offering.
Mr. McHenry has served as Vice President--Sales and Marketing since April
1997. Prior thereto, he served from September 1993 to June 1997 as National
Sales Manager of J&L. From 1990 to September 1993, he was managing partner of
Flow Solutions Company (manufacturer's representative specializing in industrial
instrumentation and process control equipment).
Mr. Lazzaro has served as Vice President--Operations since April 1997.
Prior thereto, he served from May 1994 to June 1997 as Director, Branch
Development of J&L, from June 1992 to May 1994 as General Manager--East Coast
Region of J&L and from November 1990 to June 1992 as Controller of J&L.
Mr. Mussog has served as Vice President and Chief Financial Officer since
April 1997. Prior thereto, he served from September 1996 to June 1997 as
Manager, Strategic Sales and Marketing Planning of Kennametal, from April 1995
to August 1996 as Chief Financial Officer of J&L and from February 1993 to March
1995 as Manager, External Reporting of Kennametal. Mr. Mussog is a certified
public accountant and prior to joining Kennametal was an Audit Manager for Price
Waterhouse LLP.
Mr. Alberding is retired, having served as Executive Vice President,
Marketing and International, of Hewlett-Packard Company (a designer and
manufacturer of electronic products for measurement and computation). He is also
a director of Kennametal, Walker Interactive Systems, Inc., Sybase, Inc.,
Digital Microwave Corp., Paging Network, Inc., Quickturn Design Systems Inc. and
Digital Link Corporation.
Mr. Elson, a co-founder of J&L, is retired. He served as President of J&L
from July 1996 until shortly prior to the Offering and had been a Vice President
of Kennametal from 1990, when it acquired J&L, to August 1994.
Mr. McLaughlin is a consultant to Dick Corporation (general contracting),
having served as its Vice Chairman from 1993 to 1995 and as its President and
Chief Operating Officer from 1985 to 1993. Mr. McLaughlin is a director of
Kennametal.
Mr. McGeehan has been President of Kennametal since July 1989 and its Chief
Executive Officer since October 1991. He served as Director of Metalworking
Systems Division of Kennametal from 1988 to 1989 and as General Manager of
Machining Systems Division from 1985 to 1988. He has been a director of
Kennametal since 1989.
37
<PAGE> 39
Mr. Newlin has been Managing Director of Buchanan Ingersoll Professional
Corporation (attorneys at law) for more than the past five years. He also serves
as a Managing General Partner of CEO Venture Funds (private venture capital
funds). He has been a director of Kennametal since 1982 and its Chairman of the
Board since October 1996. He is a also a director of Black Box Corporation,
National City Bank of Pennsylvania, Parker/Hunter Incorporated, the Pittsburgh
High Technology Council and CME Information Services, Inc. The law firm of which
Mr. Newlin is a member performed services for the Company and Kennametal during
fiscal 1997.
At or following the Offering, the existing directors of the Company will
increase the size of the Board to seven persons and will appoint one additional
director not affiliated with the Company or Kennametal to fill this vacancy.
In accordance with the terms of the Articles of Incorporation, prior to the
Control Termination Date, directors will hold office for one-year terms and be
elected at each annual meeting of the shareholders of the Company. After the
Control Termination Date, the Board of Directors will be divided into three
classes, designated as Class I, Class II and Class III, respectively, with
staggered three-year terms of office. At each annual meeting thereafter,
directors who are elected to succeed the class of directors whose terms expire
at that meeting will be elected for three-year terms.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Audit Committee of the Board is comprised of Messrs. Alberding and
. The Audit Committee's primary function is to evaluate management's
performance of its financial reporting responsibilities. The Committee is also
charged with reviewing internal financial and operational controls of the
Company, with monitoring the fees, results and effectiveness of annual audits
and the independence of the public accountants.
The Compensation Committee of the Board is comprised of Messrs. McGeehan
and McLaughlin. The Compensation Committee generally is responsible for
establishing salaries, bonuses and other compensation for the Company's
executive officers and for administering the Company's compensation plans,
including two plans the Company intends to adopt prior to the Offering--the JLK
Direct Distribution Inc. 1997 Stock Option and Incentive Plan (the "1997 Plan")
and the JLK Direct Distribution Inc. Management Bonus Plan (the "JLK Bonus
Plan"), each of which is more fully described below.
Members of the Board of Directors who are not employees of the Company will
receive an annual retainer of $20,000 for membership on the Board of Directors.
In addition, a fee of $1,000 will be paid for attendance at each committee
meeting.
EXECUTIVE COMPENSATION
The Company was formed in April 1997. Prior to the Offering, the Company
did not have a separate Compensation Committee or other board committee
performing similar functions. These functions were performed by the Board of
Directors, Committee on Executive Compensation and executive officers of
Kennametal.
The following table sets forth the compensation paid by Kennametal to the
Company's chief executive officer, Mr. Ruprich, during the last three fiscal
years and during the last completed fiscal year to each of the other three
executive officers of the Company (the "Named Executive Officers").
38
<PAGE> 40
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2) OPTIONS (3)
- ------------------------------------- -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael W. Ruprich,.................. 1996 $ 197,968 $103,696 11,000 $5,045
President(4)(5) 1995 178,384 123,270 11,334 4,500
1994 155,044 82,693 -- 4,660
Kenneth M. McHenry,.................. 1996 110,000 30,000 3,000 4,033
Vice President--Sales and Marketing
Roland E. Lazzaro,................... 1996 103,800 31,500 3,000 2,002
Vice President--Operations
Michael J. Mussog,................... 1996 89,000 25,000 2,000 3,237
Vice President and Chief Financial
Officer
</TABLE>
- ---------
(1) In accordance with the rules promulgated by the Securities and Exchange
Commission (the "Commission"), only the information with respect to the most
recently completed fiscal year is required in the Summary Compensation Table
except for information that was previously reported to the Commission.
(2) Includes, for each of the Named Executive Officers, bonuses paid in shares
of Capital Stock, par value $1.25 per share, of Kennametal ("Kennametal
Capital Stock"), or in stock credits representing Kennametal Capital Stock
("Kennametal Stock Credits") as elected by the individual under Kennametal's
Performance Bonus Stock Plan of 1995 described below.
(3) This figure includes amounts contributed by Kennametal under the Kennametal
Inc. Thrift Plan. Eligible employees may elect to contribute 2% to 12% of
their monthly compensation (salary and, if applicable, bonus) to this plan.
Kennametal contributes to each participant's account an amount equal to
one-half of that portion of the employee's contribution which does not
exceed 6% of the employee's compensation. Contributed sums are invested in
proportions as directed by the employee among five different types of equity
funds (including the Kennametal Capital Stock fund), a Fixed Income Fund and
three balanced funds (consisting of both equity and fixed income
securities), each managed by investment management companies, and can be
withdrawn by the employee only upon the occurrence of certain events.
Certain terms of the plan are designed to make available to participants the
provisions of section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"), which permit elective employee contributions on a
pre-tax basis.
(4) Mr. Ruprich was President of J&L, then a wholly owned subsidiary of
Kennametal and, after the Offering, a wholly-owned subsidiary of the
Company, until June 30, 1996. Effective July 1, 1996, Mr. Ruprich was named
Director of Global Marketing and Sales, Kennametal. Mr. Ruprich was named
President of the Company upon its formation.
(5) All other compensation for Mr. Ruprich in each year includes imputed income
based upon premiums paid by Kennametal to secure and maintain for certain
officers, including all executive officers of Kennametal who elect to
participate, a $500,000 term life insurance policy on the life of such
officer until he or she reaches age 65.
Immediately following the Offering, the annual base salaries of the Named
Executive Officers will be as follows: Michael W. Ruprich, $350,000; Kenneth M.
McHenry, $170,000; Roland E. Lazzaro, $150,000; and Michael J. Mussog, $160,000.
In connection with the Offering, it is anticipated that the Company will adopt
the JLK Bonus Plan and the 1997 Plan, each of which is more fully described
below. Annual bonus opportunities for each of the Named Executive Officers under
the JLK Bonus Plan will be set at the following percentage of annual base
salary: Michael W. Ruprich, 66%; Kenneth M. McHenry, 60%; Roland E. Lazzaro,
45%; and Michael J. Mussog, 50%. In addition, effective upon consummation of the
Offering, the Company will grant, pursuant to the terms of the 1997 Plan,
options to purchase Class A Common Stock at the initial public offering price
set forth on the cover page of this Prospectus to the Named Executive Officers
in the
39
<PAGE> 41
following share amounts: Michael W. Ruprich, 100,000; Kenneth M. McHenry,
50,000; Roland E. Lazzaro, 50,000; and Michael J. Mussog, 50,000. The Company
will also grant to each non-employee director of the Company options to purchase
15,000 shares of Class A Common Stock at the initial public offering price set
forth on the cover page of this Prospectus pursuant to the 1997 Plan.
KENNAMETAL MANAGEMENT PERFORMANCE BONUS PLAN
Bonus amounts set forth in the Summary Compensation Table were paid
pursuant to Kennametal's Management Performance Bonus Plan for executives and
managers which is designed to tie bonus awards to Kennametal performance, unit
performance, and individual contribution, relative to Kennametal's business
plans, strategies and shareholder value creation. This bonus plan also is
intended to maintain management compensation at a competitive level, as
indicated by published compensation surveys. After fiscal 1997, bonuses to the
Company's employees, including the Named Executive Officers, will be paid
pursuant to Company plans, including the JLK Bonus Plan. See "--JLK Direct
Distribution Inc. Management Bonus Plan."
KENNAMETAL PERFORMANCE BONUS STOCK PLAN
Pursuant to the Kennametal Inc. Performance Bonus Stock Plan of 1995,
participants in selected cash bonus and deferred compensation plans are
permitted to elect to receive, in lieu of their bonus, Kennametal Capital Stock
or Kennametal Stock Credits.
KENNAMETAL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Each person who has an employment agreement with Kennametal or the Company
is eligible to receive supplemental retirement benefits for life following
termination of active employment by retirement or disability pursuant to the
Kennametal Inc. Supplemental Executive Retirement Plan. These supplemental
retirement benefits vest in equal annual increments over a term of five years
commencing on the officer's 56th birthday or completely upon the occurrence of a
change in control of Kennametal, whether or not the transaction or election
causing the change in control is approved by at least two-thirds of the
directors. If the officer dies while actively employed or receiving such
payments, his spouse or other designated beneficiary will receive annually up to
50% of the vested amount for life. The severance payments and the accrued
supplemental retirement benefits would be funded by the transfer of cash into a
Rabbi Trust upon the occurrence of a threatened or actual change in control of
Kennametal. For Company employees who participated in such plan prior to the
Offering as employees of Kennametal, the Offering will not trigger eligibility
for benefits under the plan, or constitute a change in control under the plan.
KENNAMETAL STOCK OPTION PLANS
The Kennametal Inc. Stock Option and Incentive Plan of 1988 (the "1988
Plan") provides for the granting of nonstatutory and incentive stock options and
share awards covering 1,000,000 shares of Kennametal Capital Stock. The
Kennametal Inc. Stock Option and Incentive Plan of 1992 (the "1992 Plan")
provides for the granting of nonstatutory and incentive stock options and share
awards covering the lesser of 1,650,000 shares (gross) and 1,100,000 shares
(net) of Kennametal Capital Stock. The Kennametal Inc. Stock Option and
Incentive Plan of 1996 (the "1996 Plan") provides for the granting of
nonstatutory and incentive stock options and share awards covering 1,500,000
shares of Kennametal Capital Stock. Although options are still outstanding under
the Kennametal Inc. Stock Option Plan of 1982, as amended, no further grants of
options may be made under that plan. Following the Offering, Company employees
will remain eligible to receive grants and awards under these plans.
Under each of the plans, the price at which shares covered by an option may
be purchased must not be less than the fair market value of such shares at the
time the option is granted or, in the case of the non-qualified stock options
granted under the 1992 Plan, at not less than 75% of the fair market value. The
purchase price must be paid in full at the time of exercise either in cash or,
in the discretion of the administrator of the plan, by delivering shares of
Kennametal Capital Stock or a combination of shares and
40
<PAGE> 42
cash having an aggregate fair market value equal to the purchase price. Under
the 1988 Plan and 1996 Plan, any shares of Kennametal Capital Stock delivered as
payment, in whole or in part, of the purchase price must have been held by the
optionee for at least six months.
The following table sets forth information concerning options with respect
to Kennametal Capital Stock granted to the Named Executive Officers during
fiscal 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1996
-------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE VALUE(2)
- ------------------------------------- ---------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Michael W. Ruprich................... 11,000 1.9 $ 37.0625 7/29/05 $ 179,869
Kenneth M. McHenry................... 3,000 * 37.0625 7/29/05 49,055
Roland E. Lazzaro.................... 3,000 * 37.0625 7/29/05 49,055
Michael J. Mussog.................... 2,000 * 37.0625 7/29/05 32,703
</TABLE>
- ---------
* Less than one percent.
(1) These options were granted with an exercise price equal to the fair market
value of Kennametal Capital Stock on the date of grant and require the
optionee to hold 10% of the shares received from any exercise for a one-year
period from the date of exercise.
(2) Based on the Black-Scholes Option Valuation model adjusted for dividends to
determine grant date present value of the options. Kennametal has advised
the Company that it does not advocate or necessarily agree that the
Black-Scholes model properly reflects the value of an option. The
assumptions used in calculating the option value include the following: a
risk-free interest rate of 6.28% (the rate applicable to a ten-year treasury
security at the time of the award); a dividend yield of 1.9% (the annualized
yield at the date of grant); volatility of 30.227% (calculated using daily
stock returns for the 12-month period preceding the option award); and a
stock price at date of grant of $37.0625 (the exercise price at which these
options were granted was equal to the fair market value on the date of
grant). No adjustments were made for forfeitures or vesting restrictions on
exercise. The value of these options under the Black-Scholes model of option
valuation applying the preceding assumptions is $16.35170 per share. The
ultimate values of the options will depend on the future market price of
Kennametal Capital Stock, which cannot be forecast with reasonable accuracy.
The actual value, if any, an optionee will realize upon exercise of an
option will depend on the excess of the market value of Kennametal Capital
Stock over the exercise price on the date the option is exercised.
The following table sets forth information concerning options to purchase
Kennametal Capital Stock held by the Named Executive Officers:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR END YEAR END
SHARES ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ---------------------------------------------- --------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Michael W. Ruprich............................ -0- $-0- 34,834/0 $ 144,684/0
Kenneth M. McHenry............................ -0- -0- 3,000/0 0/0
Roland E. Lazzaro............................. -0- -0- 3,000/0 0/0
Michael J. Mussog............................. -0- -0- 2,000/0 0/0
</TABLE>
41
<PAGE> 43
RETIREMENT BENEFITS
The Named Executive Officers and certain other Company employees are
entitled to receive benefits pursuant to the Kennametal Inc. Retirement Income
Plan. The following table indicates, for purposes of illustration, the
approximate annual retirement benefits that would be payable at the present time
on a straight life annuity basis pursuant to the Kennametal Inc. Retirement
Income Plan, including supplemental retirement benefits under various
assumptions as to salary and years of service to employees in higher salary
classifications. The amounts shown below have not been adjusted for Social
Security benefits which offset the Company's obligation under the plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL BENEFIT UPON RETIREMENT WITH INDICATED YEARS OF
ANNUALIZED CREDITED SERVICE
COVERED -----------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 75,000 $22,500 $ 30,000 $ 37,500 $ 41,250 $ 45,000
100,000 30,000 40,000 50,000 55,000 60,000
150,000 45,000 60,000 75,000 82,500 90,000
200,000 60,000 80,000 100,000 110,000 120,000
250,000 75,000 100,000 125,000 137,500 150,000
</TABLE>
Pursuant to the Kennametal Inc. Retirement Income Plan, annual benefits
payable upon retirement to eligible salaried employees are calculated based upon
a monthly benefit equal to 2% of Covered Compensation (as described below) for
each year of credited service up to a maximum of 25 years, plus 1% of Covered
Compensation for each year of credited service over 25 years, less 1.5% of the
primary monthly Social Security benefit payable for each year of credited
service up to a maximum of 33 1/3 years (50% of the monthly Social Security
benefit). Covered Compensation is based on average monthly earnings, consisting
solely of base salary and bonus (which amounts for the past three fiscal years
are included in the Salary and Bonus columns of the Summary Compensation Table),
for the nine years out of the last twelve years of service immediately preceding
retirement during which the highest compensation was received. The entire cost
of the plan is paid by Kennametal although, after the Offering, the Company will
be required to reimburse Kennametal for the incremental cost of providing the
benefit to employees of the Company. Under the Code, certain limits are imposed
on payments under the plan. Payments in excess of the maximum annual pension
benefits payable under this plan to the Named Executive Officers and certain
other executive officers of Kennametal and the Company would be paid pursuant to
the Supplemental Executives Retirement Plan as more fully described above.
Following the Offering, the Company will reimburse Kennametal for any
supplemental retirement benefit amounts paid by Kennametal to former Company
employees under these plans.
As of June 30, 1996, the credited years of service under the Kennametal
Inc. Retirement Income Plan for the Named Executive Officers were approximately:
Michael W. Ruprich, 7 years; Kenneth M. McHenry, 2 years; Roland E. Lazzaro, 11
years; and Michael J. Mussog, 4 years.
Annualized Covered Compensation as of June 30, 1996, for purposes of the
retirement benefits table set forth above for the Named Executive Officers is as
follows: Michael W. Ruprich, $135,752; Kenneth M. McHenry, $101,117; Roland E.
Lazzaro, $77,844; and Michael J. Mussog, $84,724.
JLK DIRECT DISTRIBUTION INC. MANAGEMENT BONUS PLAN
It is anticipated that, prior to the Offering, the Company's Board of
Directors will adopt the JLK Bonus Plan for executives and managers which is
designed to tie bonus awards to Company performance, unit performance and
individual contribution, relative to the Company's business plans, strategies
and stockholder value creation. This bonus plan also is intended to maintain
management compensation at a competitive level, as indicated by published
compensation surveys. Each of the Named Executive Officers is eligible to
receive bonuses under this plan. The annual bonus opportunities for each of the
Named Executive Officers is specified above under "--Executive Compensation."
42
<PAGE> 44
JLK DIRECT DISTRIBUTION INC. 1997 STOCK OPTION AND INCENTIVE PLAN
It is anticipated that, prior to the Offering, the Company's Board of
Directors will adopt, and Kennametal, as the Company's sole shareholder, will
approve, the 1997 Plan.
In the judgment of the Board of Directors, it is important that the Company
be in a position to be able to grant stock options and, to make certain limited
stock awards in the form of shares, to directors, officers, employees and other
persons who are responsible for the Company's continued growth, development and
future financial success, in order to develop the sense of proprietorship
inherent in stock ownership by such person, to reward prior performance and to
assist in the Company's efforts to recruit, retain and motivate high quality
persons. Furthermore, the Board believes that it is important to have the
ability to grant stock-based compensation to directors in order to recruit and
retain highly qualified directors and to further align their interests with
those of shareholders.
The following description is intended to summarize certain provisions of
the 1997 Plan. The full text of the 1997 Plan is set forth in an exhibit to the
Registration Statement of which this Prospectus is a part. The following
description is qualified in its entirety by reference to such exhibit.
Administration. The 1997 Plan provides that it may be administered by the
full Board of Directors or by a committee of the Board (the "Plan
Administrator"). Subject to the terms of the 1997 Plan, the Plan Administrator
will select persons to whom options will be granted and/or shares awarded. The
Plan Administrator will determine the type of option, the number of shares to be
included in each option, the option price and the period in which each option
may be exercised. The Plan Administrator also will determine the number of
shares to be awarded pursuant to the 1997 Plan and the terms and conditions
which must be met in order for such shares to vest.
Shares Available; Eligibility. The 1997 Plan authorizes the issuance of to
2,000,000 shares of Class A Common Stock, although the maximum number of shares
that can take the form of share awards is 100,000, subject to adjustment.
Options and shares may be granted under the 1997 Plan to directors, officers and
employees of the Company and its subsidiaries and of Kennametal and its
subsidiaries who, in the opinion of the Plan Administrator, are mainly
responsible for the continued growth, development and future financial success
of the Company. There currently are approximately 50 directors, officers and
employees of the Company and Kennametal who may be eligible generally under the
1997 Plan, including the Named Executive Officers. Other persons may receive
options or shares under the 1997 Plan to reward superior performance.
Stock Options. The 1997 Plan provides for the Plan Administrator, in its
discretion, to grant options either in the form of incentive stock options
qualified as such under the Code or other options.
The price at which each share covered by an option granted under the 1997
Plan may be purchased will be determined in each case by the Plan Administrator
but may not be less than the fair market value at the time the option is
granted. For options granted simultaneously with the Offering, the fair market
value will be the price at which the Class A Common Stock is offered to the
public. Thereafter, fair market value will be the mean between the highest and
lowest sales prices for the Class A Common Stock as reported on the New York
Stock Exchange--Composite Transactions reporting system for the date in question
or, if no sales were made on that date, on the next preceding date on which
sales were made.
If the optionee is an employee who ceases to be employed by the Company or
any of its subsidiaries, the option may be exercised only within three months
after the termination of employment and within the option period or, if such
termination was due to disability or retirement, within one year after
termination of employment and within the option period, unless such termination
of employment is for cause or in violation of an agreement by the optionee to
remain in the employ of the Company or the subsidiary, in which case the option
will terminate. In the discretion of the Plan Administrator, the option period
may be extended for up to three years from the date of termination regardless of
the original option period. Further, the option may be exercised only within 450
calendar days after the optionee's death and within the option period and only
by the optionee's personal representatives or persons entitled thereto under the
optionee's will or the laws of descent and distribution.
43
<PAGE> 45
If an optionee is a non-employee director of the Company who ceases to
serve as a director of the Company and Kennametal, the option may be exercised
only within three months thereafter and within the option period or, if such
cessation was due to disability, within one year after cessation of service and
within the option period, unless such cessation of service was the result of
removal for cause, in which case the option will immediately terminate.
The Plan Administrator, in its discretion, may grant rights authorizing the
automatic issuance, upon exercise of an option granted under the 1997 Plan,
using previously owned shares, of additional stock options under the 1997 Plan
with an exercise price equal to the fair market value on the date of exercise
and for up to the number of shares delivered in payment of the exercise price of
the option. Such additional stock options must have the same option period as
the original option.
In consideration for the granting of each option, the optionee must agree
to remain in the employment of the Company or a subsidiary for at least one year
from the date of the granting of the option or until the first day of the month
coinciding with or next following the optionee's 65th birthday, whichever may be
earlier.
Share Awards. The Plan Administrator may from time to time award shares to
participants pursuant to share award agreements which may contain such terms and
conditions as the Plan Administrator determines. The aggregate maximum number of
shares of Class A Common Stock that may take the form of share awards is
100,000. The Plan Administrator may establish such vesting period, schedule and
criteria as it deems appropriate for each share award, such as vesting in
installments upon the achievement by the Company or grantee of specified periods
of continued employment, specific performance criteria or other goals; provided,
however, that any single award of shares to a participant in an amount greater
than 100 shares will vest only upon the grantee or the Company satisfying
specified performance goals. If the grantee or the Company, as the case may be,
fails to achieve the designated goals or the grantee ceases to be employed by
the Company for any reason prior to the expiration of the vesting period, the
grantee will forfeit all non-vested shares.
Allotment of Shares. Not more than 15% of the aggregate number of shares
subject to the 1997 Plan may be optioned or awarded in the aggregate to any one
individual excluding shares covered by an option previously granted to the
individual to the extent it has expired or terminated without being exercised
and excluding shares to the extent the award has terminated without such shares
having vested.
Change in Control. The 1997 Plan provides that in the event of a change in
control of the Company or Kennametal (as defined in the 1997 Plan), (i) all
options that become exercisable in installments will become immediately
exercisable in full, (ii) an optionee who ceases to be employed by the Company
or Kennametal or any of their respective subsidiaries within one year following
the change in control may in all events exercise his or her options for a period
of three months after the termination of employment and within the option period
and (iii) all awards of shares which have not previously vested will become
vested.
Amendment or Discontinuance. The Board of Directors may alter, amend,
suspend or discontinue the 1997 Plan, provided that no such action may deprive
any person without such person's consent of any rights granted under the 1997
Plan.
EMPLOYMENT AGREEMENTS
The Company intends to enter into agreements with each of the Named
Executive Officers whereby, subject to a provision for termination without cause
by either party upon written notice, they will be employed by the Company. The
agreements generally provide that the officers will devote their entire time and
attention to the business of the Company, will refrain during employment and for
three years thereafter from competing with the Company (unless employment is
terminated by the Company without cause or following a change in control), and
will not disclose confidential or trade secret information belonging to the
Company. The agreements provide for severance payments upon termination of
employment occurring either before or after a change in control of the Company.
In the event of termination of employment by the Company prior to a change
in control (and without cause), each officer would receive as severance pay an
amount equal to three months' base salary at the time of such termination. In
the event of termination of the employee prior to a change in control, or
without good
44
<PAGE> 46
reason following a change in control, no severance payments will be made. In the
event of termination of employment by the Company (other than for cause or
disability or by the employee with good reason at or after a change in control
of the Company or Kennametal), each officer would receive as severance pay an
amount equal to up to 2.8 (decreasing to zero if employment continues for
thirty-six (36) months following the change in control) times the sum of (i) his
respective annual base salary at the date of termination or, at the officer's
election, his salary as of the beginning of the month preceding the month in
which the change in control occurs, and (ii) the average of any bonuses which
the officer was entitled to be paid during the three most recent fiscal years
ending prior to the date of termination. The officer would receive the same
medical and group insurance benefits that he received at the date of termination
for up to 36 months following the date of termination.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition in fiscal 1990 by Kennametal of J&L,
which is a wholly owned subsidiary of Kennametal and will become a wholly owned
subsidiary of the Company upon consummation of the Offering, Kennametal entered
into certain leases with Irwin L. Elson, a director of the Company, and parties
affiliated with Mr. Elson. As a result of these transactions, J&L leases office
and warehouse space in Livonia, Michigan from a partnership in which Mr. Elson
is a partner. The initial term of the lease commenced on January 1, 1991 and
continues to December 31, 2000. During fiscal 1996, J&L made aggregate lease
payments to that partnership under this lease of $613,000. J&L also leases
office and warehouse space in Mt. Prospect, Illinois, from a general partnership
comprised of Mr. Elson and other unrelated individuals. The initial lease term
commenced on August 1, 1988 and terminates on December 31, 1998. During fiscal
1996, J&L made aggregate lease payments to that partnership under this lease of
$311,000.
From July 1, 1996 until April 30, 1997, Mr. Elson was President of J&L. In
such capacity, he received a salary of approximately $175,000 for such period
and participated in Kennametal's benefit plans, including the Kennametal Inc.
Management Performance Bonus Plan. He also received stock options, first
exercisable after July 1, 1997, for 10,000 shares of Kennametal Capital Stock.
During fiscal 1994 and fiscal 1995, Mr. Elson was a consultant to and director
of J&L.
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<PAGE> 47
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDER AND MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK BY PRINCIPAL SHAREHOLDER
No shares of Class A Common Stock were outstanding or beneficially owned
prior to the Offering. All of the shares of Class B Common Stock
outstanding are beneficially owned by Kennametal. Accordingly, upon consummation
of the Offering, Kennametal will own Common Stock representing
approximately % of the economic interest in the Company ( % if the
Underwriters' over-allotment option is exercised in full) and representing
approximately % of the combined voting power of the Company's outstanding
Common Stock (or % if the Underwriters' over-allotment option is exercised
in full).
Immediately after the Offering, the only shares of Class A Common Stock
that will be outstanding are those that will be issued in the Offering
(including any shares issued upon exercise of the Underwriters' over-allotment
option).
The following table sets forth information with respect to the beneficial
ownership of the Company's Class B Common Stock as of the date of this
Prospectus:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS
- ---------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Kennametal Inc.(3).............................................. 100
</TABLE>
- ---------
(1) The address of Kennametal is Route 981 at Westmoreland County Airport, P.O.
Box 231, Latrobe, Pennsylvania 15650.
(2) Because the Class B Common Stock is convertible by Kennametal into Class A
Common Stock on a one-for-one basis, such ownership also represents
beneficial ownership of Class A Common Stock.
(3) See "Relationship with Kennametal" for a description of transactions and
arrangements between Kennametal and the Company.
OWNERSHIP OF KENNAMETAL AND COMPANY COMMON STOCK BY MANAGEMENT
The following table sets forth the beneficial ownership of the Kennametal
Capital Stock as of March 31, 1997, by each director of the Company, each
nominee for director of the Company, each Named Executive Officer and all
directors and executive officers of the Company as a group. None of such persons
owned any shares of the Company's Class A Common Stock or Class B Common Stock
as of such date. Options with respect to an aggregate of 425,000 shares of the
Class A Common Stock will be awarded by the Company to
46
<PAGE> 48
its executive officers, directors and employees effective upon consummation of
the Offering. See "Management--Board Committees and Compensation" and
"--Executive Compensation."
<TABLE>
<CAPTION>
TOTAL
AMOUNT AND BENEFICIAL
NATURE OF OWNERSHIP
BENEFICIAL PERCENTAGE DEFERRED FEE AND FEE PLAN
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS PLAN SHARES(3) SHARES
- ------------------------------------------- --------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Richard C. Alberding....................... 1,734(4) * -- 1,734
Irwin L. Elson............................. 3,000 * -- 3,000
Robert L. McGeehan......................... 263,049(5) 1.0% 6,718 269,767
Aloysius T. McLaughlin, Jr. ............... 24,791 * 4,920 27,870
William R. Newlin.......................... 23,052(6) * 8,322 30,977
Michael W. Ruprich......................... 38,708(7) * -- 38,708
Kenneth M. McHenry......................... 6,000 * -- 6,000
Roland E. Lazzaro.......................... 5,000 * -- 5,000
Michael J. Mussog.......................... 4,000 * -- 4,000
Directors and Executive Officers as a
Group (9 persons)........................ 369,334(1)
</TABLE>
- ---------
* Less than one percent.
(1) The figures shown include 216,507, 34,834, 6,000, 5,000, 4,000 and 270,841
shares of Kennametal Capital Stock over which Messrs. McGeehan, Ruprich,
McHenry, Lazzaro, Mussog and all directors and executive officers of the
Company as a group, respectively, have the right to acquire within 60 days
of March 31, 1997, pursuant to Kennametal's stock option plans.
(2) No individual beneficially owns in excess of one percent of the total shares
outstanding. Directors and executive officers of the Company as a group
beneficially own .01% of the total shares of Kennametal Capital Stock
outstanding. Unless otherwise noted, the shares shown are subject to the
sole voting and investment power of the person named.
(3) In addition to these shares, Messrs. McGeehan, McLaughlin and Newlin hold
Kennametal Stock Credits for an aggregate of 19,960 shares of Kennametal
Capital Stock to which they are entitled at certain dates in the future
pursuant to a Kennametal deferred directors fee plan.
(4) All such shares are owned jointly by Mr. Alberding and his wife.
(5) The figure shown includes 8,214 shares owned jointly by Mr. McGeehan and
his wife.
(6) The figure shown includes 2,265 shares owned jointly by Mr. Newlin and his
wife.
(7) In addition to these shares, Mr. Ruprich holds 3,314 Kennametal Stock
Credits, pursuant to Kennametal's Performance Bonus Stock Plan of 1995.
47
<PAGE> 49
RELATIONSHIP WITH KENNAMETAL
GENERAL
Upon completion of the Offering, Kennametal will own 100% of the
outstanding Class B Common Stock of the Company which will represent
approximately % of the combined voting power of all of the outstanding
Common Stock (or approximately % if the Underwriters' over-allotment option
is exercised in full). For so long as Kennametal continues to own shares of
Common Stock representing more than 50% of the combined voting power of the
Common Stock of the Company, Kennametal will be able, among other things, to
determine any corporate action requiring approval of holders of Common Stock
representing a majority of the combined voting power of the Common Stock,
including the election of the entire Board of Directors of the Company, certain
amendments to the Articles of Incorporation and By-Laws of the Company and
approval of certain mergers and other control transactions, without the consent
of the other shareholders of the Company. See "Description of Capital Stock."
In addition, through its control of the Board of Directors and beneficial
ownership of Common Stock, Kennametal will be able to control certain decisions,
including decisions with respect to the Company's dividend policy, the Company's
access to capital (including borrowing from third-party lenders and the issuance
of additional equity securities), mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the Company
and any change in control of the Company. Kennametal has advised the Company
that its current intention is to continue to hold all of the Class B Common
Stock beneficially owned by it. Kennametal has no agreement with the Company not
to sell or distribute such shares, other than pursuant to the Purchase Agreement
in which Kennametal has agreed not to (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Class A Common Stock or any
securities convertible into or exercisable or exchangeable for Class A Common
Stock (including Class B Common Stock) or file any registration statement under
the Securities Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the Class
A Common Stock or any securities convertible into or exercisable or exchangeable
for Class A Common Stock (including Class B Common Stock), whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Class A Common Stock or such other securities, in cash or otherwise,
for a period of 180 days from the date of this Prospectus without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf
of the Underwriters, except for any shares of Class A Common Stock issued, or
options to purchase Class A Common Stock granted, pursuant to the Company's
employee benefit plans described herein. There can be no assurance concerning
the period of time during which Kennametal will maintain its beneficial
ownership of Common Stock.
Beneficial ownership of at least 80% of the total voting power and value of
the outstanding Common Stock is required in order for Kennametal to continue to
include the Company in its consolidated group for federal income tax purposes
and ownership of at least 80% of the total voting power and 80% of any class of
nonvoting capital stock is required in order for Kennametal to be able to effect
a Tax-Free Spin-Off. The Company's relationship with Kennametal will also be
governed by agreements to be entered into in connection with the Offering with
Kennametal, including an administrative services agreement, a lease agreement,
shared facilities agreements (subleases), a product supply agreement, the
Tax-Sharing Agreement, a trademark license agreement, an indemnification
agreement, a non-competition and corporate opportunities allocation agreement,
an intercompany debt/investment and cash management agreement, warehousing
agreements and a stock option and registration rights agreement, the material
terms of which are described below. It is anticipated that such agreements will
be entered into concurrently with the consummation of the Offering. Management
believes the fees and other amounts paid to Kennametal under such agreements
will not exceed the amounts that would be paid if such services or products were
provided by an independent third party and which are consistent in all material
respects with the allocation of the costs of such services set forth in the
historical financial statements of the Company. See the Consolidated Financial
Statements included elsewhere herein. Management's estimate of the net charge
for service fees and other amounts that would have been payable by the Company
to Kennametal in fiscal 1996 if the Services Agreement had been in effect
48
<PAGE> 50
during that period is approximately $5.7 million, which is approximately the
amount included in the fiscal 1996 Consolidated Financial Statements.
With respect to matters covered by the Services Agreement, the relationship
between Kennametal and the Company is intended to continue in a manner generally
consistent with past practices. BECAUSE THE COMPANY IS A WHOLLY OWNED SUBSIDIARY
OF KENNAMETAL, NONE OF THESE ARRANGEMENTS WILL RESULT FROM ARM'S LENGTH
NEGOTIATIONS, AND THEREFORE, THE PRICES CHARGED TO THE COMPANY FOR SERVICES
PROVIDED THEREUNDER MAY BE HIGHER OR LOWER THAN PRICES THAT MAY BE CHARGED BY A
THIRD PARTY.
The descriptions set forth below are intended to be summaries, and while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the forms of the relevant agreement
filed as exhibits to the Registration Statement of which this Prospectus is a
part. The Articles of Incorporation also contain provisions relating to the
allocation of business opportunities that may be suitable for either of
Kennametal or the Company and to the approval of transactions between the
Company and Kennametal. For additional information concerning the
above-mentioned provisions of the Articles of Incorporation and circumstances
under which the Class B Common Stock may be converted into Class A Common Stock,
see "Description of Capital Stock."
ADMINISTRATIVE SERVICES AGREEMENT
The Company and Kennametal will enter into an intercompany administrative
services agreement (the "Services Agreement") with respect to services to be
provided by Kennametal to the Company. The Services Agreement provides that such
services will be provided in exchange for fees which, generally, (i) in the case
of services purchased by Kennametal from third parties for the Company, will be
based upon the incremental cost charged by such third parties to Kennametal for
such services provided to the Company and (ii) in the case of services directly
provided by Kennametal, will be based on the estimated costs, including a
reasonable allocation of direct and indirect overhead costs, incurred by
Kennametal for the services it provides directly to the Company. Such fees will
be paid monthly in arrears. The Company may request an expansion or termination
of services, in which case the parties will discuss, without obligation, the
provision or termination of such services and an appropriate charge or reduction
in charges for such services. The purpose of the Services Agreement is to ensure
that Kennametal continues to provide to the Company the range of services that
Kennametal provided to the Company prior to the Offering. With respect to
matters covered by the Services Agreement, the relationship between Kennametal
and the Company is intended to continue in a manner generally consistent with
current practices. The services initially to be provided by Kennametal to the
Company include, among other things, certain treasury, general accounting and
administrative services including, tax, risk management, human resources, legal,
internal audit, marketing, executive time and space, and information systems
services.
The Services Agreement also provides that Kennametal will continue coverage
of the Company under Kennametal's insurance policies and will allow eligible
employees of the Company to participate in all of Kennametal's benefit plans. In
addition, under the Services Agreement, the Company will reimburse Kennametal
for the portion of Kennametal's premium cost with respect to such insurance that
is attributable to coverage of the Company and reimburse Kennametal for
Kennametal's costs (including any contributions and premium costs and including
certain third-party expenses and allocation of certain personnel expenses of
Kennametal), generally in accordance with past practice, relating to
participation by the Company's employees in any of Kennametal's benefit plans.
The Services Agreement will have an initial term of 10 years and will be
renewed automatically thereafter for successive one-year terms unless either the
Company or Kennametal elects not to renew the Services Agreement. After the
initial 10-year term, the Services Agreement may be terminated at any time by
either party upon six months' prior written notice. The Services Agreement also
provides that any services provided thereunder may be terminated upon mutual
agreement of the Company and Kennametal or in order for either party to comply
with law and that it will be subject to early termination by Kennametal if:
Kennametal owns Common Stock representing less than a majority of the voting
power of all Common Stock, any person or
49
<PAGE> 51
group, other than Kennametal, beneficially owns 20% of the Common Stock; any
person or group, other than Kennametal, directly or indirectly has the power to
exercise a controlling influence over the Company; or a majority of the
directors of the Company were neither nominated by Kennametal or by the
Company's Board of Directors nor appointed by directors so nominated. The
Services Agreement also may be terminated by the non-breaching party if the
other party materially breaches its terms.
Pursuant to the Services Agreement, each party will agree to indemnify the
other, except in certain limited circumstances, against liabilities that the
other may incur by reason of or related to such party's failure to perform its
obligations under the Services Agreement.
LEASE AGREEMENT
The Company and Kennametal will enter into a lease agreement (the "Lease
Agreement") pursuant to which Kennametal will lease to the Company space within
buildings located on Kennametal's premises. The Company will use such space for
the display and retail sale of metalworking consumables and related products, as
well as for ancillary office and storage use. The Company may not use the
premises for any other purpose or business without the prior written consent of
Kennametal. The Company is required to indemnify Kennametal against certain
liabilities in respect of the use of the premises. The Lease Agreement will
remain in effect for a term of 10 years, but may be extended for successive
one-year terms by the Company upon written notice to Kennametal. Kennametal may
terminate the Lease Agreement if (i) any person or group, other than Kennametal,
beneficially owns 20% of the Common Stock, (ii) any person or group, other than
Kennametal, directly or indirectly has the power to exercise a controlling
influence over the Company, or (iii) a majority of the directors of the Company
were neither nominated by Kennametal or by the Company's Board of Directors nor
appointed by directors so nominated. The Lease Agreement also may be terminated
by the non-breaching party if the other party materially breaches its terms.
SHARED FACILITIES AGREEMENTS
The Company and Kennametal will enter into Shared Facilities Agreements
(the "Shared Facilities Agreements") pursuant to which each company will
sublease to the other company the facilities which are leased by either of the
companies and shared with the other company. See "Business--Properties". The
Shared Facilities Agreements provide that the relevant sublessor will lease
space to the sublessee at an average annual rental rate equal to a pro rata
share (based on square feet occupied) of all costs and expenses (principally
fixed rent) under the relevant lease. The Company's management believes that the
rental rates payable by the Company are commensurate with market rates, although
the Company did not seek bids from third parties. Management estimates that in
fiscal 1996 the Company would have owed Kennametal rent, net of the rent that
Kennametal would pay the Company, if the Shared Facilities Agreements had been
in effect during that period, of approximately $.5 million, which amount is
included in the fiscal 1996 Consolidated Financial Statements. The Shared
Facilities Agreements provide for a term, with respect to each subleased
facility, equal to the term of the underlying lease.
PRODUCT SUPPLY AGREEMENT
The Company and Kennametal will enter into a product supply agreement (the
"Supply Agreement") which has a term of 10 years pursuant to which Kennametal
agrees to supply and the Company agrees to purchase from Kennametal all of the
Company's requirements for metalworking consumables and related products
direct-marketed by the Company and Kennametal further agrees to supply all
metalworking consumables and related products requested pursuant to Full Service
Supply Programs, except as otherwise agreed from time to time between the
Company and Kennametal. The Company will be entitled to purchase products for
its direct-marketing business at prices discounted from Kennametal's published
price for each such product depending upon the volume of each such product
purchased by the Company. The gross margin realized by the Company from the sale
of products purchased from Kennametal and resold in the Company's
direct-marketing program will slightly exceed the gross margin which the Company
realizes on all products resold in the direct-marketing program. The Articles of
Incorporation contain similar provisions regarding product supply. See
"Description of Capital Stock--Certain Provisions of the Articles and By-Laws--
50
<PAGE> 52
Limitations on the Company's Business Activities." Pursuant to the Corporate
Opportunities Agreement, Kennametal has agreed that, with the exception of
existing relationships, Kennametal will not sell, distribute or otherwise make
available Kennametal products to any person that competes with the Company. The
Supply Agreement will remain in effect for a term of 10 years, but may be
earlier terminated by either party if Kennametal owns Common Stock representing
less than a majority of the voting power of all Common Stock or if the other
party materially breaches any of the intercompany agreements.
TAX-SHARING AGREEMENT
The Company is, and after the Offering will continue to be, included in
Kennametal's federal consolidated income tax group and the Company's tax
liability will be included in the consolidated federal income tax liability of
Kennametal and its subsidiaries. In certain circumstances, certain of the
Company's subsidiaries may be included with certain subsidiaries of Kennametal
in combined, consolidated or unitary income tax groups for state and local tax
purposes. The Company and Kennametal intend to enter into the Tax-Sharing
Agreement. Pursuant to the Tax-Sharing Agreement, the Company will make payments
to Kennametal such that, with respect to any period, the amount of taxes to be
paid by the Company, subject to certain adjustments, will be determined as
though the Company were to file separate federal, state and local income tax
returns (including, except as provided below, any amounts determined to be due
as a result of a redetermination of the tax liability of Kennametal arising from
an audit or otherwise) as the common parent of an affiliated group of
corporations filing combined, consolidated or unitary (as applicable) federal,
state and local returns rather than a consolidated subsidiary of Kennametal with
respect to federal, state and local income taxes. The Company will be
reimbursed, however, for tax attributes that it generates, such as net operating
losses, if and when they are used on a consolidated basis.
Kennametal will continue to have all the rights of a parent of a
consolidated group (and similar rights provided for by applicable state and
local law with respect to a parent of a combined, consolidated or unitary
group), will be the sole and exclusive agent for the Company in any and all
matters relating to the income, franchise and similar tax liabilities of the
Company, will have sole and exclusive responsibility for the preparation and
filing of consolidated federal and consolidated or combined state income tax
returns (or amended returns), and will have the power, in its sole discretion,
to contest or compromise any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for refund on behalf of the Company. In
addition, Kennametal has agreed to undertake to provide the aforementioned
services with respect to the Company's separate state and local income tax
returns and the Company's foreign income tax returns. Under the Services
Agreement, the Company will pay Kennametal a fee intended to reimburse
Kennametal for all direct and indirect costs and expenses incurred with respect
to the Company's share of the overall costs and expenses incurred by Kennametal
with respect to tax related services.
In general, the Company will be included in Kennametal's consolidated group
for federal income tax purposes for so long as Kennametal beneficially owns at
least 80% of the total voting power and value of the outstanding Common Stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Company and Kennametal, during the period in which the Company is
included in Kennametal's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Kennametal's consolidated group.
TRADEMARK LICENSE AGREEMENT
The Company and Kennametal will enter into a trademark license agreement
(the "License Agreement"). The License Agreement provides, among other things,
for the grant to the Company by Kennametal of a non-exclusive license to use
Kennametal trademarks (collectively, the "Marks") in connection with the
Company's business. Under the License Agreement, Kennametal has the right to
revoke the license if the Marks are used in a fashion contrary to the terms of
the License Agreement or if Kennametal owns Common Stock representing less than
a majority of the voting power of all Common Stock. A revocation of the license
to use the Marks could have a material adverse effect on the business, financial
condition or results of
51
<PAGE> 53
operation of the Company. Under the terms of the License Agreement, each party
will indemnify the other and its affiliates against certain liabilities in
respect of the use of the Marks and other activities relating to the business of
the Company. The Company has also granted to Kennametal a non-exclusive license
to use the Company's trademarks and tradenames on terms similar to those granted
by Kennametal to the Company for the Marks. The License Agreement will remain in
effect for a term of 10 years, but may be earlier terminated by Kennametal if it
owns Common Stock representing less than a majority of the voting power of all
Common Stock or by either party if the other party materially breaches any of
the intercompany agreements.
INDEMNIFICATION AGREEMENT
The Company and Kennametal will enter into an indemnification agreement
(the "Indemnification Agreement"). Under the Indemnification Agreement, subject
to limited exceptions, the Company is required to indemnify Kennametal and its
directors, officers, employees, agents and representatives for liabilities under
federal or state securities laws as a result of the Offering, including
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the Registration Statement, of which this Prospectus is a part.
The Indemnification Agreement also provides that each party thereto (the
"Indemnifying Party") will indemnify the other party thereto and its directors,
officers, employees, agents and representatives (the "Indemnified Party") for
liabilities that may be incurred by the Indemnified Party relating to, resulting
from or arising out of (i) the businesses and operations conducted or formerly
conducted, or assets owned or formerly owned, by the Indemnifying Party and its
subsidiaries (except, in the case where Kennametal is the Indemnifying Party,
such businesses, operations and assets of the Company and its subsidiaries) or
(ii) the failure by the Indemnifying Party to comply with any other agreements
executed in connection with the Offering.
The Indemnification Agreement also provides that the Company will indemnify
Kennametal for any liabilities incurred under guarantees of leases.
NON-COMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT
Pursuant to a Non-Competition and Corporate Opportunities Agreement (the
"Corporate Opportunities Agreement") to be entered into between Kennametal and
the Company: (i) Kennametal agrees for as long as the other intercompany
agreements remain in effect (whose current term is 10 years) (A) not to compete
with the Company in the business (the "Base Business") of direct marketing of a
broad range of metalworking consumables and related products through catalogs,
monthly promotional flyers, additional mailings and advertisements,
telemarketing efforts, direct-sales efforts and showrooms targeted at small and
medium-sized metalworking shops as well as the supply of consumable tooling and
related metalworking products at designated manufacturing plants of large
industrial customers through integrated industrial supply programs, and (B) not
to sell, offer to sell, distribute or otherwise make available Kennametal
manufactured and branded products to anyone who intends to direct market such
products and therefore competes with the Company's direct-marketing program
except with respect to those contracts, arrangements or relationships in
existence on the date of the Corporate Opportunities Agreement or with the
consent of the Company; and (ii) the Company agrees for as long as the other
intercompany agreements remain in effect not to sell, offer to sell, distribute
or otherwise make available any products which compete directly or indirectly
with Kennametal without the prior written consent of Kennametal. Similar
provisions are contained in the Articles of Incorporation. See "Description of
Capital Stock--Certain Provisions of the Articles of By-Laws--Limitation on the
Company's Business Activities."
The Corporate Opportunities Agreement provides that Kennametal will have
the right to any future business opportunities outside the scope of the Base
Business, and will have the right as to any future business opportunities
outside the scope of the Base Business but which are reasonably related to the
Base Business, to determine the allocation thereof based solely upon
Kennametal's evaluation of what is in the best interests of Kennametal under the
circumstances. Under such agreement, the good faith determination of Kennametal
as to the scope of the Base Business, the applicability of any exceptions
discussed above to its agreement not to compete, or the allocation of any
corporate opportunities outside the scope of the Base Business, will be
conclusive and binding. The Corporate Opportunities Agreement will remain in
effect for a term of 10 years,
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but may be earlier terminated by Kennametal if it owns Common Stock representing
less than a majority of the voting power of all Common Stock or if the Company
materially breaches any of the intercompany agreements. The Articles of
Incorporation also restrict the Company's ability to pursue future business
opportunities. See "Description of Capital Stock--Certain Provisions of the
Articles and By-Laws--Corporate Opportunities."
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT
The Company and Kennametal will enter into an intercompany debt/investment
and cash management agreement (the "Cash Management Agreement") under which the
Company will continue to participate in Kennametal's centralized cash management
system. The Cash Management Agreement provides for a daily transfer from the
Company's cash accounts to Kennametal's centralized cash accounts and daily
funding of the disbursements of the Company from such Kennametal cash account.
The Company will receive interest on net cash flows to Kennametal's centralized
cash accounts and be charged interest on net borrowings from the Kennametal
centralized cash accounts at a rate equal to the all-in interest rate available
to Kennametal from outside sources for short term borrowings or investments,
depending upon the overall position of the centralized cash accounts. The
Company will pay for this service pursuant to the Services Agreement and will
reimburse Kennametal for an allocable portion of Kennametal's facility and/or
commitment fees under its credit lines. The Cash Management Agreement will
remain in effect for a term of 10 years, but may be earlier terminated by
Kennametal if it owns Common Stock representing less than a majority of the
voting power of all Common Stock or by either party if the other party
materially breaches any of the intercompany agreements.
WAREHOUSING AGREEMENTS
The Company and Kennametal will enter into separate warehousing agreements
("Warehousing Agreements") with respect to (i) Kennametal distribution centers
and warehouses which store products for the Company and (ii) Company
distribution centers and warehouses that store products for Kennametal. The
terms of each Warehousing Agreement provide for the warehouser to store the
warehousee's products in the warehouses segregated and separate from the
warehouser's products and, upon request by the warehousee, to ship its products
from these warehouses to the warehousee's customers. The warehousee will pay to
the warehouser a line item charge for each of the products picked, packed and
shipped based upon an allocation of costs (including overhead) incurred by the
warehouser at these warehouses. The Warehousing Agreements will remain in effect
for a term of 10 years, but may be earlier terminated by Kennametal if it owns
Common Stock representing less than a majority of the voting power of all Common
Stock or by either party if the other party materially breaches any of the
intercompany agreements.
CORPORATE AGREEMENT
The Company and Kennametal will enter into a corporate agreement (the
"Corporate Agreement") under which the Company grants to Kennametal a continuing
option, transferable, in whole or in part, to any of its subsidiaries, to
purchase, under certain circumstances, additional shares of Class B Common Stock
or Class A Common Stock (the "Stock Option"). The Stock Option may be exercised
by Kennametal simultaneously with the issuance of any equity security of the
Company (other than in the Offering or upon the exercise of the Underwriters'
over-allotment option) or immediately prior to a Tax-Free Spin-Off to the extent
necessary to maintain its then existing percentage of the total voting power and
economic value of the Company at 80% of all outstanding Common Stock or, in
connection with a Tax-Free Spin-Off, in order to acquire stock ownership
necessary to effect a Tax-Free Spin-Off. The purchase price of the shares of
Common Stock purchased upon any exercise of the Stock Option, subject to certain
exceptions, will be based on the market price of the Class A Common Stock. The
Stock Option expires on the Control Termination Date. The Company does not
intend to issue additional shares of Class B Common Stock except pursuant to the
exercise of the Stock Option and as permitted by any law, rule or regulation to
which the Company is subject.
The Corporate Agreement further provides that, upon the request of
Kennametal, the Company will use its best efforts to effect the registration
under the applicable federal and state securities laws of any of the
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shares of Common Stock (and any other securities issued in respect of or in
exchange for either) held by Kennametal for sale in accordance with Kennametal's
intended method of disposition thereof and will take such other actions
necessary to permit the sale thereof in other jurisdictions, subject to certain
limitations specified in the Corporate Agreement. Although as of the date of
this Prospectus, Kennametal has no current plan or intention other than to hold
its shares of Class B Common Stock for the foreseeable future, Kennametal will
also have the right, which it may exercise at any time and from time to time, to
include the shares of Class A Common Stock (and any other securities issued in
respect of or in exchange for either) held by it in certain other registrations
of common equity securities of the Company initiated by the Company on its own
behalf or on behalf of its other shareholders. The Company will agree to pay all
out-of-pocket costs and expenses (other than underwriting discounts and
commissions) in connection with each such registration that Kennametal requests
or in which Kennametal participates. Subject to certain limitations specified in
the Corporate Agreement, such registration rights will be assignable by
Kennametal and its assigns. The Corporate Agreement contains indemnification and
contribution provisions (i) by Kennametal and its permitted assigns for the
benefit of the Company and related persons and (ii) by the Company for the
benefit of Kennametal and the other persons entitled to effect registrations of
Common Stock and related persons.
The Corporate Agreement provides that for so long as Kennametal maintains
beneficial ownership of at least 40% of the number of outstanding shares of
Common Stock, the Company may not take any action or enter into any commitment
or agreement which may reasonably be anticipated to result, with or without
notice and with or without lapse of time or otherwise, in a contravention or an
event of default by Kennametal of (i) any provision of applicable law or
regulation, including but not limited to provisions pertaining to the Code or
ERISA, (ii) any provision of Kennametal's Articles of Incorporation or
Kennametal's By-Laws, (iii) any credit agreement or other material instrument
binding upon Kennametal or (iv) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Kennametal or any of
its assets.
CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and Kennametal in a
number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, potential competitive
business activities, the election of new or additional directors, payment of
dividends, incurrence of indebtedness, tax matters, financial commitments,
marketing functions, indemnity arrangements, registration rights, administration
of benefits plans, service arrangements, issuances of capital stock of the
Company, sales or distributions by Kennametal of its remaining shares of Common
Stock and the exercise by Kennametal of its ability to control the management
and affairs of the Company. The Company cannot engage in the manufacture of
metalcutting tools and inserts and other related products in which Kennametal is
engaged. The Articles of Incorporation and the Corporate Opportunities Agreement
contain certain noncompete provisions. Circumstances could arise, however, in
which the Company and Kennametal would engage in activities in competition with
one another.
The Company and Kennametal may enter into material transactions and
agreements in the future in addition to those described above. The Board will
utilize such procedures in evaluating the terms and provisions of any material
transactions between the Company and Kennametal or its affiliates as the Board
may deem appropriate in light of its fiduciary duties under state law. Depending
on the nature and size of the particular transaction, in any such evaluation,
the Board may rely on management's statements and opinions and may or may not
utilize outside experts or consultants or obtain independent appraisals or
opinions.
Four of the six current directors of the Company are also directors of
Kennametal, including Kennametal's Chairman, William R. Newlin, and Kennametal's
Chief Executive Officer, Robert L. McGeehan. Directors of the Company who are
also directors of Kennametal will have conflicts of interest with respect to
matters potentially or actually involving or affecting the Company and
Kennametal, such as acquisitions, financing and other corporate opportunities
that may be suitable for the Company and Kennametal. To the extent that such
opportunities arise, such directors may consult with their legal advisors and
make a determination after consideration of a number of factors, including
whether such opportunity is presented to any such director in his capacity as a
director of the Company, whether such opportunity is within the Company's line
of business or consistent with its strategic objectives and whether the Company
will be able to
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undertake or benefit from such opportunity. In addition, determinations may be
made by the Board, when appropriate, by the vote of the disinterested directors
only. Notwithstanding the foregoing, there can be no assurance that conflicts
will be resolved in favor of the Company.
So long as the Company remains a subsidiary of Kennametal, the directors
and officers of the Company will, subject to certain limitations, be indemnified
by Kennametal and insured under insurance policies maintained by Kennametal
against liability for actions taken or omitted to be taken in their capacities
as directors and officers of the Company, including actions or omissions that
may be alleged to constitute breaches of the fiduciary duties owed by such
persons to the Company and its shareholders. This insurance may not be
applicable to certain of the claims which Kennametal may have against the
Company pursuant to the Indemnification Agreement or otherwise. It is
contemplated that, in the event that Kennametal ceases to own in excess of a
majority of the voting power of the Common Stock, the Company will obtain its
own insurance coverage for its directors and officers in respect of such matters
comparable to that currently provided by Kennametal.
KENNAMETAL'S ALTERNATIVES FOR ITS SHARES OF COMMON STOCK
As of the date of this Prospectus, Kennametal has no current plan or
intention other than to hold its shares of Class B Common Stock for the
foreseeable future. After the date of the Offering, options which may be
considered by Kennametal regarding its interest in the Company include whether
to sell all or a portion of its shares of Common Stock to the public in a
subsequent public offering or to a strategic investor or to distribute pro rata
to its shareholders its remaining shares of Common Stock in a Tax-Free Spin-Off
(as defined below).
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (a)(i) 75,000,000
shares of Class A Common Stock, par value $0.01 per share, of which no shares
are outstanding as of the date hereof and (ii) 50,000,000 shares of Class B
Common Stock, par value $0.01 per share, of which one share is outstanding as of
the date hereof, and (b) 25,000,000 shares of Preferred Stock, par value $0.01
per share (the "Preferred Stock"), of which no shares are outstanding as of the
date hereof. Of the 75,000,000 shares of Class A Common Stock authorized,
are being offered hereby ( shares if the Underwriters'
over-allotment option is exercised in full), and shares are reserved
for issuance upon conversion of Class B Common Stock into Class A Common Stock.
Of the 50,000,000 shares of Class B Common Stock authorized, shares
will be held by Kennametal upon consummation of the Offering. A description of
the material terms and provisions of the Articles of Incorporation affecting the
relative rights of the Class A Common Stock, the Class B Common Stock and the
Preferred Stock is set forth below. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Articles and the By-Laws of the Company (the "By-Laws"), copies of which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
Voting Rights. The holders of Class A Common Stock and Class B Common Stock
generally have identical rights, except that holders of Class A Common Stock are
entitled to one vote per share, while holders of Class B Common Stock are
entitled to 10 votes per share, on all matters to be voted on by the
shareholders. Generally, all matters to be voted on by the shareholders must be
approved by a majority of the votes cast by the holders of all shares of Class A
Common Stock and Class B Common Stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any Preferred Stock. Except as otherwise provided by law, and subject
to any voting rights granted to holders of any outstanding Preferred Stock,
amendments to the Articles must be approved by a majority of the combined votes
cast by the holders of all shares of Class A Common Stock and Class B Common
Stock present in person or represented by proxy, voting together as a single
class. However, amendments to the Articles that
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would alter or change the powers, preferences or special rights of the Class A
Common Stock or the Class B Common Stock so as to affect them adversely also
must be approved by a majority of the votes cast by the holders of the shares
affected by the amendment present in person or represented by proxy, voting as a
separate class. In addition, approval of certain other transactions with persons
other than Kennametal and its affiliates will require the approval of a majority
of certain shareholders. See "--Certain Provisions of the Articles and
By-Laws--Change of Control Provisions--PBCL Anti-Takeover Provisions."
Board Classification and Cumulative Voting. In accordance with the terms of
the Articles, prior to the Control Termination Date, members of the Board of
Directors of the Company will hold office for one year terms, will be elected at
each annual meeting of the shareholders of the Company and shareholders will not
be entitled to cumulate their votes in the election of directors. On or as
reasonably practicable after the Control Termination Date, the Board will be
divided into three classes designated as Class I, Class II and Class III,
respectively, with staggered three-year terms of office. At each annual meeting
thereafter, directors who are elected to succeed the class of directors whose
terms expire at that meeting will be elected for three-year terms and
shareholders will have cumulative voting rights (i.e., in voting for directors
each shareholder multiplies the total number of votes which its shares
represents by the number of directors to be elected and is entitled to cast the
entire number of votes so determined for one nominee or to distribute them among
the nominees in such proportion as the shareholder may determine). This
classification of the Board and cumulative voting will help to ensure continuity
and stability of corporate leadership and policy of the Company after Kennametal
has divested itself of a controlling interest in the Company. The classification
of the Board will also have the effect, however, of increasing the period of
time before each member of the Board will be re-elected or can be replaced,
which may have the effect of frustrating persons seeking to effect a takeover or
assume control of the Board.
Dividends. Holders of Class A Common Stock and Class B Common Stock will
share ratably in any dividends declared by the Board, subject to any
preferential rights of any outstanding Preferred Stock. Dividends consisting of
shares of Class A Common Stock and Class B Common Stock may be paid only as
follows: (i) shares of Class A Common Stock may be paid only to holders of
shares of Class A Common Stock, (ii) shares of Class B Common Stock may be paid
only to holders of shares of Class B Common Stock, and (iii) shares shall be
paid proportionally with respect to each outstanding share of Class A Common
Stock and Class B Common Stock.
Dividends may be paid on the Common Stock if, when and as determined by the
Board from time to time out of any funds legally available therefor. Under the
Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL"), a
dividend may not be paid if the Company is at the time insolvent or would be
insolvent after the payment of such dividend.
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law. See "Dividend Policy." By virtue of its
stock ownership, Kennametal will have the ability to change the size and
composition of the Board and thereby control the payments of dividends by the
Company.
Conversion. Each share of Class B Common Stock will convert into one share
of Class A Common Stock (i) while such share of Class B Common Stock is held by
Kennametal, at the option of Kennametal prior to a Tax-Free Spin-Off, (ii)
automatically on the Control Termination Date if it occurs prior to a Tax-Free
Spin-Off, and (iii) automatically upon a transfer by Kennametal to a person
other than an affiliate of Kennametal or upon any Kennametal affiliate ceasing
to be a Kennametal affiliate, except for a disposition effected in connection
with a transfer of Class B Common Stock to shareholders of Kennametal as a
dividend in a transaction intended to be tax-free under the Code (a "Tax-Free
Spin-Off"). If Kennametal determines to effect a Tax-Free Spin-Off and in its
discretion determines that it could effect a Tax-Free Spin-Off by distribution
of the shares of Class A Common Stock into which the Class B Common Stock can be
converted,
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Kennametal will convert its Class B Common Stock into Class A Common Stock
immediately prior to such Tax-Free Spin-Off and distribute such shares of Class
A Common Stock rather than shares of Class B Common Stock to its shareholders.
At present, the Code requires, among other matters, that a company have
beneficial ownership of at least 80% of the voting power of outstanding common
stock in order for a spin-off to be tax-free under the Code.
Following a Tax-Free Spin-Off of the Class B Common Stock, shares of Class
B Common Stock will automatically convert into shares of Class A Common Stock on
the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free
Spin-Off, Kennametal delivers to the Company written advice of counsel
reasonably satisfactory to the Company (which shall include Kennametal's General
Counsel) to the effect that either (i) such conversion could adversely affect
the ability of Kennametal to obtain a favorable ruling from the Internal Revenue
Service (the "IRS") that the distribution would be a Tax-Free Spin-Off or (ii)
the IRS has adopted a general non-ruling policy on tax-free spin-offs and that
such conversion could adversely affect the status of the distribution as a
Tax-Free Spin-Off. If such written advice is received, approval of such
conversion will be submitted to a vote of the holders of the Company's Common
Stock as soon as practicable after the fifth anniversary of the Tax-Free
Spin-Off unless Kennametal delivers to the Company written advice of counsel
reasonably satisfactory to the Company (which shall include Kennametal's General
Counsel) prior to such anniversary that such vote would adversely affect the
status of the distribution as a Tax-Free Spin-Off, including the ability to
obtain a favorable ruling from the IRS; if such written advice is delivered, the
Company shall call no such meeting, no such meeting shall be held and no such
vote shall be taken. Approval of such conversion will require the affirmative
vote of the holders of a majority of the shares of both the Company's Class A
Common Stock and Class B Common Stock present and voting, voting together as a
single class, with each share entitled to one vote for such purpose. No
assurance can be given that such conversion would be consummated. Kennametal has
no current plans with respect to a Tax-Free Spin-Off of the Company.
The foregoing requirements are intended to ensure that tax-free treatment
of the Tax-Free Spin-Off is preserved should the IRS challenge such automatic
conversion as violating the 80% vote requirement currently required by the Code
for a tax-free spin-off. Similarly, the requirement to submit a conversion to a
vote of the holders of Common Stock is intended to preserve such tax treatment
should the IRS challenge such automatic conversion as violating the 80% vote
requirement.
All conversions will be effected on a share-for-share basis. Automatic
conversion of the Class B Common Stock into Class A Common Stock if a Tax-Free
Spin-Off has not occurred on the Control Termination Date is intended to ensure
that Kennametal retains voting control by virtue of its ownership of Class B
Common Stock only if it has a material economic interest in the Company.
In addition, in order to give any holder of the Class A Common Stock or
Class B Common Stock the right to participate in any offer for a significant
amount of the shares of the other class that is not similarly offered for the
shares of such holder's class, shares of Common Stock of each class will be
convertible, at the option of the registered holder thereof, on a
share-for-share basis, into shares of the other class if any person (other than
Kennametal and, in the case of Class A Common Stock, only following a Tax-Free
Spin-Off), or any group of persons agreeing to act together for the purpose of
acquiring, holding, voting or disposing of shares of Common Stock (other than
Kennametal or any one or more of its affiliates), makes an offer, which the
Board deems to be a bona fide offer, to purchase five percent or more of the
other class of Common Stock for cash and/or other securities or property without
making a similar offer for the shares of such class. The shares of Common Stock
of a class may be so converted only during the period in which such bona fide
offer is in effect. Any share of Common Stock so converted and not acquired by
the offeror prior to the termination, rescission or completion of the offer will
automatically reconvert to a share of the class from which it was converted upon
such termination, rescission or completion.
Other Rights. In the event of a voluntary or involuntary liquidation,
dissolution or winding-up of the Company, the holders of shares of Common Stock
will be entitled to share in all assets of the Company remaining after the
payment of its liabilities, subject to prior distribution rights and payment of
any distributions owing to holders of shares of Preferred Stock then
outstanding, if any. No shares of either class of
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Common Stock are subject to redemption or have preemptive rights to purchase
additional shares of Common Stock. The Company may issue Common Stock, option
rights or securities having conversion or option rights without first offering
them to the holders of the Common Stock. Upon consummation of the Offering, all
the outstanding shares of Class A Common Stock and Class B Common Stock will be
legally issued, fully paid and nonassessable.
PREFERRED STOCK
The Board is authorized, without further action by the shareholders of the
Company and with the full authority permitted by law, to issue the Preferred
Stock from time to time in one or more classes or series and to determine the
voting rights, designations, preferences, limitations, qualifications,
privileges, options, restrictions and special rights, if any, including, without
limitation, the dividend rights, conversion rights, voting rights, redemption
rights and maturity dates thereof. The Preferred Stock is available for possible
future financing and acquisition transactions, stock dividends or distributions,
employee benefit plans and other general corporate purposes. Under certain
circumstances, the Preferred Stock could be used to create voting impediments or
to frustrate persons seeking to effect a takeover, assume control of the Board
or otherwise gain control of the Company.
CERTAIN PROVISIONS OF THE ARTICLES AND BY-LAWS
CHANGE OF CONTROL PROVISIONS. Certain provisions of the Articles and
By-Laws may have the effect of delaying, deferring or preventing a change of
control of the Company that would be operative with respect to an extraordinary
corporate transaction involving the Company, such as a merger, reorganization,
tender offer, sale or transfer of substantially all of its assets or
liquidation. These provisions might discourage a potentially interested
purchaser from attempting a unilateral takeover bid for the Company on terms
which some shareholders might favor. Although the Company does not believe that,
by discouraging potential takeover bids, these provisions will depress the stock
price of the Common Stock, these provisions might diminish the opportunity for
the shareholders of the Company to sell their shares at a premium over then
prevailing market prices. Set forth below is a discussion of such provisions.
Advance Notice of Business to be Brought Before Shareholder
Meetings. Except as otherwise provided with respect to the nomination of
directors, the By-Laws restrict the ability of a shareholder other than
Kennametal to bring business before an annual or special meeting of
shareholders. Specifically, to do so, such shareholder must provide written
notice of the proposed business to the Secretary of the Company at least 60 days
in advance of such annual or special meeting (or if less than 60 days' notice or
prior public disclosure of the date of such annual or special meeting is given,
not later than 10 days after the date of mailing of such notice or the date of
such public disclosure, whichever occurs first). Such shareholder notice is
required to set forth the following information: (i) the name and address of the
shareholder proposing such business; (ii) a brief description of such business;
(iii) the class, series and number of shares of the Company's capital stock
owned by such shareholder; (iv) a description of all arrangements or
understandings between such shareholder and any other person or persons (naming
such person or persons) in connection with such business or any special interest
such shareholder may have in connection with such business; (v) all other
information as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Commission had proxies been solicited with
respect to such business by the Board; and (vi) a representation that the
shareholder is a shareholder of record of stock of the Company entitled to vote
at such meeting and intends to appear in person or by proxy in order to present
such proposal.
The foregoing provisions may delay the ability of shareholders to bring
matters before annual or special meetings of the shareholders other than matters
which the Company deems desirable and may provide sufficient time for the
Company to institute litigation or take other appropriate steps to respond to
such business or to prevent such business from being acted upon, if such
response or prevention is thought to be necessary or desirable for any reason.
The foregoing provisions do not limit a shareholder's right to provide a
proposal for inclusion in the proxy statement of the Company in accordance with
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
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Special Shareholder Meetings. Separately, the PBCL provides that unless
specifically permitted in the corporation's articles, shareholders of a
registered corporation are not entitled to call a special meeting of
shareholders. The Articles do not permit the shareholders of the Company, other
than Kennametal, to call a special meeting. Therefore, the shareholders of the
Company, other than Kennametal prior to the Control Termination Date, are not
entitled to call a special meeting.
Advance Notice of Nominees for the Board. The By-Laws restrict the ability
of a shareholder other than Kennametal to nominate individuals for election as
directors. Specifically, in order for such shareholder to make such
nomination(s), such shareholder must provide written notice of such
shareholder's intent to make such nomination(s) to the Secretary of the Company
at least 60 days in advance of the meeting of the shareholders at which such
election is to be held (or if less than 60 days' notice or prior public
disclosure of the date of such annual meeting is given, not later than 10 days
after the date of mailing of such notice or the date of such public disclosure,
whichever occurs first). Such shareholder notice is required to set forth the
following information: (i) the name and address of the shareholder who intends
to make the nomination(s) and of the person(s) to be nominated; (ii) the class,
series and number of shares of the Company's capital stock owned by such
shareholder and a representation that the shareholder is a holder of record of
such stock of the Company and intends to appear in person or by proxy at the
meeting to nominate the person(s) specified in the notice; (iii) a description
of all arrangements or understandings between such shareholder and any other
person(s), naming such person(s), pursuant to which the nomination or
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission had the nominee been nominated by the Board; and (v) the consent of
each nominee to serve as a director of the Company if so elected.
The foregoing provisions provide the Company sufficient time to assess the
qualifications of any person proposed for election to the Board and provide
sufficient time for the Company to institute litigation or take other
appropriate steps to prevent the nominee from being elected or serving, if such
prevention is thought to be necessary or desirable for any reason. Such
provisions also may inhibit shareholders who do not have any intention of
controlling the Company or the Board from participating in the nomination
process.
Limitation Of Liability. The Articles provides that, to the fullest extent
permitted by law, directors of the Company will not be personally liable for
monetary damages for any action taken, or any failure to take any action, as a
director.
PBCL Anti-Takeover Provisions. The PBCL contains a number of statutory
"anti-takeover" provisions, including Subchapters E, F, G and H of Chapter 25
and Section 2538 of the PBCL, which apply automatically to a Pennsylvania
registered corporation (usually a public company) unless such corporation elects
to opt-out as provided in such provisions. The Company, as a new Pennsylvania
registered corporation, has elected in its Articles to opt-out of certain of the
anti-takeover provisions entirely, namely Subchapters E and G (and the related
Subchapters I and J as discussed below) and Subchapters F and H, and has elected
in its Articles to exclude Kennametal and its affiliates from Section 2538
(which applies to transactions with interested shareholders). Upon completion of
the Offering, Kennametal will beneficially own approximately % of the
combined voting power of all classes of voting stock of the Company ( % if
the Underwriters' over-allotment option is exercised). The Company believes that
certain of the PBCL "anti-takeover" provisions are less necessary as a result of
such ownership structure and elimination of such provisions alleviates their
being inadvertently triggered by virtue of the Company's ownership structure,
contrary to the intentions of such provisions.
The following descriptions are qualified in their entirety by reference to
such provisions of the PBCL:
Subchapter E (relating to control transactions) generally provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person
or group the fair value of their shares, including a proportionate amount
of any control premium.
59
<PAGE> 61
Subchapter F (relating to business combinations) generally delays for
five years and imposes conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions between a
corporation and an interested shareholder including mergers, sales or
leases of specified amounts of assets, liquidations, reclassifications and
issuances of specified amounts of additional shares of stock of the
corporation. An "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Subchapter G (relating to control-share acquisitions) generally
prevents a person or group who has acquired 20% or more of the voting power
of a covered corporation from voting such shares unless the "disinterested"
shareholders approve such voting rights. Failure to obtain such approval
exposes the owner to the risk of a forced sale of the shares to the issuer.
If shareholder approval is obtained, the corporation is also subject to
Subchapters I and J of Chapter 25 of the PBCL. Subchapter I provides for a
minimum severance payment to certain employees terminated within two years
of the approval. Subchapter J prohibits the abrogation of certain labor
contracts prior to their stated date of expiration.
Subchapter H (relating to disgorgement) generally applies in the event
that any person or group publicly discloses that the person or group may
acquire control of the corporation or a person or the group acquires (or
publicly discloses an offer or intent to acquire) 20% or more of the voting
power of the corporation and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation
by the person or the group during the 18-month period belong to the
corporation if the securities that were sold were acquired during the
18-month period or within the preceding 24 months.
Section 2538 of the PBCL generally establishes certain shareholder
approval requirements with respect to specified transactions with
"interested shareholders."
Also, Subchapters E, F, G and H contain a wide variety of
transactional and status exemptions, exclusions and safe harbors.
LIMITATIONS ON THE COMPANY'S BUSINESS ACTIVITIES. The Articles provide
that, at any time prior to the day after the third annual meeting of
shareholders held after the Control Termination Date, the Company will not,
directly or indirectly (whether through a subsidiary of, or any other person
controlled by, the Company), for its own account or for the account of another,
engage in manufacturing metalworking tools, inserts and related products,
including, but not limited to, cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies (collectively, the "Metalworking Products").
The Articles also provide that the Company may not engage in any business
or activity other than the Industrial Supply Business without the consent of
Kennametal or a majority vote of the Company's shareholders and that no person
will be liable for breach of any fiduciary duty as a shareholder or controlling
person of the Company, or otherwise, by reason of such person consenting to or
voting in favor of, or not consenting to or voting against authorization for the
Company to engage in any business or activity other than the Industrial Supply
Business.
The Company's Articles also require that, unless Kennametal otherwise
consents, the Company purchase from Kennametal all of the Company's
direct-marketing requirements for Metalworking Products available from
Kennametal.
CORPORATE OPPORTUNITIES. The Articles provide that no opportunity,
transaction, agreement or other arrangement to which Kennametal is a party shall
be a corporate opportunity of the Company, directly or indirectly, unless such
opportunity, transaction, agreement or other arrangement was initially offered
to the Company before it is offered to Kennametal and either: (i) the Company
has an enforceable contractual interest in such opportunity, transaction,
agreement or arrangement or (ii) the subject matter of such opportunity,
transaction, agreement or other arrangement is a constituent element of an
activity in which the Company is then actively engaged. Even if the foregoing
conditions were met, the Articles provide that such fact alone does not
conclusively render such opportunity the property of the Company.
60
<PAGE> 62
Kennametal may in the future receive business opportunities which would be
suitable for either the Company or Kennametal (or an affiliate of Kennametal
other than the Company). There can be no assurance that such business
opportunities will be offered to the Company.
NEW YORK STOCK EXCHANGE LISTING
Prior to the date of this Prospectus, there has been no established public
market for the Common Stock. Application will be made for listing of the Class A
Common Stock on the New York Stock Exchange under the symbol " ."
TRANSFER AGENT AND REGISTRAR
The Company presently intends to use ChaseMellon Shareholder Services,
L.L.C. as the Transfer Agent and Registrar for the Class A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have shares of
Class A Common Stock issued and outstanding ( if the Underwriters'
over-allotment option is exercised in full) and shares of Class B Common
Stock issued and outstanding. All of the shares of Class A Common Stock to be
sold in the Offering will be freely transferable and tradable without
restrictions under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (as that term is defined in Rule 144 adopted under
the Securities Act ("Rule 144")), which will be subject to the resale
limitations of Rule 144. All of the outstanding shares of Class B Common Stock
are owned by Kennametal and have not been registered under the Securities Act
and may not be sold in the absence of an effective registration statement under
the Securities Act other than in accordance with Rule 144 or another exemption
from registration. Kennametal has certain rights to require the Company to
effect registration of shares of Common Stock owned by Kennametal, which rights
may be assigned. See "Relationship with Kennametal--Corporate Agreement."
In general, under Rule 144 as currently in effect, a person (including an
affiliate) who beneficially owns shares that are "restricted securities" as to
which at least one year has elapsed since the later of the date of acquisition
of such securities from the issuer or from an affiliate of the issuer, and any
affiliate who owns shares that are not "restricted securities", is entitled to
sell within any three-month period, a number of shares that does not exceed
(together with the sales by other persons required to be aggregated) the greater
of one percent of the total number of outstanding shares of the class of stock
being sold or the average weekly reported trading volume of the class of stock
being sold during the four calendar weeks preceding the filing of the required
notice of such sale. A person (or persons whose shares are aggregated) who is
not deemed an "affiliate" of the Company and who has beneficially owned
restricted securities as to which at least two years have elapsed since the
later of the date of the acquisition of such securities from the issuer or from
an affiliate of the issuer is entitled to sell such shares without regard to the
volume limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with, such
issuer.
Prior to the Offering, there has been no public market for the Common
Stock. No predictions can be made as to the effect, if any, that future sales of
Common Stock or the availability of such shares for sale will have on the
prevailing market prices of the Class A Common Stock following the Offering.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing market
prices for Class A Common Stock. Although Kennametal in the future may effect or
direct sales or other dispositions of Common Stock that would reduce its
beneficial ownership interest in the Company, Kennametal has advised the Company
that its current intention is to continue to hold all of the Class B Common
Stock beneficially owned by it immediately after the completion of the Offering.
However, Kennametal has no agreement with the Company not to sell or distribute
such shares and, other than pursuant to the Purchase Agreement described below,
there can be no assurance concerning the period of time during which Kennametal
will maintain its beneficial ownership of Common Stock. Beneficial ownership of
at least 80% of the total voting power and value of the outstanding Common
61
<PAGE> 63
Stock is required in order for Kennametal to continue to include the Company in
its consolidated group for federal tax purposes and ownership of at least 80% of
the total voting power and 80% of each class of nonvoting capital stock is
required in order for Kennametal to be able to effect a Tax-Free Spin-Off of the
Company. Kennametal has indicated to the Company that any decision by Kennametal
to reduce such beneficial ownership interest would be made in the future on the
basis of all of the circumstances existing at such time, including the effect,
if any, of any such reduction on Kennametal, stock market conditions and other
factors. The Company and Kennametal have agreed not to (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Class A
Common Stock or any securities convertible into or exercisable or exchangeable
for Class A Common Stock (including Class B Common Stock) or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock
(including Class B Common Stock) whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Class A Common Stock
or such other securities, in cash or otherwise, for a period of 180 days from
the date of this Prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters, except for
any shares of Class A Common Stock issued or options to purchase Class A Common
Stock granted pursuant to the Company's employee benefit plans described herein.
62
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and each of the underwriters named below
(the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase from
the Company, the aggregate number of shares of Class A Common Stock set forth
opposite its name below. The Purchase Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Class A Common
Stock offered hereby if any of such shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................
Goldman, Sachs & Co.....................................................
-------
Total......................................................
=======
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Class A Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted the Underwriters an option exercisable for 30 days
from the date of this Prospectus to purchase up to an aggregate of
additional shares of Class A Common Stock at the public offering price set forth
on the cover page of this Prospectus, less the underwriting discount. The
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of the shares of Class A Common Stock offered hereby. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Class A Common Stock to be
purchased by it shown in the foregoing table bears to the shares of Class
A Common Stock initially offered hereby.
The Company and Kennametal have agreed not to (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Class A Common Stock
or any securities convertible into or exercisable or exchangeable for Class A
Common Stock (including Class B Common Stock) or file any registration statement
under the Securities Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock (including Class B Common Stock) whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Class A Common Stock or such other securities, in cash or
otherwise, for a period of 180 days from the date of this Prospectus without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of the Underwriters, except for any shares of Class A Common Stock issued
or options to purchase Class A Common Stock granted pursuant to the Company's
employee benefit plans described herein.
The Company and Kennametal have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Class A Common Stock is completed, rules of
the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Class A Common Stock. As an exception
to these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Class A Common Stock. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Class A Common Stock.
63
<PAGE> 65
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering (i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of the Prospectus), the Underwriters
may reduce that short position by purchasing Class A Common Stock in the open
market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Underwriters purchase shares of
Class A Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Class A Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Certain of the Underwriters have provided from time to time, and may
provide in the future, investment banking services to Kennametal, the Company
and their affiliates, for which such Underwriters have received and will receive
customary fees and commissions.
Application will be made for listing of the Class A Common Stock on the New
York Stock Exchange under the trading symbol " ." In order to meet the
requirements for listing the Class A Common Stock on the New York Stock
Exchange, the Underwriters will undertake to sell lots of 100 or more shares of
Class A Common Stock to a minimum of 2,000 beneficial owners.
Prior to the Offering, there has been no established trading market for the
shares of Class A Common Stock. The initial public offering price for the Class
A Common Stock offered hereby has been determined by negotiations between the
Company and the Underwriters. Among the factors considered in making such
determination were the history of and the prospects for the industry in which
the Company competes, an assessment of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
earnings of the Company, the general condition of the securities markets at the
time of the Offering, the prices of similar securities of generally comparable
companies and other relevant factors. There can be no assurance that an active
trading market will develop for the Class A Common Stock or that the Class A
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.
The Underwriters have informed the Company that they do not intend to
confirm sales of Class A Common Stock offered hereby to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby will be
passed upon for the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. William R. Newlin, Chairman of the Board of the
Company and Kennametal, is a shareholder in Buchanan Ingersoll Professional
Corporation. As of April 28, 1997, Mr. Newlin beneficially owned 23,052 shares
of Kennametal Capital Stock and 8,322 Kennametal Stock Credits. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York. Simpson Thacher & Bartlett will rely on
Buchanan Ingersoll Professional Corporation with respect to matters of
Pennsylvania law.
64
<PAGE> 66
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Class A Common Stock offered hereby. This Prospectus, which constitutes part of
the Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. In addition, the Registration Statement may
be accessed electronically at the Commission's site on the World Wide Web at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
Prior to the Offering, the Company has not been required to file reports
under the Exchange Act. However, following the consummation of the Offering, the
Company will be required to file reports proxy statements and other information
with the Commission pursuant to the Exchange Act. Such reports, proxy statements
and other information can be inspected and copied at the addresses, and may be
accessed electronically at the web site, set forth above. The Company intends to
furnish to its shareholders annual reports containing audited financial
statements following the end of each fiscal year and to make available quarterly
reports containing unaudited summary financial information for the first three
fiscal quarters of each fiscal year. Kennametal is subject to the information
requirements of the Exchange Act and in accordance therewith files reports and
other information with the Commission.
65
<PAGE> 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Income..................................................... F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Cash Flows................................................. F-5
Consolidated Statements of Shareholder's Equity....................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO JLK DIRECT DISTRIBUTION INC.
We have audited the accompanying consolidated balance sheets of JLK Direct
Distribution Inc. as of June 30, 1995 and 1996, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JLK Direct
Distribution Inc. and subsidiaries as of June 30, 1995 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
April 25, 1997
F-2
<PAGE> 69
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $144,933 $188,202 $243,969 $175,989 $225,195
Cost of goods sold........................ 100,672 127,917 166,326 120,017 152,339
-------- -------- -------- -------- --------
Gross profit............................ 44,261 60,285 77,643 55,972 72,856
Operating expenses........................ 33,026 40,658 52,761 38,217 50,425
-------- -------- -------- -------- --------
Operating income........................ 11,235 19,627 24,882 17,755 22,431
Interest and other........................ -- -- -- -- --
-------- -------- -------- -------- --------
Income before income taxes................ 11,235 19,627 24,882 17,755 22,431
Provision for income taxes................ 4,522 7,799 9,819 7,019 8,812
-------- -------- -------- -------- --------
Net income.............................. $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======== ======== ======== ======== ========
Unaudited data, as adjusted:
Pro forma net income per share............
======== ======== ======== ======== ========
Pro forma weighted average shares
outstanding.............................
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 70
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, MARCH 31,
-------------------- MARCH 31, 1997
1995 1996 1997 (NOTE 12)
------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents........................ $ 6,854 $ 690 $ 6,678 $ 6,678
Accounts receivable, less allowance for
doubtful accounts of $152, $175 and $185,
respectively............................. 20,268 32,520 39,697 39,697
Inventories................................. 44,388 59,302 61,659 61,659
Deferred income taxes....................... 1,948 2,838 3,094 3,094
------- -------- -------- ---------
Total current assets..................... 73,458 95,350 111,128 111,128
------- -------- -------- ---------
Property, plant and equipment:
Land and buildings.......................... 834 1,073 950 950
Machinery and equipment..................... 4,838 6,090 8,177 8,177
Less accumulated depreciation............... (2,596) (3,191) (3,926) (3,926)
------- -------- -------- ---------
Net property, plant and equipment........ 3,076 3,972 5,201 5,201
------- -------- -------- ---------
Other assets:
Goodwill, net............................... 21,628 20,990 20,512 20,512
Deferred income taxes....................... -- 79 226 226
Other....................................... 731 654 1,065 1,065
------- -------- -------- ---------
Total other assets....................... 22,359 21,723 21,803 21,803
------- -------- -------- ---------
TOTAL ASSETS............................. $98,893 $121,045 $138,132 $ 138,132
======= ======== ======== =========
LIABILITIES:
Current liabilities:
Accounts payable............................ $ 9,537 $ 13,519 $ 17,617 $ 17,617
Due to Kennametal and affiliates............ 7,853 4,861 3,476 3,476
Income taxes payable........................ 2,683 1,966 2,460 2,460
Accrued vacation pay........................ 640 777 830 830
Other....................................... 800 964 1,105 1,105
Dividends payable........................... -- -- -- 20,000
------- -------- -------- ---------
Total current liabilities................ 21,513 22,087 25,488 45,488
------- -------- -------- ---------
Deferred income taxes....................... 87 -- -- --
Other liabilities........................... 571 967 1,266 1,266
------- -------- -------- ---------
Total liabilities........................ 22,171 23,054 26,754 46,754
------- -------- -------- ---------
SHAREHOLDER'S EQUITY:
Investments by and advances from
Kennametal............................... 76,725 98,038 111,244 91,244
Translation adjustment...................... (3) (47) 134 134
------- -------- -------- ---------
Total shareholder's equity............... 76,722 97,991 111,378 91,378
------- -------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................. $98,893 $121,045 $138,132 $ 138,132
======= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 71
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
---------------------------- ------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $6,713 $11,828 $15,063 $10,736 $13,619
Adjustments for noncash items:
Depreciation and amortization................. 1,240 1,278 1,458 1,073 1,118
Noncash transactions with Kennametal.......... 3,438 3,481 5,660 4,067 4,714
Changes in certain assets and liabilities:
Accounts receivable........................... (5,051) 2,100 (12,252) (9,554) (7,177)
Inventories................................... (1,612) (8,697) (14,914) (8,205) (2,357)
Accounts payable and accrued liabilities...... 3,058 6,815 1,278 (127) 2,907
Other......................................... 1,801 1,378 (1,287) (1,253) (21)
------ ------- ------- ------- -------
Net cash flow from (used in) operating
activities.................................... 9,587 18,183 (4,994) (3,263) 12,803
------ ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (648) (1,175) (2,053) (1,408) (2,028)
Other........................................... 529 234 337 -- 159
------ ------- ------- ------- -------
Net cash flow used in investing activities...... (119) (941) (1,716) (1,408) (1,869)
------ ------- ------- ------- -------
FINANCING ACTIVITIES:
Net cash advances by (payments to) Kennametal... (7,159) (15,391) 590 (1,450) (5,127)
------ ------- ------- ------- -------
EXCHANGE RATE EFFECT ON CASH.................... -- (3) (44) 10 181
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and
equivalents................................... 2,309 1,848 (6,164) (6,111) 5,988
Cash and equivalents, beginning of period....... 2,697 5,006 6,854 6,854 690
------ ------- ------- ------- -------
Cash and equivalents, end of period............. $5,006 $ 6,854 $ 690 $ 743 $ 6,678
====== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Income taxes paid............................... $4,944 $ 7,575 $10,891 $ 8,168 $ 9,168
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 72
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------------- MARCH 31,
1994 1995 1996 1997
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $73,815 $76,807 $76,722 $ 97,991
Net income.......................................... 6,713 11,828 15,063 13,619
Net cash advances by (payments to) Kennametal....... (7,159) (15,391) 590 (5,127)
Other noncash transactions.......................... 3,438 3,481 5,660 4,714
Translation adjustment.............................. -- (3) (44) 181
------- ------- ------- ---------
Balance at end of period............................ $76,807 $76,722 $97,991 $ 111,378
======= ======= ======= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 73
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements of JLK Direct
Distribution Inc. (the "Company") include the operations of J&L America, Inc.
("J&L"), a wholly owned subsidiary of Kennametal Inc. ("Kennametal"), and Full
Service Supply ("Full Service Supply"), which had been operated as a program of
Kennametal. Prior to April 1, 1997, the Company had no separate legal status or
existence. Kennametal incorporated the Company as a Pennsylvania corporation
under the name "JLK Direct Distribution Inc." in April 1997. In anticipation of
an initial public offering ("IPO"), (i) Kennametal contributed to the Company
the stock of J&L and the assets and liabilities of Full Service Supply and (ii)
the Company and Kennametal entered into certain contractual arrangements (see
Note 12). The Company and Kennametal will operate as separate companies.
The Company is a global distributor of metalworking consumables and related
products to the metalworking industry utilizing mail order catalogs, showrooms,
and integrated industrial supply programs, which constitutes a single business
segment. The Company's executive offices are located in Latrobe, Pennsylvania
and serve both domestic and international markets through its 18 showrooms and
six distribution centers and numerous integrated industrial supply programs,
with the largest concentration in the midwest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist
in evaluating the Company's financial statements.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
consist of the financial statements of the Company as described in Note 1. These
statements are presented as if the Company had existed as a corporation separate
from Kennametal and include the historical assets, liabilities, sales and
expenses directly related to the Company's operations that were either
specifically identifiable or allocable. Shareholder's equity (which represents
Kennametal's 100% interest prior to the IPO) comprises both investments by and
non-interest bearing advances from Kennametal. The Company expects that in
connection with the IPO, such amounts will be included as part of the Company's
permanent equity capitalization. All operating expenses related to the Company
have been appropriately reflected in the Company's consolidated financial
statements. All material transactions between entities included in the
consolidated financial statements have been eliminated. The accompanying
financial statements do not include Kennametal's general corporate debt or an
allocation of interest expense.
For the periods presented, certain operating expenses reflected in the
consolidated financial statements include charges for certain services provided
by Kennametal. These charges are based on personnel, business volume or other
appropriate bases and generally include expenses related to information
management and other administrative services. These charges are estimates based
on Kennametal management's best estimate of actual expenses. It is Kennametal
management's opinion that the expenses charged to the Company are reasonable and
are representative of the expenses the Company would have incurred on a
stand-alone basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. 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 period.
Actual results could differ from those estimates.
CASH AND EQUIVALENTS. Cash as reflected in the consolidated financial
statements represents the Company's position in Kennametal's centralized cash
management system. Kennametal considers temporary cash investments having
original maturities of three months or less as cash equivalents. Cash
equivalents consist principally of investments in money market funds and
certificates of deposit.
INVENTORIES are carried at the lower of cost, using the first-in, first-out
(FIFO) method, or market.
F-7
<PAGE> 74
PROPERTY, PLANT AND EQUIPMENT are carried at cost. Major improvements are
capitalized, while maintenance and repairs are generally expensed as incurred.
Retirements and disposals are removed from cost and accumulated depreciation
accounts, with the gain or loss reflected in net income. Depreciation for
financial reporting purposes is computed using the straight-line method over the
estimated useful lives of the assets ranging from three to 10 years.
ADVERTISING AND CATALOG COSTS. Advertising costs are expensed as incurred.
The costs of producing and distributing the Company's catalog are deferred and
are included in other assets in the Company's balance sheet. These costs are
amortized over the life of the catalog which typically is one year or less.
PRE-OPENING COSTS related to showrooms, distribution centers and new
integrated supply contracts are expensed as incurred.
GOODWILL represents an allocation from Kennametal for the excess of costs
over the fair value of net assets acquired related to the historical acquisition
costs of the Company. Goodwill is being amortized on a straight-line basis over
the expected period to be benefited, which is estimated to be 40 years. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
INCOME TAXES. The provision for Federal and state income taxes has been
calculated as if the Company were a stand-alone corporation filing separate tax
returns. Deferred income taxes are recognized based on the future income tax
effects (using enacted tax laws and rates) of differences in the carrying
amounts of assets and liabilities for financial reporting and tax purposes. A
valuation allowance is recognized if it is "more likely than not" that some or
all of a deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
international operation are translated into U.S. dollars using year-end exchange
rates, while sales and expenses are translated at average exchange rates
throughout the year. The resulting net translation adjustments are recorded as a
separate component of shareholder's equity.
EARNINGS PER SHARE is computed using the weighted average number of shares
outstanding during the year.
REVENUE RECOGNITION. The Company recognizes revenue from product sales upon
transfer of title to the customer.
NEW ACCOUNTING STANDARDS. In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Company adopted SFAS No. 121 on July 1, 1996 and
the adoption of SFAS No. 121 did not have an impact on the consolidated
financial statements, as the statement is consistent with existing Company
policy.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the intrinsic-
value-based method. Companies electing to continue using the
intrinsic-value-based method must provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method had been applied.
Management intends to account for stock-based compensation using the
intrinsic-value-based method and, as such, SFAS No. 123 will not have an impact
on the Company's results of operations or financial position. The required
disclosure will be provided in the Company's fiscal 1997 consolidated financial
statements.
The FASB also recently issued SFAS No. 128, "Earnings Per Share" ("SFAS No.
128") and SFAS No. 129, "Disclosure of Information about Capital Structures"
("SFAS No. 129"). SFAS No. 128 was issued in February 1997 and is effective for
periods ending after December 15, 1997. This statement, upon adoption, will
require all prior period earnings per share ("EPS") data to be restated to
conform to the provisions of the statement. This statement's objective is to
simplify the computations of EPS and to make the U.S. standard for EPS
computations more compatible with that of the International Accounting Standards
Committee. The
F-8
<PAGE> 75
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure. SFAS
No. 129 will specify the disclosure for all companies, including descriptions of
their capital structure and the contractual rights of the holders of such
securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
INTERIM UNAUDITED FINANCIAL INFORMATION. The consolidated financial
statements as of, and for the nine months ended March 31, 1997 and 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
unaudited consolidated financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.
3. GOODWILL
Goodwill is comprised of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill....................................................... $25,167 $25,167
Less: Accumulated amortization................................. 3,539 4,177
------- -------
$21,628 $20,990
======= =======
</TABLE>
4. LEASES
The operations of the Company are conducted on leased premises, primarily
leased from related parties. The leases (most of which provide for the payment
of real estate taxes, insurance and other operating costs) are for varying
periods, the longest extending to the year 2005. At June 30, 1996, approximate
minimum annual rentals on such leases are as follows:
<TABLE>
<CAPTION>
TOTAL
(INCLUDING
RELATED RELATED
PARTY PARTY
COMMITMENTS) COMMITMENTS
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1997...................................... $2,534 $1,199
1998...................................... 2,603 1,201
1999...................................... 2,360 1,188
2000...................................... 1,907 1,181
2001...................................... 1,133 788
2002 and thereafter....................... 342 11
</TABLE>
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for the fiscal years ended June 30,
1994, 1995, and 1996 was approximately $1.8 million, $1.8 million and $2.3
million, respectively, including approximately $.8 million, $.8 million, and
$1.1 million, respectively, paid to related parties. In the opinion of the
Company's management, these leases with affiliates are on terms which
approximate fair market value.
5. COMMITMENTS AND CONTINGENCIES
The Company has available a credit facility with a bank aggregating $2.0
million, with interest payable at the prevailing prime interest rate. The credit
facility may be terminated at the option of the bank or the Company. At June 30,
1996 and for the nine months ended March 31, 1997, no amounts were outstanding
under the credit facility.
F-9
<PAGE> 76
6. INCOME TAXES
Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 utilizes an asset and liability approach and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statements and tax bases of assets and
liabilities given the provisions of enacted tax laws. The adoption of SFAS No.
109 did not have a material impact on the consolidated financial statements.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Federal........................................................ $4,297 $6,559 $9,454
State.......................................................... 646 987 1,421
------ ------ ------
Total.......................................................... 4,943 7,546 10,875
Deferred income taxes............................................ (421) 253 (1,056)
------ ------ ------
Provision for income taxes....................................... $4,522 $7,799 $9,819
====== ====== ======
Effective tax rate............................................... 40.2% 39.7% 39.5%
====== ====== ======
</TABLE>
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at U.S. statutory rate.............................. $3,932 $6,869 $8,709
State income taxes, net of federal tax benefits.................. 386 660 835
Nondeductible goodwill........................................... 223 223 223
Other............................................................ (19) 47 52
------ ------ ------
Provision for income taxes....................................... $4,522 $7,799 $9,819
====== ====== ======
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Inventory valuation and reserves.......................................... $1,742 $2,589
Accrued vacation and workers compensation............................... 161 172
Property, plant and equipment........................................... (306) (291)
Postretirement benefits................................................. 87 120
Pension benefits........................................................ 131 250
Other................................................................... 46 77
------ ------
Net deferred tax assets................................................... $1,861 $2,917
====== ======
</TABLE>
7. PENSION BENEFITS
The Company participates in Kennametal's Retirement Income Plan (the
"Plan") which covers substantially all of the Company's employees. The benefits
provided by the Plan are measured by length of service, compensation and other
factors and are funded by a trust established under the Plan. The Kennametal
Plan is currently overfunded and complies with the funding requirements of
ERISA. Plan assets consist principally of common stocks, corporate bonds and
U.S. government securities.
The following table provides the details of the components of pension
expense for the Company. It is not practicable to determine the funded status of
the portion of the Plan which relates to the Company. On an overall basis, the
funded assets of the Plan were in excess of the projected benefit obligation as
of June 30, 1995 and 1996.
F-10
<PAGE> 77
The components of net pension cost for the Company's portion of the Plan
were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................................... $420 $515 $601
Interest cost........................................................ 366 275 332
Return on plan assets................................................ (529) (422) (551)
Net amortization and deferral........................................ (48) (57) (88)
---- ---- ----
Net pension cost..................................................... $209 $311 $294
==== ==== ====
</TABLE>
The Company also participates in Kennametal's 401(k) Thrift Plan for
employees. The charge to operations incurred by the Company for contributions
totaled $.2 million, $.3 million and $.4 million in fiscal 1994, 1995 and 1996,
respectively.
8. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company participates in Kennametal's sponsored plan whereby certain
health care and life insurance benefits are provided for retired employees.
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Company. These benefits are
currently unfunded.
Effective July 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Under the standard,
the expected cost of providing such benefits must be accrued during the periods
in which employees render the necessary service. The Company previously expensed
these costs as incurred. The adoption of SFAS No. 106 did not have a material
impact on the consolidated financial statements.
The components of other postretirement benefit costs for the Company's plan
were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................................... $52 $56 $66
Interest cost........................................................ 9 13 19
---- ---- ----
Postretirement benefit costs......................................... $61 $69 $85
==== ==== ====
</TABLE>
In 1995, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." Under this standard, employers must accrue the cost of
separation and other benefits provided to former or inactive employees after
employment but before retirement. The Company's previous practice was to
generally accrue these costs as they arose. The adoption of this standard did
not have a material impact on the consolidated financial statements.
Postemployment benefit costs were not significant in 1995 and 1996.
9. FINANCIAL INSTRUMENTS
FAIR VALUE.
The Company had $0.7 million in cash and equivalents at June 30, 1996,
which approximates fair value because of the short maturity of these
investments.
CONCENTRATIONS OF CREDIT RISK.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. By policy, the Company makes temporary cash investments
with high credit quality financial institutions. With respect to trade
receivables, concentrations of credit risk are somewhat reduced because the
Company serves numerous customers in many industries and geographic areas. As of
June 30, 1995 and 1996, receivables with the Company's five largest accounts
represented 22% and 35%, respectively, of total accounts receivables (see Note
12).
F-11
<PAGE> 78
10. SIGNIFICANT CUSTOMERS
The Company operates predominantly in one industry segment, that being
distribution of metalworking consumables and related products to the
metalworking industry utilizing mail order catalogs, showrooms, and integrated
industrial supply programs. During fiscal 1994, 1995, and 1996, sales to one
customer amounted to 24%, 22% and 21% of total sales, respectively (see Note
12). Sales outside of the United States were approximately $1.8 million and $5.1
million during fiscal 1995 and 1996, respectively. These sales were principally
to customers in the United Kingdom.
11. RELATED PARTY TRANSACTIONS
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased
for resale from Kennametal and its subsidiaries totaled $8.0 million in 1994,
$11.4 million in 1995 and $18.0 million in 1996. Sales to these entities totaled
$8.5 million in 1994, $11.4 million in 1995 and $11.4 million in 1996.
The Company receives from Kennametal certain warehouse, management
information systems, financial and administrative services. All amounts incurred
by Kennametal on behalf of the Company are reflected in operating expenses in
the accompanying statements of income. In addition, costs charged to the Company
by Kennametal, totaling $3.4 million in 1994, $3.5 million in 1995 and $5.7
million in 1996 are included in the accompanying statements of income.
Kennametal intends to continue to provide services to the Company in the future
in accordance with the terms of the intercompany agreements described in Note
12. The amounts to be charged pursuant to these intercompany agreements will
reflect the actual costs of providing these services which will include the
additional costs associated with operating as a public company. However, the
increase in these charges is not expected to be material in the future.
Subsequent to the pending IPO discussed in Note 12, the Company will remit cash
to Kennametal in payment of such operating expense allocations.
12. SUBSEQUENT EVENTS
REORGANIZATION
The Company will be incorporated in April 1997. The authorized capital
stock of the Company consists of 75,000,000 shares of Class A Common Stock
("Class A Common Stock"), par value $0.01 per share, 50,000,000 shares of Class
B Common Stock ("Class B Common Stock"), par value $0.01 per share, and
25,000,000 shares of Preferred Stock, par value $0.01 per share. The holders of
Class A Common Stock and Class B Common Stock generally have identical rights
except that holders of Class A Common Stock are entitled to one vote per share,
while holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted on by the Company's shareholders.
Immediately prior to the effective date of the pending IPO described below,
Kennametal will exchange its currently outstanding investment for
shares of Class B Common Stock.
COMMON STOCK OFFERING
In April 1997, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission
("SEC") with respect to an IPO of 20% of the Company's Class A Common Stock (the
"Offering"). If the Offering is consummated under the terms presently
anticipated, shares of Class A Common Stock (inclusive of an
over-allotment option granted to the Company's Underwriters) will be issued.
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $ million (or
approximately $ million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend to be paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million relating to
acquisitions, income taxes and employee benefit obligations, (iii) to construct
a new midwest distribution center, (iv) to provide working capital for new
showrooms and Full
F-12
<PAGE> 79
Service Supply Programs and (v) to fund acquisitions which the Company is
currently considering. Pending such uses, the net proceeds will be loaned to
Kennametal in exchange for a note bearing interest at a fluctuating rate equal
to Kennametal's short term borrowing costs which provides for the repayment of
amounts due thereunder upon demand by the Company. Kennametal's short term
borrowing rate during April 1997 was approximately 5.75%. Kennametal will
maintain unused lines of credit to enable it to repay any portion or all of such
loans upon demand by the Company.
In anticipation of the Offering, the Company and Kennametal have entered
into a number of agreements, which will become effective upon completion of the
Offering, for the purpose of defining certain relationships between them. As a
result of Kennametal's ownership interest in the Company, the terms of such
agreements were not, and the terms of any future amendments to those agreements
may not be, the result of arm's length negotiations. Management believes that
the fees to be charged by Kennametal are reasonable and such fees are
representative of the expenses that the Company would incur on a stand alone
basis. The agreements primarily have initial terms of ten years. The following
summaries of these agreements are qualified in all material respects by the
terms and conditions of such agreements.
Administrative Services Agreement
The Company and Kennametal will enter into an administrative services
agreement with respect to services to be provided by Kennametal to the Company.
The administrative services agreement provides that such services will be
provided in exchange for fees which, generally, (i) in the case of services
purchased by Kennametal from third parties for the Company, will be based upon
the incremental cost charged by such third parties to Kennametal for such
services provided to the Company and (ii) in the case of services directly
provided by Kennametal, will be based on the estimated costs, including a
reasonable allocation of direct and indirect overhead costs, incurred by
Kennametal for the services it provides directly to the Company. The services
initially to be provided by Kennametal to the Company include, among other
things, certain treasury, general accounting and administrative services
including, tax, risk management, human resources, legal, internal audit,
marketing, executive time and space, and information systems services. The
administrative services agreement also provides that Kennametal will agree to
continue coverage of the Company under Kennametal's insurance policies and will
allow eligible employees of the Company to participate in all of Kennametal's
benefit plans.
Lease Agreement
The Company and Kennametal will enter into a lease agreement pursuant to
which Kennametal will lease to the Company certain executive office space and
warehouse space owned by Kennametal. The lease agreement provides that
Kennametal lease to the Company space within buildings located on Kennametal's
premises.
Shared Facilities Agreements
The Company and Kennametal will enter into shared facilities agreements
pursuant to which each company will sublease to the other company the facilities
which are leased by either of the companies and shared with the other company.
The shared facilities agreements provide that the relevant sublessor will lease
space to the sublessee at an average annual rental rate equal to a pro rata
share (based on square feet occupied) of all costs and expenses (principally
fixed rent) under the relevant lease. The Company's management believes that the
rental rates payable by the Company are commensurate with market rates.
Product Supply Agreement
The Company and Kennametal will enter into a product supply agreement
pursuant to which Kennametal agrees to supply and the Company agrees to purchase
from Kennametal all of the Company's requirements for metalworking consumables
and related products direct-marketed by the Company and available from
Kennametal, and Kennametal further agrees to supply all metalworking consumables
and related products requested pursuant to Full Service Supply programs, except
as otherwise agreed from time to
F-13
<PAGE> 80
time between the Company and Kennametal. The Company will be entitled to
purchase products for its direct-marketing business at prices discounted from
Kennametal's published price for each such product depending upon the volume of
each such product purchased by the Company.
Tax-Sharing Agreement
Pursuant to the tax-sharing agreement, the Company will make payments to
Kennametal determined as though the Company were to file separate federal, state
and local income tax returns.
Trademark License Agreement
The Company and Kennametal will enter into a trademark license agreement
which provides, among other things, for the grant to the Company by Kennametal
of a non-exclusive license to use Kennametal trademarks in connection with the
Company's business. The Company has also granted to Kennametal a non-exclusive
license to use the Company's trademarks and tradenames on terms similar to those
granted by Kennametal to the Company.
Indemnification Agreement
Under the indemnification agreement, subject to limited exceptions, the
Company is required to indemnify Kennametal and its directors, officers,
employees, agents and representatives for liabilities under federal or state
securities laws as a result of the Offering, including liabilities arising out
of or based upon alleged misrepresentations in or omissions from the
Registration Statement, of which this Prospectus is a part. The indemnification
agreement also provides that each party thereto (the "Indemnifying Party") will
indemnify the other party thereto and its directors, officers, employees, agents
and representatives (the "Indemnified Party") for liabilities that may be
incurred by the Indemnified Party relating to, resulting from or arising out of:
(i) the businesses and operations conducted or formerly conducted, or assets
owned or formerly owned, by the Indemnifying Party and its subsidiaries (except,
in the case where Kennametal is the Indemnifying Party, such businesses,
operations and assets of the Company and its subsidiaries); or (ii) the failure
by the Indemnifying Party to comply with any other agreements executed in
connection with the Offering. The indemnification agreement also provides that
the Company will indemnify Kennametal for any liabilities incurred under
guarantees of leases.
Non-Competition and Corporate Opportunities Allocation Agreement
Pursuant to a non-competition and corporate opportunities allocation
agreement (the "Corporate Opportunities Agreement") to be entered into between
Kennametal and the Company: (i) Kennametal agrees for as long as the other
intercompany agreements remain in effect (whose current term is 10 years) (A)
not to compete with the Company in the business of direct marketing of a broad
range of metalworking consumables and related products through catalogs, monthly
promotional flyers, additional mailings and advertisements, telemarketing
efforts, direct-sales efforts and showrooms targeted at small and medium-sized
metalworking shops as well as the supply of consumable tooling and related
metalworking products at designated manufacturing plants of large industrial
customers through integrated supply programs, and (B) not to sell, offer to
sell, distribute or otherwise make available Kennametal manufactured and branded
products to anyone who competes with the Company except, with respect to those
contracts, arrangements or relationships in existence on the date of the
Corporate Opportunities Agreement or with the consent of the Company; and (ii)
the Company agrees for as long as the other intercompany agreements remain in
effect not to sell, offer to sell, distribute or otherwise make available any
products which compete directly or indirectly with Kennametal without the prior
written consent of Kennametal.
Intercompany Debt/Investment and Cash Management Agreement
The Company and Kennametal will enter into an Intercompany Debt/Investment
and Cash Management Agreement (the "Cash Management Agreement") under which the
Company will continue to participate in Kennametal's centralized cash management
system. The Cash Management Agreement
F-14
<PAGE> 81
provides for a daily transfer from the Company's cash accounts to Kennametal's
centralized cash accounts and daily funding of the disbursements of the Company
from such Kennametal cash account. The Company will receive interest on net cash
flows to Kennametal's centralized cash accounts and be charged interest on net
borrowings from the Kennametal centralized cash accounts at a rate equal to the
all-in interest rate available to Kennametal from outside sources for short-term
borrowings or investments, depending upon the overall position of the
centralized cash accounts. The Company will pay for this service pursuant to the
Administrative Services Agreement and will reimburse Kennametal for an allocable
portion of Kennametal's facility and/or commitment fees under its credit lines.
Warehousing Agreements
The Company and Kennametal will enter into separate warehousing agreements
with respect to (i) Kennametal distribution centers and warehouses which store
products for the Company and (ii) Company distribution centers and warehouses
that store products for Kennametal. The terms of each warehousing agreement
provide for the warehouser to store the warehousee's products in the warehouses
segregated and separate from the warehouser's products and upon request by the
warehousee to ship its products from these warehouses to the warehousee's
customers. The warehousee will pay to the warehouser a line item charge for each
of the products picked, packed and shipped based upon an allocation of costs
(including overhead) incurred by the warehouser at these warehouses.
Corporate Agreement
The Company and Kennametal will enter into a corporate agreement under
which the Company grants to Kennametal a continuing option, transferable, in
whole or in part, to any of its subsidiaries, to purchase, under certain
circumstances, additional shares of Class B Common Stock or Class A Common Stock
(the "Stock Option"). The Stock Option may be exercised by Kennametal
simultaneously with the issuance of any equity security of the Company or
immediately prior to a Tax-Free Spin-Off to the extent necessary to maintain its
then existing percentage of the total voting power and economic value of the
Company at 80% of all outstanding Common Stock or, in connection with a Tax-Free
Spin Off, in order to acquire stock ownership necessary to effect a Tax-Free
Spin-Off. The purchase price of the shares of Common Stock purchased upon any
exercise of the Stock Option, subject to certain exceptions, will be based on
the market price of the Class A Common Stock.
ACQUISITION
On April 25, 1997, the Company entered into an agreement to acquire all of
the outstanding stock of the Strelinger Company ("Strelinger"). Strelinger, with
annualized sales of approximately $30 million, is based in Troy, Michigan and is
engaged in the distribution of metalcutting tools and industrial supplies. The
Company paid $4.0 million in cash and assumed certain liabilities totaling $7.0
million.
The acquisition will be accounted for using the purchase method of
accounting and the results of operations of Strelinger will be included in the
consolidated financial statements after the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired was approximately
$5.0 million and will be amortized on a straight-line basis over 20 years.
STOCK OPTION PLAN
The Company will adopt a stock option plan (the "Stock Option Plan") under
which directors, officers and employees may be granted options to purchase
shares of Class A Common Stock. Options are granted at fair market value at the
date of grant. Options are exercisable under specified conditions for up to 10
years from the date of grant. Under provisions of the Stock Option Plan,
participants may deliver to the Company stock in payment of the option price and
receive credit for the fair market value of the shares of Class A Common Stock
delivered on the date of delivery.
F-15
<PAGE> 82
TERMINATION OF LARGE CONTRACT
For the nine month period ended March 31, 1997, the Company had $225.2
million in net sales of which $36.5 million of net sales were related to a Full
Service Supply Program contract with General Electric Corporation ("GE") for
services provided at certain metalworking manufacturing facilities within GE's
Aircraft Engine Group (the "GE Contract"). The operating margin related to the
GE Contract was lower than the Company's other Full Service Supply Program
contracts. Many of the products provided by the Company to GE under the GE
Contract fell outside of the Company's core focus on metalworking consumables
and related products.
In April 1997, the Company conducted extensive negotiations with GE
relating to the continuation of its Full Service Supply Program contract. After
careful evaluation, the Company concluded that it was not in its best interest
to accede to certain price concessions requested by GE. As a result, GE served
notice to the Company that the GE Contract would not be renewed for a
significant portion of the manufacturing facilities served by the Company.
The Company is currently developing a plan of disengagement from those
manufacturing sites that are not being continued. Although such plan has not yet
been fully developed and reviewed with GE, the Company expects that it will
result in a gradual reduction in future sales to GE until the implementation of
this disengagement plan is completed, which is expected to occur by June 1998.
In fiscal 1998 in conjunction with such disengagement, the Company expects sales
to GE to amount to approximately 30% of the total amounts to be received by the
Company in fiscal 1997 under the GE Contract. Ongoing sales to GE for those
manufacturing sites that will continue to be served by the Full Service Supply
programs are expected to amount to approximately 10% of the total amounts to be
received by the Company in fiscal 1997 under the GE Contract.
The Company is currently redeploying its resources related to the GE
Contract to take advantage of requests by certain current Full Service Supply
program customers to ramp-up their existing programs at an increased rate as
well as to offer Full Service Supply programs to new customers. However, there
can be no assurance that the Company will be able to replace the revenues
received from the GE Contract within the foreseeable future period or at all. No
other single customer accounted for more than 6% of the Company's total net
sales for fiscal 1996 or for the nine months ended March 31, 1997.
LINE OF CREDIT
On April 25, 1997, the Company, through J&L, obtained a $25.0 million line
of credit with a bank and shortly thereafter borrowed $20.0 million under the
line of credit to fund a dividend to Kennametal. Upon completion of the
Offering, a portion of the net proceeds will be used to repay the borrowings
under the line of credit. Interest payable under the line of credit is based on
the LIBOR rate plus 25 basis points and is required to be repaid in full within
six months. Kennametal has guaranteed repayment of the line of credit in the
event of default by the Company.
PRO FORMA INFORMATION
On April 23, 1997, J&L declared a dividend of $20.0 million payable to
Kennametal to be paid on April, 1997. The pro forma balance sheet as of March
31, 1997 reflects this dividend payable at that date. Pro forma weighted average
common shares outstanding have been presented on a basis which gives pro forma
effect to (i) the issuance of the Class B Common Stock for all periods
presented, and (ii) the assumed issuance for fiscal 1996 and the nine months
ended March 31, 1997 of shares of Class A Common Stock to fund the excess
of dividends over net income for the nine months ended March 31, 1997.
F-16
<PAGE> 83
===============================================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 10
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Consolidated Financial and
Operating Data..................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................. 27
Management........................... 37
Security Ownership of Principal
Shareholder and Management......... 46
Relationship with Kennametal......... 48
Description of Capital Stock......... 55
Shares Eligible for Future Sale...... 61
Underwriting......................... 63
Legal Matters........................ 64
Experts.............................. 65
Additional Information............... 65
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
SHARES
JLK DIRECT
DISTRIBUTION INC.
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
, 1997
===============================================================================
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the
Commission registration fee, the listing fee and the NASD filing fee.
<TABLE>
<S> <C>
Commission Registration Fee............................................ $ 33,304
NASD Filing Fee........................................................ 10,500
NYSE Listing Fee.......................................................
Blue Sky Fees and Expenses.............................................
Transfer Agent and Registrar Fees and Expenses.........................
Accounting Fees and Expenses...........................................
Legal Fees and Expenses................................................
Printing and Engraving Expenses........................................
Miscellaneous Expenses.................................................
-----------
Total............................................................. $
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
(the "PBCL") provides in general that a corporation may indemnify any person,
including its directors, officers and employees who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative (including
actions by or in the right of the corporation) by reason of the fact that he or
she is or was a representative of or serving at the request of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
the action or proceedings if he or she is determined by the board of directors,
or in certain circumstances by independent legal counsel to the shareholders, to
have acted in good faith and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal proceeding, had no reason to believe his conduct was unlawful. In
the case of actions by or in the right of the corporation, indemnification is
not permitted in respect of any claim, issue or matter as to which the person
has been adjudged to be liable to the corporation except to the extent a court
determines that the person is fairly and reasonably entitled to indemnification.
In any case, to the extent that the person has been successful on the merits or
otherwise in defense of any claim, issue or matter, he or she shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him or her in connection therewith. Subchapter D also provides that
the indemnification permitted or required by Subchapter D is not exclusive of
any other rights to which a person seeking indemnification may be entitled.
The Company's By-Laws provide that except as prohibited by law, every
director and officer of the Company is entitled to be indemnified by the Company
against reasonable expenses and any liability paid or incurred by such person in
connection with any actual or threatened claim, action, suit or proceeding,
civil, criminal, administrative, investigative or other in which he or she may
be involved by reason of being or having been a Director or Officer of the
Company or by reason that such person is or was serving at the request of the
Company as a director, officer, employee, fiduciary or other representative of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity. Such indemnification includes the right to have expenses incurred
paid in advance by the Company prior to final disposition, subject to such
conditions as may be prescribed by law. Persons who are not directors or
officers of the Company may be similarly indemnified in respect of service to
the Company or to another such entity at the request of the Company, to the
extent the Board of Directors designates. Expenses included fees and expenses of
counsel selected by such person, and liability includes amount of judgments,
excise taxes, fines and penalties, and amounts paid in settlement.
Indemnification pursuant to this provision of the Company's By-laws is not
permitted in any case in which the
II-1
<PAGE> 85
act or failure to act giving rise to the claim for indemnification is determined
by a court to have constituted willful misconduct or recklessness. There may be
other circumstances where indemnification may not be permitted as a matter of
public policy.
The By-Laws of the Company also provide that to the fullest extent that the
laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter
amended, permit elimination of limitation of the liability of directors, no
director of the Company shall be personally liable for monetary damages as such
for any action taken, or any failure to take any action, as a director. Under
Section 1713 of the PBCL, the personal liability of a director may not be
eliminated or limited if: (1) the director has breached or failed to perform the
duties of his office under Subchapter B of Chapter 17 of the PBCL (relating to
the fiduciary duties of directors; and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. Furthermore, this
limitation to the personal liability of directors of the Company does not apply
to (1) the responsibility or liability of a director pursuant to any criminal
statute; or (2) the liability of a director for the payment of taxes pursuant to
local, state or federal law.
The Company purchases director and officer liability insurance covering its
directors and officers with respect to liability which they may incur in
connection with their serving as such. Under the insurance, the Company will
receive reimbursement for amounts as to which the directors and officers are
indemnified under the Company's By-Laws. The insurance may also provide certain
additional coverage for the directors and officers against certain liability
even though such liability is not subject to indemnification under the Company's
By-Laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued shares of Class B Common Stock to Kennametal Inc. in
connection with the formation of the Company in a transaction exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement*
3.a Articles of Incorporation of the Registrant
3.b By-Laws of the Registrant*
5 Opinion of Buchanan Ingersoll Professional Corporation*
10.a Form of Administrative Services Agreement*
10.b Form of Corporate Agreement*
10.c Form of Indemnification Agreement*
10.d Form of Intercompany Debt/Investment and Cash Management Agreement*
10.e Form of Non-Competition and Corporate Opportunities Allocation Agreement*
10.f Form of Shared Facilities Agreements (Subleases)*
10.g Form of Tax Sharing Agreement*
10.h Form of Trademark License Agreement*
10.i Form of Warehousing Agreements*
10.j Form of Lease Agreement*
10.k Form of Product Supply Agreement*
10.1 Form of JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan*
10.m Kennametal Inc. Supplemental Executive Retirement Plan*
</TABLE>
II-2
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
<S> <C>
10.n Kennametal Inc. Employment Agreement with Michael W. Ruprich*
Form of JLK Direct Distribution Inc. Employment Agreement with Michael W.
10.o Ruprich*
Form of JLK Direct Distribution Inc. Employment Agreement with Kenneth M.
10.p McHenry*
10.q Form of JLK Direct Distribution Inc. Employment Agreement with Roland E. Lazzaro*
10.r Form of JLK Direct Distribution Inc. Employment Agreement with Michael J. Mussog*
10.s Description of JLK Direct Distribution Inc. Management Bonus Plan*
11.1 Calculation of Primary Net Income per Share
21 Subsidiaries of the Registrant*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Buchanan Ingersoll Professional Corporation**
24 Powers of Attorney (included as part of the signature page hereof)
27 Financial Data Schedule
</TABLE>
- ---------
* to be filed by amendment
** included in their opinion filed as Exhibit 5
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by a final
adjudication of such issue.
(3) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Latrobe, Pennsylvania, on April 28,
1997.
JLK DIRECT DISTRIBUTION INC.
By: /s/ MICHAEL W. RUPRICH
--------------------------------------
Michael W. Ruprich
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints William R. Newlin and David T. Cofer, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any and all related Registration
Statements (including amendments thereto) filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933 , and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATES
<C> <S> <C>
/s/ MICHAEL W. RUPRICH President and Director April 28, 1997
- ------------------------------------------ (Principal Executive Officer)
Michael W. Ruprich
/s/ MICHAEL J. MUSSOG Vice President and Chief April 28, 1997
- ------------------------------------------ Financial Officer (Principal
Michael J. Mussog Financial and Accounting
Officer)
/s/ RICHARD C. ALBERDING Director April 28, 1997
- ------------------------------------------
Richard C. Alberding
Director April 28, 1997
- ------------------------------------------
Irwin L. Elson
/s/ ROBERT L. MCGEEHAN Director April 28, 1997
- ------------------------------------------
Robert L. McGeehan
/s/ ALOYSIUS T. MCLAUGHLIN, JR. Director April 28, 1997
- ------------------------------------------
Aloysius T. McLaughlin, Jr.
/s/ WILLIAM R. NEWLIN Chairman of the Board of April 28, 1997
- ------------------------------------------ Directors
William R. Newlin
</TABLE>
II-4
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of JLK Direct Distribution Inc. and have
issued our report thereon dated April 25, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is presented for purposes
of complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits 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
Pittsburgh, Pennsylvania
April 25, 1997
S-1
<PAGE> 89
SCHEDULE II
JLK DIRECT DISTRIBUTION INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED
AT TO BALANCE
BEGINNING COSTS AT
OF AND END OF
PERIOD ENDED DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------ ------------------------------------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
June 30, 1994 Allowance for doubtful accounts $120,524 $176,528 $(148,776) $148,276
June 30, 1995 Allowance for doubtful accounts $148,276 $142,500 $(138,934) $151,842
June 30, 1996 Allowance for doubtful accounts $151,842 $25,713 -- $174,990
</TABLE>
S-2
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement*
3.a Articles of Incorporation of the Registrant
3.b By-Laws of the Registrant*
5 Opinion of Buchanan Ingersoll Professional Corporation*
10.a Form of Administrative Services Agreement*
10.b Form of Corporate Agreement*
10.c Form of Indemnification Agreement*
10.d Form of Intercompany Debt/Investment and Cash Management Agreement*
10.e Form of Non-Competition and Corporate Opportunities Allocation Agreement*
10.f Form of Shared Facilities Agreements (Subleases)*
10.g Form of Tax Sharing Agreement*
10.h Form of Trademark License Agreement*
10.i Form of Warehousing Agreements*
10.j Form of Lease Agreement*
10.k Form of Product Supply Agreement*
10.1 Form of JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan*
10.m Kennametal Inc. Supplemental Executive Retirement Plan*
10.n Kennametal Inc. Employment Agreement with Michael W. Ruprich*
10.o Form of JLK Direct Distribution Inc. Employment Agreement with Michael W. Ruprich*
10.p Form of JLK Direct Distribution Inc. Employment Agreement with Kenneth M. McHenry*
10.q Form of JLK Direct Distribution Inc. Employment Agreement with Roland E. Lazzaro*
10.r Form of JLK Direct Distribution Inc. Employment Agreement with Michael J. Mussog*
10.s Description of JLK Direct Distribution Inc. Management Bonus Plan*
11.1 Calculation of Primary Net Income per Share
21 Subsidiaries of the Registrant*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Buchanan Ingersoll Professional Corporation**
24 Powers of Attorney (included as part of the signature page hereof)
27 Financial Data Schedule
</TABLE>
- ---------
* to be filed by amendment
** included in their opinion filed as Exhibit 5
<PAGE> 1
EXHIBIT 3.a
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
ARTICLES OF INCORPORATION
OF
JLK DIRECT DISTRIBUTION INC.
The undersigned, intending to form a corporation under the Pennsylvania
Business Corporation Law of 1988, as amended (15 Pa. C.S. ss.ss. 1101 et seq.),
hereby certifies as follows:
FIRST. The name of the Corporation is JLK Direct Distribution Inc.
SECOND. The address of the Corporation's initial registered office in the
Commonwealth of Pennsylvania is State Route 981 South, P.O. Box 231, Latrobe,
PA 15650-0231.
THIRD. The Corporation is incorporated under the provisions of the
Business Corporation Law of 1988, as amended (15 Pa. C.S. ss.ss. 1101 et seq.)
(the "BCL").
FOURTH. The Corporation shall have the power to create and issue a total
of 150,000,000 shares of capital stock.
(i) The shares of capital stock of the Corporation shall be divided into
75,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), 50,000,000 shares of Class B Common
Stock, par value $.01 per share (the "Class B Common Stock"), and
25,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). The Preferred Stock shall be divided into one or
more series as the Board of Directors may determine as hereinafter
provided.
(ii) Except as provided in Section (vii)(e) of this Article FOURTH, the
holders of Class A Common Stock shall have one (1) vote per share on
all matters to be voted on by the shareholders, and the holders of
Class B Common Stock shall have ten (10) votes per share on all
matters to be voted on by the shareholders. The holders of capital
stock entitled to vote in the election of directors shall not be
entitled to cumulate their votes in the election of directors;
provided, however, that the holders of capital stock entitled to vote
in the election of directors shall be entitled to cumulate their
votes in the election of directors beginning on the date (the
"Control Termination Date") on which Kennametal Inc., a Pennsylvania
corporation ("Kennametal"), and its affiliates (other than the
Corporation or its subsidiaries) (Kennametal, together with its
affiliates (other than the Corporation and its subsidiaries), being
known as the "Kennametal
<PAGE> 2
Group") no longer beneficially own 40% or more of the then
outstanding aggregate number of shares of Class A Common Stock and
Class B Common Stock.
(iii)At each annual meeting of the shareholders, the shareholders shall
elect directors to hold office for a one (1) year term; provided,
however, that on or as promptly as reasonably practicable after the
Control Termination Date:
(a) The then current Board of Directors, by a majority vote, will
divide the then current directors into three (3) classes which
shall be as nearly equal in number as possible, designated as
Class I, Class II or Class III, with terms that expire at the
next, second and third succeeding annual meeting of the
shareholders, respectively;
(b) The then current directors shall serve as directors of the
Corporation for the respective terms of the class of which they
are members; and
(c) At each annual meeting of the shareholders thereafter, the
shareholders shall elect directors of the class whose term then
expires to hold office until the third (3rd) succeeding annual
meeting.
(iv) Holders of Class A Common Stock and Class B Common Stock shall be
entitled to share in an equal amount per share in any dividend or
distribution declared by the Board of Directors. Dividends or
distributions consisting of shares of Class A Common Stock and Class
B Common Stock may be paid only as follows:
(a) Shares of Class A Common Stock may be paid only to holders of
Class A Common Stock;
(b) Shares of Class B Common Stock may be paid only to holders of
Class B Common Stock; and
(c) Shares shall be paid proportionately with respect to each
outstanding share of Class A Common Stock and Class B Common
Stock.
(v) In the event of a voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, holders of Class A Common Stock and
Class B Common Stock will be entitled to share in an equal amount per
share of such amount as shares of common stock are entitled to by
law.
(vi) After a Tax-Free Spin-Off (as defined below), shares of the Class A
Common Stock shall convert, on a one-for-one basis, into shares of
the Class B Common Stock at the option of the holder thereof upon any
-2-
<PAGE> 3
person (other than any member of the Kennametal Group) or any group
of persons agreeing to act together for the purpose of acquiring,
holding, voting or disposing of shares of the Class B Common Stock
(other than a group of any or all members of the Kennametal Group)
making an offer, which the Board of Directors deems to be a bona fide
offer, to purchase five percent (5%) or more of the Class B Common
Stock for cash, other securities and/or property without making a
similar offer for the shares of the Class A Common Stock; provided,
however, that such conversion shall be effective upon receipt in
writing by the Corporation prior to such termination, recission or
completion of notice from such holder of his/her/its election to
exercise such option; provided further, however, that the shares of
the Class A Common Stock may be so converted only during the period
in which such bona fide offer is in effect and that any share of
Class A Common Stock so converted and not acquired by such offeror
prior to the termination, recission or completion of such offer will
automatically reconvert to a share of the Class A Common Stock upon
such termination, rescission or completion.
(vii)A Share of the Class B Common Stock shall convert, on a one-for-one
basis, into a share of the Class A Common Stock in the following
circumstances:
(a) While such share is held by any member of the Kennametal Group,
at the option of such holder prior to a Tax-Free Spin-Off;
provided, however, that such conversion shall be effective upon
receipt in writing by the Corporation prior to the closing of a
Tax-Free Spin-Off of notice from such holder of his/her/its
election to exercise such option;
(b) Automatically on the Control Termination Date if it occurs prior
to a Tax-Free Spin-Off;
(c) Automatically upon a transfer of such share to a person other
than any member of the Kennametal Group or upon any member of
the Kennametal Group holding such share ceasing to be a member
of the Kennametal Group, provided, however, that any shares of
Class B Common Stock transferred to shareholders of Kennametal
in a transaction intended to be on a tax-free basis under the
Internal Revenue Code of 1986, as amended (a "Tax-Free
Spin-Off"), shall not convert to shares of Class A Common Stock
upon or following a Tax-Free Spin-Off unless and until so
converted pursuant to Sections (vii)(d), (e) or (f) of this
Article FOURTH;
(d) Automatically upon the fifth (5th) anniversary of a Tax-Free
Spin-Off, provided, however, that prior to such Tax-Free
Spin-Off, no such conversion shall occur if Kennametal delivers
to the Corporation written advice of counsel reasonably
satisfactory to
-3-
<PAGE> 4
the Corporation (which shall include Kennametal's General
Counsel) to the effect that either:
(A) Such conversion could adversely affect the ability of
Kennametal to obtain a favorable ruling from the Internal
Revenue Service (the "IRS") that the distribution would be
a Tax-Free Spin-Off; or
(B) The IRS has adopted a general non-ruling policy on tax-free
spin-offs and that such conversion could adversely affect
the status of the distribution as a Tax-Free Spin-Off;
(e) In the event the Corporation receives the written advice of
counsel pursuant to Section (d) of this Article FOURTH,
automatically upon the approval by the affirmative vote of a
majority of the votes cast by all shareholders entitled to vote
thereon, voting together as a single class with each share
entitled only to one (1) vote for such purpose, at a meeting of
the shareholders which shall be called by the Corporation for
such purpose as soon as practicable after the fifth (5th)
anniversary of the Tax-Free Spin-Off, provided, however, that
the Corporation shall call no such meeting, no such meeting
shall be held, and no such vote shall be taken if Kennametal
delivers to the Corporation written advice of counsel reasonably
satisfactory to the Corporation (which shall include
Kennametal's General Counsel) prior to such fifth (5th)
anniversary that such vote could adversely affect the status of
the distribution as a Tax-Free Spin-Off, including the ability
to obtain a favorable ruling from the IRS;
(f) At the option of the holder thereof upon any person (other than
any member of the Kennametal Group) or any group of persons
agreeing to act together for the purpose of acquiring, holding,
voting or disposing shares of the Class A Common Stock (other
than a group of any or all members of the Kennametal Group)
making an offer, which the Board of Directors deems to be a bona
fide offer, to purchase five percent (5%) or more of the Class A
Common Stock for cash, other securities and/or property without
making a similar offer for the shares of the Class B Common
Stock; provided that such conversion shall be effective upon
receipt in writing by the Corporation of notice prior to such
termination, recission or completion from such holder of
his/her/its election to exercise such option; provided further,
however, that the shares of the Class B Common Stock may be so
converted only during the period in which such bona fide offer
is in effect and that any share of Class B Common Stock so
converted and not acquired by such offeror prior to the
termination, recission or completion of such offer will
-4-
<PAGE> 5
automatically reconvert to a share of the Class B Common Stock
upon such termination, rescission or completion.
(viii)Any issued and outstanding shares of capital stock of the Corporation
which are repurchased by the Corporation shall be deemed to be issued
but not outstanding. The Board may, by resolution, restore any or all
of such issued but not outstanding shares to the status of authorized
but unissued shares immediately prior to the reissuance thereof and
thereafter reissue such shares.
(ix) Redeemable shares of capital stock that have been called for
redemption (other than those held beneficially by any member of the
Kennametal Group) shall not be entitled to vote on any matter and
shall not be deemed outstanding shares as of the date specified in
the written notice mailed to shareholders thereof indicating that the
shares have been called for redemption. Redeemable shares of capital
stock held beneficially by any member of the Kennametal Group that
have been called for redemption shall be entitled to vote on any
matter and shall be deemed outstanding shares until such time as they
have been redeemed by the Corporation, notwithstanding that written
notice has been mailed to holders thereof that the shares have been
called for redemption and that a sum sufficient to redeem the shares
has been deposited with a specified financial institution with
irrevocable instruction and authority to pay the redemption price to
the holders of the shares on the redemption date, or upon surrender
of certificates therefor, and the sum has been so deposited.
(x) Notwithstanding the foregoing Sections (iv) and (v) of this Article
FOURTH, the Class A Common Stock and the Class B Common Stock shall
be subject to the prior rights of holders of any series of Preferred
Stock outstanding according to the preferences, if any, of such
series as the Board of Directors may determine as hereinafter
provided. The Preferred Stock may be divided into one or more classes
or series as determined by the Board of Directors as hereinafter
provided. Each class or series of Preferred Stock may have full,
limited, multiple, fractional or no voting rights, and such
designations, preferences, limitations, qualifications, privileges,
options, restrictions and special rights as determined by the Board
of Directors as hereinafter provided. The division of the Preferred
Stock into classes or series, the determination of the designation
and the number of shares of any such class or series and the
determination of the voting rights, preferences, limitations,
qualifications, privileges, options, restrictions and special rights
of the shares of any such class or series may be accomplished by an
amendment to this Article FOURTH, which amendment may be made solely
by action of the Board of Directors, which shall have the full
authority permitted by law to make such divisions and determinations.
Unless otherwise provided in a resolution or resolutions establishing
any particular class or series of Preferred Stock, the aggregate
number of authorized shares of
-5-
<PAGE> 6
Preferred Stock may be increased by an amendment to the Articles
approved solely by the holders of the Class A Common Stock and the
Class B Common Stock and of any Preferred Stock which is entitled
pursuant to its voting rights designated by the Board of Directors to
vote thereon, if at all, voting together as a class.
FIFTH. The name and address of the sole incorporator is Lewis U. Davis,
Jr., One Oxford Centre, 301 Grant Street, 21st Floor, Pittsburgh, PA
15219-1410.
SIXTH. The purpose of the Corporation shall be to engage in all lawful
business for which corporations may be incorporated under the BCL, provided,
however, that until the day after the third (3rd) annual meeting of
shareholders held after the Control Termination Date:
(i) The Corporation shall not, directly or indirectly (whether through a
subsidiary of, or any other person controlled by, the Corporation)
for its own account or for the account of another, engage in
manufacturing metalworking tools, inserts or related products,
including, but not limited to, cutting tools, carbide and other tool
inserts, abrasives, drills, machine tool accessories, hand tools and
other industrial supplies (the "Metalworking Products");
(ii) The Corporation may, directly or indirectly (whether through a
subsidiary of, or any other person controlled by, the Corporation),
engage in the business of distributing the Metalworking Products
through a direct marketing program comprised of catalog, telephone,
showroom and similar direct marketing efforts (the "Direct Marketing
Business") and through integrated industrial supply programs in which
the Corporation carries out all aspects of complex metalworking
supply processes for industrial manufacturers, including, but not
limited to, needs assessment, cost analysis, procurement planning,
supplier selection, "just-in-time" restocking of supplies and ongoing
technical support (together with the Direct Marketing Business, the
"Base Business");
(iii)The Corporation shall not, directly or indirectly (whether through a
subsidiary of, or any other person controlled by, the Corporation),
engage in any business or activity other than the Base Business
unless the Corporation receives the consent of Kennametal or the
affirmative vote of a majority of the votes cast by all shareholders
of the Corporation entitled to vote thereon, provided that no person
(including any member of the Kennametal Group acting in any capacity
with respect to the Corporation) shall be liable for breach of
fiduciary duty as a shareholder or controlling person of the
Corporation, or otherwise, by reason of such person consenting to or
voting in favor of, or not consenting to or voting against,
authorization for the Corporation to engage in any business or
activity other than the Base Business;
-6-
<PAGE> 7
(iv) Unless Kennametal consents otherwise, in connection with the Direct
Marketing Business, the Corporation shall purchase all Metalworking
Products required for distribution through such channel from the
Kennametal Group, and shall not purchase Metalworking Products from
any other supplier, excluding, however, products that are not
available to the Direct Marketing Business from any member of the
Kennametal Group; and
(v) No opportunity, transaction, agreement or other arrangement to which
any member of the Kennametal Group is a party shall be a corporate
opportunity of the Corporation, directly or indirectly (whether
through a subsidiary of, or any other person controlled by, the
Corporation), unless such opportunity, transaction, agreement or
other arrangement shall have been initially offered to the
Corporation or its subsidiaries before it is offered to any member of
the Kennametal Group and either:
(a) The Corporation or its subsidiaries has an enforceable
contractual interest in such opportunity, transaction, agreement
or other arrangement; or
(b) The subject matter of such opportunity, transaction, agreement
or other arrangement is a constituent element of an activity in
which the Corporation or its subsidiaries is then actively
engaged;
provided, however, that even if either of the foregoing conditions is
met, such fact alone does not conclusively render such opportunity
the property of the Corporation or its subsidiaries.
SEVENTH. Any action required or permitted to be taken at a meeting of the
shareholders or of a class of shareholders may be taken without a meeting upon
the written consent of shareholders who would have been entitled to cast the
minimum number of votes that would be necessary to authorize the action at a
meeting at which all shareholders entitled to vote thereon were present and
voting; provided, however, that such shareholders shall not be entitled to take
any action upon such written consent after the Control Termination Date. Such
consents shall be filed with the secretary of the Corporation, and the action
shall become effective immediately upon its authorization, or at such later
time as shall be specified in such consent, but prompt notice of the action
shall be given to those shareholders entitled to vote thereon who have not
consented thereto.
EIGHTH. Prior to the Control Termination Date, special meetings of the
shareholders may be called at any time by any member of the Kennametal Group
holding shares of the capital stock entitled to vote in the election of
directors. No other shareholders shall be entitled to call a special meeting of
shareholders.
NINTH. Prior to the Control Termination Date, the entire Board of
Directors, any class of directors or any individual director may be removed
from office, without assigning any cause, by the vote of the shareholders or of
the holders of a class or series of shares entitled
-7-
<PAGE> 8
to elect such directors or director. On and after the Control Termination Date,
the entire Board of Directors, any class of directors or any individual
director may be removed from office by the vote of the shareholders or of the
holders of a class or series of shares entitled to elect such directors or
director only for Cause (as hereinafter defined). In the event that the Board
of Directors, a class of the Board of Directors or any one (1) or more
directors is so removed, new directors may be elected at the same meeting.
"Cause" shall mean any one (1) of the following:
(i) A judicial declaration that a director is of unsound mind;
(ii) A director is convicted of an offense punishable by imprisonment for
a term of more than one year;
(iii)A director breaches or fails to perform the statutory duties of said
director's office and the breach or failure constitutes self-dealing,
willful misconduct or recklessness; or
(iv) Within one hundred eighty (180) days after notice of his or her
election a director does not accept such office either in writing or
by attending a meeting of the Board of Directors.
TENTH. To the fullest extent that the laws of the Commonwealth of
Pennsylvania, as now in effect or as hereinafter amended, permit elimination or
limitation of the liability of directors, no director of the Corporation shall
be personally liable for monetary damages as such for any action taken, or any
failure to take any action, as a director. Any amendment or repeal of this
Article which has the effect of increasing director liability shall operate
prospectively only and shall not affect any action taken, or any failure to
act, prior to its adoption.
ELEVENTH. The control transaction provisions contained in Subchapter E,
the business combination provisions contained in Subchapter F, the control
share acquisition provisions contained in Subchapter G and the disgorgement
provisions contained in Subchapter H, each of the BCL, shall not be applicable
to the Corporation. Section 2538 of the BCL shall not be applicable to any
member of the Kennametal Group for so long as any such member is considered an
"interested shareholder" pursuant to Section 2538.
TWELFTH. Notwithstanding any provision of law or the Articles of
Incorporation or the By-Laws of the Corporation, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of all
of the holders of the outstanding capital stock of the Corporation entitled to
vote, voting together as a single class, shall be required in order to amend,
alter or repeal, or to adopt any provision inconsistent with, Article SIXTH
before the Control Termination Date.
-8-
<PAGE> 9
EXECUTED as of this 28th day of April, 1997.
/s/ LEWIS U. DAVIS, JR.
------------------------------------------
Lewis U. Davis, Jr., Sole Incorporator
-9-
<PAGE> 1
Exhibit 11.1
Calculation of Primary Net Income per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year ended Year ended Year ended ended
June 30, 1994 June 30, 1995 June 30, 1996 March 31, 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income $6,713 $11,828 $15,063 $13,619
Weighted average
shares outstanding
during the period
------ ------- ------- -------
Net income per share ====== ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
April 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038243
<NAME> JLK DIRECT DISTRIBUTION INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 690
<SECURITIES> 0
<RECEIVABLES> 32,695
<ALLOWANCES> 175
<INVENTORY> 59,302
<CURRENT-ASSETS> 95,350
<PP&E> 7,163
<DEPRECIATION> 3,191
<TOTAL-ASSETS> 121,045
<CURRENT-LIABILITIES> 22,087
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 97,991
<TOTAL-LIABILITY-AND-EQUITY> 121,045
<SALES> 243,969
<TOTAL-REVENUES> 243,969
<CGS> 166,326
<TOTAL-COSTS> 166,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,882
<INCOME-TAX> 9,819
<INCOME-CONTINUING> 15,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,063
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
