FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2896928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
State Route 981 South
P. O. Box 231
Latrobe, Pennsylvania 15650
(Address of principal executive offices)
Registrant's telephone number, including area code: 412-539-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Class A Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of August 29, 1997, the aggregate market value of the registrant's capital
stock held by non-affiliates of the registrant, estimated solely for the
purposes of this Form 10-K, was approximately $88,600,000. For purposes of
the foregoing calculation only, all directors and executive officers of the
registrant and each person who may be deemed to own beneficially more than 5%
of the registrant's Capital Stock have been deemed affiliates.
As of August 29, 1997, shares of Common Stock outstanding were:
Class A Common Stock - 4,917,000 Class B Common Stock - 20,237,000
<PAGE>
TABLE OF CONTENTS
Item No.
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PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Capital Stock and Related Stockholder
Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<PAGE>
PART I
ITEM 1. BUSINESS
Certain information set forth herein contains forward-looking
statements, as such term is defined in Section 21E of the Securities Exchange
Act of 1934. Such statements are subject to certain risks and uncertainties
discussed under "Risk Factors" in the Company's prospectus dated June 26,
1997, which could cause actual results to differ materially from those in the
forward-looking statements.
The Company, a subsidiary of Kennametal Inc. ("Kennametal"), 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,
telemarketing efforts, direct sales efforts and 28 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 pickup 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 three minutes. In addition, the Company has a
dedicated sales force based in each showroom which 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 1997, the
Company's net sales increased from $109.4 million to $316.2 million,
representing a compound annual growth rate ("CAGR") of 29.0%. Operating
income during this period increased from $5.0 million to $32.2 million,
representing a CAGR of 64.2%.
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
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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 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
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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 three 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
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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
generated from the initial public offering ("IPO") of 20% of the Company's
Class A Common Stock ("the Offering") consummated on July 2, 1997. 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"), and its acquisition in May 1997 of Mill & Abrasive Supply, Inc.
("M&A"), based in Roseville, Michigan (the "M&A Acquisition"). 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. The Company also intends to customize versions of its Full
Service Supply Programs to meet the needs of medium-sized industrial
facilities. The Company estimates that the market for Full Service Supply
Programs consists of 12,000 to 15,000 industrial manufacturing facilities in
the United States.
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 20,000 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
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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 86,000 active customers during fiscal 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) which 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 47,000 to
86,000. The average size of a catalog order received by the Company in fiscal
1997 was approximately $130, and the number of customers who purchase annually
over $10,000 of products increased from 800 to approximately 3,000 from fiscal
1993 through fiscal 1997. 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 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 to approximately
3.2 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 96% 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.
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. 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. 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
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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 three
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 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 27 domestic showrooms and distribution
facilities 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
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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 which 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 1997 and 1996 approximately 16% and 11%, 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
1997 and 1996.
Acquisitions
- ------------
In April 1997, the Company acquired all of the outstanding stock of
Strelinger. Strelinger, with sales of $30.0 million in 1996, is based in
Troy, Michigan, and is engaged in the distribution of metalcutting tools and
industrial supplies. The Company paid approximately $3.9 million in cash and
assumed certain liabilities totaling approximately $11.0 million. In May
1997, the Company acquired all of the outstanding stock of M&A. M&A, with
sales of $6.0 million in 1996, is based in Roseville, Michigan, and is engaged
in the distribution of metalcutting tools and industrial supplies. The
Company paid approximately $1.2 million in cash and assumed certain
liabilities totaling $2.1 million. The Company believes that the customer
base of Strelinger and M&A and their service capabilities will enhance the
Company's ability to serve small and medium-sized customers and strengthen 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. As of September 26, 1997, the Company is not a party to any
oral or written acquisition agreement with respect to any material acquisition
candidate.
Competition
- -----------
The metalworking supply industry is a large, fragmented industry which
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 June 30, 1997, the Company employed approximately 833 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.
ITEM 2. PROPERTIES
Properties
- ----------
The Company's distribution centers, warehouses, showrooms and executive
offices, all of which are leased, are as follows:
Approximate
Location Description Lease Expiration Square Feet
-------- ----------- ---------------- -----------
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
Dayton, OH Showroom 11/30/01 10,000
Fraser, MI Showroom 04/30/98 6,200
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
Hazel Park, MI Showroom 12/31/00 9,600
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
Roseville, MI Showroom 12/31/99 20,400
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
Troy, MI Showroom 10/31/99 42,000
* Shared with Kennametal.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than litigation
incidental to the ordinary course of business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous written consent dated June 24, 1997, Kennametal, the sole
shareholder of the Company, elected the following persons as directors of the
Company until the next annual meeting or until the election or qualification
of their respective successors:
Michael W. Ruprich
Richard C. Alberding
Jeffrey T. Boetticher
Irwin L. Elson
Aloysius T. McLaughlin, Jr.
Robert L. McGeehan
William R. Newlin
In addition, Kennametal approved the 1997 JLK Direct Distribution Inc.
Stock Option and Incentive Plan, which is described more fully herein.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S CAPITAL STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol "JLK." The following table sets forth
the range of the high and low closing sales price as reported by the NYSE for
the period from June 27, 1997 (when the Company listed the Class A Common
Stock on the NYSE) to June 30, 1997:
Period High Low
------ ---- ---
June 27, 1997-June 30, 1997 $25 5/8 $24 3/8
On September 18, 1997, the last reported sales price for the Class A
Common Stock on the NYSE was $28.50 per share.
The number of shareholders of record of the Class A Common Stock as of
September 18, 1997, was 17. The number of shareholders of record of the
Company's Class B Common Stock as of September 18, 1997, was one.
The Company has not declared cash dividends on the Class A Common Stock
and does not have any plans to pay any cash dividends on the Class A Common
Stock in the foreseeable future. The Company anticipates that any earnings
that might be available to pay dividends on the Class A Common Stock will be
retained to finance the business of the Company.
ITEM 6. 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, 1996 and 1997 have been
audited by Arthur Andersen LLP. The financial information for the fiscal year
ended 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 document, Management's Discussion and Analysis of
Financial Condition and Results of Operations and other financial information
set forth herein.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $109,364 $144,933 $188,202 $243,969 $316,189
Cost of goods sold 75,823 100,672 127,917 166,326 213,020
-------- -------- -------- -------- --------
Gross profit 33,541 44,261 60,285 77,643 103,169
Operating expenses 28,511 33,026 40,658 52,761 70,976
-------- -------- -------- -------- --------
Operating income 5,030 11,235 19,627 24,882 32,193
Interest and other -- -- -- -- 368
-------- -------- -------- -------- --------
Income before income taxes 5,030 11,235 19,627 24,882 31,825
Provision for income taxes 2,114 4,522 7,799 9,819 12,518
-------- -------- -------- -------- --------
Net income $ 2,916 $ 6,713 $ 11,828 $ 15,063 $ 19,307
======== ======== ======== ======== ========
Pro forma net income
per share(1) $ 0.72 $ 0.92
======== ========
Pro forma weighted average
shares outstanding(1) 20,897 20,932
======== ========
<CAPTION>
June 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $44,394 $50,670 $51,945 $ 73,263 $ 61,472
Total assets 85,835 92,059 98,893 121,045 165,488
Shareholders' equity 73,815 76,807 76,722 97,991 92,731
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Active direct marketing
customers(2)(3) 47,000 48,000 59,000 71,000 86,000
Number of SKUs(3) 50,000 60,000 70,000 80,000 100,000
Number of publications
per year 6 6 9 13 15
Total number of
publications mailed 1,416,000 1,403,000 2,285,000 3,048,000 3,224,000
Direct-mail costs(4) $1,551,000 $1,401,000 $2,261,000 $3,622,000 $4,318,000
Showroom and
distribution facilities(3) 6 7 12 19 28
Full Service Supply
Programs:
Customers(2)(3) 16 21 29 42 60
Site locations(3) 46 54 69 86 120
</TABLE>
- -------------------------
(1) Gives effect to (i) the issuance of 20,897,000 shares of Class B Common
Stock to Kennametal for the periods presented and (ii) the assumed
issuance for fiscal 1997 of 34,650 shares of Class A Common Stock to
fund the excess of dividends over net income for the fiscal year ended
June 30, 1997.
(2) Number of customers that have purchased products from the Company within
the 12 months preceding the relevant period end.
(3) Represents data at period end.
(4) Direct-mail costs include direct production and mailing costs.
ITEM 7. 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 IPO. 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.
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 the IPO of 20% of the Company's Class A Common Stock
("the Offering"). Upon exercise of the underwriters over-allotment option,
Kennametal surrendered to the Company 640,000 shares of Class B Common Stock
equal to the number of additional shares of Class A Common Stock purchased by
the underwriters from the Company. In addition, Kennametal sold 20,000 shares
of Class B Common Stock at $20 per share to one of the members of its and the
Company's board of directors. The 20,000 shares of Class B Common Stock were
subsequently converted to Class A Common Stock. Net proceeds received by
Kennametal were $400,000. Subsequent to the Offering, 4,917,000 shares of
Class A Common Stock were outstanding and Kennametal held 20,237,000 shares of
Class B Common Stock. The Company and Kennametal operate as separate
companies.
Results of Operations
- ---------------------
The following discussion should be read in connection with the
consolidated financial statements of JLK (the "Company") and the related
footnotes.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
- ---------------------------------------------------------------------------
NET SALES. Net sales for fiscal 1997 were $316.2 million, an increase
of 29.6% from $244.0 million in fiscal 1996. Net sales increased primarily
because of the addition of five 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 to new customers. Also contributing to the sales
revenue was the acquisition of two industrial supply companies during the
fourth quarter of fiscal 1997. The acquired companies had annual sales of
$36.0 million in their latest fiscal year and provided four additional
showrooms in the Midwest. 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. Excluding the acquisitions, net
sales increased 27.4%. At June 30, 1997, the Company operated a total of 28
showrooms, including six distribution centers in the United States and one in
the United Kingdom, and provided Full Service Supply Programs to approximately
60 customers covering approximately 120 different facilities, as compared to
19 showrooms, including five distribution centers, in the United States and
one in the United Kingdom, and Full Service Supply Programs for 42 customers
covering 86 facilities at June 30, 1996.
GROSS PROFIT. Gross profit for fiscal 1997 was $103.2 million, an
increase of 32.9% from $77.6 million in fiscal 1996. Gross margin for fiscal
1997 was 32.6% compared to 31.8% in fiscal 1996. The gross margin improved
slightly 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 five new showrooms.
OPERATING EXPENSES. Operating expenses for fiscal 1997 were
$71.0 million, an increase of 34.5% from $52.8 million in fiscal 1996.
Operating expenses as a percentage of net sales were 22.4% in fiscal 1997
compared to 21.6% in fiscal 1996. Operating expenses as a percentage of net
sales increased as a result of higher costs associated with the start-up of
five new showrooms, including a new distribution center, and new Full Service
Supply Programs for customers covering over 30 different facilities and from
effects related to acquisitions. 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 $6.3 in fiscal 1997, an increase of 10.7% from $5.7 million in fiscal
1996. Charges from Kennametal as a percentage of net sales were 2.0% in
fiscal 1997 compared to 2.3% 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% in fiscal
1997 compared to 39.5% in fiscal 1996. Net income increased 28.2% to
$19.3 million in fiscal 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 19 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
12 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 gross 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 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.
Quarterly Results of Operations and Seasonality
- -----------------------------------------------
The following table sets forth summary unaudited quarterly financial
information for fiscal 1997 and 1996. In the opinion of management, such
information has been prepared on the same basis as the Consolidated Financial
Statements 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 notes hereto. 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.
Selected Quarterly Financial Data
- ---------------------------------
Quarter Ended
-----------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(In thousands, except per share data)
FISCAL 1997:
Net sales $70,018 $70,744 $84,433 $90,994
Gross profit 21,945 23,110 27,801 30,313
Net income 3,970 3,947 5,702 5,688
Pro forma net income per share 0.19 0.19 0.27 0.27
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 0.13 0.15 0.23 0.21
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. With the completion of the IPO, the Company
anticipates that its cash flows from operations, coupled with the net proceeds
from the IPO, will be adequate to support its operations for the foreseeable
future.
Net cash provided by (used in) operating activities was $22.6 million,
$(5.0) million and $18.2 million in fiscal 1997, 1996 and 1995, respectively.
The increase in cash from operations in fiscal 1997 resulted from higher net
income and noncash transactions for services provided by and paid for by
Kennametal and from lower working capital requirements. 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.
Net cash used in investing activities was $7.4 million, $1.7 million and
$0.9 million in fiscal 1997, 1996 and 1995, respectively. The increase in net
cash used in investing activities in fiscal 1997 resulted from the acquisition
of two industrial supply companies. The remaining cash used in investing
activities in fiscal 1997, 1996 and 1995 was for investments related primarily
to capital expenditures for improved information systems and office and
computer equipment to accommodate new product offerings and showroom openings.
In April 1997, the Company acquired all of the outstanding stock of
Strelinger. Strelinger, with sales of $30.0 million in 1996, is based in
Troy, Michigan, and is engaged in the distribution of metalcutting tools and
industrial supplies. The Company paid approximately $3.9 million in cash and
assumed certain liabilities totaling approximately $11.0 million. In May
1997, the Company acquired all of the outstanding stock of M&A. M&A, with
sales of $6.0 million in 1996, is based in Roseville, Michigan, and is engaged
in the distribution of metalcutting tools and industrial supplies. The
Company paid approximately $1.2 million in cash and assumed certain
liabilities totaling $2.1 million. The Company initially borrowed the
necessary funds from Kennametal to pay for these acquisitions and used a
portion of the net proceeds of the IPO to repay Kennametal.
Net cash provided by (used in) financing activities was $(3.0) million,
$0.6 million and $(15.4) million in fiscal 1997, 1996 and 1995, respectively.
The increase in net cash used for financing activities in fiscal 1997 was due
to repayments to Kennametal for amounts previously advanced to the Company for
working capital needs, a dividend paid to Kennametal offset by short-term
borrowings. The short-term borrowings were made under the Company's line of
credit primarily to fund the dividend paid to Kennametal. 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.
On April 25, 1997, the Company, through J&L, obtained a $25.0 million
line of credit with a bank and borrowed $20.0 million under the line of credit
to fund a dividend to Kennametal. Interest payable under the line of credit
was based on LIBOR plus 25 basis points and was required to be repaid in full
within six months. Kennametal had guaranteed repayment of the line of credit
in the event of default by the Company. The line of credit was repaid and
canceled in full during July 1997.
On July 2, 1997, the Company consummated an IPO of approximately
4.9 million shares of common stock at a price of $20 per share. The net
proceeds from the IPO were approximately $90.0 million and represented
approximately 20% of the Company's outstanding common stock. The net proceeds
were used by the Company to repay $20 million of short-term debt related to
the dividend paid to Kennametal and $20 million to repay Kennametal for the
recent acquisitions and income taxes paid for on behalf of the Company. The
remaining proceeds will be used to acquire or construct a new $15-20 million
Midwest distribution center, to provide working capital for new showrooms and
Full Service Supply Programs and to fund acquisitions. In connection with the
IPO, the remaining net proceeds were loaned to Kennametal under an
intercompany debt/investment and cash management agreement at a fluctuating
rate of interest equal to Kennametal's short-term borrowing costs. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all
of such loans on demand by the Company.
The Company anticipates that its accounts receivable will continue to
increase due to increased sales levels and from the effects of acquisitions,
and that inventory levels will also increase due to the addition of new
products, showrooms, Full Service Supply Programs and from acquisitions. Full
Service Supply Program sales will experience a gradual reduction in fiscal
1998 due to the termination of the GE Contract as subsequently defined herein.
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 completely by fiscal 1999
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 received from the IPO.
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.
Termination of Large Contract
- -----------------------------
In fiscal 1997, the Company had $316.2 million in net sales of which
$54.7 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 has finalized its plan of disengagement from those
manufacturing sites that are not being continued. 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 November 1998. In fiscal 1998, in conjunction with such
disengagement, the Company expects sales to GE to amount to approximately 30%
of the total amount received by the Company in fiscal 1997 under the GE
Contract. After fiscal 1998, estimated 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 amount received by the
Company in fiscal 1997 under the GE Contract.
The Company is 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 6% of the Company's net sales in fiscal 1997.
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 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
Company's stock compensation plan is discussed in Note 13.
The FASB also recently issued SFAS No. 128, "Earnings Per Share" and
SFAS No. 129, "Disclosure of Information about Capital Structures." 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
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data
- ---------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. 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. as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1997
<PAGE>
JLK DIRECT DISTRIBUTION INC.
Consolidated Statements of Income
(In thousands, except per share data)
Fiscal Year Ended June 30,
--------------------------------------------
1997 1996 1995
---- ---- ----
Net sales $316,189 $243,969 $188,202
Cost of goods sold 213,020 166,326 127,917
-------- -------- --------
Gross profit 103,169 77,643 60,285
Operating expenses 70,976 52,761 40,658
-------- -------- --------
Operating income 32,193 24,882 19,627
Interest expense and other 368 -- --
-------- -------- --------
Income before provision for
income taxes 31,825 24,882 19,627
Provision for income taxes 12,518 9,819 7,799
-------- -------- --------
Net income $ 19,307 $ 15,063 $ 11,828
======== ======== ========
Unaudited data, as adjusted:
Pro forma net income per share $ 0.92 $ 0.72
======== =======
Pro forma weighted average
shares outstanding 20,932 20,897
======== =======
The accompanying notes are an integral part of these statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
Consolidated Balance Sheets
(In thousands)
June 30,
-------------------
1997 1996
---- ----
ASSETS:
Current assets:
Cash and equivalents $ 13,088 $ 690
Accounts receivable, less
allowance for doubtful accounts
of $186 and $175, respectively 42,589 32,520
Inventories 70,332 59,302
Deferred income taxes 3,260 2,838
-------- --------
Total current assets 129,269 95,350
-------- --------
Property, plant and equipment:
Land and buildings 2,604 1,073
Machinery and equipment 9,630 6,090
Less accumulated depreciation (5,202) (3,191)
-------- --------
Net property, plant and equipment 7,032 3,972
-------- --------
Other assets:
Intangible assets, net 27,927 20,990
Deferred income taxes 258 79
Other 1,002 654
-------- --------
Total other assets 29,187 21,723
-------- --------
Total assets $165,488 $121,045
======== ========
LIABILITIES:
Current liabilities:
Notes payable to banks $ 20,295 $ --
Notes payable to Kennametal 15,805 --
Accounts payable 15,460 13,519
Due to Kennametal and affiliates 7,641 4,861
Income taxes payable 4,055 1,966
Accrued vacation pay 1,308 777
Other 3,233 964
-------- --------
Total current liabilities 67,797 22,087
-------- --------
Other liabilities 4,960 967
-------- --------
Total liabilities 72,757 23,054
-------- --------
SHAREHOLDERS' EQUITY:
Investments by and advances
from Kennametal 92,643 98,038
Translation adjustment 88 (47)
-------- --------
Total shareholders' equity 92,731 97,991
-------- --------
Total liabilities and
shareholders' equity $165,488 $121,045
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Year Ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net income $19,307 $15,063 $11,828
Adjustments for noncash items:
Depreciation and amortization 1,768 1,458 1,278
Noncash transactions
with Kennametal 6,266 5,660 3,481
Changes in certain assets and
liabilities, net of effects from
acquisitions:
Accounts receivable (4,074) (12,252) 2,100
Inventories (4,390) (14,914) (8,697)
Accounts payable and
accrued liabilities 1,377 1,278 6,815
Other 2,383 (1,287) 1,378
------- ------- -------
Net cash flow from (used in)
operating activities 22,637 (4,994) 18,183
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (2,287) (2,053) (1,175)
Acquisitions, net of cash (5,106) -- --
Other -- 337 234
------- ------- -------
Net cash flow used in
investing activities (7,393) (1,716) (941)
------- ------- -------
FINANCING ACTIVITIES:
Increase in short-term debt 27,987 -- --
Cash dividend paid to Kennametal (20,000) -- --
Net cash advances by
(payments to) Kennametal (10,968) 590 (15,391)
------- ------- -------
Net cash flow from (used in)
financing activities (2,981) 590 (15,391)
------- ------- -------
Exchange rate effect on cash 135 (44) (3)
CASH AND EQUIVALENTS:
Net increase (decrease)
in cash and equivalents 12,398 (6,164) 1,848
Cash and equivalents,
beginning 690 6,854 5,006
------- ------- -------
Cash and equivalents,
ending $13,088 $ 690 $ 6,854
======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $12,518 $10,891 $ 7,575
Interest paid 368 -- --
The accompanying notes are an integral part of these statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
Consolidated Statements of Shareholders' Equity
(In thousands)
June 30,
-------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period $97,991 $76,722 $76,807
Net income 19,307 15,063 11,828
Dividend (20,000) -- --
Net cash advances by (payments to)
Kennametal (10,968) 590 (15,391)
Other noncash transactions 6,266 5,660 3,481
Translation adjustment 135 (44) (3)
------- ------- -------
Balance at end of period $92,731 $97,991 $76,722
======= ======= =======
The accompanying notes are an integral part of these statements.
<PAGE>
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 the initial public offering ("IPO"), (i) Kennametal
contributed to the Company the stock of J&L, including the J&L United Kingdom
operations, and the assets and liabilities of Full Service Supply and (ii) the
Company and Kennametal entered into certain contractual arrangements (see Note
14). The Company and Kennametal 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 28 showrooms including 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. Shareholders' equity
(which represents Kennametal's 100% interest prior to the IPO) comprises both
investments by and non-interest bearing advances from Kennametal. In
connection with the IPO which was consummated on July 2, 1997, such amounts
were included as part of the Company's permanent equity capitalization (see
Note 14). 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 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 EQUIVALENTS. Cash equivalents 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.
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 3 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.
INTANGIBLE ASSETS. Goodwill includes 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 and includes the excess of cost
over net assets of acquired companies. Goodwill is being amortized on a
straight-line basis over periods not exceeding 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. Other intangibles
assets arising from acquisitions consist of employee retention and non-compete
agreements and are being amortized over the life of the agreements which range
between three and five years.
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 shareholders' equity.
PRO FORMA EARNINGS PER SHARE is computed using the weighted average
number of shares outstanding during the year. Pro forma weighted average
common shares outstanding have been presented on a basis that gives pro forma
effect to (i) the issuance of the Class B Common Stock for the periods
presented and (ii) the assumed issuance for fiscal 1997 of 34,650 shares of
Class A Common Stock to fund the excess of dividends over net income for
fiscal 1997.
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
Company's stock compensation plan is discussed in Note 13.
The FASB also recently issued SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structures."
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
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.
3. ACQUISITIONS
In April 1997, the Company acquired all of the outstanding stock of the
Strelinger Company ("Strelinger"). Strelinger, with sales of $30.0 million in
1996, is based in Troy, Michigan, and is engaged in the distribution of
metalcutting tools and industrial supplies. The Company paid approximately
$3.9 million in cash and assumed certain liabilities totaling approximately
$11.0 million. In May 1997, the Company acquired all of the outstanding stock
of Mill & Abrasive Supply, Inc. ("M&A"). M&A, with sales of $6.0 million in
1996, is based in Roseville, Michigan, and is engaged in the distribution of
metalcutting tools and industrial supplies. The Company paid approximately
$1.2 million in cash and assumed certain liabilities totaling $2.1 million.
The acquisitions have been accounted for using the purchase method of
accounting with the purchase price being allocated to the assets purchased and
the liabilities assumed based on their fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets
acquired was approximately $3.6 million and has been recorded as goodwill.
The net purchase price of the acquisitions was allocated as follows:
(In thousands)
- --------------
Current assets $12,660
Property, plant & equipment 1,687
Other long-term assets 250
Goodwill 3,629
Current liabilities (13,120)
--------
Purchase price, net of cash $ 5,106
=======
The results of operations of the acquired businesses have been included
in the consolidated financial statements from the date of acquisition. On a
pro forma basis, as if the acquisitions had taken place at the beginning of
fiscal 1997 and 1996, consolidated net sales would have been $352.4 million
and $278.3 million, respectively. The pro forma impact on net income and
earnings per share would not be materially different from the amounts reported
in fiscal 1997 and 1996.
In connection with the acquisitions, the Company also entered into
employee retention and non-compete agreements which amounted to approximately
$4.1 million. The agreements will be amortized over their respective life
which ranges between three and five years.
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
As of June 30,
-----------------
1997 1996
---- ----
(In thousands)
Goodwill $28,800 $25,167
Other intangible assets 4,075 --
------- -------
32,875 25,167
Accumulated amortization (4,948) (4,177)
------- -------
$27,927 $20,990
======= =======
5. 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, 1997,
approximate minimum annual rentals on such leases are as follows:
Total
(including
Related Party Related Party
Commitments) Commitments
------------- -------------
(In thousands)
1998 $2,963 $1,201
1999 2,687 1,188
2000 2,075 1,181
2001 1,161 788
2002 165 11
2003 and thereafter 177 11
Total rental expense (exclusive of real estate taxes, insurance and
other operating costs) for all operating leases for the fiscal years ended
1997, 1996 and 1995 was approximately $2.8 million, $2.3 million and
$1.8 million, respectively, including approximately $1.2 million,
$1.1 million, and $0.8 million, respectively, paid to related parties. In the
opinion of the Company's management, these leases with related parties are on
terms that approximate fair market value.
6. 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, 1997, no amounts were outstanding under the credit
facility.
On April 25, 1997, the Company, through J&L, obtained a $25.0 million
line of credit with a bank and borrowed $20.0 million under the line of credit
to fund a dividend to Kennametal. Interest payable under the line of credit
was based on LIBOR plus 25 basis points and was required to be repaid in full
within six months. Kennametal had guaranteed repayment of the line of credit
in the event of default by the Company. The line of credit was repaid and
canceled in full during July 1997.
7. INCOME TAXES
The provision for income taxes consisted of the following:
1997 1996 1995
---- ---- ----
(In thousands)
Current income taxes:
Federal $11,410 $9,454 $6,559
State 1,709 1,421 987
------- ------ ------
Total 13,119 10,875 7,546
Deferred income taxes (601) (1,056) 253
------- ------ ------
Provision for income taxes $12,518 $9,819 $7,799
======= ====== ======
Effective tax rate 39.3% 39.5% 39.7%
======= ====== ======
The reconciliation of income taxes computed using the statutory
U.S. income tax rate and the provision for income taxes was as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Income taxes at U.S. statutory rate $11,139 $8,709 $6,869
State income taxes, net of
federal tax benefits 1,064 835 660
Nondeductible goodwill 237 223 223
Other 78 52 47
------- ------ ------
Provision for income taxes $12,518 $9,819 $7,799
======= ====== ======
Deferred tax assets and liabilities consisted of the following:
1997 1996
---- ----
(In thousands)
Deferred tax assets (liabilities):
Inventory valuation and reserves $2,891 $2,589
Accrued vacation and workers compensation 275 172
Property, plant and equipment (264) (291)
Postretirement benefits 160 120
Pension benefits 362 250
Other 94 77
------ ------
Net deferred tax assets $3,518 $2,917
====== ======
8. 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 that 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, 1997 and 1996.
The components of net pension cost for the Company's portion of the Plan
were as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Service cost $601 $515 $420
Interest cost 332 275 366
Return on plan assets (1,110) (422) (529)
Net amortization and deferral 471 (57) (48)
---- ---- ----
Net pension cost $294 $311 $209
==== ==== ====
The Company also participates in Kennametal's 401(k) Thrift Plan for
employees. The charge to operations incurred by the Company for contributions
totaled $0.5 million, $0.4 million and $0.3 million in fiscal 1997, 1996 and
1995, respectively.
9. 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.
The components of other postretirement benefit costs for the Company's
plan were as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Service cost $ 74 $66 $56
Interest cost 28 19 13
Net amortization and deferral 1 -- --
---- --- ---
Postretirement benefit costs $103 $85 $69
==== === ===
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 1997, 1996 and 1995.
10. FINANCIAL INSTRUMENTS
Fair Value
- ----------
The Company had $13.1 million in cash and equivalents at June 30, 1997,
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. 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, 1997 and 1996,
receivables with the Company's five largest accounts represented 22% and 35%,
respectively, of total accounts receivables (see Note 11).
11. 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 1997, 1996 and 1995, sales to one
customer amounted to 17%, 21% and 22% of total sales, respectively. Sales
outside of the United States were approximately $9.4 million and $5.1 million
during fiscal 1997 and 1996, respectively. These sales were principally to
customers in the United Kingdom.
For the fiscal year ended June 30, 1997, the Company had $316.2 million
in net sales of which $54.7 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 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 has finalized its plan of disengagement from those
manufacturing sites that are not being continued. 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 November 1998. In fiscal 1998, in conjunction with such
disengagement, the Company expects sales to GE to amount to approximately 30%
of the total amount received by the Company in fiscal 1997 under the GE
Contract. After fiscal 1998, estimated 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 amount received by the
Company in fiscal 1997 under the GE Contract.
The Company is 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 in
fiscal 1997.
12. RELATED PARTY TRANSACTIONS
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries totaled $30.4 million in 1997, $18.6 million in 1996 and
$11.4 million in 1995. Sales to these entities totaled $12.3 million in 1997,
$11.4 million in 1996 and $11.4 million in 1995.
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 $6.3 million in 1997, $5.7 million in
1996 and $3.5 million in 1995 are included in the accompanying statements of
income. Kennametal will continue to provide services to the Company in the
future in accordance with the terms of the intercompany agreements described
in Note 14. The amounts charged pursuant to these intercompany agreements
reflect the actual costs of providing these services which 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.
Following the IPO discussed in Note 14, the Company has remitted cash to
Kennametal in payment of such operating expense allocations.
13. STOCK OPTION AND INCENTIVE PLAN
Effective June 27, 1997, the Company adopted a stock option and
incentive plan (the "Plan") under which directors, officers and employees may
be granted options to purchase shares of Class A Common Stock. The Plan
authorizes the issuance of up to 2,000,000 shares of Class A Common Stock.
Options are granted at fair market value at the date of grant and are
exercisable under specified conditions for up to 10 years from the date of
grant. Under provisions of the 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.
Under the Plan, shares also may be awarded to eligible employees without
payment. The Plan also specifies such shares to be awarded in the name of the
employee, who has all the rights of a shareholder, subject to certain
restrictions or forfeitures.
The Company adopted the disclosure requirements of SFAS No. 123
effective with the 1997 consolidated financial statements but elected to
continue to measure compensation expense in accordance with Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense for stock options has been recognized in
the accompanying consolidated financial statements. If compensation cost had
been determined based on the value of options granted, consistent with the
methodology in SFAS No. 123, net income and pro forma earnings per share would
have been reduced to the pro forma amounts indicated below:
(In thousands)
- --------------
Net income:
As reported $19,307
Pro forma 17,271
Pro forma net income per share:
As reported $ 0.92
Pro forma 0.82
The fair values of the options granted were estimated on the date of their
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:
Risk-free interest rate 6.49%
Expected life (years) 5
Expected volatility 30%
Expected dividend yield 0.0%
A summary of stock option activity is set forth below:
Weighted Avg.
Options Exercise Price
------- --------------
Options outstanding, beginning of year -- --
Granted 513,500 $20.00
Exercised -- --
Lapsed and forfeited -- --
------- ------
Options outstanding, end of year 513,500 $20.00
------- ------
Options exercisable, end of year -- --
------- ------
Weighted average fair value of
options granted during the year -- $ 6.50
14. SUBSEQUENT EVENTS
Reorganization
- --------------
The Company was 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 $.01 per share, 50,000,000 shares of
Class B Common Stock ("Class B Common Stock"), par value $.01 per share, and
25,000,000 shares of Preferred Stock, par value $.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 IPO described below, Kennametal
exchanged its currently outstanding investment for 20,897,000 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 the IPO of up to 20% of the Company's Class A Common
Stock ("the Offering"). Upon exercise of the underwriters over-allotment
option, Kennametal surrendered to the Company 640,000 shares of Class B Common
Stock equal to the number of additional shares of Class A Common Stock
purchased by the underwriters from the Company. In addition, Kennametal sold
20,000 shares of Class B Common Stock at $20 per share to one of the members
of its and the Company's board of directors. The 20,000 shares of Class B
Common Stock were subsequently converted to Class A Common Stock. Net
proceeds received by Kennametal were $400,000. Subsequent to the Offering,
4,917,000 shares of Class A Common Stock were outstanding and Kennametal held
20,237,000 shares of Class B Common Stock.
Upon consummation of the Offering on July 2, 1997, the net proceeds from
the Offering, after deducting underwriting discounts and estimated expenses,
were approximately $90.0 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 $20.0 million
related to acquisitions and income taxes, (iii) to spend $15-20 million to
acquire or construct a new Midwest distribution center in the Detroit,
Michigan metropolitan area, which is expected to be approximately 200,000 to
250,000 square feet in size and should be in operation by June 30, 1999,
(iv) to provide working capital for new showrooms and Full Service Supply
Programs and (v) to fund acquisitions. Pending such uses, the net proceeds
were 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 on demand by the Company.
Kennametal maintains unused lines of credit to enable it to repay any portion
or all of such loans on demand by the Company.
The Company and Kennametal have entered into a number of agreements,
which became 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 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 entered into an intercompany 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 arrange and administer all existing insurance arrangements and
may 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 entered into a lease agreement pursuant to
which Kennametal will lease to the Company space within buildings located on
Kennametal's premises.
SHARED FACILITIES AGREEMENTS
The Company and Kennametal entered 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 a 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 entered 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
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 is 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 makes 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 entered 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 this
Registration Statement. 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, except to the extent caused by the Indemnified Party. 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") 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, (the "Base
Business") except where the Company has been offered by Kennametal or its
affiliates or a third party, the right to acquire a business which falls under
the Base Business at fair market value, and the Company's Board of Directors
has determined, for whatever reason, that the Company shall not acquire such
business, 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 prior written 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, except in connection with the provision
of integrated industrial supply programs as may be required specifically by
customers thereof.
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT
The Company and Kennametal entered 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 receives interest on net cash flows to
Kennametal's centralized cash accounts and is 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 pays for this service pursuant to
the Administrative Services Agreement and reimburses Kennametal for an
allocable portion of Kennametal's facility and/or commitment fees under its
credit lines.
WAREHOUSING AGREEMENTS
The Company and Kennametal entered 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 pays to the warehouser a 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 entered into a corporate agreement under
which the Company grants to Kennametal a continuing option, transferable, in
whole or in part, to any of its affiliates, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the executive
officers of the Company who were elected to the positions listed in April
1997. The table also sets forth information with respect to the directors of
the Company who were elected to the positions listed on June 24, 1997.
Name Age Position
- ---- --- --------
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
Jeffery M. Boetticher 46 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
MICHAEL W. 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 1993 to 1994 as General Manager of
J&L, from 1992 to 1993 as National Sales and Marketing Manager and prior
thereto, as General Manager-East Coast Region of J&L. He resigned his
positions with Kennametal upon consummation of the Offering.
KENNETH M. 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).
ROLAND E. 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.
MICHAEL J. 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.
RICHARD C. 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.
JEFFERY M. BOETTICHER is the Chief Executive Officer of Black Box
Corporation (a leading worldwide direct marketer of computer communications
and technical service provider of networking solutions), having also served as
President of Black Box Corporation from June 1994 through May 1997. Since
March 1991, he has been President and Chief Executive Officer of Black Box
Corporation of Pennsylvania, a wholly-owned subsidiary of Black Box
Corporation. He is also a director of Holden Corporation, CME Information
Services, Inc. and the Pittsburgh High Technology Council.
IRWIN L. 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.
ALOYSIUS T. MCLAUGHLIN, Jr. is retired, having served as Vice Chairman
of Dick Corporation (a national general contractor), from 1993 to 1995 and as
President and Chief Operating Officer from 1985 to 1993. Mr. McLaughlin is a
director of Kennametal.
ROBERT L. 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.
WILLIAM R. 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 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.
ITEM 11. EXECUTIVE COMPENSATION
Board Committees and Director Compensation
- ------------------------------------------
The Audit Committee of the Board is comprised of Messrs. Alberding and
Boetticher. The Audit Committee's primary function is to evaluate
management's performance of its financial reporting responsibilities. The
Committee is also charged with reviewing the internal financial and
operational controls of the Company and 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, excluding the President
whose compensation shall be recommended by the Compensation Committee but
determined by the Board, 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 adopted
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").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Securities All Other
-----Annual Compensation----- Underlying Compen-
Name and Principal Position Year(1) Salary Bonus(2) Options sation (3)
- --------------------------- ------- ------ -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Michael W. Ruprich, 1997 $264,508 $120,000 100,000(6) $5,045
President(4)(5) 12,500(7)
1996 197,968 103,696 11,000 5,045
1995 178,384 123,270 11,334 4,500
Kenneth M. McHenry, 1997 120,045 35,308 50,000(6) 4,500
Vice President-Sales 3,000(7)
and Marketing
Roland E. Lazzaro, 1997 113,049 36,873 50,000(6) 4,400
Vice President-Operations 2,000(7)
Michael J. Mussog, 1997 105,044 25,000 50,000(6) 3,900
Vice President and Chief 2,000(7)
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.
(6) Represents options to purchase shares of the Company's Class A Common
Stock.
(7) Represents options to purchase shares of Kennametal's capital stock.
The annual base salaries of the Named Executive Officers are as follows:
Michael W. Ruprich, $350,000; Kenneth M. McHenry, $170,000; Roland E. Lazzaro,
$150,000; and Michael J. Mussog, $160,000. The Company has adopted the JLK
Management Bonus Plan and the 1997 Stock Option and Incentive Plan, each of
which is more fully described below. Annual bonus opportunities for each of
the Named Executive Officers under the JLK Management 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, the Company has granted, pursuant to the terms of the 1997 Stock
Option and Incentive Plan, options to purchase Class A Common Stock at the IPO
price to the Named Executive Officers in the 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 has also granted to each non-
employee director of the Company options to purchase 15,000 shares of Class A
Common Stock at the IPO price 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.
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 cash, 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 did 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 1,107,555
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. Company employees are 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 cash having
an aggregate fair market value equal to the purchase price. 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 granted to
the Named Executive Officers during fiscal 1997:
<TABLE>
<CAPTION>
Option Grants in Fiscal 1997
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 100,000(3) 19.5 $20.00 6/27/07 50,000
12,500(4) * 30.8125 8/1/06 158,125
Kenneth M. McHenry 50,000(3) 9.7 20.00 6/27/07 325,000
3,000(4) * 30.8125 8/1/06 37,950
Roland E. Lazzaro 50,000(3) 9.7 20.00 6/27/07 325,000
2,000(4) * 34.0625 10/31/06 18,960
Michael J. Mussog 50,000(3) 9.7 20.00 6/27/07 325,000
2,000(4) * 34.0625 10/31/06 18,960
* Less than 1%.
</TABLE>
- ------------------------
(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 for Kennametal Capital
Stock include the following: a risk-free interest rate of 6.64% (the
rate applicable to a 10-year treasury security at the time of the
award); dividend yield of 2.0% (the annualized yield at the date of
grant); volatility of 27.9% (calculated using daily Kennametal stock
returns for the 12-month period preceding the option award); and a stock
price at date of grant of $30.8125 for Mr. Ruprich and Mr. McHenry, and
$34.0625 for Mr. Lazzaro and Mr. Mussog (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
$12.65 per share for Mr. Ruprich and Mr. McHenry, and $9.48 per share
for Mr. Lazzaro and Mr. Mussog . The assumptions used in calculating
the option value of JLK's Class A Common Stock include the following: a
risk-free interest rate of 6.49% for all optionees (the rate applicable
to a 10-year treasury security at the time of award); no dividend yield
(the Company does not presently intend to pay cash dividends to the
holders of its Class A Common Stock ); volatility of 30.0% for all
optionees (calculating using the average of Kennametal's volatility
based on daily stock returns for the six months ended June 30, 1997 and
the Company's volatility from June 27, 1997 through August 18, 1997);
and a stock price at date of grant of $20.00 for all optionees (the
exercise price at which these options were granted was equal to the
initial public offering price of the Class A Common Stock). The value
of these options under the Black-Scholes model of option valuation
applying the preceding assumptions is $6.50 per share for all optionees.
The ultimate values of the options will depend on the future market
price of the stock of Kennametal or the Company, as the case may be,
which cannot be forecast with reasonable accuracy. The actual value, if
any, an optionee will realize upon exercise of an option will depend on
the excess of the market value of the relevant stock over the exercise
price on the date the option is exercised. No adjustments were made for
forfeitures or vesting restrictions on exercise.
(3) Represents options to purchase shares of Class A Common Stock of the
Company.
(4) Represents options to purchase shares of Kennametal's Capital Stock.
The following table sets forth information concerning options to
purchase the Company's Class A Common Stock held by the Named Executive
Officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at Fiscal at Fiscal
Acquired Year End(#) Year End ($)
on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
---- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Michael W. Ruprich -0- $-0- 0/100,000 0/$562,500
Kenneth M. McHenry -0- -0- 0/ 50,000 0/ 281,250
Roland E. Lazzaro -0- -0- 0/ 50,000 0/ 281,250
Michael J. Mussog -0- -0- 0/ 50,000 0/ 281,250
</TABLE>
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
Annualized Annual Benefit Upon Retirement With Indicated Years of
Covered Credited Service
Compensation 15 20 25 30 35
- ------------ -- -- -- -- --
$ 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
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 33.33 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 the
Company is 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 Executive Retirement Plan as more
fully described above. Following the Offering, the Company reimbursed
Kennametal for any supplemental retirement benefit amounts paid by Kennametal
to former Company employees under these plans.
As of June 30, 1997, the credited years of service under the Kennametal
Inc. Retirement Income Plan for the Named Executive Officers were
approximately: Michael W. Ruprich, eight years; Kenneth M. McHenry, four
years; Roland E. Lazzaro, 12 years; and Michael J. Mussog, four years.
Annualized Covered Compensation as of June 30, 1997, for purposes of the
retirement benefits table set forth above for the Named Executive Officers is
as follows: Michael W. Ruprich, $138,532; Kenneth M. McHenry, $114,557; Roland
E. Lazzaro, $88,486; and Michael J. Mussog, $89,315.
JLK Direct Distribution Inc. Management Bonus Plan
- --------------------------------------------------
The Company's Board of Directors has adopted the JLK Management 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."
JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan
- -----------------------------------------------------------------
The Company's Board of Directors has adopted, and Kennametal, as the
Company's sole shareholder, has approved the 1997 Stock Option and Incentive
Plan ("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 persons, 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 non-
employee 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
Amendment Number 2 to the Company's Registration Statement on Form S-1 filed
with the Commission of July 24, 1997 and is incorporated herein by reference.
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 that 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 employees of the Company or of Kennametal 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 is the price at which the Class A Common Stock was 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.
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 has entered 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 full time and
attention to the business and affairs of the Company and perform such services
as shall be determined by the Board of Directors, 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 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 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 that 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.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Robert L. McGeehan, who serves on the Compensation Committee, is
president and Chief Executive Officer of Kennametal.
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries totaled $30.4 million in 1997, $18.6 million in 1996 and
$11.4 million in 1995. Sales to these entities totaled $12.3 million in 1997,
$11.4 million in 1996 and $11.4 million in 1995.
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 Company's statements of income. In addition, costs charged to
the Company by Kennametal totaling $6.3 million in 1997, $5.7 million in 1996
and $3.5 million in 1995 are included in the Company's 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 "Relationship with Kennametal." 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Kennametal and Company Common Stock by Management
- --------------------------------------------------------------
The following table sets forth the beneficial ownership of the Company's
Class A Common Stock and Kennametal Capital Stock as of July 30, 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. Options with respect to an aggregate of 513,500 shares of Class A
Common Stock were awarded by the Company to its executive officers, directors
and employees upon consummation of the Offering.
<TABLE>
<CAPTION>
Amount and Total Amount and
Nature of Kennametal Nature of
Beneficial Beneficial Beneficial
Ownership of Kennametal Ownership Ownership of
Kennametal Capital Stock and Stock JLK Class A
Name of Beneficial Owner Stock(1)(2)(3) Credits(7) Credits Common Stock(2)
- ------------------------ -------------- ---------- ------- ---------------
<S> <C> <C> <C> <C>
Richard C. Alberding 1,734(4) -- 1,734 1,000
Jeffery M. Boetticher -- -- -- 1,000
Irwin L. Elson 13,000 -- 13,000 10,100
Robert L. McGeehan 263,049(5) 6,747 269,796 10,000
Aloysius T. McLaughlin, Jr. 20,901 5,291 26,192 2,500
William R. Newlin 24,385(6) 9,260 33,645 20,000
Michael W. Ruprich 38,723 -- 38,723 7,500
Kenneth M. McHenry 6,139 -- 6,139 400
Roland E. Lazzaro 5,021 -- 5,021 2,000
Michael J. Mussog 4,095 -- 4,095 1,000
Directors and Executive
Officers as a Group (10 persons) 377,047 21,298 398,345 55,500
</TABLE>
- ------------------------
(1) The figures shown include 216,507, 34,834, 6,000, 5,000, 4,000 and
280,841 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 July 30, 1997, pursuant to Kennametal's stock
option plans.
(2) No individual beneficially owns in excess of 1% of the total shares
outstanding. Directors and executive officers as a group beneficially
own 1.5% and 1.1% of the total outstanding shares of the Kennametal
Capital Stock and the Company's Class A Common Stock, respectively.
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 (Deferred Fee Plan Shares) for an
aggregate of 21,298 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) The figure shown includes 1,734 shares 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 2,276 shares owned jointly by Mr. Newlin and
his wife.
(7) These amounts represent Stock Credits to which non-employee directors of
Kennametal are entitled pursuant to Kennametal's Directors Stock
Incentive Plan and to which executive officers of Kennametal are
entitled pursuant to Kennametal's Management Performance Bonus Plan.
Ownership of Company Common Stock by Principal Shareholder
- ----------------------------------------------------------
In connection with the IPO of approximately 20% of the Company's Class A
Common Stock, Kennametal exchanged its outstanding investment in the Company
for 20,897,000 shares of the Company's Class B Common Stock. Upon exercise of
the underwriters' over-allotment option of 640,000 shares of the Company's
Class A Common Stock, Kennametal surrendered to the Company a number of its
shares of the Class B Common Stock equal to the number of additional shares of
Class A Common Stock purchased by the underwriters from the Company. Upon
consummation of the Offering on July 2, 1997, Kennametal held 20,257,000
shares of the Class B Common Stock. In addition, Kennametal sold 20,000
shares of its Class B Common Stock at a price of $20.00 per share to one of
the members of its and the Company's Board of Directors. The 20,000 shares
were subsequently converted to Class A Common Stock, and Kennametal currently
holds 20,237,000 shares of the Company's Class B Common Stock. As of
September 18, 1997, 4,917,000 shares of Class A Common Stock were outstanding.
All of the 20,237,000 shares of Class B Common Stock outstanding are
beneficially owned by Kennametal. Accordingly, Kennametal owns Common Stock
representing approximately 80.5% of the economic interest in the Company and
representing approximately 97.6% of the combined voting power of the Company's
outstanding Common Stock.
The following table sets forth information with respect to the
beneficial ownership of the Company's Class B Common Stock as of
September 18, 1997:
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership(2) Class
- --------------------------------------- ------------ -----
Kennametal Inc.(3) 20,237,000 100
(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.
The following table sets forth each person or entity who may be deemed
to have beneficial ownership of more than 5% of the outstanding Class A Common
Stock of the Company based upon information available to the Corporation as of
September 22, 1997.
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership Class
- --------------------------------------- ------------ -----
RCM Capital Management, L.L.C. 733,800(1) 14.9
Four Embarcadero Center
San Francisco, CA 94111
The Capital Group Companies, Inc. 453,200(2) 9.2
Capital Research and Management Company
333 South Hope St.
Los Angeles, CA 90071
(1) According to a Schedule 13G amendment filed in September 1997, RCM
Capital Management is a registered investment advisor with sole
dispositive power as to all shares listed above and with sole voting
power with respect to 607,800 of the shares listed above.
(2) According to a Schedule 13G filed in September 1997, Capital Research
and Management Company is a wholly-owned subsidiary of The Capital Group
Companies, Inc. The Capital Group Companies, Inc. reports sole voting
power over 48,800 of such shares. Capital Research and Management
Company, a registered investment advisor, reports sole dispositive power
over 404,400 of such shares and no voting power over any shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
- -------
Upon completion of the Offering, Kennametal owned 100% of the
outstanding Class B Common Stock of the Company which represented
approximately 97.6% of the combined voting power of all of the outstanding
Common Stock. 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.
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 the Company's Rule 424(b) Prospectus,
filed with the Commission on June 27, 1997, 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 is also governed by agreements 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. Management
believes the fees and other amounts paid to Kennametal under such agreements
does 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 1997 if the Services Agreement had been in
effect during that period is approximately $6.3 million, which is
approximately the amount included in the fiscal 1997 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. Notwithstanding management's
belief that the prices charged would not exceed the prices that would be
charged by a third party, because the Company is a subsidiary of Kennametal,
none of these arrangements will result from arm's-length negotiations, and
therefore, there can be no assurance that the 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 which are incorporated herein by reference to the exhibits to
Amendment No. 1 to the Company's Registration Statement on Form S-1, filed
with the Commission on June 4, 1997. 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.
Administrative Services Agreement
- ---------------------------------
The Company and Kennametal have entered into an intercompany
administrative services agreement (the "Services Agreement") with respect to
services provided by Kennametal to the Company. The Services Agreement
provides that such services are provided in exchange for fees which,
generally, (i) in the case of services purchased by Kennametal from third
parties for the Company, are 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, are 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 are paid monthly in arrears. The Company may
request an expansion or termination of services, in which case the parties
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 prior practices. The services
initially 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 arrange and
administer all existing insurance arrangements and may 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 has an initial term of 10 years and will be
renewed automatically thereafter for successive one-year terms, provided
however, that after the initial 10-year term or any renewal term, the Services
Agreement may be terminated at the end of such initial term or any subsequent
renewal term by either party upon six months' prior written notice. The
Services Agreement also provides that it is subject to early termination by
Kennametal if: (i) Kennametal or its affiliates own Common Stock representing
less than a majority of the voting power of all Common Stock, (ii) any person
or group, other than Kennametal or its affiliates, 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 Services Agreement also may be terminated by the non-breaching
party if the other party materially breaches its terms.
Pursuant to the Services Agreement, for the term of and for a period of
five years following the termination of the Services Agreement, each party
agrees 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 have entered into a lease agreement (the
"Lease Agreement") pursuant to which Kennametal leases to the Company space
within buildings located on Kennametal's premises. The Company uses 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
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) the Company owns shares
representing less than a majority of the voting power of the outstanding
common stock of J&L, (ii) Kennametal or its affiliates, own Common Stock
representing less than a majority of the voting power of all Common Stock,
(iii) any person or group, other than Kennametal or its affiliates, directly
or indirectly has the power to exercise a controlling influence over the
Company or (iv) 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 have entered into Shared Facilities
Agreements (the "Shared Facilities Agreements") pursuant to which each company
subleases 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 a 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 1997 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 $0.5 million, which amount is
included in the fiscal 1997 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 have entered 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 is 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 slightly exceeds 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. 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 or its affiliates own Common Stock representing less than a
majority of the voting power of all Common Stock or if the other party
materially breaches the Product Supply Agreement or the Non-Competition and
Corporate Opportunities Allocation Agreement.
Tax-Sharing Agreement
- ---------------------
The Company is included in Kennametal's federal consolidated income tax
group, and the Company's tax liability is 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 have
entered into the Tax-Sharing Agreement. Pursuant to the Tax-Sharing
Agreement, the Company makes payments to Kennametal such that, with respect to
any period, the amount of taxes to be paid by the Company, subject to certain
adjustments, are 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 is reimbursed, however, for tax
attributes that it generates, such as net operating losses, if and when they
are used on a consolidated basis.
Kennametal has 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), is 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, has sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined state income tax returns (or amended returns), and
has 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 pays 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 have entered 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 the trademarks service marks, trade names and other
intellectual property (collectively, the "Marks") of Kennametal identified
therein in connection with the Company's business and for the grant to
Kennametal by the Company of a non-exclusive license to use the Company's
Marks on similar terms. Under the terms of the License Agreement, each party
shall indemnify the other and its affiliates against certain liabilities in
respect of the use of the Marks. The License Agreement shall remain in effect
for a term of 10 years, but may be earlier terminated by Kennametal if
Kennametal or its affiliates own 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 the License Agreement or any of the other
intercompany agreements. A termination of the License Agreement could have a
material adverse effect on the business, financial condition or results of
operation of the Company.
Indemnification Agreement
- -------------------------
The Company and Kennametal have entered 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 Company's Rule 424(b) Prospectus,
filed with the Commission on June 27, 1997. 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, except to the extent caused by the
Indemnified Party.
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") entered into between
Kennametal and the Company: (i) Kennametal has agreed 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 industrial supply programs
(the "Base Business"), except where the Company has been offered by Kennametal
or its affiliates or a third party the right to acquire a business which falls
under the Base Business at fair market value and the Company's Board of
Directors has determined, for whatever reason, that the Company shall not
acquire such business 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 prior written consent of the
Company; and (ii) the Company has agreed 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, except in
connection with the provision of integrated industrial supply programs as may
be required specifically by customers thereof. Similar provisions are
contained in the Articles of Incorporation.
The Corporate Opportunities Agreement provides that Kennametal has the
right to any future business opportunities outside the scope of the Base
Business and has 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 but may be earlier terminated by Kennametal if
Kennametal or its affiliates own Common Stock representing less than a
majority of the voting power of all Common Stock or if the Company materially
breaches the Corporate Opportunities Agreement or the Product Supply
Agreement. The Articles of Incorporation also restrict the Company's ability
to pursue future business opportunities.
Intercompany Debt/Investment and Cash Management Agreement
- ----------------------------------------------------------
The Company and Kennametal have entered into an intercompany
debt/investment and cash management agreement (the "Cash Management
Agreement") under which the Company participates 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 receives interest on net cash flows to
Kennametal's centralized cash accounts and is 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 pays for this service pursuant to
the Services Agreement and reimburses 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 Kennametal or its affiliates own 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 the Cash
Management Agreement or any of the other intercompany agreements.
Warehousing Agreements
- ----------------------
The Company and Kennametal have entered into separate warehousing
agreements ("Warehousing Agreements") with respect to (i) Kennametal
distribution centers and warehouses that 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 pays to the warehouser a 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
shall remain in effect for a term of 10 years but may be earlier terminated by
Kennametal if (i) Kennametal or its affiliates own Common Stock representing
less than a majority of the voting power of all Common Stock or (ii) if the
Company owns shares representing less than a majority of the voting power of
the outstanding common stock of J&L. The Warehousing Agreements may also be
terminated by either party if the other party materially breaches such
Warehousing Agreement or any of the other intercompany agreements.
Corporate Agreement
- -------------------
The Company and Kennametal have entered into a corporate agreement (the
"Corporate Agreement") under which the Company granted to Kennametal a
continuing option, transferable, in whole or in part, to any of its
affiliates, 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, shall 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 shall use its best efforts to effect the registration
under the applicable federal and state securities laws of any of the 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 hereof,
Kennametal has no current plan or intention other than to hold its shares of
Class B Common Stock for the foreseeable future, Kennametal also has 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 agrees 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 assignees. The Corporate Agreement contains indemnification and
contribution provisions (i) by Kennametal and its permitted assignees 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 that 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 affiliates or any of their respective assets.
The Corporate Agreement also provided that if the Underwriters exercised
their over-allotment option to acquire additional shares of Class A Common
Stock (as the Underwriters in fact did), Kennametal would surrender a number
of its shares of Class B Common Stock that equals the number of additional
shares of Class A Common Stock purchased by the Underwriters from the Company.
Kennametal surrendered such number of shares in connection with the Offering.
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 seven 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 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 that 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements
Financial statements filed as a part of this report are listed on the
"Index to Financial Statements" herein.
2. Financial Statement Schedules
The financial statement schedule shown below should be read in
conjunction with the financial statements contained in this
Form 10-K. The Financial Statement Schedule is shown below. Other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts for the
Three Years Ended June 30, 1997
3. Exhibits
(3) Articles of Incorporation and By-laws
-------------------------------------
(3.1) Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.a of Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(3.2) By-laws (incorporated by reference to Exhibit 3.b of
Amendment No. 1 to the Company's Registration Statement on Form S-1
(No. 333-25989) filed with the Commission on June 4, 1997).
(10) Material Contracts
------------------
(10.1) Administrative Services Agreement (incorporated by
reference to Exhibit 10.a of Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed with the Commission on
June 4, 1997).
(10.2) Corporate Agreement (incorporated by reference to
Exhibit 10.b of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.3) Indemnification Agreement (incorporated by reference to
Exhibit 10.c of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.4) Intercompany Debt/Investment and Cash Management
Agreement (incorporated by reference to Exhibit 10.d of Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.5) Noncompetition and Corporate Opportunities Allocation
Agreement (incorporated by reference to Exhibit 10.e of Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.6) Shared Facilities Agreement (incorporated by reference
to Exhibit 10.f of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.7) Tax Sharing Agreement (incorporated by reference to
Exhibit 10.g of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.8) Trademark License Agreement (incorporated by reference
to Exhibit 10.h of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.9) Warehousing Agreements (incorporated by reference to
Exhibit 10.i of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.10) Lease Agreement (incorporated by reference to Exhibit
10.j of Amendment No. 1 to the Company's Registration Statement on Form S-1
(No. 333-25989) filed with the Commission on June 4, 1997).
(10.11) Product Supply Agreement (incorporated by reference to
Exhibit 10.k of Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.12) 1997 JLK Direct Distribution Inc. Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.l of Amendment No. 2
to the Company's Registration Statement on Form S-1 (No. 333-25989) filed with
the Commission on June 24, 1997).
(10.13) Kennametal Inc. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.m of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-25989) filed with the Commission
on June 4, 1997).
(10.14) Kennametal Inc. Employment Agreement with Michael W.
Ruprich (incorporated by reference to Exhibit 10.n of Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.15) JLK Direct Distribution Inc. Management Bonus Plan
(incorporated by reference to Exhibit 10.s of Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 333-25989) filed with the Commission
on June 24, 1997).
(10.16) Form of JLK Direct Distribution Inc. Employment
Agreement with Michael W. Ruprich (incorporated by reference to Exhibit 10.o
of Amendment No. 1 to the Company's Registration Statement on Form S-1 (No.
333-25989) filed with the Commission on June 4, 1997).
(10.17) Form of JLK Direct Distribution Inc. Employment
Agreement with Kenneth M. McHenry (incorporated by reference to Exhibit 10.p
of Amendment No. 1 to the Company's Registration Statement on Form S-1 (No.
333-25989) filed with the Commission on June 4, 1997).
(10.18) Form of JLK Direct Distribution Inc. Employment
Agreement with Roland E. Lazzaro (incorporated by reference to Exhibit 10.q of
Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 333-
25989) filed with the Commission on June 4, 1997).
(10.19) Form of JLK Direct Distribution Inc. Employment
Agreement with Michael J. Mussog (incorporated by reference to Exhibit 10.r of
Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 333-
25989) filed with the Commission on June 4, 1997).
(21) Subsidiaries of the Registrant Filed herewith.
------------------------------
(27) Financial Data Schedule Filed herewith.
-----------------------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
By /s/ MICHAEL J. MUSSOG
--------------------------------------
Michael J. Mussog
Vice President and Chief Financial Officer
Date: September 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM R. NEWLIN
- ------------------------------------
William R. Newlin Chairman of the Board September 29, 1997
/s/ MICHAEL W. RUPRICH
- ------------------------------------
Michael W. Ruprich President and Director September 29, 1997
/s/ MICHAEL J. MUSSOG
- ------------------------------------
Michael J. Mussog Vice President, Chief Financial September 29, 1997
and Accounting Officer
/s/ RICHARD C. ALBERDING
- ------------------------------------
Richard C. Alberding Director September 29, 1997
/s/ JEFFERY M. BOETTICHER
- ------------------------------------
Jeffery M. Boetticher Director September 29, 1997
/s/ IRWIN L. ELSON
- ------------------------------------
Irwin L. Elson Director September 29, 1997
/s/ ROBERT L. MCGEEHAN
- ------------------------------------
Robert L. McGeehan Director September 29, 1997
/s/ ALOYSIUS T. MCLAUGHLIN, JR.
- ------------------------------------
Aloysius T. McLaughlin, Jr. Director September 29, 1997
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
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 July 21, 1997. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This schedule 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.
/s/ ARTHUR ANDERSEN LLP
------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1997
<TABLE>
<CAPTION>
JLK DIRECT DISTRIBUTION INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
Balance Balance
at Charged to at
Beginning Costs and End of
Period Ended Description of Period Expenses Deductions Period
- ------------ ----------- --------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
June 30, 1997 Allowance for doubtful accounts $174,555 $351,431 $(339,628) $186,358
June 30, 1996 Allowance for doubtful accounts $151,842 $ 22,713 -- $174,555
June 30, 1995 Allowance for doubtful accounts $148,276 $142,500 $(138,934) $151,842
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
No. Reference
- ------- ---------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporated herein by reference to Exhibit
Incorporation 3.a of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-
25989) filed with the Commission on
June 4, 1997.
3.2 By-laws Incorporated by reference to Exhibit 3.b of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.1 Administrative Services Agreement Incorporated by reference to Exhibit 10.a of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.2 Corporate Agreement Incorporated by reference to Exhibit 10.b of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.3 Indemnification Agreement Incorporated by reference to Exhibit 10.c of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.4 Intercompany Debt/Investment and Cash Incorporated by reference to Exhibit 10.d of
Management Agreement Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.5 Noncompetition and Corporate Incorporated by reference to Exhibit 10.e of
Opportunities Allocation Agreement Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.6 Shared Facilities Agreement Incorporated by reference to Exhibit 10.f of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.7 Tax Sharing Agreement Incorporated by reference to Exhibit 10.g of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.8 Trademark License Agreement Incorporated by reference to Exhibit 10.h of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.9 Warehousing Agreements Incorporated by reference to Exhibit 10.i of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.10 Lease Agreement Incorporated by reference to Exhibit 10.j of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.11 Product Supply Agreement Incorporated by reference to Exhibit 10.k of
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.12 1997 JLK Direct Distribution Inc. Stock Incorporated by reference to Exhibit 10.l of
Option and Incentive Plan Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 24, 1997.
10.13 Kennametal Inc. Supplemental Executive Incorporated by reference to Exhibit 10.m of
Retirement Plan Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.14 Kennametal Inc. Employment Agreement Incorporated by reference to Exhibit 10.n of
with Michael W. Ruprich Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.15 JLK Direct Distribution Inc. Management Incorporated by reference to Exhibit 10.s of
Bonus Plan Amendment No. 2 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 24, 1997.
10.16 Form of JLK Direct Distribution Inc. Incorporated by reference to Exhibit 10.o of
Employment Agreement with Michael W. Amendment No. 1 to the Company's Registration
Ruprich. Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.17 Form of JLK Direct Distribution Inc. Incorporated by reference to Exhibit 10.p of
Employment Agreement with Kenneth M. Amendment No. 1 to the Company's Registration
McHenry. Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.18 Form of JLK Direct Distribution Inc. Incorporated by reference to Exhibit 10.q of
Employment Agreement with Roland E. Amendment No. 1 to the Company's Registration
Lazzaro. Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.19 Form of JLK Direct Distribution Inc. Incorporated by reference to Exhibit 10.r of
Employment Agreement with Michael J. Amendment No. 1 to the Company's Registration
Mussog. Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
21 Subsidiaries of the Registrant Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
CONSOLIDATED SUBSIDIARIES
J&L America, Inc. Michigan, United States
CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
Mill & Abrasive Supply, Inc. Michigan, United States
Strelinger Company Michigan, United States
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 10-K
This schedule contains summary financial information extracted from the
June 30, 1997 Consolidated Financial Statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 13,088
<SECURITIES> 0
<RECEIVABLES> 42,775
<ALLOWANCES> 186
<INVENTORY> 70,332
<CURRENT-ASSETS> 129,269
<PP&E> 12,234
<DEPRECIATION> 5,202
<TOTAL-ASSETS> 165,488
<CURRENT-LIABILITIES> 67,797
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 92,731
<TOTAL-LIABILITY-AND-EQUITY> 165,488
<SALES> 316,189
<TOTAL-REVENUES> 316,189
<CGS> 213,020
<TOTAL-COSTS> 213,020
<OTHER-EXPENSES> 771
<LOSS-PROVISION> 351
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> 31,825
<INCOME-TAX> 12,518
<INCOME-CONTINUING> 19,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,307
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0
</TABLE>
