<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 2, 1998
REGISTRATION NO. 333-40809
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1 TO THE
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
KENNAMETAL INC. KENNAMETAL FINANCING I
(Exact Name of Registrant as Specified in its (Exact Name of Registrant as Specified in its
Charter) Charter)
25-0900168 52-2064104
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
PENNSYLVANIA DELAWARE
(State of Incorporation) (State of Incorporation)
c/o Kennametal Inc.
Route 981 South at Westmoreland County Airport Route 981 South at Westmoreland County Airport
Latrobe, PA 15650 Latrobe, PA 15650
(412) 539-5000 (412) 539-5000
(Address, including zip code, and telephone number, (Address, including zip code, and telephone number,
including area code, of registrant's principal including area code, of registrant's principal
executive offices) executive offices)
</TABLE>
------------------------
DAVID T. COFER
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
KENNAMETAL INC.
ROUTE 981 SOUTH AT WESTMORELAND COUNTY AIRPORT
LATROBE, PA 15650
(412) 539-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service for each Registrant)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LEWIS U. DAVIS, JR., ESQ. VINCENT PAGANO, JR., ESQ.
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION RISE B. NORMAN, ESQ.
20TH FLOOR, ONE OXFORD CENTRE SIMPSON THACHER & BARTLETT
301 GRANT STREET 425 LEXINGTON AVENUE
PITTSBURGH, PA 15219 NEW YORK, NY 10017
(412) 562-8800 (212) 455-2000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
Included in this Registration Statement: (i) a "shelf" prospectus relating
to stock purchase units, stock purchase contracts, debt securities and capital
stock of Kennametal Inc. and preferred securities of Kennametal Financing I;
(ii) a prospectus supplement to be used in an offering in the United States of
America of FELINE PRIDES(SM), consisting of "Income PRIDES"(SM) and "Growth
PRIDES"(SM) of Kennametal and Kennametal Financing I, as such terms are referred
to in the FELINE PRIDES(SM) Prospectus Supplement; (iii) a prospectus supplement
to be used in an offering in the United States of America and Canada (the "U.S.
Common Stock Prospectus Supplement") and a prospectus supplement to be used in a
concurrent international offering (the "International Common Stock Prospectus
Supplement") of the Common Stock of Kennametal Inc; and (iv) a prospectus
supplement to be used in an offering in the United States of America of Senior
Debt Securities (as defined herein) issued by Kennametal Inc. The form of U.S.
Common Stock Prospectus Supplement included in this registration statement is
followed by those pages to be used in the International Common Stock Prospectus
Supplement that differ from, or are in addition to, those in the U.S. Common
Stock Prospectus Supplement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998
PROSPECTUS
- ----------
KENNAMETAL INC.
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
DEBT SECURITIES
COMMON STOCK
KENNAMETAL FINANCING I
PREFERRED SECURITIES
GUARANTEED AS SET FORTH HEREIN BY
KENNAMETAL INC.
------------------------
Kennametal Inc., a Pennsylvania corporation ("Kennametal" or the
"Company"), from time to time may offer together or separately: (i) Stock
Purchase Contracts ("Stock Purchase Contracts") to purchase shares of capital
stock, par value $1.25 per share ("Common Stock"), of the Company; (ii) Stock
Purchase Units ("Stock Purchase Units"), each representing ownership of a Stock
Purchase Contract and Preferred Securities (as defined herein) or debt
obligations of third parties, including U.S. Treasury securities, securing the
holder's obligation to purchase Common Stock under the Stock Purchase Contracts;
(iii) its debentures (the "Trust Debentures") to be purchased with the proceeds
from the sale of preferred securities representing preferred undivided
beneficial interests in Kennametal Financing I ("Preferred Securities"), a
statutory business trust created under the laws of the State of Delaware (the
"Trust"), and its other debentures, notes and other debt securities in one or
more series, (the "Senior Debt Securities;" and together with the Trust
Debentures, the "Debt Securities"); (iv) Common Stock; and (v) the Trust may
offer, from time to time, its Preferred Securities, in each case in amounts, at
prices and on terms to be determined at the time or times of offering. The
aggregate initial offering price of all of the Securities (as defined herein)
which may be sold pursuant to this Prospectus will not exceed U.S.
$1,400,000,000 (or its equivalent based on the applicable exchange rate at the
time of issue in one or more foreign currencies or currency units as shall be
designated by Kennametal). The Stock Purchase Contracts, Stock Purchase Units,
Debt Securities, Common Stock and Preferred Securities are collectively called
the "Securities."
(continued on next page)
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the trading symbol "KMT." An accompanying Prospectus Supplement will state
whether any Securities offered thereby will be listed on any national securities
exchange. If such Securities are not listed on any national securities exchange,
there can be no assurance that there will be a secondary market for any such
Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Company may sell the Securities to or through underwriters, through
dealers or agents, directly to purchasers or through a combination of such
methods. See "Plan of Distribution." An accompanying Prospectus Supplement sets
forth the names of any underwriters, dealers or agents, if any, involved in the
sale of the Securities in respect of which this Prospectus is being delivered,
and any applicable fee, commission or discount arrangements with them.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 4
(continued from prior page)
Certain specific terms of the particular Securities in respect of which
this Prospectus is being delivered are set forth in an accompanying prospectus
supplement (the "Prospectus Supplement"), including, where applicable: (i) in
the case of Stock Purchase Contracts, the number of shares of Common Stock
issuable thereunder, the purchase price of the Common Stock, the date or dates
on which the Common Stock is required to be purchased by the holders of the
Stock Purchase Contracts, any periodic payments required to be made by the
Company to the holders of the Stock Purchase Contracts or vice versa, and the
terms of the offering and sale thereof; (ii) in the case of Stock Purchase
Units, the specific terms of the Stock Purchase Contracts and any Preferred
Securities or debt obligations of third parties securing the holder's obligation
to purchase the Common Stock under the Stock Purchase Contracts, and the terms
of the offering and sale thereof; (iii) in the case of Debt Securities, the
specific designation, aggregate principal amount, denominations, maturity,
interest payment dates, interest rate (which may be fixed or variable) or method
of calculating interest, if any, applicable Extension Period (as defined below)
or interest deferral terms, if any, place or places where principal, premium, if
any, and interest, if any, will be payable, any terms of redemption, any sinking
fund provisions, terms for any conversion or exchange into other securities,
initial offering or purchase price, methods of distribution and any other
special terms; (iv) in the case of Preferred Securities, the specific title,
aggregate amount, stated liquidation preference, number of securities, the rate
of payment of periodic cash distributions ("Distributions") or method of
calculating such rate, applicable Extension Period or Distribution deferral
terms, if any, place or places where Distributions will be payable, any terms of
redemption, initial offering or purchase price, methods of distribution and any
other special terms; and (v) in the case of Common Stock, the number of shares
offered, the methods of distribution and the public offering or purchase price.
If so specified in the applicable Prospectus Supplement, the Securities offered
thereby may be issued in whole or in part in the form of one or more temporary
or permanent global securities ("Global Securities").
Unless otherwise specified in a Prospectus Supplement, the Debt Securities
will be senior unsecured obligations of the Company and will rank pari passu in
right of payment with all of the Company's other senior unsecured obligations.
If provided in an accompanying Prospectus Supplement, the Company will have the
right to defer principal payments or payments of interest on any series of Debt
Securities by extending the interest payment period thereon at any time or from
time to time for such number of consecutive interest payment periods (which
shall not extend beyond the maturity of the Debt Securities) with respect to
each deferral period as may be specified in such Prospectus Supplement (each, an
"Extension Period"). See "Description of Debt Securities--Option to Defer
Interest Payments". The Debt Securities may be denominated in U.S. Dollars, or
at the option of Kennametal, to the extent described herein and in the
applicable Prospectus Supplement, in one or more foreign currencies or currency
units.
The Company will be the owner of the common securities (the "Common
Securities" and, together with the Preferred Securities, the "Trust Securities")
of the Trust. The payment of Distributions with respect to the Preferred
Securities and payments on liquidation or redemption with respect to the
Preferred Securities, in each case out of funds held by the Trust, will be
irrevocably guaranteed by the Company to the extent described herein (the
"Guarantee"). Certain payments in respect of the Common Securities may also be
guaranteed by the Company. See "Description of the Guarantee." Unless otherwise
specified in a Prospectus Supplement, the obligations of the Company under the
Guarantee will be senior unsecured obligations of the Company and will rank pari
passu with all of the Company's other senior unsecured obligations. Concurrently
with the issuance by the Trust of the Preferred Securities, the Trust will
invest the proceeds thereof and any contributions made in respect of the Common
Securities in the Trust Debentures, which will have terms corresponding to the
terms of the Preferred Securities. The Trust Debentures will be the sole assets
of the Trust, and payments under the Trust Debentures and those made by the
Company in respect of fees and expenses incurred by the Trust will be the only
revenues of the Trust. Upon the occurrence of certain events as are described
herein and in the applicable Prospectus Supplement, the Company may redeem the
Trust Debentures and cause the redemption of the Trust Securities. In addition,
if provided in the applicable Prospectus Supplement, the Company may dissolve
the Trust at any time and, after satisfaction of the liabilities to creditors of
the Trust as provided by applicable law, cause the Trust Debentures to be
distributed to the holders of the Preferred Securities in liquidation of their
interests in
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the Trust. See "Description of Preferred Securities--Redemption--Distribution of
Trust Debentures" and "--Liquidation Distribution Upon Dissolution."
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash Distributions accruing from the date of original
issuance and payable periodically as specified in an accompanying Prospectus
Supplement. If provided in an accompanying Prospectus Supplement, the Company
will have the right to defer payments of interest on the Trust Debentures by
extending the interest payment period thereon at any time or from time to time
for one or more Extension Periods (which shall not extend beyond the maturity of
the Trust Debentures). If interest payments are so deferred, Distributions on
the Preferred Securities will also be deferred and the Company will not be
permitted, subject to certain exceptions set forth herein, to declare or pay any
cash distributions with respect to the Company's capital stock or debt
securities that rank junior to the Trust Debentures. During an Extension Period,
Distributions will continue to accumulate (and the Preferred Securities will
accumulate additional Distributions thereon at the rate per annum if and as
specified in the related Prospectus Supplement). See "Description of Preferred
Securities--Distributions."
Taken together, the Company's obligations under the Trust Debentures, the
Indenture (as defined herein), the Declaration (as defined herein) and the
Guarantee, in the aggregate, have the effect of providing a full, irrevocable
and unconditional guarantee of payments of Distributions and other amounts due
on the Preferred Securities. See "Relationship Among the Preferred Securities,
the Trust Debentures and the Guarantee."
------------------------
No dealer, salesman or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus, any
accompanying Prospectus Supplement or the documents incorporated or deemed
incorporated by reference herein. If given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any underwriter, dealer or agent. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any securities other than
the registered securities to which it relates, or an offer to sell or a
solicitation of an offer to buy those securities to which it relates, in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus or any Prospectus
Supplement nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at
Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. In addition, the Registration Statement may
be accessed electronically at the Commission's site on the World Wide Web at
http://www.sec.gov. The Company's reports are also on file at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Securities being offered, reference is made to
the Registration Statement which can be inspected at the public reference
facilities at the offices of the Commission. No separate financial statements of
the Trust have been included herein. The Company and the Trust do not consider
that such financial statements would be material to holders of the Preferred
Securities because the Trust is a newly formed special purpose entity, has no
operating history or independent operations and is not engaged in and does not
propose to engage in any activity other than its holding as trust assets the
Trust Debentures, and the issuance of the Trust Securities. See "The Trust,"
"Description of Preferred Securities" and "Description of the Guarantee."
The Trust is not currently subject to the information reporting
requirements of the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated herein
by reference:
(1) Kennametal's Annual Report on Form 10-K for the fiscal year ended June
30, 1997, and Greenfield Industries, Inc.'s ("Greenfield") Annual
Report on Form 10-K for the fiscal year ended December 31, 1996;
(2) Kennametal's Proxy Statement dated September 12, 1997, and Greenfield's
Information Statement pursuant to Section 14(f) dated October 17, 1997;
(3) Kennametal's Current Report on Form 8-K dated November 20, 1997, as
amended on December 31, 1997;
(4) Kennametal's Quarterly Report on Form 10-Q for the period ended
September 30, 1997, and Greenfield's Quarterly Reports on Form 10-Q for
the periods ended March 31, 1997, June 30, 1997 and September 30, 1997;
and
(5) the descriptions of Kennametal's Common Stock and Preferred Stock
Purchase Rights contained in Kennametal's Registration Statements filed
under Section 12(b) of the Exchange Act, including any amendments or
reports filed for the purpose of updating such descriptions.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not
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be deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any such amendment or supplement.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated herein, other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
into such documents. Requests for such documents should be directed to:
Kennametal Inc., Route 981 South at Westmoreland County Airport, Latrobe,
Pennsylvania 15650, Attention: David T. Cofer, Vice President, Secretary and
General Counsel, telephone (412) 539-5000.
KENNAMETAL INC.
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods: turning, milling and
drilling. In addition, through its 80%-owned subsidiary, JLK Direct Distribution
Inc. ("JLK"), the Company markets and distributes a broad line of consumable
metalcutting tools, as well as abrasives, machine tool accessories, hand tools,
measuring equipment and other industrial supplies used in the metalworking
industry. The Company is a recognized leader in turning and milling consumable
metalcutting tools and believes it is the largest North American and the second
largest global provider of consumable metalcutting tools and supplies.
Leveraging its expertise in tungsten carbide powder metallurgy, the Company has
developed innovative consumable tools for the mining and construction industries
and believes it is the largest global manufacturer, marketer and distributor of
such tools to these markets. End users of the Company's metalworking products
include manufacturers and suppliers in the aerospace, automotive, construction
and farm machinery, railroad equipment, power generation and transmission
equipment, home appliance, electrical equipment and oil field services and gas
exploration industries.
The address of the Company's principal executive office is Route 981 South
at Westmoreland County Airport, Latrobe, Pennsylvania 15650 and its telephone
number is (412) 539-5000.
THE TRUST
The Trust is a statutory business trust created under the laws of the State
of Delaware pursuant to (i) an agreement of trust, dated as of November 12,
1997, executed by the Company, as sponsor (the "Sponsor") and certain of the
trustees of the Trust (the "Kennametal Trustees") and (ii) the filing of a
certificate of trust with the Secretary of State of the State of Delaware on
November 12, 1997. Such agreement of trust will be amended and restated in its
entirety (the "Declaration") substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The
Declaration will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Company will directly or
indirectly acquire Common Securities in an aggregate liquidation amount equal to
3% of the total capital of the Trust. The Trust exists for the exclusive
purposes of (i) issuing the Trust Securities representing undivided beneficial
interests in the assets of the Trust, (ii) investing the proceeds of the Trust
Securities in the Trust Debentures and (iii) engaging in only those other
activities necessary or incidental thereto unless otherwise specified in the
applicable Prospectus Supplement. The Trust has a term of approximately seven
(7) years, but may dissolve earlier as provided in the Declaration.
Pursuant to the Declaration, the number of Kennametal Trustees initially is
five. Three of the Kennametal Trustees (the "Regular Trustees") are persons who
are employees or officers of or who are affiliated with the Company. Pursuant to
the Declaration, the fourth trustee will be a financial institution that is
unaffiliated with the Company, which trustee serves as institutional trustee
under the Declaration and as indenture trustee for the purposes of compliance
with the provisions of the Trust Indenture Act (the "Institutional Trustee").
For the purpose of compliance with the provisions of the Trust Indenture Act,
the Institutional Trustee will also act as trustee (the "Guarantee Trustee")
under the Guarantee for the purposes of the Trust Act (as defined herein), until
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removed or replaced by the holder of the Common Securities. See "Description of
the Guarantee" and "Description of Preferred Securities--Voting Rights;
Amendment of Declaration."
The Institutional Trustee will hold title to the Trust Debentures for the
benefit of the holders of the Trust Securities and the Institutional Trustee
will have the power to exercise all rights, powers and privileges under the
Indenture as the holder of the Trust Debentures. In addition, the Institutional
Trustee will maintain exclusive control of a segregated non-interest bearing
bank account (the "Property Account") to hold all payments made in respect of
the Trust Debentures for the benefit of the holders of the Trust Securities. The
Institutional Trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the Trust Securities out
of funds from the Property Account. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Preferred Securities. The
Company, as the direct or indirect holder of all the Common Securities, will
have the right to appoint, remove or replace any Kennametal Trustee and to
increase or decrease the number of Kennametal Trustees; provided, that the
number of Kennametal Trustees shall be at least three, a majority of which shall
be Regular Trustees. The Company will pay all fees and expenses related to the
Trust and the offering of the Trust Securities. See "Description of the
Guarantee."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration, the Delaware Business Trust Act, as amended (the "Trust Act"), and
the Trust Indenture Act. See "Description of the Preferred Securities."
The trustee in the State of Delaware (the "Delaware Trustee") is First
Chicago Delaware, Inc., Wilmington, Delaware. The principal place of business of
the Trust is c/o Kennametal Inc., Route 981 South, at Westmoreland County
Airport, Latrobe, PA 15650, and its telephone number is (412) 539-5000.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
Kennametal for the periods indicated. For the purpose of the calculation of this
ratio, earnings represents income from continuing operations before fixed
charges, minority interest, provision for income taxes and the cumulative effect
of accounting changes. Fixed charges includes interest expense, including
amounts capitalized and the portion (one-third) of rental expenses deemed to be
representative of interest expense.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
- ---------------------------------------- -------------
1993 1994 1995 1996 1997 1996 1997
- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
3.75 2.47 8.02 8.62 8.75 7.65 14.94
</TABLE>
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
Kennametal intends to apply the net proceeds from the sale of the Securities
(including Trust Debentures issued to the Trust in connection with the
investment by the Trust of all of the proceeds from the sale of the Preferred
Securities) to which this Prospectus relates to its general funds to be used for
general corporate purposes including capital expenditures, acquisitions, the
reduction of indebtedness and other purposes. Funds not required immediately for
such purposes may be invested in short-term obligations or used to reduce the
future level of the Company's indebtedness.
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DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the series of Debt Securities offered by a
Prospectus Supplement, and the extent to which such general terms and provisions
described below may apply thereto, will be described in the Prospectus
Supplement relating to such series of Debt Securities.
The Debt Securities are to be issued in one or more series under an
Indenture, as supplemented or amended from time to time (as supplemented or
amended, the "Indenture"), between the Company and The First National Bank of
Chicago, as trustee (the "Debt Trustee"). This summary of certain terms and
provisions of the Debt Securities and the Indenture is not necessarily complete,
and reference is hereby made to the copy of the form of the Indenture which is
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, and to the Trust Indenture Act. Whenever particular defined terms of the
Indenture are referred to in this Section or in a Prospectus Supplement, such
defined terms are incorporated herein or therein by reference.
GENERAL
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Debt Securities will be issued as senior unsecured debt under the
Indenture and will rank pari passu in right of payment with all of the Company's
other senior unsecured obligations. Except as otherwise provided in the
applicable Prospectus Supplement, the Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, whether under the
Indenture, any other indenture that the Company may enter into in the future or
otherwise. See the Prospectus Supplement relating to any offering of Securities.
The Debt Securities will be issuable in one or more series pursuant to an
indenture supplemental to the Indenture or a resolution of the Company's Board
of Directors or a committee thereof.
The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms of each series of Debt Securities: (i) the title of
the Debt Securities; (ii) any limit upon the aggregate principal amount of the
Debt Securities; (iii) the date or dates on which the principal of the Debt
Securities is payable or the method of determination thereof or the right, if
any, of the Company to defer payment of principal; (iv) the rate or rates, if
any, at which the Debt Securities shall bear interest (including reset rates, if
any, and the method by which any such rate will be determined), the Interest
Payment Dates on which any such interest shall be payable and the right, if any,
of the Company to defer any interest payment; (v) the place or places where,
subject to the terms of the Indenture as described below under "--Payment and
Paying Agents," the principal of and premium, if any, and interest, if any, on
the Debt Securities will be payable ("Place of Payment") and where, subject to
the terms of the Indenture as described below under "--Denominations,
Registration and Transfer," the Company will maintain an office or agency where
Debt Securities may be presented for registration of transfer or exchange and
the place or places where notices and demands to or upon the Company in respect
of the Debt Securities and the Indenture may be made; (vi) any period or periods
within, or date or dates on which, the price or prices at which and the terms
and conditions upon which Debt Securities may be redeemed, in whole or in part,
at the option of the Company pursuant to any sinking fund or otherwise; (vii)
the obligation, if any, of the Company to redeem or purchase the Debt Securities
pursuant to any sinking fund or analogous provisions or at the option of a
holder and the period or periods within which, the price or prices at which, the
currency or currencies (including currency unit or units) in which and the other
terms and conditions upon which the Debt Securities shall be redeemed or
purchased, in whole or in part, pursuant to such obligation; (viii) the
denominations in which any Debt Securities shall be issuable if other than
denominations of $1,000 and any integral multiple thereof; (ix) if other than in
U.S. Dollars, the currency or currencies (including currency unit or units) in
which the principal of (and premium, if any) and interest, if any, on the Debt
Securities shall be payable, or in which the Debt Securities shall be
denominated; (x) any additions, modifications or deletions in the Events of
Default or covenants of the Company specified in the Indenture with respect to
the Debt Securities; (xi) if other than the principal amount thereof, the
portion of the principal amount of Debt Securities that shall be payable upon
declaration of acceleration of the maturity thereof; (xii) any additions or
changes to the Indenture with respect to a series of Debt Securities as shall be
necessary to permit or facilitate the issuance of such series in bearer form,
registrable or not registrable as to principal, and with or without interest
coupons; (xiii) any index or indices used to determine the amount of
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payments of principal of and premium, if any, on the Debt Securities and the
manner in which such amounts will be determined; (xiv) subject to the terms
described under "--Global Debt Securities," whether the Debt Securities of the
series shall be issued in whole or in part in the form of one or more Global
Securities and, in such case, the depositary for such Global Securities; (xv)
the appointment of any trustee, registrar, paying agent or agents; (xvi) the
terms and conditions of any obligation or right of the Company or a holder to
convert or exchange Debt Securities into Preferred Securities or other
securities; (xvii) whether the defeasance and covenant defeasance provisions
described under "--Satisfaction and Discharge; Defeasance" shall be
inapplicable; and (xviii) any other terms of the Debt Securities not
inconsistent with the provisions of the Indenture.
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time of
issuance is below market rates. Certain material U.S. federal income tax
consequences and special considerations applicable to any such Debt Securities
will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, the restrictions,
elections, certain material U.S. federal income tax considerations, specific
terms and other information with respect to such issue of Debt Securities and
such foreign currency or currency units will be set forth in the applicable
Prospectus Supplement.
If any index is used to determine the amount of payments of principal,
premium, if any, or interest on any series of Debt Securities, certain material
U.S. federal income tax, accounting and other considerations applicable thereto
will be described in the applicable Prospectus Supplement.
DENOMINATIONS, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities will be issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. Debt Securities of
any series will be exchangeable for other Debt Securities of the same issue and
series, of any authorized denominations of a like aggregate principal amount,
the same original issue date ("Original Issue Date"), stated maturity ("Stated
Maturity") and bearing the same interest rate.
Each series of Debt Securities may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the appropriate Securities Registrar or at the
office of any transfer agent designated by the Company for such purpose with
respect to such series of Debt Securities and referred to in the applicable
Prospectus Supplement, without service charge and upon payment of any taxes and
other governmental charges as described in the Indenture. The Company will
appoint the Debt Trustee of each series of Debt Securities as Securities
Registrar for such series under the Indenture. If the applicable Prospectus
Supplement refers to any transfer agents (in addition to the Securities
Registrar) initially designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, provided that the Company maintains a transfer agent in
each Place of Payment for such series. The Company may at any time designate
additional transfer agents with respect to any series of Debt Securities.
In the event of any redemption, neither the Company nor the Debt Trustee
shall be required to (i) issue, register the transfer of or exchange Debt
Securities of any series during a period beginning at the opening of business 15
days before the day of mailing of a notice for redemption of Debt Securities of
that series, and ending at the close of business on the day of mailing of the
relevant notice of redemption or (ii) transfer or exchange any Debt Securities
so selected for redemption, except, in the case of any Debt Securities being
redeemed in part, any portion thereof not to be redeemed.
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GLOBAL DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities of a series may be issued in whole or in part in the form of one
or more global securities ("Global Debt Securities") that will be deposited
with, or on behalf of, a depositary identified in the Prospectus Supplement
relating to such series. Global Debt Securities may be issued only in fully
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or in part for the individual Debt Securities represented
thereby, a Global Debt Security may not be transferred except as a whole by the
depositary for such Global Debt Security to a nominee of such depositary or by a
nominee of such depositary to such depositary or another nominee of such
depositary or by the depositary or any nominee to a successor depositary or any
nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company anticipates that the following provisions will
generally apply to depositary arrangements.
Upon the issuance of a Global Debt Security, and the deposit of such Global
Debt Security with or on behalf of the applicable depositary, the depositary for
such Global Debt Security or its nominee will credit on its book-entry
registration and transfer system, the respective principal amounts of the
individual Debt Securities represented by such Global Debt Security to the
accounts of persons that have accounts with such depositary ("Participants").
Such accounts shall be designated by the dealers, underwriters or agents with
respect to such Debt Securities or by the Company if such Debt Securities are
offered and sold directly by the Company. Ownership of beneficial interests in a
Global Debt Security will be limited to participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Debt Security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the applicable depositary or its
nominee (with respect to interests of Participants) and the records of
Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Debt Security.
So long as the depositary for a Global Debt Security, or its nominee, is
the registered owner of such Global Debt Security, such depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Debt Securities represented by such Global Debt Security for all purposes under
the Indenture. Except as provided below, owners of beneficial interests in a
Global Debt Security will not be entitled to have any of the individual Debt
Securities of the series represented by such Global Debt Security registered in
their names, will not receive or be entitled to receive physical delivery of any
such Debt Securities of such series in definitive form and will not be
considered the owners or holders thereof under the Indenture.
Payments of principal of (and premium, if any) and interest on individual
Debt Securities represented by a Global Debt Security registered in the name of
a depositary or its nominee will be made to such depositary or its nominee, as
the case may be, as the registered owner of the Global Debt Security
representing such Debt Securities. None of the Company, the Debt Trustee, any
paying agent, or the Securities Registrar for such Debt Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interest of the Global Debt
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Debt Security representing any of such Debt
Securities, immediately will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the principal
amount of such Global Debt Security for such Debt Securities as shown on the
records of such depositary or its nominee. The Company also expects that
payments by Participants to owners of beneficial interests in such Global Debt
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.
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Unless otherwise specified in the applicable Prospectus Supplement, if the
depositary for a series of Debt Securities is at any time unwilling, unable or
ineligible to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, the Company will issue individual Debt Securities
of such series in exchange for the Global Debt Security representing such series
of Debt Securities. In addition, unless otherwise specified in the applicable
Prospectus Supplement, the Company may at any time and in its sole discretion,
subject to any limitations described in the Prospectus Supplement relating to
such Debt Securities, determine not to have any Debt Securities of such series
represented by one or more Global Debt Securities and, in such event, will issue
individual Debt Securities of such series in exchange for such Global Debt
Securities. Further, if the Company so specifies with respect to the Debt
Securities of a series, an owner of a beneficial interest in a Global Debt
Security representing Debt Securities of such series may, on terms acceptable to
the Company, the Debt Trustee and the depositary for such Global Debt Security,
receive individual Debt Securities of such series in exchange for such
beneficial interests, subject to any limitations described in the Prospectus
Supplement relating to such Debt Securities. In any such instance, an owner of a
beneficial interest in a Global Debt Security will be entitled to physical
delivery of individual Debt Securities of the series represented by such Global
Debt Security equal in principal amount to such beneficial interest and to have
such Debt Securities registered in its name. Individual Debt Securities of such
series so issued will be issued in denominations, unless otherwise specified by
the Company, of $1,000 and integral multiples thereof. The applicable Prospectus
Supplement may specify other circumstances under which individual Debt
Securities may be issued in exchange for the Global Debt Security representing
any Debt Securities.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of principal of (and premium, if any) and any interest on Debt Securities will
be made at the office of the Debt Trustee in Delaware or at the office of such
paying agent or paying agents as the Company may designate from time to time in
the applicable Prospectus Supplement, except that at the option of the Company
payment of any interest may be made (i) except in the case of Global Debt
Securities, by check mailed to the address of the person or entity entitled
thereto as such address shall appear in the Securities Register or (ii) by
transfer to an account maintained by the person or entity entitled thereto as
specified in the Securities Register, provided that proper transfer instructions
have been received by the Regular Record Date. Unless otherwise indicated in the
applicable Prospectus Supplement, payment of any interest on Debt Securities
will be made to the person or entity in whose name such Debt Security is
registered at the close of business on the Regular Record Date for such
interest, except in the case of defaulted interest ("Defaulted Interest"). The
Company may at any time designate additional paying agents or rescind the
designation of any paying agent; however, the Company will at all times be
required to maintain a paying agent in each Place of Payment for each series of
Debt Securities.
Any moneys deposited with the Debt Trustee or any paying agent, or held by
the Company in trust, for the payment of the principal of (and premium, if any)
or interest on any Debt Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall, at the request of the Company, be repaid to the Company or released from
such trust, as applicable, and the holder of such Debt Security shall thereafter
look, as a general unsecured creditor, only to the Company for payment thereof.
OPTION TO DEFER INTEREST PAYMENTS
If provided in the applicable Prospectus Supplement, the Company shall have
the right, at any time and from time to time during the term of any series of
Debt Securities, to defer the payment of interest for such number of consecutive
interest payment periods as may be specified in the applicable Prospectus
Supplement (each, an "Extension Period"), subject to the terms, conditions and
covenants, if any, specified in such Prospectus Supplement, provided that such
Extension Period may not extend beyond the Stated Maturity of the final
installment of principal of such series of Debt Securities. Certain material
U.S. federal income tax consequences and special considerations applicable to
any such Debt Securities will be described in the applicable Prospectus
Supplement.
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MODIFICATION OF INDENTURE
From time to time, the Indenture may be modified by the Company and the
Debt Trustee without the consent of any holders of any series of Debt Securities
with respect to certain matters, including (i) to cure any ambiguity, defect or
inconsistency or to correct or supplement any provision which may be
inconsistent with any other provision of the Indenture, (ii) to qualify, or
maintain the qualification of, the Indenture under the Trust Indenture Act and
(iii) to make any change that does not materially adversely affect the interests
of any holder of such series of Debt Securities. In addition, under the
Indenture, certain rights, covenants and obligations of the Company and the
rights of holders of any series of Debt Securities may be modified by the
Company and the Debt Trustee with the written consent of the holders of at least
a majority in aggregate principal amount of such series of outstanding Debt
Securities; but no extension of the maturity of any series of Debt Securities,
reduction in the interest rate or extension of the time for payment of interest,
change in the optional redemption or repurchase provisions in a manner adverse
to any holder of such series of Debt Securities, other modification in the terms
of payment of the principal of, or interest on, such series of Debt Securities,
or reduction of the percentage required for modification, will be effective
against any holder of such series of outstanding Debt Securities without such
holder's consent.
In addition, the Company and the Debt Trustee may execute, without the
consent of any holder of the Debt Securities, any supplemental Indenture for the
purpose of creating any new series of Debt Securities.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to a series of Debt Securities that has occurred and is
continuing constitutes an "Indenture Event of Default" with respect to such
series of Debt Securities:
(i) failure for 30 days to pay any interest or any sinking fund payment on
such series of the Debt Securities when due (subject to the deferral of any due
date in the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on such series of the
Debt Securities when due whether at maturity, upon redemption, by declaration or
otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice has been
given to the Company from the Debt Trustee or the holders of at least 25% in
principal amount of such series of outstanding Debt Securities; or
(iv) default resulting in acceleration of other indebtedness of the Company
for borrowed money where the aggregate principal amount so accelerated exceeds
$25 million and such acceleration is not rescinded or annulled within 30 days
after the written notice thereof to the Company by the Trustee or to the Company
and the Trustee by the holders of 25% in aggregate principal amount of the Debt
Securities of such series then outstanding, provided that such Event of Default
will be remedied, cured or waived if the default that resulted in the
acceleration of such other indebtedness is remedied, cured or waived; or
(v) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in outstanding principal amount of such series of
Debt Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debt Trustee. The Debt
Trustee or the holders of not less than 25% in aggregate outstanding principal
amount of such series of Debt Securities may declare the principal due and
payable immediately upon an Indenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of such series of Debt
Securities may annul such declaration and waive the default if the default
(other than the non-payment of the principal of such series of Debt Securities
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debt Trustee.
The holders of a majority in outstanding principal amount of a series of
Debt Securities affected thereby may, on behalf of the holders of all the
holders of such series of Debt Securities, waive any past default, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all
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matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debt Trustee) or a default in respect
of a covenant or provision which under the Indenture cannot be modified or
amended without the consent of the holder of each outstanding Debt Security of
such series of Debt Securities. The Company is required to file annually with
the Debt Trustee a certificate as to whether or not the Company is in compliance
with all the conditions and covenants applicable to it under the Indenture.
In case an Indenture Event of Default shall occur and be continuing as to a
series of Debt Securities, all of which are held by the Trust, the Institutional
Trustee will have the right to declare the principal of and the interest on such
Debt Securities, and any other amounts payable under the Indenture, to be
forthwith due and payable and to enforce its other rights as a creditor with
respect to such Debt Securities.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other person or entity or sell, assign, convey, transfer or lease its
properties and assets substantially as an entirety to any person or entity
unless (i) either the Company is the continuing corporation, or any successor or
purchaser is a corporation, partnership, or trust or other entity organized
under the laws of the United States of America, any State thereof or the
District of Columbia, and any such successor or purchaser expressly assumes the
Company's obligations on the Debt Securities under a supplemental indenture; and
(ii) immediately before and after giving effect thereto, no Indenture Event of
Default, and no event which, after notice or lapse of time or both, would become
an Indenture Event of Default, shall have happened and be continuing.
The general provisions of the Indenture do not afford holders of the Debt
Securities protection in the event of a highly leveraged or other transaction
involving the Company that may adversely affect holders of the Debt Securities.
SATISFACTION AND DISCHARGE; DEFEASANCE
The Indenture provides that when, among other things, all Debt Securities
not previously delivered to the Debt Trustee for cancellation (i) have become
due and payable or (ii) will become due and payable at their Stated Maturity
within one year, and the Company deposits or causes to be deposited with the
Debt Trustee, as trust funds in trust for the purpose, an amount in the currency
or currencies in which the Debt Securities are payable sufficient to pay and
discharge the entire indebtedness on the Debt Securities not previously
delivered to the Debt Trustee for cancellation, for the principal (and premium,
if any) and interest to the date of the deposit or to the Stated Maturity, as
the case may be, then the Indenture will cease to be of further effect (except
as to the Company's obligations to pay all other sums due pursuant to the
Indenture and to provide the officers' certificates and opinions of counsel
described therein), and the Company will be deemed to have satisfied and
discharged the Indenture.
The Indenture provides that the Company may elect either (a) to terminate
(and be deemed to have satisfied) all its obligations with respect to any series
of Debt Securities (except for the obligations to register the transfer or
exchange of such Debt Securities, to replace mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of the Debt
Securities, to compensate and indemnify the Trustee ("defeasance") or (b) to be
released from its obligations with respect to certain covenants, ("covenant
defeasance"), upon the deposit with the Trustee, in trust for such purpose, of
money and/or U.S. Government Obligations (as defined in the Indenture) which
through the payment of principal and interest in accordance with their terms
will provide money, in an amount sufficient (in the opinion of a nationally
recognized firm of independent public accountants) to pay the principal of,
interest on and any other amounts payable in respect of the outstanding Debt
Securities of such series. Such a trust may be established only if, among other
things, the Company has delivered to the Trustee an opinion of counsel (as
specified in the Indenture) with regard to certain matters, including an opinion
to the effect that the holders of such Debt Securities will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and discharge and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance or covenant defeasance, as the case may be, had not
occurred.
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REDEMPTION
Unless otherwise indicated in the applicable Prospectus Supplement, Debt
Securities will not be subject to any sinking fund.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company may, at its option, redeem the Debt Securities of any series in whole at
any time or in part from time to time, at the redemption price set forth in the
applicable Prospectus Supplement plus accrued and unpaid interest to the date
fixed for redemption, and Debt Securities in denominations larger than $50 may
be redeemed in part but only in integral multiples of $50. If the Debt
Securities of any series are so redeemable only on or after a specified date or
upon the satisfaction of additional conditions, the applicable Prospectus
Supplement will specify such date or describe such conditions.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Debt Securities to be
redeemed at such holder's registered address. Unless the Company defaults in the
payment of the redemption price, on and after the redemption date interest shall
cease to accrue on such Debt Securities or portions thereof called for
redemption.
CONVERSION OR EXCHANGE
If and to the extent indicated in the applicable Prospectus Supplement, the
Debt Securities of any series may be convertible or exchangeable into other
securities. The specific terms on which Debt Securities of any series may be so
converted or exchanged will be set forth in the applicable Prospectus
Supplement. Such terms may include provisions for conversion or exchange, either
mandatory, at the option of the holder, or at the option of the Company, in
which case the number of shares of other securities to be received by the
holders of Debt Securities would be calculated as of a time and in the manner
stated in the applicable Prospectus Supplement.
CERTAIN COVENANTS
The Indenture contains certain covenants regarding, among other matters,
corporate existence, payment of taxes and reports to holders of Debt Securities.
If and to the extent indicated in the applicable Prospectus Supplement, these
covenants may be removed or additional covenants added with respect to any
series of Debt Securities.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
MISCELLANEOUS
The Company will pay all fees and expenses related to (i) the offering of
the Trust Securities and the Debt Securities, (ii) the organization, maintenance
and dissolution of the Trust, (iii) the retention of the Kennametal Trustees and
(iv) the enforcement by the Institutional Trustee of the rights of the holders
of the Preferred Securities.
INFORMATION CONCERNING THE DEBT TRUSTEE
The Debt Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debt Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Debt Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The Debt Trustee is not required to expend or risk its own
funds or otherwise incur personal financial liability in the performance of its
duties if the Debt Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
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The First National Bank of Chicago, the Debt Trustee, is also Institutional
Trustee under the Declaration and Guarantee Trustee under the Guarantee. The
Company maintains trust and other business relationships in the ordinary course
of business with The First National Bank of Chicago. Pursuant to the provisions
of the Trust Indenture Act, upon the occurrence of certain events, The First
National Bank of Chicago may be deemed to have a conflicting interest, by virtue
of its acting as the Institutional Trustee, the Debt Trustee and the Guarantee
Trustee, its other business relationships with the Company, and by virtue of its
subsidiary acting as Delaware Trustee, and thereby may be required to resign and
be replaced by a successor trustee under the Indenture, the Declaration and the
Guarantee.
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DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Declaration, the Kennametal Trustees on behalf
of the Trust will issue the Preferred Securities and the Common Securities. The
Preferred Securities will represent preferred undivided beneficial interests in
the assets of the Trust and the holders thereof will be entitled to a preference
in certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation over the Common Securities, as well as other benefits
as described in the Declaration. This summary of certain provisions of the
Preferred Securities and the Declaration is not necessarily complete, and
reference is hereby made to the copy of the Declaration, including the
definitions therein of certain terms, which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and to the Trust
Indenture Act. Wherever particular defined terms of the Declaration are referred
to in this Section or in a Prospectus Supplement, such defined terms are
incorporated herein by reference.
GENERAL
The Preferred Securities of the Trust will rank pari passu, and payments
will be made thereon pro rata, with the Common Securities of the Trust except as
described under "--Subordination of Common Securities." Legal title to the Trust
Debentures will be held by the Institutional Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
Agreement executed by the Company for the benefit of the holders of the Trust's
Preferred Securities (the "Guarantee") will be a guarantee with respect to the
Preferred Securities but will not guarantee payment of Distributions or amounts
payable on redemption or liquidation of the Preferred Securities when the Trust
does not have funds on hand available to make such payments. See "Description of
the Guarantee."
DISTRIBUTIONS
The Trust's Preferred Securities will represent preferred undivided
beneficial interests in the assets of the Trust, and the Distributions on each
Preferred Security will be payable at a rate specified in the Prospectus
Supplement for the Preferred Securities. The amount of Distributions payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months unless otherwise specified in the applicable Prospectus Supplement.
Distributions that are in arrears will accumulate additional Distributions
thereon at the rate per annum if and as specified in the applicable Prospectus
Supplement ("Additional Amounts"). The term "Distributions" as used herein
includes any Additional Amounts unless otherwise stated.
Distributions on the Preferred Securities will be cumulative, will
accumulate from the date of original issuance and will be payable on such dates
as specified in the applicable Prospectus Supplement. In the event that any date
on which Distributions are payable on the Preferred Securities is not a Business
Day (as defined below), payment of the Distribution payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay) except that, if such Business Day
is in the next succeeding calendar year, payment of such Distribution shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date (each date on which Distributions are payable
in accordance with the foregoing, a "Distribution Date"). A "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in The City of New York are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Institutional Trustee or the Debt Trustee is closed for business.
If provided in the applicable Prospectus Supplement, the Company has the
right under the Indenture to defer payments of interest on the Trust Debentures
by extending the interest payment period thereon from time to time for a period
or periods that will be specified in the applicable Prospectus Supplement. Such
extension right, if exercised, would result in the deferral of Distributions on
the Preferred Securities (though such Distributions would continue to accumulate
additional Distributions thereon at the rate per annum if and as specified in
the applicable Prospectus Supplement) during any such extended interest payment
period. Such right to extend the interest payment period for the Trust
Debentures is limited to a period not extending beyond the Stated Maturity of
the Trust Debentures. In the event that the Company exercises this right, then
(a) the Company shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a
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liquidation payment with respect to, any of its capital stock other than (i)
purchases or acquisitions of capital stock (of the Company in connection with
the satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase capital stock of the Company), (ii) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or a series of the Company's capital stock for another class or a
series of the Company's capital stock, (iii) the purchase of fractional
interests in shares of the Company's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (iv) dividends or distributions in capital stock of the Company (or
rights to acquire capital stock) or repurchases or redemptions of capital stock
solely from the issuance or exchange of capital stock and (v) redemptions or
repurchases of any rights pursuant to the Rights Agreement, and the declaration
thereunder of a dividend of rights in the future), (b) the Company shall not
make any payment of interest, principal or premium, if any, on or repay,
repurchase or redeem any debt securities issued by the Company that rank junior
to the Trust Debentures, although it may make any such payments or repay,
repurchase or redeem any debt securities that rank pari passu with the Trust
Debentures and (c) the Company shall not make any guarantee payments with
respect to the foregoing (other than payments pursuant to the Guarantee or the
Common Securities Guarantee (as defined herein)). Prior to the termination of
any such Extension Period, the Company may further extend the interest payment
period; provided, that such Extension Period, together with all such previous
and further extensions thereof, may not extend beyond the Stated Maturity of the
Trust Debentures. Upon the termination of any Extension Period and the payment
of all amounts then due, the Company may select a new Extension Period, subject
to the above requirements. See "Description of the Debentures--Option to Defer
Interest Payments." If Distributions are deferred, the deferred Distributions
and accumulated additional Distributions thereon shall be paid to holders of
record of the Preferred Securities as they appear on the books and records of
the Trust on the record date next following the termination of such deferral
period.
It is anticipated that the revenue of the Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Trust Debentures in which the Trust will invest the proceeds from the issuance
and sale of the Preferred Securities and the Common Securities. If the Company
does not make interest payments on such Trust Debentures, the Institutional
Trustee will not have funds available to pay Distributions on the Preferred
Securities. The payment of Distributions (if and to the extent the Trust has
funds legally available for the payment of such Distributions and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Description of the Guarantee."
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the register of the Trust on the relevant record
dates, which, as long as the Preferred Securities remain in book-entry form,
will be one Business Day prior to the relevant Distribution Date. Subject to any
applicable laws and regulations and the provisions of the Declaration, unless
otherwise specified in the applicable Prospectus Supplement, each such payment
will be made as described under "Book-Entry Issuance." In the event any
Preferred Securities are not in book-entry form, the relevant record date for
such Preferred Securities shall be the date, at least 15 days prior to the
relevant Distribution Date, that is specified in the applicable Prospectus
Supplement.
REDEMPTION
MANDATORY REDEMPTION. Unless otherwise specified in the applicable
Prospectus Supplement, upon any repayment, redemption, in whole or in part, of
any Trust Debentures that are held by the Trust unless otherwise specified in
the applicable Prospectus Supplement, whether at maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption shall be applied by the Institutional Trustee to redeem a Like Amount
(as defined below) of the related Trust Securities, upon not less than 30 nor
more than 60 days notice, at a redemption price (the "Redemption Price") equal
to the aggregate liquidation amount of such Trust Securities plus accumulated
and unpaid Distributions thereon to the date of redemption (the "Redemption
Date") and the related amount of the premium, if any, paid by the Company upon
the concurrent redemption of such Trust Debentures. If less than all of any
series of Trust Debentures that are held by the Trust are to be repaid or
redeemed on a Redemption Date, then the proceeds from such repayment or
redemption shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities. The amount of premium, if any,
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paid by the Company upon the redemption of all or any part of any Trust
Debentures held by the Trust shall be allocated pro rata to the Preferred
Securities and the Common Securities.
DISTRIBUTION OF TRUST DEBENTURES. Unless otherwise specified in the
applicable Prospectus Supplement, the Company will have the right at any time to
dissolve the Trust and, after satisfaction of the liabilities of creditors of
the Trust as provided by applicable law, to cause the Trust Debentures in
respect of the Trust Securities issued by the Trust to be distributed to the
holders of the Trust Securities in liquidation of the Trust.
After the liquidation date fixed for any distribution of Trust Debentures
held by the Trust, (i) the Preferred Securities will no longer be deemed to be
outstanding, (ii) the depositary (if any) for the Preferred Securities, as the
record holder of the Preferred Securities, will receive a registered global
certificate or certificates representing the Trust Debentures to be delivered
upon such distribution and (iii) any certificates representing such Preferred
Securities not held by or on behalf of such depositary will be deemed to
represent the Trust Debentures having a principal amount equal to the
liquidation amount of the Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the
Preferred Securities, until such certificates are presented to the Regular
Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Trust Debentures that may be distributed in exchange for
Preferred Securities if a dissolution or liquidation of the Trust were to occur.
Accordingly, the Preferred Securities that an investor may purchase, or the
Trust Debentures that the investor may receive on dissolution or liquidation of
the Trust, may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby.
SPECIAL EVENT REDEMPTION. If a Tax Event or an Investment Company Event
(each as defined below or in the applicable Prospectus Supplement, a "Special
Event") shall occur and be continuing, unless otherwise specified in the
applicable Prospectus Supplement, the Company will have the right to redeem the
Trust Debentures in whole (but not in part) and therefore cause a mandatory
redemption of the Trust Securities in whole (but not in part) at the Redemption
Price within 90 days following the occurrence of such Special Event.
If provided in the applicable Prospectus Supplement, the Company shall have
the right to extend or shorten the maturity of any series of Trust Debentures
held by the Trust at the time that the Company exercises its right to elect to
dissolve the Trust and, after satisfaction of the liability to creditors of the
Trust as provided by applicable law, cause such Trust Debentures to be
distributed to the holders of the Preferred Securities and Common Securities of
the Trust in liquidation of the Trust, provided that it can extend the maturity
only if certain conditions specified in the applicable Prospectus Supplement are
met at the time such election is made and at the time of such extension.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of (i) any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any amendment to or
change in an interpretation or application of such laws or regulations by any
legislative body, court, governmental agency or regulatory authority or (iii)
any interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the generally accepted position on
the date the Preferred Securities are issued, which amendment or change is
effective or which interpretation or pronouncement is announced on or after the
date of issuance of the Preferred Securities under the Declaration, there is
more than an insubstantial risk that (x) the Trust is, or will be within 90 days
of the date thereof, subject to U.S. federal income tax with respect to income
received or accrued on the Trust Debentures, (y) interest payable by the Company
on the Debentures is not, or within 90 days of the date thereof, will not be,
deductible, in whole or in part, for U.S. federal income tax purposes, or (z)
the Trust is, or will be within 90 days of the date thereof, subject to more
than a de minimis amount of other taxes, duties or other governmental charges.
"Investment Company Event" means the occurrence of a change in law or
regulation or a written change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law") to the effect that there is a more than
insubstantial risk that the Trust is or will be considered an "investment
company" that is required to be registered under the Investment
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Company Act of 1940, as amended (the "Investment Company Act"), which Change in
1940 Act Law becomes effective on or after the date of original issuance of the
Preferred Securities.
"Like Amount" means (i) with respect to a redemption of any Trust
Securities, Trust Securities having a liquidation amount equal to that portion
of the principal amount of Trust Debentures to be contemporaneously redeemed in
accordance with the Indenture, allocated to the Common Securities and to the
Preferred Securities based upon the relative liquidation amounts of such classes
of Trust Securities, and the proceeds of which will be used to pay the
Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Trust Debentures to holders of any Trust Securities in
connection with a dissolution or liquidation of Trust, Trust Debentures having a
principal amount equal to the liquidation amount of the Trust Securities of the
holder to whom such Trust Debentures are distributed.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Trust Debentures. Redemptions of Preferred Securities shall be
made and the Redemption Price shall be payable on each Redemption Date only to
the extent that the Trust has funds on hand available for the payment of such
Redemption Price. See also "--Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Preferred
Securities, then, on the Redemption Date, to the extent funds are available, the
Institutional Trustee will deposit irrevocably with the Depositary for the
Preferred Securities (if such Preferred Securities are issued in the form of one
or more Global Preferred Securities) funds sufficient to pay the applicable
Redemption Price and will give such Depositary irrevocable instructions and
authority to pay the Redemption Price to the beneficial owners of the Preferred
Securities. See "--Global Preferred Securities" and "Book-Entry Issuance." If
the Preferred Securities are not issued in the form of one or more Global
Preferred Securities, the Trust, to the extent funds are available, will
irrevocably deposit with the paying agent for the Preferred Securities funds
sufficient to pay the applicable Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing the Preferred
Securities. Notwithstanding the foregoing, Distributions payable on or prior to
the Redemption Date for the Preferred Securities called for redemption shall be
payable to the holders of the Preferred Securities on the relevant record dates
for the related Distribution Dates. If a notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit, all
rights of the holders of the Preferred Securities so called for redemption will
cease, except the right of the holders of the Preferred Securities to receive
the Redemption Price, but without interest on such Redemption Price, and the
Preferred Securities will cease to be outstanding. In the event that any date
fixed for redemption of Preferred Securities is not a Business Day, then payment
of the Redemption Price payable on such date will be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately preceding Business
Day. In the event that payment of the Redemption Price in respect of Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by the Trust or by the Company pursuant to the Guarantee as described
under "Description of the Guarantee", Distributions on such Preferred Securities
will continue to accumulate at the then applicable rate, from the Redemption
Date originally established by the Trust for the Preferred Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law (including, without limitation, U.S. federal
securities law), the Company or its subsidiaries may at any time and from time
to time purchase outstanding Preferred Securities by tender, in the open market
or by private agreement.
If less than all of the Preferred Securities and Common Securities issued
by the Trust are to be redeemed on a Redemption Date, then the aggregate
liquidation amount of such Preferred Securities and Common Securities to be
redeemed shall be allocated pro rata among the Preferred Securities and Common
Securities of such Trust based on the relative liquidation amounts of such
classes of Trust Securities. The particular Preferred Securities to
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be redeemed shall be selected on a pro rata basis not more than 60 days prior to
the Redemption Date by the Institutional Trustee from the outstanding Preferred
Securities not previously called for redemption, by such method as the
Institutional Trustee shall deem fair and appropriate and which may provide for
the selection for redemption of portions (equal to $50 or an integral multiple
of $50 in excess thereof) of the liquidation amount of Preferred Securities of a
denomination larger than $50. The Institutional Trustee shall promptly notify
the registrar in writing of the Preferred Securities selected for redemption
and, in the case of any Preferred Securities selected for partial redemption,
the liquidation amount thereof to be redeemed. For all purposes of each
Declaration, unless the context otherwise requires, all provisions relating to
the redemption of Preferred Securities shall relate, in case of any Preferred
Securities redeemed or to be redeemed only in part, to the portion of the
aggregate liquidation amount of Preferred Securities which has been or is to be
redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Preferred Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the Redemption Price on the Trust Debentures, on and after the Redemption Date
interest will cease to accrue on the Trust Debentures or portions thereof (and
Distributions will cease to accumulate on the Preferred Securities or portions
thereof) called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions (including Additional Amounts, if applicable) on,
and the Redemption Price of, the Trust's Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the liquidation
amount of such Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date, an Indenture Event of Default shall have occurred and
be continuing, no payment of any Distribution (including Additional Amounts, if
applicable) on, or Redemption Price of, any of the Trust's Common Securities,
and no other payment on account of the redemption, liquidation or other
acquisition of such Common Securities, shall be made unless payment in full in
cash of all accumulated and unpaid Distributions (including Additional Amounts,
if applicable) on all of the Trust's outstanding Preferred Securities for all
Distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price the full amount of such Redemption Price on all of the
Trust's outstanding Preferred Securities then called for redemption, shall have
been made or provided for, and all funds available to the Institutional Trustee
shall first be applied to the payment in full in cash of all Distributions
(including Additional Amounts, if applicable) on, or Redemption Price of, the
Trust's Preferred Securities then due and payable.
In the case of any Event of Default under the Declaration resulting from an
Indenture Event of Default, the Company as holder of the Trust's Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default under the Declaration until the effect of all such Events
of Default with respect to the Preferred Securities have been cured, waived or
otherwise eliminated. Until any such Events of Default under the Declaration
have been so cured, waived or otherwise eliminated, the Institutional Trustee
shall act solely on behalf of the holders of the Preferred Securities and not on
behalf of the Company as holder of the Trust's Common Securities, and only the
holders of the Preferred Securities will have the right to direct the
Institutional Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Unless otherwise specified in the applicable Prospectus Supplement,
pursuant to the Declaration, the Trust shall dissolve (i) on November 12, 2004,
the expiration of the term of the Trust, (ii) upon the bankruptcy of the
Company, (iii) upon the filing of a certificate of dissolution or its equivalent
with respect to the Company, after receipt by the Institutional Trustee of
written direction from the Company to dissolve the Trust or after obtaining the
consent of the holders of at least a majority in liquidation amount of the Trust
Securities affected thereby voting together as a single class to dissolve the
Trust, or the revocation of the charter of the Company and the expiration of 90
days after the date of revocation without a reinstatement thereof, (iv) upon the
distribution of Trust Debentures, (v) upon the entry of a decree of a judicial
dissolution of the holder of the Common Securities, the Company or the Trust, or
(vi) upon the redemption of all the Trust Securities.
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If an early dissolution occurs as described in clause (ii), (iii) or (v)
above, the Trust shall be liquidated by the Kennametal Trustees as expeditiously
as the Kennametal Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of the applicable Trust Securities a Like Amount of the
Trust Debentures that are then held by the Trust, unless such distribution is
determined by the Institutional Trustee not to be practical, in which event such
holders will be entitled to receive out of the assets of the Trust available for
distribution to holders, after satisfaction of liabilities to creditors of the
Trust as provided by applicable law, an amount equal to, in the case of holders
of Preferred Securities, the aggregate of the liquidation amount plus accrued
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Trust's Common Securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that if an Indenture Event of Default has occurred
and is continuing, the Preferred Securities shall have a priority over the
Common Securities. If specified in the applicable Prospectus Supplement, a
supplemental Indenture may provide that if an early dissolution occurs as
described in clause (v) above, the Trust Debentures that are then held by the
Trust may be subject to optional redemption in whole (but not in part).
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Declaration (an "Event of Default") with respect to the Preferred Securities
issued thereunder (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) the occurrence of an Indenture Event of Default under the Indenture; or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of 30
days; or
(iii) default by the Trust in the Payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Kennametal Trustees in the Declaration (other than a
covenant or warranty a default in the performance of which or the breach of
which is dealt with in clause (ii) or (iii) above), and continuation of such
default or breach for a period of 90 days after written notice has been given to
the defaulting Kennametal Trustee or Trustees by the holders of at least 25% in
aggregate liquidation amount of the outstanding Preferred Securities, which
notice shall specify such default or breach and require it to be remedied and
shall state that such notice is a "Notice of Default" under the Declaration; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Institutional Trustee and the failure by the Company to appoint a
successor Institutional Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Institutional Trustee, the Institutional Trustee shall
transmit notice of such Event of Default to the holders of the Preferred
Securities, the Regular Trustees and the Company, as Sponsor, unless such Event
of Default shall have been cured or waived. The Company, as Sponsor, and the
Regular Trustees are required to file annually with the Institutional Trustee a
certificate as to whether or not they are in compliance with all the conditions
and covenants applicable to them under the Declaration.
If an Indenture Event of Default has occurred and is continuing, the
Preferred Securities of the Trust shall have a preference over the Common
Securities of the Trust upon dissolution of the Trust as described above. See
"--Liquidation Distribution Upon Dissolution." The existence of an Event of
Default does not entitle the holders of Preferred Securities to accelerate the
maturity thereof.
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REMOVAL OF KENNAMETAL TRUSTEES
Unless an Indenture Event of Default shall have occurred and be continuing
with respect to the Trust Debentures, any Kennametal Trustee may be removed at
any time by the holder of the Common Securities. If an Indenture Event of
Default with respect to any series of Trust Debentures has occurred and is
continuing, the Institutional Trustee and the Delaware Trustee may be removed at
such time by the holders of a majority in liquidation amount of the outstanding
Preferred Securities of the Trust. In no event will the holders of the Preferred
Securities of the Trust have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities of the Trust. No resignation or
removal of a Kennametal Trustee and no appointment of a successor trustee shall
be effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Declaration.
CO-TRUSTEES AND SEPARATE INSTITUTIONAL TRUSTEE
Unless an Event of Default with respect to the Preferred Securities of the
Trust shall have occurred and be continuing, at any time or times, for the
purpose of meeting the legal requirements of the Trust Indenture Act or of any
jurisdiction in which any part of the trust property ("Trust Property") may at
the time be located, the Company, as the holder of the Common Securities of the
Trust, and the Regular Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Institutional Trustee, of all or
any part of such Trust Property, or to act as separate trustee of any such
property, in either case with such powers as may be provided in the instrument
of appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the applicable Declaration. In case an Indenture Event of Default
with respect to the Trust Debentures has occurred and is continuing, the
Institutional Trustee alone shall have power to make such appointment.
MERGER OR CONSOLIDATION OF TRUST TRUSTEES
Any entity into which the Institutional Trustee, the Delaware Trustee or
any Regular Trustee that is not a natural person may be merged or converted or
with which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
entity succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Declaration,
provided such entity shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below or as described in "--Liquidation Distribution Upon
Dissolution". The Trust may, with the consent of the Regular Trustees and
without the consent of the holders of the Trust Securities, consolidate,
amalgamate, merge with or into, or be replaced by a trust organized as such
under the laws of any State; provided, that (i) if the Trust is not the
survivor, such successor entity either (x) assumes all of the obligations of the
Trust under the Trust Securities or (y) substitutes for the Trust Securities
other securities having substantially the same terms as the Trust Securities
(the "Successor Securities"), so long as the Successor Securities rank the same
as the Trust Securities rank with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly acknowledges a
trustee of such successor entity possessing the same powers and duties as the
Institutional Trustee as the holder of the Trust Debentures, (iii) the Preferred
Securities or any Successor Securities are listed, or any Successor Securities
will be listed upon notification of issuance, on any national securities
exchange or with another organization on which the Preferred Securities are then
listed or quoted, (iv) such merger, consolidation, amalgamation or replacement
does not cause the Preferred Securities (including any Successor Securities) to
be downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Securities (including any Successor Securities) in any material respect (other
than with respect to any dilution of the holders' interest in the new entity),
(vi) such successor entity has a purpose substantially identical to that of the
Trust, (vii) prior to such merger, consolidation, amalgamation or replacement,
the Company has received an opinion of independent counsel to the Trust
experienced in such
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matters to the effect that, (A) such merger, consolidation, amalgamation or
replacement does not adversely affect the rights, preferences and privileges of
the holders of the Trust Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders'
interest in the new entity), (B) following such merger, consolidation,
amalgamation or replacement, neither the Trust nor such successor entity will be
required to register as an investment company under the 1940 Act and (C)
following such merger, consolidation, amalgamation or replacement, the Trust (or
the successor entity) will continue to be classified as a grantor trust for
United States federal income tax purposes and (viii) the Company guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee and the Common Securities Guarantee.
Notwithstanding the foregoing, the Trust shall not, except with the consent of
holders of 100% in liquidation amount of the Trust Securities, consolidate,
amalgamate, merge with or into, or be replaced by any other entity or permit any
other entity to consolidate, amalgamate, merge with or into, or replace it, if
such consolidation, amalgamation, merger or replacement would cause the Trust or
the successor entity to be classified as other than a grantor trust for United
States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF DECLARATION
Except as provided below and under "Description of the
Guarantee--Modification of the Guarantee; Assignment" and as otherwise required
by law and the Declaration, the holders of the Preferred Securities will have no
voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate liquidation amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Institutional Trustee,
or direct the exercise of any trust or power conferred upon the Institutional
Trustee under the Declaration including the right to direct the Institutional
Trustee, as holder of the Trust Debentures, to (i) exercise the remedies
available under the Indenture with respect to the Trust Debentures, (ii) waive
any past Indenture Event of Default that is waivable under Section 513 of the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Trust Debentures shall be due and payable or (iv) consent
to any amendment, modification or termination of the Indenture or the Trust
Debentures where such consent shall be required; provided, however, that, where
a consent or action under the Indenture would require the consent or act of
holders of more than a majority in principal amount of the Trust Debentures (a
"Super-Majority") affected thereby, only the holders of at least such
Super-Majority in aggregate liquidation amount of the Preferred Securities may
direct the Institutional Trustee to give such consent or take such action. The
Institutional Trustee shall notify all holders of the Preferred Securities of
any notice of default received from the Debt Trustee with respect to the Trust
Debentures. Such notice shall state that such Indenture Event of Default also
constitutes an Event of Default. Except with respect to directing the time,
method and place of conducting a proceeding for a remedy, the Institutional
Trustee shall not take any of the actions described in clause (i), (ii) or (iii)
above unless the Institutional Trustee has obtained an opinion of tax counsel
experienced in such matters to the effect that, as a result of such action, the
Trust will not fail to be classified as a grantor trust for United States
federal income tax purposes.
In the event the consent of the Institutional Trustee, as a holder of the
Trust Debentures, is required under the Indenture with respect to any amendment,
modification or termination of the Indenture, the Institutional Trustee shall
request the direction of the holders of the Trust Securities with respect to
such amendment, modification or termination and shall vote with respect to such
amendment, modification or termination as directed by a majority in liquidation
amount of the Trust Securities voting together as a single class; provided,
however, that where a consent under the Indenture would require the consent of a
Super-Majority, the Institutional Trustee may only give such consent at the
direction of the holders of at least the proportion in liquidation amount of the
Trust Securities which the relevant Super-Majority represents of the aggregate
principal amount of the Trust Debentures outstanding. The Institutional Trustee
shall be under no obligation to take any such action in accordance with the
directions of the holders of the Trust Securities unless the Institutional
Trustee has obtained an opinion of tax counsel experienced in such matters to
the effect that for the purposes of United States federal income tax, the Trust
will not be classified as other than a grantor trust.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Event of Default.
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Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of Trust Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Trust Debentures in accordance
with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Company or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
The procedures by which holders of Preferred Securities may exercise their
voting rights are described below. See "Book-Entry Issuance."
Holders of the Preferred Securities will have no rights to appoint or
remove the Kennametal Trustees, who may be appointed, removed or replaced solely
by the Company as the indirect or direct holder of all of the Common Securities.
GLOBAL PREFERRED SECURITIES
The Preferred Securities of the Trust may be issued in whole or in part in
the form of one or more Global Preferred Securities that will be deposited with,
or on behalf of, the depositary identified in the Prospectus Supplement relating
to the Preferred Securities. Unless otherwise indicated in the applicable
Prospectus Supplement for the Preferred Securities, the depositary will be The
Depository Trust Company ("DTC"). Global Preferred Securities may be issued only
in fully registered form and in either temporary or permanent form. Unless and
until it is exchanged in whole or in part for the individual Preferred
Securities represented thereby, a Global Preferred Security may not be
transferred except as a whole by the depositary for such Global Preferred
Security to a nominee of such depositary or by a nominee of such depositary to
such depositary or another nominee of such depositary or by such depositary or
any nominee to a successor depositary or any nominee of such successor.
While the specific terms of the depositary arrangement with respect to the
Preferred Securities of the Trust (if other than as described under "Book-Entry
Issuance") will be described in the Prospectus Supplement relating to the
Preferred Securities, the Company anticipates that the following provisions will
generally apply to depositary arrangements.
Upon the issuance of a Global Preferred Security, and the deposit of such
Global Preferred Security with or on behalf of the applicable depositary, the
depositary for such Global Preferred Security or its nominee will credit, on its
book-entry registration and transfer system, the respective aggregate
liquidation amounts of the individual Preferred Securities represented by such
Global Preferred Securities to the accounts of Participants. Such accounts shall
be designated by the dealers, underwriters or agents with respect to such
Preferred Securities or by the Company if such Preferred Securities are offered
and sold directly by the Company. Ownership of beneficial interests in a Global
Preferred Security will be limited to Participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Preferred Security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the applicable depositary or its
nominee (with respect to interests of Participants) and the records of
Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Preferred Security.
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So long as the depositary for a Global Preferred Security, or its nominee,
is the registered owner of such Global Preferred Security, such depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Preferred Securities represented by such Global Preferred Security for all
purposes under the Declaration. Except as provided below, owners of beneficial
interests in a Global Preferred Security will not be entitled to have any of the
individual Preferred Securities represented by such Global Preferred Security
registered in their names, will not receive or be entitled to receive physical
delivery of any such Preferred Securities in definitive form and will not be
considered the owners or holders thereof under the Declaration.
Payments of liquidation amount, premium or Distributions in respect of
individual Preferred Securities represented by a Global Preferred Security
registered in the name of a depositary or its nominee will be made to such
depositary or its nominee, as the case may be, as the registered owner of the
Global Preferred Security representing such Preferred Securities. None of the
Company, the Institutional Trustee, any paying agent or the registrar for such
Preferred Securities will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests of the Global Preferred Security representing such Preferred
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that the depositary for the Preferred Securities of the
Trust, or its nominee, upon receipt of any payment of liquidation amount,
premium or Distributions in respect of a Global Preferred Security representing
any of such Preferred Securities, immediately will credit Participants' accounts
with payments in amounts proportionate to their respective beneficial interest
in the aggregate of such Global Preferred Security for such Preferred Securities
as shown on the records of such depositary or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in such
Global Preferred Security held through such Participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name." Such payments will be the responsibility of such Participants.
Unless otherwise specified in the applicable Prospectus Supplement, if a
Depositary for the Preferred Securities of a Trust is at any time unwilling,
unable or ineligible to continue as a depositary and a successor depositary is
not appointed by the Company within 90 days, the Trust will issue individual
Preferred Securities of the Trust in exchange for the Global Preferred Security
representing such Preferred Securities. In addition, the Company may at any time
and in its sole discretion, subject to any limitations described in the
Prospectus Supplement relating to the Preferred Securities, determine not to
have any Preferred Securities of the Trust represented by one or more Global
Preferred Securities and, in such event, the Trust will issue individual
Preferred Securities in exchange for the Global Preferred Security or Securities
representing such Preferred Securities. Further, if the Company so specifies
with respect to the Preferred Securities of the Trust, an owner of a beneficial
interest in a Global Preferred Security representing such Preferred Securities
may, on terms acceptable to the Company, the Institutional Trustee and the
Depositary for such Global Preferred Security, receive individual Preferred
Securities in exchange for such beneficial interests, subject to any limitations
described in the Prospectus Supplement relating to such Preferred Securities. In
any such instance, an owner of a beneficial interest in a Global Preferred
Security will be entitled to physical delivery of individual Preferred
Securities represented by such Global Preferred Security equal in liquidation
amount to such beneficial interest and to have such Preferred Securities
registered in its name. Individual Preferred Securities so issued will be issued
in denominations, unless otherwise specified by the Company, of $50 and integral
multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to the
applicable depositary, which shall credit the relevant accounts at such
depositary on the applicable Distribution Dates or, if the Preferred Securities
are not held by a depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
Register. Unless otherwise specified in the applicable Prospectus Supplement,
the paying agent for the Preferred Securities shall initially be the
Institutional Trustee and any co-paying agent chosen by the Institutional
Trustee and acceptable to the Regular Trustees and the Company. The paying agent
shall be permitted to resign as paying agent upon 30 days' written notice to the
Institutional Trustees and the Company. In the event that the Institutional
Trustee shall no longer be the paying agent, the Regular Trustees
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shall appoint a successor to act as paying agent (which shall be a bank or trust
company acceptable to the Regular Trustees and the Company).
REGISTRAR AND TRANSFER AGENT
Unless otherwise specified in the applicable Prospectus Supplement, the
Institutional Trustee will act as registrar and transfer agent for the Preferred
Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required to register or cause to be registered
the transfer of the Preferred Securities after the Preferred Securities have
been called for redemption.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Institutional Trustee is under no obligation to exercise any of the powers
vested in it by the Declaration at the request of any holder of Preferred
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Event of Default has
occurred and is continuing and the Institutional Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the
Declaration or is unsure of the application of any provision of the Declaration,
and the matter is not one on which holders of Preferred Securities are entitled
under the Declaration to vote, then the Institutional Trustee shall take such
action as is directed by the Company and if not so directed, shall take such
action as it deems advisable and in the best interests of the holders of the
Trust Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or fail to be classified as a grantor trust for U.S. federal income tax
purposes and so that the Debentures will be treated as indebtedness of the
Company for U.S. federal income tax purposes. In this connection, the Company
and the Regular Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust or the Declaration,
that the Company and the Regular Trustees determine in their discretion to be
necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the Preferred
Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust may not borrow money or issue debt or mortgage or pledge any of
its assets.
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DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by the Company for the benefit of the holders
from time to time of Preferred Securities. The Guarantee will be qualified as an
indenture under the Trust Indenture Act. The First National Bank of Chicago, an
independent trustee, will act as indenture trustee under the Guarantee (the
"Guarantee Trustee") for the purposes of compliance with the provisions of the
Trust Indenture Act. The terms of the Guarantee will be those set forth in the
Guarantee and those made part of the Guarantee by the Trust Indenture Act. The
following summary is not necessarily complete, and reference is hereby made to
the copy of the form of the Guarantee (including the definitions therein of
certain terms) which is filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, and to the Trust Indenture Act. Whenever
particular defined terms of the Guarantee are referred to in this Prospectus,
such defined terms are incorporated herein by reference. The Guarantee will be
held by the Trustee for the benefit of the holders of the Preferred Securities.
GENERAL
Pursuant to the Guarantee, unless otherwise specified in the applicable
Prospectus Supplement, the Company will irrevocably and unconditionally agree,
to the extent set forth therein, to pay in full to the holders of the Preferred
Securities issued by the Trust, the Guarantee Payments (as defined herein)
(except to the extent paid by the Trust), as and when due, regardless of any
defense, right of set-off or counterclaim which the Trust may have or assert.
The following payments or distributions with respect to Preferred Securities
issued by the Trust, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee (without duplication):
(i) any accrued and unpaid distributions which are required to be paid on the
Preferred Securities, to the extent the Trust shall have funds available
therefor; (ii) with respect to any Preferred Securities called for redemption by
the Trust, the redemption price (the "Redemption Price") and all accrued and
unpaid distributions to the date of redemption, to the extent the Trust has
funds available therefor and (iii) upon a voluntary or involuntary dissolution,
winding-up or termination of the Trust (other than in connection with the
distribution of Trust Debentures to the holders of Preferred Securities or the
redemption of all of the Preferred Securities), the lesser of (a) the aggregate
of the liquidation amount and all accrued and unpaid distributions on the
Preferred Securities to the date of payment, to the extent the Trust has funds
available therefor, and (b) the amount of assets of the Trust remaining
available for distribution to holders of the Preferred Securities in liquidation
of the Trust. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of Preferred Securities or by causing the Trust to pay such amounts to
such holders.
The Guarantee will be a full and unconditional guarantee of the Guarantee
Payments with respect to the Preferred Securities, but will not apply to any
payment of distributions except to the extent the Trust shall have funds
available therefor. If the Company does not make interest payments on the Trust
Debentures purchased by the Trust, the Trust will not pay distributions on the
Preferred Securities issued by the Trust and will not have funds available
therefor. See "Relationship Among the Preferred Securities, the Trust Debentures
and the Guarantee." The Guarantee, when taken together with the Company's
obligations under the Indenture and the Declaration, will have the effect of
providing a full and unconditional guarantee on a subordinated basis by the
Company of payments due on the Preferred Securities.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon an Indenture Event of Default, holders of the Preferred Securities
shall have priority over holders of Common Securities with respect to
distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any Preferred
Securities issued by the Trust remain outstanding, if there shall have occurred
any event that would constitute an event of default under the Guarantee or the
Declaration, then (a) the Company shall not declare or pay any dividend on, make
any distributions with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of
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its capital stock (other than (i) purchases or acquisitions of capital stock of
the Company in connection with the satisfaction by the Company of its
obligations under any employee benefit plans or the satisfaction by the Company
of its obligations pursuant to any contract or security outstanding on the date
of such event requiring the Company to purchase capital stock of the Company,
(ii) as a result of a reclassification of the Company's capital stock or the
exchange or conversion of one class or series of the Company's capital stock for
another class or series of the Company's capital stock, (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (iv) dividends or distributions in capital stock of the
Company and (v) redemptions or purchases of any rights pursuant to the Rights
Agreement, any successor to the Rights Agreement, and the declaration thereunder
of a dividend of rights in the future), (b) the Company shall not make any
payment of interest, principal or premium, if any, on or repay, repurchase or
redeem any debt securities issued by the Company which rank junior to the Trust
Debentures, although it may make any such payments or repay, repurchase or
redeem any debt securities that rank pari passu with the Trust Debentures and
(c) the Company shall not make any guarantee payments with respect to the
foregoing (other than payments pursuant to the Guarantee or the Common
Securities Guarantee).
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of Preferred Securities (in which case no vote will be required), the
Guarantee may be amended only with the prior approval of the holders of not less
than a majority in liquidation amount of the outstanding Preferred Securities
issued by the Trust. All guarantees and agreements contained in the Guarantee
shall bind the successors, assigns, receivers, trustees and representatives of
the Company and shall inure to the benefit of the holders of the Preferred
Securities then outstanding.
TERMINATION
The Guarantee will terminate as to the Preferred Securities (i) upon full
payment of the Redemption Price of all Preferred Securities then outstanding,
(ii) upon distribution of the Trust Debentures held by the Trust to the holders
of the Preferred Securities of the Trust or (iii) upon full payment of the
amounts payable in accordance with the Declaration upon liquidation of the
Trust. The Guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of Preferred Securities must return
payment of any sums paid under such Preferred Securities or the Guarantee.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder.
The holders of a majority in liquidation amount of the Preferred Securities
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Guarantee Trustee in respect of the Guarantee or
to direct the exercise of any trust or power conferred upon the Guarantee
Trustee under the Guarantee. If the Guarantee Trustee fails to enforce the
Guarantee, any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce such holder's rights under the
Guarantee, without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. Notwithstanding the foregoing,
if the Company has failed to make a required guarantee payment, a holder of
Preferred Securities may directly institute a proceeding against the Company for
enforcement of the Guarantee for such payment. The Company waives any right or
remedy to require that any action be brought first against the Trust or any
other person or entity before proceeding directly against the Company.
STATUS OF THE GUARANTEE
The Guarantee will constitute a senior unsecured obligation of the Company
and will rank pari passu with all of the Company's other senior unsecured
obligations. The terms of the Preferred Securities provide that each holder of
Preferred Securities issued by the Trust by acceptance thereof agrees to the
subordination provisions and other terms of the Guarantee.
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The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the guarantee without instituting a
legal proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Preferred Securities, unless offered reasonable
indemnity against the costs, expenses and liabilities which might be incurred
thereby; but the foregoing shall not relieve the Guarantee Trustee, upon the
occurrence of an event of default under the Guarantee, from exercising the
rights and powers vested in it by the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
internal laws of the State of New York.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE TRUST DEBENTURES
AND THE GUARANTEE
As long as payments of interest and other payments are made when due on the
Trust Debentures, such payments will be sufficient to cover Distributions and
other payments due on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Trust Debentures will be equal to the sum of
the aggregate stated liquidation amount of the Preferred Securities and Common
Securities; (ii) the interest rate and interest and other payment dates on the
Trust Debentures will match the Distribution rate and Distribution and other
payment dates for the Preferred Securities; (iii) the Company shall be obligated
to pay, directly or indirectly, all costs, expenses, debts and obligations of
the Trust (other than with respect to the Trust Securities); and (iv) the
Declaration further provides that the Trust will not engage in any activity that
is not consistent with the limited purposes of the Trust.
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." Taken together, the Company's
obligations under the Trust Debentures, the Indenture, the Declaration and the
Guarantee have the effect of providing a full, irrevocable and unconditional
guarantee of payments of Distributions and other amounts due on the Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust's obligations under the
Preferred Securities. If and to the extent that the Company does not make
payments on the Trust Debentures, the Trust will not pay Distributions or other
amounts due on the Preferred Securities. The Guarantee does not cover payment of
Distributions when the Trust does not have sufficient funds to pay such
Distributions.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofor made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust or
any other person or entity.
The Trust's Preferred Securities evidence preferred undivided beneficial
interests in the assets of the Trust, and the Trust exists for the sole purpose
of issuing the Preferred Securities and Common Securities and investing the
proceeds thereof in Trust Debentures. A principal difference between the rights
of a holder of a Preferred Security and a holder of a Trust Debenture is that a
holder of a Trust Debenture will accrue, and (subject to the permissible
extension of the interest period) is entitled to receive, interest on the
principal amount of Trust Debentures held, while a holder of Preferred
Securities is only entitled to receive Distributions if and to the extent the
Trust has funds available for the payment of such Distributions.
Upon any voluntary or involuntary dissolution of the Trust involving the
liquidation of the Trust Debentures, the holders of Preferred Securities of the
Trust will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See "Description of Preferred
Securities--Liquidation Distribution Upon Dissolution." Upon any voluntary or
involuntary liquidation or bankruptcy of the Company, the Institutional Trustee
as holder of the Trust Debentures would be entitled to receive payment in full
of principal and interest, before any shareholders of the Company receive
payments or distributions.
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DESCRIPTION OF COMMON STOCK
The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Pennsylvania
law and to the provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") and its By-Laws (the "By-Laws"), copies
of which have been filed with the Commission.
COMMON STOCK
The Company has authorized 70,000,000 shares of capital stock, par value
$1.25 per share ("Common Stock"). As of November 30, 1997, there were 26,284,093
shares of Common Stock outstanding. Holders of Common Stock are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor after payment of dividends on any outstanding Preferred Stock
and are entitled to one vote for each share of Common Stock held by them with
respect to all matters upon which they are entitled to vote.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of Class A Preferred Stock, no
par value per share (the "Preferred Stock"). At present, there are no shares of
Preferred Stock outstanding. The Board of Directors of the Company, without
further action by the stockholders, is authorized to designate and issue in
series Preferred Stock and to fix as to any series the dividend rate, redemption
prices, preferences on dissolution, the terms of any sinking fund, conversion
rights, voting rights, and any other preferences or special rights and
qualifications. The Board of Directors of the Company has authorized 200,000
shares of Series One Preferred Stock for use in the Rights Agreement. See
"Rights Agreement."
Any Preferred Stock so issued may rank senior to the Common Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights. Issuances of Preferred Stock, while providing the
Company with flexibility in connection with general corporate purposes, may,
among other things, have an adverse effect on the rights of holders of Common
Stock. The Company has no present plans to issue any Preferred Stock.
COVENANT RESTRICTIONS
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into a bank credit facility with BankBoston, N.A., Deutsche
Bank AG, New York Branch, Mellon Bank, N.A. and PNC Bank, National Association
(the "New Bank Credit Facility"). The Company's New Bank Credit Facility
contains financial and operating covenants, including restrictions on the
ability of the Company to, among other things, incur additional debt, make
advances and investments, create, incur or permit the existence of certain
liens, make loans or guarantees and requires the Company to achieve and maintain
certain financial ratios, including minimum net worth, maximum leverage ratio
and minimum fixed charge coverage ratio.
Securities issued by the Company in the future, including the Debt
Securities and future credit agreements, may contain various restrictive
covenants similar or in addition to the covenants above described.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Restated Articles and By-Laws could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and in the policies formulated by the Board and to discourage an unsolicited
takeover of the Company if the Board determines that such takeover is not in the
best interests of the Company and its shareholders. However, these provisions
could have the effect of discouraging certain attempts to acquire the Company or
remove incumbent management even if some or a majority of shareholders deemed
such an attempt to be in their best interests.
The provisions in the Restated Articles and By-Laws include: (i) the
classification of the Board of Directors into three classes; (ii) a procedure
which requires shareholders to nominate directors in advance of a meeting to
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elect such directors; and (iii) the authority to issue additional shares of
Common Stock or Preferred Stock without shareholder approval.
The Restated Articles also include a provision requiring a 75 percent
shareholder vote for certain mergers or other business combinations or
transactions with five percent shareholders; a provision requiring a 75 percent
shareholder vote to remove the entire Board, a class of the Board, any
individual member of the Board without cause, or to increase the size of the
Board to more than twelve members or decrease the size of the Board to fewer
than eight members; a provision requiring disinterested shareholder approval of
stock repurchases at a premium over market by the Company from certain four
percent Shareholders (as defined in the Restated Articles); and a provision
requiring a majority of disinterested shareholders to approve certain business
combinations involving a stockholder who beneficially owns more than 10 percent
of the voting power of the Company, unless certain minimum price, form of
consideration and procedural requirements are satisfied or the transaction is
approved by a majority of disinterested directors.
Pursuant to the Restated Articles, the Board of Directors is permitted to
consider the effects of a change in control on non-shareholder constituencies of
the Company, such as its employees, suppliers, creditors, customers and the
communities in which it operates. Pursuant to this provision, the Board may be
guided by factors in addition to price and other financial considerations.
PBCL Anti-Takeover Provisions. The Pennsylvania Business Corporation Law
(the "PBCL") contains a number of statutory "anti-takeover" provisions,
including Subchapters E, F, G and H of Chapter 25 and Section 2538 of the PBCL,
which apply automatically to a Pennsylvania registered corporation (usually a
public company) unless such corporation elects to opt-out as provided in such
provisions. The Company, as a Pennsylvania registered corporation, has elected
in its By-Laws to opt-out of certain of the anti-takeover provisions entirely,
namely Subchapters G and H.
The following descriptions are qualified in their entirety by reference to
such provisions of the PBCL:
Subchapter E (relating to control transactions) generally provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person
or group the fair value of their shares, including a proportionate amount
of any control premium.
Subchapter F (relating to business combinations) generally delays for
five years and imposes conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions between a
corporation and an interested shareholder including mergers, sales or
leases of specified amounts of assets, liquidations, reclassifications and
issuances of specified amounts of additional shares of stock of the
corporation. An "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Section 2538 of the PBCL generally establishes certain shareholder
approval requirements with respect to specified transactions with
"interested shareholders."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is the Transfer Agent and
Registrar for the Common Stock.
RIGHTS AGREEMENT
The Company has adopted a rights plan pursuant to which the Board of
Directors authorized and the Company distributed one preferred stock purchase
right (each a "right") for each outstanding share of Common Stock of the
Company. The terms of the rights are governed by a Rights Agreement between the
Company and Mellon Bank, N.A., as Rights Agent, dated as of October 25, 1990
(the "Rights Agreement"). The rights, which currently are automatically
transferred with the related shares of Common Stock and are not separately
transferable, will entitle the holder thereof to purchase one-hundredth of a
share of a new series of preferred stock of the Company at a price of $105
(subject to certain adjustments).
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Subject to certain restrictions, the rights become exercisable only if a
person or group of persons acquires or intends to make a tender offer for 20
percent or more of the Company's Common Stock. If any person acquires 20 percent
of the Common Stock, each right will entitle the shareholder to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price. If the Company is acquired in a merger or certain
other business combinations, each right then will entitle the shareholder to
purchase at the exercise price, that number of shares of the acquiring company
having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption
in certain circumstances by the Company at a redemption price of $0.01 per
right.
The foregoing summary description of the Rights Agreement does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, a copy of which has been filed with the Commission as an exhibit in
the Registration Statement of which this Prospectus forms a part. For a more
detailed description of the Rights Agreement, see the Company's Form 8-A filed
with the Commission with respect to the rights and incorporated by reference
into this Prospectus.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
The Company may issue Stock Purchase Contracts, including contracts
obligating holders to purchase from the Company, and the Company to sell to the
holders, a specified number of shares of Common Stock or Preferred Stock at a
future date or dates. The consideration per share of Preferred Stock or Common
Stock may be fixed at the time the Stock Purchase Contracts are issued or may be
determined by reference to a specific formula set forth in the Stock Purchase
Contracts. The Stock Purchase Contracts may be issued separately or as Stock
Purchase Units consisting of a Stock Purchase Contract and Preferred Securities
or debt obligations of third parties, including U.S. Treasury securities,
securing the holders' obligations to purchase the Common Stock under the Stock
Purchase Contracts. The Stock Purchase Contracts may require the Company to make
periodic payments to the holders of the Stock Purchase Units or vice versa, and
such payments may be unsecured or prefunded on some basis. The Stock Purchase
Contracts may require holders to secure their obligations thereunder in a
specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the applicable
Prospectus Supplement will not necessarily be complete, and reference will be
made to the Stock Purchase Contracts, and, if applicable, collateral
arrangements and depositary arrangements, relating to such Stock Purchase
Contracts or Stock Purchase Units.
32
<PAGE> 35
BOOK ENTRY ISSUANCE
Unless otherwise specified in the applicable Prospectus Supplement, DTC
will act as depositary for Securities issued in the form of Global Securities.
Such Securities will be issued only as fully-registered securities registered in
the name of Cede & Co. (DTC's nominee). One or more fully-registered Global
Securities will be issued for such Securities representing in the aggregate the
total number of such Securities, and will be deposited with or on behalf of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
the American Stock Exchange and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
custodial relationships with Direct Participants, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for such Securities on DTC's
records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Securities. Transfers of ownership
interests in Securities issued in the form of Global Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in such Securities, except in the event that use of
the book-entry system for such Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Securities
issued in the form of Global Securities. DTC's records reflect only the identity
of the Direct Participants to whose accounts such Securities are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. as the registered holder of
Securities issued in the form of Global Securities. If less than all of a series
of such Securities are being redeemed, DTC's current practice is to determine by
lot the amount of the interest of each Direct Participant to be redeemed.
Although voting with respect to Securities issued in the form of Global
Securities is limited to the holders of record of such Securities, in those
instances in which a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to such Securities. Under its usual procedures, DTC
would mail an omnibus proxy (the "Omnibus Proxy") to the issuer of such
Securities as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts such Securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Payments in respect of Securities issued in the form of Global Securities
will be made by the issuer of such Securities to DTC. DTC's practice is to
credit Direct Participants' accounts on the relevant payment date in
33
<PAGE> 36
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participant and not of DTC, the Institutional Trustee, either Trust or the
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payments to DTC are the responsibility of the issuer of the
applicable Securities, disbursement of such payments to Direct Participants is
the responsibility of DTC, and disbursements of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depositary with respect to
any Securities at any time by giving reasonable notice to the issuer of such
Securities. In the event that a successor depositary is not obtained, individual
Security certificates representing such Securities are required to be printed
and delivered. The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depositary).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust and the Company believe to be
accurate, but the Trust and the Company assume no responsibility for the
accuracy thereof. Neither the Trust nor the Company has any responsibility for
the performance by DTC or its Participants of their respective obligations as
described herein or under the rules and procedures governing their respective
operations.
PLAN OF DISTRIBUTION
Any of the Securities being offered hereby may be sold in any one or more
of the following ways from time to time: (i) through agents; (ii) to or through
underwriters; (iii) through dealers; and (iv) directly by the Company or, in the
case of Preferred Securities, by the Trust to purchasers.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by the
Company from time to time. Any such agent involved in the offer or sale of the
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company or the Trust to such agent will be set
forth, in the applicable Prospectus Supplement. Unless otherwise indicated in
such Prospectus Supplement, any such agent will be acting on a reasonable best
efforts basis for the period of its appointment. Any such agent may be deemed to
be an underwriter, as that term is defined in the Securities Act, of the
Securities so offered and sold.
If Securities are sold by means of an underwritten offering, the Company
and, in the case of an offering of Preferred Securities, the Trust will execute
an underwriting agreement with an underwriter or underwriters at the time an
agreement for such sale is reached, and the names of the specific managing
underwriter or underwriters, as well as any other underwriters, the respective
amounts underwritten and the terms of the transaction, including commissions,
discounts and any other compensation of the underwriters and dealers, if any,
will be set forth in the applicable Prospectus Supplement which will be used by
the underwriters to make resales of the Securities in respect of which this
Prospectus is being delivered to the public. If underwriters are utilized in the
sale of any Securities in respect of which this Prospectus is being delivered,
such Securities will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
determined by the underwriters and the Company or the Trust, as applicable, at
the time of sale. Securities may be offered to the public either through
underwriting syndicates represented by managing underwriters or directly by one
or more underwriters. If any underwriter or underwriters are utilized in the
sale of Securities, unless otherwise indicated in the applicable Prospectus
Supplement, the underwriting agreement will provide that the obligations of the
underwriters are subject to certain conditions precedent and that the
underwriters with respect to a sale of such Securities will be obligated to
purchase all such Securities if any are purchased.
The Company or the Trust, as applicable, may grant to the underwriters
options to purchase additional Securities, to cover over-allotments, if any, at
the initial public offering price (with additional underwriting
34
<PAGE> 37
commissions or discounts), as may be set forth in the Prospectus Supplement
relating thereto. If the Company or the Trust, as applicable, grants any
over-allotment option, the terms of such over-allotment option will be set forth
in the Prospectus Supplement for such Securities.
If a dealer is utilized in the sale of the Securities in respect of which
this Prospectus is delivered, the Company or the Trust, as applicable, will sell
such Securities to the dealer as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale. Any such dealer may be deemed to be an underwriter, as such
term is defined in the Securities Act, of the Securities so offered and sold.
The name of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Offers to purchase Securities may be solicited directly by the Company or
the Trust, as applicable, and the sale thereof may be made by the Company or the
Trust directly to institutional investors or others, who may be deemed to be
underwriters within the meaning of the Securities Act with respect to any resale
thereof. The terms of any such sales will be described in the Prospectus
Supplement relating thereto.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("remarketing firms"), acting as principals for their own
accounts or as agents for the Company or the Trust, as applicable. Any
remarketing firm will be identified and the terms of its agreement, if any, with
the Company or the Trust and its compensation will be described in the
applicable Prospectus Supplement. Remarketing firms may be deemed to be
underwriters, as that term is defined in the Securities Act, in connection with
the Securities remarketed thereby.
If so indicated in the applicable Prospectus Supplement, the Company or the
Trust, as applicable, may authorize agents and underwriters to solicit offers by
certain institutions to purchase Securities from the Company or the Trust at the
public offering price set forth in the applicable Prospectus Supplement pursuant
to delayed delivery contracts providing for payment and delivery on the date or
dates stated in the applicable Prospectus Supplement. Such delayed delivery
contracts will be subject to only those conditions set forth in the applicable
Prospectus Supplement. A commission indicated in the applicable Prospectus
Supplement will be paid to underwriters and agents soliciting purchases of
Securities pursuant to delayed delivery contracts accepted by the Company or the
Trust, as applicable.
Agents, underwriters, dealers and remarketing firms may be entitled under
relevant agreements with the Company or the Trust, as applicable, to
indemnification by the Company or the Trust, as applicable, against certain
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which such agents, underwriters, dealers and
remarketing firms may be required to make in respect thereof.
Each series of Securities will be a new issue and, other than the Common
Stock, which is listed on the NYSE, will have no established trading market. The
Company may elect to list any series of Securities on an exchange, and in the
case of the Common Stock, except as set forth in the applicable Prospectus
Supplement, on any additional exchange, but, unless otherwise specified in the
applicable Prospectus Supplement, the Company shall not be obligated to do so.
No assurance can be given as to the liquidity of the trading market for any of
the Securities.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for, the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities will be passed upon by Buchanan Ingersoll
Professional Corporation, Pittsburgh, Pennsylvania. William R. Newlin, Chairman
of the Board of the Company, is a shareholder in Buchanan Ingersoll Professional
Corporation. As of July 30, 1997, Mr. Newlin owned 24,385 shares of Common
Stock, stock credits representing the right to acquire 9,260 shares of Common
Stock pursuant to the Company's directors deferred fee plan, 20,000 shares of
JLK common stock and held options to acquire 1,500 shares of Common Stock and
15,000 shares of JLK common stock. Except as provided in the applicable
Prospectus
35
<PAGE> 38
Supplement, if the Securities are underwritten, the validity of the Securities
will be passed upon for the underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Simpson Thacher & Bartlett will rely on Buchanan Ingersoll Professional
Corporation with respect to matters of Pennsylvania law.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and June 30, 1997 and for each of the three years in the period ended June 30,
1997, incorporated in this Registration Statement by reference to the Form 10-K
for the fiscal year ended June 30, 1997, of which this Prospectus is a part,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. The consolidated financial statements of Greenfield as
of December 31, 1995 and December 31, 1996 and for each of the three years in
the period ended December 31, 1996, incorporated in this Registration Statement
by reference to the Form 8-K dated November 20, 1997, as amended, have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
36
<PAGE> 39
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE
BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
4,500,000 FELINE PRIDES(SM)
KENNAMETAL INC. KENNAMETAL LOGO
KENNAMETAL FINANCING I
------------------------
The securities offered (the "Offering") hereby are FELINE PRIDES(SM)
("FELINE PRIDES" or the "Securities") of Kennametal Inc., a Pennsylvania
corporation ("Kennametal" or the "Company"), and Kennametal Financing I, a
statutory business trust created under the laws of the State of Delaware (the
"Trust"). Each FELINE PRIDES offered hereby initially will consist of a unit
(referred to as an "Income PRIDES(SM)") with a Stated Amount of $50 (the "Stated
Amount") comprised of (a) a stock purchase contract (a "Purchase Contract")
under which (i) the holder will purchase from the Company on February 16, 2001
(the "Purchase Contract Settlement Date"), for an amount of cash equal to the
Stated Amount, a number of newly issued shares of capital stock, par value $1.25
per share (the "Common Stock"), of the Company equal to the Settlement Rate
described herein, and (ii) the Company will pay the holder unsecured,
subordinated contract adjustment payments ("Contract Adjustment Payments") at
the rate of % of the Stated Amount per annum, provided that if such rate
is 0%, then the Company will not make any Contract Adjustment Payments and (b)
either beneficial ownership of a % Trust Originated Preferred Security(SM)
(a "Trust Preferred Security"), having a stated liquidation amount per Trust
Preferred Security equal to the Stated Amount, representing a preferred
undivided beneficial interest in the assets of the Trust or, upon the occurrence
of a Tax Event Redemption (as defined herein) prior to the Purchase Contract
Settlement Date, the Applicable Ownership Interest (as defined herein) in the
Treasury Portfolio (as defined herein). The Company will, directly or
indirectly, own all the common securities (the "Common Securities" and, together
with the Trust Preferred Securities, the "Trust Securities") representing common
undivided beneficial interests in the
(continued on next page)
The Company is concurrently offering 4,300,000 shares of the Common Stock
(as defined herein) (4,945,000 shares if the underwriters for the shares
exercise their over-allotment options in full, the "Common Stock Offerings") and
$150,000,000 aggregate principal amount of % Senior Notes due 2001 (the
"2001 Notes"), $150,000,000 aggregate principal amount of % Senior Notes due
2008 (the "2008 Notes") and $150,000,000 aggregate principal amount of %
Senior Debentures due 2028 (the "2028 Debentures," and together with the 2001
Notes and the 2008 Notes, the "Senior Debt Securities,") (the "Senior Debt
Offering"). The gross proceeds of the Common Stock Offerings are expected to be
approximately $ million ($ million if the underwriters for the Common Stock
Offerings exercise their over-allotment options in full) and of the Senior Debt
Offering are expected to be approximately $ million. The Offering, the
Common Stock Offerings, and the Senior Debt Offering are independent offerings
and consummation of none of such offerings is conditioned upon consummation of
any of the other offerings.
Prior to the Offering there has been no public market for the Securities.
Application has been made to list the Income PRIDES on the New York Stock
Exchange ("NYSE") under the symbol "KMTprI." The Common Stock is listed on the
New York Stock Exchange and is traded under the symbol "KMT." On December 31,
1997, the last reported sale price of the Common Stock on the NYSE was $52 1/16
per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-24 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE SECURITIES, INCLUDING THE
PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE
SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF SUCH DEFERRAL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Income PRIDES.......................... $50.00 $ $
- ----------------------------------------------------------------------------------------------------------------
Total(4)................................... $225,000,000 $ $
================================================================================================================
</TABLE>
(1) Plus accrued distributions on the related Trust Preferred Securities and
Contract Adjustment Payments, if any, from , 1998.
(2) Kennametal and the Trust have agreed to indemnify the several Underwriters
against certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,250,000.
(4) The Company and the Trust have granted the several Underwriters a 30 day
option, to purchase up to an additional 675,000 Income PRIDES to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The Securities are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, and
subject to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Securities offered hereby will be made in New York, New
York, on or about , 1998.
------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus Supplement is , 1998.
- ---------
(SM)Service Mark of Merrill Lynch & Co., Inc.
<PAGE> 40
------------------------
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Securities. Such
transactions may include stabilizing, the purchase of Securities to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
------------------------
(continued from prior page)
assets of the Trust. The Trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in an equivalent principal amount
of % Debentures of the Company due February 16, 2003 (the "Debentures").
As long as the FELINE PRIDES are in the form of Income PRIDES, the related Trust
Preferred Securities or the Treasury Portfolio, as applicable, will be pledged
to the Collateral Agent (as defined herein), to secure the holder's obligation
to purchase Common Stock under the related Purchase Contracts.
Aggregate payments of % of the Stated Amount per annum are scheduled
to be made or accrued on each Income PRIDES quarterly in arrears on February 16,
May 16, August 16 and November 16 of each year, commencing February 16, 1998,
until the Purchase Contract Settlement Date. These payments will consist of
cumulative cash distributions on the related Trust Preferred Securities or the
Treasury Portfolio, as applicable, payable at the rate of % of the Stated
Amount per annum, and Contract Adjustment Payments payable by the Company at the
rate of % of the Stated Amount per annum (provided that if such rate is
0%, then the Company will not make any Contract Adjustment Payments), subject in
the case of distributions on Trust Preferred Securities and the Contract
Adjustment Payments, to the Company's right to defer payment of such amounts.
The ability of the Trust to make the quarterly distributions on the Trust
Preferred Securities will be solely dependent upon the receipt of corresponding
interest payments from the Company on the Debentures. The Company will have the
right at any time, and from time to time, limited to a period not extending
beyond the maturity date of the Debentures, to defer the interest payments due
on the Debentures, and to defer Contract Adjustment Payments, if any, until the
Purchase Contract Settlement Date. As a consequence of such deferral, quarterly
distributions on the Income PRIDES would be deferred, but would continue to
accrue with interest compounded quarterly. If a Tax Event Redemption has
occurred prior to the Purchase Contract Settlement Date and the Treasury
Portfolio has become a component of the Income PRIDES as described herein,
quarterly distributions of the Treasury Portfolio as a portion of the cumulative
cash distributions to the holders of Income PRIDES will not be deferred.
The applicable distribution rate on the Trust Preferred Securities and the
interest rate on the related Debentures that remain outstanding on and after the
Purchase Contract Settlement Date will be reset on the third Business Day (as
defined herein) immediately preceding the Purchase Contract Settlement Date to a
rate per annum (the "Reset Rate") to be determined by the Reset Agent (as
defined herein) equal to the sum of (x) a spread amount (the "Reset Spread") to
be determined by the Reset Agent on the tenth Business Day prior to the Purchase
Contract Settlement Date and (y) the rate of interest on the Two-Year Benchmark
Treasury (as defined herein) in effect on the third Business Day immediately
preceding the Purchase Contract Settlement Date, such sum being the distribution
rate the Trust Preferred Securities should bear in order for a Trust Preferred
Security to have an approximate market value of 100.5% of the Stated Amount on
the third Business Day immediately preceding the Purchase Contract Settlement
Date, provided that the Company may limit such Reset Spread to be no higher than
200 basis points (2%). Such market value may be less than 100.5% if the Reset
Spread is limited to a maximum of 2%.
The payment of distributions and certain redemptions out of monies held by
the Trust and payments on liquidation of the Trust will be guaranteed by the
Company (the "Guarantee") to the extent described herein and under "Description
of the Guarantee." The Guarantee covers payments of distributions and other
payments on the Trust Preferred Securities only if and to the extent the Trust
has funds available therefor, which will not be the case unless the Company has
made a payment of principal or interest on the Debentures held by the Trust as
its sole asset. The Guarantee, when taken together with the Company's
obligations under the Debentures, the Indenture (as defined herein) and the
Company's obligations under the Declaration (as defined below), provides a full
and unconditional guarantee by the Company of amounts due on the Trust Preferred
Securities.
S-2
<PAGE> 41
The Company's obligations in respect of the Debentures and the Guarantee
generally will be senior unsecured obligations of the Company. The Contract
Adjustment Payments will be subordinated and junior in right of payment only to
the Company's obligations under the Senior Indebtedness. "Senior Indebtedness"
means indebtedness of any kind of the Company unless the instrument under which
such indebtedness is incurred expressly provides that it is on parity with or
subordinate in right of payment to the Contract Adjustment Payments.
If the holder of an Income PRIDES (unless a Tax Event Redemption has
occurred) has not notified the Purchase Contract Agent (as defined herein) by
the fifth Business Day immediately preceding the Purchase Contract Settlement
Date, in the manner described herein of its intention to settle the related
Purchase Contract with separate cash on the Business Day immediately preceding
the Purchase Contract Settlement Date, the Remarketing Agent (as defined
herein), pursuant to the terms of the Remarketing Agreement and the Remarketing
Underwriting Agreement (each as defined herein), will use its reasonable efforts
to remarket the related Trust Preferred Security on the third Business Day
immediately preceding the Purchase Contract Settlement Date for settlement on
the Purchase Contract Settlement Date at a price of approximately 100.5% of such
Trust Preferred Security's stated liquidation amount plus accrued and unpaid
distributions, if any, thereon. The proceeds from such remarketing, in an amount
equal to the aggregate stated liquidation amount of such Trust Preferred
Securities, will automatically be applied to satisfy in full such holder's
obligation to purchase Common Stock under the related Purchase Contract. In
addition, after deducting as a remarketing fee (the "Remarketing Fee"), an
amount not exceeding 25 basis points (.25%) of the aggregate stated liquidation
amount of the remarketed securities, from any amount received in connection with
such remarketing in excess of the aggregate stated liquidation amount of such
Trust Preferred Securities plus any accrued and unpaid distributions (including
deferred distributions, if any), the Remarketing Agent will remit the remaining
portion of the proceeds, if any, to the Purchase Contract Agent for the benefit
of such holder. If, despite using its reasonable efforts the Remarketing Agent
fails to remarket the Trust Preferred Securities at a price not less than 100%
of their aggregate stated liquidation amount plus accrued and unpaid
distributions, including deferred distributions, if any, the remarketing will be
deemed to have failed (a "Failed Remarketing") and the Company will exercise its
rights as a secured party to dispose of the Trust Preferred Securities in
accordance with applicable law and satisfy in full, from such proceeds, such
holder's obligation to purchase Common Stock under the related Purchase
Contracts, provided that if the Company exercises such rights as a secured
creditor, with respect to such Trust Preferred Securities, any accrued and
unpaid distributions (including any deferred distributions) on such Trust
Preferred Securities will be paid in cash by the Company to the holder of record
of such Trust Preferred Securities. The Company will cause a notice of such
Failed Remarketing to be published on the second Business Day immediately
preceding the Purchase Contract Settlement Date.
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date, each holder (including, initially, an Underwriter) of
an Income PRIDES (unless a Tax Event Redemption has occurred) will have the
right to substitute for the related Trust Preferred Securities held by the
Collateral Agent zero-coupon U.S. Treasury Securities (Cusip No. ), which
are principal strips of the % U.S. Treasury Securities that mature on the
Business Day immediately preceding the Purchase Contract Settlement Date (the
"Treasury Securities"), in an amount per Income PRIDES equal to the Stated
Amount per Trust Preferred Security. Because Treasury Securities are issued in
integral multiples of $1,000, holders may make such substitutions only in
integral multiples of 20 Income PRIDES; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase Contract Settlement Date and the
Treasury Portfolio (as defined herein) has become a component of the Income
PRIDES, holders of Income PRIDES may make such substitutions only in integral
multiples of 32,000 Income PRIDES (but obtaining the release of the appropriate
Applicable Ownership Interest of the Treasury Portfolio rather than the Trust
Preferred Securities), at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. Such Treasury
Securities will be substituted for the Trust Preferred Securities or the
appropriate Applicable Ownership Interest of the Treasury Portfolio, as the case
may be, and will be pledged with the Collateral Agent to secure the holder's
obligation to purchase Common Stock under the related Purchase Contracts. FELINE
PRIDES with respect to which Treasury Securities have been substituted for the
related Trust Preferred Securities or the Treasury Portfolio, as the case may
be, as collateral to secure such obligation are referred to herein as Growth
PRIDES(SM) (the "Growth PRIDES"). Each Growth PRIDES will consist of a unit with
a face amount of $50 comprised of (a) a Purchase Contract under
S-3
<PAGE> 42
which (i) the holder will purchase from the Company on the Purchase Contract
Settlement Date for an amount of cash equal to the Stated Amount of such Growth
PRIDES a number of newly issued shares of Common Stock of the Company equal to
the Settlement Rate described herein and (ii) the Company will pay the holder
Contract Adjustment Payments, at the rate of % of the Stated Amount per
annum, provided that if such rate is 0%, then the Company will not make any
Contract Adjustment Payments, and (b) a 1/20 undivided beneficial ownership
interest in a related Treasury Security having a principal amount at maturity
equal to $1,000 and maturing on the Business Day immediately preceding the
Purchase Contract Settlement Date. Upon such substitution, the Trust Preferred
Securities or appropriate Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, will be released to the holder as described
herein and thereafter will trade separately from the resulting Growth PRIDES.
Contract Adjustment Payments, if any, will be payable by the Company on the
Growth PRIDES on February 16, May 16, August 16 and November 16 of each year. In
addition, original issue discount ("OID") will continue to accrue on the related
Treasury Securities. A holder of Growth PRIDES will have the right to
subsequently recreate Income PRIDES at any time on or prior to the fifth
Business Day immediately preceding the Purchase Contract Settlement Date by
delivering 20 Growth PRIDES to the Purchase Contract Agent plus 20 Trust
Preferred Securities to the Collateral Agent in exchange for 20 Income PRIDES
and the release of the related Treasury Security to such holder; provided,
however, if a Tax Event Redemption has occurred prior to the Purchase Contract
Settlement Date and the Treasury Portfolio has become a component of the Income
PRIDES, holders of Growth PRIDES may make such substitution only in integral
multiples of 32,000 Growth PRIDES (but using the appropriate Applicable
Ownership Interest of the Treasury Portfolio rather than Trust Preferred
Securities) at any time on or prior to the second Business Day immediately
preceding the Purchase Contract Settlement Date. Such Trust Preferred Securities
or the appropriate Applicable Ownership Interest of the Treasury Portfolio, as
the case may be, will be substituted for the Treasury Security and will be
pledged with the Collateral Agent to secure the holder's obligation to purchase
Common Stock under the related Purchase Contracts.
If a Failed Remarketing has occurred, holders of Trust Securities
(including, following the distribution of the Debentures upon a dissolution of
the Trust as described herein, such Debenture holders), holding such Trust
Securities or Debentures, as the case may be, following the Purchase Contract
Settlement Date will have the right, in the case of the Trust Securities, to
require the Trust to put to the Company the related Debentures or, in the case
of the Debentures holders, to put such Debentures directly to the Company on
March 2, 2001, upon at least three Business Days' prior notice, at a price equal
to $50 per Debenture, plus accrued and unpaid interest (including deferred
interest), if any, thereon. Upon the repurchase of such Debentures from the
Trust by the Company, (i) the proceeds from such repurchase shall simultaneously
be applied to redeem such Trust Securities of such holder having an aggregate
stated liquidation amount equal to the aggregate principal amount of the
Debentures so repurchased and (ii) any accrued and unpaid distributions
(including deferred distributions) with respect to such Trust Securities will be
paid to such holder in cash.
On the Business Day immediately preceding the Purchase Contract Settlement
Date, unless a holder of Income PRIDES or Growth PRIDES (i) has settled the
related Purchase Contracts through the early delivery of cash to the Purchase
Contract Agent in the manner described herein, (ii) in the case of Income PRIDES
has settled the related Purchase Contracts with separate cash on the Business
Day immediately preceding the Purchase Contract Settlement Date pursuant to
prior notification to the Purchase Contract Agent, (iii) has had the Trust
Preferred Securities related to such holder's Purchase Contract remarketed in
the manner described herein in connection with settling such Purchase Contracts,
or (iv) an event described under "Description of the Purchase
Contracts--Termination" has occurred, then (A) in the case of Income PRIDES
(unless a Tax Event Redemption has occurred), the Company will exercise its
rights as a secured party to dispose of the Trust Preferred Securities in
accordance with the applicable law and (B) in the case of Growth PRIDES or
Income PRIDES (in the event that a Tax Event Redemption has occurred) the
principal amount of the related Treasury Securities or the appropriate
Applicable Ownership Interest of the Treasury Portfolio, as applicable, when
paid at maturity, will automatically be applied to satisfy in full such holder's
obligation to purchase Common Stock under the related Purchase Contracts.
In the event that a holder of either Income PRIDES or Growth PRIDES effects
the early settlement of the related Purchase Contracts through the delivery of
cash or settles (in the case of Income PRIDES) the related
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Purchase Contracts with cash on the Business Day immediately preceding the
Purchase Contract Settlement Date, the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or Treasury
Securities, as the case may be, will be released to the holder as described
herein.
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors, if any, to cause the Debentures
to be distributed to the holders of the Trust Securities. If the Debentures are
distributed to the holders of the Trust Preferred Securities, the Company will
use its best efforts to cause the Debentures to be listed on such exchange on
which the Trust Preferred Securities are then listed, including, if applicable,
the New York Stock Exchange.
The Debentures (and, thus, the Trust Securities) are redeemable at the
option of the Company, in whole but not in part, on not less than 30 days nor
more than 60 days prior notice upon the occurrence and continuation of a Tax
Event (as defined herein) under the circumstances described herein (a "Tax Event
Redemption"). If the Company so redeems all of the Debentures, the Trust must
redeem all of the Trust Securities at a redemption price (the "Redemption
Price") per Trust Security equal to the Redemption Amount (as defined herein)
plus accrued and unpaid distributions, including deferred distributions, if any,
thereon to the date fixed for redemptions and pay in cash such Redemption Price
to the holders of such Trust Preferred Securities. If such Tax Event Redemption
occurs prior to the Purchase Contract Settlement Date, the Redemption Price
payable in liquidation of the Income PRIDES holders' interests in the Trust or
in the Debentures will be distributed to the Collateral Agent, who in turn will
apply an amount equal to the Redemption Amount of such Redemption Price to
purchase, on behalf of the holders of Income PRIDES, the Treasury Portfolio and
remit the remaining portion, if any, of such Redemption Price to the Purchase
Contract Agent for payment to the holder of such Income PRIDES. See "Description
of the Debentures--Tax Event Redemption." Such Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be pledged with the
Collateral Agent to secure such Income PRIDES holders' obligations to purchase
the Company's Common Stock under their Purchase Contracts.
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<PAGE> 44
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and the related notes
thereto appearing elsewhere in this Prospectus Supplement. On November 17, 1997,
Kennametal Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of
Kennametal, purchased in accordance with its tender offer (the "Tender Offer")
approximately 98% of the outstanding common stock of Greenfield Industries, Inc.
("Greenfield") pursuant to an Agreement and Plan of Merger dated as of October
10, 1997 (the "Merger Agreement"), among Kennametal, Greenfield and Acquisition
Corp. and, on November 18, 1997, Acquisition Corp. was merged into Greenfield
and Greenfield became a wholly-owned subsidiary of Kennametal. Except as
otherwise noted or unless the context otherwise requires, (i) "fiscal" in
connection with a year means the 12 months ended June 30 of the calendar year
specified, and (ii) the information in this Prospectus Supplement assumes no
exercise of the Underwriters' over-allotment option. Unless the context
indicates otherwise, any reference in this Prospectus Supplement to the
"Company" or "Kennametal" refers to Kennametal Inc. and its consolidated
subsidiaries other than Greenfield.
This Prospectus Supplement contains certain forward-looking statements (as
such term is defined in the Securities Act) concerning the Company's operations,
performance and financial condition, including, in particular, the likelihood of
the Company's success in integrating the acquisition of Greenfield. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements to the extent that
economic conditions in the United States, Europe and, to a lesser extent, the
Asia Pacific region change from the Company's expectations and to the extent
that the Company does not effectively integrate the acquisition of Greenfield
and achieve expected synergistic benefits.
THE TRUST
Kennametal Financing I is a statutory business trust created under Delaware
law pursuant to (i) an agreement of trust, dated as of November 12, 1997,
executed by the Company as sponsor (the "Sponsor"), and certain of the trustees
of the Trust (the "Trustees"), and (ii) the filing of a certificate of trust
with the Secretary of State of the State of Delaware on November 12, 1997. Such
agreement will be amended and restated in its entirety (as so amended and
restated, the "Declaration") substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus Supplement forms a part. The
Declaration will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Trust exists for the exclusive
purposes of (i) issuing the Trust Securities representing undivided beneficial
interests in the assets of the Trust, (ii) investing the gross proceeds of the
Trust Securities in the Debentures and (iii) engaging in only those other
activities necessary, appropriate, convenient or incidental thereto. See "The
Trust."
THE OFFERING
Securities Offered............ 4,500,000 Income PRIDES.
Issuers....................... Kennametal Inc. and Kennametal Financing I
Stated Amount................. $50 per Income PRIDES.
Components of FELINE PRIDES... Each FELINE PRIDES offered hereby initially
will consist of a unit (referred to as an
Income PRIDES) comprised of (a) a Purchase
Contract under which (i) the holder will
purchase from the Company on the Purchase
Contract Settlement Date, for an amount of cash
equal to the Stated Amount, a number of newly
issued shares of Common Stock of the Company
equal to the Settlement Rate, and (ii) the
Company will pay Contract Adjustment Payments,
if any, to the holder, and (b) either
beneficial ownership of a % Trust Preferred
Security, having a stated liquidation amount
equal to the Stated Amount, representing a
preferred, undivided beneficial interest in the
assets of the Trust or, upon the occurrence of
a Tax Event
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<PAGE> 45
Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable
Ownership Interest in the Treasury Portfolio.
The purchase price of each Income PRIDES will
be allocated between the related Purchase
Contract and the related Trust Preferred
Security, in proportion to their respective
fair market values at the time of purchase. See
"Certain Federal Income Tax Consequences--
Income PRIDES; Allocation of Purchase Price."
The Company will, directly or indirectly, own
all of the Common Securities. The Trust exists
for the sole purpose of issuing the Trust
Preferred Securities and the Common Securities
and investing the proceeds thereof in an
equivalent principal amount of % Debentures
of the Company due February 16, 2003.
The applicable distribution rate on the Trust
Preferred Securities and the interest rate on
the related Debentures that remain outstanding
on and after the Purchase Contract Settlement
Date will be reset on the third Business Day
immediately preceding the Purchase Contract
Settlement Date to the Reset Rate, to be
determined by a nationally recognized
investment banking firm chosen by the Company
(the "Reset Agent"). See "Description of the
Trust Preferred Securities--Market Rate Reset."
The Company will have the right at any time to
dissolve the Trust and, after satisfaction of
liabilities to creditors of the Trust, if any,
to cause the Debentures to be distributed to
the holders of the Trust Preferred Securities.
References herein to Trust Preferred
Securities, unless the context otherwise
requires, mean (i) the Trust Preferred
Securities or (ii) the Debentures which have
been delivered to the holders of the Trust
Preferred Securities upon dissolution of the
Trust. In addition, as described below, upon
the occurrence of a Tax Event (as defined
herein) prior to the Purchase Contract
Settlement Date, the Company may at its option
cause the Debentures (and, thus, the Trust
Preferred Securities) to be redeemed at the
Redemption Price and the Treasury Portfolio
will be substituted for the redeemed Trust
Preferred Securities in the manner described
herein to secure the Income PRIDES holders'
obligations under their related Purchase
Contracts. The distribution rate and the
payment dates for the Trust Preferred
Securities will correspond to the interest rate
and the payment dates for the Debentures, which
will be the sole assets of the Trust. As long
as a FELINE PRIDES is in the form of an Income
PRIDES, the related Trust Preferred Securities
or the Treasury Portfolio, as applicable, will
be pledged pursuant to a pledge agreement, to
be dated as of January , 1998 (the "Pledge
Agreement"), between the Company and The Chase
Manhattan Bank as collateral agent for the
Company (together with any successor thereto in
such capacity, the "Collateral Agent"), to
secure the holder's obligation to purchase
Common Stock under the related Purchase
Contract. See "Risk Factors."
Purchase Contract Agreement... The FELINE PRIDES will be issued under a
Purchase Contract Agreement, to be dated as of
January , 1998 (the "Purchase Contract
Agreement"), between the Company and The First
National Bank of Chicago, as agent for the
holders of the FELINE PRIDES (together with any
successor thereto in such capacity, the
"Purchase Contract Agent").
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<PAGE> 46
Substitution of Pledged
Securities; Growth PRIDES..... Each holder (including, initially an
Underwriter) of an Income PRIDES will have the
right, on or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, to substitute for the related
Trust Preferred Securities held by the
Collateral Agent zero-coupon U.S. Treasury
Securities in an amount per Income PRIDES equal
to the Stated Amount per Trust Preferred
Security. Such Treasury Securities will be
substituted for the Trust Preferred Securities
and will be pledged with the Collateral Agent
to secure the holder's obligation to purchase
Common Stock under the related Purchase
Contracts. Because Treasury Securities are
issued in integral multiples of $1,000, holders
of Income PRIDES may make such substitutions
only in integral multiples of 20 Income PRIDES;
provided, however, if a Tax Event Redemption
has occurred prior to the Purchase Contract
Settlement Date and the Treasury Portfolio has
become a component of the Income PRIDES,
holders of Income PRIDES may make such
substitutions only in integral multiples of
32,000 Income PRIDES (but obtaining the release
of the appropriate Applicable Ownership
Interest of the Treasury Portfolio rather than
the Trust Preferred Securities) at any time on
or prior to the second Business Day immediately
preceding the Purchase Contract Settlement
Date. FELINE PRIDES with respect to which
Treasury Securities have been substituted for
the related Trust Preferred Securities or the
Treasury Portfolio, as the case may be, as
collateral to secure such obligation will be
referred to as Growth PRIDES. Each Growth
PRIDES will consist of a unit with a face
amount of $50 comprised of (a) a Purchase
Contract under which (i) the holder will
purchase from the Company on the Purchase
Contract Settlement Date or earlier for an
amount of cash equal to the Stated Amount of
such Growth PRIDES a number of newly issued
shares of Common Stock equal to the Settlement
Rate described herein and (ii) the Company will
pay the holder Contract Adjustment Payments, if
any, and (b) a 1/20 undivided beneficial
ownership interest in a related Treasury
Security having a principal amount at maturity
equal to $1,000 and maturing on the Business
Day immediately preceding the Purchase Contract
Settlement Date. Upon the substitution of
Treasury Securities for the related Trust
Preferred Securities or the appropriate
Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, as collateral,
such Trust Preferred Securities or the
appropriate Applicable Ownership Interest of
the Treasury Portfolio, as the case may be,
will be released to the holder as described
herein and thereafter will trade separately
from the resulting Growth PRIDES. See
"Description of the FELINE PRIDES--Substitution
of Pledged Securities."
Holders who elect to substitute Pledged
Securities (as defined in "Description of the
Purchase Contracts--Pledged Securities and
Pledge Agreement"), thereby creating Growth
PRIDES or recreating Income PRIDES (as
discussed below), will be responsible for any
fees or expenses payable in connection
therewith. See "Certain Provisions of the
Purchase Contract Agreements and the Pledge
Agreement--Miscellaneous."
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<PAGE> 47
Recreating Income PRIDES...... On or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, a holder of Growth PRIDES will
have the right to subsequently recreate Income
PRIDES by delivering 20 Growth PRIDES to the
Purchase Contract Agent plus 20 Trust Preferred
Securities to the Collateral Agent in exchange
for 20 Income PRIDES and the release of the
related Treasury Security to such holder;
provided, however, if a Tax Event Redemption
has occurred prior to the Purchase Contract
Settlement Date and the Treasury Portfolio has
become a component of the Income PRIDES,
holders of Growth PRIDES may make such
substitution (but using the Treasury Portfolio
rather than Trust Preferred Securities) only in
integral multiples of 32,000 Growth PRIDES at
any time on or prior to the second Business Day
immediately preceding the Purchase Contract
Settlement Date. Such Trust Preferred
Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio,
as the case may be, will be pledged with the
Collateral Agent to secure the holder's
obligation to purchase Common Stock under the
related Purchase Contracts. See "Description of
the FELINE PRIDES--Recreating Income PRIDES."
Current Payments.............. Holders of Income PRIDES will be entitled to
receive aggregate cash distributions at a rate
of % of the Stated Amount per annum from and
after February 16, 1998, payable quarterly in
arrears, consisting of cumulative cash
distributions on the related Trust Preferred
Securities or the Treasury Portfolio, as
applicable, payable at the rate of % of the
Stated Amount per annum, and Contract
Adjustment Payments, payable by the Company at
the rate of % of the Stated Amount per annum;
provided that if such rate is 0%, then the
Company will not make any Contract Adjustment
Payments, subject in the case of such
distributions on the Trust Preferred Securities
and of the Contract Adjustment Payments, to the
Company's right to defer the payment of such
amounts. The ability of the Trust to make the
quarterly distributions on the related Trust
Preferred Securities will be solely dependent
upon the receipt of corresponding interest
payments from the Company on the Debentures.
In the event that a holder of Income PRIDES
substitutes Treasury Securities for the related
Trust Preferred Securities or the appropriate
Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, such holder
would receive on the resulting Growth PRIDES
only the quarterly distributions of Contract
Adjustment Payments, subject to the Company's
rights of deferral described herein. In
addition, OID would continue to accrue on the
related Treasury Securities. See "Risk
Factors--Right to Defer Current Payments."
If a Tax Event Redemption has occurred prior to
the Purchase Contract Settlement Date as
described herein and the Treasury Portfolio has
become a component of the Income PRIDES,
quarterly distributions on the appropriate
Applicable Ownership Interest of the Treasury
Portfolio, as a portion of the cumulative
quarterly distribution to the holders of Income
PRIDES, will not be deferred.
The Company's obligations with respect to the
Debentures will be senior and unsecured and
will rank pari passu in right of payment with
all other senior unsecured obligations of the
Company. The
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<PAGE> 48
Contract Adjustment Payments, if any, will be
subordinated and junior in right of payment to
the Senior Indebtedness.
Contract Adjustment
Payments...................... Contract Adjustment Payments will be fixed at a
rate per annum of % of the Stated Amount per
Purchase Contract, provided that if such rate
is 0%, then the Company will not make any
Contract Adjustment Payments. Contract
Adjustment Payments will be specified as a
positive component of the distributions on the
Income PRIDES only if and to the extent that
the rate of distributions on the Trust
Preferred Securities, as determined on the date
on which the Income PRIDES are initially priced
for sale to the public, is less than the
aggregate distribution rate required on such
date for the offer and sale of the Income
PRIDES at the price to public specified on the
cover page of this Prospectus Supplement.
Accordingly, the final Prospectus Supplement
will indicate whether and to what extent
Contract Adjustment Payments will be required
to be made by the Company. See "Description of
the Purchase Contracts--Contract Adjustment
Payments."
Option to Extend Distribution
Payment Periods............... The Company has the right at any time, and from
time to time, limited to a period not extending
beyond the maturity date of the Debentures, to
defer the interest payments due on the
Debentures. As a consequence of such deferral,
the corresponding quarterly distributions to
holders of Income PRIDES (or any Trust
Preferred Securities outstanding after the
Purchase Contract Settlement Date or after a
substitution of collateral resulting in the
creation of Growth PRIDES) would be deferred
(but despite such deferral, would continue to
accumulate quarterly and would accrue interest
thereon compounded quarterly at the rate of %
per annum through and including February 15,
2001, and at the Reset Rate thereafter). The
Company also has the right to defer the payment
of Contract Adjustment Payments, if any, on the
related Purchase Contracts until no later than
the Purchase Contract Settlement Date; however,
such deferred Contract Adjustment Payments, if
any, will bear additional Contract Adjustment
Payments at the rate of % per annum (such
deferred Contract Adjustment Payments together
with such additional Contract Adjustment
Payments shall be referred to as the "Deferred
Contract Adjustment Payments"). See
"Description of the Purchase
Contracts--Contract Adjustment Payments." If
interest payments on the Debentures or the
Contract Adjustment Payments, if any, are
deferred, the Company has agreed, among other
things, not to declare or pay any dividend on
or repurchase its capital stock (subject to
certain exceptions) during the period of such
deferral. If a Tax Event Redemption has
occurred prior to the Purchase Contract
Settlement Date and the Treasury Portfolio has
become a component of the Income PRIDES,
quarterly distributions on the appropriate
Applicable Ownership Interest Treasury
Portfolio as a portion of the cumulative
quarterly distributions to the holders of
Income PRIDES will not be deferred.
In the event that the Company elects to defer
the payment of Contract Adjustment Payments, if
any, on the related Purchase Contracts until
the Purchase Contract Settlement Date, each
holder of the related Income PRIDES or Growth
PRIDES will receive on
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<PAGE> 49
the Purchase Contract Settlement Date in
respect of such Deferred Contract Adjustment
Payments, in lieu of a cash payment, a number
of shares of Common Stock equal to (x) the
aggregate amount of Deferred Contract
Adjustment Payments payable to such holder
divided by (y) the Applicable Market Value (as
defined herein). See "Description of the
Purchase Contracts--Option to Defer Contract
Adjustment Payments."
Payment Dates................. Subject to the deferral provisions described
herein, the current payments described above in
respect of the Income PRIDES will be payable
quarterly in arrears on February 16, May 16,
August 16 and November 16 of each year,
commencing February 16, 1998, through and
including (i) in the case of the Contract
Adjustment Payments, the earlier of the
Purchase Contract Settlement Date or the most
recent such quarterly date on or prior to any
early settlement of the related Purchase
Contracts and (ii) in the case of Trust
Preferred Securities, the most recent such
quarterly date on or prior to the earlier of
the Purchase Contract Settlement Date and the
date the liquidation amount of a Trust
Preferred Security, together with all
accumulated and unpaid distributions thereon
(each, a "Payment Date").
Remarketing................... Unless a Tax Event Redemption has occurred,
pursuant to a remarketing agreement (the
"Remarketing Agreement") dated as of
, 1998, among the Company, the Trust, the
Purchase Contract Agent and a nationally
recognized investment banking firm chosen by
the Company (the "Remarketing Agent"), and
subject to the terms of a Remarketing
Underwriting Agreement to be dated as of the
third Business Day immediately preceding the
Purchase Contract Settlement Date among such
parties (the "Remarketing Underwriting
Agreement"), the Trust Preferred Securities of
such Income PRIDES holders who have failed to
notify the Purchase Contract Agent, on or prior
to the fifth Business Day immediately preceding
the Purchase Contract Settlement Date, of their
intention to settle the related Purchase
Contracts with separate cash, will be
remarketed on the third Business Day
immediately preceding the Purchase Contract
Settlement Date. The Remarketing Agent will use
its reasonable efforts to remarket such Trust
Preferred Securities on such date for
settlement on the Purchase Contract Settlement
Date at a price of approximately 100.5% of the
aggregate stated liquidation amount of such
Trust Preferred Security, plus accrued and
unpaid distributions (including deferred
distributions), if any, thereon. The portion of
the proceeds from such remarketing equal to the
aggregate stated liquidation amount of such
Trust Preferred Securities will be
automatically applied to satisfy in full such
Income PRIDES holders' obligations to purchase
Common Stock under the related Purchase
Contracts. In addition, after deducting as the
Remarketing Fee an amount not exceeding 25
basis points (.25%) of the aggregate stated
liquidation amount of the remarketed securities
from any amount of such proceeds in excess of
the aggregate stated liquidation amount of the
remarketed Trust Preferred Securities plus any
accrued and unpaid distributions (including any
deferred distributions), the Remarketing Agent
will remit the remaining portion of the
proceeds, if any, for the benefit of such
holder. Income PRIDES holders,
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<PAGE> 50
whose Trust Preferred Securities are so
remarketed will not otherwise be responsible
for any Remarketing Fee in connection
therewith. If, despite using its reasonable
efforts, the Remarketing Agent cannot remarket
the related Trust Preferred Securities of such
holders of Income PRIDES at a price not less
than 100% of the aggregate stated liquidation
amount of such Trust Preferred Securities plus
accrued and unpaid distributions, including
deferred distributions, if any, resulting in a
Failed Remarketing, the Company will exercise
its rights as a secured party to dispose of the
Trust Preferred Securities in accordance with
applicable law and to satisfy in full, from
such disposition, such holder's obligation to
purchase Common Stock under the related
Purchase Contracts, provided, that if the
Company exercises such rights as a secured
creditor, with respect to such Trust Preferred
Securities, any accrued and unpaid
distributions (including any deferred
distributions) on such Trust Preferred
Securities will be paid in cash by the Company
to the holder of record of such Trust Preferred
Securities. The Company will cause a notice of
such Failed Remarketing to be published on the
second Business Day immediately preceding the
Purchase Contract Settlement Date. It is
currently anticipated that Merrill Lynch,
Pierce, Fenner & Smith Incorporated will be the
Remarketing Agent. See "Description of the
Purchase Contracts--Remarketing."
Purchase Contract Settlement
Date.......................... February 16, 2001.
Settlement of Purchase
Contracts..................... On the Business Day immediately preceding the
Purchase Contract Settlement Date, unless a
holder of Income PRIDES or Growth PRIDES (i)
has settled the related Purchase Contracts
through the early delivery of cash to the
Purchase Contract Agent in the manner described
herein, (ii) in the case of Income PRIDES, has
settled the related Purchase Contracts with
separate cash on the Business Day prior to the
Purchase Contract Settlement Date pursuant to
prior notification to the Purchase Contract
Agent, (iii) has had the Trust Preferred
Securities related to such holder's Purchase
Contracts remarketed in the manner described
herein in connection with settling such
Purchase Contracts, or (iv) an event described
under "Description of the Purchase
Contracts--Termination" has occurred, (A) in
the case of Income PRIDES (unless a Tax Event
Redemption has occurred), the Company will
exercise its rights as a secured party to
dispose of the related Trust Preferred
Securities in accordance with the applicable
law, and (B) in the case of Growth PRIDES or
Income PRIDES (if a Tax Event Redemption has
occurred prior to the Purchase Contract
Settlement Date) the principal amount of the
related Treasury Securities or the appropriate
Applicable Ownership Interest of the Treasury
Portfolio, as applicable, when paid at
maturity, will automatically be applied to
satisfy in full such holder's obligation to
purchase Common Stock under the related
Purchase Contracts.
In the event that a holder of either Income
PRIDES or Growth PRIDES effects the early
settlement of the related Purchase Contracts
through the delivery of cash or, in the case of
an Income PRIDES, settles such Purchase
Contracts with cash on the Business Day
immediately preceding the Purchase Contract
Settlement Date, the related Trust Preferred
Securities, the appropriate Applicable
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<PAGE> 51
Ownership Interest of the Treasury Portfolio or
the Treasury Securities, as the case may be,
will be released to such holder as described
herein.
Settlement Rate............... The number of newly issued shares of Common
Stock issuable upon settlement of each Purchase
Contract on the Purchase Contract Settlement
Date (the "Settlement Rate") will be calculated
as follows (subject to adjustment under certain
circumstances): (a) if the Applicable Market
Value is equal to or greater than $
(the "Threshold Appreciation Price," which is
approximately % above the last reported sale
price of the Common Stock set forth on the
cover page of the final Prospectus Supplement
(the "Reference Price")), the Settlement Rate
(which will be equal to the Stated Amount
divided by the Threshold Appreciation Price)
will be ; accordingly, if, between the
date of the final Prospectus Supplement and the
period during which the Applicable Market Value
is measured, the market price for the Common
Stock increases to an amount that is higher
than the Threshold Appreciation Price, the
aggregate market value of the shares of Common
Stock issued upon settlement of each Purchase
Contract (assuming that such market value is
the same as the Applicable Market Value of such
Common Stock) will be higher than the Stated
Amount, and if such market price is the same as
the Threshold Appreciation Price, the aggregate
market value of such shares (assuming that such
market value is the same as the Applicable
Market Value of such Common Stock) will be
equal to the Stated Amount; (b) if the
Applicable Market Value is less than the
Threshold Appreciation Price but greater than
the Reference Price, the Settlement Rate will
be equal to the Stated Amount divided by the
Applicable Market Value; accordingly, if the
market price for the Common Stock increases
between the date of the final Prospectus
Supplement and the period during which the
Applicable Market Value is measured but such
market price is less than the Threshold
Appreciation Price, the aggregate market value
of the shares of Common Stock issued upon
settlement of each Purchase Contract (assuming
that such market value is the same as the
Applicable Market Value of such Common Stock)
will be equal to the Stated Amount; and (c) if
the Applicable Market Value is less than or
equal to the Reference Price, the Settlement
Rate (which will be equal to the Stated Amount
divided by the Reference Price) will be
; accordingly, if the market price for
the Common Stock decreases between the date of
the final Prospectus Supplement and the period
during which the Applicable Market Value is
measured, the aggregate market value of the
shares of Common Stock issued upon settlement
of each Purchase Contract (assuming that such
market value is the same as the Applicable
Market Value of such Common Stock) will be less
than the Stated Amount, and if such market
price stays the same, the aggregate market
value of such shares (assuming that such market
value is the same as the Applicable Market
Value of such Common Stock) will be equal to
the Stated Amount. "Applicable Market Value"
means the average of the Closing Price (as
defined herein) per share of Common Stock on
each of the twenty consecutive Trading Days (as
defined herein) ending on the third Trading Day
immediately preced-
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ing the Purchase Contract Settlement Date. See
"Description of the Purchase
Contracts--General."
Early Settlement.............. A holder of Income PRIDES (unless a Tax Event
Redemption has occurred) may settle the related
Purchase Contracts on or prior to the fifth
Business Day immediately preceding the Purchase
Contract Settlement Date in the manner
described herein, but only in integral
multiples of 20 Income PRIDES; provided,
however, if a Tax Event Redemption has occurred
prior to the Purchase Contract Settlement Date
and the Treasury Portfolio has become a
component of the Income PRIDES, holders of
Income PRIDES may settle early only in integral
multiples of 32,000 Income PRIDES at anytime on
or prior to the second Business Day immediately
preceding the Purchase Contract Settlement
Date. Holders of Growth PRIDES may settle the
related Purchase Contracts on or prior to the
second Business Day immediately preceding the
Purchase Contract Settlement Date in the manner
described herein (in either case, an "Early
Settlement"). Upon such Early Settlement, (a)
the holder will pay to the Company through the
Purchase Contract Agent in immediately
available funds an amount equal to the Stated
Amount for each Purchase Contract to be settled
and deliver the Income PRIDES or Growth PRIDES,
as the case may be, to the Purchase Contract
Agent, (b) the related Trust Preferred
Securities, the appropriate Applicable
Ownership Interest of the Treasury Portfolio or
the Treasury Securities, as the case may be,
within three Business Days of the date of Early
Settlement, will be transferred to the holder
free and clear of the Company's security
interest therein, and (c) the Company, within
three Business Days of the date of Early
Settlement, will deliver newly issued
shares of Common Stock to the holder for each
Purchase Contract so settled. Upon Early
Settlement, (i) the holder's rights to receive
Deferred Contract Adjustment Payments, if any,
on the Purchase Contracts being settled will be
forfeited, (ii) the holder's right to receive
additional Contract Adjustment Payments, if
any, in respect of such Purchase Contracts will
terminate and (iii) no adjustment will be made
to or for the holder on account of Deferred
Contract Adjustment Payments, if any, or any
amount accrued in respect of Contract
Adjustment Payments. See "Description of the
Purchase Contracts--Early Settlement."
Termination................... The Purchase Contracts (including the right
thereunder to receive accrued or Deferred
Contract Adjustment Payments, if any, and the
obligation to purchase Common Stock) will
automatically terminate upon the occurrence of
certain events of bankruptcy, insolvency or
reorganization with respect to the Company.
Upon such termination, the Collateral Agent
will release the related Trust Preferred
Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio,
as the case may be, or, if substituted, the
related Treasury Securities held by it to the
Purchase Contract Agent for distribution to the
holders, subject in the case of the Treasury
Portfolio to the Purchase Contract Agent's
disposition of the subject securities for cash,
and the payment of such cash to the holders, to
the extent that the holder would otherwise have
been entitled to receive less than $1,000 of
any such security. Upon such termination, there
may be a
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delay before such release and distribution. In
the event that the Company becomes the subject
of a case under the United States Bankruptcy
Code of 1978, as amended (the "Bankruptcy
Code"), such delay may occur as a result of the
automatic stay under the Bankruptcy Code and
continue until such automatic stay has been
lifted. The Company expects any such delay to
be limited. See "Description of the Purchase
Contracts--Termination."
Voting and Certain Other
Rights........................ Holders of Trust Preferred Securities will not
be entitled to vote to appoint, remove or
replace, or to increase or decrease the number
of Regular Trustees (as defined herein) and
will generally have no voting rights except in
the limited circumstances described under
"Description of Trust Preferred
Securities--Voting Rights." Holders of Purchase
Contracts forming part of the Income PRIDES or
Growth PRIDES in their capacities as such
holders will have no voting or other rights in
respect of the Common Stock.
Listing of the Income
PRIDES........................ Application has been made to list the Income
PRIDES on the NYSE under the symbol "KMTprI",
subject to official notice of issuance. If
Growth PRIDES and Trust Preferred Securities
are separately traded to a sufficient extent
that applicable exchange listing requirements
are met, the Company will endeavor to cause
such securities to be listed on such exchange
on which the Income PRIDES are then listed,
including, if applicable, the NYSE. See
"Underwriting."
NYSE Symbol of Common Stock... "KMT"
TRUST PREFERRED SECURITIES
The Trust..................... The Trust is a Delaware statutory business
trust. The sole assets of the Trust will
consist of the Debentures. The Company will
directly or indirectly own all of the Common
Securities representing common undivided
beneficial ownership interests in the assets of
the Trust.
Trust Preferred Securities.... 4,500,000 of % Trust Preferred Securities
(liquidation amount $50 per Trust Preferred
Security), representing preferred, undivided
beneficial ownership interests in the assets of
the Trust.
Distributions................. Distributions on the Trust Preferred Securities
which will constitute all or a portion of the
distributions on the Income PRIDES will be
cumulative, will accrue from the first date of
issuance of the Trust Preferred Securities and
will be payable initially at the annual rate of
% of the liquidation amount of $50 per Trust
Preferred Security to but excluding the
Purchase Contract Settlement Date, and in the
case of Trust Preferred Securities that remain
outstanding on and after the Purchase Contract
Settlement Date, from the Purchase Contract
Settlement Date to but excluding February 16,
2003, at the Reset Rate, in each case, when, as
and if funds are available for payment. Subject
to the distribution deferral provisions,
distributions will be payable quarterly in
arrears on each February 16, May 16, August 16
and November 16, commencing February 16, 1998.
Market Rate Reset............. The applicable quarterly distribution rate on
the Trust Preferred Securities and the interest
rate on the Debentures on and after the
Purchase Contract Settlement Date, will be
reset on the third Business Day immediately
preceding the Purchase Contract Settlement Date
to the Reset Rate, determined by the Reset
Agent as the rate the Trust Preferred
Securities should bear in order for a Trust
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<PAGE> 54
Preferred Security to have an approximate
market value of 100.5% of the Stated Amount on
the third Business Day immediately preceding
the Purchase Contract Settlement Date,
provided, that the Company may limit such Reset
Rate to be no higher than the rate on the
Two-Year Benchmark Treasury plus 200 basis
points (2%). Such market value may be less than
100.5% if the Reset Spread is limited to a
maximum of 2%. It is currently anticipated that
Merrill Lynch, Pierce, Fenner & Smith
Incorporated will be the Reset Agent. See
"Description of the Trust Preferred
Securities--Market Rate Reset."
Distribution Deferral
Provisions.................... The ability of the Trust to pay distributions
on the Trust Preferred Securities will be
solely dependent on the receipt of interest
payments from the Company on the Debentures.
The Company will have the right at any time,
and from time to time, to defer the interest
payments due on the Debentures for successive
extension periods (the "Extension Periods")
limited, in the aggregate, to a period not
extending beyond the maturity date of the
Debentures. The corresponding quarterly
distributions on the Trust Preferred Securities
would be deferred by the Trust (but would
continue to accumulate quarterly and would
accrue interest, compounded quarterly, at the
rate of % per annum through and including
February 15, 2001, and at the Reset Rate
thereafter) until the end of any such Extension
Period. If a deferral of an interest payment
occurs, the holders of the Trust Preferred
Securities will be required to accrue interest
income for United States federal income tax
purposes in advance of the receipt of any
corresponding cash distribution with respect to
such deferred interest payment. See "Risk
Factors--Right to Defer Current Payments,"
"Description of the Trust Preferred
Securities-- Distributions" and "Certain
Federal Income Tax Consequences-- Income
PRIDES--Trust Preferred Securities--Interest
Income and Original Issue Discount."
Rights Upon Deferral of
Distribution.................. During any period in which interest payments on
the Debentures are deferred, interest will
accrue on the Debentures (compounded quarterly)
and the corresponding quarterly distributions
on the Trust Preferred Securities will continue
to accumulate with interest thereon at the rate
of % per annum through and including February
15, 2001, and at the Reset Rate thereafter,
compounded quarterly.
Liquidation Preference........ In the event of any liquidation of the Trust,
and after satisfaction of liabilities to
creditors of the Trust, if any, holders will be
entitled to receive Debentures in an aggregate
principal amount equal to the aggregate stated
liquidation amount of the Trust Preferred
Securities.
Put Option.................... If a Failed Remarketing has occurred, holders
of Trust Securities (including, following the
distribution of the Debentures upon a
dissolution of the Trust as described herein,
such Debenture holders), holding such Trust
Securities or Debentures, as the case may be,
following the Purchase Contract Settlement Date
will have the right, in the case of Trust
Securities, to require the Trust to put to the
Company the related Debentures, or in the case
of Debentures, to put such Debentures directly
to the Company on March 2, 2001, upon at least
three Business Days' prior notice, at a price
per Debenture equal to $50, plus accrued and
unpaid interest (including deferred interest),
if any, thereon. Upon the repurchase of such
Debentures by
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<PAGE> 55
the Company, (i) the proceeds from such
repurchase shall simultaneously be applied (in
the case of Trust Securities) to redeem such
Trust Securities of such holder in an aggregate
stated liquidation amount equal to the
aggregate principal amount of the Debentures so
repurchased and (ii) any accrued and unpaid
distributions (including deferred
distributions) with respect to such Trust
Securities will be paid to such holder in cash.
See "Description of the Debentures --Put
Option."
Distribution of Debentures.... In certain circumstances involving an
Investment Company Event, the Trust would be
dissolved, with the result that, after
satisfaction of liabilities to creditors of the
Trust, if any, Debentures with an aggregate
principal amount equal to the aggregate stated
liquidation amount of the Trust Preferred
Securities would be distributed to the holders
of the Trust Preferred Securities on a pro rata
basis including the Collateral Agent. In such
event an Income PRIDES would thereafter consist
of beneficial ownership of a Debenture with a
principal amount equal to the Stated Amount of
such Income PRIDES and the related Purchase
Contract, and such Debenture would be otherwise
treated as if it were a Trust Preferred
Security. See "Description of the Trust
Preferred Securities--Distribution of the
Debentures."
Tax Event Redemption.......... The Debentures (and, thus, the Trust
Securities) are redeemable, at the option of
the Company, on not less than 30 days or more
than 60 days prior written notice in whole but
not in part upon the occurrence and
continuation of a Tax Event under the
circumstances described herein at a Redemption
Price equal to, for each Debenture, the
Redemption Amount together with accrued and
unpaid distributions (including deferred
distributions). See "Description of the
Debentures--Tax Event Redemption." If the
Company so redeems all of the Debentures, the
Trust must redeem all of the Trust Securities
and pay in cash such Redemption Price to the
holders of such Trust Securities. If such Tax
Event Redemption occurs prior to the Purchase
Contract Settlement Date, the Redemption Price
payable in liquidation of any Income PRIDES
holders' interest in the Trust, will be
distributed to the Collateral Agent, who in
turn will apply an amount equal to the
Redemption Amount of such Redemption Price to
purchase the Treasury Portfolio on behalf of
the holders of Income PRIDES and remit the
remaining portion, if any, of such Redemption
Price to the Purchase Contract Agent for
payment to holders of such Income PRIDES. The
Treasury Portfolio will be substituted for the
Trust Preferred Security and will be pledged
with the Collateral Agent to secure such Income
PRIDES holders' obligations to purchase the
Common Stock under their Purchase Contracts.
Other than in the event of a Tax Event
Redemption, the Company will not have the
ability to redeem the Debentures prior to their
stated maturity date. See "Description of the
Debentures--Tax Event Redemption."
Guarantee..................... The Company will irrevocably and
unconditionally guarantee (the "Guarantee"),
generally on a senior unsecured basis, the
payment in full of (i) distributions on the
Trust Preferred Securities to the extent the
Trust has funds available therefor, (ii) the
redemption price of
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<PAGE> 56
Trust Preferred Securities in respect of which
the related Debentures have been repurchased by
the Company on the Purchase Contract Settlement
Date, to the extent the Trust has funds
available therefor, and (iii) generally, the
liquidation amount of the Trust Preferred
Securities or the Redemption Price upon a Tax
Event Redemption, to the extent the Trust has
assets available for distribution to holders of
Trust Preferred Securities in the event of a
dissolution of the Trust. The Company's
obligations under the Guarantee will be a
senior unsecured obligation of the Company and
will rank pari passu with all of the Company's
other senior unsecured obligations. See
"Description of the Guarantee."
Debentures.................... Unless a Tax Event Redemption has occurred, the
Debentures will mature on February 16, 2003,
and will bear interest initially at the rate of
% per annum, payable quarterly in arrears on
each February 16, May 16, August 16 and
November 16, commencing February 16, 1998. The
interest rate on the Debentures, and the
distribution rate on the Trust Preferred
Securities, that remain outstanding after the
Purchase Contract Settlement Date will be reset
on the third Business Day immediately preceding
the Purchase Contract Settlement Date to the
Reset Rate determined by the Reset Agent. See
"Description of Debentures--Interest." Interest
payments on the Debentures may be deferred from
time to time by the Company for successive
Extension Periods not extending, in the
aggregate, beyond the stated maturity date of
the Debentures. During any Extension Period,
interest at the rate of % per annum through
and including February 15, 2001, and at the
Reset Rate thereafter would continue to accrue
and compound quarterly. Upon the termination of
any Extension Period and the payment of all
amounts then due, the Company may commence a
new Extension Period, provided such new
Extension Period does not extend beyond the
stated maturity date of the Debentures. No
interest shall be due during an Extension
Period until the end of such period. During an
Extension Period, the Company will be
prohibited (subject to certain exceptions) from
paying dividends on or purchasing any of its
capital stock and making certain other
restricted payments until quarterly interest
payments are resumed and all amounts then due
on the Debentures are paid. The Debentures will
be senior unsecured obligations of the Company
and will rank pari passu with all of the
Company's other senior unsecured obligations.
See "Description of the Debentures."
Federal Income Tax
Consequences.................. Provided the Company does not exercise its
right to defer interest on the Debentures, a
beneficial owner of Income PRIDES and Trust
Preferred Securities will include in gross
income its pro rata share of the stated
interest on the Debentures when such interest
income is paid or accrued in accordance with
its regular method of tax accounting. The
Company intends to report the Contract
Adjustment Payments as income to holders of
Income PRIDES and Growth PRIDES, but holders
should consult their tax advisors concerning
the possibility that the Contract Adjustment
Payments may be treated as loans, purchase
price adjustments, rebates or option premiums
rather than being includible in income on a
current basis. Holders of Growth PRIDES will be
required to include in gross income their
allocable share of any OID or market discount,
or amortize their
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<PAGE> 57
allocable share of any bond premium otherwise
includible or deductible, respectively, with
respect to the Treasury Securities posted with
the Collateral Agent. If a Tax Event Redemption
has occurred, a beneficial owner of Income
PRIDES will be required to include in gross
income its allocable share of OID on the
Treasury Portfolio as it accrues on a constant
yield to maturity basis. See "Certain Federal
Income Tax Consequences."
Use of Proceeds............... All or substantially all of the proceeds from
the sale of the Income PRIDES, of which the
Trust Preferred Securities are a component, and
from the sale of Common Securities will be
invested by the Trust in Debentures of the
Company, and the remainder, if any, will be
paid to the Company. The net proceeds from such
sale, estimated to be approximately ,
will be used by the Company to repay
indebtedness under the Company's New Bank
Credit Facility, which indebtedness was
incurred by the Company in connection with the
acquisition of Greenfield. See "Use of
Proceeds."
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<PAGE> 58
THE COMPANY
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods--turning, milling and
drilling. In addition, through its 80%-owned subsidiary, JLK Direct Distribution
Inc. ("JLK"), the Company markets and distributes a broad line of consumable
metalcutting tools, as well as abrasives, machine tool accessories, hand tools,
measuring equipment and other industrial supplies used in the metalworking
industry. The Company is a recognized leader in turning and milling consumable
metalcutting tools and believes it is the largest North American and the second
largest global provider of consumable metalcutting tools and supplies.
Leveraging its expertise in tungsten carbide powder metallurgy, the Company has
developed innovative consumable tools for the mining and construction industries
and believes it is the largest global manufacturer, marketer and distributor of
such tools to these markets.
In November 1997, the Company acquired Greenfield, the leading North
American manufacturer of drilling and other rotary high-speed steel consumable
metalcutting tools for the metalworking industry. Kennametal believes that
Greenfield's operations strongly complement its core businesses and that the
acquisition of Greenfield, in addition to providing the Company with
opportunities for substantial cost savings, offers significant strategic
benefits, including: (i) providing an important new channel of traditional
industrial distributors through which to sell the Company's products; (ii)
expanding and enhancing the Company's line of drilling products; (iii) allowing
the Company to diversify into new markets such as certain wear products by
leveraging its material science expertise in tungsten carbide powder metallurgy;
and (iv) providing the opportunity to introduce and sell each company's products
into the markets served by the other company.
End users of the Company's metalworking products include manufacturers and
suppliers in the aerospace, automotive, construction and farm machinery,
railroad equipment, power generation and transmission equipment, home appliance,
electrical equipment, and oil field services and gas exploration industries. The
Company markets its products through: a technically skilled direct sales force;
JLK's catalogs, showrooms and other direct marketing efforts; JLK's integrated
industrial supply programs; and, with the acquisition of Greenfield, a network
of traditional industrial distributors. This multi-channel marketing approach
enables the Company to meet the varying needs of metalworking customers of all
sizes which range from same-day ordering and rapid delivery of products to
outsourcing the entire procurement and inventory management process for
metalworking and related products. The Company estimates there are approximately
250,000 metalworking industrial sites in the United States. The Company's
multi-channel distribution network, comprehensive product offering and global
presence allow customers of all sizes the advantage of a single source of supply
for most metalworking needs.
The Company believes five significant trends are currently impacting the
metalworking industry: (i) consolidation of fragmented distribution channels as
customers seek a single source of supply for their metalworking needs; (ii)
increasing demand from large customers to outsource procurement and inventory
management processes through integrated supply programs; (iii) growing demand
for suppliers that can provide a complete selection of tools, supplies and
services globally; (iv) demand for world class capabilities including customer
service, technical application support and information and product technology
while, at the same time, maintaining or reducing costs; and (v) continuing
advances in customers' metalworking manufacturing technology requiring more
technically advanced tools. These factors are resulting in a restructuring and
consolidation in the metalworking industry as tooling manufacturers and
distributors are forced to either become more competitive or seek stronger
partners. The Company's business strategy is designed to capitalize on these and
other trends.
BUSINESS STRATEGY
The Company's objective is to become the supplier of first choice of
consumable tools, related supplies, and services to the worldwide metalworking
industry and to other industries which can benefit from tungsten carbide
products. The Company believes its market-leadership position results from the
successful implementation of its business strategy, the major elements of which
include:
- Expanding Customer Base Through Multi-Channel Distribution. The Company
seeks to access potential customers through all primary distribution
channels. The Company serves its traditional base of large and
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<PAGE> 59
medium-sized metalworking customers through a direct sales force. JLK
direct markets a broad range of tiered ("good," "better" and "best")
metalworking consumables and other related products targeted at small and
medium-sized metalworking customers and offers integrated supply programs
targeted at large industrial metalworking customers. The acquisition of
Greenfield, which sells its consumable tools, related products and
services through a network of more than 2,500 traditional industrial
distributors, provides Kennametal with access to approximately 50% of the
North American metalworking market.
- Providing Most Complete Product Offering. The Company seeks to provide
the most complete and comprehensive product offering in the metalworking
industry. As a result of various acquisitions and internal development,
the Company markets and distributes what it believes is one of the
broadest lines of tools and services typically used by metalworking
customers. The recent acquisition of Greenfield with its consumable
high-speed steel rotary cutting tools and related products provides the
Company with the capability to manufacture all of the major consumable
tools needed by customers in their metalcutting manufacturing processes.
- Expanding Strong Global Presence. Kennametal is committed to growing its
global presence as demonstrated by its position as the second largest
provider of tools to the European metalworking industry, the world's
largest metalworking market, as well as its plans to expand its presence
in the Asia Pacific region. The Company recently completed construction
of a cutting tool manufacturing facility in Shanghai, China, for a total
investment of about $20 million, and has increased to 100% its ownership
interest in a sales and marketing subsidiary in Japan. The Company also
has targeted marketing efforts in Eastern Europe and Russia and other
developing countries.
- Providing Superior Customer Service, Product Availability, and Technical
Support. The Company's skills in rapidly filling orders, maintaining
high levels of product availability and providing technical product
application support are vital to the ability of its metalworking
customers to meet their production and delivery schedules in a cost
effective manner. Kennametal's sophisticated order entry and inventory
management systems enable the Company to ship more than 90 percent of its
products from stock. In addition, the Company's technically skilled
direct sales force of more than 700 persons provide on-site product
selection and application support to enable customers to optimize their
metalcutting processes. The addition of Greenfield's more than 70
technical specialists broadens the Company's technical support capability
into high-speed steel drilling applications.
- Maintaining Leadership in Product Innovation. As a result of its
commitment to research and development, the Company has brought to market
during the past few years a number of new or improved metalcutting
products. The exacting requirements of modern high-precision
metalcutting, along with advances in manufacturing technology, exacting
manufacturing specifications, and new workpiece materials are driving the
demand for new and improved consumable tools and systems capable of
achieving superior technical performance with high and uniform quality.
The Company believes that its reputation for supplying high quality and
technologically innovative consumable metalcutting tools and supplies to
the metalworking industry has been a very significant factor in its
achieving its market position.
- Leveraging Use of Information Technology. The Company's decision to
invest nearly $40 million in a business information system utilizing SAP
R-3 software demonstrates its commitment to the use of information
technology. This system, which is expected to be fully operational in
fiscal 1999, will link sales, distribution, manufacturing, purchasing and
accounting activities at all major sites throughout Kennametal and is
designed to enhance customer service, operational effectiveness and
management decision-making.
In addition to the above business strategies, the Company seeks to continue
to improve operating efficiencies as well as to pursue selected acquisitions
that enhance its distribution channels, complement its existing product
offerings and strengthen its geographic presence.
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<PAGE> 60
RECENT DEVELOPMENTS
GREENFIELD ACQUISITION
On November 17, 1997, the Company purchased in the Tender Offer
approximately 98% of Greenfield's common stock and acquired the balance by a
merger (the "Merger") on the following day. The total purchase price for the
acquisition of Greenfield (including estimated transaction costs and assumed
Greenfield debt and convertible redeemable preferred securities of approximately
$320 million) is estimated to be $1.0 billion. Greenfield is the largest North
American manufacturer of consumable rotary metalcutting tools as well as a
leading manufacturer of consumable tools and related products, wear products and
marine products.
NEW BANK CREDIT FACILITY
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into a $1.4 billion credit agreement with the banks named
therein (the "New Bank Credit Facility") under which, as of December 18, 1997,
the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans. The proceeds from the loans were principally
used to pay for the shares of common stock of Greenfield purchased in the Tender
Offer and the Merger, to pay transaction costs, to refinance certain
indebtedness of Greenfield and to refinance certain indebtedness of the Company.
If the Offering, the Common Stock Offerings and the Senior Debt Offering are
consummated, the Company intends to replace the New Bank Credit Facility with a
$500 million senior unsecured credit facility, although there can be no
assurance that the Company will be able to replace the New Bank Credit Facility.
OTHER ACQUISITIONS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom, Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. The companies had
aggregate sales of approximately $66 million in 1996.
OTHER OFFERINGS
Concurrently with the Offering, (i) the Company is undertaking the Common
Stock Offerings of an aggregate of 4,300,000 shares (4,945,000 shares if the
underwriters for the shares exercise their over-allotment options in full) and
(ii) the Company is undertaking the Senior Debt Offering of $450 million
aggregate principal amount of the Senior Debt Securities. The Offering, the
Common Stock Offerings, and the Senior Debt Offering are independent offerings
and consummation of none of such offerings is conditioned upon consummation of
any of the other offerings. The net proceeds to the Company from the Common
Stock Offerings and the Senior Debt Offering will be used to prepay loans and,
correspondingly, permanently reduce commitments of the lenders under the New
Bank Credit Facility.
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<PAGE> 61
SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The summary condensed consolidated income statement and balance sheet data
for the Company presented below are derived from the Company's consolidated
financial statements. The Company's condensed consolidated financial statements
as of and for the fiscal years ended June 30, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP. The condensed consolidated financial statements
as of and for the three months ended September 30, 1996 and 1997 are derived
from the Company's unaudited interim financial statements appearing elsewhere in
this Prospectus Supplement which in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the data included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the three
months ended September 30, 1997, are not necessarily indicative of the results
of operations to be expected for the full fiscal year. The summary financial
information presented below should be read in conjunction with, and is qualified
by reference to, the more detailed information in the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus Supplement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information set forth
herein. Pro forma information is based on the historical financial statements of
the Company and Greenfield adjusted to give effect to the acquisition of
Greenfield, the Offering, the Common Stock Offerings and the Senior Debt
Offering. See "Pro Forma Condensed Consolidated Financial Information." The pro
forma financial information is provided for informational purposes only and does
not purport to present what the Company's results of operations would actually
have been if the acquisition of Greenfield had occurred on the assumed dates or
to project the Company's financial condition or results of operations for any
future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- ----------------------------------
1997 PRO 1997 PRO
FORMA AS FORMA AS
1995 1996 1997 ADJUSTED 1996 1997 ADJUSTED
-------- ---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $983,873 $1,079,963 $1,156,343 $1,683,362 $275,203 $310,792 $450,628
Cost of goods sold.................. 560,867 625,473 668,415 1,043,548 160,493 178,569 277,842
-------- ---------- ---------- ---------- -------- -------- -------
Gross profit.......................... 423,006 454,490 487,928 639,814 114,710 132,223 172,786
Operating expenses.................. 293,868 328,377 357,996 450,417 86,964 98,518 124,287
Restructuring charge................ -- 2,666 -- -- -- -- --
Amortization of intangibles......... 2,165 1,596 2,907 18,410 546 1,052 5,036
-------- ---------- ---------- ---------- -------- -------- -------
Operating income...................... 126,973 121,851 127,025 170,987 27,200 32,653 43,463
Interest expense.................... 12,793 11,296 10,393 57,373 2,642 1,180 10,590
Other income (expense).............. 54 4,821 1,531 1,531 627 (440) (440)
Minority interest on
Company-obligated, mandatorily
redeemable securities of
subsidiary holding solely parent
company debentures................ -- -- -- 15,165 -- -- 3,791
-------- ---------- ---------- ---------- -------- -------- -------
Income before income taxes and
minority interest................... 114,234 115,376 118,163 99,980 25,185 31,033 28,642
Provision for income taxes.......... 45,000 43,900 44,900 39,992 9,800 12,100 11,457
Minority interest................... 940 1,744 1,231 1,231 182 1,385 1,385
-------- ---------- ---------- ---------- -------- -------- -------
Net income............................ $ 68,294 $ 69,732 $ 72,032 $ 58,757 $ 15,203 $ 17,548 $ 15,800
======== ========== ========== ========== ======== ======== =======
PER SHARE AND OTHER DATA:
Net income............................ $ 2.58 $ 2.62 $ 2.71 $ 1.90 $ 0.57 $ 0.67 $ 0.52
Dividends............................. 0.60 0.60 0.66 -- 0.15 0.17 --
Weighted average shares outstanding... 26,486 26,635 26,575 30,875 26,729 26,171 30,471
Ratio of earnings to fixed
charges(a).......................... 8.02 8.62 8.75 -- 7.65 14.94 --
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------
AS OF JUNE 30, 1997 PRO
------------------------------------ FORMA AS
1995 1996 1997 1997 ADJUSTED
---------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $184,072 $217,651 $175,877 $258,435 $ 492,912
Total assets.............................................. 781,609 799,491 869,309 919,589 2,018,870
Long-term debt (less current maturities).................. 78,700 56,059 40,445 40,464 635,110
Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures..... -- -- -- -- 222,300
Shareholders' equity...................................... 391,885 438,949 459,608 530,069 725,809
</TABLE>
- ---------
(a) For the purpose of the calculation of these ratios, earnings represents
income from continuing operations before fixed charges, minority interest,
provision for income taxes and the cumulative effect of accounting changes.
Fixed charges include interest expense, including amounts capitalized and
the portion (one third) of rental expenses deemed to be representative of
interest expense.
S-23
<PAGE> 62
RISK FACTORS
Prospective purchasers of the FELINE PRIDES offered hereby should carefully
consider the risk factors set forth herein under "Risk Factors" as well as the
other information contained in this Prospectus Supplement, the accompanying
Prospectus and the documents incorporated by reference therein.
INVESTMENT IN FELINE PRIDES REQUIRES HOLDERS TO PURCHASE COMMON STOCK; RISK OF
DECLINE IN EQUITY VALUE
Although holders of the FELINE PRIDES will be the beneficial owners of the
related Trust Preferred Securities, Treasury Portfolio or Treasury Securities,
as the case may be, prior to the Purchase Contract Settlement Date, unless a
holder of FELINE PRIDES settles the related Purchase Contracts through the
delivery of cash to the Purchase Contract Agent in the manner described below or
the Trust Preferred Securities related to such holder's Purchase Contracts have
been remarketed in the manner described below in connection with settling such
Purchase Contracts or the Purchase Contracts are terminated (upon the occurrence
of certain events of bankruptcy, insolvency or reorganization with respect to
the Company), the proceeds of the repurchase by the Company of the related
Debentures or the principal of the related Treasury Securities, or the
applicable Appropriate Ownership Interest of the Treasury Portfolio, when paid
at maturity, as the case may be, will automatically be applied to the purchase
of a specified number of shares of Common Stock on behalf of such holder. Thus,
unless a holder of Income PRIDES has cash settled or the Trust Preferred
Securities related to such holder's Purchase Contracts have been remarketed in
the manner described below in connection with settling such Purchase Contracts,
following the Purchase Contract Settlement Date, the holder will own shares of
Common Stock rather than a beneficial interest in Trust Preferred Securities.
See "Description of the Purchase Contracts--General." There can be no assurance
that the market value of the Common Stock receivable by the holder on the
Purchase Contract Settlement Date will be equal to or greater than the Stated
Amount of the FELINE PRIDES held by such holder. If the Applicable Market Value
of the Common Stock is less than the Reference Price, the aggregate market value
of the Common Stock issued to the holder in settlement of each Purchase Contract
on the Purchase Contract Settlement Date (assuming that such market value is the
same as the Applicable Market Value of such Common Stock) will be less than the
Stated Amount paid for the FELINE PRIDES and the market value per share of such
Common Stock will be less than the effective price per share paid by each holder
for such Common Stock on the date of the final Prospectus Supplement, in which
case an investment in the Securities will result in a loss. Accordingly, a
holder of the FELINE PRIDES assumes the risk that the market value of the Common
Stock may decline, and that such decline could be substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
FELINE PRIDES is less than the opportunity for equity appreciation afforded by a
direct investment in the Common Stock because the market value of the Common
Stock to be received by a holder of Purchase Contracts on the Purchase Contract
Settlement Date (assuming that such market value is the same as the Applicable
Market Value of such Common Stock) will only exceed the Stated Amount if the
Applicable Market Value of the Common Stock exceeds the Threshold Appreciation
Price (which represents an appreciation of % over the Reference Price).
Moreover, in such event, holders of FELINE PRIDES would receive on the Purchase
Contract Settlement Date only % (the percentage equal to the Reference Price
divided by the Threshold Appreciation Price) of the shares of Common Stock that
such holders would have received if they had made a direct investment in the
Common Stock on the date of the final Prospectus Supplement, and therefore would
receive on the Purchase Contract Settlement Date % of the appreciation in
the value of the Common Stock in excess of the Threshold Appreciation Price
through such date.
FACTORS AFFECTING TRADING PRICES
The trading prices of Income PRIDES and Growth PRIDES in the secondary
market will be directly affected by the trading prices of the Common Stock in
the secondary market, the general level of interest rates and the credit quality
of the Company. It is impossible to predict whether the price of Common Stock or
interest rates will rise or fall. Trading prices of the Common Stock will be
influenced by Kennametal's operating results and prospects and by economic,
financial and other factors and market conditions that can affect the capital
markets
S-24
<PAGE> 63
generally, including the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of Common Stock in the market
subsequent to the offering of the Securities or the perception that such sales
could occur. Fluctuations in interest rates may give rise to opportunities for
arbitrage based upon changes in the relative value of the Common Stock
underlying the Purchase Contracts and of the other components of the FELINE
PRIDES. Any such arbitrage could, in turn, affect the trading prices of the
Income PRIDES, Growth PRIDES, Trust Preferred Securities and Common Stock.
VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities will not be entitled to vote to
appoint, remove or replace or to increase or decrease the number of Kennametal
Trustees, and generally will have no voting rights except in the limited
circumstances described under "Description of the Trust Preferred
Securities--Voting Rights." Holders of FELINE PRIDES will not be entitled to any
rights with respect to the Common Stock (including, without limitation, voting
rights and rights to receive any dividends or other distributions in respect
thereof) unless and until such time as the Company shall have delivered shares
of Common Stock for FELINE PRIDES on the Purchase Contract Settlement Date or as
a result of Early Settlement, as the case may be, and unless the applicable
record date, if any, for the exercise of such rights occurs after such date. For
example, in the event that an amendment is proposed to the Amended and Restated
Articles of Incorporation (the "Restated Articles") or the Amended and Restated
By-Laws (the "Restated By-Laws") of the Company and the record date for
determining the stockholders of record entitled to vote on such amendment occurs
prior to such delivery, holders of FELINE PRIDES will not be entitled to vote on
such amendment.
DILUTION OF COMMON STOCK
The number of shares of Common Stock that holders of the FELINE PRIDES are
entitled to receive on the Purchase Contract Settlement Date or as a result of
Early Settlement is subject to adjustment for certain events arising from stock
splits and combinations, stock dividends and certain other actions of Kennametal
that modify its capital structure. See "Description of the Purchase
Contracts--Anti-Dilution Adjustments." Such number of shares of Common Stock to
be received by such holders on the Purchase Contract Settlement Date or as a
result of Early Settlement will not be adjusted for other events, such as
offerings of Common Stock for cash or in connection with acquisitions.
Kennametal is not restricted from issuing additional Common Stock during the
term of either the Purchase Contracts or the Trust Preferred Securities and has
no obligation to consider the interests of the holders of FELINE PRIDES for any
reason. Additional issuances may materially and adversely affect the price of
the Common Stock and, because of the relationship of the number of shares to be
received on the Purchase Contract Settlement Date to the price of the Common
Stock, such other events may adversely affect the trading price of Income PRIDES
or Growth PRIDES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how Income PRIDES, Growth PRIDES or Trust
Preferred Securities will trade in the secondary market or whether such market
for any such securities will be liquid or illiquid. Income PRIDES and Growth
PRIDES are novel securities and there is currently no secondary market for
either Income PRIDES or Growth PRIDES. Application has been made to list the
Income PRIDES on the NYSE. If Growth PRIDES and Trust Preferred Securities are
separately traded to a sufficient extent that applicable exchange listing
requirements are met, the Company will endeavor to cause such securities to be
listed on such exchange on which the Income PRIDES are then listed, including,
if applicable, the NYSE. The Company and the Trust have been advised by the
Underwriters that they presently intend to make a market for the Growth PRIDES
and the Trust Preferred Securities; however, they are not obligated to do so and
any market making may be discontinued at any time. There can be no assurance as
to the liquidity of any such market that may develop for the Income PRIDES, the
Growth PRIDES or the Trust Preferred Securities, the ability of holders to sell
such securities or whether a trading market, if it develops, will continue. In
addition, in the event that holders of Income PRIDES were to substitute Treasury
Securities for the Trust Preferred Securities, thereby converting their Income
PRIDES to Growth PRIDES, the liquidity of Income PRIDES could be adversely
affected. There can be no assurance that the Income PRIDES will not be delisted
from the NYSE or that trading in the Income PRIDES will not be suspended as a
result of the election by holders to create Growth PRIDES through the
substitution of collateral, which could
S-25
<PAGE> 64
cause the number of Income PRIDES to fall below the requirement for listing
securities on the NYSE that at least 1,000,000 Income PRIDES be outstanding at
any time.
PLEDGED SECURITIES ENCUMBERED
Although the beneficial owners of FELINE PRIDES will be beneficial owners
of the related Trust Preferred Securities, Treasury Portfolio or the Treasury
Securities (together, the "Pledged Securities"), as applicable, those Pledged
Securities will be pledged with the Collateral Agent to secure the obligations
of the holders under the related Purchase Contracts. Thus, rights of the holders
to their Pledged Securities will be subject to the Company's security interest.
Additionally, notwithstanding the automatic termination of the Purchase
Contracts, in the event that the Company becomes the subject of a case under the
Bankruptcy Code, the delivery of the Pledged Securities to holders of the FELINE
PRIDES may be delayed by the imposition of the automatic stay of Section 362 of
the Bankruptcy Code.
INVESTMENT COMPANY EVENT DISTRIBUTION
Upon the occurrence of an Investment Company Event, the Trust will be
dissolved (except in the limited circumstances described in the following
sentence) with the result that Debentures with an aggregate principal amount
equal to the aggregate stated liquidation amount of the Trust Preferred
Securities would be distributed to the holders of the Trust Preferred Securities
on a pro rata basis including the Collateral Agent. Such dissolution and
distribution shall be conditioned on the Company being unable to avoid such
Investment Company Event within a 90 day period by taking some ministerial
action or pursuing some other reasonable measure that will have no adverse
effect on the Trust, the Company or the holders of the Trust Preferred
Securities, and will involve no material cost. In addition, the Company will
have the right at any time to dissolve the Trust. See "Description of the Trust
Preferred Securities--Distribution of the Debentures."
There can be no assurance as to the impact on the market prices for Income
PRIDES of a distribution of the Debentures in exchange for Trust Preferred
Securities upon a dissolution of the Trust. Because Income PRIDES will consist
of a beneficial ownership interest in Debentures and related Purchase Contracts
upon the occurrence of the dissolution of the Trust as a result of an Investment
Company Event or otherwise, prospective purchasers of Income PRIDES are also
making an investment decision with regard to the Debentures and should carefully
review all the information regarding the Debentures contained herein. See
"Description of the Trust Preferred Securities--Distribution of the Debentures"
and "Description of the Debentures--General."
TAX EVENT REDEMPTION
The Debentures (and, thus, the Trust Securities) are redeemable, at the
option of the Company, on not less than 30 days or more than 60 days prior
written notice, in whole but not in part, at any time upon the occurrence and
continuation of a Tax Event under the circumstances described herein at a
Redemption Price equal to, for each Debenture, the Redemption Amount plus
accrued and unpaid distributions (including deferred distributions). See
"Description of the Debentures--Tax Event Redemption." If the Company so redeems
all of the Debentures, the Trust must redeem all of the Trust Securities and pay
in cash such Redemption Price to the holder of such Trust Securities. If the Tax
Event Redemption has occurred prior to the Purchase Contract Settlement Date,
the Redemption Price payable, in liquidation of the Income PRIDES holders'
interest in the Trust, will be distributed to the Collateral Agent, who in turn
will apply an amount equal to the Redemption Amount of such Redemption Price to
purchase the Treasury Portfolio on behalf of the holders of Income PRIDES.
Holders of Trust Preferred Securities, not held in the form of Income PRIDES,
will receive redemption payments directly. The Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be pledged with the
Collateral Agent to secure such Income PRIDES holders' obligations to purchase
the Company's Common Stock under their Purchase Contracts. There can be no
assurance as to the impact on the market prices for the Income PRIDES of the
substitution of the Treasury Portfolio as collateral in replacement of any Trust
Preferred Securities so redeemed. See "Description of the Trust Preferred
Securities--Optional Redemption." A Tax Event Redemption will be a taxable event
to the beneficial owners of the Trust Preferred Securities. See "Certain Federal
Income Tax Consequences--Tax Event Redemption."
S-26
<PAGE> 65
RIGHT TO DEFER CURRENT PAYMENTS
The Company may, at its option, defer the payment of Contract Adjustment
Payments on the Purchase Contracts until the Purchase Contract Settlement Date.
However, deferred installments of Contract Adjustment Payments, if any, will
bear Deferred Contract Adjustment Payments at the rate of % per annum
(compounding on each succeeding Payment Date) until paid. If the Purchase
Contracts are settled early or terminated (upon the occurrence of certain events
of bankruptcy, insolvency or reorganization with respect to the Company), the
right to receive Contract Adjustment Payments and Deferred Contract Adjustment
Payments, if any, will also terminate.
In the event that the Company elects to defer the payment of any Contract
Adjustment Payments on the Purchase Contracts until the Purchase Contract
Settlement Date, each holder of Purchase Contracts will receive on the Purchase
Contract Settlement Date in respect of the Deferred Contract Adjustment
Payments, in lieu of a cash payment, a number of shares of Common Stock equal to
(x) the aggregate amount of Deferred Contract Adjustment Payments payable to
such holder divided by (y) the Applicable Market Value. See "Description of the
Purchase Contracts--Contract Adjustment Payments."
The Company also will have the right under the Indenture to defer payments
of interest on the Debentures by extending the interest payment period at any
time, and from time to time, on the Debentures. As a consequence of such an
extension, quarterly distributions on the Trust Preferred Securities, held
either as a component of the Income PRIDES or held separately, would be deferred
(but despite such deferrals would accrue interest at a rate of % per annum
through and including February 16, 2001, and at the Reset Rate thereafter,
compounded on a quarterly basis) by the Trust during any such Extension Period.
Such right to extend the interest payment period for the Debentures will be
limited such that an Extension Period may not extend beyond the stated maturity
of the Debentures. During any such Extension Period, (a) the Company shall not
declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of its
capital stock (other than (i) purchases or acquisitions of capital stock of the
Company in connection with the satisfaction by the Company of its obligations
under any employee or agent benefit plans or the satisfaction by the Company of
its obligations pursuant to any contract or security outstanding on the date of
such event requiring the Company to purchase capital stock of the Company, (ii)
as a result of a reclassification of the Company's capital stock or the exchange
or conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock, (iii) the purchase of fractional
interests in shares of the Company's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (iv) dividends or distributions in capital stock of the Company (or
rights to acquire capital stock) or repurchases or redemptions of capital stock
solely from the issuance or exchange of capital stock or (v) redemptions or
repurchases of any rights pursuant to the Rights Agreement, as amended, between
the Company and Mellon Bank, N.A., as Rights Agent (the "Rights Agreement"), or
any successor to the Rights Agreement, and the declaration thereunder of a
dividend of rights in the future), (b) the Company shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities issued by the Company that rank junior to the Debentures and (c)
the Company shall not make any guarantee payments with respect to the foregoing
(other than payments pursuant to the Guarantee or the Common Securities
Guarantee (as defined herein)). Prior to the termination of any such Extension
Period, the Company may further extend the interest payment period; provided,
that such Extension Period may not extend beyond the stated maturity of the
Debentures. Upon the termination of any Extension Period and the payment of all
amounts then due, the Company may commence a new Extension Period, subject to
the above requirements. See "Description of the Trust Preferred
Securities--Distributions" and "Description of the Debentures--Option to Extend
Interest Payment Period."
The Company believes, and intends to take the position, that as of the
issue date of the Debentures, the likelihood that it will exercise its right to
defer payments of stated interest on the Debentures is remote and that,
therefore, the Debentures should not be considered to be issued with OID as a
result of the Company's right to defer payments of stated interest on the
Debentures unless it actually exercises such deferral right. There is no
assurance that the Internal Revenue Service will agree with such position. See
"Certain Federal Income Tax Consequences--Income PRIDES-Trust Preferred
Securities--Interest Income and Original Issue Discount."
S-27
<PAGE> 66
Should the Company exercise its right to defer payments of interest by
extending the interest payment period, each beneficial owner of Trust Preferred
Securities held either as a component of the Income PRIDES or held separately
would be required to include such beneficial owner's share of the stated
interest on the Trust Preferred Securities in gross income, as OID, on a daily
economic accrual basis, regardless of its method of tax accounting and in
advance of receipt of the cash attributable to such income. As a result, each
such beneficial owner of Trust Preferred Securities would recognize income for
United States federal income tax purposes in advance of the receipt of cash
attributable to such income, and would not receive the cash from the Trust
related to such income if such holder disposes of its Trust Preferred Securities
prior to the record date for the date on which distributions of such amounts are
made. See "Certain Federal Income Tax Consequences--Income PRIDES-Trust
Preferred Securities--Interest Income and Original Issue Discount." The Company
has no current intention of exercising its right to defer payments of interest
by extending the interest payment period on the Debentures. However, should the
Company determine to exercise such right in the future, the market price of the
Trust Preferred Securities is likely to be affected. A holder that disposes of
its Trust Preferred Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continues to hold its
Trust Preferred Securities. In addition, as a result of the existence of the
Company's right to defer interest payments, the market price of the Trust
Preferred Securities (which represent a preferred, undivided beneficial interest
in the assets of the Trust) may be more volatile than the market price of other
securities that are not subject to such deferral. See "Certain Federal Income
Tax Consequences--Income PRIDES-Trust Preferred Securities--Interest Income and
Original Issue Discount."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
treatment of the FELINE PRIDES or instruments similar to the FELINE PRIDES for
United States federal income tax purposes. As a result, certain United States
federal income tax consequences of the purchase, ownership and disposition of
FELINE PRIDES are not entirely clear. See "Certain Federal Income Tax
Consequences."
PURCHASE CONTRACT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF PURCHASE CONTRACT AGENT
Although the Trust Preferred Securities constituting a part of the Income
PRIDES will be issued pursuant to the Declaration, which will be qualified under
the Trust Indenture Act, the Purchase Contract Agreement will not be qualified
as an indenture under the Trust Indenture Act and the Purchase Contract Agent
will not be required to qualify as a trustee thereunder. Accordingly, holders of
FELINE PRIDES will not have the benefit of the protections of the Trust
Indenture Act. The protections generally afforded the holder of a security
issued under an indenture that has been qualified under the Trust Indenture Act
include disqualification of the indenture trustee for "conflicting interests" as
defined under the Trust Indenture Act, provisions preventing a trustee that is
also a creditor of the issuer from improving its own credit position at the
expense of the security holders immediately prior to or after a default under
such indenture and the requirement that the indenture trustee deliver reports at
least annually with respect to certain matters concerning the indenture trustee
and the securities. Under the terms of the Purchase Contract Agreement, the
Purchase Contract Agent will have only limited obligations to the holders of
FELINE PRIDES. See "Certain Provisions of the Purchase Contract Agreements and
the Pledge Agreement--Information Concerning the Purchase Contract Agent."
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Guarantee Trustee will act as indenture trustee under the Guarantee for
the purposes of compliance with the provisions of the Trust Indenture Act. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Trust Preferred Securities.
The Guarantee guarantees to the holders of the Trust Preferred Securities,
generally on a senior basis, the payment of (i) any accrued and unpaid
distributions that are required to be paid on the Trust Preferred Securities, to
the extent the Trust has funds available therefor, (ii) the redemption price,
including all accumulated and unpaid distributions to the date of redemption, of
Trust Preferred Securities in respect of which the related Debentures have been
repurchased by the Company on the Purchase Contract Settlement Date, to the
extent the
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<PAGE> 67
Trust has funds available therefor, and (iii) upon a voluntary or involuntary
dissolution of the Trust (other than in connection with the distribution of
Debentures to the holders of Trust Preferred Securities), the lesser of (a) the
aggregate of the liquidation amount and all accrued and unpaid distributions on
the Trust Preferred Securities to the date of payment to the extent the Trust
has funds available therefor or (b) the amount of assets of the Trust remaining
available for distribution to holders of the Trust Preferred Securities in
liquidation of the Trust. The majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee or
to direct the exercise of any trust or power conferred upon the Guarantee
Trustee under the Guarantee. Notwithstanding the foregoing, any holder of Trust
Preferred Securities may institute a legal proceeding directly against the
Company to enforce such holder's rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee or any
other person or entity. If the Company were to default on its obligation to pay
amounts payable on the Debentures or otherwise, the Trust would lack funds for
the payment of distributions or amounts payable on redemption of the Trust
Preferred Securities or otherwise, and, in such event, holders of the Trust
Preferred Securities would not be able to rely upon the Guarantee for payment of
such amounts. Instead, holders of the Trust Preferred Securities would rely on
the enforcement (i) by the Institutional Trustee of its rights as registered
holder of the Debentures against the Company pursuant to the terms of the
Indenture and the Debentures or (ii) by such holder of the Institutional
Trustee's or such holder's own rights against the Company to enforce payments on
the Debentures. See "--Enforcement of Certain Rights by Holders of Trust
Preferred Securities," "Description of the Debentures" and "Description of the
Guarantee." The Declaration provides that each holder of Trust Preferred
Securities, by acceptance thereof, agrees to the provisions of the Guarantee and
the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, the holders of Trust Preferred Securities would rely on the
enforcement by the Institutional Trustee of its rights as registered holder of
the Debentures against the Company. In addition, the holders of a majority in
liquidation amount of the Trust Preferred Securities will have the right to
direct the time, method, and place of conducting any proceeding for any remedy
available to the Institutional Trustee or to direct the exercise of any trust or
power conferred upon the Institutional Trustee under the Declaration, including
the right to direct the Institutional Trustee to exercise the remedies available
to it as the holder of the Debentures. The Indenture provides that the Debt
Trustee (as defined herein) shall give holders of Debentures notice of all
defaults or events of default within 30 days after occurrence. However, except
in the cases of a default or an event of default in payment on the Debentures,
the Debt Trustee will be protected in withholding such notice if its officers or
directors in good faith determine that withholding of such notice is in the
interest of such holders.
If the Institutional Trustee fails to enforce its rights under the
Debentures in respect of an Indenture Event of Default (as defined herein) after
a holder of record of Trust Preferred Securities has made a written request,
such holder of record of Trust Preferred Securities may, to the extent permitted
by applicable law, institute a legal proceeding against the Company to enforce
the Institutional Trustee's rights under the Debentures. In addition, if the
Company fails to pay interest or principal on the Debentures on the date such
interest or principal is otherwise payable, and such failure to pay is
continuing, a holder of Trust Preferred Securities may directly institute a
proceeding for enforcement of payment to such holder of the principal of or
interest on the Debentures having a principal amount equal to the aggregate
stated liquidation amount of the Trust Preferred Securities of such holder (a
"Direct Action") after the respective due date specified in the Debentures. In
connection with such a Direct Action, the Company shall have the right under the
Indenture to set off any payment made to such holder by the Company. The holders
of Trust Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Debentures. See "Description of the Trust
Preferred Securities--Declaration Events of Default."
LIMITED RIGHTS OF ACCELERATION
The Institutional Trustee, as holder of the Debentures, may accelerate
payment of the principal and accrued and unpaid interest on the Debentures only
upon the occurrence and continuation of a Declaration Event of Default or
Indenture Event of Default, which generally are limited to payment defaults,
breach of certain
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<PAGE> 68
covenants, certain events of bankruptcy, insolvency and reorganization of the
Company and certain events of dissolution of the Trust. See "Description of the
Trust Preferred Securities--Declaration Events of Default." Accordingly, there
is no right to acceleration upon default by the Company of its payment
obligations under the Guarantee.
TRADING PRICE OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Debentures. A holder who disposes of his Trust Preferred Securities between
record dates for payments of distributions thereon will be required to include
accrued but unpaid interest on the Debentures through the date of disposition in
income as ordinary income (i.e., interest or, possibly, OID), and to add such
amount to his adjusted tax basis in his pro rata share of the underlying
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a loss. See "Certain
Federal Income Consequences--Income PRIDES--Trust Preferred Securities--Interest
Income and Original Issue Discount" and "--Sales, Exchanges or Other
Dispositions of Trust Preferred Securities."
RECENT DEVELOPMENTS
GREENFIELD ACQUISITION
On October 10, 1997, Kennametal and Acquisition Corp. entered into the
Merger Agreement with Greenfield pursuant to which Acquisition Corp. purchased
at $38 per share on November 17, 1997, approximately 16,179,976 (98% of the
outstanding) shares of Greenfield's common stock. The merger occurred on
November 18, 1997, and Greenfield became a wholly-owned subsidiary of Kennametal
on that date. The total purchase price for the acquisition of Greenfield
(including estimated transaction costs and assumed Greenfield debt and
convertible redeemable preferred securities of approximately $320 million) is
estimated to be $1.0 billion. There can be no assurance that the Company will
effectively integrate and manage the acquired business or retain the management
and the numerous distributorship customers of Greenfield. In addition there can
be no assurance that the anticipated benefits of the Greenfield acquisition will
be achieved. If Kennametal does not successfully integrate and manage the
acquisition, there could be a material adverse effect on the Company.
NEW BANK CREDIT FACILITY
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into the New Bank Credit Facility with BankBoston, N.A.,
Deutsche Bank AG, New York Branch, Mellon Bank, N.A. and PNC Bank, National
Association. As of December 18, 1997, the Company had borrowed $500 million in
term loans and approximately $382 million in revolving credit loans under the
New Bank Credit Facility. The proceeds from the loans were principally used to
pay for the shares of common stock of Greenfield purchased in the Tender Offer
and the Merger, to pay transaction costs, to refinance certain indebtedness of
Greenfield and to refinance certain indebtedness of the Company. Subject to
certain conditions, the New Bank Credit Facility permits revolving credit loans
of up to $900 million for working capital requirements, capital expenditures,
and general corporate purposes. The New Bank Credit Facility was initially
secured by all of the stock of certain of Kennametal's significant domestic
subsidiaries, by guarantees of certain of such subsidiaries and by 65% of the
stock of Kennametal's significant foreign subsidiaries. On December 24, 1997,
the stock held as security was released. The New Bank Credit Facility contains
various restrictive covenants and affirmative covenants requiring the
maintenance of certain financial ratios. The term loans under the New Bank
Credit Facility are subject to mandatory amortization commencing on November 30,
1998 and all loans mature on August 31, 2002. Proceeds from the Offering, the
Common Stock Offerings and the Senior Debt Offering will be used to prepay loans
and, correspondingly, permanently reduce the commitments of the lenders under
the New Bank Credit Facility. If all of such offerings are consummated, the
Company intends to replace the New Bank Credit Facility with a $500 million
senior unsecured credit facility, although there can be no assurance that the
Company will be able to replace the New Bank Credit Facility. See
"Capitalization," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Financial Condition."
S-30
<PAGE> 69
OTHER ACQUISITIONS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, a marketer
of carbide precision tools for milling, drilling and other metalcutting
applications, Presto Engineers Cutting Tools Limited of Sheffield, United
Kingdom, a manufacturer of industrial high-speed steel cutting tools, Car-Max
Tool & Cutter Sales, Inc., which is engaged in the distribution of metalcutting
tools and industrial supplies in the midwestern United States and GRS Industrial
Supply Company, which is engaged in the distribution of metalcutting tools and
industrial supplies in the midwestern United States. The companies had aggregate
sales of approximately $66 million in 1996.
OTHER OFFERINGS
Concurrently with the Offering, (i) the Company is offering 4,300,000
shares of Common Stock (4,945,000 shares if the underwriters for the shares
exercise their over-allotment options in full) to the public pursuant to the
Common Stock Offerings and (ii) the Company is also offering $450 million
aggregate principal amount of the Senior Debt Securities. The Offering, the
Common Stock Offerings, and the Senior Debt Offering are independent offerings
and consummation of none of such offerings is conditioned upon consummation of
any of the other offerings. Proceeds from the Common Stock Offerings and the
Senior Debt Offering will be used to prepay loans and, correspondingly,
permanently reduce commitments of the lenders under the New Bank Credit
Facility. This Prospectus Supplement does not constitute an offer to buy or the
solicitation of an offer to sell the Common Stock or the Senior Debt Securities
being offered by the Common Stock Offerings or the Senior Debt Offering,
respectively. The Common Stock Offerings and the Senior Debt Offering will be
made only by means of prospectuses, as amended or supplemented, relating to such
offerings.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the FELINE
PRIDES, after deducting estimated underwriting discounts and expenses of the
Offering payable by the Company, are expected to be approximately $ million
(or approximately $ million if the Underwriters' over-allotment option is
exercised in full). See "Underwriting." The net proceeds from the Common Stock
Offerings (assuming they are completed and the over-allotment options are not
exercised) are estimated to be $ million and the net proceeds from the
Senior Debt Offering (assuming it is completed) are expected to be $
million. The net proceeds from the Offering, the Common Stock Offerings and the
Senior Debt Offering will be used to prepay loans and, correspondingly,
permanently reduce commitments of the lenders under the New Bank Credit
Facility, which indebtedness was incurred by the Company in connection with the
acquisition of Greenfield, and had a weighted average interest rate, as of
November 30, 1997, of 7.1%. If the Company consummates the Offering, the Common
Stock Offerings and the Senior Debt Offering, the Company intends to replace the
New Bank Credit Facility with a $500 million senior unsecured credit facility,
although there can be no assurance that the Company will be able to replace the
New Bank Credit Facility.
S-31
<PAGE> 70
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on the NYSE under the symbol
"KMT." The high and low sales prices as reported on the NYSE Composite Tape and
dividends paid for the periods indicated are set forth in the table below.
<TABLE>
<CAPTION>
PRICE RANGE
--------------
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
Fiscal 1996
First Quarter................................................. $41 1/8 $34 5/8 $0.15
Second Quarter................................................ 36 1/4 28 3/4 0.15
Third Quarter................................................. 37 1/4 27 3/4 0.15
Fourth Quarter................................................ 38 1/4 33 5/8 0.15
Fiscal 1997
First Quarter................................................. $34 3/8 $28 7/8 $0.15
Second Quarter................................................ 39 32 3/4 0.17
Third Quarter................................................. 43 1/8 34 7/8 0.17
Fourth Quarter................................................ 44 1/8 33 1/8 0.17
Fiscal 1998
First Quarter................................................. $49 1/2 $41 1/4 $0.17
Second Quarter................................................ 55 47 0.17
</TABLE>
On December 31, 1997, the last reported sale price of the Common Stock on
the NYSE was $52 1/16 per share.
The Company has paid cash dividends in every quarter since fiscal 1947. The
Board of Directors intends to continue its present policy of declaring regular
quarterly dividends when justified by the financial condition of the Company.
The amount of future dividends, if any, will depend on general business
conditions encountered by the Company, earnings, financial condition and capital
requirements of the Company, and such other factors as the Board of Directors
may deem relevant. The payment of dividends is subject to compliance with
certain financial covenants in the New Bank Credit Facility (see "Description of
Common Stock--Covenant Restrictions") and will be subject to certain
restrictions in connection with the Offering (see "Description of the
Debentures").
S-32
<PAGE> 71
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the consummation of the
acquisition of Greenfield (including borrowings under the New Bank Credit
Facility), the Offering, the Common Stock Offerings and the Senior Debt
Offering, and the application of the net proceeds therefrom, after deducting
estimated underwriting commissions and expenses of the Offering (assuming that
the Underwriters' over-allotment option is not exercised). See "Use of Proceeds"
and "Description of Other Offerings." The information set forth in this table
should be read in conjunction with the consolidated financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus
Supplement. See "Pro Forma Condensed Consolidated Balance Sheet."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Short-term debt.............................................. $ 60,794 $ 37,069
======== ==========
Long-term debt............................................... $ 40,464 $ 635,110
Minority interest in consolidated subsidiaries............... 44,162 44,162
Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures........ -- 222,300
Shareholders' equity:
Preferred stock, 5,000 shares authorized; none issued...... -- --
Capital stock, $1.25 par value per share;
70,000 shares authorized; 29,370 and 33,670 shares
issued(a)............................................... 36,712 42,087
Additional paid-in capital................................. 148,438 346,663
Retained earnings.......................................... 419,174 411,314
Less treasury shares, at cost; 3,153 shares held........... (61,101) (61,101)
Cumulative translation adjustments......................... (13,154) (13,154)
-------- ----------
Total shareholders' equity.............................. 530,069 725,809
-------- ----------
Total capitalization.................................... $614,695 $1,627,381
======== ==========
</TABLE>
- ---------
(a) Does not include: (i) 1,567,185 shares of Common Stock as of September 30,
1997, issuable upon exercise of outstanding options of which options
covering 1,539,929 shares were exercisable as of that date; (ii) 63,804
shares issuable as of September 30, 1997, pursuant to the Company's deferred
stock plans; (iii) shares which may be issued pursuant to the Company's
dividend reinvestment and stock purchase plan; or (iv) from to
shares which will be issued on , 2001 pursuant to the
Offering depending upon the average trading price of the Common Stock prior
to issuance (or from to shares if the underwriters for the
Offering exercise their over-allotment option in full).
S-33
<PAGE> 72
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Statements of Income, the
Pro Forma Condensed Consolidated Balance Sheet and the pro forma data under
"Prospectus Supplement Summary--Summary Condensed Consolidated Financial
Information" are based on the historical financial statements of the Company and
Greenfield adjusted to give effect to the acquisition of Greenfield, the
Offering, the Common Stock Offerings and the Senior Debt Offering. The Pro Forma
Condensed Consolidated Statements of Income for the year ended June 30, 1997,
and for the three months ended September 30, 1997, assume that the acquisition
of Greenfield occurred as of the first day of the Company's 1997 fiscal year
(July 1, 1996). Since Greenfield has a fiscal year-end of December 31, the
historical information included in the Pro Forma Condensed Consolidated
Statement of Income for the year ended June 30, 1997 has been derived from
Greenfield's operating results for the twelve months ended June 30, 1997. The
Pro Forma Condensed Consolidated Balance Sheet gives effect to the acquisition
of Greenfield, the Offering, the Common Stock Offerings and the Senior Debt
Offering as if they had occurred on September 30, 1997.
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Greenfield, and accordingly is based on
estimated purchase accounting adjustments that are subject to further revision
depending upon completion of appraisals or other studies of the fair value of
Greenfield's assets and liabilities. Final purchase accounting adjustments will
differ from the pro forma adjustments presented herein and described in the
accompanying notes due to the results of operations of Greenfield from September
30, 1997, to the date of closing (November 18, 1997). See Note 18 to the
Company's consolidated financial statements included herein.
The pro forma financial information reflects certain assumptions described
above and in the Notes to Pro Forma Condensed Consolidated Statements of Income
and Pro Forma Condensed Consolidated Balance Sheet which follow. The pro forma
financial information, including notes thereto, should be read in conjunction
with the consolidated financial statements of the Company and of Greenfield, and
the related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus Supplement. The pro forma financial information is provided for
informational purposes only and does not purport to present what the Company's
results of operations would actually have been if the acquisition of Greenfield
had occurred on the assumed dates, as specified above, or to project the
Company's financial condition or results of operations for any future period.
S-34
<PAGE> 73
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $1,156,343 $ 527,019 $ -- $ -- $ 1,683,362
Cost of goods sold.............. 668,415 373,133 2,000(a) -- 1,043,548
---------- -------- -------- -------- ----------
Gross profit...................... 487,928 153,886 (2,000) -- 639,814
Operating expenses.............. 357,996 92,421 -- -- 450,417
Amortization of intangibles..... 2,907 4,946 10,557(b) -- 18,410
---------- -------- -------- -------- ----------
Operating income.................. 127,025 56,519 (12,557) -- 170,987
Interest expense................ 10,393 10,916 64,922(c) (28,858)(d) 57,373
Other income.................... 1,531 -- -- -- 1,531
Dividends on
Greenfield-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield................... -- 6,900 (6,900)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures.... -- -- -- 15,165(f) 15,165
---------- -------- -------- -------- ----------
Income before income taxes and
minority interest............... 118,163 38,703 (70,579) 13,693 99,980
Provision for income taxes...... 44,900 15,876 (26,261) 5,477 39,992(g)
Minority interest............... 1,231 -- -- -- 1,231
---------- -------- -------- -------- ----------
Net income........................ $ 72,032 $ 22,827 $ (44,318) $ 8,216 $ 58,757
========== ======== ======== ======== ==========
PER SHARE DATA:
Net income........................ $ 2.71 $ 1.90(h)
========== ==========
Weighted average shares
outstanding..................... 26,575 30,875(h)
========== ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
S-35
<PAGE> 74
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $15.5 million less the elimination of historical
Greenfield goodwill amortization of approximately $4.9 million.
(c) Reflects (i) an increase in interest expense of approximately $69.1 million
associated with the New Bank Credit Facility, (ii) the elimination of
historical interest expense of approximately $17.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield and (iii)
the amortization of deferred financing costs of approximately $13.1 million
to establish the New Bank Credit Facility, which includes a charge to
reflect repayments of the New Bank Credit Facility using the net proceeds of
the Offering, the Common Stock Offerings and the Senior Debt Offering.
(d) Reflects a decrease in interest expense of approximately $28.9 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offering, the Common Stock Offerings and the
Senior Debt Offering.
(e) Reflects the elimination of historical dividends of approximately $6.9
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $14.6 million in connection with Company-obligated,
mandatorily redeemable securities of subsidiary holding solely parent
company debentures, and amortization of transaction costs related to the
trust preferred securities of approximately $0.5 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
S-36
<PAGE> 75
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................... $310,792 $ 139,836 $ -- $ -- $ 450,628
Cost of goods sold................ 178,569 98,773 500(a) -- 277,842
-------- -------- -------- ------- --------
Gross profit........................ 132,223 41,063 (500) -- 172,786
Operating expenses................ 98,518 25,769 -- -- 124,287
Amortization of intangibles....... 1,052 1,263 2,721(b) -- 5,036
-------- -------- -------- ------- --------
Operating income.................... 32,653 14,031 (3,221) -- 43,463
Interest expense.................. 1,180 3,670 12,955(c) (7,215)(d) 10,590
Other (expense)................... (440) -- -- -- (440)
Dividends on Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield..................... -- 1,725 (1,725)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures...... -- -- -- 3,791(f) 3,791
-------- -------- -------- ------- --------
Income before income taxes and
minority interest................. 31,033 8,636 (14,451) 3,424 28,642
Provision for income taxes........ 12,100 3,541 (5,554) 1,370 11,457(g)
Minority interest................. 1,385 -- -- -- 1,385
-------- -------- -------- ------- --------
Net income.......................... $ 17,548 $ 5,095 $ (8,897) $ 2,054 $ 15,800
======== ======== ======== ======= ========
PER SHARE DATA:
Net income.......................... $ 0.67 $ 0.52(h)
======== ========
Weighted average shares
outstanding....................... 26,171 30,471(h)
======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
S-37
<PAGE> 76
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $3.9 million less the elimination of historical
Greenfield goodwill amortization of approximately $1.2 million.
(c) Reflects: (i) an increase in interest expense of approximately $17.3 million
associated with the New Bank Credit Facility and (ii) the elimination of
historical interest expense of approximately $4.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield.
(d) Reflects a decrease in interest expense of approximately $7.2 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offering, the Common Stock Offerings and the
Senior Debt Offering.
(e) Reflects the elimination of historical dividends of approximately $1.7
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $3.7 million in connection with Company-obligated, mandatorily
redeemable securities of subsidiary holding solely parent company
debentures, and amortization of transaction costs related to the trust
preferred securities of approximately $0.1 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
S-38
<PAGE> 77
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents.............. $ 45,409 $ -- $ -- $ -- $ 45,409
Accounts receivable, net of
allowance....................... 202,144 98,100 -- -- 300,244
Inventories....................... 214,068 182,524 5,700(a) -- 396,292
-- -- (6,000)(b) -- --
Other current assets.............. 24,949 5,875 -- -- 30,824
-------- -------- ---------- --------- ----------
Total current assets............ 486,570 286,499 (300) -- 772,769
Net property, plant and
equipment....................... 310,563 169,179 20,000(a) -- 497,242
-- -- (2,500)(b) -- --
Intangible assets................. 57,691 180,187 439,952(a) -- 677,830
Other assets...................... 64,765 2,302 13,100(c) (13,100) (c) 71,029
-- -- -- 3,962(d) --
-------- -------- ---------- --------- ----------
Total assets.................... $919,589 $ 638,167 $ 470,252 $ (9,138) $ 2,018,870
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Short-term debt................... $ 60,794 $ 6,632 $ (30,357)(e) $ -- $ 37,069
Accounts payable.................. 61,306 31,026 -- -- 92,332
Other current liabilities......... 106,035 41,561 3,000(b) 5,100(f) 150,456
-- -- -- (5,240)(c) --
-------- -------- ---------- --------- ----------
Total current liabilities....... 228,135 79,219 (27,357) (140) 279,857
Term debt and capital leases, less
current maturities.............. 40,464 197,734 (200,000)(e) 450,000(d) 635,110
-- -- 1,023,950(e) (877,038)(d) --
Other liabilities................. 76,759 29,193 5,680(a) -- 111,632
-------- -------- ---------- --------- ----------
Total liabilities............... 345,358 306,146 802,273 (427,178) 1,026,599
Minority interest in consolidated
subsidiaries.................... 44,162 -- -- -- 44,162
Greenfield-obligated, mandatorily
redeemable convertible preferred
securities of subsidiary
Greenfield Capital Trust holding
solely convertible subordinated
debentures of Greenfield........ -- 115,000 (115,000)(e) -- --
Company-obligated, mandatorily
redeemable securities of
subsidiary holding solely parent
company debentures.............. -- -- -- 222,300(g) 222,300
Shareholders' equity.............. 530,069 217,021 (217,021)(a) 214,000(d) 725,809
-- -- -- (7,860)(c) --
-- -- -- (10,400)(h) --
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity......... $919,589 $ 638,167 $ 470,252 $ (9,138) $ 2,018,870
======== ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet.
S-39
<PAGE> 78
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(a) The preliminary allocation of the estimated purchase price to assets
acquired and liabilities assumed as of September 30, 1997 is as follows:
<TABLE>
<S> <C>
Purchase price............................................................. $ 624,960
Buy-out of stock options and warrants...................................... 16,333
Estimated acquisition costs................................................ 24,200
---------
Total purchase price.............................................. $ 665,493
=========
Net book value of assets acquired.......................................... $ 217,021
Less: goodwill of Greenfield............................................... (180,187)
Adjustments to fair value:
Inventories, eliminate LIFO reserve............................... 5,700
Property, plant and equipment..................................... 20,000
Net deferred income tax liabilities............................... (5,680)
Impact of restructuring of Greenfield............................. (11,500)
Goodwill.......................................................... 620,139
---------
$ 665,493
=========
</TABLE>
(b) Reflects the costs related to the restructuring of Greenfield's South
Deerfield, Massachusetts operations. In November 1997, Greenfield recorded
an $11.5 million charge for non-recurring expenses primarily related to the
restructuring of its South Deerfield operations. These costs primarily
included inventory and machinery and equipment reserves, severance costs and
other miscellaneous expenses relative to Greenfield's decision to
discontinue the manufacture and sale of certain low-margin product lines.
The restructuring will result in a reduction in personnel, thereby
eliminating excessive costs and redundancies in future periods. Greenfield
also expects to record additional non-recurring expenses of approximately
$2.0 million in 1998 related to the restructuring of its South Deerfield
operations. These amounts are not included in the restructuring charge.
<TABLE>
<S> <C>
The components of the restructuring charge are recorded as follows:
Inventory write-down................................................ $ 6,000
Property, plant and equipment write-down............................ 2,500
Severance costs and other current liabilities....................... 3,000
Impact of restructuring of Greenfield............................... $11,500
</TABLE>
(c) Represents payment of estimated deferred financing costs of approximately
$13.1 million to establish the New Bank Credit Facility. Such costs are
subsequently charged to interest expense, with a related tax benefit of
approximately $5.2 million, upon payment of the New Bank Credit Facility
using the net proceeds of the Offering, the Common Stock Offerings and the
Senior Debt Offering.
(d) Reflects the net proceeds of approximately $877.0 million from: (i)
approximately $214.0 million from the issuance of 4.3 million shares of
Common Stock, net of related transaction costs of approximately $11.0
million; (ii) approximately $217.0 million from the issuance of $225.0
million of Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures, net of related
transaction costs of approximately $8.0 million; and (iii) an aggregate of
approximately $446.0 million from the issuance of $450.0 million of the 2001
Notes, the 2008 Notes and the 2028 Debentures, net of the estimated portion
of the anticipated transaction costs of approximately $4.0 million.
(e) Reflects borrowings under the New Bank Credit Facility of approximately
$1,024.0 million to: (i) acquire Greenfield (approximately $665.5 million);
(ii) repay approximately $230.4 million of certain debt of Greenfield and
Kennametal; (iii) repay $115.0 million of outstanding indebtedness of
Greenfield-obligated, mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust holding solely convertible
subordinated debentures of Greenfield; and (iv) pay transaction fees of
approximately $13.1 million related to the New Bank Credit Facility.
(f) Reflects the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering.
(g) Reflects the proceeds of approximately $225.0 million from the issuance of
Company-obligated, mandatorily redeemable securities of subsidiary holding
solely parent company debentures, net of the estimated portion of the
anticipated transaction costs related solely to the trust preferred
securities of approximately $2.7 million.
(h) Reflects: (i) the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering; and (ii) the estimated portion of
anticipated transaction costs related to the stock purchase contract
component of the FELINE PRIDES Offering of approximately $5.3 million.
S-40
<PAGE> 79
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) an agreement of trust, dated as of November 12, 1997, executed by the
Company, as depositor (the "Sponsor") and certain of the trustees of the Trust
(the "Kennametal Trustees") and (ii) the filing of a certificate of trust with
the Secretary of State of the State of Delaware on November 12, 1997. Such
agreement of trust will be amended and restated in its entirety (the
"Declaration") substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus Supplement forms a part. The Declaration will
be qualified as an indenture under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). Although upon issuance of the Trust Preferred
Securities, the holders of Income PRIDES will be the beneficial owners of the
related Trust Preferred Securities, such Trust Preferred Securities will be
pledged with the Collateral Agent to secure the obligations of the holders under
the related Purchase Contracts. See "Description of the Purchase
Contracts--Pledged Securities and Pledge Agreement" and "Description of the
Trust Preferred Securities--Book-Entry Only Issuance--The Depository Trust
Company." The Company will directly or indirectly acquire Common Securities in
an aggregate liquidation amount equal to 3% of the total capital of the Trust.
The Trust exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) investing the proceeds of the Trust Securities in the Debentures and
(iii) engaging in only those other activities necessary, appropriate, convenient
or incidental thereto. The Trust has a term of approximately seven years, but
may dissolve earlier as provided in the Trust Agreement.
The number of Kennametal Trustees initially is five. Three of the
Kennametal Trustees (the "Regular Trustees") are persons who are employees or
officers of or who are affiliated with the Company. Pursuant to the Trust
Agreement, the fourth trustee is The First National Bank of Chicago, a financial
institution that is unaffiliated with the Company, which trustee serves as
institutional trustee under the Trust Agreement and as indenture trustee for the
purposes of compliance with the provisions of the Trust Indenture Act (the
"Institutional Trustee"). For the purpose of compliance with the provisions of
the Trust Indenture Act, the Institutional Trustee will also act as trustee (the
"Guarantee Trustee") under the Guarantee and First Chicago Delaware Inc. serves
as trustee in the State of Delaware (the "Delaware Trustee") for the purposes of
the Trust Act (as defined herein), until removed or replaced by the holder of
the Common Securities. See "Description of the Guarantee" and "Description of
the Trust Preferred Securities--Voting Rights."
The Institutional Trustee will hold title to the Debentures for the benefit
of the holders of the Trust Securities and the Institutional Trustee will have
the power to exercise all rights, powers and privileges under the Indenture as
the holder of the Debentures. In addition, the Institutional Trustee will
maintain exclusive control of a segregated noninterest bearing bank account (the
"Property Account") to hold all payments made in respect of the Debentures for
the benefit of the holders of the Trust Securities. The Institutional Trustee
will make payments of distributions and payments on liquidation, redemption and
otherwise to the holders of the Trust Securities out of funds from the Property
Account. The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Preferred Securities. The Company, as the direct or indirect
holder of all the Common Securities, will have the right to appoint, remove or
replace any Kennametal Trustee and to increase or decrease the number of
Kennametal Trustees; provided however, that the number of Kennametal Trustees
shall be at least three, a majority of which shall be Regular Trustees. The
Company will pay all fees and expenses related to the Trust and the offering of
the Trust Securities. See "Description of the Debentures--Miscellaneous."
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Declaration, the Delaware Business Trust Act, as amended (the "Trust Act"), and
the Trust Indenture Act. See "Description of the Trust Preferred Securities."
The trustee in the State of Delaware is First Chicago Delaware Inc.,
Wilmington, Delaware. The principal place of business of the Trust is c/o
Kennametal Inc., Route 981 South at Westmoreland County Airport, Latrobe, PA
15650, and its telephone number is (412) 539-5000.
S-41
<PAGE> 80
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in Kennametal's
consolidated financial statements with the Trust Preferred Securities shown on
the Company's balance sheet under the caption "Company-obligated mandatorily
redeemable securities of subsidiary holding solely parent company debentures."
The financial statement footnotes to the Company's consolidated financial
statements will reflect that the sole asset of the Trust will be the Debentures.
Dividends on the Trust Preferred Securities will be reflected as a charge to the
Company's consolidated income, identified as "Minority interest on
Company-obligated, mandatorily redeemable securities of subsidiary holding
solely parent company debentures," whether paid or accrued.
The Purchase Contracts are forward transactions in the Company's Common
Stock. Upon settlement of a Purchase Contract, the Company will receive the
Stated Amount on such Purchase Contract and will issue the requisite number of
shares of Common Stock. The Stated Amount thus received will be credited to
shareholders' equity allocated between the common stock and paid-in capital
accounts. The present value of the Contract Adjustment Payments will initially
be charged to equity, with an offsetting credit to liabilities.
Prior to the issuance of shares of Common Stock upon settlement of the
Purchase Contracts, it is anticipated that the FELINE PRIDES will be reflected
in the Company's earnings per share calculations using the treasury stock
method. Under this method, the number of shares of Common Stock used in
calculating earnings per share is deemed to be increased by the excess, if any,
of the number of shares issuable upon settlement of the Purchase Contracts over
the number of shares that could be purchased by the Company in the market (at
the average market price during the period) using the proceeds receivable upon
settlement. Consequently, it is anticipated there will be no dilutive effect on
the Company's earnings per share except during periods when the average market
price of Common Stock is above the Threshold Appreciation Price.
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<PAGE> 81
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
The selected condensed 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, 1993, 1994, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP. The consolidated financial statements as of and
for the three months ended September 30, 1996 and 1997 are derived from the
Company's unaudited interim financial statements appearing elsewhere in this
Prospectus Supplement, which in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the data included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the three
months ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected for the full fiscal year. 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 of the Company and the related notes thereto included elsewhere in
this Prospectus Supplement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information set forth
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------------ --------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $598,496 $802,513 $983,873 $1,079,963 $1,156,343 $275,203 $310,792
Cost of goods sold.................. 352,773 472,533 560,867 625,473 668,415 160,493 178,569
-------- -------- -------- ---------- ---------- -------- --------
Gross profit.......................... 245,723 329,980 423,006 454,490 487,928 114,710 132,223
Research and development expenses... 14,714 15,201 18,744 20,585 24,105 5,739 5,227
Selling, marketing and distribution
expenses.......................... 144,850 189,487 219,271 242,375 263,980 63,019 68,571
General and administrative
expenses.......................... 41,348 58,612 55,853 65,417 69,911 18,206 24,720
Restructuring charge................ -- 24,749 -- 2,666 -- -- --
Patent litigation income............ (1,738) -- -- -- -- -- --
Amortization of intangibles......... 3,425 3,996 2,165 1,596 2,907 546 1,052
-------- -------- -------- ---------- ---------- -------- --------
Operating income...................... 43,124 37,935 126,973 121,851 127,025 27,200 32,653
Interest expense.................... 9,549 13,811 12,793 11,296 10,393 2,642 1,180
Other income (expense).............. 519 1,860 54 4,821 1,531 627 (440)
-------- -------- -------- ---------- ---------- -------- --------
Income before income taxes and
minority interest................. 34,094 25,984 114,234 115,376 118,163 25,185 31,033
Provision for income taxes.......... 14,000 15,500 45,000 43,900 44,900 9,800 12,100
Minority interest................... -- (431) 940 1,744 1,231 182 1,385
-------- -------- -------- ---------- ---------- -------- --------
Income before cumulative effect of
accounting changes.................. 20,094 10,915 68,294 69,732 72,032 15,203 17,548
Cumulative effect of accounting
changes............................. -- (15,003) -- -- -- -- --
-------- -------- -------- ---------- ---------- -------- --------
Net income (loss)..................... $ 20,094 $ (4,088) $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
======== ======== ======== ========== ========== ======== ========
PER SHARE AND OTHER DATA:
Income before cumulative effect of
accounting changes.................. $ 0.93 $ 0.45 $ 2.58 $ 2.62 $ 2.71 $ 0.57 $ 0.67
Net income (loss)..................... 0.93 (0.17) 2.58 2.62 2.71 0.57 0.67
Dividends............................. 0.58 0.58 0.60 0.60 0.66 0.15 0.17
Weighted average shares outstanding... 21,712 24,304 26,486 26,635 26,575 26,729 26,171
Ratio of earnings to fixed
charges(a).......................... 3.75 2.47 8.02 8.62 8.75 7.65 14.94
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
-------------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $120,877 $130,777 $184,072 $217,651 $175,877 $ 258,435
Total assets................................. 448,263 697,532 781,609 799,491 869,309 919,589
Long-term debt (less current maturities)..... 87,891 90,178 78,700 56,059 40,445 40,464
Shareholders' equity......................... 255,141 322,836 391,885 438,949 459,608 530,069
</TABLE>
- ---------
(a) For the purpose of the calculation of this ratio, earnings represent income
from continuing operations before fixed charges, minority interest,
provision for income taxes and the cumulative effect of accounting changes.
Fixed charges include interest expense, including amounts capitalized and
the portion (one-third) of rental expenses deemed to be representative of
interest expense.
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<PAGE> 82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
SALES AND MARKETS. During the quarter ended September 30, 1997,
consolidated sales were $310.8 million, up 13 percent from $275.2 million in the
same quarter last year. Sales rose 16 percent excluding unfavorable foreign
currency translation effects. The increase in sales was primarily attributable
to higher sales of metalworking products in North America and from higher sales
of industrial supplies sold by J&L Industrial Supply ("J&L") and by integrated
industrial supply programs ("Full Service Supply programs"), both operating
within JLK.
Net income for the first quarter ended September 30, 1997, was $17.5
million, or $0.67 per share, as compared with net income of $15.2 million, or
$0.57 per share, in the same quarter last year. The results included expenses of
$5.2 million, or $0.12 per share, for the completion of the relocation and
related expenses incurred in connection with the construction of the new world
headquarters. Earnings benefited from higher sales of metalcutting and related
products in North America and Europe as well as from higher production levels
and productivity improvements related to its focused factory initiative of
rearranging manufacturing layout to improve productivity. This was partially
offset by unfavorable foreign currency translation effects.
During the September 1997 quarter, sales in the North America Metalworking
market increased 7 percent from the previous year. Sales of metalcutting inserts
and toolholding devices in North America increased due to improved economic
conditions in the United States in most major end markets and from continued
emphasis on milling and drilling products. Additionally, sales of metalcutting
and toolholding devices sold through all sales channels in North America,
including sales through the industrial supply market, increased 11 percent.
Sales in the Europe Metalworking market on a local currency basis increased
13 percent over the same quarter a year ago. Including unfavorable foreign
currency translation effects, sales in the Europe Metalworking market were flat.
Demand for metalworking products continued to show improvement during the
quarter in most key end markets as a result of improved market conditions in
Europe, principally in Germany. Sales in the European market have posted
double-digit order gains for four consecutive months.
In the Asia Pacific Metalworking market, sales decreased slightly as
results were affected by weak economic conditions in Korea, Singapore and
Thailand. Excluding unfavorable foreign currency translation effects, sales in
the Asia Pacific Metalworking market increased 3 percent. Additionally,
effective August 1, 1997, the Company acquired 100 percent of Kobe Kennametal
K.K. from its joint venture partner, Kobe Steel.
Sales in the industrial supply market rose 35 percent as a result of
increased sales through mail order, Full Service Supply programs and from
acquisitions. Excluding the acquisitions, sales increased approximately 24
percent. Sales increased because of four additional showrooms, from the
integration of new showroom locations from acquired companies, from further
penetration of existing customers, and from an expanded product offering of more
than 10,000 new stock keeping units ("SKUs") in J&L's 1998 master catalog issued
September 1, 1997.
During the September 1997 quarter, sales in the mining and construction
market increased 10 percent from the previous year as a result of increased
domestic demand for highway construction tools. International sales of mining
and highway construction tools also improved as a result of strong market demand
in South Africa and China.
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom ("Presto"), Car-Max
Tool & Cutter Sales, Inc. and GRS Industrial Supply Company ("GRS"). The
companies had aggregate sales of approximately $66 million in 1996. The
acquisitions were accounted for using the purchase method of accounting. The
consolidated financial statements include the operating results of each business
from the date of acquisition except for the acquisitions of Presto and GRS,
which were acquired after September 30, 1997. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
significant.
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<PAGE> 83
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
September 1997 quarter was 42.5 percent as compared with 41.7 percent in the
prior year. The gross profit margin increased primarily as a result of
productivity improvements related in part to the focused factory initiative and
from higher production levels. This increase was partially offset by unfavorable
foreign currency translation effects.
Operating expenses as a percentage of sales were 31.7 percent compared to
31.6 percent last year. Operating expenses increased 13 percent primarily
because of relocation and related costs incurred in connection with the
construction of the new world headquarters, which amounted to approximately $5.2
million during the first quarter. The project is now successfully completed.
Operating expenses also increased because of higher costs related to
acquisitions, and from the JLK showroom expansion program, including higher
direct mail costs and increased direct marketing costs in new territories in the
United States and in Europe.
Interest expense for the September 1997 quarter was $1.2 million compared
to $2.6 million in the same quarter of a year ago. Interest expense decreased as
a result of lower debt balances as the Company used the proceeds received from
the initial public offering ("IPO") of approximately 4.9 million shares of
common stock of JLK to reduce indebtedness.
The effective tax rate for the September 1997 quarter was 39.0 percent
compared to an effective tax rate of 38.9 percent in the prior year.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
OVERVIEW. Net income for 1997 was $72.0 million, compared to $69.7 million
last year. While revenues and earnings rose to record highs, earnings were
affected by weakness in the European market, primarily in Germany, and from
negative effects of foreign currency translations due to the strength of the
U.S. dollar. Earnings for 1997 also were affected by additional costs related to
the J&L showroom expansion program, integration of new client-server information
systems and relocation and related costs associated with the construction of a
new world headquarters in Latrobe, Pennsylvania. Earnings in 1997 benefited from
slightly higher sales of metalworking products in North America and from higher
sales of metalworking products and industrial supplies sold to the Industrial
Supply market through mail order and Full Service Supply programs.
<TABLE>
<CAPTION>
SALES BY MARKET AND GEOGRAPHIC AREA
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------
1995 1996 1997
-------------------- --------------------------------- ---------------------------------
(IN THOUSANDS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL AMOUNT CHANGE OF TOTAL AMOUNT CHANGE
-------- -------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MARKET
Metalworking:
North America..... 37% $367,807 34% $ 368,481 --% 33% $ 378,679 3%
Europe............ 26 254,037 25 271,004 7 22 251,304 (7)
Asia Pacific...... 3 24,579 3 35,854 46 4 41,425 16
Industrial
Supply............ 20 201,152 24 256,703 28 28 328,531 28
Mining
and
Construction... 14 136,298 14 147,921 9 13 156,404 6
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
BY GEOGRAPHIC AREA
Within the
United States..... 62% $606,623 62% $ 665,510 10% 65% $ 752,268 13%
International....... 38 377,250 38 414,453 10 35 404,075 (3)
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
</TABLE>
SALES AND MARKETS. Sales for the year ended June 30, 1997, were $1.2
billion, up 7 percent from $1.1 billion last year. Sales primarily increased in
1997 because of higher sales of metalworking products and industrial supplies
sold to the Industrial Supply market by J&L and by Full Service Supply programs.
The increase in sales
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<PAGE> 84
was offset in part by lower sales of metalworking products in Europe due to weak
economic conditions, especially the German market, and from negative foreign
currency translation effects.
Sales in the North America Metalworking market increased 3 percent over
1996, despite the transfer of small customer accounts to J&L, as a result of
improved economic conditions in the United States and from the continued
emphasis on milling and drilling products. Sales in Canada rose 15 percent
because of increased sales of metalworking products to aerospace and automotive
companies. Additionally, sales of traditional metalworking products sold through
all sales channels in North America, including sales through the Industrial
Supply market, increased 7 percent.
Sales in the Europe Metalworking market decreased 7 percent. Demand for
metalworking products continued to be slow due to weak economic conditions in
Europe, primarily in the German market. Demand in Europe was weak for most of
1997 but began to show improvement during the fourth quarter of fiscal 1997.
Despite the economic situation in Europe, sales continued to post gains in the
United Kingdom and France. In the Asia Pacific Metalworking market, sales rose
16 percent as a result of increased demand in China, Japan and Taiwan, although
sales were affected by soft economic conditions in Korea and Thailand. Excluding
foreign currency translation effects, sales in the Europe Metalworking market
decreased 2 percent, while sales in the Asia Pacific Metalworking market
increased 21 percent.
The Industrial Supply market was the major contributor to the overall sales
increase because of the continued growth of mail order and Full Service Supply
programs. Sales rose 28 percent primarily because of the expanded product
offering of over 20,000 new SKUs in the J&L 1997 master catalog, from the
addition of five new showrooms and from innovative marketing programs. Full
Service Supply programs increased, to a lesser extent, from the continued
ramp-up of existing Full Service Supply programs. Also contributing to the sales
increase was the acquisition of two industrial supply companies during the
fourth quarter of 1997. The acquired companies had annual sales of $36 million
in their latest fiscal year and will provide four additional showroom locations
in the Midwest. Excluding these acquisitions, the Industrial Supply market sales
increased 26 percent. 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 around 60
customers covering about 120 different facilities.
Sales in the Mining and Construction market increased 6 percent from 1996
as a result of increased domestic and international demand for mining tools.
Highway construction tool sales were flat in the United States, while
international sales declined slightly as a result of weak economic conditions in
Europe.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1997, was 42.2 percent, compared to 42.1 percent last year.
The gross profit margin improved slightly as a result of the positive effects of
productivity improvements related to the focused factory initiative. These
benefits were partially offset by a less favorable sales mix coupled with
unfavorable foreign currency translation effects.
Operating expenses as a percentage of sales were 31.0 percent, compared to
30.4 percent last year, excluding the effects of the one-time restructuring
charge in fiscal 1996. Operating expenses increased primarily because of higher
costs related to the J&L showroom expansion program, including higher direct
mail costs and increased direct marketing in new territories in the United
States and in Europe. Operating expenses also increased from higher costs to
support new and existing Full Service Supply programs, from the integration of
new client-server information systems, from higher research and development
costs and from relocation and related costs of $4.7 million associated with the
construction of a new world headquarters.
Interest expense decreased 8 percent because of lower average borrowings
coupled with slightly lower interest rates. The effective tax rate was 38.4
percent in 1997, compared to 38.6 percent in 1996. The decrease in the effective
tax rate resulted from additional tax benefits derived from international
operations.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
OVERVIEW. Net income for 1996 was $69.7 million, up 2 percent from $68.3
million in 1995. The 1996 results included a restructuring charge totaling $2.7
million ($0.06 per share) for the relocation of the North America Metalworking
Headquarters and for the closure of a manufacturing facility in Canada.
Excluding the restructuring charge, net income for 1996 was up 5 percent.
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<PAGE> 85
Earnings for 1996 increased because of the rapid growth in industrial
supply sales, primarily through mail order and Full Service Supply programs and
from slightly higher sales of metalcutting products in each of the three
metalworking markets. Earnings were affected by a less favorable sales mix and
lower production levels. Further, costs associated with the implementation of
new client-server information systems and focused factory programs reduced
pretax earnings by $10.4 million during 1996.
SALES AND MARKETS. Sales for the year ended June 30, 1996, were $1.1
billion, up 10 percent from $984 million in 1995. Sales increased in each of the
five markets over 1995. Sales increased in 1996 because of slightly higher sales
volumes and modest price increases.
Sales in the North America Metalworking market were flat compared to the
prior year. Sales of metalcutting inserts and toolholding devices in the United
States were flat, as sales growth was affected by weak economic conditions.
Sales of metalworking products in Canada increased 11 percent because of
increased demand.
In the Europe Metalworking market, sales increased 7 percent because of
higher sales volumes. Demand for metalworking products was slow in Germany,
while sales grew at a faster pace in the United Kingdom and France. Demand in
Europe was stronger in the first half of the fiscal year but slowed as the year
progressed. In the Asia Pacific Metalworking market, sales rose 11 percent as a
result of increased demand. Sales also increased because, effective July 1,
1995, Kennametal began to consolidate its majority-owned subsidiaries in China
and Japan. Excluding foreign currency translation effects, sales in the Europe
and Asia Pacific Metalworking markets increased 6 and 7 percent, respectively.
The Industrial Supply market accounted for the largest percentage sales
gain because of the rapid growth of mail order and Full Service Supply programs.
Sales rose 28 percent as a result of aggressive marketing programs, the
successful geographic showroom expansion program at J&L and new and existing
Full Service Supply programs with large customers. During fiscal 1996, J&L
opened seven showroom locations and at the end of fiscal 1996 operated a total
of 18 showrooms in the United States and one location in the United Kingdom.
Full Service Supply added 18 new contracts, bringing the total number to
slightly more than 50 contracts covering more than 100 plant locations in 1996.
Also, during June 1996, the Company began transferring small customer accounts
from the North America Metalworking market to J&L to provide added customer
service and to further leverage J&L's full complement of metalcutting supplies.
Sales in the Mining and Construction market increased 9 percent over 1995
as a result of strong domestic demand for both mining and highway construction
tools. International sales rose only slightly because of increased competition.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1996, was 42.1 percent, compared to 43.0 percent in 1995.
The gross profit margin benefited from higher sales volumes and modest price
increases. These benefits were offset by a less favorable sales mix, slightly
higher raw material costs, costs associated with the implementation of focused
factory programs and reduced manufacturing efficiencies because of lower
production levels.
Operating expenses as a percentage of sales were 30.4 percent, compared to
29.9 percent in 1995. Operating expenses increased 12 percent primarily because
of costs related to the implementation of new client-server information systems,
costs necessary to support the higher sales levels, and marketing and showroom
expansion programs at J&L. Results of operations also included a restructuring
charge related to the consolidation of the North America Metalworking
headquarters from Raleigh, North Carolina, to Latrobe, Pennsylvania, and the
closure of a manufacturing facility in Canada. These pretax items were recorded
during the fourth quarter of fiscal 1996 and amounted to $2.7 million.
Interest expense decreased 12 percent because of lower average borrowings
and slightly lower interest rates. The effective tax rate was 38.6 percent in
1996, compared to 39.7 percent in 1995. The decrease in the effective tax rate
resulted from additional tax benefits derived from international operations.
RESTRUCTURING CHARGE. During the fourth quarter of fiscal 1996, the
Company recorded a pretax charge of $2.7 million to relocate its North America
Metalworking headquarters from Raleigh, North Carolina, to Latrobe,
Pennsylvania, and to close a manufacturing facility in Canada. The relocation
was made to globalize key functions and to provide a more efficient corporate
structure. As a result, a pretax charge of $2.7 million was recorded to cover
the related one-time costs of employee separation arrangements and early
retirements. In
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<PAGE> 86
connection with the relocation, the Company is constructing a new world
headquarters building estimated to cost $20 million.
Certain costs resulting from the relocation of employees, hiring and
training new employees, and other costs resulting from the temporary duplication
of certain operations were not included in the one-time charge and will be
included in operating expenses as incurred. The costs related to these items
were estimated to be $9 million pretax and will be incurred during fiscal 1997
and 1998.
LIQUIDITY AND CAPITAL RESOURCES
On October 10, 1997, Kennametal and Acquisition Corp. entered into the
Merger Agreement with Greenfield pursuant to which Acquisition Corp. purchased
at $38 per share on November 17, 1997 approximately 16,179,976 shares (98
percent of the outstanding) of Greenfield's common stock. The Merger occurred on
November 18, 1997 and Greenfield became a wholly-owned subsidiary of Kennametal
on that date. The total purchase price for the acquisition of Greenfield
(including estimated transaction costs and assumed Greenfield debt and
convertible redeemable preferred securities of approximately $320 million) is
estimated to be $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into the New Bank Credit Facility. As of December 18, 1997,
the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans under the New Bank Credit Facility. The
proceeds from the loans were principally used to pay for the shares of common
stock of Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of Greenfield and to
refinance certain indebtedness of the Company. Subject to certain conditions,
the New Bank Credit Facility permits revolving credit loans of up to $900
million for working capital requirements, capital expenditures, and general
corporate purposes. The New Bank Credit Facility was initially secured by all of
the stock of certain of Kennametal's significant domestic subsidiaries, by
guarantees of certain of such subsidiaries and by 65 percent of the stock of
Kennametal's significant foreign subsidiaries. On December 24, 1997, the stock
held as security was released. The New Bank Credit Facility contains various
restrictive covenants and affirmative covenants requiring the maintenance of
certain financial ratios. The term loans under the New Bank Credit Facility are
subject to mandatory amortization commencing on November 30, 1998 and all loans
mature on August 31, 2002. Proceeds from the Offering, the Common Stock
Offerings and the Senior Debt Offering will be used to prepay loans and,
correspondingly, permanently reduce the commitments of the lenders under the New
Bank Credit Facility. If all of such offerings are consummated, the Company
intends to replace the New Bank Credit Facility with a $500 million senior
unsecured credit facility, although there can be no assurance that the Company
will be able to replace the New Bank Credit Facility.
Kennametal's cash flow from operations is the primary source of financing
for capital expenditures and internal growth. The Company and its subsidiaries
generally obtain local financing through credit lines with commercial banks.
During 1997, the Company generated $99.9 million in cash from operations.
Cash provided by operations increased from 1996 primarily because of lower
working capital requirements and slightly higher net income. Capital
expenditures, totaling $73.8 million, were made to construct a new world
headquarters in Latrobe, Pennsylvania, and a manufacturing facility in China,
for new client-server information systems and to upgrade machinery and
equipment. Additionally, the Company paid $17.5 million of cash dividends and
paid $19 million to acquire five small companies throughout 1997. The effects of
the acquisitions were not significant to the Company. During the quarter ended
September 30, 1997, the Company generated $40.6 million in cash from operations.
The increase in cash provided by operations resulted primarily from higher net
income and slightly lower incremental working capital requirements. Net cash
used in investing activities during the quarter ended September 30, 1997 was
$32.4 million. The increase in net cash used in investing activities resulted
from higher capital expenditures and from the acquisition of Rubig G.m.b.H. and
the remaining interest in Kobe Kennametal K.K. from its joint venture partner,
Kobe Steel.
On January 31, 1997, the Company initiated a stock repurchase program to
repurchase from time to time up to a total of 1.6 million shares of its
outstanding capital stock. During the year ended June 30, 1997, the Company
repurchased approximately 781,000 shares of its Common Stock at a total cost of
approximately $28.7 million.
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The repurchases were made in the open market or in negotiated or other
permissible transactions. The repurchase of Common Stock was financed
principally by cash from operations and short-term borrowings.
On July 2, 1997, an IPO of approximately 4.9 million shares of common stock
of JLK at a price of $20 per share was consummated. JLK operates the industrial
supply operations consisting of the Company's wholly owned J&L subsidiary and
its Full Service Supply programs. The net proceeds from the offering were
approximately $90 million and represented the sale of approximately 20 percent
of JLK's common stock. The net proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and $20 million related to
intercompany obligations to the Company. The Company used these proceeds to
repay short-term debt. In connection with the IPO, the remaining net proceeds
were loaned to the Company, under an intercompany debt/investment and cash
management agreement at a fluctuating rate of interest equal to the Company's
short-term borrowing costs. The Company will maintain unused lines of credit to
enable it to repay any portion of the borrowed funds as the amounts are due on
demand by JLK. The Company owns approximately 80 percent of the outstanding
common stock of JLK and intends to retain a majority of both the economic and
voting interests of JLK.
During 1996, the Company generated $85 million in cash from operations,
which was used primarily to finance $58 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment, and to acquire new information
systems. In January 1996, the Company announced plans to build a $20 million
facility in Shanghai, China to manufacture cemented carbide metalcutting tools.
Pilot production commenced in the second quarter of fiscal 1998 with full
production beginning in the third quarter of fiscal 1998.
During 1995, the Company generated $57 million in cash from operations,
which was used primarily to finance $43 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment and to acquire new information
systems.
Capital expenditures for fiscal 1998 (excluding) Greenfield are estimated
to be $70-$80 million of which $16.7 million has been spent through September
30, 1997, and will be used primarily to complete the construction of a new world
headquarters in Latrobe, Pennsylvania and a manufacturing facility in China, to
acquire additional client-server information systems, to construct or acquire a
new Midwest distribution center and to upgrade machinery and equipment.
FINANCIAL CONDITION
Kennametal's financial condition remains strong. Total assets were $869
million in 1997, up 9 percent from $799 million in 1996. Net working capital was
$176 million, down 19 percent from the previous year. The ratio of current
assets to current liabilities was 1.6 in 1997, compared with 2.0 in 1996. Total
assets were $920 million at September 30, 1997, up 6 percent from $869 million
at June 30, 1997. Net working capital was $258 million, up 47 percent from $176
million from the previous quarter and the ratio of current assets to current
liabilities was 2.1 as of September 30, 1997 and 1.6 as of June 30, 1997.
Accounts receivable increased 6 percent to $201 million because of
increased sales and from the effects of acquisitions. Inventories rose slightly
to $210 million due to the growth of sales to the Industrial Supply market, the
effects of acquisitions, offset by the Company's inventory reduction efforts of
manufactured products. Inventory turnover was 3.2 in 1997 and 3.0 in 1996. The
Company will continue to focus on ways to improve inventory turnover and overall
asset utilization.
Total debt (including capital lease obligations) increased 33 percent to
$174 million in 1997. In 1997, total debt increased principally because of the
stock repurchase program and increased capital expenditures. The ratio of total
debt to total capital (i.e., total debt divided by the sum of total debt,
minority interest and shareholders' equity) was 27.1 percent in 1997 as compared
with 22.5 percent in 1996. Total debt decreased 42 percent to $101 million and
the Company's debt-to-capital ratio was 15.0 percent at September 30, 1997.
Total debt decreased as a result of the application of net proceeds of $90
million received from the IPO of approximately 4.9 million shares of common
stock of JLK.
After the acquisition of Greenfield, the Offering, the Common Stock
Offerings and the Senior Debt Offering, and the application of the net proceeds
therefrom, total debt will increase to approximately $672.2 million and the
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debt-to-capital ratio will increase to approximately 40.4 percent. To maintain
financial flexibility and to optimize the cost of capital, Kennametal's
financial objective, over the long term, is to maintain a total debt-to-capital
ratio of not more than 40 percent. Cash from operations and the Company's debt
capacity are expected to continue to be sufficient to fund capital expenditures,
dividend payments, stock repurchases, acquisitions and operating requirements.
ENVIRONMENTAL MATTERS
Compliance with Environmental Laws did not have a material effect on the
Company's capital expenditures, earnings or competitive position for fiscal
1997, nor is the Company currently aware of any compliance requirement that it
expects will have a material effect in the future.
The Company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In addition,
the Company has been named as a potentially responsible party at several
Superfund sites in the United States. However, management believes that, based
on its evaluations and discussions with outside counsel and independent
consultants, that the ultimate resolution of these environmental matters will
not have a material adverse effect on the results of operations, financial
position or cash flows of the Company. See Note 14 to the consolidated financial
statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("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 year 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 disclosures.
Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130
is effective for years ending after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company will adopt
SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have
a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the effect of applying this statement.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect
the Company's operations throughout the world. Kennametal strives to minimize
the effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
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BUSINESS
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods--turning, milling and
drilling. In addition, through JLK, the Company markets and distributes a broad
line of consumable metalcutting tools, as well as abrasives, machine tool
accessories, hand tools, measuring equipment and other industrial supplies used
in the metalworking industry. The Company is a recognized leader in turning and
milling consumable metalcutting tools and believes it is the largest North
American and the second largest global provider of consumable metalcutting tools
and supplies. Leveraging its expertise in tungsten carbide powder metallurgy,
the Company has developed innovative consumable tools for the mining and
construction industries and believes it is the largest global manufacturer,
marketer and distributor of such tools to these markets.
In November 1997, the Company acquired Greenfield, the leading North
American manufacturer of drilling and other rotary high-speed steel consumable
metalcutting tools for the metalworking industry. Kennametal believes that
Greenfield's operations strongly complement its core businesses and that the
acquisition of Greenfield, in addition to providing the Company with
opportunities for substantial cost savings, offers significant strategic
benefits, including: (i) providing an important new channel of traditional
industrial distributors through which to sell the Company's products; (ii)
expanding and enhancing the Company's line of drilling products; (iii) allowing
the Company to diversify into new markets such as certain wear products by
leveraging its material science expertise in tungsten carbide powder metallurgy
and (iv) providing the opportunity to introduce and sell each company's products
into the markets served by the other company.
End users of the Company's metalworking products include manufacturers and
suppliers in the aerospace, automotive, construction and farm machinery,
railroad equipment, power generation and transmission equipment, home appliance,
electrical equipment, and oil field services and gas exploration industries. The
Company markets its products through: a technically skilled direct sales force;
JLK's catalogs, showrooms and other direct marketing efforts; JLK's integrated
industrial supply programs; and, with the acquisition of Greenfield, a network
of traditional industrial distributors. This multi-channel product marketing
approach enables the Company to meet the varying needs of metalworking customers
of all sizes which range from same-day ordering and rapid delivery of products
to outsourcing the entire procurement and inventory management process for
metalworking and related products. The Company estimates there are approximately
250,000 metalworking industrial sites in the United States. The Company's
multi-channel distribution network, comprehensive product offering and global
presence allow customers of all sizes the advantage of a single source of supply
for most metalworking needs.
The Company believes five significant trends are currently impacting the
metalworking industry: (i) consolidation of fragmented distribution channels as
customers seek a single source of supply for their metalworking needs; (ii)
increasing demand from large customers to outsource procurement and inventory
management processes through integrated supply programs; (iii) growing demand
for suppliers that can provide a complete selection of tools, supplies and
services globally; (iv) demand for world class capabilities including customer
service, technical application support and information and product technology
while, at the same time, maintaining or reducing costs; and (v) continuing
advances in customers' metalworking manufacturing technology requiring more
technically advanced tools. These factors are resulting in a restructuring and
consolidation in the metalworking industry as tooling manufacturers and
distributors are forced to either become more competitive or seek stronger
partners. The Company's business strategy is designed to capitalize on these and
other trends.
The address of the Company's principal executive offices is Route 981 South
at Westmoreland County Airport, Latrobe, Pennsylvania 15650 and its telephone
number is (412) 539-5000.
BUSINESS STRATEGY
The Company's objective is to become the supplier of first choice of
consumable tools, related supplies, and services to the worldwide metalworking
industry and to other industries which can benefit from tungsten carbide
products. The Company believes its market-leadership position results from
successful implementation of its business strategy, the major elements of which
include:
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- Expanding Customer Base Through Multi-Channel Distribution. The Company
seeks to access potential customers through all primary distribution
channels. The Company serves its traditional base of large and
medium-sized metalworking customers through a direct sales force. JLK
direct markets a broad range of tiered ("good," "better" and "best")
metalworking consumables and other related products targeted at small and
medium-sized metalworking customers and offers integrated supply programs
targeted at large industrial metalworking customers. The acquisition of
Greenfield, which sells its consumable tools, related products and
services through a network of more than 2,500 traditional industrial
distributors, provides Kennametal with access to approximately 50% of the
North American metalworking market.
- Providing Most Complete Product Offering. The Company seeks to provide
the most complete and comprehensive product offering in the metalworking
industry. As a result of various acquisitions and internal development,
the Company markets and distributes what it believes is one of the
broadest lines of tools and services typically used by metalworking
customers. The recent acquisition of Greenfield with its consumable
high-speed steel rotary cutting tools and related products provides the
Company with the capability to manufacture all of the major consumable
tools needed by customers in their metalcutting manufacturing processes.
- Expanding Strong Global Presence. Kennametal is committed to growing its
global presence as demonstrated by its position as the second-largest
provider of tools to the European metalworking industry, the world's
largest metalworking market, as well as its plans to expand its presence
in the Asia Pacific region. The Company recently completed construction
of a cutting tool manufacturing facility in Shanghai, China for a total
investment of about $20 million, and has increased to 100% its ownership
interest in a sales and marketing subsidiary in Japan. The Company also
has targeted marketing efforts in Eastern Europe and Russia and other
developing countries.
- Providing Superior Customer Service, Product Availability, and Technical
Support. The Company's skills in rapidly filling orders, maintaining
high levels of product availability and providing technical product
application support are vital to the ability of its metalworking
customers to meet their production and delivery schedules in a
cost-effective manner. Kennametal's sophisticated order entry and
inventory management systems enable the Company to ship more than 90
percent of its products from stock. In addition, the Company's
technically skilled direct sales force of more than 700 persons provides
on-site product selection and application support to enable customers to
optimize their metalcutting processes. The addition of Greenfield's more
than 70 technical specialists broadens the Company's technical support
capability into high-speed steel drilling applications.
- Maintaining Leadership in Product Innovation. As a result of its
commitment to research and development, the Company has brought to market
during the past few years a number of new or improved metalcutting
products. The exacting requirements of modern high-precision
metalcutting, along with advances in manufacturing technology, exacting
manufacturing specifications, and new workpiece materials, are driving
the demand for new and improved consumable tools and systems capable of
achieving superior technical performance with high and uniform quality.
The Company believes that its reputation for supplying high quality and
technologically innovative consumable metalcutting tools and supplies to
the metalworking industry has been a very significant factor in its
achieving its market position.
- Leveraging Use of Information Technology. The Company's decision to
invest nearly $40 million in a business information system utilizing SAP
R-3 software demonstrates its commitment to the use of information
technology. This system, which is expected to be fully operational in
fiscal 1999, will link sales, distribution, manufacturing, purchasing and
accounting activities at all major sites throughout Kennametal and is
designed to enhance customer service, operational effectiveness and
management decision-making.
In addition to the above business strategies, the Company seeks to continue
to improve operating efficiencies as well as to pursue selected acquisitions
that enhance its distribution channels, complement its existing product
offerings and strengthen its geographic presence.
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BUSINESS SEGMENT AND MARKETS
The Company operates predominantly as a tooling supplier specializing in
powder metallurgy, which represents a single business segment. While many of the
Company's products are similar in composition, sales are classified into three
markets: metalworking, industrial supply, and mining and construction.
METALWORKING MARKETS. Kennametal markets, manufactures and distributes a
full line of products and services for the metalworking industry. The Company
provides metalcutting tools to manufacturing companies in a wide range of
industries throughout the world.
A Kennametal tooling system usually consists of a steel toolholder and an
indexable cutting tool called an insert. During a metalworking operation, the
toolholder is positioned in a machine tool that provides the turning power.
While the workpiece or toolholder is rapidly rotating, the cutting tool insert
contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert
is consumed during use and must be replaced periodically. Metalcutting
operations include turning, boring, threading, grooving, milling and drilling.
The Company also makes wear-resistant parts for use in abrasive environments and
specialty applications.
INDUSTRIAL SUPPLY MARKET. Kennametal distributes a full line of industrial
supplies to the metalworking industry principally through JLK. These products
include cutting tools, abrasives, precision measuring devices, power tools and
hand tools, machine tool accessories and, to a lesser extent, some maintenance,
repair and operating supplies. The majority of industrial supplies distributed
by the Company are purchased from other manufacturers, although the industrial
supply product offering does include Kennametal-manufactured items.
MINING AND CONSTRUCTION MARKET. Mining and construction cutting tools are
fabricated from steel parts and tipped with cemented carbide. Mining tools, used
primarily in the coal industry, include longwall shearer and continuous miner
drums, blocks, bits, pinning rods, augers and a wide range of mining tool
accessories. The Company also supplies compacts for mining, quarrying, water
well drilling and oil and gas exploration. Construction cutting tools include
carbide-tipped bits for ditching, trenching and road planing, grader blades for
site preparation and routine roadbed control, and snowplow blades and shoes for
winter road plowing.
The Company also makes proprietary metallurgical powders for use as a basic
material in many of its metalworking, mining and construction products. In
addition, the Company produces a variety of metallurgical powders and related
materials for specialized markets. These products include intermediate carbide
powders, hardfacing materials and matrix powders that are sold to manufacturers
of cemented carbide products, oil and gas drilling equipment and diamond drill
bits.
INTERNATIONAL OPERATIONS. The Company's principal international operations
are conducted in Western Europe and Canada. In addition, the Company has joint
ventures in India, Italy, Poland and Russia, manufacturing and sales
subsidiaries in Asia Pacific and sales agents and distributors in eastern Europe
and other areas of the world.
The Company's international operations are subject to the usual risks of
doing business in those countries, including currency fluctuations and changes
in social, political and economic environments. In management's opinion, the
Company's business is not materially dependent upon any one international
location involving significant risk.
MARKETING AND DISTRIBUTION
The Company's products are sold through three distinct channels: a direct
sales force, Full Service Supply programs, and retail showrooms and mail-order
catalogs. The Company's manufactured products are sold to end users primarily
through a direct sales force. Service engineers and technicians directly assist
customers with product design, selection and application. In addition,
Kennametal-manufactured products, together with a broad range of purchased
products, are sold through Full Service Supply programs and retail showrooms and
mail-order catalogs. The Company also uses independent distributors and sales
agents in the United States and certain international markets.
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The Company's products are marketed under various trademarks and
tradenames, such as Kennametal*, Hertel*, Kendex*, Kenloc*, Top Notch*,
Erickson*, Kyon*, KM*, Drill-Fix* and Fix-Perfect*. Purchased products are sold
under the manufacturer's name or a private label.
- ---------
* Trademark owned by Kennametal Inc. or Kennametal Hertel AG
GREENFIELD
GENERAL. Greenfield is a leading manufacturer of consumable cutting tools
and related products used primarily in industrial applications and is the
largest North American producer of expendable rotary cutting tools used to cut
metal and other industrial materials. Greenfield's products are sold in six
principal markets: industrial, electronics, energy and construction, engineered
products, consumer and marine. Greenfield offers products made from high-speed
steel and tungsten carbide materials; and each accounts for approximately half
of Greenfield's revenues. In addition, Greenfield manufactures and markets a
line of marine products.
MARKETS AND PRODUCTS. Greenfield manufactures and markets expendable
cutting tools and carbide products to the industrial, electronics, energy and
construction, engineered products, and consumer markets. Greenfield manufactures
a wide variety of cutting tools. High-speed steel is the predominant material
for rotary cutting tools, offering high performance in a broad range of
applications. Tungsten carbide materials are costlier and more durable and are
preferred in certain applications. Greenfield also manufactures and markets a
line of marine products. Greenfield's brand names enjoy a high degree of
recognition in their respective markets. Greenfield also supplies a number of
industrial and consumer private label customers with its products, including
Sears' line of Craftsman(R) drill bits.
Greenfield is the largest producer in North America of rotary cutting tools
for industrial applications. Products sold in the industrial market include
rotary cutting tools and related products such as drills, reamers, taps, end
mills, burrs, routers, counterbores and countersinks. Greenfield also
manufactures and markets an extensive line of hardware products, primarily
stationary and portable power tool accessories for use in the industrial and
consumer markets. In 1996, the industrial market accounted for approximately 51%
of Greenfield's consolidated net sales.
Greenfield manufactures and markets small diameter circuit board drills for
the electronics market. Greenfield believes that it is one of the largest
worldwide manufacturers of circuit board drills and routers. In 1996, the
electronics market accounted for approximately 12% of Greenfield's consolidated
net sales.
Greenfield believes that it is the largest independent supplier of oilfield
compacts in the world. Compacts are the cutting edges of oil well drilling bits,
which are commonly referred to as "rock bits." Greenfield's compacts are used
both for oil and natural gas drilling. Natural gas reserves tend to be found
deeper than oil, thereby increasing the utilization of rock bits. Greenfield is
a significant producer of tungsten carbide-tipped mining bits for the United
States coal mining industry and manufactures mining bit accessories and
carbide-tipped bits used in highway road resurfacing. In 1996, the energy and
construction market accounted for approximately 12% of Greenfield's consolidated
net sales.
Greenfield is an on-demand producer of custom-made tungsten carbide preform
wear parts for use in the tool and die industry including stamping dies, powder
metal tooling, container and impact tooling, seal rings, extruded rods, wear
parts and steel processing parts. Greenfield also manufactures tungsten carbide
balls used in rotary equipment such as pumps and mixers and seats which are
components in the check valves used in oil producing pumps, tungsten carbide
trim parts used in oil field chokes, mechanical face seals and ceramic-based
wear parts. In 1996, the engineered products market accounted for approximately
13% of Greenfield's consolidated net sales.
Greenfield is an active supplier of consumer drill bits, saws, hand tools
and other products to the do-it-yourself market, which includes Sears, Home
Depot and other major retailers and includes products sold under private label
brands such as the Sears Craftsman(R) drill line, which Greenfield has supplied
for more than 65 years. In 1996, the consumer market accounted for approximately
7% of Greenfield's consolidated net sales.
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Greenfield also manufactures a line of marine products. Greenfield's marine
products include submersible pumps, activating switches, magnetic compasses,
DC-powered winches and various electronic instruments and gauges. In 1996, the
marine market accounted for approximately 5% of Greenfield's consolidated net
sales.
MARKETING AND DISTRIBUTION. Greenfield's cutting tool products are sold
primarily through selected distributors supported by Greenfield's technical
sales personnel. In addition to distributors, Greenfield sells cutting tool
products as well as other products directly to private label, catalog, large
industrial and other customers having special technical or other requirements.
Generally, Greenfield's major brands are represented by distinct sales forces.
Greenfield's sales force numbers approximately 150 and sells to over 2,500
independent distributors in North America and worldwide.
COMPETITION
Kennametal is one of the world's leading producers of cemented carbide
tools and maintains a strong competitive position, especially in North America
and Europe. There is active competition in the sale of all products made by the
Company, with approximately 30 companies engaged in the cemented carbide
business in the United States and many more outside the United States. Several
competitors are divisions of larger corporations. In addition, several hundred
fabricators and toolmakers, many of whom operate out of relatively small shops,
produce tools similar to those made by the Company and buy the cemented carbide
components for such tools from cemented carbide producers, including the
Company. Major competition exists from both U.S.-based and international-based
concerns. In addition, the Company competes with thousands of industrial supply
distributors.
The purchase price of consumable cutting tools is relatively small compared
to the customer's significant investment in production equipment, control
systems, work piece materials and a trained work force. However, use of the
customer's equipment and systems can be significantly impaired if consumable
cutting tools are of inconsistent quality, fail to meet technical
specifications, or are not readily available. The Company therefore believes
that its competitive strengths rest on the consistently high quality of its
products, state-of-the-art manufacturing capabilities, customer service,
multiple distribution channels, global presence, and its ability to develop new
and improved systems responsive to its customer's needs. These factors
frequently permit the Company to sell many of its products based on their value
added to the customer, rather than strictly on price.
SEASONALITY
Seasonal variations do not have a major effect on the Company's and
Greenfield's business. However, to varying degrees, traditional summer vacation
shutdowns of metalworking customers' plants and holiday shutdowns often affect
the Company's first and second fiscal quarters and Greenfield's third and fourth
fiscal quarters.
RESEARCH AND DEVELOPMENT
The Company is involved in research and development of new products and
processes. Research and development expenses totaled $18.7 million, $20.6
million and $24.1 million in 1995, 1996 and 1997, respectively. Additionally,
certain costs associated with improving manufacturing processes are included in
cost of goods sold. The Company holds a number of patents and licenses which, in
the aggregate, are not material to the operation of the business.
The Company has brought a number of new products to market during the past
few years. These include metalcutting inserts that incorporate innovative tool
geometries or compositions for improved chip control and productivity. These new
compositions include KC994M* multi-coated metalcutting inserts for milling
applications, KC9010* and KC9025* multi-coated metalcutting inserts for turning
applications, Kyon 3500* ceramic metalcutting inserts for machining cast irons,
and KCD25* diamond-coated metalcutting inserts for machining aluminum alloys and
other nonferrous materials.
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EMPLOYEES
The Company employed approximately 7,500 persons at June 30, 1997, of which
4,700 were located in the United States and 2,800 in other parts of the world,
principally Europe and Asia Pacific. Approximately 1,100 employees were
represented by labor unions, of which 170 were hourly-rated employees located at
plants in the Latrobe, Pennsylvania area. The remaining 930 employees
represented by labor unions were employed at seven plants located outside of the
United States. The Company has not experienced any work stoppages in the last
five years and considers its labor relations to be generally good.
At December 31, 1996, Greenfield had approximately 5,000 employees
worldwide. Approximately 1,000 employees at eight of Greenfield's facilities
were covered under collective bargaining agreements which expire in June 2002.
Greenfield has not experienced any work stoppages in the last five years and
considers its relations with employees to be good.
REGULATION
The Company and its operations are subject to federal, state, and local
laws and regulations that impose limitations and prohibitions on the discharge
and emission of, and establish standards for the use, disposal, and management
of, certain materials and waste, and impose liability for the costs of
investigating and cleaning up, and certain damages resulting from, present and
past spills, disposals, or other releases of hazardous substances or materials
(collectively, "Environmental Laws"). Environmental Laws can be complex and may
change often, and violations of Environmental Laws may result in substantial
fines and penalties. In addition, Environmental Laws such as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," also known as
"Superfund") impose liability on several grounds for the investigation and
cleanup of contaminated soil, groundwater, and buildings, and for damages to
natural resources, at a wide range of properties: for example, contamination at
properties formerly owned or operated by the Company or its subsidiaries as well
as at properties the Company currently owns or operates, and properties to which
hazardous substances were sent by any of them, may result in liability for the
Company under Environmental Laws.
From time to time in the past, the Company has been cited for violations of
Environmental Laws, and in light of the nature of its operations, the Company
may in the future be cited for alleged violations of Environmental Laws. The
cost to correct any such violations and to satisfy any associated penalties that
may be alleged in the future could be substantial. In addition, changes in
existing Environmental Laws or their interpretation could adversely impact the
Company. However, compliance with government laws and regulations pertaining to
the discharge of materials or pollutants into the environment or otherwise
relating to the protection of the environment did not have a material effect on
the Company's capital expenditures, earnings or competitive position for fiscal
1997, nor is such compliance expected to have a material effect in the future.
The Company and some of its subsidiaries (including Greenfield) have
actively acquired companies or businesses. As a result of such acquisitions, the
Company may be subject to claims that it is liable for conditions at (or
resulting from disposal by) facilities formerly owned or operated by such
companies or businesses, as well as facilities the Company or its subsidiaries
currently owns or operates. In light of the activities (such as manufacturing)
of some of the companies and businesses acquired, such claims could be
substantial if they were to arise. In addition, some of the Company's
facilities, including a number of those acquired through the Greenfield
acquisition, have long histories of manufacturing or similar uses and could have
conditions, which could be material, that give rise to an obligation by the
Company or its subsidiaries to investigate or remediate the conditions. The
Company is not aware of any such obligations or of claims, pending or
threatened, against it or any of its subsidiaries, for such matters. The Company
has been involved in various environmental cleanup and remediation activities at
several of its manufacturing facilities. In addition, the Company has been named
as a potentially responsible party at several Superfund sites in the United
States. However, in management's opinion, based on its evaluations and
discussions with outside counsel and independent consultants, the ultimate
resolution of these environmental matters will not have a material adverse
effect on the results of operations, financial position or cash flows of the
Company.
The Company maintains a Corporate Environmental, Health and Safety ("EH&S")
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee
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<PAGE> 95
remediation activities. In addition, the Company has established an EH&S
administrator at each of its domestic manufacturing facilities. The Company's
financial management team periodically meets with members of the Corporate EH&S
Department and the Corporate Legal Department to review and evaluate the status
of environmental projects and contingencies. On a quarterly and annual basis,
management establishes or adjusts financial provisions and reserves for
environmental contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies."
PROPERTIES
Presented below is a summary of principal manufacturing facilities used by
the Company as of September 30, 1997.
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED PRINCIPAL PRODUCTS
- --------------------------------- ------------ -------------------------------------------
<S> <C> <C>
United States:
Monrovia, California Leased Metalworking Boring Bars
Troy, Michigan Leased Metalworking Toolholders
Fallon, Nevada Owned Metallurgical Powders
Henderson, North Carolina Owned Metallurgical Powders
Roanoke Rapids, North Carolina Owned Metalworking Inserts
Orwell, Ohio Owned Metalworking Inserts
Solon, Ohio Owned Metalworking Toolholders
Bedford, Pennsylvania Owned Mining and Construction Tools and Wear
Parts
Latrobe, Pennsylvania Owned Metallurgical Powders and Wear Parts
Johnson City, Tennessee Owned Metalworking Inserts
New Market, Virginia Owned Metalworking Toolholders
International (a):
Victoria, Canada Owned Wear Parts
Shanxi, China Owned Mining Tools
Xuzhou, China Owned Mining Tools
Blaydon, England Leased Mining Tools
Kingswinford, England Leased Metalworking Toolholders
Bordeaux, France Leased Metalworking Cutting Tools
Ebermannstadt, Germany Owned Metalworking Inserts
Mistelgau, Germany Owned Metallurgical Powders, Metalworking Inserts
and Wear Parts
Nabburg, Germany Owned Metalworking Toolholders
Vohenstrauss, Germany Owned Metalworking Carbide Drills
Arnhem, Netherlands Owned Wear Products
</TABLE>
- ---------
(a) In January 1996, the Company announced plans to construct a $20-million
facility in Shanghai, China, to manufacture cemented carbide metalcutting
tools. Operations began in the second quarter of 1998.
The Company also has a network of warehouses and customer service centers
located throughout North America, Western Europe, Asia and Australia, a
significant portion of which are leased. The majority of the Company's research
and development efforts are conducted in a corporate technology center located
adjacent to world headquarters in Latrobe, Pennsylvania and in Furth, Germany.
All significant properties are used in the Company's dominant business of
powder metallurgy, tools, tooling systems and supplies. The Company's production
capacity is adequate for its present needs. The Company believes that its
properties have been adequately maintained, are generally in good condition and
are suitable for the Company's business as presently conducted.
Greenfield's headquarters are located in Augusta, Georgia. Greenfield owns
significant manufacturing facilities in Arkansas, Georgia, Indiana,
Massachusetts, Michigan, North Carolina, Ohio, Pennsylvania, South
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<PAGE> 96
Carolina and Virginia, and leases significant facilities in Illinois,
Massachusetts, Missouri, Vermont and Wisconsin. Greenfield also maintains,
through ownership or leases, smaller manufacturing, office, warehouse and
research facilities, as well as property held for sale, in eight other states
and seven other countries. In the event of a cancellation or termination of a
lease relating to any of Greenfield's leased properties, Greenfield anticipates
no difficulty in connection with leasing alternate space at reasonable rates.
LEGAL MATTERS
There are no material legal proceedings pending against the Company.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Robert L. McGeehan........................ 60 President, Chief Executive Officer and
Director
William R. Newlin......................... 56 Chairman of the Board and Director
David B. Arnold........................... 58 Vice President and Chief Technical Officer
David T. Cofer............................ 52 Vice President, Secretary and General
Counsel
Richard C. Hendricks...................... 58 Vice President and Director of Corporate
Business Development
H. Patrick Mahanes, Jr.................... 54 Vice President and Chief Operating Officer
Richard J. Orwig.......................... 56 Vice President and Chief Financial and
Administrative Officer
Michael W. Ruprich........................ 41 President of JLK Direct Distribution Inc.
A. David Tilstone......................... 43 Vice President and Director of Global
Marketing
Richard C. Alberding...................... 66 Director
Peter B. Bartlett......................... 62 Director
A. Peter Held............................. 53 Director
Warren H. Hollinshead..................... 60 Director
Aloysius T. McLaughlin, Jr................ 62 Director
Larry Yost................................ 58 Director
</TABLE>
The following table sets forth information with respect to the senior
officers of Greenfield, all of whom are expected to continue in such capacity
with Greenfield.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Paul W. Jones............................. 49 President and Chief Executive Officer
Peter K. Hunt............................. 51 Senior Vice President--Business
Development
Henry G. Libby............................ 57 Senior Vice President--Consumer Products
Group
Roger B. Farley........................... 53 Senior Vice President--Human Resources
Ajita G. Rajendra......................... 45 Senior Vice President--Industrial Products
Group
Mark R. Richards.......................... 37 Vice President--Electronics Products Group
J. Robert Quinlan......................... 59 Vice President--Energy and Construction
Products Group
Bart A. Aiken............................. 38 Vice President--Engineered Products Group
</TABLE>
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<PAGE> 97
DESCRIPTION OF THE FELINE PRIDES
The following descriptions of certain terms of the FELINE PRIDES offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the FELINE PRIDES set forth
in the accompanying Prospectus, to which reference is hereby made. The summaries
of certain provisions of documents described below are not necessarily complete,
and in each instance reference is hereby made to the copies of such documents
(including the definitions therein of certain terms) which are on file with the
Commission. Wherever particular sections of, or terms defined in, such documents
are referred to herein, such sections or defined terms are incorporated by
reference herein.
Each FELINE PRIDES will be issued under the Purchase Contract Agreement
between the Company and the Purchase Contract Agent. Each FELINE PRIDES offered
hereby initially will consist of a unit (referred to as an Income PRIDES) with a
Stated Amount of $50 comprised of (a) a Purchase Contract under which (i) the
holder (including, initially, an Underwriter) will purchase from the Company on
the Purchase Contract Settlement Date, for an amount of cash equal to the Stated
Amount, a number of newly issued shares of Common Stock equal to the Settlement
Rate described below under "Description of the Purchase Contracts--General," and
(ii) the Company will pay Contract Adjustment Payments, if any, to the holder,
and (b) beneficial ownership of (i) a related % Trust Preferred Security,
having a stated liquidation amount per Trust Preferred Security equal to the
Stated Amount, representing a preferred, undivided beneficial ownership interest
in the assets of the Trust, which will consist solely of the Debentures, (ii) in
the case of a distribution of the Debentures upon the dissolution of the Trust
as a result of an Investment Company Event, as described below, or otherwise,
Debentures having a principal amount equal to the Stated Amount or (iii) upon
the occurrence of a Tax Event Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable Ownership Interest in the Treasury
Portfolio. "Applicable Ownership Interest" means, with respect to an Income
PRIDES and the U.S. Treasury Securities in the Treasury Portfolio, (A) a 1/20,
or 5%, undivided beneficial ownership interest in $1,000 principal or interest
amount of a principal or interest strip in a U.S. Treasury Security included in
such Treasury Portfolio which matures on or prior to February 15, 2001 and (B)
for each scheduled interest payment date on the Debentures that occurs after the
Tax Event Redemption Date, a % undivided beneficial ownership interest in
$1,000 face amount of such U.S. Treasury Security which is a principal or
interest strip maturing on such date. The purchase price of each Income PRIDES
will be allocated between the related Purchase Contract and the related Trust
Preferred Security in proportion to their respective fair market values at the
time of purchase. The Company expects that, at the time of issuance, the fair
market value of each Trust Preferred Security will be equal to $ and the
fair market value of each Purchase Contract will be equal to $ . Such
position generally will be binding on each beneficial owner of each Income
PRIDES (but not on the IRS (as defined herein)). See "Certain Federal Income Tax
Consequences--Income PRIDES--Allocation of Purchase Price." As long as a FELINE
PRIDES is in the form of an Income PRIDES, the related Trust Preferred
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as applicable, will be pledged to the Collateral Agent, to secure the
holder's obligation to purchase Common Stock under the related Purchase
Contracts.
SUBSTITUTION OF PLEDGED SECURITIES
Each holder (including, initially, an Underwriter) of an Income PRIDES
(unless a Tax Event Redemption has occurred) will have the right, at any time on
or prior to the fifth Business Day immediately preceding the Purchase Contract
Settlement Date, to substitute for the related Trust Preferred Securities held
by the Collateral Agent, Treasury Securities in an aggregate principal amount
equal to the aggregate stated liquidation amount of such Trust Preferred
Securities. Such Treasury Securities will be pledged with the Collateral Agent
to secure the holder's obligation to purchase Common Stock under the related
Purchase Contracts. Because Treasury Securities are issued in integral multiples
of $1,000, holders of Income PRIDES may make such substitution only in integral
multiples of 20 Income PRIDES; provided, however, if a Tax Event Redemption has
occurred prior to the Purchase Contract Settlement Date and the Treasury
Portfolio has become a component of the Income PRIDES, holders of such Income
PRIDES may make such substitutions only in integral multiples of 32,000 Income
PRIDES (but obtaining the release of the Treasury Portfolio rather than the
Trust Preferred Securities), at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. FELINE PRIDES with
respect to which Treasury Securities have been substituted for the related Trust
Preferred
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<PAGE> 98
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, as collateral to secure such holder's obligation
under the related Purchase Contracts will be referred to as Growth PRIDES. To
create 20 Growth PRIDES (unless a Tax Event Redemption has occurred), the Income
PRIDES holder will (a) deposit with the Collateral Agent a Treasury Security
having a principal amount at maturity of $1,000 and (b) transfer 20 Income
PRIDES to the Purchase Contract Agent accompanied by a notice stating that the
Income PRIDES holder has deposited a Treasury Security with the Collateral Agent
and requesting that the Purchase Contract Agent instruct the Collateral Agent to
release to such holder the 20 Trust Preferred Securities relating to such 20
Income PRIDES. Upon such deposit and receipt of an instruction from the Purchase
Contract Agent, the Collateral Agent will effect the release of the related 20
Trust Preferred Securities from the pledge under the Pledge Agreement free and
clear of the Company's security interest therein to the Purchase Contract Agent,
which will (i) cancel the 20 Income PRIDES, (ii) transfer 20 related Trust
Preferred Securities to such holder and (iii) deliver 20 Growth PRIDES to the
holder. The Treasury Security will be substituted for the Trust Preferred
Securities and will be pledged with the Collateral Agent to secure the holder's
obligation to purchase Common Stock under the related Purchase Contracts. Each
Growth PRIDES will consist of a unit with a Stated Amount of $50 comprised of
(a) a Purchase Contract with respect to which (i) the holder will purchase from
the Company on the Purchase Contract Settlement Date or earlier for an amount of
cash equal to the Stated Amount of such Growth PRIDES, a number of newly issued
shares of Common Stock of the Company equal to the Settlement Rate described
herein, and (ii) the Company will pay the holder Contract Adjustment Payments,
if any, and (b) a 1/20 undivided beneficial ownership interest in a related
Treasury Security having a principal amount at maturity equal to $1,000 and
maturing on the Business Day immediately preceding the Purchase Contract
Settlement Date. The related Trust Preferred Securities released to the holder
thereafter will trade separately from the resulting Growth PRIDES. Contract
Adjustment Payments, if any, will be payable by the Company on the Growth PRIDES
on each Payment Date from the later of January , 1998 and the last Payment
Date on which Contract Adjustment Payments were paid. In addition, original
issue discount will accrete on the related Treasury Securities. Distributions on
any Trust Preferred Securities, up to but not including the Purchase Contract
Settlement Date, including after a substitution of collateral resulting in the
creation of Growth PRIDES, will continue to be payable by the Trust at the rate
of % of the Stated Amount per annum, subject to the Company's deferral rights
described in "--Current Payments."
Holders who elect to substitute Pledged Securities, thereby creating Growth
PRIDES or recreating Income PRIDES (as discussed below), shall be responsible
for any fees or expenses payable in connection with such substitution. See
"Certain Provisions of the Purchase Contract Agreements and the Pledge
Agreement-- Miscellaneous."
RECREATING INCOME PRIDES
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date a holder of Growth PRIDES may recreate Income PRIDES
(unless a Tax Event Redemption has occurred) by (a) depositing with the
Collateral Agent 20 Trust Preferred Securities and (b) transferring 20 Growth
PRIDES to the Purchase Contract Agent accompanied by a notice stating that the
Growth PRIDES holder has deposited 20 Trust Preferred Securities with the
Collateral Agent and requesting that the Purchase Contract Agent instruct the
Collateral Agent to release to such holder the related Treasury Security. Upon
such deposit and receipt of instructions from the Purchase Contract Agent, the
Collateral Agent will effect the release of the related Treasury Security from
the pledge of the Pledge Agreement free and clear of the Company's security
interest therein to the Purchase Contract Agent, which will (i) cancel the 20
Growth PRIDES (ii) transfer such Treasury Security to such holder and (iii)
deliver 20 Income PRIDES to such holder; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase Contract Settlement Date and the
Treasury Portfolio has become a component of the Income PRIDES, holders of
Growth PRIDES may make such substitutions (but using the appropriate Applicable
Ownership Interest of the Treasury Portfolio rather than the Trust Preferred
Securities) at any time on or prior to the second Business Day immediately
preceding the Purchase Contract Settlement Date but only in integral multiples
of 32,000 Growth PRIDES. The substituted Trust Preferred Securities, or the
appropriate Applicable Ownership Interest of the Treasury Portfolio, as the case
may be, will be pledged with the Collateral Agent to secure the holder's
obligation to purchase Common Stock under the related Purchase Contracts.
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<PAGE> 99
CURRENT PAYMENTS
Holders of Income PRIDES are entitled to receive aggregate cash
distributions at a rate of % of the Stated Amount per annum from and after
, 1998, payable quarterly in arrears. The quarterly payments on the
Income PRIDES will consist of (i) cumulative cash distributions on the related
Trust Preferred Securities or the Treasury Portfolio, as applicable, payable at
the rate of % of the Stated Amount per annum and (ii) Contract Adjustment
Payments payable by the Company at the rate of % of the Stated Amount per
annum, provided that if such rate is 0%, then the Company will not make any
Contract Adjustment Payments, subject in the case of distributions on the Trust
Preferred Securities and the Contract Adjustment Payments, to the Company's
right of deferral as described herein.
The ability of the Trust to make the quarterly distributions on the Trust
Preferred Securities is solely dependent upon the receipt of corresponding
interest payments from the Company on the Debentures. The Company has the right
at any time, and from time to time, limited to a period not extending beyond the
maturity of the Debentures, to defer the interest payments on the Debentures. As
a consequence of such deferral, quarterly distributions (unless a Tax Event
Redemption has occurred) to holders of Income PRIDES (or any Trust Preferred
Securities outstanding after the Purchase Contract Settlement Date or after a
substitution of collateral resulting in the creation of Growth PRIDES) would be
deferred (but despite such deferral, would continue to accumulate quarterly and
would accrue interest thereon compounded quarterly at the rate of % per annum
through and including February 15, 2001, and at the Reset Rate thereafter). The
Company also has the right to defer the payment of Contract Adjustment Payments,
if any, on the related Purchase Contracts until the Purchase Contract Settlement
Date; however, deferred Contract Adjustment Payments, if any, will bear
additional Contract Adjustment Payments at the rate of % per annum (such
deferred installments of Contract Adjustment Payments together with the
additional Contract Adjustment Payments, if any, shall be referred to as the
"Deferred Contract Adjustment Payments"). See "Description of the Purchase
Contracts--Contract Adjustment Payments" and "Description of the Trust Preferred
Securities--Distributions." If a Tax Event Redemption has occurred and the
Treasury Portfolio has become a component of the Income PRIDES, quarterly
distributions on the Treasury Portfolio, as a portion of the cumulative
quarterly distributions to the holders of Income PRIDES, will not be deferred.
The Company's obligations with respect to the Debentures will be senior and
unsecured and will rank pari passu in right of payment with all other senior
unsecured obligations of the Company. The Company's obligations with respect to
the Contract Adjustment Payments, if any, will be subordinated and junior in
right of payment to the Company's Senior Indebtedness.
In the event a holder of Income PRIDES substituted Treasury Securities for
the related Trust Preferred Securities or the Treasury Portfolio, as the case
may be, such holder would receive on the resulting Growth PRIDES only quarterly
Contract Adjustment Payments, if any, subject to the Company's rights of
deferral. In addition, OID would accrue on the related Treasury Securities.
MISCELLANEOUS
The Company or its affiliates may from time to time purchase any of the
Securities offered hereby which are then outstanding by tender, in the open
market or by private agreement.
VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities, in their capacities as such holders,
will not be entitled to vote to appoint, remove or replace, or to increase or
decrease the number of Regular Trustees and will generally have no voting rights
except in the limited circumstances described under "Description of Trust
Preferred Securities--Voting Rights." Holders of Purchase Contracts relating to
the Income PRIDES or Growth PRIDES, in their capacities as such holders, will
have no voting or other rights in respect of the Common Stock.
LISTING OF THE SECURITIES
Application has been made to list the Income PRIDES on the NYSE under the
symbol "KMTprI" subject to official notice of issuance. If the Growth PRIDES and
Trust Preferred Securities are separately traded to a sufficient extent that
applicable exchange listing requirements are met, the Company will endeavor to
cause such
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<PAGE> 100
securities to be listed on such exchange on which the Income PRIDES are listed,
including, if applicable, the NYSE.
NYSE SYMBOL OF COMMON STOCK
The Common Stock is listed on the NYSE under the symbol "KMT."
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
Each Purchase Contract underlying a FELINE PRIDES (unless earlier
terminated, or earlier settled at the holder's option) will obligate the holder
of such Purchase Contract to purchase, and the Company to sell, on the Purchase
Contract Settlement Date, for an amount in cash equal to the Stated Amount of
such FELINE PRIDES, a number of newly issued shares of Common Stock equal to the
Settlement Rate. The number of newly issued shares of Common Stock issuable upon
settlement of each Purchase Contract on the Purchase Contract Settlement Date
(the "Settlement Rate") will be calculated as follows (subject to adjustment
under certain circumstances): (a) if the Applicable Market Value (as defined
herein) is equal to or greater than $ (the "Threshold Appreciation
Price", which is approximately % above the last reported sale price of the
Common Stock set forth on the cover page of the final Prospectus Supplement (the
"Reference Price")) the Settlement Rate (which is equal to the Stated Amount
divided by the Threshold Appreciation Price) will be ; accordingly, if,
between the date of the final Prospectus Supplement and the period during which
the Applicable Market Value is measured, the market price for the Common Stock
increases to an amount that is higher than the Threshold Appreciation Price, the
aggregate market value of the shares of Common Stock issued upon settlement of
each Purchase Contract (assuming that such market value is the same as the
Applicable Market Value of such Common Stock) will be higher than the Stated
Amount, and if such market price is the same as the Threshold Appreciation
Price, the aggregate market value of such shares (assuming that such market
value is the same as the Applicable Market Value of such Common Stock) will be
equal to the Stated Amount; (b) if the Applicable Market Value is less than the
Threshold Appreciation Price but greater than the Reference Price, the
Settlement Rate will be equal to the Stated Amount divided by the Applicable
Market Value; accordingly, if the market price for the Common Stock increases
between the date of the final Prospectus Supplement and the period during which
the Applicable Market Value is measured but such market price is less than the
Threshold Appreciation Price, the aggregate market value of the shares of Common
Stock issued upon settlement of each Purchase Contract (assuming that such
market value is the same as the Applicable Market Value of such Common Stock)
will be equal to the Stated Amount; and (c) if the Applicable Market Value is
less than or equal to the Reference Price, the Settlement Rate (which will be
equal to the Stated Amount divided by the Reference Price) will be ;
accordingly, if the market price for the Common Stock decreases between the date
of the final Prospectus Supplement and the period during which the Applicable
Market Value is measured, the aggregate market value of the shares of Common
Stock issued upon settlement of each Purchase Contract (assuming that such
market value is the same as the Applicable Market Value of such Common Stock)
will be less than the Stated Amount, and if such market price stays the same,
the aggregate market value of such shares (assuming that such market value is
the same as the Applicable Market Value of such Common Stock) will be equal to
the Stated Amount. "Applicable Market Value" means the average of the Closing
Prices (as defined herein) per share of Common Stock on each of the twenty
consecutive Trading Days (as defined herein) ending on the third Trading Day
immediately preceding the Purchase Contract Settlement Date. "Closing Price" of
the Common Stock on any date of determination means the closing sale price (or,
if no closing price is reported, the last reported sale price) of the Common
Stock on the NYSE on such date or, if the Common Stock is not listed for trading
on the NYSE on any such date, as reported in the composite transactions for the
principal United States securities exchange on which the Common Stock is so
listed, or if the Common Stock is not so listed on a United States national or
regional securities exchange, as reported by the Nasdaq Stock Market, or, if the
Common Stock is not so reported, the last quoted bid price for the Common Stock
in the over-the-counter market as reported by the National Quotation Bureau or
similar organization, or, if such bid price is not available, the market value
of the Common Stock on such date as determined by a nationally recognized
independent investment banking firm retained for this purpose by the Company. A
"Trading Day" means a day on which the Common Stock (A) is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (B) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of the Common
Stock.
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No fractional shares of Common Stock will be issued by the Company pursuant
to the Purchase Contracts. In lieu of fractional shares otherwise issuable
(calculated on an aggregate basis) in respect of Purchase Contracts being
settled by a holder of Income PRIDES or Growth PRIDES, the holder will be
entitled to receive an amount of cash equal to such fraction of a share times
the Applicable Market Value.
On the Business Day immediately preceding the Purchase Contract Settlement
Date, unless a holder of Income PRIDES or Growth PRIDES (i) has settled the
related Purchase Contracts prior to the Purchase Contract Settlement Date
through the early delivery of cash to the Purchase Contract Agent in the manner
described under "--Early Settlement," (ii) in the case of Income PRIDES has
settled the related Purchase Contracts with separate cash on the Business Day
immediately preceding the Purchase Contract Settlement Date pursuant to prior
notice in the manner described under "--Notice to Settle with Cash," (iii) has
had the Trust Preferred Securities related to such holder's Purchase Contracts
remarketed in the manner described herein in connection with settling such
Purchase Contracts, or (iv) an event described under "--Termination" below has
occurred, then (A) in the case of Income PRIDES (unless a Tax Event Redemption
has occurred), the Company will exercise its rights as a secured party to
dispose of the Trust Preferred Securities in accordance with the applicable law,
and (B) in the case of Growth PRIDES or Income PRIDES (in the event that a Tax
Event Redemption has occurred), the principal amount of the related Treasury
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as applicable, when paid at maturity, will automatically be applied
to satisfy in full such holder's obligation to purchase Common Stock under the
related Purchase Contracts. Such Common Stock will then be issued and delivered
to such holder or such holder's designee, upon presentation and surrender of the
certificate evidencing such FELINE PRIDES (a "FELINE PRIDES Certificate") and
payment by the holder of any transfer or similar taxes payable in connection
with the issuance of the Common Stock to any person other than such holder. In
the event that a holder of either Income PRIDES or Growth PRIDES effects the
early settlement of the related Purchase Contracts through the delivery of cash
or, (in the case of Income PRIDES holder) settles the related Purchase Contracts
with cash on the Business Day immediately preceding the Purchase Contract
Settlement Date, the related Trust Preferred Securities or Treasury Securities,
as the case may be, will be released to the holder as described herein. The
funds received by the Collateral Agent on the Business Day immediately preceding
the Purchase Contract Settlement Date, upon cash settlement of a Purchase
Contract, will be promptly invested in overnight permitted investments and paid
to the Company on the Purchase Contract Settlement Date. Any funds received by
the Collateral Agent in respect of the interest earned from the overnight
investment in permitted investments will be distributed to the Purchase Contract
Agent for payment to the holders.
Prior to the date on which shares of Common Stock are issued in settlement
of Purchase Contracts, the Common Stock underlying the related Purchase
Contracts will not be deemed to be outstanding for any purpose and the holders
of such Purchase Contracts will not have any voting rights, rights to dividends
or other distributions or other rights or privileges of a shareholder of the
Company by virtue of holding such Purchase Contracts. See "Description of the
Trust Preferred Securities--Voting Rights."
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the related Purchase
Contracts be deemed to have (a) irrevocably agreed to be bound by the terms of
the related Purchase Contracts and the Pledge Agreement for so long as such
holder remains a holder of such FELINE PRIDES, and (b) duly appointed the
Purchase Contract Agent as such holder's attorney-in-fact to enter into and
perform the related Purchase Contracts on behalf of and in the name of such
holder. In addition, each beneficial owner of Income PRIDES or Growth PRIDES, by
acceptance of such interest, will be deemed to have agreed to treat (i) itself
as the owner of the related Trust Preferred Securities appropriate Applicable
Ownership Interest of the Treasury Portfolio or Treasury Securities, as the case
may be, and (ii) the Debentures as indebtedness of the Company, in each case,
for United States federal, state and local income and franchise tax purposes.
REMARKETING
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement to be dated as of February , 2001 between
the Remarketing Agent, Purchase Contract Agent, the Company and the Trust, the
Trust Preferred Securities of Income PRIDES holders' who have failed to notify
the Purchase Contract Agent, on or prior to the fifth Business Day immediately
preceding the Purchase Contract Settlement Date (in the manner described under
"--Notice to Settle with Cash") of their intention to settle the
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<PAGE> 102
related Purchase Contracts with separate cash on the Business Day immediately
preceding the Purchase Contract Settlement Date, will be remarketed on the third
Business Day immediately preceding the Purchase Contract Settlement Date. The
Remarketing Agent will use its reasonable efforts to remarket such Trust
Preferred Securities on such date at a price of approximately 100.5% of the
aggregate stated liquidation amount of such Trust Preferred Securities, plus
accrued and unpaid distributions (including deferred distributions), if any,
thereon. The portion of the proceeds from such remarketing equal to the
aggregate stated liquidation amount of such Trust Preferred Securities will
automatically be applied to satisfy in full such Income PRIDES holders'
obligations to purchase Common Stock under the related Purchase Contracts. In
addition, after deducting as the Remarketing Fee an amount not exceeding 25
basis points (.25%) of the aggregate stated liquidation amount of the remarketed
securities, from any amount of such proceeds in excess of the aggregate stated
liquidation amount of the remarketed Trust Preferred Securities plus accrued and
unpaid distributions (including delivered distributions, if any), the
Remarketing Agent will remit the remaining portion of such proceeds, if any, for
the benefit of such holder. Income PRIDES holders whose Trust Preferred
Securities are so remarketed will not otherwise be responsible for the payment
of any Remarketing Fee in connection therewith. If, in spite of using its
reasonable efforts the Remarketing Agent cannot remarket the related Trust
Preferred Securities of such holders of Income PRIDES at a price not less than
100% of the aggregate stated liquidation amount of such Trust Preferred
Securities plus accrued and unpaid distributions (including deferred
distributions, if any) and thus a Failed Remarketing occurs, the Company will
exercise its rights as a secured party to dispose of the Trust Preferred
Securities in accordance with applicable law and satisfy in full, from the
proceeds of such disposition, such Income PRIDES holder's obligation to purchase
Common Stock under the related Purchase Contracts, provided, that, if the
Company exercises such rights as a secured creditor, any accrued and unpaid
distributions (including any deferred distributions) on such Trust Preferred
Securities will be paid in cash by the Company to the holders of record of such
Trust Preferred Securities. The Company will cause a notice of such Failed
Remarketing to be published on the second Business Day immediately preceding the
Purchase Contract Settlement Date by publication in a daily newspaper in the
English language of general circulation in The City of New York, which is
expected to be The Wall Street Journal. In addition, the Company will request,
not later than 7 nor more than 15 calendar days prior to the remarketing date,
that the Depository notify its participants holding Trust Preferred Securities,
Income PRIDES and Growth PRIDES of such remarketing and of the procedures that
must be followed if a Trust Preferred Security holder wishes to exercise its
right to put its Trust Preferred Security to the Company as described herein.
The Company will endeavor to ensure that a registration statement with regard to
the full amount of the Trust Preferred Securities to be remarketed shall be
effective in such form as will enable the Remarketing Agent to rely on it in
connection with the remarketing process. It is currently anticipated that
Merrill Lynch, Pierce, Fenner & Smith Incorporated will be the Remarketing
Agent.
EARLY SETTLEMENT
A holder of Income PRIDES may settle the related Purchase Contracts on or
prior to the fifth Business Day immediately preceding the Purchase Contract
Settlement Date by presenting and surrendering the FELINE PRIDES Certificate
evidencing such Income PRIDES at the offices of the Purchase Contract Agent with
the form of "Election to Settle Early" on the reverse side of such certificate
completed and executed as indicated, accompanied by payment (payable to the
Company in immediately available funds) of an amount equal to the Stated Amount
times the number of Purchase Contracts being settled; provided, however, if a
Tax Event Redemption has occurred prior to the Purchase Contract Settlement Date
and the Treasury Portfolio has become a component of the Income PRIDES, holders
of such Income PRIDES may settle early only in integral multiples of 32,000
Income PRIDES (and the related appropriate Applicable Ownership Interest of the
Treasury Portfolio) at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. A holder of Growth
PRIDES may settle the related Purchase Contracts prior to the second Business
Day immediately preceding the Purchase Contract Settlement Date by presenting
and surrendering the FELINE PRIDES Certificate evidencing such Growth PRIDES at
the offices of the Purchase Contract Agent with the form of "Election to Settle
Early" on the reverse side of such certificate completed and executed as
indicated, accompanied by payment (in immediately available funds) of an amount
equal to the Stated Amount times the number of Purchase Contracts being settled.
So long as the FELINE PRIDES are evidenced by one or more global security
certificates deposited with the Depositary (as defined herein), procedures for
early settlement will also be governed by standing arrangements between the
Depositary and the Purchase Contract Agent.
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Upon Early Settlement of the Purchase Contracts related to any Income
PRIDES or Growth PRIDES, (a) the holder will receive newly issued shares
of Common Stock per Income PRIDES or Growth PRIDES having a Stated Amount of $50
(regardless of the market price of the Common Stock on the date of such Early
Settlement), subject to adjustment under the circumstances described in
"--Anti-Dilution Adjustments" below, (b) the Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or the
Treasury Securities, as the case may be, related to such Income PRIDES or Growth
PRIDES will thereupon be transferred to the holder free and clear of the
Company's security interest therein, (c) the holder's right to receive Deferred
Contract Adjustment Payments, if any, on the Purchase Contracts being settled
will be forfeited, (d) the holder's right to receive future Contract Adjustment
Payments will terminate and (e) no adjustment will be made to or for the holder
on account of Deferred Contract Adjustment Payments, if any, or any amounts
accrued in respect of Contract Adjustment Payments.
If the Purchase Contract Agent receives a FELINE PRIDES Certificate,
accompanied by the completed "Election to Settle Early" and requisite
immediately available funds, from a holder of FELINE PRIDES by 5:00 p.m., New
York City time, on a Business Day, that day will be considered the settlement
date. If the Purchase Contract Agent receives the foregoing after 5:00 p.m., New
York City time, on a Business Day or at any time on a day that is not a Business
Day (other than from Income PRIDES holders after the occurrence of a Tax Event
Redemption), the next Business Day will be considered the settlement date.
Upon Early Settlement of Purchase Contracts in the manner described above,
presentation and surrender of the FELINE PRIDES Certificate evidencing the
related Income PRIDES or Growth PRIDES and payment of any transfer or similar
taxes payable by the holder in connection with the issuance of the related
Common Stock to any person other than the holder of such Income PRIDES or Growth
PRIDES, the Company will cause the shares of Common Stock being purchased to be
issued, and the related Trust Preferred Securities, the appropriate Applicable
Ownership Interest of the Treasury Portfolios or Treasury Securities, as the
case may be, securing such Purchase Contracts to be released from the pledge
under the Pledge Agreement (described in "--Pledged Securities and Pledge
Agreement") and transferred, within three Business Days following the settlement
date, to the purchasing holder or such holder's designee.
NOTICE TO SETTLE WITH CASH
A holder of an Income PRIDES or Growth PRIDES wishing to settle the related
Purchase Contract with separate cash on the Business Day immediately preceding
the Purchase Contract Settlement Date must notify the Purchase Contract Agent by
presenting and surrendering the FELINE PRIDES Certificate evidencing such Income
PRIDES or Growth PRIDES at the offices of the Purchase Contract Agent with the
form of "Notice to Settle by Separate Cash" on the reverse side of the
certificate completed and executed as indicated on or prior to 5:00 p.m., New
York City time, on the second Business Day immediately preceding the Purchase
Contract Settlement Date in the case of a Growth PRIDES holder or an Income
PRIDES holder (if a Tax Event Redemption has occurred) and on the fifth Business
Day immediately preceding the Purchase Contract Settlement Date in the case of
an Income PRIDES holder. If a holder that has given notice of such holder's
intention to settle the related Purchase Contract with separate cash, fails to
deliver such cash on the Business Day immediately preceding the Purchase
Contract Settlement Date, then the Company will exercise its right as a secured
party to dispose of, in accordance with the applicable law, the related Trust
Preferred Securities or Treasury Securities, as the case may be, or the
principal amount of related Treasury Securities or of the appropriate Applicable
Ownership Interest of the Treasury Portfolio, as the case may be, to satisfy in
full such holder's obligation to purchase Common Stock under the related
Purchase Contract.
CONTRACT ADJUSTMENT PAYMENTS
Contract Adjustment Payments will be fixed at a rate per annum of % of
the Stated Amount per Purchase Contract, provided that if such rate is 0%, then
the Company will not make any Contract Adjustment Payments. Contract Adjustment
Payments that are not paid when due (after giving effect to any permitted
deferral thereof) will bear interest thereon at the rate per annum of %
thereof, compounded quarterly, until paid. Contract Adjustment Payments, if any,
payable for any period will be computed on the basis of a 360-day year of twelve
30 day-months. Contract Adjustment Payments, if any, will accrue from
1998 and will be payable
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quarterly in arrears on February 16, May 16, August 16 and November 16 each
year, commencing February 16, 1998.
Contract Adjustment Payments, if any, will be payable to the holders of
Purchase Contracts as they appear on the books and records of the Purchase
Contract Agent on the relevant record dates, which, as long as the Income PRIDES
or Growth PRIDES remain in book-entry only form, will be one Business Day prior
to the relevant payment dates. Such distributions will be paid through the
Purchase Contract Agent who will hold amounts received in respect of the
Contract Adjustment Payments, if any, for the benefit of the holders of the
Purchase Contracts relating to such Income PRIDES or Growth PRIDES. Subject to
any applicable laws and regulations, each such payment will be made as described
under "Book-Entry System" below. In the event that the Income PRIDES or Growth
PRIDES do not continue to remain in book-entry only form, the Company shall have
the right to select relevant record dates, which shall be more than one Business
Day but less than 60 Business Days prior to the relevant payment dates. In the
event that any date on which Contract Adjustment Payments, if any, are to be
made on the Purchase Contracts related to the Income PRIDES or Growth PRIDES is
not a Business Day, then payment of the Contract Adjustment Payments payable on
such date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such payment date. A "Business Day" shall
mean any day other than Saturday, Sunday or any other day on which banking
institutions in New York City (in the State of New York) are permitted or
required by any applicable law to close.
The Company's obligations with respect to Contract Adjustment Payments, if
any, will be subordinated and junior in right of payment to the Company's
obligations under the Senior Indebtedness.
OPTION TO DEFER CONTRACT ADJUSTMENT PAYMENTS
The Company may, at its option and upon prior written notice to the holders
of the FELINE PRIDES and the Purchase Contract Agent, defer the payment of
Contract Adjustment Payments, if any, on the Purchase Contracts until no later
than the Purchase Contract Settlement Date. However, Deferred Contract
Adjustment Payments, if any, will bear additional Contract Adjustment Payments
at the rate of % per annum (compounding on each succeeding Payment Date)
until paid. If the Purchase Contracts are terminated (upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to the
Company), the right to receive Contract Adjustment Payments and Deferred
Contract Adjustment Payments, if any, will also terminate.
In the event that the Company elects to defer the payment of Contract
Adjustment Payments, if any, on the Purchase Contracts until the Purchase
Contract Settlement Date, each holder of FELINE PRIDES will receive on the
Purchase Contract Settlement Date in respect of the Deferred Contract Adjustment
Payments, in lieu of a cash payment, a number of shares of Common Stock equal to
(x) the aggregate amount of Deferred Contract Adjustment Payments payable to
such holder divided by (y) the Applicable Market Value.
In the event the Company exercises its option to defer the payment of
Contract Adjustment Payments, if any, then, until the Deferred Contract
Adjustment Payments have been paid, the Company shall not declare or pay
dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital stock
or make guarantee payments with respect to the foregoing (other than (i)
purchases or acquisitions of capital stock of the Company in connection with the
satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase capital stock of the Company, (ii) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company capital stock, (iii) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of the Company capital stock or the security being converted or
exchanged, (iv) dividends or distributions in capital stock of the Company (or
rights to acquire capital stock) or repurchase or redemptions of capital stock
solely from the issuance or exchange of capital stock or (v) redemptions or
repurchases of any rights pursuant to the Rights Agreement, or any successor to
such Rights Agreement, and the declaration thereunder of a dividend of rights in
the future).
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ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment (without duplication) upon the occurrence of certain events,
including: (a) the payment of dividends (and other distributions) of Common
Stock on Common Stock; (b) the issuance to all holders of Common Stock of
rights, warrants or options entitling them, for a period of up to 45 days, to
subscribe for or purchase Common Stock at less than the Current Market Price (as
defined herein) thereof; (c) subdivisions, splits and combinations of Common
Stock; (d) distributions to all holders of Common Stock of evidences of
indebtedness of the Company, shares of capital stock, securities, cash or
property (excluding any dividend or distribution covered by clause (a) or (b)
above and any dividend or distribution paid exclusively in cash); (e)
distributions consisting exclusively of cash to all holders of Common Stock in
an aggregate amount that, together with (i) other all-cash distributions made
within the preceding 12 months and (ii) any cash and the fair market value, as
of the expiration of the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange offer by the Company
or a subsidiary thereof for the Common Stock concluded within the preceding 12
months, exceeds 15% of the Company's aggregate market capitalization (such
aggregate market capitalization being the product of the Current Market Price of
the Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the date of such distribution; and (f) the successful completion
of a tender or exchange offer made by the Company or any subsidiary thereof for
the Common Stock which involves an aggregate consideration that, together with
(i) any cash and the fair market value of other consideration payable in respect
of any tender or exchange offer by the Company or a subsidiary thereof for the
Common Stock concluded within the preceding 12 months and (ii) the aggregate
amount of any all-cash distributions to all holders of the Company's Common
Stock made within the preceding 12 months, exceeds 15% of the Company's
aggregate market capitalization on the expiration of such tender or exchange
offer. The "Current Market Price" per share of Common Stock on any day means the
average of the daily Closing Prices for the 5 consecutive Trading Days selected
by the Company commencing not more than 30 Trading Days before, and ending not
later than, the earlier of the day in question and the day before the "ex date"
with respect to the issuance or distribution requiring such computation. For
purposes of this paragraph, the term "ex date," when used with respect to any
issuance or distribution, shall mean the first date on which the Common Stock
trades on such exchange or in such market without the right to receive such
issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or property, each
Purchase Contract then outstanding would, without the consent of the holders of
the related Income PRIDES or Growth PRIDES, as the case may be, become a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of the
number of shares of Common Stock which would have been received by the holder of
the related Income PRIDES or Growth PRIDES immediately prior to the date of
consummation of such transaction if such holder had then settled such Purchase
Contract.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (i.e., distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe to capital stock) and, pursuant to the Settlement Rate
adjustment provisions of the Purchase Contract Agreement, the Settlement Rate is
increased, such increase may give rise to a taxable dividend to holders of
FELINE PRIDES. See "Certain Federal Income Tax Consequences--Income
PRIDES--Purchase Contracts --Adjustment to Settlement Rate."
In addition, the Company may make such increases in the Settlement Rate as
the Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of its capital stock resulting from any dividend or
distribution of capital stock (or rights to acquire capital stock) or from any
event treated as such for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
(1)/(10,000)th of a share. No adjustment in the Settlement Rate shall be
required unless such adjustment would require an increase or decrease of at
least one percent in the Settlement Rate; provided, however, that any
adjustments which by reason of the foregoing are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
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The Company will be required, within ten Business Days following the
adjustment of the Settlement Rate, to provide written notice to the Purchase
Contract Agent of the occurrence of such event and a statement in reasonable
detail setting forth the method by which the adjustment to the Settlement Rate
was determined and setting forth the revised Settlement Rate.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of shares of Common Stock issuable upon early
settlement of a Purchase Contract.
TERMINATION
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the FELINE PRIDES thereunder (including the right thereunder
to receive accrued Contract Adjustment Payments or Deferred Contract Adjustment
Payments and the right and obligation to purchase Common Stock), will
automatically terminate upon the occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to the Company. Upon such termination,
the Collateral Agent will release the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or Treasury
Securities, as the case may be, held by it to the Purchase Contract Agent for
distribution to the holders, subject in the case of the Treasury Portfolio to
the Purchase Contract Agent's disposition of the subject securities for cash and
the payment of such cash to the holders to the extent that the holders would
otherwise have been entitled to receive less than $1,000 of any such security.
Upon such termination, however, such release and distribution may be subject to
a delay. In the event that the Company becomes the subject of a case under the
Bankruptcy Code, such delay may occur as a result of the automatic stay under
the Bankruptcy Code and continue until such automatic stay has been lifted. The
company expects any such delay to be limited.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
The Trust Preferred Securities related to the Income PRIDES or, if
substituted, the Treasury Securities related to the Growth PRIDES or the
Treasury Portfolio if a Tax Event Redemption has occurred prior to the Purchase
Contract Settlement Date (collectively, the "Pledged Securities") will be
pledged to the Collateral Agent, for the benefit of the Company, pursuant to the
Pledge Agreement to secure the obligations of holders of FELINE PRIDES to
purchase Common Stock under the related Purchase Contracts. The rights of
holders of FELINE PRIDES to the related Pledged Securities will be subject to
the Company's security interest therein created by the Pledge Agreement. No
holder of Income PRIDES or Growth PRIDES will be permitted to withdraw the
Pledged Securities related to such Income PRIDES or Growth PRIDES from the
pledge arrangement except (i) to substitute Treasury Securities for the related
Trust Preferred Securities or the appropriate Applicable Ownership Interest of
the Treasury Portfolio, as the case may be, (ii) to substitute Trust Preferred
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as the case may be for the related Treasury Securities (for both (i)
and (ii), as provided for under "Description of the FELINE PRIDES--Substitution
of Pledged Securities" and "--Recreating Income PRIDES"), (iii) upon the
termination or Early Settlement of the related Purchase Contracts. Subject to
such security interest and the terms of the Purchase Contract Agreement and the
Pledge Agreement, each holder of Income PRIDES (unless a Tax Event Redemption
has occurred) will be entitled through the Purchase Contract Agent and the
Collateral Agent to all of the proportional rights and preferences of the
related Trust Preferred Securities (including distribution, voting, redemption,
repayment and liquidation rights) and each holder of Growth PRIDES or Income
PRIDES (if a Tax Event Redemption has occurred) will retain beneficial ownership
of the related Treasury Securities or the appropriate Applicable Ownership
Interest of the Treasury Portfolio, as applicable, pledged in respect of the
related Purchase Contracts. The Company will have no interest in the Pledged
Securities other than its security interest.
Except as described in "Description of the Purchase Contracts--General,"
the Collateral Agent will, upon receipt of distributions on the Pledged
Securities, distribute such payments to the Purchase Contract Agent, which will
in turn distribute those payments, together with Contract Adjustment Payments
received from the Company, to the persons in whose names the related Income
PRIDES or Growth PRIDES are registered at the close of business on the Record
Date immediately preceding the date of such distribution.
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BOOK ENTRY-SYSTEM
The Depository Trust Company (the "Depositary") will act as securities
depositary for the FELINE PRIDES. The FELINE PRIDES will be issued only as
fully-registered securities registered in the name of Cede & Co. (the
Depositary's nominee). One or more fully-registered global security certificates
("Global Security Certificates"), representing the total aggregate number of
FELINE PRIDES, will be issued and will be deposited with the Depositary and will
bear a legend regarding the restrictions on exchanges and registration of
transfer thereof referred to below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the FELINE PRIDES so
long as such FELINE PRIDES are represented by Global Security Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depositary holds
securities that its participants ("Participants") deposit with the Depositary.
The Depositary also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations ("Direct Participants").
The Depositary is owned by a number of its Direct Participants and by the NYSE,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the Depositary system is also available to others, such
as securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a Direct Participant either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Participants are
on file with the Commission.
No FELINE PRIDES represented by Global Security Certificates may be
exchanged in whole or in part for FELINE PRIDES registered, and no transfer of
Global Security Certificates in whole or in part may be registered, in the name
of any person other than the Depositary or any nominee of the Depositary unless
the Depositary has notified the Company that it is unwilling or unable to
continue as depositary for such Global Security Certificates or has ceased to be
qualified to act as such as required by the Purchase Contract Agreement or there
shall have occurred and be continuing a default by the Company in respect of its
obligations under one or more Purchase Contracts. All FELINE PRIDES represented
by one or more Global Security Certificates or any portion thereof will be
registered in such names as the Depositary may direct.
As long as the Depositary or its nominee is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the Global Security
Certificates and all FELINE PRIDES represented thereby for all purposes under
the FELINE PRIDES and the Purchase Contract Agreement. Except in the limited
circumstances referred to above, owners of beneficial interests in Global
Security Certificates will not be entitled to have such Global Security
Certificates or the FELINE PRIDES represented thereby registered in their names,
will not receive or be entitled to receive physical delivery of FELINE PRIDES
Certificates in exchange therefor and will not be considered to be owners or
holders of such Global Security Certificates or any FELINE PRIDES represented
thereby for any purpose under the FELINE PRIDES or the Purchase Contract
Agreement. All payments on the FELINE PRIDES represented by the Global Security
Certificates and all transfers and deliveries of Trust Preferred Securities,
Treasury Portfolio, Treasury Securities and Common Stock with respect thereto
will be made to the Depositary or its nominee, as the case may be, as the holder
thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with the Depositary or its nominee. Ownership of
beneficial interests in Global Security Certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to Participants'
interests) or any such Participant (with respect to interests of persons held by
such Participants on their behalf). Procedures for settlement of Purchase
Contracts on the Purchase Contract
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Settlement Date or upon Early Settlement will be governed by arrangements among
the Depositary, Participants and persons that may hold beneficial interests
through Participants designed to permit such settlement without the physical
movement of certificates. Payments, transfers, deliveries, exchanges and other
matters relating to beneficial interests in Global Security Certificates may be
subject to various policies and procedures adopted by the Depositary from time
to time. None of the Company, the Purchase Contract Agent or any agent of the
Company or the Purchase Contract Agent will have any responsibility or liability
for any aspect of the Depositary's or any Participant's records relating to, or
for payments made on account of, beneficial interests in Global Security
Certificates, or for maintaining, supervising or reviewing any of the
Depositary's records or any Participant's records relating to such beneficial
ownership interests.
The information in this section concerning the Depository and its
book-entry system has been obtained from sources that the Company and the Trust
believe to be reliable, but neither the Company nor the Trust takes
responsibility for the accuracy thereof.
CERTAIN PROVISIONS OF THE PURCHASE CONTRACT
AGREEMENTS AND THE PLEDGE AGREEMENT
GENERAL
Distributions on the FELINE PRIDES will be payable, Purchase Contracts (and
documents related thereto) will be settled and transfers of the FELINE PRIDES
will be registrable at the office of the Purchase Contract Agent in the Borough
of Manhattan, The City of New York. In addition, in the event that the FELINE
PRIDES do not remain in book-entry form, payment of distributions on the FELINE
PRIDES may be made, at the option of the Company, by check mailed to the address
of the person entitled thereto as shown on the Security Register.
Shares of Common Stock will be delivered on the Purchase Contract
Settlement Date (or earlier upon Early Settlement), or, if the Purchase
Contracts have terminated, the related Pledged Securities will be delivered
potentially after a limited delay as a result of the imposition of an automatic
stay under the Bankruptcy Code (see "Description of the Purchase
Contracts--Termination"), in each case upon presentation and surrender of the
FELINE PRIDES Certificate at the office of the Purchase Contract Agent. The
Company expects any such delay to be limited. If a holder of outstanding Income
PRIDES or Growth PRIDES fails to present and surrender the FELINE PRIDES
Certificate evidencing such Income PRIDES or Growth PRIDES to the Purchase
Contract Agent on the Purchase Contract Settlement Date, the shares of Common
Stock issuable in settlement of the related Purchase Contract and in payment of
any Deferred Contract Adjustment Payments will be registered in the name of the
Purchase Contract Agent and, together with any distributions thereon, shall be
held by the Purchase Contract Agent as agent for the benefit of such holder,
until such FELINE PRIDES Certificate is presented and surrendered or the holder
provides satisfactory evidence that such certificate has been destroyed, lost or
stolen, together with any indemnity that may be required by the Purchase
Contract Agent and the Company.
If the Purchase Contracts have terminated prior to the Purchase Contract
Settlement Date, the related Pledged Securities have been transferred to the
Purchase Contract Agent for distribution to the holders entitled thereto and a
holder fails to present and surrender the FELINE PRIDES Certificate evidencing
such holder's Income PRIDES or Growth PRIDES to the Purchase Contract Agent, the
related Pledged Securities delivered to the Purchase Contract Agent and payments
thereon shall be held by the Purchase Contract Agent as agent for the benefit of
such holder, until such FELINE PRIDES Certificate is presented or the holder
provides the evidence and indemnity described above.
The Purchase Contract Agent will have no obligation to invest or to pay
interest on any amounts held by the Purchase Contract Agent pending
distribution, as described above.
No service charge will be made for any registration of transfer or exchange
of the FELINE PRIDES, except for any tax or other governmental charge that may
be imposed in connection therewith.
MODIFICATION
The Purchase Contract Agreement and the Pledge Agreement will contain
provisions permitting the Company and the Purchase Contract Agent or Collateral
Agent, as the case may be, with the consent of the
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holders of not less than a majority of the Purchase Contracts at the time
outstanding, to modify the terms of the Purchase Contracts, the Purchase
Contract Agreement and the Pledge Agreement, except that no such modification
may, without the consent of the holder of each outstanding Purchase Contract
affected thereby, (a) change any Payment Date, (b) change the amount or type of
Pledged Securities related to such Purchase Contract, impair the right of the
holder of any Pledged Securities to receive distributions on such Pledged
Securities (except for the rights of holders of Income PRIDES to substitute
Treasury Securities for the related Trust Preferred Securities or Treasury
Portfolio, as the case may be, or the rights of holders of Growth PRIDES to
substitute Trust Preferred Securities or Treasury Portfolio, as the case may be,
for the related Treasury Securities) or otherwise adversely affect the holder's
rights in or to such Pledged Securities, (c) change the place or currency of
payment or reduce any Contract Adjustment Payments or any Deferred Contract
Adjustment Payments, (d) impair the right to institute suit for the enforcement
of such Purchase Contract, (e) reduce the amount of Common Stock purchasable
under such Purchase Contract, increase the price to purchase Common Stock on
settlement of such Purchase Contract, change the Purchase Contract Settlement
Date or otherwise adversely affect the holder's rights under such Purchase
Contract or (f) reduce the above-stated percentage of outstanding Purchase
Contracts the consent of whose holders is required for the modification or
amendment of the provisions of the Purchase Contracts, the Purchase Contract
Agreement or the Pledge Agreement; provided, that if any amendment or proposal
referred to above would adversely affect only the Income PRIDES or the Growth
PRIDES, then only the affected class of holder will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the consent of the holders of not less than a majority of such
class.
NO CONSENT TO ASSUMPTION
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the Income PRIDES or
Growth PRIDES, as applicable, be deemed expressly to have withheld any consent
to the assumption (i.e., affirmance) of the related Purchase Contracts by the
Company or its trustee in the event that the Company becomes the subject of a
case under the Bankruptcy Code.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will covenant in the Purchase Contract Agreement that it will
not merge or consolidate with any other entity or sell, assign, transfer, lease
or convey all or substantially all of its properties and assets to any person,
firm or corporation unless the Company is the continuing corporation or the
successor corporation is a corporation organized under the laws of the United
States of America or a state thereof and such corporation expressly assumes the
obligations of the Company under the Purchase Contracts, the Debentures, the
Purchase Contract Agreement and the Pledge Agreement, and the Company or such
successor corporation is not, immediately after such merger, consolidation,
sale, assignment, transfer, lease or conveyance, in default in the performance
of any of its obligations thereunder.
TITLE
The Company, the Purchase Contract Agent and the Collateral Agent may treat
the registered owner of any FELINE PRIDES as the absolute owner thereof for the
purpose of making payment and settling the related Purchase Contracts and for
all other purposes.
REPLACEMENT OF FELINE PRIDES CERTIFICATES
In the event that physical certificates have been issued, any mutilated
FELINE PRIDES Certificate will be replaced by the Company at the expense of the
holder upon surrender of such certificate to the Purchase Contract Agent. FELINE
PRIDES Certificates that become destroyed, lost or stolen will be replaced by
the Company at the expense of the holder upon delivery to the Company and the
Purchase Contract Agent of evidence of the destruction, loss or theft thereof
satisfactory to the Company and the Purchase Contract Agent. In the case of a
destroyed, lost or stolen FELINE PRIDES Certificate, an indemnity satisfactory
to the Purchase Contract Agent and the Company may be required at the expense of
the holder of the FELINE PRIDES evidenced by such certificate before a
replacement will be issued.
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Notwithstanding the foregoing, the Company will not be obligated to issue
any Income PRIDES or Growth PRIDES on or after the Purchase Contract Settlement
Date (or after Early Settlement) or after the Purchase Contracts have
terminated. The Purchase Contract Agreement will provide that in lieu of the
delivery of a replacement FELINE PRIDES Certificate following the Purchase
Contract Settlement Date, the Purchase Contract Agent, upon delivery of the
evidence and indemnity described above, will deliver the Common Stock issuable
pursuant to the Purchase Contracts included in the Income PRIDES or Growth
PRIDES evidenced by such certificate, or, if the Purchase Contracts have
terminated prior to the Purchase Contract Settlement Date, transfer the
principal amount of the Pledged Securities included in the Income PRIDES or
Growth PRIDES evidenced by such certificate.
GOVERNING LAW
The Purchase Contract Agreement, the Pledge Agreement and the Purchase
Contracts will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The First National Bank of Chicago will be the Purchase Contract Agent. The
Purchase Contract Agent will act as the agent for the holders of Income PRIDES
and Growth PRIDES from time to time. The Purchase Contract Agreement will not
obligate the Purchase Contract Agent to exercise any discretionary actions in
connection with a default under the terms of the Income PRIDES and Growth PRIDES
or the Purchase Contract Agreement.
The Purchase Contract will contain provisions limiting the liability of the
Purchase Contract Agent. The Purchase Contract Agreement will contain provisions
under which the Purchase Contract Agent may resign or be replaced. Such
resignation or replacement would be effective upon the appointment of a
successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Chase Manhattan Bank will be the Collateral Agent. The Collateral Agent
will act solely as the agent of the Company and will not assume any obligation
or relationship of agency or trust for or with any of the holders of the Income
PRIDES and Growth PRIDES except for the obligations owed by a pledgee of
property to the owner thereof under the Pledge Agreement and applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
MISCELLANEOUS
The Purchase Contract Agreement will provide that the Company will pay all
fees and expenses related to (i) the Offering, (ii) the retention of the
Collateral Agent and (iii) the enforcement by the Purchase Contract Agent of the
rights of the holders of the FELINE PRIDES; provided, however, that holders who
elect to substitute the related Pledged Securities, thereby creating Growth
PRIDES or recreating Income PRIDES, shall be responsible for any fees or
expenses payable in connection with such substitution, as well as any
commissions, fees or other expenses incurred in acquiring the Pledged Securities
to be substituted, and the Company shall not be responsible for any such fees or
expenses.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities, which form a component of the Income
PRIDES, and which, under certain circumstances, will trade separately, will be
issued pursuant to the terms of the Declaration. See "Description of the FELINE
PRIDES--Substitution of Pledged Securities." The Declaration will be qualified
as an indenture under the Trust Indenture Act. The Institutional Trustee, The
First National Bank of Chicago, an independent trustee, will act as indenture
trustee for the Trust Preferred Securities under the Declaration for purposes of
compliance with the provisions of the Trust Indenture Act. The terms of the
Trust Preferred Securities will include those stated in the Declaration and
those made part of the Declaration by the Trust Indenture Act. The following
summary of certain provisions of the Trust Preferred Securities and the
Declaration is not necessarily complete, and reference is hereby made to the
copy of the Declaration (including the definitions therein of certain terms)
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement, the Trust Act and the Trust Indenture Act. Whenever
particular defined terms are referred to in this Prospectus Supplement, such
defined terms are incorporated herein by reference. The following descriptions
of certain terms of the Trust Preferred Securities offered hereby supplements,
and to the extent inconsistent with, replaces the description of the general
terms and provisions of the Trust Preferred Securities set forth in the
accompanying Prospectus, to which reference is hereby made.
GENERAL
The Declaration authorizes the Kennametal Trustees to issue on behalf of
the Trust the Trust Securities, which represent undivided beneficial ownership
interests in the assets of the Trust. All of the Common Securities will be
owned, directly or indirectly, by the Company. The Common Securities rank pari
passu, and payments will be made thereon on a pro rata basis, with the Trust
Preferred Securities, except that upon the occurrence and during the continuance
of an Indenture Event of Default, the rights of the holders of the Common
Securities to receive payment of periodic distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of the Trust Preferred Securities. The Declaration does not permit the
issuance by the Trust of any securities other than the Trust Securities or the
incurrence of any indebtedness by the Trust. Pursuant to the Declaration, the
Institutional Trustee will own the Debentures purchased by the Trust for the
benefit of the holders of the Trust Securities. The payment of distributions out
of money held by the Trust, and payments upon redemption of the Trust Preferred
Securities or liquidation of the Trust, are guaranteed by the Company to the
extent described under "Description of the Guarantee." The Guarantee, when taken
together with the Company's obligations under the Debentures and the Indenture
and its obligations under the Declaration, including the obligations to pay
costs, expenses, debts and liabilities of the Trust (other than with respect to
the Trust Preferred Securities), provides a full and unconditional guarantee of
amounts due on the Trust Preferred Securities. The Guarantee will be held by,
the Guarantee Trustee, for the benefit of the holders of the Trust Preferred
Securities. The Guarantee does not cover payment of distributions when the Trust
does not have sufficient available funds to pay such distributions. In such
event, the remedy of a holder of Trust Preferred Securities is to vote to direct
the Institutional Trustee to enforce the Institutional Trustee's rights under
the Debentures (except in the limited circumstances in which the holder may take
direct action). See "--Declaration Events of Default" and "--Voting Rights."
DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be fixed initially at
a rate per annum of % of the stated liquidation amount of $50 per Trust
Preferred Security. Distributions applicable on the Trust Preferred Securities
that remain outstanding on and after the Purchase Contract Settlement Date will
be reset on the third Business Day immediately preceding the Purchase Contract
Settlement Date. See "--Market Rate Reset." Distributions in arrears for more
than one quarter will bear interest thereon at the rate of % per annum
through and including February 15, 2001 and at the Reset Rate thereafter,
compounded quarterly. The term "distribution" as used herein includes any such
interest payable unless otherwise stated. The amount of distributions payable
for any period will be computed on the basis of a 360-day year of twelve 30-day
months.
Distributions on the Trust Preferred Securities will be cumulative and will
accrue from 1998 and will be payable quarterly in arrears on February 16,
May 16, August 16, and November 16 each year,
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commencing February 16, 1998, when, as and if funds are available for payment.
Distributions will be made by the Institutional Trustee, except as otherwise
described below.
The Company has the right under the Indenture to defer payments of interest
on the Debentures by extending the interest payment period from time to time on
the Debentures, which right, if exercised, would defer quarterly distributions
on the Trust Preferred Securities (though such distributions would continue to
accrue with interest at the rate of % per annum through and including
February 15, 2001, and at the Reset Rate thereafter) during any such extended
interest payment period. Such right to extend the interest payment period for
the Debentures is limited to a period, in the aggregate, not extending beyond
the maturity date of the Debentures. In the event that the Company exercises
this right, then (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of capital stock of the Company in connection with the
satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase capital stock of the Company, (ii) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company's capital stock, (iii) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(iv) dividends or distributions in capital stock of the Company (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock, and (v) redemptions or
repurchases of any rights pursuant to the Rights Agreement or any successor to
the Rights Agreement, and the declaration thereunder of a dividend of rights in
the future), (b) the Company shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities issued
by the Company that rank junior to such Debentures, and (c) the Company shall
not make any guarantee payments with respect to the foregoing other than
pursuant to the Guarantee or the Common Securities Guarantee. Prior to the
termination of any such Extension Period, the Company may further extend the
interest payment period; provided, that such Extension Period, together with all
such previous and further extensions thereof, may not extend beyond the maturity
date of the Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may select a new Extension Period,
subject to the above requirements. See "Description of the Debentures--Interest"
and "--Option to Extend Interest Payment Period." If distributions are deferred,
the deferred distributions and accrued interest thereon shall be paid to holders
of record of the Trust Preferred Securities as they appear on the books and
records of the Trust on the record date next following the termination of such
Extension Period.
Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Trust has funds available in the Property Account
for the payment of such distributions. The Trust's funds available for
distribution to the holders of the Trust Preferred Securities will be limited to
payments received from the Company on the Debentures. See "Description of the
Debentures." The payment of distributions out of moneys held by the Trust is
guaranteed by the Company to the extent set forth under "Description of the
Guarantee." Distributions on the Trust Preferred Securities will be payable to
the holders thereof, including the Collateral Agent, as they appear on the books
and records of the Trust on the relevant record dates, which, as long as the
Trust Preferred Securities remain in book-entry only form, will be one Business
Day prior to the relevant payment dates. Such distributions will be paid through
the Institutional Trustee who will hold amounts received in respect of the
Debentures in the Property Account for the benefit of the holders of the Trust
Preferred Securities. Subject to any applicable laws and regulations and the
provisions of the Declaration, each such payment will be made as described under
"Book-Entry Only Issuance--The Depository Trust Company" below. In the event
that the Trust Preferred Securities do not continue to remain in book-entry
form, the Regular Trustees shall have the right to select relevant record dates,
which shall be more than one Business Day but less than 60 Business Days prior
to the relevant payment dates. In the event that any date on which distributions
are to be made on the Trust Preferred Securities is not a Business Day, then
payment of the distributions payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such record date.
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MARKET RATE RESET
The applicable quarterly distribution rate on the Trust Preferred
Securities and the interest rate on the related Debentures that remain
outstanding on and after the Purchase Contract Settlement Date will be reset on
the third Business Day immediately preceding the Purchase Contract Settlement
Date to the Reset Rate, which will be equal to the sum of the Reset Spread and
the rate on the Two-Year Benchmark Treasury in effect on the third Business Day
immediately preceding the Purchase Contract Settlement Date and will be
determined by the Reset Agent as the rate the Trust Preferred Securities should
bear in order for a Trust Preferred Security to have an approximate market value
on the third Business Day immediately preceding the Purchase Contract Settlement
Date of 100.5% of the Stated Amount, provided that the Company may limit such
Reset Rate to be no higher than the rate on the Two-Year Benchmark Treasury on
the Purchase Contract Settlement Date plus 200 basis points (2%). Such market
value may be less than 100.5% if the Reset Spread is limited to a maximum of 2%.
The "Two-Year Benchmark Treasury" shall mean direct obligations of the United
States (which may be obligations traded on a when-issued basis only) having a
maturity comparable to the remaining term to maturity of the Trust Preferred
Securities, as agreed upon by the Company and the Reset Agent. The rate for the
Two-Year Benchmark Treasury will be the bid side rate displayed at 10:00 A.M.,
New York City time, on the third Business Day immediately preceding the Purchase
Contract Settlement Date in the Telerate system (or if the Telerate system is
(a) no longer available on the third Business Day immediately preceding the
Purchase Contract Settlement Date or (b) in the opinion of the Reset Agent
(after consultation with the Company) no longer an appropriate system from which
to obtain such rate, such other nationally recognized quotation system as, in
the opinion of the Reset Agent (after consultation with the Company) is
appropriate). If such rate is not so displayed, the rate for the Two-Year
Benchmark Treasury shall be, as calculated by the Reset Agent, the yield to
maturity for the Two-Year Benchmark Treasury, expressed as a bond equivalent on
the basis of a year of 365 or 366 days, as applicable, and applied on a daily
basis, and computed by taking the arithmetic mean of the secondary market bid
rates, as of 10:30 A.M., New York City time, on the third Business Day
immediately preceding the Purchase Contract Settlement Date of three leading
United States government securities dealers selected by the Reset Agent (after
consultation with the Company) (which may include the Reset Agent or an
affiliate thereof). The Company may limit the Reset Rate to be no higher than
the rate on the Two-Year Benchmark Treasury on the third Business Day
immediately preceding the Purchase Contract Settlement Date plus 200 basis
points (2%). It is currently anticipated that Merrill Lynch, Pierce, Fenner &
Smith Incorporated will be the investment banking firm acting as the Reset
Agent.
On the tenth Business Day immediately preceding the Purchase Contract
Settlement Date, the Two-Year Benchmark Treasury to be used to determine the
Reset Rate on the Purchase Contract Settlement Date will be selected and the
Reset Spread to be added to the rate on the Two-Year Benchmark Treasury in
effect on the third Business Day immediately preceding the Purchase Contract
Settlement Date will be established by the Reset Agent, and the Reset Spread and
the Two-Year Benchmark Treasury will be announced by the Company (the "Reset
Announcement Date"). The Company will cause a notice of the Reset Spread and
such Two-Year Benchmark Treasury to be published on the Business Day following
the Reset Announcement Date by publication in a daily newspaper in the English
language of general circulation in The City of New York, which is expected to be
The Wall Street Journal. The Company will request, not later than 7 nor more
than 15 calendar days prior to the Reset Announcement Date, that the Depositary
notify its participants holding Trust Preferred Securities, Income PRIDES or
Growth PRIDES of such Reset Announcement Date and of the procedures that must be
followed if any owner of FELINE PRIDES wishes to settle the related Purchase
Contract with cash on the Business Day immediately preceding the Purchase
Contract Settlement Date.
OPTIONAL REDEMPTION
The Debentures are redeemable at the option of the Company, in whole but
not in part, on not less than 30 days nor more than 60 days notice, upon the
occurrence and continuation of a Tax Event under the circumstances described
under "Description of the Debentures--Tax Event Redemption." If the Company
redeems the Debentures, upon the occurrence and continuation of a Tax Event, the
proceeds from such repayment shall simultaneously be applied to redeem Trust
Preferred Securities having an aggregate stated liquidation amount equal to the
aggregate principal amount of the Debentures so redeemed at a Redemption Price,
per Trust Preferred Security, equal to the Redemption Amount plus accrued and
unpaid interest, thereon to the date of such
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redemption. Such proceeds will be payable in cash to the holders of such Trust
Preferred Securities. If the Tax Event Redemption occurs prior to the Purchase
Contract Settlement Date, the Redemption Price payable to the Collateral Agent,
in liquidation of the Income PRIDES holders' interests in the Trust, will be
simultaneously applied by the Collateral Agent to purchase on behalf of such
holders of the Income PRIDES the Treasury Portfolio. The Treasury Portfolio will
be pledged with the Collateral Agent to secure the obligation of the Income
PRIDES holders' to purchase Common Stock under the related Purchase Contracts.
If a Failed Remarketing has occurred, holders of Trust Securities
(including, following the distribution of the Debentures upon a dissolution of
the Trust as described herein, such Debenture holders), holding such Trust
Securities or Debentures, as the case may be, following the Purchase Contract
Settlement Date will have the right, in the case of Trust Securities, to require
the Trust to put to the Company the related Debentures, or in the case of
Debentures, to put such Debentures directly to the Company on March , 2001,
upon at least three Business Days' prior notice at a price per Debenture equal
to $50, plus accrued and unpaid interest (including deferred interest), if any,
thereon. Upon the repurchase of such Debentures from the Trust by the Company,
(i) the proceeds from such repurchase shall simultaneously be applied to redeem
such Trust Securities of such holder in an aggregate stated liquidation amount
equal to the aggregate principal amount of the Debentures so repurchased and
(ii) any accrued and unpaid distributions, including deferred distributions,
with respect to such Trust Securities will be paid to such holder in cash.
REDEMPTION PROCEDURES
If the Trust gives a notice of redemption (which notice will be
irrevocable) in respect of all of the Trust Preferred Securities, then, by 12:00
noon, New York City time, on the redemption date, provided that the Company has
paid to the Institutional Trustee a sufficient amount of cash in connection with
the related redemption or maturity of the Debentures, the Trust will irrevocably
deposit with the Depositary, the Purchase Contract Agent or the Collateral
Agent, as applicable, funds sufficient to pay the applicable Redemption Price
and will give the Depositary, the Purchase Contract Agent or the Collateral
Agent, as applicable, irrevocable instructions and authority to pay the
Redemption Price to the holders of the Trust Preferred Securities so called for
redemption. If notice of redemption shall have been given and funds deposited as
required, then, immediately prior to the close of business on the date of such
deposit, distributions will cease to accrue and all rights of holders of such
Trust Preferred Securities so called for redemption will cease, except the right
of the holders of such Trust Preferred Securities to receive the Redemption
Price but without interest on such Redemption Price. In the event that any date
fixed for redemption of Trust Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day that is a Business Day (without any interest or other payment in
respect of any such delay), except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately preceding Business
Day.
DISTRIBUTION OF THE DEBENTURES
"Investment Company Event" means that the Regular Trustees shall have
received an opinion from independent counsel experienced in practice under the
1940 Act (as defined below) to the effect that, as a result of the occurrence of
a change in law or regulation or a written change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law"), which Change in
1940 Act Law becomes effective on or after the date of this Prospectus
Supplement, there is more than an insubstantial risk that the Trust is or will
be considered an "investment company" which is required to be registered under
the Investment Company Act of 1940, as amended (the "1940 Act").
If, at any time, an Investment Company Event shall occur and be continuing,
the Trust shall be dissolved, with the result that Debentures with an aggregate
principal amount equal to the aggregate stated liquidation amount of, with an
interest rate identical to the distribution rate of, and accrued and unpaid
interest equal to accrued and unpaid distributions on, the Trust Securities,
would be distributed to the holders of the Trust Securities in liquidation of
such holders' interests in the Trust on a pro rata basis within 90 days
following the occurrence of such Investment Company Event; provided, however,
that such dissolution and distribution shall be conditioned on the Company being
unable to avoid such Investment Company Event within such 90-day period by
taking some ministerial action or pursuing some other similar reasonable measure
that will have no adverse effect on the Trust, the Company or the holders of the
Trust Securities and will involve no material cost. If an
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Investment Company Event occurs, Debentures distributed to the Collateral Agent
in liquidation of such holder's interest in the Trust would be pledged (in lieu
of the Trust Preferred Securities) to secure such Income PRIDES holders'
obligations to purchase Common Stock under the Purchase Contracts.
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities of creditors of the Trust as provided by
applicable law, cause the Debentures to be distributed to the holders of the
Trust Securities. As of the date of any distribution of Debentures upon
dissolution of the Trust, (i) the Trust Preferred Securities will no longer be
deemed to be outstanding, (ii) the Depositary or its nominee, as the record
holder of the Trust Preferred Securities, will receive a registered global
certificate or certificates representing the Debentures to be delivered upon
such distribution, and (iii) any certificates representing Trust Preferred
Securities not held by the Depositary or its nominee will be deemed to represent
Debentures having an aggregate principal amount equal to the aggregate stated
liquidation amount of, with an interest rate identical to the distribution rate
of, and accrued and unpaid interest equal to accrued and unpaid distributions
on, such Trust Preferred Securities until such certificates are presented to the
Company or its agent for transfer or reissuance. Debentures distributed to the
Collateral Agent in liquidation of the interest of the holders of the Trust
Preferred Securities in the Trust would be substituted for the Trust Preferred
Securities and pledged to secure Income PRIDES holders' obligations to purchase
Common Stock under the Purchase Contracts.
There can be no assurance as to the market prices for either the Trust
Preferred Securities or the Debentures that may be distributed in exchange for
the Trust Preferred Securities if a dissolution of the Trust were to occur.
Accordingly, the Trust Preferred Securities or such Debentures that an investor
may receive if a dissolution of the Trust were to occur may trade at a discount
to the price that the investor paid to purchase the Trust Preferred Securities
forming a part of the Income PRIDES offered hereby.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the Trust
(unless a Tax Event Redemption has occurred), the then holders of the Trust
Preferred Securities will be entitled to receive out of the assets of the Trust,
after satisfaction of liabilities to creditors, Debentures in an aggregate
principal amount equal to the aggregate stated liquidation amount of, with an
interest rate identical to the distribution rate of, and accrued and unpaid
interest equal to accrued and unpaid distributions on, the Trust Preferred
Securities on a pro rata basis in exchange for such Trust Preferred Securities.
The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution pro rata with the holders of the Trust
Preferred Securities, except that if a Declaration Event of Default has occurred
and is continuing, the Trust Preferred Securities shall have a preference over
the Common Securities with regard to such distributions.
Pursuant to the Declaration, the Trust shall dissolve (i) on November 12,
2004, the expiration of the term of the Trust, (ii) upon the bankruptcy of the
Company or the holder of the Common Securities, (iii) upon the filing of a
certificate of dissolution or its equivalent with respect to the Company or the
revocation of the charter of the Company and the expiration of 90 days after the
date of revocation without a reinstatement thereof, (iv) after the receipt by
the Institutional Trustee of written direction from the Company to dissolve the
Trust or the filing of a certificate of dissolution or its equivalent with
respect to the Trust, (v) upon the distribution of Debentures, (vi) upon the
occurrence and continuation of a Tax Event Redemption or (vii) upon the entry of
a decree of a judicial dissolution of the holder of the Common Securities, the
Company or the Trust.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); provided, that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Trust Preferred Securities
have been cured, waived or otherwise eliminated. Until such Declaration Events
of Default with respect to the Trust Preferred Securities have been so cured,
waived or otherwise eliminated, the Institutional Trustee will be deemed to be
acting solely on behalf of the holders of the Trust Preferred Securities and
only the holders of the Trust Preferred Securities will have the right to direct
the Institutional Trustee with
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respect to certain matters under the Declaration and, therefore, the Indenture.
If a Declaration Event of Default with respect to the Trust Preferred Securities
is waived by holders of Trust Preferred Securities, such waiver will also
constitute the waiver of such Declaration Event of Default with respect to the
Common Securities without any further act, vote or consent of the holders of the
Common Securities. If the Institutional Trustee fails to enforce its rights
under the Debentures in respect of an Indenture Event of Default after a holder
of record of Trust Preferred Securities has made a written request, such holder
of record of Trust Preferred Securities may, to the fullest extent permitted by
applicable law, institute a legal proceeding against the Company to enforce the
Institutional Trustee's rights under the Debentures without first proceeding
against the Institutional Trustee or any other person or entity. Notwithstanding
the foregoing, if a Declaration Event of Default has occurred and is continuing
and such event is attributable to the failure of the Company to pay interest or
principal on the Debentures on the date such interest or principal is otherwise
payable (after giving effect to any right of deferral), then a holder of Trust
Preferred Securities may directly institute a proceeding after the respective
due date specified in the Debentures for enforcement of payment (a "Direct
Action") to such holder directly of the principal of or interest on the
Debentures having a principal amount equal to the aggregate liquidation amount
of the Trust Preferred Securities of such holder. In connection with such Direct
Action, the Company shall have the right under the Indenture to set off any
payment made to such holder of the Company. The holders of Trust Preferred
Securities will not be able to exercise directly any other remedy available to
the holders of the Debentures. See "Effect of Obligations under the Debentures
and the Guarantee."
Upon the occurrence of a Declaration Event of Default, the Institutional
Trustee as the sole holder of the Debentures will have the right under the
Indenture to declare the principal of and interest on the Debentures to be
immediately due and payable. The Company and the Trust are each required to file
annually with the Institutional Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act and the Trust Indenture Act
and under "Description of the Guarantee--Modification of the Guarantee;
Assignment," and as otherwise required by law and the Declaration, the holders
of the Trust Preferred Securities will have no voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate stated liquidation amount of
the Trust Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Institutional
Trustee, or direct the exercise of any trust or power conferred upon the
Institutional Trustee under the Declaration, including the right to direct the
Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies
available under the Indenture with respect to the Debentures, (ii) waive any
past Indenture Event of Default that is waivable under Section of the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Debentures where
such consent shall be required; provided, however, that, where a consent or
action under the Indenture would require the consent or act of holders of more
than a majority in principal amount of the Debentures (a "Super-Majority")
affected thereby, only the holders of at least such Super-Majority in aggregate
stated liquidation amount of the Trust Preferred Securities may direct the
Institutional Trustee to give such consent or take such action. The
Institutional Trustee shall notify all holders of the Trust Preferred Securities
of any notice of default received from the Debt Trustee (as defined herein) with
respect to the Debentures. Such notice shall state that such Indenture Event of
Default also constitutes a Declaration Event of Default. Except with respect to
directing the time, method and place of conducting a proceeding for a remedy,
the Institutional Trustee shall not take any of the actions described in clauses
(i), (ii) or (iii) above unless the Institutional Trustee has obtained an
opinion of tax counsel experienced in such matters to the effect that, as a
result of such action, the Trust will not fail to be classified as a grantor
trust for federal income tax purposes.
In the event the consent of the Institutional Trustee, as the holder of the
Debentures, is required under the Indenture with respect to any amendment,
modification or termination of the Indenture or the Debentures, the
Institutional Trustee shall request the direction of the holders of the Trust
Preferred Securities and the Common Securities with respect to such amendment,
modification or termination and shall vote with respect to such amendment,
modification or termination as directed by a majority in stated liquidation
amount of the Trust
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Preferred Securities and the Common Securities voting together as a single
class; provided, however, that where a consent under the Indenture would require
the consent of a Super-Majority, the Institutional Trustee may only give such
consent at the direction of the holders of at least the proportion in stated
liquidation amount of the Trust Preferred Securities and the Common Securities
which the relevant Super-Majority represents of the aggregate principal amount
of the Debentures outstanding. The Institutional Trustee shall not take any such
action in accordance with the directions of the holders of the Trust Preferred
Securities and the Common Securities unless the Institutional Trustee has
obtained an opinion of tax counsel experienced in such matters to the effect
that, as a result of such action, the Trust will not fail to be classified as a
grantor trust for United States federal income tax purposes.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Trust Preferred Securities
may be given at a separate meeting of holders of Trust Preferred Securities
convened for such purpose, at a meeting of all of the holders of Trust
Securities or pursuant to written consent. The Regular Trustees will cause a
notice of any meeting at which holders of Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Trust Preferred
Securities. Each such notice will include a statement setting forth the
following information: (i) the date of such meeting or the date by which such
action is to be taken; (ii) a description of any resolution proposed for
adoption at such meeting on which such holders are entitled to vote or of such
matter upon which written consent is sought; and (iii) instructions for the
delivery of proxies or consents. No vote or consent of the holders of Trust
Preferred Securities will be required for the Trust to cancel Trust Preferred
Securities or distribute Debentures in accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities that are owned at such time by the Company or any entity
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, the Company, shall not be entitled to vote or consent and
shall, for purposes of such vote or consent, be treated as if such Trust
Preferred Securities were not outstanding.
The procedures by which holders of Trust Preferred Securities may exercise
their voting rights are described below. See "--Book-Entry Only Issuance--The
Depository Trust Company".
Holders of the Trust Preferred Securities will have no rights to appoint or
remove the Kennametal Trustees, who may be appointed, removed or replaced solely
by the Company as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Institutional Trustee or the Delaware
Trustee), provided, that if any proposed amendment provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Trust Securities, whether by
way of amendment to the Declaration or otherwise or (ii) the dissolution of the
Trust other than pursuant to the terms of the Declaration, then the holders of
the Trust Securities voting together as a single class will be entitled to vote
on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of at least a majority in such stated
liquidation amount of the Trust Securities affected thereby; provided further,
that if any amendment or proposal referred to in clause (i) above would
adversely affect only the Trust Preferred Securities or the Common Securities,
then only the affected class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of a majority in stated liquidation amount of such class of securities.
In addition, the Declaration may be amended without the consent of the holders
of the Trust Securities to, among other things, cause the Trust to continue to
be classified for United States federal income tax purposes as a grantor trust.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified as other than a grantor trust for purposes of United States
federal income taxation, (ii) reduce or otherwise adversely affect the powers of
the Institutional
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Trustee or (iii) cause the Trust to be deemed an "investment company" which is
required to be registered under the 1940 Act.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below or as described in "Liquidation Distribution Upon Dissolution".
The Trust may, with the consent of the Regular Trustees and without the consent
of the holders of the Trust Securities, consolidate, amalgamate, merge with or
into, or be replaced by a trust organized as such under the laws of any State;
provided, that (i) if the Trust is not the surviving entity, such successor
entity either (x) expressly assumes all of the obligations of the Trust under
the Trust Securities or (y) substitutes for the Trust Securities other
securities having substantially the same terms as the Trust Securities (the
"Successor Securities"), so long as the Successor Securities rank the same as
the Trust Securities with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly acknowledges a
trustee of such successor entity possessing the same powers and duties as the
Institutional Trustee as the holder of the Debentures, (iii) if the Trust
Preferred Securities are listed, any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or with another
organization on which the Trust Preferred Securities are then listed or quoted,
(iv) such merger, consolidation, amalgamation or replacement does not cause the
Trust Preferred Securities (including any Successor Securities) to be downgraded
by any nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the rights,
preferences and privileges of the holders of the Trust Securities (including any
Successor Securities) in any material respect (other than with respect to any
dilution of the holders' interest in the new entity), (vi) such successor entity
has a purpose substantially identical to that of the Trust, (vii) prior to such
merger, consolidation, amalgamation or replacement, the Company has received an
opinion of a nationally recognized independent counsel to the Trust experienced
in such matters to the effect that, (A) such merger, consolidation, amalgamation
or replacement does not adversely affect the rights, preferences and privileges
of the holders of the Trust Securities (including any Successor Securities) in
any material respect (other than with respect to any dilution of the holders'
interest in the new entity), (B) following such merger, consolidation,
amalgamation or replacement, neither the Trust nor such successor entity will be
required to register as an investment company under the 1940 Act and (C)
following such merger, consolidation, amalgamation or replacement, the Trust (or
the successor entity) will continue to be classified as a grantor trust for
federal income tax purposes, and (viii) the Company guarantees the obligations
of such successor entity under the Successor Securities at least to the extent
provided by the Guarantee and the Common Securities Guarantee. Notwithstanding
the foregoing the Trust shall not, except with the consent of holders of 100% in
stated liquidation amount of the Trust Securities, consolidate, amalgamate,
merge with or into, or be replaced by any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it, if such
consolidation, amalgamation, merger or replacement would cause the Trust or the
successor entity to be classified as other than a grantor trust for federal
income tax purposes.
BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
In the event that the Trust Preferred Securities are issued as one or more
fully-registered global Trust Preferred Securities certificates representing the
total aggregate number of the Trust Preferred Securities, the Depositary is
designated to act as securities depositary for any Trust Preferred Securities
that are held separately from the Income PRIDES or that are released to holders
in connection with the creation of Growth PRIDES. In such event, the Trust
Preferred Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (the Depositary's nominee). However, under
certain circumstances, the Regular Trustees with the consent of the Company may
decide not to use the system of book-entry transfers, through the DTC with
respect to the Trust Preferred Securities. In that event, certificates of the
Trust Preferred Securities will be printed and delivered to the holders.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Trust
Preferred Securities as represented by a global certificate.
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Purchases of Trust Preferred Securities within the Depositary's system must
be made by or through Direct Participants, which will receive a credit for the
Trust Preferred Securities on the Depositary's records. The ownership interest
of each actual purchaser of each Trust Preferred Security (a "Beneficial Owner")
is in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from the Depositary of
their purchases, but Beneficial Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Trust Preferred Securities. Transfers of
ownership interests in the Trust Preferred Securities are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in the Trust Preferred Securities, except in the event that use of the
book-entry system for the Trust Preferred Securities is discontinued.
To facilitate subsequent transfers, all the Trust Preferred Securities
deposited by Participants with the Depositary will be registered in the name of
the Depositary's nominee, Cede & Co. The deposit of Trust Preferred Securities
with the Depositary and their registration in the name of Cede & Co. effect no
change in beneficial ownership. The Depositary has no knowledge of the actual
Beneficial Owners of the Trust Preferred Securities. The Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
Trust Preferred Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
So long as the Depositary or its nominee is the registered owner or holder
of a global certificate, the Depositary or such nominee, as the case may be,
will be considered the sole owner or holder of the Trust Preferred Securities
represented thereby for all purposes under the Declaration and the Trust
Preferred Securities. No beneficial owner of an interest in a global certificate
will be able to transfer that interest except in accordance with the Depositary
applicable procedures, in addition to those provided for under the Declaration.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of Trust Preferred Securities (including the
presentation of Trust Preferred Securities for exchange as described below) only
at the direction of one or more Participants to whose account the Depositary's
interests in the global certificates are credited and only in respect of such
portion of the stated liquidation amount of Trust Preferred Securities as to
which such Participant or Participants has or have given such directions.
However, if there is a Declaration Event of Default under the Trust Preferred
Securities, the Depositary will exchange the global certificates for
certificated securities, which it will distribute to its Participants.
Conveyance of notices and other communications by the Depositary to Direct
Participants and Indirect Participants and by Direct Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
Although voting with respect to the Trust Preferred Securities is limited,
in those cases where a vote is required, neither the Depositary nor Cede & Co.
will itself consent or vote with respect to Trust Preferred Securities. Under
its usual procedures, the Depositary would mail an omnibus proxy to the Trust as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Trust Preferred Securities are credited on the record date (identified in a
listing attached to the omnibus proxy). The Company and the Trust believe that
the arrangements among the Depositary, Direct and Indirect Participants, and
Beneficial Owners will enable the Beneficial Owners to exercise rights
equivalent in substance to the rights that can be directly exercised by a record
holder of a beneficial interest in the Trust.
Distribution payments on the Trust Preferred Securities issued in the form
of one or more global certificates will be made to the Depositary in immediately
available funds. The Depositary's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on the Depositary's records unless the Depositary has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name," and such payments will
be the responsibility of such Participant and not of the Depositary, the Trust
or the Company, subject to any statutory or regulatory requirements to the
contrary that may be in effect
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from time to time. Payment of distributions to the Depositary is the
responsibility of the Trust, disbursement of such payments to Direct
Participants is the responsibility of the Depositary, and disbursement of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
Except as provided herein, a Beneficial Owner in a global Trust Preferred
Security certificate will not be entitled to receive physical delivery of Trust
Preferred Securities. Accordingly, each Beneficial Owner must rely on the
procedures of the Depositary to exercise any rights under the Trust Preferred
Securities.
Although the Depositary has agreed to the foregoing procedure in order to
facilitate transfer of interests in the global certificates among Participants,
the Depositary is under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. None of the
Company, the Trust or any Kennametal Trustee will have any responsibility for
the performance by the Depositary or its Participants or Indirect Participants
under the rules and procedures governing the Depositary. The Depositary may
discontinue providing its services as securities depositary with respect to the
Trust Preferred Securities at any time by giving reasonable notice to the Trust.
Under such circumstances, in the event that a successor securities depositary is
not obtained, Trust Preferred Securities certificates are required to be printed
and delivered to holders. Additionally, the Regular Trustees (with the consent
of the Company) may decide to discontinue use of the system of book-entry
transfers through the Depositary (or any successor depositary) with respect to
the Trust Preferred Securities. In that event, certificates for the Trust
Preferred Securities will be printed and delivered to holders. In each of the
above circumstances, the Company will appoint a paying agent with respect to the
Trust Preferred Securities.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
and the Trust believe to be reliable, but neither the Company nor the Trust
takes responsibility for the accuracy hereof.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
Payments in respect of the Trust Preferred Securities represented by the
global certificates shall be made to the Depositary, which shall credit the
relevant accounts at the Depositary on the applicable distribution dates, or, in
the case of certificated securities, such payments shall be made by check mailed
to the address of the holder entitled thereto as such address shall appear on
the Register. The Paying Agent shall be permitted to resign as Paying Agent upon
30 days' written notice to the Kennametal Trustees. In the event that The First
National Bank of Chicago shall no longer be the Paying Agent, the Regular
Trustees shall appoint a successor to act as Paying Agent (which shall be a bank
or trust company).
The First National Bank of Chicago will act as registrar, transfer agent
and paying agent for the Trust Preferred Securities.
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (and the giving of
such indemnity as the Trust or the Company may require) in respect of any tax or
other government charge which may be imposed in relation to it.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee prior to the occurrence of a default with respect
to the Trust Securities and after the curing of any defaults that may have
occurred, undertakes to perform only such duties as are specifically set forth
in the Declaration and, after default, shall exercise the same degree of care as
a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provisions, the Institutional Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The holders of Trust Preferred Securities will not be required to offer
such indemnity in the event such holders, by exercising their voting rights,
direct the Institutional Trustee to take any action it is empowered to take
under the Declaration following a Declaration Event of Default. The
Institutional Trustee also serves as trustee under the Guarantee.
The First National Bank of Chicago maintains commercial banking
relationships with the Company.
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GOVERNING LAW
The Declaration and the Trust Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to operate the Trust in
such a way so that the Trust will not be required to register as an "investment
company" under the 1940 Act or be characterized as other than a grantor trust
for federal income tax purposes. The Company is authorized and directed to
conduct its affairs so that the Debentures will be treated as indebtedness of
the Company for federal income tax purposes. In this connection, the Company and
the Regular Trustees are authorized to take any action not inconsistent with
applicable law, the Declaration of Trust, the certificate of trust of the Trust
or the certificate of incorporation of the Company, that each of the Company and
the Regular Trustees determines in its discretion to be necessary or desirable
to achieve such end, as long as such action does not adversely affect the
interests of the holders of the Trust Preferred Securities or vary the terms
thereof.
Holders of the Trust Preferred Securities have no preemptive or similar
rights.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by the Company for the benefit of the holders
from time to time of Trust Preferred Securities. The Guarantee will be qualified
as an indenture under the Trust Indenture Act. The First National Bank of
Chicago, an independent trustee, will act as indenture trustee under the
Guarantee (the "Guarantee Trustee") for the purposes of compliance with the
provisions of the Trust Indenture Act. The terms of the Guarantee will be those
set forth in the Guarantee and those made part of the Guarantee by the Trust
Indenture Act. The following summary is not necessarily complete, and reference
is hereby made to the copy of the form of Guarantee (including the definitions
therein of certain terms) which is filed as an exhibit to the Registration
Statement relating to this Prospectus Supplement, and to the Trust Indenture
Act. Whenever particular defined terms of the Guarantee are referred to in this
Prospectus Supplement, such defined terms are incorporated herein by reference.
The Guarantee will be held by the Guarantee Trustee for the benefit of the
holders of the Trust Preferred Securities. The following descriptions of certain
terms of the Guarantee supplements and, to the extent inconsistent with,
replaces the description of the general terms and provisions of the Guarantee
set forth in the accompanying Prospectus, to which reference is hereby made.
GENERAL
Pursuant to the Guarantee, the Company will irrevocably and unconditionally
agree, to the extent set forth therein, to pay in full on a senior unsecured
basis, to the holders of the Trust Preferred Securities issued by the Trust, the
Guarantee Payments (as defined herein) (except to the extent paid by the Trust),
as and when due, regardless of any defense, right of set-off or counterclaim
which the Trust may have or assert. The following payments or distributions with
respect to Trust Preferred Securities issued by the Trust to the extent not paid
by or on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee thereon (without duplication): (i) any accrued and unpaid
distributions which are required to be paid on the Trust Preferred Securities,
to the extent the Trust shall have funds available therefor; (ii) the redemption
price, including all accrued and unpaid distributions to the date of redemption,
of Trust Preferred Securities in respect of which the related Debentures have
been redeemed by the Company upon the occurrence of a Tax Event Redemption, to
the extent the Trust shall have funds available therefor; and (iii) upon a
voluntary or involuntary dissolution of the Trust (other than in connection with
the distribution of Debentures to the holders of Trust Preferred Securities),
the lesser of (a) the aggregate of the stated liquidation amount and all accrued
and unpaid distributions on such Trust Preferred Securities to the date of
payment, to the extent the Trust has funds available therefor, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
the Trust Preferred Securities in liquidation of the Trust. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of Trust Preferred Securities or
by causing the Trust to pay such amounts to such holders.
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The Guarantee will be a full and unconditional guarantee generally on a
senior unsecured basis with respect to the Trust Preferred Securities issued by
the Trust, but will not apply to any payment of distributions except to the
extent the Trust shall have funds available therefor. If the Company does not
make interest payments on the Debentures purchased by the Trust, the Trust will
not pay distributions on the Trust Preferred Securities and will not have funds
available therefor. See "Effect of Obligations under the Debentures and the
Guarantee."
The Guarantee, when taken together with the Company's obligations under the
Debentures, the Indenture, and the Declaration, will have the effect of
providing a full and unconditional guarantee on a senior unsecured basis by the
Company of payments due on the Trust Preferred Securities.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon an Indenture Event of Default, holders of Trust Preferred Securities
shall have priority over holders of Common Securities with respect to
distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any Trust
Preferred Securities issued by the Trust remain outstanding, if there shall have
occurred any event that would constitute an event of default under the Guarantee
or the Declaration, then (a) the Company shall not declare or pay any dividend
on, make any distributions with respect to, or redeem, purchase, acquire or make
a liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of capital stock of the Company in connection with the
satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase capital stock of the Company, (ii) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company's capital stock, (iii) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(iv) dividends or distributions in capital stock of the Company (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock or (v) redemptions or repurchases
of any rights pursuant to the Rights Agreement or any successor to the Rights
Agreement, and the declaration thereunder of a dividend of rights in the
future), (b) the Company shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities issued by
the Company which rank junior to the Debentures and (c) the Company shall not
make any guarantee payments with respect to the foregoing (other than payments
pursuant to the Guarantee or the Common Securities Guarantee).
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of Trust Preferred Securities (in which case no vote will be
required), the Guarantee may be amended only with the prior approval of the
holders of not less than a majority in stated liquidation amount of the
outstanding Trust Preferred Securities issued by the Trust. All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Trust Preferred Securities then outstanding.
TERMINATION
The Guarantee will terminate (a) upon distribution of the Debentures held
by the Trust to the holders of the Trust Preferred Securities, (b) upon full
payment of the redemption price of all the Trust Preferred Securities in the
event that all of the Debentures are repurchased by the Company upon the
occurrence of a Tax Event Redemption or (c) upon full payment of the amounts
payable in accordance with the Declaration upon liquidation of the Trust. The
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of Trust Preferred Securities must return payment
of any sums paid under the Trust Preferred Securities or the Guarantee.
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EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder.
The holders of a majority in stated liquidation amount of the Trust
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee. If the Guarantee
Trustee fails to enforce such Guarantee, any holder of Trust Preferred
Securities may institute a legal proceeding directly against the Company to
enforce such holder's rights under the Guarantee, without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. The Company waives any right or remedy to require that any action be
brought first against the Trust or any other person or entity before proceeding
directly against the Company.
STATUS OF THE GUARANTEE
The Guarantee will constitute a senior unsecured obligation of the Company
and will rank pari passu with all of the Company's other senior unsecured
obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the guarantor to enforce its rights under the guarantee without instituting a
legal proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Trust Preferred Securities, unless offered reasonable
indemnity against the costs, expenses and liabilities which might be incurred
thereby; but the foregoing shall not relieve the Guarantee Trustee, upon the
occurrence of an event of default under the Guarantee, from exercising the
rights and powers vested in it by the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
internal laws of the State of New York.
DESCRIPTION OF THE DEBENTURES
Set forth below is a description of the specific terms of the Debentures in
which the Trust will invest the proceeds from the issuance and sale of the Trust
Securities. The following description is not necessarily complete, and reference
is hereby made to the copy of the form of the Indenture and First Supplemental
Indenture to be entered into between the Company and, The First National Bank of
Chicago, as trustee (the "Debt Trustee"), as supplemented or amended from time
to time (as so supplemented and amended, the "Indenture"), which is filed as an
exhibit to the Registration Statement relating to this Prospectus Supplement,
and to the Trust Indenture Act. Certain capitalized terms used herein are
defined in the Indenture.
Under certain circumstances involving the dissolution of the Trust,
Debentures may be distributed to the holders of the Trust Securities in
liquidation of the Trust. See "Description of the Trust Preferred Securities--
Distribution of the Debentures." The following descriptions of certain terms of
the Debentures supplement and, to the extent inconsistent with, replaces the
description of the general terms and provisions of the Debt Securities set forth
in the accompanying Prospectus, to which reference is hereby made.
GENERAL
The Debentures will be issued as senior unsecured debt under the Indenture
and will rank pari passu in right of payment with all of the Company's other
senior unsecured debt obligations. The Company's obligations with respect to the
Debentures will not be subordinated to any other unsecured debt obligations of
the Company,
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whether incurred prior to, on or after the date hereof. The Debentures will be
limited in aggregate principal amount to $ , such amount being the sum
of the aggregate stated liquidation amounts of the Trust Preferred Securities
and the Common Securities.
The Debentures will not be subject to a sinking fund provision. Unless a
Tax Event Redemption has occurred, the entire principal amount of the Debentures
will mature and become due and payable, together with any accrued and unpaid
interest thereon including Compound Interest and expenses and taxes of the Trust
(as defined herein), if any, on February 16, 2003.
The Company will have the right at any time to dissolve the Trust and cause
the Debentures to be distributed to the holders of the Trust Securities. If
Debentures are distributed to holders of Trust Securities in liquidation of such
holders' interests in the Trust, such Debentures will initially be issued as a
Global Security (as defined herein). As described herein, under certain limited
circumstances, Debentures may be issued in certificated form in exchange for a
Global Security. See "-- Book-Entry and Settlement" below. In the event that
Debentures are issued in certificated form, such Debentures will be in
denominations of $50 and integral multiples thereof and may be transferred or
exchanged at the offices described below. Payments on Debentures issued as a
Global Security will be made to the Depositary, a successor depositary or, in
the event that no depositary is used, to a Paying Agent for the Debentures. In
the event Debentures are issued in certificated form, principal and interest
will be payable, the transfer of the Debentures will be registrable and
Debentures will be exchangeable for Debentures of other denominations of a like
aggregate principal amount, at the corporate trust office or agency of the
Institutional Trustee in Chicago, Illinois; provided, that at the option of the
Company, payment of interest may be made by check mailed to the address of the
holder entitled thereto or by wire transfer to an account appropriately
designated by the holder entitled thereto. Notwithstanding the foregoing, so
long as the holder of any Debentures is the Institutional Trustee, the payment
of principal and interest on the Debentures held by the Institutional Trustee
will be made at such place and to such account as may be designated by the
Institutional Trustee.
The Indenture does not contain provisions that afford holders of the
Debentures protection in the event of a highly leveraged transaction or other
similar transaction involving the Company that may adversely affect such
holders.
INTEREST
Each Debenture shall bear interest initially at the rate of % per annum
from the original date of issuance, payable quarterly in arrears on February 16,
May 16, August 16 and November 16 of each year (each an "Interest Payment
Date"), commencing February 16, 1998, to the person in whose name such Debenture
is registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. The applicable interest
rate on the Debentures and the distribution rate on the related Trust Preferred
Securities outstanding on and after the Purchase Contract Settlement Date will
be reset on the third Business Day immediately preceding the Purchase Contract
Settlement Date to the Reset Rate, which will be equal to the sum of the Reset
Spread and the rate on the Two-Year Benchmark Treasury in effect on the third
Business Day immediately preceding the Purchase Contract Settlement Date, and
will be determined by the Reset Agent as the rate the Trust Preferred Securities
should bear in order for a Trust Preferred Security to have an approximate
market value on the third Business Day immediately preceding the Purchase
Contract Settlement Date of 100.5% of the Stated Amount, provided that the
Company may limit such Reset Rate to be no higher than the rate on the Two-Year
Benchmark Treasury on the third Business Day immediately preceding the Purchase
Contract Settlement Date plus 200 basis points (2%). Such market value may be
less than 100.5% if the Reset Spread is limited to a maximum of 2%. The
"Two-Year Benchmark Treasury" shall mean direct obligations of the United States
(which may be obligations traded on a when-issued basis only) having a maturity
comparable to the remaining term of the Trust Preferred Securities, as agreed
upon by the Company and the Reset Agent.
On the Reset Announcement Date, the Two-Year Benchmark Treasury will be
selected and the Reset Spread to be added to the rate on the Two-Year Benchmark
Treasury in effect on the third Business Day immediately preceding the Purchase
Contract Settlement Date will be established by the Reset Agent, and the Reset
Spread and the Two-Year Benchmark Treasury will be announced by the Company. The
Company will cause a notice of the Reset Spread and such Two-Year Benchmark
Treasury to be published on the Business Day following the
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Reset Announcement Date by publication in a daily newspaper in the English
language of general circulation in The City of New York, which is expected to be
The Wall Street Journal. In the event the Debentures shall not continue to
remain in book-entry only form, the Company shall have the right to select
record dates, which shall be more than fifteen Business Days but less than 60
Business Days prior to the Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year consisting of twelve 30-day months. The amount of interest
payable for any period shorter than a full quarterly period for which interest
is computed will be computed on the basis of the actual number of days elapsed
in such 90-day period. In the event that any date on which interest is payable
on the Debentures is not a Business Day, then payment of the interest payable on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, then such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date.
TAX EVENT REDEMPTION
If a Tax Event shall occur and be continuing, the Company may, at its
option, redeem Debentures in whole (but not in part), at a Redemption Price
equal to, for each Debenture, the Redemption Amount plus accrued and unpaid
interest thereon, including Compound Interest and expenses and taxes of the
Trust, if any, to the date of redemption (the "Tax Event Redemption Date"). If,
following the occurrence of a Tax Event, the Company exercises its option to
redeem the Debentures, then the proceeds of such redemption will be applied to
redeem Trust Securities having a liquidation amount equal to the principal
amount of Debentures to be paid in accordance with their terms, at the
Redemption Price. Such Redemption Price will be payable in cash to the holders
of such Trust Securities. If such Tax Event Redemption occurs prior to the
Purchase Contract Settlement Date, the Redemption Price payable in liquidation
of the Income PRIDES holders' interest in the Trust will be distributed to the
Collateral Agent, who in turn will apply an amount equal to the Redemption
Amount of such Redemption Price to purchase the Treasury Portfolio on behalf of
the holders of Income PRIDES and remit the remaining portion, if any, of such
Redemption Price to the Purchase Contract Agent for payment to the holders of
such Income PRIDES. Such Treasury Portfolio will be substituted for the Trust
Preferred Securities and will be pledged with the Collateral Agent to secure
such Income PRIDES holders' obligation to purchase the Company's Common Stock
under the Purchase Contracts; provided, that if the Tax Event Redemption occurs
after the Purchase Contract Settlement Date, such Treasury Portfolio will not be
purchased.
"Tax Event" means the receipt by the Trust of an opinion of a nationally
recognized independent tax counsel experienced in such matters to the effect
that, as a result of (a) any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, (b) any amendment to or change in an interpretation or
application of such laws or regulations by any legislative body, court,
governmental agency or regulatory authority or (c) any interpretation or
pronouncement that provides for a position with respect to such laws or
regulations that differs from the generally accepted position on the date the
Trust Securities are issued, which amendment or change is effective or which
interpretation or pronouncement is announced on or after the date of issuance of
the Trust Securities under the Declaration, there is more than an insubstantial
risk that (i) interest payable by the Company on the Debentures would not be
deductible, in whole or in part, by the Company for federal income tax purposes
or (ii) the Trust would be subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Treasury Portfolio" means, with respect to the Applicable Principal Amount
of Debentures (a) if the Tax Event Redemption Date occurs prior to the Purchase
Contract Settlement Date, a portfolio of zero-coupon U.S. Treasury Securities
consisting of (i) interest or principal strips of U.S. Treasury Securities which
mature on or prior to February 15, 2001 in an aggregate amount equal to the
Applicable Principal Amount, and (ii) with respect to each scheduled interest
payment date on the Debentures that occurs after the Tax Event Redemption Date
interest or principal strips of U.S. Treasury Securities which mature on or
prior to such date in an aggregate amount equal to the aggregate interest
payment that would be due on the Applicable Principal Amount of the Debentures
on such date and (b) if the Tax Event Redemption Date occurs after the Purchase
Contract Settlement Date, a portfolio of zero-coupon U.S. Treasury Securities
consisting of (i) principal or interest strips of U.S. Treasury Securities which
mature on or prior to February 15, 2003, in an aggregate amount equal to the
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Applicable Principal Amount, and (ii) with respect to each scheduled interest
payment date on the Debentures that occurs after the Tax Event Redemption Date
interest or principal strips of such U.S. Treasury Securities which mature on or
prior to such date in an aggregate amount equal to the aggregate interest
payment that would be due on the Applicable Principal Amount of the Debentures
on such date.
"Applicable Principal Amount" means either (i) if the Tax Event Redemption
Date occurs prior to the Purchase Contract Settlement Date, the aggregate
principal amount of the Debentures corresponding to the aggregate stated
liquidation amount of the Trust Preferred Securities which are components of
Income PRIDES on the Tax Event Redemption Date or (ii) if the Tax Event
Redemption occurs on or after the Purchase Contract Settlement Date, the
aggregate principal amount of the Debentures corresponding to the aggregate
stated liquidation amount of the Trust Preferred Securities outstanding on such
Tax Event Redemption Date.
"Redemption Amount" means for each Debenture, the product of the principal
amount of such Debenture and the Treasury Portfolio Purchase Price, expressed as
a percentage of the Applicable Principal Amount.
"Treasury Portfolio Purchase Price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City (a "Primary
Treasury Dealer") to the Quotation Agent on the third Business Day immediately
preceding the Tax Event Redemption Date for the purchase of the Treasury
Portfolio for settlement on the Tax Event Redemption Date.
"Quotation Agent" means (i) Merrill Lynch Government Securities, Inc. and
its respective successors, provided, however, that if the foregoing shall cease
to be a Primary Treasury Dealer, the Company shall substitute therefor another
Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer selected by
the Company.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of Debentures to be
prepaid at its registered address. Unless the Company defaults in payment of the
Redemption Price, on and after the redemption date interest shall cease to
accrue on such Debentures.
PUT OPTION
If a Failed Remarketing has occurred, holders of Debentures (including the
Institutional Trustee, and following the distribution of the Debentures upon a
dissolution of the Trust as described herein, such Debenture holders) holding
such Debentures following the Purchase Contract Settlement Date, will have the
right to put their Debentures to the Company on March 2, 2001, upon at least
three Business Days' prior notice at a price per Debenture equal to $50, plus
accrued and unpaid interest (including deferred interest), if any, thereon. Upon
the repurchase of such Debentures from the Trust by the Company, the proceeds
from such repurchase shall simultaneously be applied to redeem any outstanding
Trust Preferred Securities of such holders having an aggregate stated
liquidation amount equal to the aggregate principal amount of the Debentures so
repurchased plus accrued and unpaid distributions, including deferred
distributions, if any.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company shall have the right at any time, and from time to time, during
the term of the Debentures, to defer payments of interest by extending the
interest payment period for a period not extending beyond the maturity date of
the Debentures, at the end of which Extension Period, the Company shall pay all
interest then accrued and unpaid (including any expenses and taxes of the Trust,
as herein defined) together with interest thereon compounded quarterly at the
rate of % per annum through and including February 15, 2001, and at the
Reset Rate thereafter, to the extent permitted by applicable law ("Compound
Interest"); provided, that during any such Extension Period, (a) the Company
shall not declare or pay dividends or make any distribution with respect to, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock (other than (i) purchases or acquisitions of capital stock of
the Company in connection with the satisfaction by the Company of its
obligations under any employee or agent benefit plans or the satisfaction by the
Company of its obligations pursuant to any contract or security outstanding on
the date of such event requiring the Company to purchase capital stock of the
Company, (ii) as a result of a reclassification of the Company's capital stock
or the exchange or conversion of one class or series of the Company's capital
stock for another class or series of the Company capital stock, (iii) the
purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (iv)
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dividends or distributions in capital stock of the Company (or rights to acquire
capital stock) or repurchases or redemptions of capital stock solely from the
issuance or exchange of capital stock or and (v) redemptions or repurchases of
any rights pursuant to the Rights Agreement or any successor to the Rights
Agreement, and the declaration thereunder of a dividend of rights in the
future), (b) the Company shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities issued by
the Company that rank junior to the Debentures, and (c) the Company shall not
make any guarantee payments with respect to the foregoing (other than payments
pursuant to the Guarantee or the Common Securities Guarantee). Prior to the
termination of any such Extension Period, the Company may further defer payments
of interest by extending the interest payment period; provided, however, that
such Extension Period, including all such previous and further extensions, may
not extend beyond the maturity of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the terms set forth in this section.
No interest during an Extension Period, except at the end thereof, shall be due
and payable, but the Company, at its option, may prepay on any Interest Payment
Date all of the interest accrued during the then elapsed portion of an Extension
Period. The Company has no present intention of exercising its right to defer
payments of interest by extending the interest payment period on the Debentures.
If the Institutional Trustee shall be the sole holder of the Debentures, the
Company shall give the Regular Trustees and the Institutional Trustee notice of
its selection of such Extension Period one Business Day prior to the earlier of
(i) the date distributions on the Trust Preferred Securities are payable or (ii)
the date the Regular Trustees are required to give notice, if applicable, to the
NYSE (or other applicable self-regulatory organization) or to holders of the
Trust Preferred Securities of the record or payment date of such distribution.
The Regular Trustees shall give notice of the Company's selection of such
Extension Period to the holders of the Trust Preferred Securities. If the
Institutional Trustee shall not be the sole holder of the Debentures, the
Company shall give the holders of the Debentures notice of its selection of such
Extension Period ten Business Days prior to the earlier of (i) the Interest
Payment Date or (ii) the date upon which the Company is required to give notice,
if applicable, to the NYSE (or other applicable self-regulatory organization) or
to holders of the Debentures as of the record or payment date of such related
interest payment.
EXPENSES AND TAXES OF THE TRUST
In the Indenture, the Company, as borrower, has agreed to pay all debts and
other obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust (including the costs and expenses relating to
the organization of the Trust, the fees and expenses of the Trustees and the
costs and expenses relating to the operation of the Trust) and to pay any and
all taxes and all costs and expenses with respect thereto (other than United
States withholding taxes) to which the Trust might become subject. The Company
also has agreed in the Indenture to execute such additional agreements as may be
necessary or desirable to give full effect to the foregoing.
INDENTURE EVENTS OF DEFAULT
If any Indenture Event of Default shall occur and be continuing, the
Institutional Trustee, as the holder of the Debentures, will have the right to
declare the principal of and the interest on the Debentures (including any
Compound Interest and expenses and taxes of the Trust, if any) and any other
amounts payable under the Indenture to be forthwith due and payable and to
enforce its other rights as a creditor with respect to the Debentures.
The following are Events of Default under the Indenture with respect to the
Debentures: (1) failure to pay interest on the Debentures when due, continued
for 30 days; provided, however, that if the Company is permitted by the terms of
the Debentures to defer the payment in question, then the date on which such
payment is due and payable shall be the date on which the Company is required to
make payment following such deferral, if such deferral has been elected pursuant
to the terms of the Debentures; (2) failure to pay the principal of (or premium,
if any, on) the Debentures when due and payable at the stated maturity date,
upon redemption or otherwise; provided, however, if the Company is permitted by
the terms of the Debentures to defer the payment in question, the date on which
such payment is due and payable shall be the date on which the Company is
required to make payment following such deferral, if such deferral has been
elected pursuant to the terms of the Debentures; (3) failure to observe or
perform in any material respect certain other covenants contained in the
Indenture,
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continued for a period of 90 days after written notice has been given to the
Company by the Debt Trustee or holders of at least 25% in aggregate principal
amount of the outstanding Debentures; and (4) certain events of bankruptcy,
insolvency or reorganization relating to the Company.
The Indenture provides that the Debt Trustee shall, within 30 days after
the occurrence of any Default or Event of Default with respect to the
Debentures, give the holders of the Debentures notice of all uncured Defaults or
Events of Default known to it (the term "Default" includes any event which after
notice or passage of time or both would be an Event of Default); provided,
however, that, except in the case of an Event of Default or a Default in a
payment on the Debentures, the Debt Trustee shall be protected in withholding
such notice so long as the board of directors, the executive committee or
directors or responsible officers of the Debt Trustee in good faith determine
that the withholding of such notice is in the interest of the holders of the
Debentures.
If an Event of Default with respect to the Debentures occurs and is
continuing, the Debt Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Debentures, by notice in writing to the
Company (and to the Debt Trustee if given by the holders of at least 25% in
aggregate principal amount of the Debentures), may declare the unpaid principal
of and accrued interest to the date of acceleration on all the outstanding
Debentures to be due and payable immediately and, upon any such declaration, the
Debentures shall become immediately due and payable.
In addition, in the case of the Debentures held by the Trust, if an Event
of Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal, then a holder of Trust
Preferred Securities may directly institute a proceeding against the Company for
payment.
Any such declaration with respect to the Debentures may be annulled and
past Events of Default and Defaults (except, unless theretofore cured, an Event
of Default or a Default in payment of principal of or interest on the
Debentures) may be waived by the holders of a majority of the principal amount
of the outstanding Debentures, upon the conditions provided in the Indenture.
The Indenture provides that the Company shall periodically file statements
with the Debt Trustee regarding compliance by the Company with certain of the
respective covenants thereof and shall specify any Event of Default or Defaults
with respect to the Debentures, in performing such covenants, of which the
signers may have knowledge.
An Indenture Event of Default also constitutes a Declaration Event of
Default. The holders of Trust Preferred Securities in certain circumstances have
the right to direct the Institutional Trustee to exercise its rights as the
holder of the Debentures. See "Description of the Trust Preferred
Securities--Declaration Events of Default" and "--Voting Rights."
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to pay
interest or principal on the Debentures on the date such interest or principal
is otherwise payable, the Company acknowledges that a holder of Trust Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder directly of the principal of and interest on the Debentures having a
principal amount equal to the aggregate stated liquidation amount of the Trust
Preferred Securities of such holder after the respective due date specified in
the Debentures. In connection with such action, the Company shall have the right
under the Indenture to set-off any payment made to such holder by the Company.
The holders of Trust Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Trust Preferred Securities in connection with
the involuntary or voluntary dissolution of the Trust, the Debentures will be
issued in the form of one or more global certificates (each a "Global Security")
registered in the name of the Depositary or its nominee. Except under the
limited circumstances described below, Debentures represented by the Global
Security will not be exchangeable for, and will not otherwise be issuable as,
Debentures in certificated form. The Global Securities described above may not
be transferred except by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the Depositary
or to a successor depositary or its nominee.
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The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in certificated form. Such
laws may impair the ability to transfer beneficial interests in such a Global
Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Debentures in
certificated form and will not be considered the holders (as defined in the
Indenture) thereof for any purpose under the Indenture, and no Global Security
representing Debentures shall be exchangeable, except for another Global
Security of like denomination and tenor to be registered in the name of the
Depositary or its nominee or to a successor Depositary or its nominee.
Accordingly, each Beneficial Owner must rely on the procedures of the Depositary
or if such person is not a Participant, on the procedures of the Participant
through which such person owns its interest to exercise any rights of a holder
under the Indenture.
THE DEPOSITARY
If Debentures are distributed to holders of Trust Preferred Securities in
liquidation of such holders' interests in the Trust, the Depositary will act as
securities depositary for the Debentures. For a description of the Depositary
and the specific terms of the depositary arrangements, see "Description of the
Trust Preferred Securities--Book-Entry Only Issuance--The Depository Trust
Company." As of the date of this Prospectus Supplement, the description therein
of the Depositary's book-entry system and the Depositary's practices as they
relate to purchases, transfers, notices and payments with respect to the Trust
Preferred Securities apply in all material respects to any debt obligations
represented by one or more Global Securities held by the Depositary. The Company
may appoint a successor to the Depositary or any successor depositary in the
event the Depositary or such successor depositary is unable or unwilling to
continue as a depositary for the Global Securities.
None of the Company, the Trust, the Institutional Trustee, any paying agent
and any other agent of the Company or the Debt Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Security
for such Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
A Global Security shall be exchangeable for Debentures registered in the
names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as a
depositary for such Global Security and no successor depositary shall have been
appointed, (ii) the Depositary at any time, ceases to be a clearing agency
registered under the Exchange Act at which time the depositary is required to be
so registered to act as such depositary and no successor depositary shall have
been appointed, (iii) the Company, in its sole discretion, determines that such
Global Security shall be so exchangeable or (iv) there shall have occurred an
Indenture Event of Default with respect to such Debentures. Any Global Security
that is exchangeable pursuant to the preceding sentence shall be exchangeable
for Debentures registered in such names as the Depositary shall direct. It is
expected that such instructions will be based upon directions received by the
Depositary from its Participants with respect to ownership of beneficial
interests in such Global Security.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the internal laws of the State of New York.
MISCELLANEOUS
The Company will pay all fees and expenses related to (i) the offering of
the Trust Securities and the Debentures, (ii) the organization, maintenance and
dissolution of the Trust, (iii) the retention of the Kennametal Trustees and
(iv) the enforcement by the Institutional Trustee of the rights of the holders
of the Trust Preferred Securities.
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EFFECT OF OBLIGATIONS UNDER THE
DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets of
the Trust, and to invest the proceeds from such issuance and sale in the
Debentures and engage in only those other activities necessary or incidental
thereto.
As long as payments of interest and other payments are made when due on the
Debentures, such payments will be sufficient to cover distributions and payments
due on the Trust Securities because of the following factors: (i) the aggregate
principal amount of Debentures will be equal to the sum of the aggregate stated
liquidation amount of the Trust Securities; (ii) the interest rate and the
interest and other payment dates on the Debentures will match the distribution
rate and distribution and other payment dates for the Trust Securities; (iii)
the Company shall pay, and the Trust shall not be obligated to pay, directly or
indirectly, all costs, expenses, debts, and obligations of the Trust (other than
with respect to the Trust Securities); and (iv) the Declaration further provides
that the Kennametal Trustees shall not take or cause or permit the Trust to,
among other things, engage in any activity that is not consistent with the
purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by the Company as and to the extent set
forth under "Description of the Guarantee." If the Company does not make
interest payments on the Debentures purchased by the Trust, the Trust will not
have sufficient funds to pay distributions on the Trust Preferred Securities.
The Guarantee does not apply to any payment of distributions unless and until
the Trust has sufficient funds for the payment of such distributions.
If the Company fails to make interest or other payments on the Debentures
when due (taking account of any Extension Period), the Declaration provides a
mechanism whereby the holders of the Trust Preferred Securities, using the
procedures described in "Description of the Trust Preferred
Securities--Book-Entry Only Issuance-- The Depository Trust Company" and
"--Voting Rights," may direct the Institutional Trustee to enforce its rights
under the Indenture. If the Institutional Trustee fails to enforce its rights
under the Indenture in respect of an Indenture Event of Default, such holder of
record of Trust Preferred Securities may, to the fullest extent permitted by
applicable law, institute a legal proceeding against the Company to enforce the
Institutional Trustee's rights under the Indenture without first instituting any
legal proceeding against the Institutional Trustee or any other person or
entity. Notwithstanding the foregoing, if a Declaration Event of Default has
occurred and is continuing and such event is attributable to the failure of the
Company to pay interest or principal on the Debentures on the date such interest
or principal is otherwise payable, then a holder of Trust Preferred Securities
may directly institute a proceeding against the Company for payment. The
Company, under the Guarantee, acknowledges that the Guarantee Trustee shall
enforce the Guarantee on behalf of the holders of the Trust Preferred
Securities. If the Company fails to make payments under the Guarantee, the
Guarantee provides a mechanism whereby the holders of the Trust Preferred
Securities may direct the Guarantee Trustee to enforce its rights thereunder.
Notwithstanding the foregoing, if the Company has failed to make a payment under
the Guarantee, any holder of Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee, or any other person or entity.
The Guarantee, when taken together with the Company's obligations under the
Debentures and the Indenture and its obligations under the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of the
Trust (other than with respect to the Trust Securities), has the effect of
providing a full and unconditional guarantee of amounts due on the Trust
Preferred Securities. See "Description of the Guarantee."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of FELINE
PRIDES, Trust Preferred Securities and Common Stock acquired under a Purchase
Contract. Unless otherwise stated, this summary applies only to "U.S. Holders"
who purchase Income PRIDES upon original issuance for an amount equal to the
Stated Amount thereof. A "U.S. Holder" is (i) a person who is a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in or under the laws of the United States or any state thereof or the
District of Columbia, (iii) an estate the income of which is subject to United
States federal income taxation, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of such trust and one or more United States persons have the
authority to control all substantial decisions of such trust. The tax treatment
of a holder may vary depending on such holder's particular situation. This
summary does not deal with special classes of holders such as banks, thrifts,
real estate investment trusts, regulated investment companies, insurance
companies, dealers in securities or currencies, tax-exempt investors, or persons
that will hold FELINE PRIDES, Trust Preferred Securities or Common Stock
acquired under a Purchase Contract as a position in a "straddle," as part of a
"synthetic security" or "hedge," as part of a "conversion transaction" or other
integrated investment, or as other than a capital asset. This summary does not
address the tax consequences to persons that have a functional currency other
than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of FELINE PRIDES, Trust Preferred Securities or Common
Stock acquired pursuant to a Purchase Contract. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state, local or foreign government that may be applicable. PROSPECTIVE INVESTORS
THAT ARE NOT UNITED STATES PERSONS (WITHIN THE MEANING OF SECTION 7701(a)(30) OF
THE CODE) ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN FELINE PRIDES,
INCLUDING THE POTENTIAL APPLICATION OF UNITED STATES WITHHOLDING TAXES.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations (including proposed Treasury regulations)
issued thereunder, Internal Revenue Service ("IRS") rulings and pronouncements
and judicial decisions now in effect, all of which are subject to change,
possibly on a retroactive basis. Any such changes may be applied retroactively
in a manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a U.S. Holder.
No statutory, administrative or judicial authority directly addresses the
treatment of FELINE PRIDES or instruments similar to FELINE PRIDES for United
States federal income tax purposes. As a result, no assurance can be given that
the IRS will agree with the tax consequences described herein. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE FELINE
PRIDES IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
INCOME PRIDES
Allocation of Purchase Price. A U.S. Holder's acquisition of Income PRIDES
will be treated as an acquisition of a unit consisting of the Trust Preferred
Security and the Purchase Contract constituting such Income PRIDES. The purchase
price of each Income PRIDES will be allocated between the Trust Preferred
Security and the Purchase Contract constituting such Income PRIDES in proportion
to their respective fair market values at the time of purchase. Such allocation
will establish the U.S. Holder's initial tax basis in the Trust Preferred
Security and the Purchase Contract. The Company will report the fair market
value of each Trust Preferred Security as $ and the fair market value
of each Purchase Contract as $ . This position will be binding upon
each U.S. Holder (but not on the IRS) unless such U.S. Holder explicitly
discloses a contrary position on a statement attached to such U.S. Holder's
timely filed United States federal income tax return for the taxable year in
which an Income PRIDES is acquired. Thus, absent such disclosure, a U.S. Holder
should allocate the purchase price for an Income PRIDES in accordance with the
foregoing. The remainder of
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this discussion assumes that this allocation of the purchase price will be
respected for United States federal income tax purposes.
TRUST PREFERRED SECURITIES
Ownership of Trust Preferred Securities. A U.S. Holder will be treated as
owning the Trust Preferred Securities constituting a part of the Income PRIDES.
The Company and, by acquiring FELINE PRIDES, each U.S. Holder agree to treat
such U.S. Holder as the owner, for United States federal, state and local income
and franchise tax purposes, of the Trust Preferred Securities constituting a
part of the Income PRIDES beneficially owned by such U.S. Holder. The remainder
of this summary will assume that U.S. Holders of Income PRIDES will be treated
as the owners of the Trust Preferred Securities constituting a part of such
Income PRIDES for United States federal, state and local income and franchise
tax purposes.
Classification of the Trust. In connection with the issuance of the FELINE
PRIDES, Buchanan Ingersoll Professional Corporation ("Tax Counsel") will deliver
an opinion that, under current law and assuming compliance with the terms of the
Declaration, and based on certain facts and assumptions contained in such
opinion, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each U.S. Holder of Trust Preferred Securities will be
treated as owning an undivided beneficial ownership interest in the Debentures.
Accordingly, each U.S. Holder of Trust Preferred Securities will be required to
include in its gross income its pro rata share of the interest income or OID
that is paid or accrued on the Debentures. See "--Interest Income and Original
Issue Discount."
Classification of the Debentures. The Company, the Trust and, by acquiring
FELINE PRIDES, each U.S. Holder agree to treat the Debentures as indebtedness of
the Company for all United States tax purposes. In connection with the issuance
of the Debentures, Tax Counsel will deliver an opinion that, under current law,
and based on certain representations, facts and assumptions set forth in such
opinion, the Debentures will be classified as indebtedness for United States
federal income tax purposes.
Interest Income and Original Issue Discount. Subject to the discussion
below regarding the Company's right to defer payments of interest on the
Debentures, the Debentures should be treated as "reset bonds" under applicable
Treasury regulations, and interest on the Debentures should not constitute
contingent interest for purposes of the OID rules. Under the Treasury
regulations applicable to reset bonds, the Debentures should be treated, solely
for purposes of calculating the accrual of OID, as maturing on the day
immediately preceding the Purchase Contract Settlement Date for an amount equal
to 100.5% of the Stated Amount (the "Reset Amount") and as having been reissued
on the Purchase Contract Settlement Date for the Reset Amount. If the amount of
the initial purchase price for the FELINE PRIDES allocated to the Trust
Preferred Securities is less than the Reset Amount, the Debentures should be
treated as having been issued with OID equal to the difference between the Reset
Amount and the amount so allocated to the Trust Preferred Securities, unless
such difference is less than three-fourths of one-percent of the Reset Amount.
If the Debentures were treated as issued with OID, a U.S. Holder would be
required to include such OID in income on an economic accrual basis over the
period between the issue date and the day immediately preceding the Purchase
Contract Settlement Date regardless of such U.S. Holder's method of tax
accounting. Consequently, each U.S. Holder (including those using the cash basis
of accounting) would be required to include OID in its gross income even though
the Company will not actually make current cash payments with respect to such
OID. Any amount of OID included in a U.S. Holder's gross income will increase
such U.S. Holder's tax basis in its Trust Preferred Securities. In addition, a
U.S. Holder should include stated interest on the Debentures in income as
ordinary income when paid to the Trust or accrued, in accordance with such U.S.
Holder's regular method of accounting.
Under the Indenture, the Company has the right to defer payments of
interest on the Debentures. The Company's right to defer payments of interest
could cause the Debentures to be subject to the OID rules. The Company, however,
believes, and intends to take the position, that as of the issue date, the terms
and conditions of the Debentures (in particular the restrictions on the
Company's ability to pay dividends during an Extension Period) make the
likelihood that the Company would exercise its option to defer the payment of
interest a "remote" contingency for these purposes. If so treated, except as
provided below, the Debentures would not be subject to the OID rules as a result
of the Company's right to defer payments of interest on the Debentures.
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If the Company were to exercise its right to defer payments of interest,
the Debentures would at that time be treated, solely for purposes of the OID
rules, as reissued with OID. In such event, all of a U.S. Holder's taxable
interest income with respect to the Debentures would thereafter be accounted for
on an economic accrual basis regardless of such U.S. Holder's method of tax
accounting, and actual distributions of stated interest would not be reported as
taxable income. Consequently, each U.S. Holder (including those using the cash
basis of accounting) would be required to include OID in its gross income even
though the Company would not make actual cash payments during an Extension
Period. Any amount of OID included in a U.S. Holder's gross income would
increase such U.S. Holder's tax basis in its Trust Preferred Securities, and the
amount of distributions received by a U.S. Holder with respect to such Trust
Preferred Securities would reduce the tax basis of such Trust Preferred
Securities.
The IRS could take the position that the likelihood that the Company would
exercise its right to defer payments of interest is not a "remote" contingency
for these purposes, in which case U.S. Holders would be required to accrue OID
on the Debentures on an economic accrual basis under the OID rules described in
the preceding paragraph.
U.S. Holders that are corporations will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Trust Preferred Securities.
Distribution of Debentures to U.S. Holders of Trust Preferred Securities.
A distribution by the Trust of the Debentures as described under the caption
"Description of the Trust Preferred Securities--Liquidation Distribution Upon
Dissolution" will be non-taxable to U.S. Holders. In such event, a U.S. Holder
will have an aggregate tax basis in the Debentures received in the liquidation
equal to the aggregate tax basis such U.S. Holder had in its Trust Preferred
Securities surrendered therefor, and the holding period of such Debentures would
include the period during which such U.S. Holder had held the Trust Preferred
Securities. A U.S. Holder will continue to include interest (or OID) in respect
of Debentures received from the Trust in the manner described under "--Interest
Income and Original Issue Discount."
Sales, Exchanges or Other Dispositions of Trust Preferred Securities. Gain
or loss will be recognized by a U.S. Holder on a sale, exchange, redemption or
other taxable disposition (collectively, a "disposition") of a Trust Preferred
Security (including a redemption for cash or the remarketing thereof in
satisfaction of the U.S. Holder's obligations pursuant to a Purchase Contract)
in an amount equal to the difference between the amount realized by the U.S.
Holder on the disposition of the Trust Preferred Securities (except to the
extent that such amount realized is characterized as a payment in respect of
accrued but unpaid interest on such U.S. Holder's allocable share of the
Debentures that such U.S. Holder has not included in gross income previously)
and the U.S. Holder's adjusted tax basis in the Trust Preferred Security.
Selling expenses incurred by a U.S. Holder, including the remarketing fee, will
reduce the amount of gain or increase the amount of loss recognized by such U.S.
Holder upon the sale, exchange or other disposition of Trust Preferred
Securities. Gain or loss realized by a U.S. Holder on a disposition of a Trust
Preferred Security may be long-term capital gain depending on the holding period
of the Trust Preferred Security. Capital gains of individuals are eligible for
reduced rates of taxation depending upon the holding period of such capital
assets. The deductibility of capital losses is subject to limitations.
PURCHASE CONTRACTS
Income From Contract Adjustment Payments and Deferred Contract Adjustment
Payments. There is no direct authority addressing the treatment of the Contract
Adjustment Payments and Deferred Contract Adjustment Payments, if any, under
current law, and such treatment is unclear. Contract Adjustment Payments and
Deferred Contract Adjustment Payments, if any, may constitute taxable income to
a U.S. Holder when received or accrued, in accordance with the U.S. Holder's
method of tax accounting. To the extent the Company is required to file
information returns with respect to Contract Adjustment Payments or Deferred
Contract Adjustment Payments, it intends to report such payments as taxable
income to each U.S. Holder. U.S. Holders should consult their own tax advisors
concerning the treatment of Contract Adjustment Payments and Deferred Contract
Adjustment Payments, including the possibility that any such payment may be
treated as a loan, purchase price adjustment, rebate or payment analogous to an
option premium, rather than being includible in income on a current basis. The
Company does not intend to deduct the Contract Adjustment Payments or Deferred
Contract Adjustment Payments, if any, because it views them as a cost of issuing
the Common Stock. The treatment of Contract
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Adjustment Payments and Deferred Contract Adjustment Payments could affect a
U.S. Holder's tax basis in a Purchase Contract or Common Stock received under a
Purchase Contract or the amount realized by a U.S. Holder upon the sale or
disposition of a FELINE PRIDES or the termination of a Purchase Contract. See
"--Acquisition of Common Stock under a Purchase Contract," "--Sale or
Disposition of FELINE PRIDES" and "--Termination of Purchase Contract."
Acquisition of Common Stock Under a Purchase Contract. A U.S. Holder
generally will not recognize gain or loss on the purchase of Common Stock under
a Purchase Contract, except with respect to any cash paid in lieu of a
fractional share of Common Stock. Subject to the following discussion, a U.S.
Holder's aggregate initial tax basis in the Common Stock received under a
Purchase Contract generally should equal the purchase price paid for such Common
Stock plus such U.S. Holder's tax basis in the Purchase Contract (if any), less
the portion of such purchase price and tax basis allocable to the fractional
share. Payments of Contract Adjustment Payments or Deferred Contract Adjustment
Payments that have been received in cash by a U.S. Holder but not included in
income by such U.S. Holder should reduce such U.S. Holder's tax basis in the
Purchase Contract or the Common Stock to be received thereunder (see "--Income
from Contract Adjustment Payments and Deferred Contract Adjustment Payments"
above). The holding period for Common Stock received under a Purchase Contract
will commence on the day after the acquisition of such Common Stock.
Ownership of Common Stock Acquired Under the Purchase Contract. Any
dividend on Common Stock paid by the Company out of its current or accumulated
earnings and profits (as determined for United States federal income tax
purposes) will be includible in income by the U.S. Holder when received. Any
such dividend will be eligible for the dividends received deduction if received
by an otherwise qualifying corporate U.S. Holder that meets the holding period
and other requirements for the dividends received deduction.
Upon a disposition of Common Stock, a U.S. Holder generally will recognize
capital gain or loss equal to the difference between the amount realized and
such U.S. Holder's adjusted tax basis in the Common Stock. Such gain or loss may
be long-term capital gain or loss depending on the holding period of the Common
Stock. Capital gains of individuals are eligible for reduced rates of taxation
depending upon the holding period of such capital assets. The deductibility of
capital losses is subject to limitations.
Early Settlement of Purchase Contract. A U.S. Holder will not recognize
gain or loss on the receipt of such U.S. Holder's proportionate share of Trust
Preferred Securities or Treasury Securities upon Early Settlement of a Purchase
Contract and will have the same tax basis in such Trust Preferred Securities or
Treasury Securities as before such Early Settlement.
Termination of Purchase Contract. If a Purchase Contract terminates, a
U.S. Holder will recognize gain or loss equal to the difference between the
amount realized (if any) upon such termination and such U.S. Holder's adjusted
tax basis (if any) in the Purchase Contract at the time of such termination.
Payments of Contract Adjustment Payments or Deferred Contract Adjustment
Payments, if any, received by a U.S. Holder but not included in income by such
U.S. Holder should either reduce such U.S. Holder's tax basis in the Purchase
Contract or result in an amount realized on the termination of the Purchase
Contract. Any Contract Adjustment Payments or Deferred Contract Adjustment
Payments included in a U.S. Holder's income but not paid should increase such
U.S. Holder's tax basis in the Purchase Contract (see "--Income from Contract
Adjustment Payments and Deferred Contract Adjustment Payments" above). Any such
gain or loss may be long-term capital gain or loss depending upon the holding
period of the Purchase Contract. Capital gains of individuals are eligible for
reduced rates of taxation depending upon the holding period of such capital
assets. The deductibility of capital losses is subject to limitations. A U.S.
Holder will not recognize gain or loss on the receipt of such U.S. Holder's
proportionate share of the Trust Preferred Securities, Treasury Securities or
Treasury Portfolio upon termination of the Purchase Contract and will have the
same tax basis in such Trust Preferred Securities, Treasury Securities or
Treasury Portfolio as before such distribution.
Adjustment to Settlement Rate. U.S. Holders of FELINE PRIDES might be
treated as receiving a constructive distribution from the Company if (i) the
Settlement Rate is adjusted and as a result of such adjustment the proportionate
interest of U.S. Holders of FELINE PRIDES in the assets or earnings and profits
of the Company is increased and (ii) the adjustment is not made pursuant to a
bona fide, reasonable anti-dilution formula. An adjustment in the Settlement
Rate would not be considered made pursuant to such a formula if the adjustment
were made to compensate a U.S. Holder for certain taxable distributions with
respect to the Common
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Stock. Thus, under certain circumstances, an increase in the Settlement Rate
might give rise to a taxable dividend to U.S. Holders of FELINE PRIDES even
though such U.S. Holders would not receive any cash related thereto.
GROWTH PRIDES
SUBSTITUTION OF TREASURY SECURITIES TO CREATE GROWTH PRIDES
A U.S. holder of an Income PRIDES that delivers Treasury Securities to the
Collateral Agent in substitution for Trust Preferred Securities generally will
not recognize gain or loss upon the delivery of such Treasury Securities or the
release of the Trust Preferred Securities to such U.S. Holder. Such U.S. Holder
will continue to include in income any interest, OID or market discount or
amortize any bond premium otherwise includible or deductible, respectively, by
such U.S. Holder with respect to such Treasury Securities and Trust Preferred
Securities, and such U.S. Holder's tax basis in the Treasury Securities, the
Trust Preferred Securities and the Purchase Contract will not be affected by
such delivery and release. U.S. Holders should consult their tax advisors
concerning the tax consequences of purchasing, owning and disposing of Treasury
Securities.
OWNERSHIP OF TREASURY SECURITIES
A U.S. Holder will be treated as owning the Treasury Securities
constituting a part of the Growth PRIDES. The Company, the Trust and, by
acquiring FELINE PRIDES, each U.S. Holder agree to treat such U.S. Holder as the
owner, for United States federal, state and local income and franchise tax
purposes, of the Treasury Securities constituting a part of the Growth PRIDES
beneficially owned by such U.S. Holder. The remainder of this summary will
assume that U.S. Holders of Growth PRIDES will be treated as the owners of the
Treasury Securities constituting a part of such Growth PRIDES for United States
federal, state and local income and franchise tax purposes.
SUBSTITUTION OF TRUST PREFERRED SECURITIES TO RECREATE INCOME PRIDES
A U.S. Holder of a Growth PRIDES that delivers Trust Preferred Securities
to the Collateral Agent to recreate an Income PRIDES generally will not
recognize gain or loss upon the delivery of such Trust Preferred Securities or
the release of the Treasury Securities to the U.S. Holder. Such U.S. Holder will
continue to include in income any interest, OID or market discount or amortize
any bond premium otherwise includible or deductible, respectively, by such U.S.
Holder with respect to such Treasury Securities and Trust Preferred Securities,
and such U.S. Holder's tax basis in the Treasury Securities, the Trust Preferred
Securities and the Purchase Contract will not be affected by such delivery and
release.
SALE OR DISPOSITION OF FELINE PRIDES
Upon a disposition of FELINE PRIDES, a U.S. Holder will be treated as
having sold, exchanged or disposed of the Purchase Contract and the Trust
Preferred Securities, Treasury Portfolio or in the case of Growth PRIDES, the
Treasury Securities, that constitute such FELINE PRIDES and generally will have
gain or loss equal to the difference between the portion of the proceeds to such
U.S. Holder allocable to the Purchase Contract and the Trust Preferred
Securities, Treasury Portfolio or Treasury Securities, as the case may be, and
such U.S. Holder's respective adjusted tax bases in the Purchase Contract and
the Trust Preferred Securities, Treasury Portfolio or Treasury Securities. Such
gain or loss generally will be capital gain or loss, except to the extent that
such U.S. Holder is treated as having received an amount with respect to accrued
interest on the Trust Preferred Securities, which will be treated as ordinary
interest income, or to the extent such U.S. Holder is treated as having received
an amount with respect to accrued Contract Adjustment Payments or Deferred
Contract Adjustment Payments, which may be treated as ordinary income, in each
case to the extent not previously included in income. Such capital gain or loss
may be long-term capital gain or loss depending on the holding period of the
FELINE PRIDES. Capital gains of individuals are eligible for reduced rates of
taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations. If the disposition of
FELINE PRIDES occurs when the Purchase Contract has negative value, the U.S.
Holder should be considered to have received additional consideration for the
Trust Preferred Securities, Treasury Portfolio or Treasury Securities in an
amount equal to such negative value, and to have paid such amount to be released
from the U.S. Holder's obligation under the Purchase Contract. U.S. Holders
should consult their tax advisors regarding a disposition of the FELINE PRIDES
at a time when the Purchase Contract has negative value.
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Payments to a U.S. Holder of Contract Adjustment Payments or Deferred
Contract Adjustment Payments that have not previously been included in the
income of such U.S. Holder should either reduce such U.S. Holder's tax basis in
the Purchase Contract or result in an increase in the amount realized on the
disposition of the Purchase Contract. Any Contract Adjustment Payments or
Deferred Contract Adjustment Payments included in a U.S. Holder's income but not
paid should increase such U.S. Holder's tax basis in the Purchase Contract (see
"--Income from Contract Adjustment Payments and Deferred Contract Adjustment
Payments" above).
TAX EVENT REDEMPTION
A Tax Event Redemption will be a taxable event for U.S. Holders of Trust
Preferred Securities. Gain or loss will be recognized by a U.S. Holder in an
amount equal to the difference between the Redemption Price (whether paid
directly to such U.S. Holder or applied by the Collateral Agent to the purchase
of the Treasury Portfolio on behalf of holders of Income PRIDES), except to the
extent of amounts paid in respect of accrued but unpaid interest not previously
included income, and the U.S. Holder's adjusted tax basis in the Trust Preferred
Securities. Gain or loss realized by a U.S. Holder upon a Tax Event Redemption
will be capital gain or loss and may be long-term capital gain or loss depending
upon the holding period of the Trust Preferred Securities. Capital gains of
individuals are eligible for reduced rates of taxation depending upon the
holding period of such capital assets. The deductibility of capital losses is
subject to limitations.
Ownership of Treasury Portfolio. The Company, the Trust, and by acquiring
FELINE PRIDES, each U.S. Holder agree to treat such U.S. Holder as the owner,
for United States federal, state and local income and franchise tax purposes, of
that portion of the Treasury Portfolio constituting a part of the Income PRIDES
beneficially owned by such U.S. Holder. Based on such agreement, each U.S.
Holder will include in income any amount earned on such pro rata portion of the
Treasury Portfolio for all United States federal, state and local income and
franchise tax purposes. The remainder of this summary assumes that U.S. Holders
of FELINE PRIDES will be treated as the owners of the Treasury Portfolio
constituting a part of such Income PRIDES for United States federal, state and
local income and franchise tax purposes.
Interest Income and Original Issue Discount. The Treasury Portfolio will
consist of stripped Treasury Securities. A U.S. Holder of Income PRIDES will be
required to treat its pro rata portion of each Treasury Security in the Treasury
Portfolio as a bond that was originally issued on the date the Collateral Agent
acquired the relevant Treasury Securities and will include OID in income over
the life of the Treasury Securities in an amount equal to the U.S. Holder's pro
rata portion of the excess of the amounts payable on such Treasury Securities
over the value of the U.S. Treasury Securities at the time the Collateral Agent
acquires them on behalf of holders of Income PRIDES. The amount of such excess
will constitute only a portion of the total amounts payable in respect of the
Treasury Portfolio. Consequently, a substantial portion of each scheduled
interest payment to U.S. Holders will be treated as a tax-free return of the
U.S. Holder's investment in the Treasury Portfolio and will not be considered
current income for federal income tax purposes.
A U.S. Holder, whether on the cash or accrual method of tax accounting,
will be required to include OID (other than OID on short-term Treasury
Securities as defined below) in income for federal income tax purposes as it
accrues on a constant yield to maturity basis. See "--Interest Income and
Original Issue Discount" above. In the case of any Treasury Security with a
maturity of one year or less from the date it is purchased (a "short-term
Treasury Security"), in general, only accrual basis taxpayers will be required
to include OID in income as it is accrued. Unless such an accrual basis U.S.
Holder elects to accrue the OID on a short-term Treasury Security according to
the constant-yield-to-maturity method, such OID will be accrued on a
straight-line basis.
Tax Basis of the Treasury Portfolio. A U.S. Holder's initial tax basis in
the Treasury Portfolio will equal such U.S. Holder's pro rata portion of the
amount paid by the Collateral Agent for the Treasury Portfolio. A U.S. Holder's
tax basis in the Treasury Portfolio will be increased by the amount of OID
included in income with respect thereto and decreased by the amount of cash
received in respect thereof.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Payments under the FELINE PRIDES, Trust Preferred Securities or Common
Stock acquired under a Purchase Contract, the proceeds received with respect to
a fractional share of Common Stock upon the settlement of a Purchase Contract,
and the sale of FELINE PRIDES, Trust Preferred Securities or Common Stock
acquired
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under a Purchase Contract, may be subject to information reporting and United
States federal backup withholding tax at the rate of 31% if the U.S. Holder
thereof fails to supply an accurate taxpayer identification number or otherwise
fails to comply with applicable United States information reporting or
certification requirements. Any amounts so withheld will be allowed as a credit
against such U.S. Holder's United States federal income tax liability.
DESCRIPTION OF COMMON STOCK
The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Pennsylvania
law and to the provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") and its By-Laws (the "By-Laws"), copies
of which have been filed with the Commission.
COMMON STOCK
The Company has authorized 70,000,000 shares of capital stock, par value
$1.25 per share ("Common Stock"). As of November 30, 1997, there were 26,284,093
shares of Common Stock outstanding. Holders of Common Stock are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor after payment of dividends on any outstanding Preferred Stock
and are entitled to one vote for each share of Common Stock held by them with
respect to all matters upon which they are entitled to vote.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of Class A Preferred Stock, no
par value per share (the "Preferred Stock"). At present, there are no shares of
Preferred Stock outstanding. The Board of Directors of the Company, without
further action by the stockholders, is authorized to designate and issue in
series Preferred Stock and to fix as to any series the dividend rate, redemption
prices, preferences on dissolution, the terms of any sinking fund, conversion
rights, voting rights, and any other preferences or special rights and
qualifications. The Board of Directors of the Company has authorized 200,000
shares of Series One Preferred Stock for use in the Rights Agreement. See
"Rights Agreement."
Any Preferred Stock so issued may rank senior to the Common Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights. Issuances of Preferred Stock, while providing the
Company with flexibility in connection with general corporate purposes, may,
among other things, have an adverse effect on the rights of holders of Common
Stock. The Company has no present plans to issue any Preferred Stock.
COVENANT RESTRICTIONS
The Company's New Bank Credit Facility contains financial and operating
covenants, including restrictions on the ability of the Company to, among other
things, incur additional debt, make advances and investments, create, incur or
permit the existence of certain liens, make loans or guarantees and requires the
Company to achieve and maintain certain financial ratios, including minimum net
worth, maximum leverage ratio and minimum fixed charge coverage ratio.
The terms of the Indenture for the Debentures and the Guarantee prohibit
the Company from declaring or paying any dividends on or making any
distributions with respect to its Common Stock if an event of default exists
under the Declaration or the Guarantee or during any Extension Period on the
payment of interest on the Debentures. See "Description of the
Debentures--Option to Extend Interest Payment Period" and "Description of the
Guarantee--Certain Covenants of the Company."
CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Restated Articles and By-Laws could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and in the policies formulated by the Board and to discourage an unsolicited
takeover of the Company if the Board determines that such takeover is not in the
best interests of the Company and its shareholders. However, these provisions
could have the effect of discouraging certain attempts to acquire the
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Company or remove incumbent management even if some or a majority of
shareholders deemed such an attempt to be in their best interests.
The provisions in the Restated Articles and By-Laws include: (i) the
classification of the Board of Directors into three classes; (ii) a procedure
which requires shareholders to nominate directors in advance of a meeting to
elect such directors; and (iii) the authority to issue additional shares of
Common Stock or Preferred Stock without shareholder approval.
The Restated Articles also include a provision requiring a 75 percent
shareholder vote for certain mergers or other business combinations or
transactions with five percent shareholders; a provision requiring a 75 percent
shareholder vote to remove the entire Board, a class of the Board, any
individual member of the Board without cause, or to increase the size of the
Board to more than twelve members or decrease the size of the Board to fewer
than eight members; a provision requiring disinterested shareholder approval of
stock repurchases at a premium over market by the Company from certain four
percent Shareholders (as defined in the Restated Articles); and a provision
requiring a majority of disinterested shareholders to approve certain business
combinations involving a stockholder who beneficially owns more than 10 percent
of the voting power of the Company, unless certain minimum price, form of
consideration and procedural requirements are satisfied or the transaction is
approved by a majority of disinterested directors.
Pursuant to the Restated Articles, the Board of Directors is permitted to
consider the effects of a change in control on non-shareholder constituencies of
the Company, such as its employees, suppliers, creditors, customers and the
communities in which it operates. Pursuant to this provision, the Board may be
guided by factors in addition to price and other financial considerations.
PBCL Anti-Takeover Provisions. The Pennsylvania Business Corporation Law
(the "PBCL") contains a number of statutory "anti-takeover" provisions,
including Subchapters E, F, G and H of Chapter 25 and Section 2538 of the PBCL,
which apply automatically to a Pennsylvania registered corporation (usually a
public company) unless such corporation elects to opt-out as provided in such
provisions. The Company, as a Pennsylvania registered corporation, has elected
in its By-Laws to opt-out of certain of the anti-takeover provisions entirely,
namely Subchapters G and H.
The following descriptions are qualified in their entirety by reference to
such provisions of the PBCL:
Subchapter E (relating to control transactions) generally provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person
or group the fair value of their shares, including a proportionate amount
of any control premium.
Subchapter F (relating to business combinations) generally delays for
five years and imposes conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions between a
corporation and an interested shareholder including mergers, sales or
leases of specified amounts of assets, liquidations, reclassifications and
issuances of specified amounts of additional shares of stock of the
corporation. An "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Section 2538 of the PBCL generally establishes certain shareholder
approval requirements with respect to specified transactions with
"interested shareholders."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is the Transfer Agent and
Registrar for the Common Stock.
RIGHTS AGREEMENT
The Company has adopted a rights plan pursuant to which the Board of
Directors authorized and the Company distributed one preferred stock purchase
right (each a "right") for each outstanding share of Common Stock of the
Company. The terms of the rights are governed by a Rights Agreement between the
Company and Mellon Bank, N.A., as Rights Agent, dated as of October 25, 1990
(the "Rights Agreement"). The rights, which currently are automatically
transferred with the related shares of Common Stock and are not separately
S-100
<PAGE> 139
transferable, will entitle the holder thereof to purchase one-hundredth of a
share of a new series of preferred stock of the Company at a price of $105
(subject to certain adjustments).
Subject to certain restrictions, the rights become exercisable only if a
person or group of persons acquires or intends to make a tender offer for 20
percent or more of the Company's Common Stock. If any person acquires 20 percent
of the Common Stock, each right will entitle the shareholder to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price. If the Company is acquired in a merger or certain
other business combinations, each right then will entitle the shareholder to
purchase at the exercise price, that number of shares of the acquiring company
having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption
in certain circumstances by the Company at a redemption price of $0.01 per
right.
The foregoing summary description of the Rights Agreement does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, a copy of which has been filed with the Commission as an exhibit in
the Registration Statement of which this Prospectus Supplement forms a part. For
a more detailed description of the Rights Agreement, see the Company's Form 8-A
filed with the Commission with respect to the rights and incorporated by
reference into the Prospectus.
DESCRIPTION OF OTHER OFFERINGS
COMMON STOCK OFFERINGS
Concurrently with the Offering, the Company is offering 4,300,000 shares of
Common Stock (4,945,000 Shares if the underwriters for the shares exercise their
over-allotment options in full). The net proceeds from the Common Stock
Offerings are expected to be approximately $ million ($
million if the underwriters for the Common Stock Offerings exercise their
over-allotment options in full). The consummation of the Common Stock Offerings
is not a condition to consummation of the Offering.
SENIOR DEBT OFFERING
Concurrently with the Offering, the Company is offering $150,000,000
aggregate principal amount of the 2001 Notes, $150,000,000 aggregate principal
amount of the 2008 Notes and $150,000,000 aggregate principal amount of the 2028
Debentures. The net proceeds from the Senior Debt Offering are expected to be
approximately $ million. The Senior Debt Securities will be senior
unsecured obligations of the Company and will rank equally with all other
existing and future senior unsecured and unsubordinated indebtedness of the
Company, including the Debentures. Interest on the Senior Debt Securities will
be payable semi-annually. The consummation of the Senior Debt Offering is not a
condition to consummation of the Offering.
S-101
<PAGE> 140
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to ERISA, plans and
individual retirement accounts that are subject to Section 4975 of the Code and
entities whose assets are considered assets of such plans ("Plans") may purchase
the Securities subject to the investing fiduciary's determination that the
investment in the Securities satisfies ERISA's fiduciary standards and other
requirements applicable to investments by Plans. Accordingly, among other
factors, the fiduciary should consider whether the investment would satisfy the
prudence and diversification requirements of ERISA and would be consistent with
the documents and instruments governing the Plans.
Under regulations issued by the U.S. Department of Labor (the "DOL"), a
Plan that owns the Securities may be deemed to own a portion of the assets held
in the Trust, including a portion of the Debentures held in the Trust. In
addition, the Company and its affiliates may be "parties in interest" (within
the meaning of ERISA) or "disqualified persons" (within the meaning of Section
4975 of the Code) with respect to certain Plans (generally, Plans maintained or
sponsored by, or contributed to by, any such persons or Plans with respect to
which any such persons are fiduciaries or service providers). The acquisition
and ownership of the Securities and a deemed acquisition and ownership of an
interest in the Debentures by a Plan with respect to which the Company or any of
its affiliates is considered a party in interest or a disqualified person may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Securities are acquired and are held pursuant to and in
accordance with an applicable exemption. In this regard, the DOL has issued
prohibited transaction class exemptions ("PTCEs") that may apply to the
acquisition and holding of the Securities. These class exemptions are PTCE 84-14
(respecting transactions determined by independent qualified professional asset
managers), PTCE 90-1 (respecting insurance company separate accounts), PTCE
91-38 (respecting bank collective trust funds), PTCE 95-60 (respecting insurance
company general accounts) and PTCE 96-23 (respecting transactions determined by
in-house asset managers).
Any fiduciary proposing to acquire the Securities on behalf of a Plan
should consult with ERISA counsel for the Plan and should not acquire the
Securities unless it is determined that such acquisition and holding does not
and will not constitute a prohibited transaction and will satisfy the applicable
fiduciary requirements imposed under ERISA. Any such acquisition by a Plan shall
be deemed a representation by the Plan and the fiduciary effecting the
investment on behalf of the Plan that such acquisition and holding satisfies the
applicable fiduciary requirements of ERISA, and is entitled to exemptive relief
from the prohibited transaction provisions of ERISA and the Code in accordance
with one or more of the foregoing PTCEs or another available prohibited
transaction exemption.
S-102
<PAGE> 141
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Goldman, Sachs & Co. are acting as representatives (the "Representatives") of
each of the underwriters named below (the "Underwriters"). Subject to the terms
and conditions set forth in a purchase agreement (the "Purchase Agreement")
among the Company and the Underwriters, the Company and the Trust have agreed to
sell to the Underwriters, and each of the Underwriters severally and not jointly
has agreed to purchase from the Company and the Trust, the number of Income
PRIDES set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INCOME
UNDERWRITERS PRIDES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................
Goldman, Sachs & Co......................................................
---------
Total........................................................ 4,500,000
=========
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Income PRIDES
offered hereby if any of the Income PRIDES are purchased. In the event of
default by an Underwriter, the Purchase Agreement provides that, in certain
circumstances, the purchase commitments of non-defaulting Underwriters may be
increased or the Purchase Agreement may be terminated.
The Representatives have advised the Company and the Trust that the
Underwriters propose initially to offer the Income PRIDES offered hereby to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement, and to certain dealers at such price less a concession
not in excess of $ per Income PRIDES. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per Income PRIDES on
sales to certain other dealers. After the public offering, the public offering
price, concession and discount may be changed.
The Company and the Trust have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus Supplement, to
purchase up to an aggregate of 675,000 additional Income PRIDES at the public
offering price set forth on the cover page of this Prospectus Supplement, less
the underwriting discount. The Underwriters may exercise this option only to
cover over-allotments, if any, made on the sale of the Income PRIDES offered
hereby. To the extent that the Underwriters exercise this option, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional Income PRIDES proportionate to such Underwriter's initial
amount reflected in the foregoing table.
The Company and the Trust have agreed not to (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any Income PRIDES, Trust Preferred
Securities, Purchase Contracts or Common Stock, as the case may be, or any
securities of the Company or the Trust similar to the Income PRIDES, Trust
Preferred Securities, Purchase Contracts or Common Stock or any security
convertible into or exercisable or exchangeable for Income PRIDES, Trust
Preferred Securities, Purchase Contracts or 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 Income PRIDES, Trust Preferred Securities,
Purchase Contracts or Common Stock or any securities convertible into or
exercisable or exchangeable for Income PRIDES, Trust Preferred Securities,
Purchase Contracts or Common Stock whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of Income
PRIDES, Trust Preferred Securities, Purchase Contracts or Common Stock or such
other securities, in cash or otherwise, for a period of 90 days from the date of
this Prospectus Supplement without the prior written consent of Merrill Lynch,
other than (i) pursuant to the Purchase Agreement, (ii) Growth PRIDES or Income
PRIDES to be created or recreated upon substitution of pledged securities or
shares of Common Stock issuable upon early settlement of the Income PRIDES or
Growth PRIDES, (iii) any shares of Common Stock issued by the Company upon
exercise of an option, warrant, or the conversion of a security described
herein, (iv) any shares of Common Stock issued, or options to purchase
S-103
<PAGE> 142
such shares granted, pursuant to existing employee benefit plans described
herein or (v) any shares of Common Stock issued pursuant to any non-employee
director stock plan or dividend reinvestment plan.
The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect hereof.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriters and any selling group
members to bid for and purchase the Securities or the shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Securities or the Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Securities or the Common Stock.
If the Underwriters create a short position in the Securities in connection
with the Offering, i.e., if they sell more Securities than are set forth on the
cover page of this Prospectus Supplement, the Representatives may reduce that
short position by purchasing Securities in the open market. The Representatives
may also elect to reduce any short position by exercising all or part of the
over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Securities in the open market to reduce the Underwriters' short position or to
stabilize the price of the Securities, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Securities as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Securities to the extent that it
discourages resales of the Securities.
Neither the Company, the Trust nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Securities or the
Common Stock. In addition, neither the Company, the Trust nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Prior to the Offering, there has been no established trading market for the
Income PRIDES. In determining the terms of the Income PRIDES, including the
public offering price, the Company, the Trust and the Underwriters considered
the market price of the Common Stock and also considered the Company's recent
results of operations, the future prospects of the Company and the industry in
general, market prices and terms of, and yields on, securities of other
companies considered to be comparable to the Company and prevailing conditions
in the securities markets. Application has been made to list the Income PRIDES
on the NYSE under the trading symbol "KMTprI." The Company and the Trust have
been advised by the Underwriters that they presently intend to make a market for
the Growth PRIDES and the Trust Preferred Securities; however, they are not
obligated to do so and any market making may be discontinued at any time. There
can be no assurance that an active trading market will develop for the Income
PRIDES, Growth PRIDES or Trust Preferred Securities or that the Income PRIDES
initially will trade in the public market subsequent to the Offering at or above
the initial public offering price.
This Prospectus Supplement, as amended or supplemented, may be used by the
Remarketing Agent for remarketing the Trust Preferred Securities at such time as
is necessary.
Merrill Lynch has from time to time provided investment banking advisory
services to the Company, for which it has received customary compensation, and
may continue to do so in the future. Merrill Lynch has acted as financial
advisor to the Company in connection with the Merger, including serving as
dealer manager with respect to the Tender Offer. In this regard, the Company has
agreed to indemnify Merrill Lynch against certain liabilities. Goldman, Sachs &
Co. has from time to time provided investment banking or financial advisory
services to the Company, and may continue to do so in the future.
S-104
<PAGE> 143
LEGAL MATTERS
The validity of the Purchase Contracts, the Common Stock issuable upon
settlement thereof and the Debentures will be passed upon for the Company and
the Trust by Buchanan Ingersoll Professional Corporation, Pittsburgh,
Pennsylvania, and certain matters of Delaware law with respect to the validity
of the Trust Preferred Securities offered hereby will be passed upon for the
Company and the Trust by Skadden, Arps, Slate Meagher & Flom, LLP, special
Delaware counsel to the Company and the Trust. William R. Newlin, Chairman of
the Board of the Company, is a shareholder in Buchanan Ingersoll Professional
Corporation. As of July 30, 1997, Mr. Newlin owned 24,385 shares of Common
Stock, stock credits representing the right to acquire 9,260 shares of Common
Stock pursuant to the Company's directors deferred fee plan, 20,000 shares of
JLK common stock and held options to acquire 1,500 shares of Common Stock and
15,000 shares of JLK common stock. The validity of the Purchase Contracts, the
Common Stock issuable upon settlement thereof, the Debentures and the Trust
Preferred Securities will be passed upon for the Underwriters by Simpson Thacher
& Bartlett (a partnership which includes professional corporations), New York,
New York. Skadden, Arps, Slate Meagher & Flom LLP, New York, New York is also
advising the Underwriters with respect to certain matters in connection with the
Securities. Simpson Thacher & Bartlett will rely on Buchanan Ingersoll
Professional Corporation with respect to matters of Pennsylvania law.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and June 30, 1997 and for each of the three years in the period ended June 30,
1997, included in this Prospectus Supplement and elsewhere in the Registration
Statement, of which this Prospectus Supplement is a part, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in the Registration Statement in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. The consolidated financial statements of Greenfield as
of December 31, 1995 and December 31, 1996 and for each of the three years in
the period ended December 31, 1996, included in this Prospectus Supplement have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
S-105
<PAGE> 144
INDEX OF SELECTED TERMS FOR PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------- -----
<S> <C>
Applicable Market Value.............................................................. S-62
Applicable Ownership Interest........................................................ S-59
Applicable Principal Amount.......................................................... S-88
Beneficial Owner..................................................................... S-81
Change in 1940 Act Law............................................................... S-76
Closing Price........................................................................ S-62
Collateral Agent..................................................................... S-7
Common Securities.................................................................... S_1
Common Securities Guarantee.......................................................... S-84
Common Stock......................................................................... S-99
Compound Interest.................................................................... S-88
Contract Adjustment Payments......................................................... S-1
Debentures........................................................................... S-2
Debt Trustee......................................................................... S-85
Declaration.......................................................................... S-6
Declaration Event of Default......................................................... S-77
Deferred Contract Adjustment Payments................................................ S-61
Direct Action........................................................................ S-78
Early Settlement..................................................................... S-14
Extension Periods.................................................................... S-16
Failed Remarketing................................................................... S-3
FELINE PRIDES........................................................................ S-1
FELINE PRIDES Certificate............................................................ S-63
Guarantee............................................................................ S-2
Guarantee Payments................................................................... S-83
Guarantee Trustee.................................................................... S-83
Global Security...................................................................... S-90
Growth PRIDES........................................................................ S-3
Income PRIDES........................................................................ S-1
Indenture............................................................................ S-85
Indenture Event of Default........................................................... S-77
Kennametal Trustees.................................................................. S-41
Institutional Trustee................................................................ S-41
Interest Payment Date................................................................ S-86
Investment Company Event............................................................. S-76
Payment Date......................................................................... S-11
Pledge Agreement..................................................................... S-7
Pledged Securities................................................................... S-68
Primary Treasury Dealer.............................................................. S-88
Property Account..................................................................... S-41
Purchase Agreement................................................................... S-103
Purchase Contract.................................................................... S-1
Purchase Contract Agent.............................................................. S-7
Purchase Contract Agreement.......................................................... S-7
Purchase Contract Settlement Date.................................................... S-1
Quotation Agent...................................................................... S-88
Redemption Amount.................................................................... S-88
Regular Trustees..................................................................... S-41
Reference Price...................................................................... S-62
</TABLE>
S-106
<PAGE> 145
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------- -----
<S> <C>
Remarketing Fee...................................................................... S-3
Reset Agent.......................................................................... S-7
Reset Announcement Date.............................................................. S-75
Reset Spread......................................................................... S-2
Rights Agreement..................................................................... S-100
Securities........................................................................... S-1
Settlement Rate...................................................................... S-62
Sponsor.............................................................................. S-41
Stated Amount........................................................................ S-1
Successor Securities................................................................. S-80
Super-Majority....................................................................... S-78
Tax Counsel.......................................................................... S-94
Tax Event............................................................................ S-87
Tax Event Redemption................................................................. S-5
Tax Event Redemption Date............................................................ S-87
Threshold Appreciation Price......................................................... S-62
Trading Day.......................................................................... S-62
Treasury Portfolio................................................................... S-87
Treasury Portfolio Purchase Price.................................................... S-88
Treasury Securities.................................................................. S-3
Trust................................................................................ S-1
Trust Preferred Security............................................................. S-1
Trust Securities..................................................................... S-1
Two-Year Benchmark Treasury.......................................................... S-86
U.S. Holder.......................................................................... S-93
</TABLE>
S-107
<PAGE> 146
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KENNAMETAL INC.
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Income..................................................... F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Cash Flows................................................. F-5
Consolidated Statements of Shareholders' Equity....................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
GREENFIELD INDUSTRIES, INC.
Report of Independent Accountants..................................................... F-22
Consolidated Statements of Operations................................................. F-23
Consolidated Balance Sheets........................................................... F-24
Consolidated Statements of Changes in Stockholders' Equity............................ F-25
Consolidated Statements of Cash Flows................................................. F-26
Notes to Consolidated Financial Statements............................................ F-27
</TABLE>
F-1
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kennametal Inc.
We have audited the accompanying consolidated balance sheets of Kennametal Inc.
and subsidiaries as of June 30, 1996 and 1997, 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 Kennametal Inc. and
subsidiaries as of June 30, 1996 and 1997, and the results of their operations
and their 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
Pittsburgh, Pennsylvania
July 21, 1997 (except with respect
to the matters discussed in Note 18,
as to which the date is November 18, 1997)
F-2
<PAGE> 148
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales........................ $983,873 $1,079,963 $1,156,343 $275,203 $310,792
Cost of goods sold............. 560,867 625,473 668,415 160,493 178,569
-------- ---------- ---------- -------- --------
Gross profit..................... 423,006 454,490 487,928 114,710 132,223
Research and development
expenses.................... 18,744 20,585 24,105 5,739 5,227
Selling, marketing and
distribution expenses....... 219,271 242,375 263,980 63,019 68,571
General and administrative
expenses.................... 55,853 65,417 69,911 18,206 24,720
Restructuring charge........... -- 2,666 -- -- --
Amortization of intangibles.... 2,165 1,596 2,907 546 1,052
-------- ---------- ---------- -------- --------
Operating income................. 126,973 121,851 127,025 27,200 32,653
Interest expense............... 12,793 11,296 10,393 2,642 1,180
Other income (expense)......... 54 4,821 1,531 627 (440)
-------- ---------- ---------- -------- --------
Income before income taxes and
minority interest.............. 114,234 115,376 118,163 25,185 31,033
Provision for income taxes..... 45,000 43,900 44,900 9,800 12,100
Minority interest.............. 940 1,744 1,231 182 1,385
-------- ---------- ---------- -------- --------
Net income....................... $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
======== ========== ========== ======== ========
PER SHARE DATA
Earnings per share............... $ 2.58 $ 2.62 $ 2.71 $ 0.57 $ 0.67
======== ========== ========== ======== ========
Dividends per share.............. $ 0.60 $ 0.60 $ 0.66 $ 0.15 $ 0.17
======== ========== ========== ======== ========
Weighted average shares
outstanding.................... 26,486 26,635 26,575 26,729 26,171
======== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 149
KENNAMETAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 17,090 $ 21,869 $ 45,409
Accounts receivable, less allowance for doubtful accounts
of $9,296, $7,325 and $7,370........................... 189,820 200,515 202,144
Inventories.............................................. 204,934 210,111 214,068
Deferred income taxes.................................... 24,620 25,384 24,949
--------- --------- ---------
Total current assets.............................. 436,464 457,879 486,570
--------- --------- ---------
Property, plant and equipment:
Land and buildings....................................... 156,064 156,292 160,474
Machinery and equipment.................................. 415,443 473,850 494,466
Less accumulated depreciation............................ (304,400) (329,756) (344,377)
--------- --------- ---------
Net property, plant and equipment................. 267,107 300,386 310,563
--------- --------- ---------
Other assets:
Investments in affiliated companies...................... 8,742 11,736 14,648
Intangible assets, less accumulated amortization of
$20,795, $23,960 and $25,031........................... 33,756 49,915 57,691
Deferred income taxes.................................... 41,757 34,307 31,644
Other.................................................... 11,665 15,086 18,473
--------- --------- ---------
Total other assets................................ 95,920 111,044 122,456
--------- --------- ---------
TOTAL ASSETS...................................... $ 799,491 $ 869,309 $ 919,589
========= ========= =========
LIABILITIES
Current liabilities:
Current maturities of term debt and capital leases....... $ 17,543 $ 13,853 $ 14,010
Notes payable to banks................................... 57,549 120,166 46,784
Accounts payable......................................... 64,663 60,322 61,306
Accrued vacation pay..................................... 19,228 18,176 17,818
Other.................................................... 59,830 69,485 88,217
--------- --------- ---------
Total current liabilities......................... 218,813 282,002 228,135
--------- --------- ---------
Term debt and capital leases, less current maturities.... 56,059 40,445 40,464
Deferred income taxes.................................... 20,611 21,055 21,138
Other liabilities........................................ 52,559 57,060 55,621
--------- --------- ---------
Total liabilities................................. 348,042 400,562 345,358
--------- --------- ---------
Minority interest in consolidated subsidiaries........... 12,500 9,139 44,162
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued.... -- -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
29,370 shares issued................................... 36,712 36,712 36,712
Additional paid-in capital............................... 87,417 91,049 148,438
Retained earnings........................................ 351,594 406,083 419,174
Treasury shares, at cost; 2,667, 3,263 and 3,153 shares
held................................................... (35,734) (62,400) (61,101)
Cumulative translation adjustments....................... (1,040) (11,836) (13,154)
--------- --------- ---------
Total shareholders' equity........................ 438,949 459,608 530,069
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 799,491 $ 869,309 $ 919,589
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 150
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................... $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
Adjustments for noncash items:
Depreciation and amortization...... 39,315 40,240 41,399 9,948 10,326
Other.............................. 11,953 9,000 5,356 2,335 1,091
Changes in certain assets and
liabilities:
Accounts receivable................ (23,815) (20,359) (8,032) 9,647 (4,077)
Inventories........................ (34,389) (9,758) 1,379 (2,551) (2,319)
Accounts payable and accrued
liabilities..................... (9,340) (1,342) (600) 2,702 8,903
Other.............................. 4,615 (2,034) (11,684) (344) 9,150
-------- -------- -------- -------- --------
Net cash flow from operating
activities......................... 56,633 85,479 99,850 36,940 40,622
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.......................... (43,371) (57,556) (73,779) (14,615) (16,695)
Disposals of property, plant and
equipment.......................... 3,725 6,348 1,063 16 193
Acquisitions, net of cash............ (1,948) (1,441) (18,995) (14,102) (17,031)
Other................................ (3,320) 2,614 907 1,938 1,116
-------- -------- -------- -------- --------
Net cash flow used in investing
activities......................... (44,914) (50,035) (90,804) (26,763) (32,417)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt............................... (5,721) 5,019 55,689 (1,406) (72,733)
Increase in term debt................ 8,163 7,780 943 403 --
Reduction in term debt............... (9,721) (28,278) (19,359) (312) (939)
Net proceeds from issuance and sale
of subsidiary stock................ -- -- -- -- 90,462
Purchase of treasury stock........... -- -- (28,657) -- --
Dividend reinvestment and employee
stock plans........................ 4,439 2,652 5,623 1,230 4,062
Cash dividends paid to
shareholders....................... (15,884) (15,976) (17,543) (4,009) (4,457)
-------- -------- -------- -------- --------
Net cash flow from (used for)
financing activities............... (18,724) (28,803) (3,304) (4,094) 16,395
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash............................... 642 (378) (963) 254 (1,060)
-------- -------- -------- -------- --------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and
equivalents........................ (6,363) 6,263 4,779 6,337 23,540
Cash and equivalents, beginning of
period............................. 17,190 10,827 17,090 17,090 21,869
-------- -------- -------- -------- --------
Cash and equivalents, end of
period............................. $ 10,827 $ 17,090 $ 21,869 $ 23,427 $ 45,409
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid........................ $ 12,569 $ 11,436 $ 10,563 $ 1,288 $ 520
Income taxes paid.................... 23,125 39,521 45,307 3,994 2,257
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 151
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of period............ $ 36,712 $ 36,712 $ 36,712 $ 36,712
-------- -------- -------- --------
Balance at end of period.................. 36,712 36,712 36,712 36,712
-------- -------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............ 83,839 85,768 87,417 91,049
Dividend reinvestment and stock purchase
plan................................... 1,015 882 1,132 189
Employee stock plans...................... 914 767 2,500 2,173
Issuance of stock by subsidiary........... -- -- -- 55,027
-------- -------- -------- --------
Balance at end of period.................. 85,768 87,417 91,049 148,438
-------- -------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............ 245,428 297,838 351,594 406,083
Net income................................ 68,294 69,732 72,032 17,548
Cash dividends............................ (15,884) (15,976) (17,543) (4,457)
-------- -------- -------- --------
Balance at end of period.................. 297,838 351,594 406,083 419,174
-------- -------- -------- --------
TREASURY SHARES
Balance at beginning of period............ (39,247) (36,737) (35,734) (62,400)
Purchase of treasury stock................ -- -- (28,657) --
Dividend reinvestment and stock purchase
plan................................... 938 537 708 74
Employee stock plans...................... 1,572 466 1,283 1,225
-------- -------- -------- --------
Balance at end of period.................. (36,737) (35,734) (62,400) (61,101)
-------- -------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of period............ (3,360) 8,304 (1,040) (11,836)
Current year translation adjustments...... 11,664 (9,344) (10,796) (1,318)
-------- -------- -------- --------
Balance at end of period.................. 8,304 (1,040) (11,836) (13,154)
-------- -------- -------- --------
PENSION LIABILITY ADJUSTMENT
Balance at beginning of period............ (536) -- -- --
Minimum pension liability adjustment...... 536 -- -- --
-------- -------- -------- --------
Balance at end of period.................. -- -- -- --
-------- -------- -------- --------
Total shareholders' equity.................. $391,885 $438,949 $459,608 $ 530,069
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 152
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
The Company is a global enterprise engaged in the manufacture, purchase and
distribution of a broad range of tools, tooling systems, supplies and services
for the metalworking, mining and highway construction industries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist
in evaluating the Company's consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
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. Temporary cash investments having original maturities of
three months or less are considered cash equivalents. Cash equivalents consist
principally of investments in money market funds and certificates of deposit.
ACCOUNTS RECEIVABLE included $16.6 million and $12.8 million of receivables
from affiliates at June 30, 1996 and 1997, respectively.
INVENTORIES are carried at the lower of cost or market. The Company uses
the last-in, first-out (LIFO) method for determining the cost of a significant
portion of its U.S. inventories. The remainder of inventories is determined
under the first-in, first-out (FIFO) or average cost methods.
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 income. Interest is capitalized
during the construction of major facilities. Capitalized interest is included in
the cost of the constructed asset and is amortized over its estimated useful
life.
Depreciation for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets ranging from
3 to 40 years. Leased property and equipment under capital leases are amortized
using the straight-line method over the terms of the related leases.
INTANGIBLE ASSETS, which include the excess of cost over net assets of
acquired companies, are amortized using the straight-line method over periods
ranging from 3 to 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 entities.
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.
INCOME TAXES. 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. For the most part, assets and liabilities of
international operations are translated into U.S. dollars using year-end
exchange rates, while revenues and expenses are translated at average
F-7
<PAGE> 153
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
exchange rates throughout the year. The resulting net translation adjustments
are recorded as a separate component of shareholders' equity.
PENSION PLANS cover substantially all employees. Pension benefits are based
on years of service and, for certain plans, on average compensation immediately
preceding retirement. Pension costs are determined in accordance with Statement
of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions." The Company funds pension costs in accordance with the funding
requirements of the Employee Retirement Income Security Act of 1974 (ERISA) for
U.S. plans and in accordance with local regulations or customs for non-U.S.
plans.
EARNINGS PER SHARE is computed using the weighted average number of shares
outstanding during the year.
REVENUE RECOGNITION. The Company recognizes revenue from product sales upon
transfer of title to the customer.
NEW ACCOUNTING STANDARDS. Effective July 1, 1996, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." 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.
Additionally on July 1, 1996, the Company adopted 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. The Company will continue to use the
intrinsic-value-based method, which does not result in compensation cost. The
Company's stock compensation plans are discussed in Note 13.
The Financial Accounting Standards Board 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 disclosures.
Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130
is effective for years ending after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company will adopt
SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have
a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the effect of applying this statement.
F-8
<PAGE> 154
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
RECLASSIFICATIONS. Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
INTERIM UNAUDITED FINANCIAL INFORMATION. The consolidated financial
statements as of, and for the three months ended September 30, 1996 and 1997 are
unaudited; however, in the opinion of management all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation have
been made. The results of interim periods are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 3. ISSUANCE OF SUBSIDIARY STOCK
On July 2, 1997, an initial public offering (IPO) of approximately 4.9
million shares of common stock at a price of $20 per share of JLK Direct
Distribution Inc. (JLK), a newly formed subsidiary of the Company, was
consummated. JLK operates the industrial supply operations consisting of the
Company's wholly owned J&L Industrial Supply (J&L) subsidiary and its Full
Service Supply programs. The net proceeds from the offering were approximately
$90 million and represented approximately 20 percent of JLK's common stock. The
transaction was accounted for as an equity transaction in the consolidated
financial statements. The net proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and $20 million related to
intercompany obligations to the Company. The Company used these proceeds to
repay short-term debt. In connection with the IPO, the remaining net proceeds
were loaned to the Company, under an intercompany debt/investment and cash
management agreement at a fluctuating rate of interest equal to the Company's
short-term borrowing costs. The Company will maintain unused lines of credit to
enable it to repay any portion of the borrowed funds as the amounts are due on
demand by JLK.
The Company owns approximately 80 percent of the outstanding common stock
of JLK and intends to retain a majority of both the economic and voting
interests of JLK.
NOTE 4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Finished goods................................... $169,108 $183,961 $ 184,628
Work in process and powder blends................ 59,326 50,351 51,027
Raw materials and supplies....................... 16,514 16,494 17,016
-------- -------- ---------
Inventories at current cost...................... 244,948 250,806 252,671
Less LIFO valuation.............................. (40,014) (40,695) (38,603)
-------- -------- ---------
Total inventories................................ $204,934 $210,111 $ 214,068
======== ======== =========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for a significant portion of U.S.
inventories and the first-in, first-out (FIFO) method or average cost for other
inventories. The Company used the LIFO method of valuing its inventories for
approximately 55 and 56 percent of total inventories at June 30, 1996 and 1997,
respectively, and for approximately 45 percent of total inventories at September
30, 1997. The Company uses the LIFO method for valuing the majority of its
inventories in order to more closely match current costs with current revenues,
thereby reducing the effects of inflation on earnings.
F-9
<PAGE> 155
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal and state income taxes.................................. $16,898 $17,563
Accrued compensation............................................ 7,259 8,522
Accrued benefits................................................ 3,613 6,894
Payroll, state and local taxes.................................. 7,910 6,098
Accrued product warranty costs.................................. 5,119 4,621
Accrued advertising expenses.................................... 906 1,363
Accrued professional fees....................................... 1,013 1,284
Accrued interest expense........................................ 996 766
Accrued restructuring charge.................................... 2,666 --
Other accrued expenses.......................................... 13,450 22,374
------- -------
Total other current liabilities................................. $59,830 $69,485
======= =======
</TABLE>
NOTE 6. TERM DEBT AND CAPITAL LEASES
Term debt and capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes, 9.64%, due in installments through 2000.......... $ 40,000 $ 30,000
Borrowings outside the U.S., varying from 6.60% to 10.25% in
1996 and 1997, due in installments through 2003.............. 13,472 6,750
Lease of office facilities with terms expiring through 2011 at
6.75% to 7.55%............................................... 12,654 11,068
Other.......................................................... 7,476 6,480
------- -------
Total term debt and capital leases............................. 73,602 54,298
------- -------
Less current maturities:
Term debt.................................................... (16,016) (12,287)
Capital leases............................................... (1,527) (1,566)
------- -------
Total current maturities..................................... (17,543) (13,853)
------- -------
Long-term debt and capital leases.............................. $ 56,059 $ 40,445
======= =======
</TABLE>
Future principal maturities of term debt are $12.3 million, $12.2 million,
$12.1 million, $1.1 million and $1.1 million, respectively, in fiscal years 1998
through 2002.
Certain of the term debt agreements contain various restrictions relating
to, among other things, minimum net worth, maximum indebtedness, fixed charge
coverage and debt guarantees.
F-10
<PAGE> 156
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Future minimum lease payments under capital leases for the next five years
and in total are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30: (IN THOUSANDS)
- ------------------------------------------------------
<S> <C>
1998................................................ $ 1,566
1999................................................ 1,511
2000................................................ 1,355
2001................................................ 1,355
2002................................................ 1,355
After 2002.......................................... 8,770
-------
Total future minimum lease payments................... 15,912
Less amount representing interest..................... (4,844)
-------
Present value of minimum lease payments............... $ 11,068
=======
</TABLE>
Future minimum lease payments under operating leases with noncancelable
terms beyond one year were not significant at June 30, 1997.
NOTE 7. NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $57.5 million and $120.2 million at June 30, 1996
and 1997, respectively, represent short-term borrowings under U.S. and
international credit lines with commercial banks. These credit lines totaled
approximately $280 million at June 30, 1997, of which $160 million was unused.
The weighted average interest rate for short-term borrowings was 5.6 percent and
6.3 percent at June 30, 1996 and 1997, respectively.
The Company has available U.S. credit lines totaling $175 million that are
covered by a revolving credit agreement that amounts to $150 million and another
agreement totaling $25 million. The revolving credit agreement allows the
Company to borrow up to $150 million at fixed or variable interest rates. This
credit line expires during fiscal 2001 and requires the Company to pay a
facility fee on the total line. The Company has the option to terminate this
agreement in whole or in part at any time.
During 1997, the Company's J&L subsidiary obtained a $25 million line of
credit with a bank and borrowed $20 million under the line of credit to fund a
dividend to the Company. Interest payable under the line of credit was based on
LIBOR plus 25 basis points. The Company guaranteed repayment of the line of
credit in the event of default by J&L. The line of credit was repaid and
canceled in full during July 1997.
F-11
<PAGE> 157
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. INCOME TAXES
Income before income taxes and the provision for income taxes consisted of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes:
United States..................................... $ 83,401 $ 76,020 $ 95,029
International..................................... 29,893 37,612 21,903
-------- -------- --------
Total income before income taxes.................... $113,294 $113,632 $116,932
======== ======== ========
Current income taxes:
Federal........................................... $ 26,500 $ 28,100 $ 30,600
State............................................. 6,100 5,500 6,000
International..................................... 4,000 1,800 4,400
-------- -------- --------
Total............................................. 36,600 35,400 41,000
Deferred income taxes............................... 8,400 8,500 3,900
-------- -------- --------
Provision for income taxes.......................... $ 45,000 $ 43,900 $ 44,900
======== ======== ========
Effective tax rate.................................. 39.7% 38.6% 38.4%
======== ======== ========
</TABLE>
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at U.S. statutory rate.................... $39,653 $39,772 $40,926
State income taxes, net of federal tax benefits........ 3,981 3,575 3,917
Combined tax effects of international income........... 1,288 (2,942) (1,990)
International losses with no related tax benefits...... 219 421 102
Other.................................................. (141) 3,074 1,945
------- ------- -------
Provision for income taxes............................. $45,000 $43,900 $44,900
======= ======= =======
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.............................. $35,985 $27,160
Other postretirement benefits................................. 14,649 15,153
Inventory valuation and reserves.............................. 6,836 7,981
Accrued vacation compensation................................. 3,965 4,316
Property and equipment........................................ 2,547 1,259
Other accruals................................................ 6,571 7,436
Pension benefits.............................................. (1,053) (2,133)
Accumulated depreciation...................................... (19,558) (18,922)
------- -------
Total........................................................... 49,942 42,250
Less valuation allowance...................................... (4,176) (3,614)
------- -------
Net deferred tax assets......................................... $45,766 $38,636
======= =======
</TABLE>
Deferred income taxes have not been provided on cumulative undistributed
earnings of international subsidiaries and affiliates. Any U.S. income taxes on
such earnings, if distributed, would generally be offset by available foreign
tax credits. In addition, there were no significant undistributed earnings of
unconsolidated affiliates at June 30, 1997.
F-12
<PAGE> 158
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Included in deferred tax assets at June 30, 1997, are unrealized tax
benefits totaling $27.2 million related to net operating loss carryforwards. The
realization of these tax benefits is contingent on future taxable income in
certain international operations. Of this amount, approximately $23.6 million
relates to net operating loss carryforwards in Germany, which can be carried
forward indefinitely. The Company's operations in Germany are profitable.
The remaining unrealized tax benefits relate to net operating loss
carryforwards in certain other international operations, which expire at various
dates through 2002. The Company established a valuation allowance of $3.6
million to offset the deferred tax benefits that may not be realized before the
expiration of the carryforward periods.
NOTE 9. PENSION BENEFITS
The components of net pension credit for the Company's U.S. defined benefit
pension plans were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................... $ 5,906 $ 6,722 $ 7,728
Interest cost........................................ 13,016 13,688 14,569
Return on plan assets................................ (37,746) (45,888) (46,845)
Net amortization and deferral........................ 17,628 24,682 22,457
-------- -------- --------
Net pension credit................................... $ (1,196) $ (796) $ (2,091)
======== ======== ========
</TABLE>
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Plan assets, at fair value.................................... $269,380 $318,229
Present value of accumulated benefit obligations:
Vested benefits............................................. 151,209 161,160
Nonvested benefits.......................................... 2,144 2,271
-------- --------
Accumulated benefit obligations............................... 153,353 163,431
Effect of future salary increases............................. 44,369 48,054
-------- --------
Projected benefit obligations................................. 197,722 211,485
-------- --------
Plan assets in excess of projected benefit obligations........ 71,658 106,744
Amounts not recognized in the financial statements:
Unrecognized net assets from July 1, 1986................... (14,509) (12,329)
Unrecognized prior service costs............................ 826 672
Unrecognized net gains...................................... (52,312) (87,118)
-------- --------
Prepaid pension costs......................................... $ 5,663 $ 7,969
======== ========
</TABLE>
Prepaid pension costs are included in other noncurrent assets.
F-13
<PAGE> 159
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Plan assets consist principally of common stocks, corporate bonds and U.S.
government securities. The significant actuarial assumptions used to determine
the present value of pension benefit obligations were as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Discount rate....................................................... 7.50% 7.50%
Rate of future salary increases..................................... 4.50% 4.50%
Rate of return on plan assets....................................... 9.00% 9.00%
</TABLE>
Pension plans of international subsidiaries are not required to report to
U.S. government agencies pursuant to ERISA. The components of net pension cost
for the Company's significant international defined benefit pension plans were
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ 231 $ 735 $ 877
Interest cost............................................. 967 1,573 1,480
Return on plan assets..................................... -- (661) (709)
Net amortization and deferral............................. -- (45) (45)
-------- -------- --------
Net pension cost.......................................... $1,198 $1,602 $1,603
======== ======== ========
</TABLE>
The return on plan assets and the net amortization and deferral in 1995
were not significant.
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997
------------------ ------------------
ASSETS ABO ASSETS ABO
EXCEED EXCEED EXCEED EXCEED
ABO ASSETS ABO ASSETS
------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Plan assets, at fair value............................. $8,274 $ -- $9,417 $ --
------ -------- ------ --------
Present value of accumulated benefit obligations
(ABO):...............................................
Vested benefits...................................... 5,602 10,922 5,643 11,863
Nonvested benefits................................... 13 2,618 13 1,465
------ -------- ------ --------
Accumulated benefit obligations........................ 5,615 13,540 5,656 13,328
Effect of future salary increases...................... 1,383 584 1,393 210
------ -------- ------ --------
Projected benefit obligations.......................... 6,998 14,124 7,049 13,538
------ -------- ------ --------
Plan assets greater (less) than projected benefit
obligations.......................................... 1,276 (14,124) 2,368 (13,538)
Amounts not recognized in the financial statements:
Unrecognized net assets.............................. (905) -- (850) --
Unrecognized net gains............................... (413) -- (1,550) --
------ -------- ------ --------
Net pension liability.................................. $ (42) $(14,124) $ (32) $(13,538)
====== ======== ====== ========
</TABLE>
Accrued pension costs are included in other noncurrent liabilities. Plan
assets consist principally of common stocks, corporate bonds and government
securities.
F-14
<PAGE> 160
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The significant actuarial assumptions used to determine the present value
of pension benefit obligations for international plans were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Discount rate.......................................... 8.00%-7.50% 8.00%-7.00%
Rate of future salary increases........................ 5.50%-4.50% 5.50%-4.00%
Rate of return on plan assets.......................... 9.00% 9.00%
</TABLE>
Total pension cost for U.S. and international plans amounted to $0.8
million, $2.1 million and $0.6 million in 1995, 1996 and 1997, respectively.
NOTE 10. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company presently provides varying levels of postretirement health care
and life insurance benefits to most U.S. employees. Postretirement health care
benefits are available to employees and their spouses retiring at or after age
65 with five or more years of service after age 40. Employees (and their
spouses) retiring under age 65 before January 1, 1998, with 20 or more years of
service after age 40 also are eligible to receive postretirement health care
benefits. Beginning with retirements on or after January 1, 1998, Kennametal's
portion of the costs of postretirement health care benefits will be capped at
1996 levels.
The components of other postretirement benefit costs for the Company's U.S.
plans were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................ $ 959 $1,100 $1,220
Interest cost........................................... 2,626 2,661 2,427
Net amortization and deferral........................... (32) -- (70)
------ ------ ------
Other postretirement benefit costs...................... $3,553 $3,761 $3,577
====== ====== ======
</TABLE>
Accumulated postretirement benefit obligations and amounts recognized in
the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Present value of accumulated benefit obligations:
Retirees..................................................... $21,333 $17,446
Fully eligible active participants........................... 6,862 2,742
Other active participants.................................... 9,321 14,392
------- -------
Accumulated benefit obligations................................ 37,516 34,580
Plan assets, at fair value..................................... -- --
------- -------
Accumulated benefit obligations in excess of plan assets....... 37,516 34,580
Unrecognized net gains......................................... 626 4,340
------- -------
Accrued postretirement benefits................................ $38,142 $38,920
======= =======
</TABLE>
Included in other noncurrent liabilities were accrued postretirement
benefits of $35.1 million and $36.0 million at June 30, 1996 and 1997,
respectively.
F-15
<PAGE> 161
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The significant actuarial assumptions used to determine the present value
of accumulated postretirement benefit obligations were as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Discount rate...................................................... 7.50% 7.50%
Rate of increase in health care costs:
Initial rate..................................................... 8.50% 8.00%
Ultimate rate in 2003 and after.................................. 5.00% 5.00%
</TABLE>
A 1 percent increase in the health care cost trend rate would have
increased other postretirement benefit costs by $0.1 million in 1997 and the
accumulated benefit obligation by $1.0 million at June 30, 1997.
The Company provides for postemployment benefits pursuant to SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The Company accrues the
cost of separation and other benefits provided to former or inactive employees
after employment but before retirement. Postemployment benefit costs were not
significant in 1995, 1996 and 1997, respectively.
NOTE 11. RESTRUCTURING CHARGE
On April 29, 1996, the Board of Directors approved the Company's plan (the
Plan) to relocate its North America Metalworking Headquarters from Raleigh,
North Carolina, to Latrobe, Pennsylvania. In connection with the Plan, the
Company is constructing a new world headquarters at an estimated cost of $20
million. The relocation was made to globalize key functions and to provide a
more efficient corporate structure. The action affected approximately 300
employees in Raleigh, North Carolina, all of whom were offered the opportunity
to move to Latrobe, Pennsylvania. As a result, a pretax charge of $2.0 million
was recorded in the fourth quarter of fiscal 1996. The charge was taken to cover
the one-time costs of employee separation arrangements and early retirement
costs.
The costs resulting from the relocation of employees, hiring and training
new employees, and other costs resulting from the temporary duplication of
certain operations were not included in the one-time charge and will be included
in operating expenses as incurred. The costs related to these items were
estimated to be approximately $9.0 million pretax, $4.7 million that was
recorded in fiscal 1997 and the remainder that will be incurred in fiscal 1998.
During the fourth quarter of fiscal 1996, the Company also recorded a
one-time pretax charge of $0.7 million related to the closure of a manufacturing
facility in Canada. The supply of products produced at this location will be
continued from other Company locations. The restructuring was substantially
complete in 1997.
NOTE 12. FINANCIAL INSTRUMENTS
FAIR VALUE. The Company had $21.9 million in cash and equivalents at June
30, 1997, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of term debt was $44.9 million at June 30, 1997.
Fair value was determined using discounted cash flow analysis and the Company's
incremental borrowing rates for similar types of arrangements.
OFF-BALANCE-SHEET RISK. The Company uses forward foreign exchange
contracts in the normal course of business to hedge foreign currency exposures
of underlying receivables and payables. These financial instruments involve
credit risk in excess of the amount recognized in the financial statements. The
Company controls credit risk through credit evaluations, limits and monitoring
procedures. There were no financial instruments with significant
off-balance-sheet risk at June 30, 1997.
F-16
<PAGE> 162
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
temporary cash investments and trade receivables. By policy, the Company makes
temporary cash investments with high credit quality financial institutions. With
respect to trade receivables, concentrations of credit risk are significantly
reduced because the Company serves numerous customers in many industries and
geographic areas. As of June 30, 1997, the Company had no significant
concentrations of credit risk.
NOTE 13. STOCK OPTIONS
Under stock option plans approved by shareholders in 1996, 1992 and 1988,
stock options generally are granted to eligible employees at fair market value
at the date of grant. Options are exercisable under specified conditions for up
to 10 years from the date of grant. No options may be granted under the 1988
plan after October 1998, no options may be granted under the 1992 plan after
October 2002, and no options may be granted under the 1996 plan after October
2006. No charges to income have resulted from the operation of the plans.
Under provisions of the plans, participants may deliver Kennametal stock in
payment of the option price and receive credit for the fair market value of the
shares on the date of delivery. Shares valued at $0.4 million (13,728 shares),
$0.9 million (22,740 shares) and $0.5 million (11,684 shares) were delivered in
1995, 1996 and 1997, respectively.
Under the 1996, 1992 and 1988 plans, shares may be awarded to eligible
employees without payment. The respective plans specify such shares are awarded
in the name of the employee, who has all the rights of a shareholder, subject to
certain restrictions or forfeitures. Such awards were not significant in 1995,
1996 and 1997.
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
Opinion 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 expense had been determined
based on the estimated fair value of options granted in 1996 and 1997,
consistent with the methodology in SFAS No. 123, the effect on the Company's
1996 and 1997 net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income:
As reported.................................................. $69,732 $72,032
Pro forma.................................................... 65,610 70,140
Earnings per share:
As reported.................................................. $ 2.62 $ 2.71
Pro forma.................................................... 2.46 2.64
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate............................................ 6.28% 6.64%
Expected life (years).............................................. 5 5
Expected volatility................................................ 30.2% 27.9%
Expected dividend yield............................................ 1.9% 2.0%
</TABLE>
F-17
<PAGE> 163
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Stock option activity for 1995, 1996 and 1997 is set forth below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER OF SHARES OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ---------------------------------------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year.................................. 475,650 $20.53 521,148 $20.55 994,244 $30.41
Granted................................. 204,950 24.75 580,500 36.86 327,000 31.42
Exercised............................... (157,452) 16.94 (105,904) 17.16 (116,877) 22.65
Lapsed and forfeited.................... (2,000) 16.94 (1,500) 37.06 (35,000) 36.45
-------- -------- -------- -------- --------- --------
Options outstanding, end of year........ 521,148 $20.55 994,244 $30.41 1,169,367 $30.85
-------- -------- -------- -------- --------- --------
Options exercisable, end of year........ 281,482 $24.75 960,970 $30.88 1,132,111 $31.16
-------- -------- -------- -------- --------- --------
Weighted average fair value of options
granted during the year............... N/A $11.56 $ 9.48
======== ======== ========
</TABLE>
Stock options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF LIFE EXERCISE EXERCISE
EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
------------------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$14.06-$16.34 6,463 1.94 $15.73 6,463 $15.73
16.94 102,000 2.59 16.94 74,744 16.94
20.53 100,000 6.35 20.53 100,000 20.53
24.75 163,904 7.15 24.75 163,904 24.75
30.81 260,000 9.08 30.81 250,000 30.81
31.06 20,000 8.33 31.06 20,000 31.06
34.06 61,000 9.33 34.06 61,000 34.06
37.06 456,000 8.08 37.06 456,000 37.06
--------- ---- ------ --------- ------
1,169,367 7.62 $30.85 1,132,111 $31.16
========= ==== ====== ========= ======
</TABLE>
NOTE 14. ENVIRONMENTAL MATTERS
The Company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In addition,
the Company has been named as a potentially responsible party at several
Superfund sites in the United States. However, it is management's opinion, based
on its evaluations and discussions with outside counsel and independent
consultants, that the ultimate resolution of these environmental matters will
not have a material adverse effect on the results of operations, financial
position or cash flows of the Company.
The Company maintains a Corporate Environmental, Health and Safety (EH&S)
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the Company has established an EH&S administrator at each of its
domestic manufacturing facilities. The Company's financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of environmental
projects and contingencies. On a quarterly and annual basis, management
establishes or adjusts financial provisions and reserves for environmental
contingencies in accordance with SFAS No. 5, "Accounting for Contingencies."
F-18
<PAGE> 164
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. SHAREHOLDER RIGHTS PLAN
Pursuant to the Company's Shareholder Rights Plan, one-half of a right is
associated with each share of capital stock. Each right entitles a shareholder
to buy 1/100th of a share of a new series of preferred stock at a price of $105
(subject to adjustment).
The rights will be exercisable only if a person or group of persons
acquires or intends to make a tender offer for 20 percent or more of the
Company's capital stock. If any person acquires 20 percent of the capital stock,
each right will entitle the shareholder to receive that number of shares of
capital stock having a market value of two times the exercise price. If the
Company is acquired in a merger or other business combination, each right will
entitle the shareholder to purchase at the exercise price that number of shares
of the acquiring Company having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption by the
Company at $0.01 per right.
NOTE 16. ACQUISITIONS
Fiscal 1997 results included sales of approximately $16 million from five
companies acquired during the year for a total consideration of approximately
$19 million. The acquisitions were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating results
of each business from the date of acquisition. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
significant.
F-19
<PAGE> 165
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17. SEGMENT DATA
The Company operates predominantly as a tooling supplier specializing in
powder metallurgy, which represents a single business segment. The following
table presents the Company's operations by geographic area:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
United States............................................ $ 726,977 $ 784,295 $ 867,321
Europe................................................... 311,178 328,732 306,065
Other international...................................... 91,269 114,432 125,856
---------- ---------- ----------
Total.................................................... 1,129,424 1,227,459 1,299,242
---------- ---------- ----------
Intersegment transfers:
United States............................................ 92,939 97,343 100,000
Europe................................................... 41,252 38,452 33,629
Other international...................................... 11,360 11,701 9,270
---------- ---------- ----------
Total.................................................... 145,551 147,496 142,899
---------- ---------- ----------
Net sales.................................................. $ 983,873 $1,079,963 $1,156,343
========== ========== ==========
Operating income:
United States............................................ $ 95,228 $ 79,517 $ 90,421
Europe................................................... 22,977 27,614 18,876
Other international...................................... 13,792 15,247 15,949
Eliminations............................................. (5,024) (527) 1,779
---------- ---------- ----------
Total operating income..................................... 126,973 121,851 127,025
---------- ---------- ----------
Interest expense......................................... (12,793) (11,296) (10,393)
Other income............................................. 54 4,821 1,531
---------- ---------- ----------
Income before income taxes and minority interest........... $ 114,234 $ 115,376 $ 118,163
========== ========== ==========
Identifiable assets:
United States............................................ $ 462,812 $ 495,452 $ 560,631
Europe................................................... 284,378 239,594 210,711
Other international...................................... 64,233 83,130 79,477
Eliminations............................................. (43,419) (37,884) (10,390)
Corporate................................................ 13,605 19,199 28,880
---------- ---------- ----------
Total assets............................................... $ 781,609 $ 799,491 $ 869,309
========== ========== ==========
</TABLE>
Intersegment transfers are accounted for at arm's-length prices, reflecting
prevailing market conditions within the various geographic areas. Such sales and
associated costs are eliminated in the consolidated financial statements.
Identifiable assets are those assets that are identified with the
operations in each geographic area. Corporate assets consist mainly of cash and
cash equivalents, investments in affiliated companies and other assets.
Sales to a single customer did not aggregate 10 percent or more of total
sales. Export sales from U.S. operations to unaffiliated customers were $27.4
million, $21.4 million and $15.1 million in 1995, 1996 and 1997, respectively.
F-20
<PAGE> 166
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18. SUBSEQUENT EVENTS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom, and Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. The companies had
aggregate annual sales of approximately $66 million in 1996. The acquisitions
were accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results of each business from the
date of acquisition.
On October 10, 1997, Kennametal and Kennametal Acquisition Corp.
(Acquisition Corp.) entered into the Merger Agreement with Greenfield pursuant
to which Acquisition Corp. purchased at $38 per share on November 17, 1997,
approximately 16,179,976 shares (98% of the outstanding) of Greenfield's common
stock. The Merger occurred on November 18, 1997, and Greenfield became a
wholly-owned subsidiary of Kennametal on that date. The total purchase price for
the acquisition of Greenfield (including estimated transaction costs and assumed
Greenfield debt and convertible redeemable preferred securities of approximately
$320 million) is estimated to be $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November
18, 1997, entered into the New Bank Credit Facility. As of November 18, 1997,
the Company had borrowed $500 million in term loans and approximately $300
million in revolving credit loans under the New Bank Credit Facility. The
proceeds from these loans were principally used to pay for the shares of common
stock of Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of Greenfield and to
refinance certain indebtedness of the Company. Subject to certain conditions,
the New Bank Credit Facility permits revolving credit loans of up to $900
million for working capital requirements, capital expenditures, and general
corporate purposes. The New Bank Credit Facility is secured by all of the stock
of certain of Kennametal's significant domestic subsidiaries, by guarantees of
certain of such subsidiaries and by 65% of the stock of Kennametal's significant
foreign subsidiaries. The New Bank Credit Facility contains various restrictive
covenants and affirmative covenants requiring the maintenance of certain
financial ratios. The term loans under the New Bank Credit Facility are subject
to mandatory amortization commencing on November 30, 1998, and all loans mature
on August 31, 2002. Proceeds from anticipated common stock offerings, a FELINE
PRIDES offering and a senior debt offering will be used to prepay loans and,
correspondingly, permanently reduce commitments of the lenders under the New
Bank Credit Facility. If all such offerings are consummated, the Company intends
to replace the New Bank Credit Facility with a $500 million senior unsecured
credit facility, although there can be no assurance that the Company will be
able to replace the New Bank Credit Facility.
F-21
<PAGE> 167
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Greenfield Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Greenfield Industries, Inc. and its subsidiaries at December 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
January 30, 1997
F-22
<PAGE> 168
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $271,787 $420,188 $510,094 $384,089 $419,480
Cost of sales................................. 180,974 288,158 357,203 266,835 295,167
-------- -------- -------- -------- --------
Gross profit.................................. 90,813 132,030 152,891 117,254 124,313
Selling, general and administrative
expenses.................................... 50,229 70,952 88,944 66,367 77,777
Restructuring costs........................... 1,300 -- 4,000 4,000 --
-------- -------- -------- -------- --------
Operating income.............................. 39,284 61,078 59,947 46,887 46,536
Interest expense.............................. 3,169 8,223 11,049 8,729 9,699
Dividends at 6% per annum on
Company-obligated, mandatorily redeemable
convertible preferred securities of
subsidiary Greenfield Capital Trust holding
solely convertible subordinated debentures
of the Company.............................. -- -- 4,734 3,009 5,175
-------- -------- -------- -------- --------
Income before provision for income taxes...... 36,115 52,855 44,164 35,149 31,662
Provision for income taxes.................... 14,106 21,390 17,975 14,264 13,003
-------- -------- -------- -------- --------
Net income.................................... $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
======== ======== ======== ======== ========
Earnings per common share:
Primary..................................... $ 1.35 $ 1.94 $ 1.60 $ 1.28 $ 1.14
Fully diluted(1)............................ $ -- $ -- $ 1.59 $ 1.25 $ 1.13
Weighted average common and common equivalent
shares outstanding:
Primary..................................... 16,250 16,252 16,328 16,313 16,404
Fully diluted(1)............................ -- -- 18,247 17,941 19,192
Dividends per common share.................... $ 0.09 $ 0.13 $ 0.17 $ 0.12 $ 0.15
</TABLE>
- ---------
(1) For the years ended December 31, 1994 and 1995, there was no dilutive
effect.
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE> 169
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 5,258 $ 1,721 $ --
Accounts receivable, net................................. 63,618 83,199 98,100
Inventories, net......................................... 109,769 152,659 182,524
Prepaid expenses and other............................... 4,069 8,034 5,875
------- ------- -------
Total current assets.................................. 182,714 245,613 286,499
Property, plant and equipment, net......................... 109,022 144,300 169,179
Goodwill, net.............................................. 98,795 169,958 180,187
Other assets, net.......................................... 7,932 2,773 2,302
------- ------- -------
$398,463 $562,644 $ 638,167
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 633 $ 513 $ 6,632
Accounts payable......................................... 24,586 22,392 31,026
Accrued liabilities...................................... 33,688 35,411 41,561
------- ------- -------
Total current liabilities............................. 58,907 58,316 79,219
Long-term debt............................................. 140,198 162,625 197,734
Deferred taxes............................................. 4,207 9,524 10,302
Other long-term liabilities................................ 15,891 16,451 18,891
------- ------- -------
Total liabilities..................................... 219,203 246,916 306,146
------- ------- -------
Commitments and contingencies (Note 14)....................
Company-obligated, mandatorily redeemable convertible
preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures
of the Company........................................... -- 115,000 115,000
------- ------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, no shares issued and outstanding..........
Common stock, $.01 par value, 100,000,000 shares
authorized, 16,260,377, 16,374,925 and 16,445,757
shares issued and outstanding, respectively........... 163 164 164
Additional paid-in capital and other..................... 111,615 109,759 111,331
Retained earnings........................................ 69,014 92,425 108,622
Cumulative translation adjustment........................ (1,532) (1,620) (3,096)
------- ------- -------
Total stockholders' equity............................ 179,260 200,728 217,021
------- ------- -------
$398,463 $562,644 $ 638,167
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE> 170
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN CAPITAL RETAINED TRANSLATION
STOCK AND OTHER EARNINGS ADJUSTMENT TOTAL
-------- --------------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............. $ 159 $ 107,338 $ 19,075 $ (862) $125,710
Net income............................. -- -- 22,009 -- 22,009
Exercise of stock options and tax
benefits
relating thereto..................... 1 1,288 -- -- 1,289
Dividends declared and paid............ -- -- (1,435) -- (1,435)
Partial repayment of stock
subscriptions receivable............. -- 128 -- -- 128
Cumulative translation adjustment...... -- -- -- 202 202
-------- -------- -------- -------- --------
Balance, December 31, 1994............. 160 108,754 39,649 (660) 147,903
Net income............................. -- -- 31,465 -- 31,465
Exercise of stock options and tax
benefits relating thereto............ 3 3,520 -- -- 3,523
Dividends declared and paid............ -- -- (2,100) -- (2,100)
Additional minimum pension liability... -- (783) -- -- (783)
Partial repayment of stock
subscriptions receivable............. -- 124 -- -- 124
Cumulative translation adjustment...... -- -- -- (872) (872)
-------- -------- -------- -------- --------
Balance, December 31, 1995............. 163 111,615 69,014 (1,532) 179,260
Net income............................. -- -- 26,189 -- 26,189
Exercise of stock options and tax
benefits relating thereto............ 1 1,218 -- -- 1,219
Dividends declared and paid............ -- -- (2,778) -- (2,778)
Partial repayment of stock
subscriptions receivable and other... -- (115) -- -- (115)
Executive restricted stock awards...... -- 761 -- -- 761
Issuance costs of mandatorily
redeemable convertible preferred
securities........................... -- (4,254) -- -- (4,254)
Additional minimum pension liability... -- 534 -- -- 534
Cumulative translation adjustment...... -- -- -- (88) (88)
-------- -------- -------- -------- --------
Balance, December 31, 1996............. 164 109,759 92,425 (1,620) 200,728
Net income (unaudited)................. -- -- 18,659 -- 18,659
Exercise of stock options and tax
benefits relating thereto
(unaudited).......................... -- 753 -- -- 753
Dividends declared and paid
(unaudited).......................... -- -- (2,462) -- (2,462)
Partial repayment of stock
subscriptions receivable
(unaudited).......................... -- 133 -- -- 133
Executive restricted stock awards
(unaudited).......................... -- 686 -- -- 686
Cumulative translation adjustment
(unaudited).......................... -- -- -- (1,476) (1,476)
-------- -------- -------- -------- --------
Balance, September 30, 1997
(unaudited).......................... $ 164 $ 111,331 $108,622 $ (3,096) $217,021
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-25
<PAGE> 171
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- --------- --------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the
effects of acquisitions:
Depreciation.......................................... 9,305 11,319 14,259 10,967 13,423
Amortization.......................................... 1,491 2,908 4,620 3,274 3,755
Deferred income taxes................................. 3,606 5,759 8,390 2,514 3,848
Tax benefits relating to stock options................ 1,210 3,210 315 302 197
Other................................................. 664 (811) 1,356 (821) 1,625
Changes in operating assets and liabilities:
Accounts receivable, net............................ (3,859) (6,080) (7,126) (2,874) (7,683)
Inventories......................................... (1,137) (21,452) (22,073) (17,242) (19,327)
Prepaid expenses and other.......................... 3,251 (1,440) (2,639) (2,411) 2,479
Accounts payable.................................... 1,244 3,912 (9,513) (17,949) 306
Accrued liabilities................................. 2,641 (11,403) (11,620) (1,358) 1,282
-------- -------- --------- --------- --------
Net cash provided by (used in) operating
activities...................................... 40,425 17,387 2,158 (4,713) 18,564
-------- -------- --------- --------- --------
Cash flows from investing activities:
Capital expenditures.................................... (13,141) (26,847) (29,185) (21,789) (26,189)
Proceeds from the sale of fixed assets.................. 325 1,219 2,018 2,352 1,733
Purchase of businesses, net of cash acquired............ (73,639) (24,434) (111,183) (96,503) (33,725)
Investment in Rule...................................... -- (5,611) -- -- --
-------- -------- --------- --------- --------
Net cash used in investing activities............. (86,455) (55,673) (138,350) (115,940) (58,181)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Proceeds from borrowings................................ 71,800 123,950 140,743 128,375 49,673
Payments on borrowings.................................. (25,915) (82,148) (117,559) (116,660) (7,258)
Net proceeds from issuance of 6% Company-obligated
mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust
holding solely convertible junior subordinated
debentures of the Company............................. -- -- 110,746 110,775 --
Dividends paid on common stock.......................... (1,435) (2,100) (2,778) (1,959) (2,462)
Other................................................... (26) (299) 1,381 2,571 650
-------- -------- --------- --------- --------
Net cash provided by financing activities......... 44,424 39,403 132,533 123,102 40,603
-------- -------- --------- --------- --------
Effect of exchange rate changes on cash................... (1,160) 145 122 (970) (2,707)
-------- -------- --------- --------- --------
Net (decrease) increase in cash........................... (2,766) 1,262 (3,537) 1,479 (1,721)
-------- -------- --------- --------- --------
Cash at beginning of period............................... 6,762 3,996 5,258 5,258 1,721
-------- -------- --------- --------- --------
Cash at end of period..................................... $ 3,996 $ 5,258 $ 1,721 $ 6,737 $ --
======== ======== ========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 2,643 $ 7,317 $ 10,937
Dividends on mandatorily redeemable convertible
preferred securities................................ -- -- 4,734
Income taxes.......................................... 7,699 16,797 18,601
Supplemental schedule of noncash investing and financing
activities:
Assets obtained under capital leases.................... 241 -- --
The Company purchased several companies as detailed in
Note 3 in 1994, 1995 and 1996. In conjunction with the
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired....................... $ 56,284 $ 26,199 $ 59,370
Fair value assigned to goodwill..................... 60,940 6,009 76,379
Cash paid........................................... (73,639) (24,434) (111,183)
-------- -------- ---------
Liabilities assumed................................. $ 43,585 $ 7,774 $ 24,566
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-26
<PAGE> 172
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS
Greenfield Industries, Inc. (Greenfield or the Company) is a global
manufacturer of expendable products for material cutting, material removal and
wear applications used in various industries. The Company also manufactures a
limited number of products (primarily bilge pumps) for the marine industry. The
Company markets its products through six product groups which are as follows:
(1) industrial products, (2) engineered products, (3) energy and construction
products, (4) electronics products, (5) consumer products, and (6) marine
products. The majority of the Company's products are made from either high-speed
steel or tungsten carbide. The Company's largest concentration of business is in
North America but it sells its products throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the consolidated
financial statements conform to generally accepted accounting principles, and
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
The significant accounting policies followed by the Company are described
below.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL INFORMATION
The interim consolidated financial information at September 30, 1997 and
for the nine months ended September 30, 1996 and 1997 and related disclosures in
the notes herein (including Note 18) is unaudited. However, in the opinion of
management, such information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the periods presented. The interim results, however,
are not necessarily indicative of the results for any future period.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign subsidiaries are maintained in their
respective local currencies. The accompanying consolidated financial statements
have been translated and adjusted to reflect U.S. dollars on the bases presented
below.
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. Adjustments resulting from the process of
translating the consolidated amounts into U.S. dollars are accumulated in a
separate translation adjustment account included in stockholders' equity. Common
stock and additional paid-in capital are translated at historical U.S. dollar
equivalents in effect at the date of acquisition. Foreign currency transaction
gains and losses are included in earnings currently. The Company recognized net
foreign currency transaction gains of $227, $540 and $599 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-27
<PAGE> 173
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CASH
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash. Cash overdrafts, if any, on the Company's
disbursement accounts are included in the balances outstanding under the
Company's revolving credit facilities.
CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors and end-users in the
industrial, energy and construction, electronics, engineered products, consumer
and marine markets. While most of the Company's business activity is with
customers located within North America, the Company also serves customers in
Europe and the Far East. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses have been
within management's expectations. At December 31, 1996, the Company had no
significant concentrations of credit risk.
RELATIONSHIPS WITH SUPPLIERS
The Company purchases tungsten carbide materials from multiple suppliers,
for which alternative suppliers also exist and are adequate. Although the
Company purchases the majority of its domestic high-speed steel requirements
from a single supplier, the Company believes that the supply of steel and the
number of alternative suppliers are adequate. The Company considers its
relationships with its primary suppliers to be strong.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, for substantially all domestic
inventories. For various tax and statutory reasons, inventories of the Company's
foreign subsidiaries are stated at first-in, first-out (FIFO) cost. The effects
on the consolidated financial position and results of operations from applying
the FIFO method (versus the LIFO method) to certain inventories are immaterial.
If the FIFO method (which approximates replacement cost) had been used in
determining cost for all inventories, inventories would have been approximately
$5,181 and $5,675 higher at December 31, 1995 and 1996, respectively.
Inventories include the cost of materials, direct labor and manufacturing
overhead. Obsolete or unsaleable inventories are reflected at their estimated
net realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 40 years. Properties held under capital leases are recorded at
the present value of the noncancelable lease payments over the term of the lease
and are amortized over the shorter of the lease term or the estimated useful
lives of the assets. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of net assets acquired
in business combinations is capitalized and amortized on a straight-line basis
over the estimated period benefited. The amortization period for all
acquisitions to date is 40 years. Amortization expense for the years ended
December 31, 1994, 1995 and 1996 was approximately $1,221, $2,636 and $4,279,
respectively. Accumulated amortization at December 31, 1995 and 1996 was
approximately $7,592 and $11,849, respectively. The carrying value of goodwill
is assessed for recoverability by management based on current and anticipated
conditions, including expected cash flows and
F-28
<PAGE> 174
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
operating results generated by the underlying tangible assets. Management
believes that there has been no impairment at December 31, 1996.
OTHER ASSETS
Other assets are primarily comprised of debt issuance and trademark costs.
At December 31, 1995, other assets also included an investment in Rule
Industries, Inc. stock as further described in Note 3. Debt issuance costs are
being amortized on a straight-line basis over the life of the related obligation
and trademarks are being amortized on a straight-line basis over 40 years.
Amortization expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $270, $272 and $341, respectively. Accumulated amortization at
December 31, 1995 and 1996 was $3,471 and $3,568, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS
109, the deferred tax provision is determined using the liability method,
whereby deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted tax rates.
EARNINGS PER SHARE
Fully diluted earnings per share primarily reflect the effects of
conversion of the Company's mandatorily redeemable convertible preferred
securities and elimination of the related dividends, net of applicable income
taxes (see Note 5). Primary earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
and common equivalent shares outstanding during the period. Options under the
Company's employee and directors stock option plans are not included as common
stock equivalents for earnings per share purposes since they did not have a
material dilutive effect.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for using the
intrinsic value method, no compensation expense is recognized because the
options are granted with an exercise price equal to the market value of the
stock on the date of grant. For variable stock awards accounted for using the
intrinsic value method, compensation cost is estimated and recorded each period
from the date of grant to the measurement date based on the market value of the
stock at the end of each period.
During 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), became effective for the
Company. FAS 123 prescribes the recognition of compensation expense based on the
fair value of options or stock awards determined on the date of grant. However,
FAS 123 allows companies to continue to apply the valuation methods set forth in
APB 25. For companies that continue to apply the valuation methods set forth in
APB 25, FAS 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. See Note 12 for additional discussion.
F-29
<PAGE> 175
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS
The following table summarizes certain information regarding the Company's
acquisitions during the past three years:
<TABLE>
<CAPTION>
NET CASH
DATE BUSINESS PURCHASE PRICE
- --------------- ------------------------------------------------------- --------------
<S> <C> <C>
October 1994 Threads, Inc. and Hendersonville Industrial Tool Co.,
Inc.................................................... $ 5,272
November 1994 The Cleveland Twist Drill Company (CTD)................ $ 45,867
November 1994 Carbidie Corporation (Carbidie)........................ $ 22,500
January 1995 American Mine Tool Division of Valenite, Inc. (AMT).... $ 14,676
June 1995 Van Keuren, Inc........................................ $ 2,500
December 1995 Cleveland Europe Limited............................... $ 7,258
January 1996 Rule Industries, Inc. (Rule)........................... $ 84,046
June 1996 Boride Products, Inc................................... $ 8,768
July 1996 Arkansas Cutting Tools, a division of Production
Carbide & Steel Company................................ $ 4,872
December 1996 Bassett Rotary Tool Company............................ $ 13,497
March 1997 Hanita Metal Works, Ltd................................ $ 33,725
</TABLE>
During the past three years, the Company has made several acquisitions
which have significantly expanded its product lines. These acquisitions were
each accounted for using the purchase method of accounting and financed
primarily through bank borrowings, resulting in an increase in the Company's
outstanding debt. Results of operations of each acquired company have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of each acquisition was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the date
of acquisition. The excess of purchase price over the estimated fair value of
net assets acquired was, in each instance, recorded as goodwill. Except for
Rule, CTD and Carbidie, the pro forma effects, individually and collectively, of
the acquisitions on the Company's consolidated results of operations and
financial position are not material.
The following table sets forth pro forma information for the Company as if
the acquisitions of Rule, CTD and Carbidie had taken place on January 1, 1994
and the acquisition of Rule had taken place on January 1, 1995, respectively.
This information is unaudited and does not purport to represent actual revenue,
net income and earnings per share had the acquisitions actually occurred on
January 1, 1994 and 1995, respectively. The pro forma effects of Rule, had the
acquisition taken place on January 1, 1996, are not material.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1994 1995
-------- --------
<S> <C> <C>
Net sales................................................ $419,662 $484,600
Net income............................................... $ 24,917 $ 31,479
Primary earnings per common share........................ $ 1.53 $ 1.94
</TABLE>
In connection with a definitive merger agreement between Rule and the
Company, on September 11, 1995 Greenfield exercised its option to acquire
630,000 shares of Rule common stock for approximately $5,611, including
acquisition costs. The cost of the Rule common stock is reflected as other
assets on the December 31, 1995 consolidated balance sheet. On January 12, 1996,
Greenfield acquired the remaining outstanding shares of Rule common stock as
discussed further below.
F-30
<PAGE> 176
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with the Company's acquisition of Rule in January 1996, the
Company recorded a restructuring reserve of $2,600 in purchase accounting
primarily related to the closing of two Rule facilities (including the corporate
office) and the involuntary termination of a substantial number of Rule
employees. Of the $2,600 reserve, $1,240 related to employee severance costs,
$346 related to the closure of the two facilities, and $1,014 related to other
nonrecurring costs associated with terminating certain Rule operations. This
restructuring has resulted in a reduction in personnel and the elimination of
certain duplicate functions. The employee severance costs related to the
reduction of approximately 62 employees from the acquisition date. Of the total
$2,600 reserve, substantially all of the costs had been paid as of December 31,
1996.
The Company, as part of the acquisition of CTD, recorded a restructuring
and plant consolidation liability of $10,480 in purchase accounting relating to
the consolidation of certain facilities of CTD into existing facilities of the
Company. The $10,480 liability included $8,430 in costs associated with plant
closures, $2,000 in severance pay and $50 in other costs. Substantially all of
these costs had been paid as of December 31, 1996.
On March 27, 1997, the Company acquired the outstanding shares of Hanita
Metal Works, Ltd., an Israeli-based company, and its U.S. subsidiary Hanita
Cutting Tools, Inc. (collectively, Hanita) for approximately $20,800 (including
cash acquired) and assumed indebtedness of approximately $14,600. Hanita, with
its primary manufacturing, sales and distribution operations in Israel, is a
leading manufacturer of high-quality, high performance end mills and other
cutting tools for the metalworking industry. Hanita also sells and distributes
products around the world, including the United States. The acquisition was
accounted for using the purchase method of accounting and was financed through
the Company's existing unsecured credit facility. For the year ended December
31, 1996, Hanita had net sales of approximately $27,000. The pro forma effects
of the acquisition on the Company's results of operations are not material. The
results of operations of Hanita are included in the Company's consolidated
financial statements from the date of acquisition.
F-31
<PAGE> 177
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
SENIOR NOTES PAYABLE TO INSTITUTIONAL INVESTORS:
Principal payable in annual installments of $10,715
commencing October 15, 1999 with a final payment of
$10,710 on October 15, 2005; interest payable
semi-annually at 7.31%; unsecured........................ $ 75,000 $ 75,000 $ 75,000
INDUSTRIAL REVENUE BONDS:
Principal due March 1, 2015; interest payable monthly at
4.3% at December 31, 1996; secured by related property
and equipment (repaid May 1997).......................... 4,178 5,602 --
Principal due August 1, 2015; interest payable monthly at
4.5% at December 31, 1996; secured by related property
and equipment............................................ 3,287 3,751 4,737
Principal due April 3, 2009; interest payable monthly at
3.85% at September 30, 1997; secured by related property
and equipment............................................ -- -- 1,222
NOTES PAYABLE TO BANKS:
Principal due in annual installments of approximately $37;
interest payable semi-annually at 6.0%; secured by the
mortgage on the property of Kemmer AG, an indirect,
wholly-owned subsidiary.................................. 1,802 1,334 1,036
Principal due in varying installments through 2001;
interest at rates ranging from 5.6% to 8.85%; secured by
property and equipment................................... -- 14 14,224
Foreign currency denominated notes due in varying
installments through 2001; interest at rates ranging from
2% to 16.5%; secured by property and equipment........... -- -- 2,445
REVOLVING CREDIT FACILITIES:
Multi-currency facility; payable in full on December 9,
2001; interest payable quarterly at LIBOR plus a
specified percentage, or at a base rate as set forth
within the loan agreement. The interest rate under each
option is determined by the Company's ratio of total
indebtedness to cash flow (6.3% to 8.3% at December 31,
1996); unsecured
Domestic.............................................. -- 60,500 89,600
Foreign currency...................................... -- 15,930 15,407
Domestic facility (replaced in December 1996).............. 34,400 -- --
Foreign currency denominated facility (replaced in December
1996).................................................... 20,709 -- --
CAPITAL LEASE OBLIGATIONS.................................... 1,455 1,007 695
-------- -------- --------
140,831 163,138 204,366
Less current portion of long-term debt and amounts due on
demand, including $590, $462 and $316 of capital lease
obligations at December 31, 1995, and 1996 and at
September 30, 1997, respectively......................... (633) (513) (6,632)
-------- -------- --------
$140,198 $162,625 $ 197,734
======== ======== ========
</TABLE>
On April 3, 1997, the Company issued $7,000 City of Pine Bluff, Arkansas
Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Greenfield
Industries, Inc. Project), Series 1997 (Arkansas Bonds) to pay for the planned
equipment purchases for its facility in Pine Bluff, Arkansas. The Arkansas Bonds
mature on
F-32
<PAGE> 178
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
April 3, 2009 and bear interest at 3.8% at September 30, 1997. The proceeds from
the Arkansas Bonds are held in trust until needed for the equipment purchases.
Approximately $1,222 has been received from the Arkansas Bonds as of September
30, 1997.
During December 1996, the Company replaced its existing foreign and
domestic unsecured revolving credit facilities. The new agreement provides for a
$130,000 multi-currency unsecured revolving facility and a $50,000 U.S. dollar
acquisition facility. The multi-currency revolving facility provides for loans
of up to DM 30,000 and Sterling 15,000. The facility requires commitment fees of
0.20% or 0.25% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the multi-
currency facility. As of December 31, 1996 and September 30, 1997, interest on
borrowings under the multi-currency facility ranged from 6.3% to 8.3% per annum
and from 4.0% to 8.2% per annum, respectively. At December 31, 1996 and
September 30, 1997, there was $53,570 and $24,993, respectively, available under
the multi-currency facility and $50,000 available under the acquisition
facility.
On October 23, 1995, the Company completed the private placement of $75,000
of senior unsecured notes (Notes) with various institutional investors. The
Notes, bearing interest payable quarterly at 7.31%, are due in 2005 with equal
payments beginning in 1999. The proceeds from the Notes were used to refinance
existing indebtedness and for general corporate purposes.
On August 16, 1995, the Company, through CTD, issued $7,200 in City of
Solon, Ohio Industrial Development Revenue Bonds (The Cleveland Twist Drill
Company Project) Series 1995 (Ohio Bonds) to pay for the construction of a new
manufacturing facility in Solon, Ohio. The Ohio Bonds mature on August 1, 2015
and bear interest at 4.5% at December 31, 1996. The proceeds from the Ohio Bonds
are held in trust until needed for the construction. Approximately $3,751 has
been received from the Ohio Bonds as of December 31, 1996.
On March 31, 1995, the Company, in conjunction with the South Carolina
Jobs-Economic Development Authority, issued $7,200 in Tax-Exempt Adjustable Mode
Economic Development Revenue Bonds (South Carolina Bonds) to pay for the
expansion of its facility in Clemson, South Carolina. The South Carolina Bonds
mature on March 1, 2015 and bear interest at 4.3% at December 31, 1996. The
proceeds from the South Carolina Bonds are held in trust until needed for the
expansion. Approximately $5,602 has been received from the South Carolina Bonds
as of December 31, 1996. The South Carolina Bonds were repaid in May 1997.
On March 15, 1995, the Company amended its existing $20,000 unsecured
foreign credit facility. The amended agreement provided for a DM 21 million
unsecured credit facility and a Sterling 4.5 million unsecured credit facility.
In connection with the acquisition of Cleveland Europe Limited, during December
1995, the Company amended the unsecured foreign credit facility, increasing the
Sterling Facility to Sterling 9.5 million. As discussed above, this foreign
revolving credit facility was replaced in December 1996.
During November 1994, the Company amended its existing unsecured credit
facility. The amended agreement provided for a $110,000 domestic revolving
facility and a $20,000 acquisition facility. The facility required commitment
fees of 0.25% or 0.375% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the
domestic and foreign revolving credit facilities. As discussed above, the
domestic revolving facility and the acquisition facility were replaced in
December 1996.
The financing agreements contain provisions which limit additional
borrowings and capital expenditures, require maintenance of certain debt to
capital and debt to cash flow ratios and net worth levels. At December 31, 1995
and 1996, and at September 30, 1997, the Company was in compliance with such
provisions.
F-33
<PAGE> 179
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1996, the minimum principal payments of long-term debt,
excluding capital lease obligations, for the five subsequent fiscal years are as
follows:
<TABLE>
<CAPTION>
INDUSTRIAL REVOLVING
NOTES REVENUE CREDIT
PAYABLE BONDS FACILITY TOTAL
------- ---------- --------- --------
<S> <C> <C> <C> <C>
1997.................................... $ 51 $ -- $ -- $ 51
1998.................................... 37 -- -- 37
1999.................................... 10,752 -- -- 10,752
2000.................................... 10,752 -- -- 10,752
2001.................................... 10,752 -- 76,430 87,182
2002 and thereafter..................... 44,004 9,353 -- 53,357
------- ------ ------- --------
$76,348 $9,353 $76,430 $162,131
======= ====== ======= ========
</TABLE>
The book value of long-term debt at December 31, 1996 approximates fair
value.
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
On April 24, 1996, the Company completed a private placement to
institutional investors of $115,000 of 6% Convertible Preferred Securities
(liquidation preference of $50 per Convertible Preferred Security). The
placement was made through the Company's wholly-owned subsidiary, Greenfield
Capital Trust (Trust), a newly-formed Delaware business trust. The securities
represent undivided beneficial ownership interests in the Trust. The sole asset
of the Trust is the $118,557 aggregate principal amount of the 6% Convertible
Junior Subordinated Deferrable Interest Debentures Due 2016 which were acquired
with the proceeds from the private placement of the Convertible Preferred
Securities and the offering and sale of Common Securities to the Company. The
Company's obligations under the Convertible Junior Subordinated Debentures, the
Indenture pursuant to which they were issued, the Amended and Restated
Declaration of Trust of the Trust and the Guarantee of Greenfield, taken
together, constitute a full and unconditional guarantee by Greenfield of amounts
due on the Convertible Preferred Securities. The Convertible Preferred
Securities are convertible at the option of the holders at any time into the
common stock of Greenfield at an effective conversion price of $41.25 per share
and are redeemable at Greenfield's option after April 15, 1999. The net proceeds
of the offering of approximately $110,746 were used by Greenfield to retire
indebtedness. A registration statement relating to resales of such Convertible
Preferred Securities was declared effective by the Securities and Exchange
Commission on September 26, 1996.
Upon consummation of the merger described in Note 18, the effective
conversion price of the Convertible Preferred Securities was adjusted to
approximately $36.05.
6. LEASE COMMITMENTS
The Company leases certain of its equipment under noncancelable lease
agreements. These agreements extend for a period of up to 42 months and contain
purchase or renewal options on a month-to-month basis. The leases are reflected
in the consolidated financial statements as capitalized leases in accordance
with the requirements of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases."
F-34
<PAGE> 180
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In addition, the Company has manufacturing facilities, office space and
certain equipment leased under noncancelable operating leases having remaining
terms of up to 14 years. Minimum lease payments under long-term capital and
operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997............................................................. $ 494 $ 4,989
1998............................................................. 274 5,359
1999............................................................. 141 2,638
2000............................................................. 246 2,285
2001............................................................. -- 1,881
2002 and thereafter.............................................. -- 10,283
------ -------
Total minimum lease payments..................................... 1,155 $27,435
=======
Less amount representing interest................................ (148)
------
Present value of net minimum lease payments, including current
portion of $462................................................ $ 1,007
======
</TABLE>
Rental expense incurred on the operating leases in 1994, 1995 and 1996
approximated $2,291, $2,840 and $6,070, respectively.
7. INCOME TAXES
Income (loss) before provision (benefit) for income taxes for the years
ended December 31 was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Domestic.............................................. $36,594 $45,213 $34,694
Foreign............................................... (479) 7,642 9,470
------- ------- -------
Total................................................. $36,115 $52,855 $44,164
======= ======= =======
</TABLE>
The provision (benefit) for income taxes charged to operations was as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current tax provision (benefit):
U.S. federal........................................ $ 7,940 $10,383 $ 8,587
State and local..................................... 1,660 2,101 1,471
Foreign............................................. 900 3,147 (473)
------- ------- -------
Total current provision............................... 10,500 15,631 9,585
======= ======= =======
Deferred tax provision (benefit):
U.S. federal........................................ 4,504 4,637 3,820
State and local..................................... 602 785 695
Foreign............................................. (1,500) 337 3,875
------- ------- -------
Total deferred provision.............................. 3,606 5,759 8,390
------- ------- -------
Total provision for income taxes...................... $14,106 $21,390 $17,975
======= ======= =======
</TABLE>
F-35
<PAGE> 181
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Depreciation................................................... $ 14,226 $ 18,705
LIFO inventory................................................. 7,424 7,300
Foreign deferred tax liabilities, primarily related to
depreciation................................................. 2,334 3,437
Other.......................................................... 105 135
------- -------
Gross deferred tax liabilities................................. 24,089 29,577
------- -------
Property, plant and equipment basis differences................ (1,547) (2,253)
Restructuring costs............................................ (2,517) (2,093)
Inventory reserves and costing capitalization.................. (1,772) (4,174)
Retiree health................................................. (3,490) (3,578)
Pension........................................................ (2,309) (2,301)
Workers' compensation reserves................................. (651) (726)
Environmental reserves......................................... (998) (1,053)
Other accruals................................................. (2,331) (3,266)
Foreign deferred tax assets, primarily loss carryforwards and
other reserves............................................... (3,708) (936)
Other.......................................................... (866) (1,327)
------- -------
Gross deferred tax assets...................................... (20,189) (21,707)
------- -------
Deferred tax assets valuation allowance........................ 975 975
------- -------
Net deferred tax liability..................................... $ 4,875 $ 8,845
======= =======
</TABLE>
The deferred tax asset valuation allowance at December 31, 1996 primarily
represents excess deductible temporary differences over taxable temporary
differences for foreign operations and potential nonrealization of certain other
deferred tax assets. The tax benefits, if any, from the future recognition of
certain deductible temporary differences present at the date of the acquisition
of CTD and Rule, but not recognized at that time, will be applied to reduce
goodwill.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. rate................................... $12,640 $18,499 $15,457
Increase (decrease) in rate resulting from:
Foreign taxes, net.................................. (432) 809 172
State/local taxes, net.............................. 1,471 1,876 1,532
Nondeductible goodwill amortization................. 282 957 1,258
Other............................................... 145 (751) (444)
------- ------- -------
Effective tax rate.................................. $14,106 $21,390 $17,975
======= ======= =======
</TABLE>
8. RESTRUCTURING COSTS
The results of operations for the year ended December 31, 1996 included
restructuring costs of $4,000 (approximately $2,400 net of related tax benefits,
or $0.15 per common share), on a primary basis. These costs were primarily
related to employee severance and certain other nonrecurring charges resulting
from the effects of the reorganization of the Company's business groups. The
restructuring costs included the costs associated with the combination or
elimination of certain functions or operations which were identified as
redundant. The $4,000 restructuring charge recorded in the third quarter
included $2,727 for employee-related costs consisting primarily
F-36
<PAGE> 182
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of severance costs, $585 for the noncash write-down of plant assets where
operations have been or will be terminated, and $688 for other nonrecurring
severance costs for personnel that have been terminated or will be terminated in
future periods. The employee severance costs relate to the reduction of
approximately 42 employees as of December 31, 1996 and future reductions of
approximately 28 employees. Of the total $4,000 charge, approximately $777 had
been incurred through December 31, 1996. The remaining accrual primarily relates
to employee severance costs and costs associated with the closure of two
facilities.
During 1994, the Company recorded restructuring costs of $1,300 relating to
the consolidation of the plant in Switzerland into a plant in Germany. The
$1,300 charge is comprised of $700 in costs associated with plant closures and
relocation of machinery and equipment, $500 in severance costs related to
approximately 35 administrative staff and plant personnel at the closed Swiss
facility and $100 in other costs. The Company substantially completed the
restructuring by the end of 1994.
The Company continues to evaluate its operations with an intent to
streamline operations, improve productivity and reduce costs and may implement
additional rationalization programs in the future.
9. RETIREMENT PLANS
The Company offers substantially all of its domestic employees a retirement
savings plan under Section 401(k) of the Internal Revenue Code. Employees may
elect to enter a written salary deferral agreement under which a maximum of 15%
of their salaries may be contributed to the plan, subject to aggregate limits
required under the Internal Revenue Code. The Company is required to make a
mandatory contribution of 2% of qualified employee earnings. In addition, the
Company will match a percentage of the employees' contribution up to a specified
maximum percentage of their salaries and may make a discretionary contribution
from profits upon resolution of its Board of Directors. For the years ended
December 31, 1994, 1995 and 1996, the Company made contributions to the defined
contribution plans of approximately $2,448, $3,406 and $3,923, respectively.
CTD, Carbidie and AMT had defined benefit pension plans covering
substantially all domestic employees with the exception of AMT non-union
employees when they were acquired by the Company. All of these plans were frozen
in 1995, and benefits were frozen at 1995 levels. In addition, Rule had a
defined benefit pension plan for certain employees for which the benefits had
been frozen prior to the Company's acquisition of Rule in January 1996. The
Company's funding policy with respect to such plans is to contribute annually
the minimum amount required under ERISA. Plan assets include marketable equity
securities, U.S. government securities, federal agency obligations, corporate
debt instruments, money market funds and other fixed income securities.
In connection with the CTD and Carbidie acquisitions in 1994, the Company
recorded an aggregate net liability of $6,051 in purchase accounting
representing the excess of the estimated projected benefit obligation (PBO) over
the fair value of plan assets. During 1996, the Company recorded a net liability
of $700 in purchase accounting for the excess of the PBO over the fair value of
the plan assets in connection with the Rule acquisition.
The following tables set forth the defined benefit pension plans' net
periodic pension costs for the years ended December 31, 1995 and 1996 and the
plans' net funded status, amounts recorded in the consolidated balance sheet,
and other summary information at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
--------------------------------------------------------------- -------- --------
<S> <C> <C>
NET PERIODIC PENSION COST:
Service cost................................................... $ 502 $ 30
Interest cost.................................................. 2,334 2,297
Other.......................................................... 583 (732)
Less: Actual return on plan assets............................. (2,842) (1,560)
-------- --------
Net periodic pension cost...................................... $ 577 $ 35
======== ========
</TABLE>
F-37
<PAGE> 183
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1996
--------------------------------------------------------------- -------- --------
<S> <C> <C>
NET PENSION LIABILITY:
Vested accumulated benefit obligation.......................... $ 30,288 $ 32,226
======= =======
Nonvested accumulated benefit obligation....................... $ 1,622 $ 751
======= =======
PBO............................................................ $ 31,910 $ 33,228
Fair value of plan assets...................................... (27,361) (29,570)
Unrecognized prior service cost................................ -- (30)
Unrecognized net loss.......................................... (519) (29)
Additional minimum pension liability........................... 783 279
-------- --------
Net pension liability.......................................... $ 4,813 $ 3,878
======= =======
Discount rate used to determine the PBO........................ 7.5% 8.0%
Assumed long-term rate of return on plan assets................ 9.0% 9.0%
</TABLE>
10. POSTRETIREMENT BENEFITS
Under Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," the Company is
required to recognize the cost of providing health care and other benefits to
retirees over the term of the employees' service. Prior to the acquisitions of
CTD and Carbidie, the Company provided no postretirement benefits other than
those related to the 401(k) plans described in Note 9. CTD and a certain other
subsidiary provides health care insurance benefits to certain of its retired
employees. All of these plans were frozen in 1995, and benefits were frozen at
1995 levels. In connection with the CTD acquisition in 1994, the Company
recorded a liability of $11,939 in purchase accounting representing the
estimated discounted present value of the expected future retiree benefits
attributed to employees' service rendered in periods prior to Greenfield's
acquisition.
The following tables set forth the plans' net periodic postretirement
benefit cost for the years ended December 31, 1995 and 1996, the accumulated
postretirement benefit obligation (APBO) at December 31, 1995 and 1996 and other
summary information:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
---------------------------------------------------------------- ------- -------
<S> <C> <C>
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost.................................................... $ 55 $ --
Interest cost................................................... 873 765
-------- --------
Net periodic postretirement benefit cost........................ $ 928 $ 765
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1996
---------------------------------------------------------------- ------- -------
<S> <C> <C>
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
APBO (consisting solely of retirees and dependents)............. $11,692 $ 9,653
Unrecognized net gain (loss).................................... (3) 754
------- -------
Net APBO........................................................ $11,689 $10,407
======= =======
Discount rate used in measuring the APBO........................ 7.5% 8.0%
Assumed health care cost trend rate used in measuring the
APBO.......................................................... 8.5% 8.5%
</TABLE>
The assumed health care cost trend rate used in measuring the APBO for 1995
and 1996 decreased gradually to 6% (until 2002 and thereafter). If the assumed
health care cost trend rates were increased by 1%, the APBO for 1995 and 1996
would have increased approximately $558 and $434, respectively.
F-38
<PAGE> 184
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
There are no plan assets and the Company expects to continue to fund these
benefit costs on a pay-as-you-go basis. During 1995 and 1996, the Company made
payments of approximately $1,018 and $1,400, respectively, related to these
benefits.
11. 1993 EXECUTIVE STOCK OPTIONS
In 1993, the Company established the 1993-1 Executive Stock Option Plan
(1993-1 Plan) and granted to certain officers of Rogers Tool Works, Inc., a
wholly-owned subsidiary of the Company (RTW), non-qualified stock options to
purchase an aggregate of 438,258 shares of common stock at a price of $0.51 per
share, subject to adjustment, in exchange for the cancellation of RTW shares
held by these officers. In addition, the Company cancelled the promissory notes
of each of these officers issued to finance the purchase of their RTW shares.
The exercise price with respect to the options granted was determined to
preserve the original purchase price per share of the RTW shares cancelled. The
options became exercisable as to 25% of the shares issuable thereunder on
January 26, 1994, and as to a cumulative 35%, 50% and 100% of the shares
issuable thereunder on each succeeding six-month anniversary thereof. As of
December 31, 1995 all of the options had been exercised. During the years ended
December 31, 1994 and 1995, 153,367 and 284,891 shares, respectively, were
issued in connection with the 1993-1 Plan.
In 1993, the Company also adopted the 1993-2 Executive Stock Option Plan
(1993-2 Plan) pursuant to which nonqualified stock options were granted to
certain existing shareholders prior to the initial public offering to acquire an
aggregate 453,350 shares of the Company's common stock, subject to adjustment,
by tendering existing common stock in payment thereof. The exercise price of all
options was the current market price on the date of exercise and all options
were exercised only by exchanging shares of previously owned common stock. The
grant and exercise of options under the 1993-2 Plan did not result in any
increase in the beneficial ownership of common stock by the plan participants
from the number of shares owned immediately after the initial public offering.
Under the terms of the 1993-2 Plan, the options were exercised immediately after
the initial public offering and the shares of common stock issued thereunder
became freely transferable by each participant as to 25% of the shares issuable
to such participants on January 31, 1994 and as to a cumulative 35%, 50% and
100% of the shares issuable to such participant on each succeeding six-month
anniversary thereof. The shares tendered in exercise of options granted under
the 1993-2 Plan were issued under promissory notes due in 1998 through 2002. The
notes are reflected in stock subscriptions receivable, included in additional
paid-in capital and other, in the accompanying consolidated financial
statements.
12. STOCK OPTION AND STOCK INCENTIVE PLANS
STOCK OPTION PLANS
The Company has three stock options plans: the Employee Stock Option Plan
(Employee Plan), the 1995 Directors Non-Qualified Stock Option Plan (Directors
Plan) and the 1993 Directors Non-Qualified Stock Option Plan (1993 Directors
Plan).
The Employee Plan provides for the granting of options to purchase up to
1,000,000 shares of common stock to the Company's executive officers and key
employees at prices equal to the fair market value of the stock on the date of
grant. The Employee Plan was amended effective May 6, 1997, to, among other
things, increase the number of options to purchase shares of common stock from
1,000,000 to 2,000,000. Options outstanding at December 31, 1996 entitle the
holders to purchase common stock at prices ranging between $16.00 and $37.00 per
share, subject to adjustment. Options shall become exercisable with respect to
one-fourth of the shares covered thereby on each anniversary of the date of
grant, commencing on the second anniversary of such date. The right to exercise
the options expires ten years from the date of grant, or earlier if an option
holder ceases to be employed by the Company.
F-39
<PAGE> 185
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Directors Plan provides for the granting of options to purchase up to
125,000 shares of common stock to the Company's Directors who are not employees
of the Company at prices equal to the fair market value of the stock on the date
of grant. Options are granted to each eligible Director on the date such person
is first elected to the board of directors of the Company and on each subsequent
re-election date. The Directors Plan was approved in May 1996 by the
stockholders. Options outstanding at December 31, 1996 entitle the holders to
purchase common stock at a price of $37.00 per share, subject to adjustment.
Options granted upon re-election shall become exercisable in full on the first
anniversary of such date. All other options shall become exercisable with
respect to one-fourth of the shares covered thereby on each anniversary date of
the date of grant, commencing on the second anniversary of such date. The right
to exercise the options expires ten years from the date of grant, or earlier, if
an option holder ceases to be a Director of the Company.
The 1993 Directors Plan provides for the granting of options to purchase up
to 100,000 shares of common stock to the Company's Directors who are not
employees of the Company at prices equal to the fair market value of the stock
on the date of grant. Options are granted to each eligible Director on the date
such person is first elected to the board of directors of the Company. Options
outstanding at December 31, 1996 entitle the holders to purchase common stock at
prices ranging between $15.50 and $25.75 per share, subject to adjustment.
Options shall become exercisable with respect to one-fourth of the shares
covered thereby on each anniversary of the date of grant, commencing on the
second anniversary of such date. The right to exercise the options expires ten
years from the date of grant, or earlier if an option holder ceases to be a
Director of the Company. Subsequent to the May 1996 approval of the Directors
Plan, no further grants will be issued under the 1993 Directors Plan.
A summary of the status of the Company's stock option plans as of December
31, 1994, 1995 and 1996, and changes during the years then ended are presented
below:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 368,500 $ 15.98 578,500 $ 18.76 788,175 $ 21.95
Granted.................. 217,500 $ 23.36 244,300 $ 29.07 255,400 $ 28.58
Exercised................ -- -- (10,375) $ 16.07 (55,000) $ 16.53
Forfeited................ (7,500) $ 16.18 (24,250) $ 19.93 (34,175) $ 27.21
------- ------- -------
Outstanding at end of
year................... 578,500 $ 18.76 788,175 $ 21.95 954,400 $ 23.85
======= ======= =======
Exercisable at end of
year................... -- -- 77,125 $ 15.98 158,875 $ 18.12
======= ======= =======
</TABLE>
The following table summarizes information for options currently
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$14-21 308,000 7 $16.24 118,015 $16.13
$22-29 360,150 9 $25.23 40,860 $23.85
$30-37 286,250 9 $30.31 --
------- -------
$14-37 954,400 8 $23.85 158,875 $18.12
======= =======
</TABLE>
F-40
<PAGE> 186
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with the resignation of a member of the Company's Board of
Directors, in 1994 the Company exchanged options for 10,000 shares of common
stock previously granted to the Director with a warrant to purchase 10,000
shares of common stock at an exercise price equal to the exercise price of the
options.
STOCK INCENTIVE PLANS
The Company has two stock incentive plans: the 1995 Equity Incentive Plan
(Incentive Plan) and the 1995 Restricted Stock Bonus Plan (Ownership Plan). Both
plans were approved in May 1996 by the stockholders of the Company.
The Incentive Plan provides for the granting of up to 273,000 shares of
common stock to certain senior executives of the Company in time-lapse
restricted stock, performance contingent restricted stock and performance
shares. Time-lapse restricted stock vests in one-third increments over a
three-year period commencing four years after the date of the award. Performance
contingent restricted stock is earned when the price for the Company's stock
reaches certain predetermined levels, and then vests over a three- or five-year
period. Performance shares are earned based on attainment of a predetermined
four-year cumulative earnings per share level. Attainment of between 50% and
200% of the predetermined objective will entitle the participants to receive
restricted performance shares of between 50% and 200% of the target award, which
then vest over a three-year period. No performance shares are earned if less
than 50% of the performance objective is obtained.
The Ownership Plan provides for the issuance of up to 250,000 shares of
common stock to certain employees, by allowing such employees to elect to defer
up to 50% of their annual cash bonus and receive, in lieu thereof, shares of the
Company's common stock. The Company will increase the employees' deferred bonus
by either 20% or 35% (depending on the employees' selection of 3 or 5 years,
respectively, for the restriction period).
Shares issued under these plans are restricted and are subject to
forfeiture upon termination of employment. During the period that the shares are
restricted, award holders have the right to vote and to receive dividends on
such shares.
A summary of stock earned and issued pursuant to the Incentive Plan and
Ownership Plan for the year ended December 31, 1996 follows:
<TABLE>
<CAPTION>
MARKET VALUE
SHARES OF DATE EARNED VESTING PERIOD
------ -------------- ---------------------
<S> <C> <C> <C>
Incentive Plan
Time-lapse Restricted Stock.......... 26,000 $ 30.50 Nov 1999-Nov 2001
Time-lapse Restricted Stock.......... 8,000 $ 31.625 July 2000-July 2002
Performance Contingent Restricted
Stock............................. 7,700 $ 37.75 Nov 2000
------
41,700
Ownership Plan......................... 17,848 $ 30.50 Feb 1997-Feb 2001
------
Total restricted shares earned and
issued in 1996....................... 59,548
======
</TABLE>
The Company awarded up to 273,000 shares of restricted stock to certain
senior executives under the Incentive Plan, subject to the attainment of certain
performance levels, as discussed above. The weighted average fair value of the
shares on the grant date was $30.73. The Company applies APB 25 and related
interpretations in accounting for stock awards under the Incentive and Ownership
Plans. Under APB 25, the Company recorded $1,500 of compensation expense during
1996 attributable to these awards, which is included in selling, general and
administrative expenses in the 1996 consolidated statement of operations.
F-41
<PAGE> 187
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Shares which have been issued but which remain restricted are recorded as
deferred compensation, a reduction to additional paid-in capital. The increase
in additional paid-in capital of $761 during 1996 represents the issuance of
executive stock awards and is net of this deferred compensation. As the shares
vest and become unrestricted, the deferred compensation will be recorded as
compensation expense and additional paid-in capital will increase.
PRO FORMA DISCLOSURES
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Accordingly, except for the Incentive and Ownership
Plans as described above, no compensation cost has been recognized for the stock
options because the options were granted with an exercise price equal to the
stock price on the date of grant. Had compensation costs for the Company's stock
option plans been determined based on the fair value of the options on the grant
dates consistent with the methodology prescribed by FAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. Due to the adoption of the methodology prescribed by FAS 123,
the pro forma results shown below only reflect the impact of options and stock
awards granted in 1995 and 1996. Because future options and stock awards may be
granted, the pro forma impact for 1995 and 1996 is not necessarily indicative of
the impact in future years.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C> <C>
Net income As reported $31,465 $26,189
Pro forma $31,336 $25,614
Primary earnings per As reported $ 1.94 $ 1.60
share....................
Pro forma $ 1.90 $ 1.55
</TABLE>
The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact), is estimated on the date of
grant using the Black-Scholes multiple option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Expected life of options................................. 5 years 5 years
Risk-free interest rates................................. 5.69--7.76% 5.39--6.69%
Expected volatility of stock............................. 29% 32%
Expected dividend yield.................................. 0.5% 0.5%
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996 was $10.34 and $10.84 per share, respectively.
13. RELATED PARTIES
Harbour Group Investments, L.P. (HGI, L.P.) was the Company's principal
stockholder prior to HGI, L.P.'s sale of substantially all of its shares in a
secondary stock offering in March 1994. Under terms of a corporate development
consulting and advisory services agreement, the Company incurred fees totaling
$1,109, $445 and $580 in 1994, 1995 and 1996, respectively, payable to an
affiliate of HGI, L.P. related to corporate development services provided in
identifying, negotiating and consummating certain acquisitions.
Under terms of a management consulting and advisory services agreement,
Harbour Group, Ltd. (HGL), an affiliate of HGI, L.P., charges the Company for
direct management and administrative services provided to the Company based on
HGL's approximate costs for such services. These charges totaled approximately
$250, $182 and $53 for the years ended December 31, 1994, 1995 and 1996,
respectively, and are reflected in selling, general and administrative expenses
in the accompanying consolidated financial statements.
F-42
<PAGE> 188
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1995 and 1996, a member of HGL management owned 80,000
shares of the Company's common stock partially financed with promissory notes
totaling $101 due in 1998 through 2003. The notes are reflected in stock
subscriptions receivable, included in additional paid-in capital and other, in
the accompanying consolidated financial statements.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal proceedings in which
monetary damages are sought. The Company is vigorously contesting these claims.
However, resolution of these claims is not expected to occur quickly and their
ultimate outcome presently cannot be predicted. It is the opinion of management
that any liability of the Company for claims or proceedings will not materially
affect its financial position.
In connection with the acquisition of CTD, the Company recorded a liability
of $2,600 in purchase accounting for certain estimated environmental clean-up
costs to be incurred relative to acquired CTD facilities. This estimated
potential liability, which is included in other accrued liabilities, has not
been reduced for any expected proceeds from other potentially responsible third
parties. At December 31, 1996, the liability balance was approximately $2,200.
15. SEGMENT INFORMATION
Worldwide operations data, as required by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
are listed below. Profitability of the Company's foreign operations by
geographic area was determined based on ultimate sales to unaffiliated
customers. Income from operations was included in the geographic area of the
entity transacting the final sale. Intercompany sales have been eliminated in
consolidation.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
NET SALES TO INCOME
UNAFFILIATED FROM IDENTIFIABLE CAPITAL
CUSTOMERS OPERATIONS ASSETS EXPENDITURES
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
1994
North America.......................... $240,809 $ 38,223 $289,610 $ 12,345
Europe................................. 30,978 1,061 30,325 1,037
-------- ------- -------- -------
$271,787 $ 39,284 $319,935 $ 13,382
======== ======= ======== =======
1995
North America.......................... $377,314 $ 52,112 $352,532 $ 26,177
Europe................................. 42,874 8,966 45,931 670
-------- ------- -------- -------
$420,188 $ 61,078 $398,463 $ 26,847
======== ======= ======== =======
1996
North America.......................... $451,383 $ 50,463 $514,163 $ 27,175
Europe................................. 58,711 9,484 48,481 2,010
-------- ------- -------- -------
$510,094 $ 59,947 $562,644 $ 29,185
======== ======= ======== =======
</TABLE>
F-43
<PAGE> 189
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Export revenues included in the North American net sales to unaffiliated
customers were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994 1995 1996
------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Geographic Areas:
Far East............................................. $ 9,113 $19,837 $20,091
Canada/Latin America................................. 6,521 5,749 10,534
Europe............................................... 3,572 7,601 15,340
Other................................................ 36 665 1,343
------- ------- -------
$19,242 $33,852 $47,308
======= ======= =======
</TABLE>
16. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- ------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Trade receivables................................ $ 66,242 $ 86,962 $102,792
Allowance for doubtful accounts and customer
rebates....................................... (2,624) (3,763) (4,692)
-------- -------- --------
$ 63,618 $ 83,199 $ 98,100
======== ======== ========
INVENTORIES:
Raw materials and component parts................ $ 28,248 $ 49,500 $ 68,988
Work in process.................................. 31,648 38,055 43,060
Finished goods................................... 49,873 65,104 70,476
-------- -------- --------
$109,769 $152,659 $182,524
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment.......................... $108,077 $143,664 $172,781
Buildings........................................ 20,531 33,125 37,985
Land and land improvements....................... 2,445 4,159 4,095
Property held under capital leases............... 4,579 4,496 4,496
-------- -------- --------
Total property, plant and equipment at
cost..................................... 135,632 185,444 219,357
Less accumulated depreciation and amortization,
including $3,241 and $3,715, respectively,
related to property held under capital
leases........................................ (46,833) (59,902) (71,931)
-------- -------- --------
88,799 125,542 147,426
Construction in progress......................... 18,558 17,338 20,231
Property held for sale........................... 1,665 1,420 1,522
-------- -------- --------
$109,022 $144,300 $169,179
======== ======== ========
ACCRUED LIABILITIES:
Employee compensation and benefits............... $ 18,676 $ 19,151 $ 22,566
Restructuring costs.............................. 4,919 3,371 2,363
Interest......................................... 1,544 1,656 3,395
Other............................................ 8,549 11,233 13,237
-------- -------- --------
$ 33,688 $ 35,411 $ 41,561
======== ======== ========
</TABLE>
F-44
<PAGE> 190
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1994, 1995 and 1996 appears below
(in thousands, except per share data):
<TABLE>
<CAPTION>
NET SALES
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 62,631 $106,419 $132,698
Second quarter...................................... 62,213 104,799 130,021
Third quarter....................................... 65,679 104,147 121,370
Fourth quarter...................................... 81,264 104,823 126,005
-------- -------- --------
$271,787 $420,188 $510,094
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS PROFIT
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 20,802 $ 34,007 $ 40,570
Second quarter...................................... 21,451 31,469 41,685
Third quarter....................................... 22,051 32,683 34,999
Fourth quarter...................................... 26,509 33,871 35,637
-------- -------- --------
$ 90,813 $132,030 $152,891
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NET INCOME
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 5,040 $ 7,055 $ 8,569
Second quarter...................................... 4,798 7,915 8,357
Third quarter....................................... 5,975 8,085 3,959
Fourth quarter...................................... 6,196 8,410 5,304
-------- -------- --------
$ 22,009 $ 31,465 $ 26,189
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRIMARY EARNINGS PER SHARE
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ .31 $ .43 $ .53
Second quarter...................................... .29 .49 .51
Third quarter....................................... .37 .50 .24
Fourth quarter...................................... .38 .52 .32
-------- -------- --------
$ 1.35 $ 1.94 $ 1.60
======== ======== ========
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED)
On October 10, 1997, the Company entered into a definitive merger agreement
with Kennametal Inc. (Kennametal), whereby Kennametal Acquisition Corp. (a
wholly-owned subsidiary of Kennametal) commenced a tender offer on October 17,
1997 for all of the outstanding shares of the Company for $38 per share. The
tender offer expired on November 14, 1997 and approximately 98% of the Company's
shares were tendered. The merger was completed on November 18, 1997. Under the
terms of the merger agreement, all outstanding options to acquire shares of the
Company were cancelled in exchange for a payment equal to the difference between
$38 per share and the strike price.
In the fourth quarter of 1997, pursuant to a plan approved by the Company's
board of directors, the Company recorded a $11.5 million charge for nonrecurring
expenses primarily related to the restructuring of the Company's South
Deerfield, Massachusetts operations. These costs primarily included write-downs
of inventory
F-45
<PAGE> 191
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and machinery and equipment to estimated net realizable values, severance costs
and other miscellaneous expenses relative to the Company's decision to
discontinue the manufacture and sale of certain low margin product lines. The
restructuring will result in a reduction in personnel, thereby eliminating
excessive costs and redundancies in future periods. The Company expects to
record additional nonrecurring expenses of approximately $2.0 million in 1998
related to the rearrangement of the remaining operations at its South Deerfield,
Massachusetts facility.
F-46
<PAGE> 192
======================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY KENNAMETAL, KENNAMETAL FINANCING I OR
THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT Page
-----
<S> <C>
Prospectus Supplement Summary............ S-6
Risk Factors............................. S-24
Recent Developments...................... S-30
Use of Proceeds.......................... S-31
Price Range of Common Stock and Dividend
Policy................................. S-32
Capitalization........................... S-33
Pro Forma Condensed Consolidated
Financial Information.................. S-34
The Trust................................ S-41
Accounting Treatment..................... S-42
Selected Condensed Consolidated Financial
Data................................... S-43
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-44
Business................................. S-51
Management............................... S-58
Description of the FELINE PRIDES......... S-59
Description of the Purchase Contracts.... S-62
Certain Provisions of the Purchase
Contract Agreements and the Pledge
Agreement.............................. S-70
Description of the Trust Preferred
Securities............................. S-73
Description of the Guarantee............. S-83
Description of the Debentures............ S-85
Effect of Obligations Under the
Debentures and the Guarantee........... S-92
Certain Federal Income Tax
Consequences........................... S-93
Description of Common Stock.............. S-99
Description of Other Offerings........... S-101
ERISA Considerations..................... S-102
Underwriting............................. S-103
Legal Matters............................ S-105
Experts.................................. S-105
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
------------------------
<TABLE>
<CAPTION>
PROSPECTUS
<S> <C>
Available Information..................... 4
Incorporation of Certain Documents by
Reference............................... 4
Kennametal Inc............................ 5
The Trust................................. 5
Ratio of Earnings to Fixed Charges........ 6
Use of Proceeds........................... 6
Description of Debt Securities............ 7
Description of Preferred Securities....... 15
Description of the Guarantee.............. 26
Relationship Among the Preferred
Securities, the Trust Debentures and the
Guarantee............................... 29
Description of Common Stock............... 30
Description of Stock Purchase Contracts
and Stock Purchase Units................ 32
Book Entry Issuance....................... 33
Plan of Distribution...................... 34
Legal Matters............................. 35
Experts................................... 36
</TABLE>
======================================================
======================================================
4,500,000
FELINE PRIDES(SM)
KENNAMETAL LOGO
KENNAMETAL INC.
KENNAMETAL FINANCING I
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
, 1998
(SM)Service Mark of Merrill Lynch & Co., Inc.
======================================================
<PAGE> 193
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
4,300,000 SHARES
KENNAMETAL INC. KENNAMETAL LOGO
COMMON STOCK
------------------------
Of the 4,300,000 shares of capital stock, par value $1.25 per share (the
"Common Stock"), hereby offered by
Kennametal Inc., a Pennsylvania corporation ("Kennametal" or the "Company"),
3,440,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 860,000 shares are being offered
in a concurrent offering outside the United States and Canada by the
International Managers (the "International Offering"). The offering price and
the underwriting discount per share in the U.S. Offering and the International
Offering will be identical. Such offerings are collectively referred to as the
"Offerings." See "Underwriting."
The Company and Kennametal Financing I, a related statutory business trust
formed under the laws of the State of Delaware (the "Trust"), are concurrently
offering 4,500,000 FELINE PRIDES(SM), stated amount $50 per FELINE PRIDES(SM)
(5,175,000 if the underwriters for the FELINE PRIDES(SM) exercise their
over-allotment option in full), issued by the Company and the Trust (the "FELINE
PRIDES Offering") and $150,000,000 aggregate principal amount of % Senior
Notes due 2001 (the "2001 Notes"), $150,000,000 aggregate principal amount of
% Senior Notes due 2008 (the "2008 Notes") and $150,000,000 aggregate
principal amount of % Senior Debentures due 2028 (the "2028 Debentures," and
together with the 2001 Notes and the 2008 Notes, the "Senior Debt Securities")
(the "Senior Debt Offering"). The gross proceeds of the FELINE PRIDES Offering
are expected to be approximately $ million ($ million if the
underwriters for the FELINE PRIDES(SM) exercise their over-allotment option in
full) and of the Senior Debt Offering are expected to be approximately
$ million. The Offerings, the FELINE PRIDES Offering, and the Senior
Debt Offering are independent offerings and consummation of none of such
offerings is conditioned upon consummation of any of the other offerings.
The Common Stock is listed on the New York Stock Exchange ("NYSE") and is
traded under the symbol "KMT." On December 31, 1997, the last reported sale
price of the Common Stock on the NYSE was $52 1/16 per share. See "Price Range
of Common Stock and Dividend Policy."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
PRICE TO UNDERWRITING
PUBLIC DISCOUNT(2) PROCEEDS TO
COMPANY(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(1)........................ $ $ $
- ---------------------------------------------------------------------------------------------------
Total(4)............................ $ $ $
===================================================================================================
</TABLE>
(1) Each share is issued with a nontransferable Preferred Stock Purchase Right.
See "Description of Common Stock-- Rights Plan."
(2) Kennametal has agreed to indemnify the several U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,400,000.
(4) The Company has granted the several U.S. Underwriters and the International
Managers options, exercisable within 30 days after the date hereof, to
purchase up to 516,000 and 129,000 additional shares, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock offered hereby will
be made in New York, New York on or about , 1998.
------------------------
MERRILL LYNCH & CO.
CIBC OPPENHEIMER
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
------------------------
The date of this Prospectus Supplement is , 1998.
- ------------------
(SM)Service Mark of Merrill Lynch & Co., Inc.
<PAGE> 194
(LOGO) KENNAMETAL
A GLOBAL PROVIDER OF CONSUMABLE TOOLS, SUPPLIES AND SERVICES
<TABLE>
<S> <C> <C>
(Photograph of (Photograph of (Photograph of
metalworking tooling) showroom sales) high speed steel drill)
PRODUCTS OFFERED
KENNAMETAL AND KENNAMETAL JLK DIRECT GREENFIELD INDUSTRIES LOGO
HERTEL LOGO DISTRIBUTION INC. LOGO
Kennametal and Metalworking inserts, Consumable industrial rotary
Hertel-branded metalcutting milling cutters, endmills, cutting tools and related
inserts, milling cutters, drills, reamers, boring products for metalworking,
endmills, solid-carbide bars, taps, dies, gauges, electronics, construction,
drills, boring bars, lathe countersinks, saw blades, and energy- production
toolholders, holemaking precision measuring tools, applications, wear resistant
tooling, quick-change and tooling components, tungsten carbide and ceramic
modular tooling, machining toolholding and workholding components, drill bits and
center tooling, tool devices, abrasives, power hardware products for the
management software, and hand tools, accessories, consumer market and marine
machining accessories and from Kennametal, Kennametal products.
supplies. Carbide-tipped Hertel, Greenfield and other
tools for mining and leading manufacturers.
construction applications.
</TABLE>
CUSTOMERS SERVED
Manufacturers of automobiles, trucks, aerospace components, oil and gas drilling
and processing equipment, construction and farm machinery, railroad equipment,
ships and marine equipment, power generation and transmission equipment,
appliances, machine tools, factory equipment and metal parts, as well as
metalworking job shops, and maintenance and repair operations. Mine operators
and suppliers, highway repair and construction firms, government agencies,
state, county, and municipal authorities.
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
S-2
<PAGE> 195
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and the related notes
thereto appearing elsewhere in this Prospectus Supplement. On November 17, 1997,
Kennametal Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of
Kennametal, purchased in accordance with its tender offer (the "Tender Offer")
approximately 98% of the outstanding common stock of Greenfield Industries, Inc.
("Greenfield") pursuant to an Agreement and Plan of Merger dated as of October
10, 1997 (the "Merger Agreement"), among Kennametal, Greenfield and Acquisition
Corp. and, on November 18, 1997, Acquisition Corp. was merged into Greenfield
and Greenfield became a wholly-owned subsidiary of Kennametal. Except as
otherwise noted or unless the context otherwise requires, (i) "fiscal" in
connection with a year means the 12 months ended June 30 of the calendar year
specified, and (ii) the information in this Prospectus Supplement assumes no
exercise of the Underwriters' over-allotment options. Unless the context
indicates otherwise, any reference in this Prospectus Supplement to the
"Company" or "Kennametal" refers to Kennametal Inc. and its consolidated
subsidiaries other than Greenfield.
This Prospectus Supplement contains certain forward-looking statements (as
such term is defined in the Securities Act) concerning the Company's operations,
performance and financial condition, including, in particular, the likelihood of
the Company's success in integrating the acquisition of Greenfield. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements to the extent that
economic conditions in the United States, Europe and, to a lesser extent, the
Asia Pacific region change from the Company's expectations and to the extent
that the Company does not effectively integrate the acquisition of Greenfield
and achieve expected synergistic benefits.
THE COMPANY
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods--turning, milling and
drilling. In addition, through its 80%-owned subsidiary, JLK Direct Distribution
Inc. ("JLK"), the Company markets and distributes a broad line of consumable
metalcutting tools, as well as abrasives, machine tool accessories, hand tools,
measuring equipment and other industrial supplies used in the metalworking
industry. The Company is a recognized leader in turning and milling consumable
metalcutting tools and believes it is the largest North American and the second
largest global provider of consumable metalcutting tools and supplies.
Leveraging its expertise in tungsten carbide powder metallurgy, the Company has
developed innovative consumable tools for the mining and construction industries
and believes it is the largest global manufacturer, marketer and distributor of
such tools to these markets.
In November 1997, the Company acquired Greenfield, the leading North
American manufacturer of drilling and other rotary high-speed steel consumable
metalcutting tools for the metalworking industry. Kennametal believes that
Greenfield's operations strongly complement its core businesses and that the
acquisition of Greenfield, in addition to providing the Company with
opportunities for substantial cost savings, offers significant strategic
benefits, including: (i) providing an important new channel of traditional
industrial distributors through which to sell the Company's products; (ii)
expanding and enhancing the Company's line of drilling products; (iii) allowing
the Company to diversify into new markets such as certain wear products by
leveraging its material science expertise in tungsten carbide powder metallurgy;
and (iv) providing the opportunity to introduce and sell each company's products
into the markets served by the other company.
End users of the Company's metalworking products include manufacturers and
suppliers in the aerospace, automotive, construction and farm machinery,
railroad equipment, power generation and transmission equipment, home appliance,
electrical equipment, and oil field services and gas exploration industries. The
Company markets its products through: a technically skilled direct sales force;
JLK's catalogs, showrooms and other direct marketing efforts; JLK's integrated
industrial supply programs; and, with the acquisition of Greenfield, a network
of traditional industrial distributors. This multi-channel marketing approach
enables the Company to meet the varying needs of metalworking customers of all
sizes which range from same-day ordering and rapid delivery of
S-3
<PAGE> 196
products to outsourcing the entire procurement and inventory management process
for metalworking and related products. The Company estimates there are
approximately 250,000 metalworking industrial sites in the United States. The
Company's multi-channel distribution network, comprehensive product offering and
global presence allow customers of all sizes the advantage of a single source of
supply for most metalworking needs.
The Company believes five significant trends are currently impacting the
metalworking industry: (i) consolidation of fragmented distribution channels as
customers seek a single source of supply for their metalworking needs; (ii)
increasing demand from large customers to outsource procurement and inventory
management processes through integrated supply programs; (iii) growing demand
for suppliers that can provide a complete selection of tools, supplies and
services globally; (iv) demand for world class capabilities including customer
service, technical application support and information and product technology
while, at the same time, maintaining or reducing costs; and (v) continuing
advances in customers' metalworking manufacturing technology requiring more
technically advanced tools. These factors are resulting in a restructuring and
consolidation in the metalworking industry as tooling manufacturers and
distributors are forced to either become more competitive or seek stronger
partners. The Company's business strategy is designed to capitalize on these and
other trends.
BUSINESS STRATEGY
The Company's objective is to become the supplier of first choice of
consumable tools, related supplies, and services to the worldwide metalworking
industry and to other industries which can benefit from tungsten carbide
products. The Company believes its market-leadership position results from the
successful implementation of its business strategy, the major elements of which
include:
- Expanding Customer Base Through Multi-Channel Distribution. The Company
seeks to access potential customers through all primary distribution
channels. The Company serves its traditional base of large and
medium-sized metalworking customers through a direct sales force. JLK
direct markets a broad range of tiered ("good," "better" and "best")
metalworking consumables and other related products targeted at small and
medium-sized metalworking customers and offers integrated supply programs
targeted at large industrial metalworking customers. The acquisition of
Greenfield, which sells its consumable tools, related products and
services through a network of more than 2,500 traditional industrial
distributors, provides Kennametal with access to approximately 50% of the
North American metalworking market.
- Providing Most Complete Product Offering. The Company seeks to provide
the most complete and comprehensive product offering in the metalworking
industry. As a result of various acquisitions and internal development,
the Company markets and distributes what it believes is one of the
broadest lines of tools and services typically used by metalworking
customers. The recent acquisition of Greenfield with its consumable
high-speed steel rotary cutting tools and related products provides the
Company with the capability to manufacture all of the major consumable
tools needed by customers in their metalcutting manufacturing processes.
- Expanding Strong Global Presence. Kennametal is committed to growing its
global presence as demonstrated by its position as the second largest
provider of tools to the European metalworking industry, the world's
largest metalworking market, as well as its plans to expand its presence
in the Asia Pacific region. The Company recently completed construction
of a cutting tool manufacturing facility in Shanghai, China, for a total
investment of about $20 million, and has increased to 100% its ownership
interest in a sales and marketing subsidiary in Japan. The Company also
has targeted marketing efforts in Eastern Europe and Russia and other
developing countries.
- Providing Superior Customer Service, Product Availability, and Technical
Support. The Company's skills in rapidly filling orders, maintaining
high levels of product availability and providing technical product
application support are vital to the ability of its metalworking
customers to meet their production and delivery schedules in a cost
effective manner. Kennametal's sophisticated order entry and inventory
management systems enable the Company to ship more than 90 percent of its
products from stock. In addition, the Company's technically skilled
direct sales force of more than 700 persons provide on-site product
selection and application support to enable customers to optimize their
metalcutting processes. The addition of Greenfield's more than 70
technical specialists broadens the Company's technical support capability
into high-speed steel drilling applications.
S-4
<PAGE> 197
- Maintaining Leadership in Product Innovation. As a result of its
commitment to research and development, the Company has brought to market
during the past few years a number of new or improved metalcutting
products. The exacting requirements of modern high-precision
metalcutting, along with advances in manufacturing technology, exacting
manufacturing specifications, and new workpiece materials are driving the
demand for new and improved consumable tools and systems capable of
achieving superior technical performance with high and uniform quality.
The Company believes that its reputation for supplying high quality and
technologically innovative consumable metalcutting tools and supplies to
the metalworking industry has been a very significant factor in its
achieving its market position.
- Leveraging Use of Information Technology. The Company's decision to
invest nearly $40 million in a business information system utilizing SAP
R-3 software demonstrates its commitment to the use of information
technology. This system, which is expected to be fully operational in
fiscal 1999, will link sales, distribution, manufacturing, purchasing and
accounting activities at all major sites throughout Kennametal and is
designed to enhance customer service, operational effectiveness and
management decision-making.
In addition to the above business strategies, the Company seeks to continue
to improve operating efficiencies as well as to pursue selected acquisitions
that enhance its distribution channels, complement its existing product
offerings and strengthen its geographic presence.
RECENT DEVELOPMENTS
GREENFIELD ACQUISITION
On November 17, 1997, the Company purchased in the Tender Offer
approximately 98% of Greenfield's common stock and acquired the balance by a
merger (the "Merger") on the following day. The total purchase price for the
acquisition of Greenfield (including estimated transaction costs and assumed
Greenfield debt and convertible redeemable preferred securities of approximately
$320 million) is estimated to be $1.0 billion. Greenfield is the largest North
American manufacturer of consumable rotary metalcutting tools as well as a
leading manufacturer of consumable tools and related products, wear products and
marine products.
NEW BANK CREDIT FACILITY
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into a $1.4 billion credit agreement with the banks named
therein (the "New Bank Credit Facility") under which, as of December 18, 1997,
the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans. The proceeds from the loans were principally
used to pay for the shares of common stock of Greenfield purchased in the Tender
Offer and the Merger, to pay transaction costs, to refinance certain
indebtedness of Greenfield and to refinance certain indebtedness of the Company.
If the Offerings, the FELINE PRIDES Offering and the Senior Debt Offering are
consummated, the Company intends to replace the New Bank Credit Facility with a
$500 million senior unsecured credit facility, although there can be no
assurance that the Company will be able to replace the New Bank Credit Facility.
OTHER ACQUISITIONS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom, Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. The companies had
aggregate sales of approximately $66 million in 1996.
OTHER OFFERINGS
Concurrently with the Offerings, (i) the Company and Kennametal Financing
I, a Delaware business trust the common securities of which are owned by the
Company, are undertaking the FELINE PRIDES Offering of 4,500,000 FELINE
PRIDES(SM) (5,175,000 if the underwriters for the FELINE PRIDES Offering
exercise their over-allotment option in full) and (ii) the Company is
undertaking the Senior Debt Offering of $450,000,000 aggregate principal amount
of the Senior Debt Securities. The Offerings, the FELINE PRIDES Offering, and
the Senior Debt Offering are independent offerings and consummation of none of
such offerings is conditioned upon consummation of any of the other offerings.
The net proceeds to the Company from the FELINE PRIDES Offering and the Senior
Debt Offering will be used to prepay loans and, correspondingly, permanently
reduce commitments of the lenders under the New Bank Credit Facility.
S-5
<PAGE> 198
THE OFFERINGS
Shares offered by the Company:
U.S. Offering.......................................... 3,440,000 shares
International Offering................................. 860,000 shares
Total(1).......................................... 4,300,000 shares
Shares to be outstanding after the Offerings(2)........30,516,591 shares
NYSE symbol............................................KMT
<TABLE>
<S> <C>
Use of Proceeds............... To repay indebtedness under the Company's New Bank
Credit Facility, which indebtedness was incurred by
the Company in connection with the acquisition of
Greenfield. See "Use of Proceeds."
</TABLE>
- ---------
(1) Does not include any shares issuable pursuant to the over-allotment options
granted to the Underwriters in the Offerings. See "Underwriting."
(2) As of September 30, 1997. Does not include (i) 1,567,185 shares of Common
Stock as of September 30, 1997, issuable upon exercise of outstanding
options of which options covering 1,539,929 shares were exercisable as of
that date, (ii) 63,804 shares issuable as of September 30, 1997 pursuant to
the Company's deferred stock plans, (iii) shares which may be issued
pursuant to the Company's dividend reinvestment and stock purchase plan, or
(iv) from to shares which will be issued on , 2001
pursuant to the FELINE PRIDES Offering depending upon the average trading
price of the Common Stock prior to issuance (or from to
shares if the underwriters for the FELINE PRIDES Offering exercise their
over-allotment option in full).
S-6
<PAGE> 199
SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The summary condensed consolidated income statement and balance sheet data
for the Company presented below are derived from the Company's consolidated
financial statements. The Company's condensed consolidated financial statements
as of and for the fiscal years ended June 30, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP. The condensed consolidated financial statements
as of and for the three months ended September 30, 1996 and 1997 are derived
from the Company's unaudited interim financial statements appearing elsewhere in
this Prospectus Supplement, which in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the data included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the three
months ended September 30, 1997, are not necessarily indicative of the results
of operations to be expected for the full fiscal year. The summary financial
information presented below should be read in conjunction with, and is qualified
by reference to, the more detailed information in the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus Supplement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information set forth
herein. Pro forma information is based on the historical financial statements of
the Company and Greenfield adjusted to give effect to the acquisition of
Greenfield, the Offerings, the FELINE PRIDES Offering and the Senior Debt
Offering. See "Pro Forma Condensed Consolidated Financial Information." The pro
forma financial information is provided for informational purposes only and does
not purport to present what the Company's results of operations would actually
have been if the acquisition of Greenfield had occurred on the assumed dates or
to project the Company's financial condition or results of operations for any
future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- ----------------------------------
1997 PRO 1997 PRO
FORMA AS FORMA AS
1995 1996 1997 ADJUSTED 1996 1997 ADJUSTED
-------- ---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $983,873 $1,079,963 $1,156,343 $1,683,362 $275,203 $310,792 $450,628
Cost of goods sold............... 560,867 625,473 668,415 1,043,548 160,493 178,569 277,842
-------- ---------- ---------- ---------- -------- -------- -------
Gross profit....................... 423,006 454,490 487,928 639,814 114,710 132,223 172,786
Operating expenses............... 293,868 328,377 357,996 450,417 86,964 98,518 124,287
Restructuring charge............. -- 2,666 -- -- -- -- --
Amortization of intangibles...... 2,165 1,596 2,907 18,410 546 1,052 5,036
-------- ---------- ---------- ---------- -------- -------- -------
Operating income................... 126,973 121,851 127,025 170,987 27,200 32,653 43,463
Interest expense................. 12,793 11,296 10,393 57,373 2,642 1,180 10,590
Other income (expense)........... 54 4,821 1,531 1,531 627 (440) (440)
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures...... -- -- -- 15,165 -- -- 3,791
-------- ---------- ---------- ---------- -------- -------- -------
Income before income taxes and
minority interest................ 114,234 115,376 118,163 99,980 25,185 31,033 28,642
Provision for income taxes....... 45,000 43,900 44,900 39,992 9,800 12,100 11,457
Minority interest................ 940 1,744 1,231 1,231 182 1,385 1,385
-------- ---------- ---------- ---------- -------- -------- -------
Net income......................... $ 68,294 $ 69,732 $ 72,032 $ 58,757 $ 15,203 $ 17,548 $ 15,800
======== ========== ========== ========== ======== ======== =======
PER SHARE DATA:
Net income......................... $ 2.58 $ 2.62 $ 2.71 $ 1.90 $ 0.57 $ 0.67 $ 0.52
Dividends.......................... 0.60 0.60 0.66 -- 0.15 0.17 --
Weighted average shares
outstanding...................... 26,486 26,635 26,575 30,875 26,729 26,171 30,471
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF SEPTEMBER 30,
------------------------------------ ----------------------
1997 PRO
FORMA AS
1995 1996 1997 1997 ADJUSTED
---------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $184,072 $217,651 $175,877 $258,435 $ 492,912
Total assets........................................... 781,609 799,491 869,309 919,589 2,018,870
Long-term debt (less current maturities)............... 78,700 56,059 40,445 40,464 635,110
Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company
debentures........................................... -- -- -- -- 222,300
Shareholders' equity................................... 391,885 438,949 459,608 530,069 725,809
</TABLE>
S-7
<PAGE> 200
RECENT DEVELOPMENTS
GREENFIELD ACQUISITION
On October 10, 1997, Kennametal and Acquisition Corp. entered into the
Merger Agreement with Greenfield pursuant to which Acquisition Corp. purchased
at $38 per share on November 17, 1997, approximately 16,179,976 (98% of the
outstanding) shares of Greenfield's common stock. The Merger occurred on
November 18, 1997, and Greenfield became a wholly-owned subsidiary of Kennametal
on that date. The total purchase price for the acquisition of Greenfield
(including estimated transaction costs and assumed Greenfield debt and
convertible redeemable preferred securities of approximately $320 million) is
estimated to be $1.0 billion. There can be no assurance that the Company will
effectively integrate and manage the acquired business or retain the management
and the numerous distributorship customers of Greenfield. In addition there can
be no assurance that the anticipated benefits of the Greenfield acquisition will
be achieved. If Kennametal does not successfully integrate and manage the
acquisition, there could be a material adverse effect on the Company.
NEW BANK CREDIT FACILITY
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into the New Bank Credit Facility with BankBoston, N.A.,
Deutsche Bank AG, New York Branch, Mellon Bank, N.A. and PNC Bank, National
Association. As of December 18, 1997, the Company had borrowed $500 million in
term loans and approximately $382 million in revolving credit loans under the
New Bank Credit Facility. The proceeds from the loans were principally used to
pay for the shares of common stock of Greenfield purchased in the Tender Offer
and the Merger, to pay transaction costs, to refinance certain indebtedness of
Greenfield, and to refinance certain indebtedness of the Company. Subject to
certain conditions, the New Bank Credit Facility permits revolving credit loans
of up to $900 million for working capital requirements, capital expenditures,
and general corporate purposes. The New Bank Credit Facility was initially
secured by all of the stock of certain of Kennametal's significant domestic
subsidiaries, by guarantees of certain of such subsidiaries and by 65% of the
stock of Kennametal's significant foreign subsidiaries. On December 24, 1997,
the stock held as security was released. The New Bank Credit Facility contains
various restrictive covenants and affirmative covenants requiring the
maintenance of certain financial ratios. The term loans under the New Bank
Credit Facility are subject to mandatory amortization commencing on November 30,
1998 and all loans mature on August 31, 2002. Proceeds from the Offerings, the
FELINE PRIDES Offering and the Senior Debt Offering will be used to prepay loans
and, correspondingly, permanently reduce the commitments of the lenders under
the New Bank Credit Facility. If all of such offerings are consummated, the
Company intends to replace the New Bank Credit Facility with a $500 million
senior unsecured credit facility, although there can be no assurance that the
Company will be able to replace the New Bank Credit Facility. See
"Capitalization," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Financial Condition."
OTHER ACQUISITIONS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, a marketer
of carbide precision tools for milling, drilling and other metalcutting
applications, Presto Engineers Cutting Tools Limited of Sheffield, United
Kingdom, a manufacturer of industrial high-speed steel cutting tools, Car-Max
Tool & Cutter Sales, Inc., which is engaged in the distribution of metalcutting
tools and industrial supplies in the midwestern United States and GRS Industrial
Supply Company which is engaged in the distribution of metalcutting tools and
industrial supplies in the midwestern United States. The companies had aggregate
sales of approximately $66 million in 1996.
OTHER OFFERINGS
Concurrently with the Offerings, (i) the Company and Kennametal Financing
I, a Delaware business trust the common securities of which are owned by the
Company, are offering 4,500,000 FELINE PRIDES(SM) (5,175,000 if the underwriters
for the FELINE PRIDES Offering exercise their over-allotment option in full) and
(ii) the Company is also undertaking the Senior Debt Offering of $450 million
aggregate principal amount of the Senior Debt Securities. The Offerings, the
FELINE PRIDES Offering, and the Senior Debt Offering are independent
S-8
<PAGE> 201
offerings and consummation of none of such offerings is conditioned upon
consummation of any of the other offerings. Proceeds from the FELINE PRIDES
Offering and the Senior Debt Offering will be used to prepay loans and,
correspondingly, permanently reduce commitments of the lenders under the New
Bank Credit Facility. This Prospectus Supplement does not constitute an offer to
buy or the solicitation of an offer to sell the FELINE PRIDES(SM) or the Senior
Debt Securities being offered by the FELINE PRIDES Offering or the Senior Debt
Offering, respectively. The FELINE PRIDES Offering and the Senior Debt Offering
will be made only by means of prospectuses, as amended or supplemented, relating
to such offerings.
S-9
<PAGE> 202
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Common Stock, after deducting estimated underwriting discounts and expenses
of the Offerings payable by the Company, are expected to be approximately $
million (or approximately $ million if the Underwriters' over-allotment
options are exercised in full). See "Underwriting." The net proceeds from the
FELINE PRIDES Offering (assuming it is completed and the over-allotment option
is not exercised) are estimated to be $ million and the net proceeds from
the Senior Debt Offering (assuming it is completed) are expected to be $
million. The net proceeds from the Offerings, the FELINE PRIDES Offering and the
Senior Debt Offering will be used to prepay loans and, correspondingly,
permanently reduce commitments of the lenders under the New Bank Credit
Facility, which indebtedness was incurred by the Company in connection with the
acquisition of Greenfield, and had a weighted average interest rate, as of
November 30, 1997, of 7.1%. If the Company consummates the Offerings, the FELINE
PRIDES Offering and the Senior Debt Offering, the Company intends to replace the
New Bank Credit Facility with a $500 million senior unsecured credit facility,
although there can be no assurance that the Company will be able to replace the
New Bank Credit Facility.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on the NYSE under the symbol
"KMT." The high and low sales prices as reported on the NYSE Composite Tape and
dividends paid for the periods indicated are set forth in the table below.
<TABLE>
<CAPTION>
PRICE RANGE
------------
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
Fiscal 1996
First Quarter.................................................... $41 1/8 $34 5/8 $0.15
Second Quarter................................................... 36 1/4 28 3/4 0.15
Third Quarter.................................................... 37 1/4 27 3/4 0.15
Fourth Quarter................................................... 38 1/4 33 5/8 0.15
Fiscal 1997
First Quarter.................................................... $34 3/8 $28 7/8 $0.15
Second Quarter................................................... 39 32 3/4 0.17
Third Quarter.................................................... 43 1/8 34 7/8 0.17
Fourth Quarter................................................... 44 1/8 33 1/8 0.17
Fiscal 1998
First Quarter.................................................... $49 1/2 $41 1/4 $0.17
Second Quarter................................................... 55 47 0.17
</TABLE>
On December 31, 1997, the last reported sale price of the Common Stock on
the NYSE was $52 1/16 per share.
The Company has paid cash dividends in every quarter since fiscal 1947. The
Board of Directors intends to continue its present policy of declaring regular
quarterly dividends when justified by the financial condition of the Company.
The amount of future dividends, if any, will depend on general business
conditions encountered by the Company, earnings, financial condition and capital
requirements of the Company, and such other factors as the Board of Directors
may deem relevant. The payment of dividends is subject to compliance with
certain financial covenants in the New Bank Credit Facility (see "Description of
Common Stock--Covenant Restrictions") and will be subject to certain
restrictions in connection with the FELINE PRIDES Offering (see "Description of
Other Offerings--FELINE PRIDES Offering").
S-10
<PAGE> 203
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the consummation of the
acquisition of Greenfield (including borrowings under the New Bank Credit
Facility), the Offerings, FELINE PRIDES Offering and the Senior Debt Offering,
and the application of the net proceeds therefrom, after deducting estimated
underwriting commissions and expenses of the Offerings (assuming that the
Underwriters' over-allotment options are not exercised). See "Use of Proceeds"
and "Description of Other Offerings." The information set forth in this table
should be read in conjunction with the consolidated financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus
Supplement. See "Pro Forma Condensed Consolidated Balance Sheet."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Short-term debt................................................ $ 60,794 $ 37,069
======== ==========
Long-term debt................................................. $ 40,464 $ 635,110
Minority interest in consolidated subsidiaries................. 44,162 44,162
Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures.......... -- 222,300
Shareholders' equity:
Preferred stock, 5,000 shares authorized; none issued........ -- --
Capital stock, $1.25 par value per share;
70,000 shares authorized; 29,370 and 33,670 shares
issued(a)................................................. 36,712 42,087
Additional paid-in capital................................... 148,438 346,663
Retained earnings............................................ 419,174 411,314
Less treasury shares, at cost; 3,153 shares held............. (61,101) (61,101)
Cumulative translation adjustments........................... (13,154) (13,154)
-------- ----------
Total shareholders' equity................................ 530,069 725,809
-------- ----------
Total capitalization...................................... $614,695 $1,627,381
======== ==========
</TABLE>
- ---------
(a) Does not include: (i) 1,567,185 shares of Common Stock as of September 30,
1997, issuable upon exercise of outstanding options of which options
covering 1,539,929 shares were exercisable as of that date; (ii) 63,804
shares issuable as of September 30, 1997, pursuant to the Company's deferred
stock plans; (iii) shares which may be issued pursuant to the Company's
dividend reinvestment and stock purchase plan; or (iv) from to
shares which will be issued on , 2001 pursuant to the
FELINE PRIDES Offering depending upon the average trading price of the
Common Stock prior to issuance (or from to shares if the
underwriters for the FELINE PRIDES Offering exercise their over-allotment
option in full).
S-11
<PAGE> 204
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Statements of Income, the
Pro Forma Condensed Consolidated Balance Sheet and the pro forma data under
"Prospectus Supplement Summary--Summary Condensed Consolidated Financial
Information" are based on the historical financial statements of the Company and
Greenfield adjusted to give effect to the acquisition of Greenfield, the
Offerings, the FELINE PRIDES Offering and the Senior Debt Offering. The Pro
Forma Condensed Consolidated Statements of Income for the year ended June 30,
1997, and for the three months ended September 30, 1997, assume that the
acquisition of Greenfield occurred as of the first day of the Company's 1997
fiscal year (July 1, 1996). Since Greenfield has a fiscal year-end of December
31, the historical information included in the Pro Forma Condensed Consolidated
Statement of Income for the year ended June 30, 1997 has been derived from
Greenfield's operating results for the twelve months ended June 30, 1997. The
Pro Forma Condensed Consolidated Balance Sheet gives effect to the acquisition
of Greenfield, the Offerings, the FELINE PRIDES Offering and the Senior Debt
Offering as if they had occurred on September 30, 1997.
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Greenfield, and accordingly is based on
estimated purchase accounting adjustments that are subject to further revision
depending upon completion of appraisals or other studies of the fair value of
Greenfield's assets and liabilities. Final purchase accounting adjustments will
differ from the pro forma adjustments presented herein and described in the
accompanying notes due to the results of operations of Greenfield from September
30, 1997, to the date of closing (November 18, 1997). See Note 18 to the
Company's consolidated financial statements included herein.
The pro forma financial information reflects certain assumptions described
above and in the Notes to Pro Forma Condensed Consolidated Statements of Income
and Pro Forma Condensed Consolidated Balance Sheet which follow. The pro forma
financial information, including notes thereto, should be read in conjunction
with the consolidated financial statements of the Company and of Greenfield, and
the related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus Supplement. The pro forma financial information is provided for
informational purposes only and does not purport to present what the Company's
results of operations would actually have been if the acquisition of Greenfield
had occurred on the assumed dates, as specified above, or to project the
Company's financial condition or results of operations for any future period.
S-12
<PAGE> 205
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $1,156,343 $ 527,019 $ -- $ -- $ 1,683,362
Cost of goods sold.............. 668,415 373,133 2,000(a) -- 1,043,548
---------- -------- -------- -------- ----------
Gross profit...................... 487,928 153,886 (2,000) -- 639,814
Operating expenses.............. 357,996 92,421 -- -- 450,417
Amortization of intangibles..... 2,907 4,946 10,557(b) -- 18,410
---------- -------- -------- -------- ----------
Operating income.................. 127,025 56,519 (12,557) -- 170,987
Interest expense................ 10,393 10,916 64,922(c) (28,858)(d) 57,373
Other income.................... 1,531 -- -- -- 1,531
Dividends on
Greenfield-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield................... -- 6,900 (6,900)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures.... -- -- -- 15,165(f) 15,165
---------- -------- -------- -------- ----------
Income before income taxes and
minority interest............... 118,163 38,703 (70,579) 13,693 99,980
Provision for income taxes...... 44,900 15,876 (26,261) 5,477 39,992(g)
Minority interest............... 1,231 -- -- -- 1,231
---------- -------- -------- -------- ----------
Net income........................ $ 72,032 $ 22,827 $ (44,318) $ 8,216 $ 58,757
========== ======== ======== ======== ==========
PER SHARE DATA:
Net income........................ $ 2.71 $ 1.90(h)
========== ==========
Weighted average shares
outstanding..................... 26,575 30,875(h)
========== ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
S-13
<PAGE> 206
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $15.5 million less the elimination of historical
Greenfield goodwill amortization of approximately $4.9 million.
(c) Reflects (i) an increase in interest expense of approximately $69.1 million
associated with the New Bank Credit Facility, (ii) the elimination of
historical interest expense of approximately $17.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield and (iii)
the amortization of deferred financing costs of approximately $13.1 million
to establish the New Bank Credit Facility, which includes a charge to
reflect repayments of the New Bank Credit Facility using the net proceeds of
the Offerings, the FELINE PRIDES Offering and the Senior Debt Offering.
(d) Reflects a decrease in interest expense of approximately $28.9 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offerings, the FELINE PRIDES Offering and the
Senior Debt Offering.
(e) Reflects the elimination of historical dividends of approximately $6.9
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $14.6 million in connection with Company-obligated,
mandatorily redeemable securities of subsidiary holding solely parent
company debentures, and amortization of transaction costs related to the
trust preferred securities of approximately $0.5 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
S-14
<PAGE> 207
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $310,792 $ 139,836 $ -- $ -- $ 450,628
Cost of goods sold............... 178,569 98,773 500(a) -- 277,842
-------- -------- -------- ------- --------
Gross profit....................... 132,223 41,063 (500) -- 172,786
Operating expenses............... 98,518 25,769 -- -- 124,287
Amortization of intangibles...... 1,052 1,263 2,721(b) -- 5,036
-------- -------- -------- ------- --------
Operating income................... 32,653 14,031 (3,221) -- 43,463
Interest expense................. 1,180 3,670 12,955(c) (7,215)(d) 10,590
Other (expense).................. (440) -- -- -- (440)
Dividends on
Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield.................... -- 1,725 (1,725)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures..... -- -- -- 3,791(f) 3,791
-------- -------- -------- ------- --------
Income before income taxes and
minority interest................ 31,033 8,636 (14,451) 3,424 28,642
Provision for income taxes....... 12,100 3,541 (5,554) 1,370 11,457(g)
Minority interest................ 1,385 -- -- -- 1,385
-------- -------- -------- ------- --------
Net income......................... $ 17,548 $ 5,095 $ (8,897) $ 2,054 $ 15,800
======== ======== ======== ======= ========
PER SHARE DATA:
Net income......................... $ 0.67 $ 0.52(h)
======== ========
Weighted average shares
outstanding...................... 26,171 30,471(h)
======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
S-15
<PAGE> 208
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $3.9 million less the elimination of historical
Greenfield goodwill amortization of approximately $1.2 million.
(c) Reflects: (i) an increase in interest expense of approximately $17.3 million
associated with the New Bank Credit Facility and (ii) the elimination of
historical interest expense of approximately $4.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield.
(d) Reflects a decrease in interest expense of approximately $7.2 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offerings, the FELINE PRIDES Offering and the
Senior Debt Offering.
(e) Reflects the elimination of historical dividends of approximately $1.7
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $3.7 million in connection with Company-obligated, mandatorily
redeemable securities of subsidiary holding solely parent company
debentures, and amortization of transaction costs related to the trust
preferred securities of approximately $0.1 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
S-16
<PAGE> 209
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents.............. $ 45,409 $ -- $ -- $ -- $ 45,409
Accounts receivable, net of
allowance....................... 202,144 98,100 -- -- 300,244
Inventories....................... 214,068 182,524 5,700 (a) -- 396,292
-- -- (6,000)(b) -- --
Other current assets.............. 24,949 5,875 -- -- 30,824
-------- -------- ---------- --------- ----------
Total current assets............ 486,570 286,499 (300) -- 772,769
Net property, plant and
equipment....................... 310,563 169,179 20,000 (a) -- 497,242
-- -- (2,500)(b) -- --
Intangible assets................. 57,691 180,187 439,952 (a) -- 677,830
Other assets...................... 64,765 2,302 13,100 (c) (13,100)(c) 71,029
-- -- -- 3,962 (d) --
-------- -------- ---------- --------- ----------
Total assets.................... $919,589 $638,167 $ 470,252 $ (9,138) $2,018,870
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Short-term debt................... $ 60,794 $ 6,632 $ (30,357)(e) $ -- $ 37,069
Accounts payable.................. 61,306 31,026 -- -- 92,332
Other current liabilities......... 106,035 41,561 3,000 (b) 5,100 (f) 150,456
-- -- -- (5,240)(c) --
-------- -------- ---------- --------- ----------
Total current liabilities....... 228,135 79,219 (27,357) (140) 279,857
Term debt and capital leases, less
current maturities.............. 40,464 197,734 (200,000)(e) 450,000 (d) 635,110
-- -- 1,023,950 (e) (877,038)(d) --
Other liabilities................. 76,759 29,193 5,680 (a) -- 111,632
-------- -------- ---------- --------- ----------
Total liabilities............... 345,358 306,146 802,273 (427,178) 1,026,599
Minority interest in consolidated
subsidiaries.................... 44,162 -- -- -- 44,162
Greenfield-obligated, mandatorily
redeemable convertible preferred
securities of subsidiary
Greenfield Capital Trust holding
solely convertible subordinated
debentures of Greenfield........ -- 115,000 (115,000)(e) -- --
Company-obligated, mandatorily
redeemable securities of
subsidiary holding solely parent
company debentures.............. -- -- -- 222,300 (g) 222,300
Shareholders' equity.............. 530,069 217,021 (217,021)(a) 214,000 (d) 725,809
-- -- -- (7,860)(c) --
-- -- -- (10,400)(h) --
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity.......... $919,589 $638,167 $ 470,252 $ (9,138) $2,018,870
======== ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet.
S-17
<PAGE> 210
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(a) The preliminary allocation of the estimated purchase price to assets
acquired and liabilities assumed as of September 30, 1997 is as follows:
<TABLE>
<S> <C>
Purchase price........................................................ $ 624,960
Buy-out of stock options and warrants................................. 16,333
Estimated acquisition costs........................................... 24,200
---------
Total purchase price......................................... $ 665,493
=========
Net book value of assets acquired..................................... $ 217,021
Less: goodwill of Greenfield.......................................... (180,187)
Adjustments to fair value:
Inventories, eliminate LIFO reserve.......................... 5,700
Property, plant and equipment................................ 20,000
Net deferred income tax liabilities.......................... (5,680)
Impact of restructuring of Greenfield........................ (11,500)
Goodwill..................................................... 620,139
---------
$ 665,493
=========
</TABLE>
(b) Reflects the costs related to the restructuring of Greenfield's South
Deerfield, Massachusetts operations. In November 1997, Greenfield recorded
an $11.5 million charge for non-recurring expenses primarily related to the
restructuring of its South Deerfield operations. These costs primarily
included inventory and machinery and equipment reserves, severance costs and
other miscellaneous expenses relative to Greenfield's decision to
discontinue the manufacture and sale of certain low-margin product lines.
The restructuring will result in a reduction in personnel, thereby
eliminating excessive costs and redundancies in future periods. Greenfield
also expects to record additional non-recurring expenses of approximately
$2.0 million in 1998 related to the restructuring of its South Deerfield
operations. These amounts are not included in the restructuring charge.
<TABLE>
<S> <C>
The components of the restructuring charge are recorded as follows:
Inventory write-down........................................... $ 6,000
Property, plant and equipment write-down....................... 2,500
Severance costs and other current liabilities.................. 3,000
-------
Impact of restructuring of Greenfield............................... $11,500
=======
</TABLE>
(c) Represents payment of estimated deferred financing costs of approximately
$13.1 million to establish the New Bank Credit Facility. Such costs are
subsequently charged to interest expense, with a related tax benefit of
approximately $5.2 million, upon payment of the New Bank Credit Facility
using the net proceeds of the Offerings, the FELINE PRIDES Offering and the
Senior Debt Offering.
(d) Reflects the net proceeds of approximately $877.0 million from: (i)
approximately $214.0 million from the issuance of 4.3 million shares of
Common Stock, net of related transaction costs of approximately $11.0
million; (ii) approximately $217.0 million from the issuance of $225.0
million of Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures, net of related
transaction costs of approximately $8.0 million; and (iii) an aggregate of
approximately $446.0 million from the issuance of $450.0 million of the 2001
Notes, the 2008 Notes and the 2028 Debentures, net of the estimated portion
of the anticipated transaction costs of approximately $4.0 million.
(e) Reflects borrowings under the New Bank Credit Facility of approximately
$1,024.0 million to: (i) acquire Greenfield (approximately $665.5 million);
(ii) repay approximately $230.4 million of certain debt of Greenfield and
Kennametal; (iii) repay $115.0 million of outstanding indebtedness of
Greenfield-obligated, mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust holding solely convertible
subordinated debentures of Greenfield; and (iv) pay transaction fees of
approximately $13.1 million related to the New Bank Credit Facility.
(f) Reflects the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering.
(g) Reflects the proceeds of approximately $225.0 million from the issuance of
Company-obligated, mandatorily redeemable securities of subsidiary holding
solely parent company debentures, net of the estimated portion of the
anticipated transaction costs related solely to the trust preferred
securities of approximately $2.7 million.
(h) Reflects: (i) the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering; and (ii) the estimated portion of
anticipated transaction costs related to the stock purchase contract
component of the FELINE PRIDES Offering of approximately $5.3 million.
S-18
<PAGE> 211
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
The selected condensed 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, 1993, 1994, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP. The consolidated financial statements as of and
for the three months ended September 30, 1996 and 1997 are derived from the
Company's unaudited interim financial statements appearing elsewhere in this
Prospectus Supplement, which in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the data included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the three
months ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected for the full fiscal year. 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 of the Company and the related notes thereto included elsewhere in
this Prospectus Supplement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information set forth
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------------ --------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $598,496 $802,513 $983,873 $1,079,963 $1,156,343 $275,203 $310,792
Cost of goods sold.................. 352,773 472,533 560,867 625,473 668,415 160,493 178,569
-------- -------- -------- ---------- ---------- -------- --------
Gross profit.......................... 245,723 329,980 423,006 454,490 487,928 114,710 132,223
Research and development expenses... 14,714 15,201 18,744 20,585 24,105 5,739 5,227
Selling, marketing and distribution
expenses.......................... 144,850 189,487 219,271 242,375 263,980 63,019 68,571
General and administrative
expenses.......................... 41,348 58,612 55,853 65,417 69,911 18,206 24,720
Restructuring charge................ -- 24,749 -- 2,666 -- -- --
Patent litigation income............ (1,738) -- -- -- -- -- --
Amortization of intangibles......... 3,425 3,996 2,165 1,596 2,907 546 1,052
-------- -------- -------- ---------- ---------- -------- --------
Operating income...................... 43,124 37,935 126,973 121,851 127,025 27,200 32,653
Interest expense.................... 9,549 13,811 12,793 11,296 10,393 2,642 1,180
Other income (expense).............. 519 1,860 54 4,821 1,531 627 (440)
-------- -------- -------- ---------- ---------- -------- --------
Income before income taxes and
minority interest................... 34,094 25,984 114,234 115,376 118,163 25,185 31,033
Provision for income taxes............ 14,000 15,500 45,000 43,900 44,900 9,800 12,100
Minority interest..................... -- (431) 940 1,744 1,231 182 1,385
-------- -------- -------- ---------- ---------- -------- --------
Income before cumulative effect of
accounting changes.................. 20,094 10,915 68,294 69,732 72,032 15,203 17,548
Cumulative effect of accounting
changes............................. -- (15,003) -- -- -- -- --
-------- -------- -------- ---------- ---------- -------- --------
Net income (loss)..................... $ 20,094 $ (4,088) $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
======== ======== ======== ========== ========== ======== ========
PER SHARE DATA:
Income before cumulative effect of
accounting changes.................. $ 0.93 $ 0.45 $ 2.58 $ 2.62 $ 2.71 $ 0.57 $ 0.67
Net income (loss)..................... 0.93 (0.17) 2.58 2.62 2.71 0.57 0.67
Dividends............................. 0.58 0.58 0.60 0.60 0.66 0.15 0.17
Weighted average shares outstanding... 21,712 24,304 26,486 26,635 26,575 26,729 26,171
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
-------------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $120,877 $130,777 $184,072 $217,651 $175,877 $ 258,435
Total assets................................. 448,263 697,532 781,609 799,491 869,309 919,589
Long-term debt (less current maturities)..... 87,891 90,178 78,700 56,059 40,445 40,464
Shareholders' equity......................... 255,141 322,836 391,885 438,949 459,608 530,069
</TABLE>
S-19
<PAGE> 212
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
SALES AND MARKETS. During the quarter ended September 30, 1997,
consolidated sales were $310.8 million, up 13 percent from $275.2 million in the
same quarter last year. Sales rose 16 percent excluding unfavorable foreign
currency translation effects. The increase in sales was primarily attributable
to higher sales of metalworking products in North America and from higher sales
of industrial supplies sold by J&L Industrial Supply ("J&L") and by integrated
industrial supply programs ("Full Service Supply programs"), both operating
within JLK.
Net income for the first quarter ended September 30, 1997, was $17.5
million, or $0.67 per share, as compared with net income of $15.2 million, or
$0.57 per share, in the same quarter last year. The results included expenses of
$5.2 million, or $0.12 per share, for the completion of the relocation and
related expenses incurred in connection with the construction of the new world
headquarters. Earnings benefited from higher sales of metalcutting and related
products in North America and Europe as well as from higher production levels
and productivity improvements related to its focused factory initiative of
rearranging manufacturing layout to improve productivity. This was partially
offset by unfavorable foreign currency translation effects.
During the September 1997 quarter, sales in the North America Metalworking
market increased 7 percent from the previous year. Sales of metalcutting inserts
and toolholding devices in North America increased due to improved economic
conditions in the United States in most major end markets and from continued
emphasis on milling and drilling products. Additionally, sales of metalcutting
and toolholding devices sold through all sales channels in North America,
including sales through the industrial supply market, increased 11 percent.
Sales in the Europe Metalworking market on a local currency basis increased
13 percent over the same quarter a year ago. Including unfavorable foreign
currency translation effects, sales in the Europe Metalworking market were flat.
Demand for metalworking products continued to show improvement during the
quarter in most key end markets as a result of improved market conditions in
Europe, principally in Germany. Sales in the European market have posted
double-digit order gains for four consecutive months.
In the Asia Pacific Metalworking market, sales decreased slightly as
results were affected by weak economic conditions in Korea, Singapore and
Thailand. Excluding unfavorable foreign currency translation effects, sales in
the Asia Pacific Metalworking market increased 3 percent. Additionally,
effective August 1, 1997, the Company acquired 100 percent of Kobe Kennametal
K.K. from its joint venture partner, Kobe Steel.
Sales in the industrial supply market rose 35 percent as a result of
increased sales through mail order, Full Service Supply programs and from
acquisitions. Excluding the acquisitions, sales increased approximately 24
percent. Sales increased because of four additional showrooms, from the
integration of new showroom locations from acquired companies, from further
penetration of existing customers, and from an expanded product offering of more
than 10,000 new stock keeping units ("SKUs") in J&L's 1998 master catalog issued
September 1, 1997.
During the September 1997 quarter, sales in the mining and construction
market increased 10 percent from the previous year as a result of increased
domestic demand for highway construction tools. International sales of mining
and highway construction tools also improved as a result of strong market demand
in South Africa and China.
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom ("Presto"), Car-Max
Tool & Cutter Sales, Inc. and GRS Industrial Supply Company ("GRS"). The
companies had aggregate sales of approximately $66 million in 1996. The
acquisitions were accounted for using the purchase method of accounting. The
consolidated financial statements include the operating results of each business
from the date of acquisition except for the acquisitions of Presto and GRS,
which were acquired after September 30, 1997. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
significant.
S-20
<PAGE> 213
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
September 1997 quarter was 42.5 percent as compared with 41.7 percent in the
prior year. The gross profit margin increased primarily as a result of
productivity improvements related in part to the focused factory initiative and
from higher production levels. This increase was partially offset by unfavorable
foreign currency translation effects.
Operating expenses as a percentage of sales were 31.7 percent compared to
31.6 percent last year. Operating expenses increased 13.0 percent primarily
because of relocation and related costs incurred in connection with the
construction of the new world headquarters, which amounted to approximately $5.2
million during the first quarter. The project is now successfully completed.
Operating expenses also increased because of higher costs related to
acquisitions, and from the JLK showroom expansion program, including higher
direct mail costs and increased direct marketing costs in new territories in the
United States and in Europe.
Interest expense for the September 1997 quarter was $1.2 million compared
to $2.6 million in the same quarter of a year ago. Interest expense decreased as
a result of lower debt balances as the Company used the proceeds received from
the initial public offering ("IPO") of approximately 4.9 million shares of
common stock of JLK to reduce indebtedness.
The effective tax rate for the September 1997 quarter was 39.0 percent
compared to an effective tax rate of 38.9 percent in the prior year.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
OVERVIEW. Net income for 1997 was $72.0 million, compared to $69.7 million
last year. While revenues and earnings rose to record highs, earnings were
affected by weakness in the European market, primarily in Germany, and from
negative effects of foreign currency translations due to the strength of the
U.S. dollar. Earnings for 1997 also were affected by additional costs related to
the J&L showroom expansion program, integration of new client-server information
systems and relocation and related costs associated with the construction of a
new world headquarters in Latrobe, Pennsylvania. Earnings in 1997 benefited from
slightly higher sales of metalworking products in North America and from higher
sales of metalworking products and industrial supplies sold to the Industrial
Supply market through mail order and Full Service Supply programs.
<TABLE>
<CAPTION>
SALES BY MARKET AND GEOGRAPHIC AREA
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------
1995 1996 1997
-------------------- --------------------------------- ---------------------------------
(IN THOUSANDS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL AMOUNT CHANGE OF TOTAL AMOUNT CHANGE
-------- -------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MARKET
Metalworking:
North America..... 37% $367,807 34% $ 368,481 --% 33% $ 378,679 3%
Europe............ 26 254,037 25 271,004 7 22 251,304 (7)
Asia Pacific...... 3 24,579 3 35,854 46 4 41,425 16
Industrial
Supply............ 20 201,152 24 256,703 28 28 328,531 28
Mining and
Construction...... 14 136,298 14 147,921 9 13 156,404 6
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
BY GEOGRAPHIC AREA
Within the
United States..... 62% $606,623 62% $ 665,510 10% 65% $ 752,268 13%
International....... 38 377,250 38 414,453 10 35 404,075 (3)
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
</TABLE>
SALES AND MARKETS. Sales for the year ended June 30, 1997, were $1.2
billion, up 7 percent from $1.1 billion last year. Sales primarily increased in
1997 because of higher sales of metalworking products and industrial supplies
sold to the Industrial Supply market by J&L and by Full Service Supply programs.
The increase in sales
S-21
<PAGE> 214
was offset in part by lower sales of metalworking products in Europe due to weak
economic conditions, especially the German market, and from negative foreign
currency translation effects.
Sales in the North America Metalworking market increased 3 percent over
1996, despite the transfer of small customer accounts to J&L, as a result of
improved economic conditions in the United States and from the continued
emphasis on milling and drilling products. Sales in Canada rose 15 percent
because of increased sales of metalworking products to aerospace and automotive
companies. Additionally, sales of traditional metalworking products sold through
all sales channels in North America, including sales through the Industrial
Supply market, increased 7 percent.
Sales in the Europe Metalworking market decreased 7 percent. Demand for
metalworking products continued to be slow due to weak economic conditions in
Europe, primarily in the German market. Demand in Europe was weak for most of
1997 but began to show improvement during the fourth quarter of fiscal 1997.
Despite the economic situation in Europe, sales continued to post gains in the
United Kingdom and France. In the Asia Pacific Metalworking market, sales rose
16 percent as a result of increased demand in China, Japan and Taiwan, although
sales were affected by soft economic conditions in Korea and Thailand. Excluding
foreign currency translation effects, sales in the Europe Metalworking market
decreased 2 percent, while sales in the Asia Pacific Metalworking market
increased 21 percent.
The Industrial Supply market was the major contributor to the overall sales
increase because of the continued growth of mail order and Full Service Supply
programs. Sales rose 28.0 percent primarily because of the expanded product
offering of over 20,000 new SKUs in the J&L 1997 master catalog, from the
addition of five new showrooms and from innovative marketing programs. Full
Service Supply programs increased, to a lesser extent, from the continued
ramp-up of existing Full Service Supply programs. Also contributing to the sales
increase was the acquisition of two industrial supply companies during the
fourth quarter of 1997. The acquired companies had annual sales of $36 million
in their latest fiscal year and will provide four additional showroom locations
in the Midwest. Excluding these acquisitions, the Industrial Supply market sales
increased 26 percent. 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 around 60
customers covering about 120 different facilities.
Sales in the Mining and Construction market increased 6 percent from 1996
as a result of increased domestic and international demand for mining tools.
Highway construction tool sales were flat in the United States, while
international sales declined slightly as a result of weak economic conditions in
Europe.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1997, was 42.2 percent, compared to 42.1 percent last year.
The gross profit margin improved slightly as a result of the positive effects of
productivity improvements related to the focused factory initiative. These
benefits were partially offset by a less favorable sales mix coupled with
unfavorable foreign currency translation effects.
Operating expenses as a percentage of sales were 31.0 percent, compared to
30.4 percent last year, excluding the effects of the one-time restructuring
charge in fiscal 1996. Operating expenses increased primarily because of higher
costs related to the J&L showroom expansion program, including higher direct
mail costs and increased direct marketing in new territories in the United
States and in Europe. Operating expenses also increased from higher costs to
support new and existing Full Service Supply programs, from the integration of
new client-server information systems, from higher research and development
costs and from relocation and related costs of $4.7 million associated with the
construction of a new world headquarters.
Interest expense decreased 8 percent because of lower average borrowings
coupled with slightly lower interest rates. The effective tax rate was 38.4
percent in 1997, compared to 38.6 percent in 1996. The decrease in the effective
tax rate resulted from additional tax benefits derived from international
operations.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
OVERVIEW. Net income for 1996 was $69.7 million, up 2 percent from $68.3
million in 1995. The 1996 results included a restructuring charge totaling $2.7
million ($0.06 per share) for the relocation of the North America Metalworking
Headquarters and for the closure of a manufacturing facility in Canada.
Excluding the restructuring charge, net income for 1996 was up 5 percent.
S-22
<PAGE> 215
Earnings for 1996 increased because of the rapid growth in industrial
supply sales, primarily through mail order and Full Service Supply programs and
from slightly higher sales of metalcutting products in each of the three
metalworking markets. Earnings were affected by a less favorable sales mix and
lower production levels. Further, costs associated with the implementation of
new client-server information systems and focused factory programs reduced
pretax earnings by $10.4 million during 1996.
SALES AND MARKETS. Sales for the year ended June 30, 1996, were $1.1
billion, up 10 percent from $984 million in 1995. Sales increased in each of the
five markets over 1995. Sales increased in 1996 because of slightly higher sales
volumes and modest price increases.
Sales in the North America Metalworking market were flat compared to the
prior year. Sales of metalcutting inserts and toolholding devices in the United
States were flat, as sales growth was affected by weak economic conditions.
Sales of metalworking products in Canada increased 11 percent because of
increased demand.
In the Europe Metalworking market, sales increased 7 percent because of
higher sales volumes. Demand for metalworking products was slow in Germany,
while sales grew at a faster pace in the United Kingdom and France. Demand in
Europe was stronger in the first half of the fiscal year but slowed as the year
progressed. In the Asia Pacific Metalworking market, sales rose 11 percent as a
result of increased demand. Sales also increased because, effective July 1,
1995, Kennametal began to consolidate its majority-owned subsidiaries in China
and Japan. Excluding foreign currency translation effects, sales in the Europe
and Asia Pacific Metalworking markets increased 6 and 7 percent, respectively.
The Industrial Supply market accounted for the largest percentage sales
gain because of the rapid growth of mail order and Full Service Supply programs.
Sales rose 28 percent as a result of aggressive marketing programs, the
successful geographic showroom expansion program at J&L and new and existing
Full Service Supply programs with large customers. During fiscal 1996, J&L
opened seven showroom locations and at the end of fiscal 1996 operated a total
of 18 showrooms in the United States and one location in the United Kingdom.
Full Service Supply added 18 new contracts, bringing the total number to
slightly more than 50 contracts covering more than 100 plant locations in 1996.
Also, during June 1996, the Company began transferring small customer accounts
from the North America Metalworking market to J&L to provide added customer
service and to further leverage J&L's full complement of metalcutting supplies.
Sales in the Mining and Construction market increased 9 percent over 1995
as a result of strong domestic demand for both mining and highway construction
tools. International sales rose only slightly because of increased competition.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1996, was 42.1 percent, compared to 43.0 percent in 1995.
The gross profit margin benefited from higher sales volumes and modest price
increases. These benefits were offset by a less favorable sales mix, slightly
higher raw material costs, costs associated with the implementation of focused
factory programs and reduced manufacturing efficiencies because of lower
production levels.
Operating expenses as a percentage of sales were 30.4 percent, compared to
29.9 percent in 1995. Operating expenses increased 12 percent primarily because
of costs related to the implementation of new client-server information systems,
costs necessary to support the higher sales levels, and marketing and showroom
expansion programs at J&L. Results of operations also included a restructuring
charge related to the consolidation of the North America Metalworking
headquarters from Raleigh, North Carolina, to Latrobe, Pennsylvania, and the
closure of a manufacturing facility in Canada. These pretax items were recorded
during the fourth quarter of fiscal 1996 and amounted to $2.7 million.
Interest expense decreased 12 percent because of lower average borrowings
and slightly lower interest rates. The effective tax rate was 38.6 percent in
1996, compared to 39.7 percent in 1995. The decrease in the effective tax rate
resulted from additional tax benefits derived from international operations.
RESTRUCTURING CHARGE. During the fourth quarter of fiscal 1996, the
Company recorded a pretax charge of $2.7 million to relocate its North America
Metalworking headquarters from Raleigh, North Carolina, to Latrobe,
Pennsylvania, and to close a manufacturing facility in Canada. The relocation
was made to globalize key functions and to provide a more efficient corporate
structure. As a result, a pretax charge of $2.7 million was recorded to cover
the related one-time costs of employee separation arrangements and early
retirements. In
S-23
<PAGE> 216
connection with the relocation, the Company is constructing a new world
headquarters building estimated to cost $20 million.
Certain costs resulting from the relocation of employees, hiring and
training new employees, and other costs resulting from the temporary duplication
of certain operations were not included in the one-time charge and will be
included in operating expenses as incurred. The costs related to these items
were estimated to be $9 million pretax and will be incurred during fiscal 1997
and 1998.
LIQUIDITY AND CAPITAL RESOURCES
On October 10, 1997, Kennametal and Acquisition Corp. entered into the
Merger Agreement with Greenfield pursuant to which Acquisition Corp. purchased
at $38 per share on November 17, 1997 approximately 16,179,976 shares (98
percent of the outstanding) of Greenfield's common stock. The Merger occurred on
November 18, 1997 and Greenfield became a wholly-owned subsidiary of Kennametal
on that date. The total purchase price for the acquisition of Greenfield
(including estimated transaction costs and assumed Greenfield debt and
convertible redeemable preferred securities of approximately $320 million) is
estimated to be $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into the New Bank Credit Facility. As of December 18, 1997,
the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans under the New Bank Credit Facility. The
proceeds from the loans were principally used to pay for the shares of common
stock of Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of Greenfield and to
refinance certain indebtedness of the Company. Subject to certain conditions,
the New Bank Credit Facility permits revolving credit loans of up to $900
million for working capital requirements, capital expenditures, and general
corporate purposes. The New Bank Credit Facility was initially secured by all of
the stock of certain of Kennametal's significant domestic subsidiaries, by
guarantees of certain of such subsidiaries and by 65.0 percent of the stock of
Kennametal's significant foreign subsidiaries. On December 24, 1997 the stock
held as security was released. The New Bank Credit Facility contains various
restrictive covenants and affirmative covenants requiring the maintenance of
certain financial ratios. The term loans under the New Bank Credit Facility are
subject to mandatory amortization commencing on November 30, 1998 and all loans
mature on August 31, 2002. Proceeds from the Offerings, the FELINE PRIDES
Offering and the Senior Debt Offering will be used to prepay loans and,
correspondingly, permanently reduce the commitments of the lenders under the New
Bank Credit Facility. If all of such offerings are consummated, the Company
intends to replace the New Bank Credit Facility with a $500 million senior
unsecured credit facility, although there can be no assurance that the Company
will be able to replace the New Bank Credit Facility.
Kennametal's cash flow from operations is the primary source of financing
for capital expenditures and internal growth. The Company and its subsidiaries
generally obtain local financing through credit lines with commercial banks.
During 1997, the Company generated $99.9 million in cash from operations.
Cash provided by operations increased from 1996 primarily because of lower
working capital requirements and slightly higher net income. Capital
expenditures, totaling $73.8 million, were made to construct a new world
headquarters in Latrobe, Pennsylvania, and a manufacturing facility in China,
for new client-server information systems and to upgrade machinery and
equipment. Additionally, the Company paid $17.5 million of cash dividends and
paid $19 million to acquire five small companies throughout 1997. The effects of
the acquisitions were not significant to the Company. During the quarter ended
September 30, 1997, the Company generated $40.6 million in cash from operations.
The increase in cash provided by operations resulted primarily from higher net
income and slightly lower incremental working capital requirements. Net cash
used in investing activities during the quarter ended September 30, 1997 was
$32.4 million. The increase in net cash used in investing activities resulted
from higher capital expenditures and from the acquisition of Rubig G.m.b.H. and
the remaining interest in Kobe Kennametal K.K. from its joint venture partner,
Kobe Steel.
On January 31, 1997, the Company initiated a stock repurchase program to
repurchase from time to time up to a total of 1.6 million shares of its
outstanding capital stock. During the year ended June 30, 1997, the Company
repurchased approximately 781,000 shares of its Common Stock at a total cost of
approximately $28.7 million.
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The repurchases were made in the open market or in negotiated or other
permissible transactions. The repurchase of Common Stock was financed
principally by cash from operations and short-term borrowings.
On July 2, 1997, an IPO of approximately 4.9 million shares of common stock
of JLK at a price of $20 per share was consummated. JLK operates the industrial
supply operations consisting of the Company's wholly owned J&L subsidiary and
its Full Service Supply programs. The net proceeds from the offering were
approximately $90 million and represented the sale of approximately 20 percent
of JLK's common stock. The net proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and $20 million related to
intercompany obligations to the Company. The Company used these proceeds to
repay short-term debt. In connection with the IPO, the remaining net proceeds
were loaned to the Company, under an intercompany debt/investment and cash
management agreement at a fluctuating rate of interest equal to the Company's
short-term borrowing costs. The Company will maintain unused lines of credit to
enable it to repay any portion of the borrowed funds as the amounts are due on
demand by JLK. The Company owns approximately 80 percent of the outstanding
common stock of JLK and intends to retain a majority of both the economic and
voting interests of JLK.
During 1996, the Company generated $85 million in cash from operations,
which was used primarily to finance $58 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment, and to acquire new information
systems. In January 1996, the Company announced plans to build a $20 million
facility in Shanghai, China to manufacture cemented carbide metalcutting tools.
Pilot production commenced in the second quarter of fiscal 1998 with full
production beginning in the third quarter of fiscal 1998.
During 1995, the Company generated $57 million in cash from operations,
which was used primarily to finance $43 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment and to acquire new information
systems.
Capital expenditures for fiscal 1998 (excluding) Greenfield are estimated
to be $70-$80 million of which $16.7 million has been spent through September
30, 1997, and will be used primarily to complete the construction of a new world
headquarters in Latrobe, Pennsylvania and a manufacturing facility in China, to
acquire additional client-server information systems, to construct or acquire a
new Midwest distribution center and to upgrade machinery and equipment.
FINANCIAL CONDITION
Kennametal's financial condition remains strong. Total assets were $869
million in 1997, up 9 percent from $799 million in 1996. Net working capital was
$176 million, down 19 percent from the previous year. The ratio of current
assets to current liabilities was 1.6 in 1997, compared with 2.0 in 1996. Total
assets were $920 million at September 30, 1997, up 6 percent from $869 million
at June 30, 1997. Net working capital was $258 million, up 47 percent from $176
million from the previous quarter and the ratio of current assets to current
liabilities was 2.1 as of September 30, 1997 and 1.6 as of June 30, 1997.
Accounts receivable increased 6 percent to $201 million because of
increased sales and from the effects of acquisitions. Inventories rose slightly
to $210 million due to the growth of sales to the Industrial Supply market, the
effects of acquisitions, offset by the Company's inventory reduction efforts of
manufactured products. Inventory turnover was 3.2 in 1997 and 3.0 in 1996. The
Company will continue to focus on ways to improve inventory turnover and overall
asset utilization.
Total debt (including capital lease obligations) increased 33 percent to
$174 million in 1997. In 1997, total debt increased principally because of the
stock repurchase program and increased capital expenditures. The ratio of total
debt to total capital (i.e., total debt divided by the sum of total debt,
minority interest and shareholders' equity) was 27.1 percent in 1997 as compared
with 22.5 percent in 1996. Total debt decreased 42 percent to $101 million and
the Company's debt-to-capital ratio was 15.0 percent at September 30, 1997.
Total debt decreased as a result of the application of net proceeds of $90
million received from the IPO of approximately 4.9 million shares of common
stock of JLK.
After the acquisition of Greenfield, the Offerings, the FELINE PRIDES
Offering and the Senior Debt Offering, and the application of the net proceeds
therefrom, total debt will increase to approximately
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$672.2 million and the debt-to-capital ratio will increase to approximately 40.4
percent. To maintain financial flexibility and to optimize the cost of capital,
Kennametal's financial objective, over the long term, is to maintain a total
debt-to-capital ratio of not more than 40 percent. Cash from operations and the
Company's debt capacity are expected to continue to be sufficient to fund
capital expenditures, dividend payments, stock repurchases, acquisitions and
operating requirements.
ENVIRONMENTAL MATTERS
Compliance with Environmental Laws did not have a material effect on the
Company's capital expenditures, earnings or competitive position for fiscal
1997, nor is the Company currently aware of any compliance requirement that it
expects will have a material effect in the future.
The Company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In addition,
the Company has been named as a potentially responsible party at several
Superfund sites in the United States. However, management believes that, based
on its evaluations and discussions with outside counsel and independent
consultants, that the ultimate resolution of these environmental matters will
not have a material adverse effect on the results of operations, financial
position or cash flows of the Company. See Note 14 to the consolidated financial
statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("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 year 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 disclosures.
Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130
is effective for years ending after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company will adopt
SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have
a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the effect of applying this statement.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect
the Company's operations throughout the world. Kennametal strives to minimize
the effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
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BUSINESS
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods--turning, milling and
drilling. In addition, through JLK, the Company markets and distributes a broad
line of consumable metalcutting tools, as well as abrasives, machine tool
accessories, hand tools, measuring equipment and other industrial supplies used
in the metalworking industry. The Company is a recognized leader in turning and
milling consumable metalcutting tools and believes it is the largest North
American and the second largest global provider of consumable metalcutting tools
and supplies. Leveraging its expertise in tungsten carbide powder metallurgy,
the Company has developed innovative consumable tools for the mining and
construction industries and believes it is the largest global manufacturer,
marketer and distributor of such tools to these markets.
In November 1997, the Company acquired Greenfield, the leading North
American manufacturer of drilling and other rotary high-speed steel consumable
metalcutting tools for the metalworking industry. Kennametal believes that
Greenfield's operations strongly complement its core businesses and that the
acquisition of Greenfield, in addition to providing the Company with
opportunities for substantial cost savings, offers significant strategic
benefits, including: (i) providing an important new channel of traditional
industrial distributors through which to sell the Company's products; (ii)
expanding and enhancing the Company's line of drilling products; (iii) allowing
the Company to diversify into new markets such as certain wear products by
leveraging its material science expertise in tungsten carbide powder metallurgy
and (iv) providing the opportunity to introduce and sell each company's products
into the markets served by the other company.
End users of the Company's metalworking products include manufacturers and
suppliers in the aerospace, automotive, construction and farm machinery,
railroad equipment, power generation and transmission equipment, home appliance,
electrical equipment, and oil field services and gas exploration industries. The
Company markets its products through: a technically skilled direct sales force;
JLK's catalogs, showrooms and other direct marketing efforts; JLK's integrated
industrial supply programs; and, with the acquisition of Greenfield, a network
of traditional industrial distributors. This multi-channel product marketing
approach enables the Company to meet the varying needs of metalworking customers
of all sizes which range from same-day ordering and rapid delivery of products
to outsourcing the entire procurement and inventory management process for
metalworking and related products. The Company estimates there are approximately
250,000 metalworking industrial sites in the United States. The Company's
multi-channel distribution network, comprehensive product offering and global
presence allow customers of all sizes the advantage of a single source of supply
for most metalworking needs.
The Company believes five significant trends are currently impacting the
metalworking industry: (i) consolidation of fragmented distribution channels as
customers seek a single source of supply for their metalworking needs; (ii)
increasing demand from large customers to outsource procurement and inventory
management processes through integrated supply programs; (iii) growing demand
for suppliers that can provide a complete selection of tools, supplies and
services globally; (iv) demand for world class capabilities including customer
service, technical application support and information and product technology
while, at the same time, maintaining or reducing costs; and (v) continuing
advances in customers' metalworking manufacturing technology requiring more
technically advanced tools. These factors are resulting in a restructuring and
consolidation in the metalworking industry as tooling manufacturers and
distributors are forced to either become more competitive or seek stronger
partners. The Company's business strategy is designed to capitalize on these and
other trends.
The address of the Company's principal executive offices is Route 981 South
at Westmoreland County Airport, Latrobe, Pennsylvania 15650 and its telephone
number is (412) 539-5000.
BUSINESS STRATEGY
The Company's objective is to become the supplier of first choice of
consumable tools, related supplies, and services to the worldwide metalworking
industry and to other industries which can benefit from tungsten carbide
products. The Company believes its market-leadership position results from
successful implementation of its business strategy, the major elements of which
include:
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- Expanding Customer Base Through Multi-Channel Distribution. The Company
seeks to access potential customers through all primary distribution
channels. The Company serves its traditional base of large and
medium-sized metalworking customers through a direct sales force. JLK
direct markets a broad range of tiered ("good," "better" and "best")
metalworking consumables and other related products targeted at small and
medium-sized metalworking customers and offers integrated supply programs
targeted at large industrial metalworking customers. The acquisition of
Greenfield, which sells its consumable tools, related products and
services through a network of more than 2,500 traditional industrial
distributors, provides Kennametal with access to approximately 50% of the
North American metalworking market.
- Providing Most Complete Product Offering. The Company seeks to provide
the most complete and comprehensive product offering in the metalworking
industry. As a result of various acquisitions and internal development,
the Company markets and distributes what it believes is one of the
broadest lines of tools and services typically used by metalworking
customers. The recent acquisition of Greenfield with its consumable
high-speed steel rotary cutting tools and related products provides the
Company with the capability to manufacture all of the major consumable
tools needed by customers in their metalcutting manufacturing processes.
- Expanding Strong Global Presence. Kennametal is committed to growing its
global presence as demonstrated by its position as the second-largest
provider of tools to the European metalworking industry, the world's
largest metalworking market, as well as its plans to expand its presence
in the Asia Pacific region. The Company recently completed construction
of a cutting tool manufacturing facility in Shanghai, China for a total
investment of about $20 million, and has increased to 100% its ownership
interest in a sales and marketing subsidiary in Japan. The Company also
has targeted marketing efforts in Eastern Europe and Russia and other
developing countries.
- Providing Superior Customer Service, Product Availability, and Technical
Support. The Company's skills in rapidly filling orders, maintaining
high levels of product availability and providing technical product
application support are vital to the ability of its metalworking
customers to meet their production and delivery schedules in a
cost-effective manner. Kennametal's sophisticated order entry and
inventory management systems enable the Company to ship more than 90
percent of its products from stock. In addition, the Company's
technically skilled direct sales force of more than 700 persons provides
on-site product selection and application support to enable customers to
optimize their metalcutting processes. The addition of Greenfield's more
than 70 technical specialists broadens the Company's technical support
capability into high-speed steel drilling applications.
- Maintaining Leadership in Product Innovation. As a result of its
commitment to research and development, the Company has brought to market
during the past few years a number of new or improved metalcutting
products. The exacting requirements of modern high-precision
metalcutting, along with advances in manufacturing technology, exacting
manufacturing specifications, and new workpiece materials, are driving
the demand for new and improved consumable tools and systems capable of
achieving superior technical performance with high and uniform quality.
The Company believes that its reputation for supplying high quality and
technologically innovative consumable metalcutting tools and supplies to
the metalworking industry has been a very significant factor in its
achieving its market position.
- Leveraging Use of Information Technology. The Company's decision to
invest nearly $40 million in a business information system utilizing SAP
R-3 software demonstrates its commitment to the use of information
technology. This system, which is expected to be fully operational in
fiscal 1999, will link sales, distribution, manufacturing, purchasing and
accounting activities at all major sites throughout Kennametal and is
designed to enhance customer service, operational effectiveness and
management decision-making.
In addition to the above business strategies, the Company seeks to continue
to improve operating efficiencies as well as to pursue selected acquisitions
that enhance its distribution channels, complement its existing product
offerings and strengthen its geographic presence.
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BUSINESS SEGMENT AND MARKETS
The Company operates predominantly as a tooling supplier specializing in
powder metallurgy, which represents a single business segment. While many of the
Company's products are similar in composition, sales are classified into three
markets: metalworking, industrial supply, and mining and construction.
METALWORKING MARKETS. Kennametal markets, manufactures and distributes a
full line of products and services for the metalworking industry. The Company
provides metalcutting tools to manufacturing companies in a wide range of
industries throughout the world.
A Kennametal tooling system usually consists of a steel toolholder and an
indexable cutting tool called an insert. During a metalworking operation, the
toolholder is positioned in a machine tool that provides the turning power.
While the workpiece or toolholder is rapidly rotating, the cutting tool insert
contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert
is consumed during use and must be replaced periodically. Metalcutting
operations include turning, boring, threading, grooving, milling and drilling.
The Company also makes wear-resistant parts for use in abrasive environments and
specialty applications.
INDUSTRIAL SUPPLY MARKET. Kennametal distributes a full line of industrial
supplies to the metalworking industry principally through JLK. These products
include cutting tools, abrasives, precision measuring devices, power tools and
hand tools, machine tool accessories and, to a lesser extent, some maintenance,
repair and operating supplies. The majority of industrial supplies distributed
by the Company are purchased from other manufacturers, although the industrial
supply product offering does include Kennametal-manufactured items.
MINING AND CONSTRUCTION MARKET. Mining and construction cutting tools are
fabricated from steel parts and tipped with cemented carbide. Mining tools, used
primarily in the coal industry, include longwall shearer and continuous miner
drums, blocks, bits, pinning rods, augers and a wide range of mining tool
accessories. The Company also supplies compacts for mining, quarrying, water
well drilling and oil and gas exploration. Construction cutting tools include
carbide-tipped bits for ditching, trenching and road planing, grader blades for
site preparation and routine roadbed control, and snowplow blades and shoes for
winter road plowing.
The Company also makes proprietary metallurgical powders for use as a basic
material in many of its metalworking, mining and construction products. In
addition, the Company produces a variety of metallurgical powders and related
materials for specialized markets. These products include intermediate carbide
powders, hardfacing materials and matrix powders that are sold to manufacturers
of cemented carbide products, oil and gas drilling equipment and diamond drill
bits.
INTERNATIONAL OPERATIONS. The Company's principal international operations
are conducted in Western Europe and Canada. In addition, the Company has joint
ventures in India, Italy, Poland and Russia, manufacturing and sales
subsidiaries in Asia Pacific and sales agents and distributors in eastern Europe
and other areas of the world.
The Company's international operations are subject to the usual risks of
doing business in those countries, including currency fluctuations and changes
in social, political and economic environments. In management's opinion, the
Company's business is not materially dependent upon any one international
location involving significant risk.
MARKETING AND DISTRIBUTION
The Company's products are sold through three distinct channels: a direct
sales force, Full Service Supply programs, and retail showrooms and mail-order
catalogs. The Company's manufactured products are sold to end users primarily
through a direct sales force. Service engineers and technicians directly assist
customers with product design, selection and application. In addition,
Kennametal-manufactured products, together with a broad range of purchased
products, are sold through Full Service Supply programs and retail showrooms and
mail-order catalogs. The Company also uses independent distributors and sales
agents in the United States and certain international markets.
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The Company's products are marketed under various trademarks and
tradenames, such as Kennametal*, Hertel*, Kendex*, Kenloc*, Top Notch*,
Erickson*, Kyon*, KM*, Drill-Fix* and Fix-Perfect*. Purchased products are sold
under the manufacturer's name or a private label.
- ---------
* Trademark owned by Kennametal Inc. or Kennametal Hertel AG
GREENFIELD
GENERAL. Greenfield is a leading manufacturer of consumable cutting tools
and related products used primarily in industrial applications and is the
largest North American producer of expendable rotary cutting tools used to cut
metal and other industrial materials. Greenfield's products are sold in six
principal markets: industrial, electronics, energy and construction, engineered
products, consumer and marine. Greenfield offers products made from high-speed
steel and tungsten carbide materials; and each accounts for approximately half
of Greenfield's revenues. In addition, Greenfield manufactures and markets a
line of marine products.
MARKETS AND PRODUCTS. Greenfield manufactures and markets expendable
cutting tools and carbide products to the industrial, electronics, energy and
construction, engineered products, and consumer markets. Greenfield manufactures
a wide variety of cutting tools. High-speed steel is the predominant material
for rotary cutting tools, offering high performance in a broad range of
applications. Tungsten carbide materials are costlier and more durable and are
preferred in certain applications. Greenfield also manufactures and markets a
line of marine products. Greenfield's brand names enjoy a high degree of
recognition in their respective markets. Greenfield also supplies a number of
industrial and consumer private label customers with its products, including
Sears' line of Craftsman(R) drill bits.
Greenfield is the largest producer in North America of rotary cutting tools
for industrial applications. Products sold in the industrial market include
rotary cutting tools and related products such as drills, reamers, taps, end
mills, burrs, routers, counterbores and countersinks. Greenfield also
manufactures and markets an extensive line of hardware products, primarily
stationary and portable power tool accessories for use in the industrial and
consumer markets. In 1996, the industrial market accounted for approximately 51%
of Greenfield's consolidated net sales.
Greenfield manufactures and markets small diameter circuit board drills for
the electronics market. Greenfield believes that it is one of the largest
worldwide manufacturers of circuit board drills and routers. In 1996, the
electronics market accounted for approximately 12% of Greenfield's consolidated
net sales.
Greenfield believes that it is the largest independent supplier of oilfield
compacts in the world. Compacts are the cutting edges of oil well drilling bits,
which are commonly referred to as "rock bits." Greenfield's compacts are used
both for oil and natural gas drilling. Natural gas reserves tend to be found
deeper than oil, thereby increasing the utilization of rock bits. Greenfield is
a significant producer of tungsten carbide-tipped mining bits for the United
States coal mining industry and manufactures mining bit accessories and
carbide-tipped bits used in highway road resurfacing. In 1996, the energy and
construction market accounted for approximately 12% of Greenfield's consolidated
net sales.
Greenfield is an on-demand producer of custom-made tungsten carbide preform
wear parts for use in the tool and die industry including stamping dies, powder
metal tooling, container and impact tooling, seal rings, extruded rods, wear
parts and steel processing parts. Greenfield also manufactures tungsten carbide
balls used in rotary equipment such as pumps and mixers and seats which are
components in the check valves used in oil producing pumps, tungsten carbide
trim parts used in oil field chokes, mechanical face seals and ceramic-based
wear parts. In 1996, the engineered products market accounted for approximately
13% of Greenfield's consolidated net sales.
Greenfield is an active supplier of consumer drill bits, saws, hand tools
and other products to the do-it-yourself market, which includes Sears, Home
Depot and other major retailers and includes products sold under private label
brands such as the Sears Craftsman(R) drill line, which Greenfield has supplied
for more than 65 years. In 1996, the consumer market accounted for approximately
7% of Greenfield's consolidated net sales.
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Greenfield also manufactures a line of marine products. Greenfield's marine
products include submersible pumps, activating switches, magnetic compasses,
DC-powered winches and various electronic instruments and gauges. In 1996, the
marine market accounted for approximately 5% of Greenfield's consolidated net
sales.
MARKETING AND DISTRIBUTION. Greenfield's cutting tool products are sold
primarily through selected distributors supported by Greenfield's technical
sales personnel. In addition to distributors, Greenfield sells cutting tool
products as well as other products directly to private label, catalog, large
industrial and other customers having special technical or other requirements.
Generally, Greenfield's major brands are represented by distinct sales forces.
Greenfield's sales force numbers approximately 150 and sells to over 2,500
independent distributors in North America and worldwide.
COMPETITION
Kennametal is one of the world's leading producers of cemented carbide
tools and maintains a strong competitive position, especially in North America
and Europe. There is active competition in the sale of all products made by the
Company, with approximately 30 companies engaged in the cemented carbide
business in the United States and many more outside the United States. Several
competitors are divisions of larger corporations. In addition, several hundred
fabricators and toolmakers, many of whom operate out of relatively small shops,
produce tools similar to those made by the Company and buy the cemented carbide
components for such tools from cemented carbide producers, including the
Company. Major competition exists from both U.S.-based and international-based
concerns. In addition, the Company competes with thousands of industrial supply
distributors.
The purchase price of consumable cutting tools is relatively small compared
to the customer's significant investment in production equipment, control
systems, work piece materials and a trained work force. However, use of the
customer's equipment and systems can be significantly impaired if consumable
cutting tools are of inconsistent quality, fail to meet technical
specifications, or are not readily available. The Company therefore believes
that its competitive strengths rest on the consistently high quality of its
products, state-of-the-art manufacturing capabilities, customer service,
multiple distribution channels, global presence, and its ability to develop new
and improved systems responsive to its customer's needs. These factors
frequently permit the Company to sell many of its products based on their value
added to the customer, rather than strictly on price.
SEASONALITY
Seasonal variations do not have a major effect on the Company's and
Greenfield's business. However, to varying degrees, traditional summer vacation
shutdowns of metalworking customers' plants and holiday shutdowns often affect
the Company's first and second fiscal quarters and Greenfield's third and fourth
fiscal quarters.
RESEARCH AND DEVELOPMENT
The Company is involved in research and development of new products and
processes. Research and development expenses totaled $18.7 million, $20.6
million and $24.1 million in 1995, 1996 and 1997, respectively. Additionally,
certain costs associated with improving manufacturing processes are included in
cost of goods sold. The Company holds a number of patents and licenses which, in
the aggregate, are not material to the operation of the business.
The Company has brought a number of new products to market during the past
few years. These include metalcutting inserts that incorporate innovative tool
geometries or compositions for improved chip control and productivity. These new
compositions include KC994M* multi-coated metalcutting inserts for milling
applications, KC9010* and KC9025* multi-coated metalcutting inserts for turning
applications, Kyon 3500* ceramic metalcutting inserts for machining cast irons,
and KCD25* diamond-coated metalcutting inserts for machining aluminum alloys and
other nonferrous materials.
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EMPLOYEES
The Company employed approximately 7,500 persons at June 30, 1997, of which
4,700 were located in the United States and 2,800 in other parts of the world,
principally Europe and Asia Pacific. Approximately 1,100 employees were
represented by labor unions, of which 170 were hourly-rated employees located at
plants in the Latrobe, Pennsylvania area. The remaining 930 employees
represented by labor unions were employed at seven plants located outside of the
United States. The Company has not experienced any work stoppages in the last
five years and considers its labor relations to be generally good.
At December 31, 1996, Greenfield had approximately 5,000 employees
worldwide. Approximately 1,000 employees at eight of Greenfield's facilities
were covered under collective bargaining agreements which expire in June 2002.
Greenfield has not experienced any work stoppages in the last five years and
considers its relations with employees to be good.
REGULATION
The Company and its operations are subject to federal, state, and local
laws and regulations that impose limitations and prohibitions on the discharge
and emission of, and establish standards for the use, disposal, and management
of, certain materials and waste, and impose liability for the costs of
investigating and cleaning up, and certain damages resulting from, present and
past spills, disposals, or other releases of hazardous substances or materials
(collectively, "Environmental Laws"). Environmental Laws can be complex and may
change often, and violations of Environmental Laws may result in substantial
fines and penalties. In addition, Environmental Laws such as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," also known as
"Superfund") impose liability on several grounds for the investigation and
cleanup of contaminated soil, groundwater, and buildings, and for damages to
natural resources, at a wide range of properties: for example, contamination at
properties formerly owned or operated by the Company or its subsidiaries as well
as at properties the Company currently owns or operates, and properties to which
hazardous substances were sent by any of them, may result in liability for the
Company under Environmental Laws.
From time to time in the past, the Company has been cited for violations of
Environmental Laws, and in light of the nature of its operations, the Company
may in the future be cited for alleged violations of Environmental Laws. The
cost to correct any such violations and to satisfy any associated penalties that
may be alleged in the future could be substantial. In addition, changes in
existing Environmental Laws or their interpretation could adversely impact the
Company. However, compliance with government laws and regulations pertaining to
the discharge of materials or pollutants into the environment or otherwise
relating to the protection of the environment did not have a material effect on
the Company's capital expenditures, earnings or competitive position for fiscal
1997, nor is such compliance expected to have a material effect in the future.
The Company and some of its subsidiaries (including Greenfield) have
actively acquired companies or businesses. As a result of such acquisitions, the
Company may be subject to claims that it is liable for conditions at (or
resulting from disposal by) facilities formerly owned or operated by such
companies or businesses, as well as facilities the Company or its subsidiaries
currently owns or operates. In light of the activities (such as manufacturing)
of some of the companies and businesses acquired, such claims could be
substantial if they were to arise. In addition, some of the Company's
facilities, including a number of those acquired through the Greenfield
acquisition, have long histories of manufacturing or similar uses and could have
conditions, which could be material, that give rise to an obligation by the
Company or its subsidiaries to investigate or remediate the conditions. The
Company is not aware of any such obligations or of claims, pending or
threatened, against it or any of its subsidiaries, for such matters. The Company
has been involved in various environmental cleanup and remediation activities at
several of its manufacturing facilities. In addition, the Company has been named
as a potentially responsible party at several Superfund sites in the United
States. However, in management's opinion, based on its evaluations and
discussions with outside counsel and independent consultants, the ultimate
resolution of these environmental matters will not have a material adverse
effect on the results of operations, financial position or cash flows of the
Company.
The Company maintains a Corporate Environmental, Health and Safety ("EH&S")
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee
S-32
<PAGE> 225
remediation activities. In addition, the Company has established an EH&S
administrator at each of its domestic manufacturing facilities. The Company's
financial management team periodically meets with members of the Corporate EH&S
Department and the Corporate Legal Department to review and evaluate the status
of environmental projects and contingencies. On a quarterly and annual basis,
management establishes or adjusts financial provisions and reserves for
environmental contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies."
PROPERTIES
Presented below is a summary of principal manufacturing facilities used by
the Company as of September 30, 1997.
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED PRINCIPAL PRODUCTS
- --------------------------------- ------------ --------------------------------
<S> <C> <C>
United States:
Monrovia, California Leased Metalworking Boring Bars
Troy, Michigan Leased Metalworking Toolholders
Fallon, Nevada Owned Metallurgical Powders
Henderson, North Carolina Owned Metallurgical Powders
Roanoke Rapids, North Carolina Owned Metalworking Inserts
Orwell, Ohio Owned Metalworking Inserts
Solon, Ohio Owned Metalworking Toolholders
Bedford, Pennsylvania Owned Mining and Construction
Tools and Wear Parts
Latrobe, Pennsylvania Owned Metallurgical Powders
and Wear Parts
Johnson City, Tennessee Owned Metalworking Inserts
New Market, Virginia Owned Metalworking Toolholders
International (a):
Victoria, Canada Owned Wear Parts
Shanxi, China Owned Mining Tools
Xuzhou, China Owned Mining Tools
Blaydon, England Leased Mining Tools
Kingswinford, England Leased Metalworking Toolholders
Bordeaux, France Leased Metalworking Cutting Tools
Ebermannstadt, Germany Owned Metalworking Inserts
Mistelgau, Germany Owned Metallurgical Powders,
Metalworking Inserts and Wear
Parts
Nabburg, Germany Owned Metalworking Toolholders
Vohenstrauss, Germany Owned Metalworking Carbide Drills
Arnhem, Netherlands Owned Wear Products
</TABLE>
- ---------
(a) In January 1996, the Company announced plans to construct a $20 million
facility in Shanghai, China, to manufacture cemented carbide metalcutting
tools. Operations began in the second quarter of 1998.
The Company also has a network of warehouses and customer service centers
located throughout North America, Western Europe, Asia and Australia, a
significant portion of which are leased. The majority of the Company's research
and development efforts are conducted in a corporate technology center located
adjacent to world headquarters in Latrobe, Pennsylvania and in Furth, Germany.
All significant properties are used in the Company's dominant business of
powder metallurgy, tools, tooling systems and supplies. The Company's production
capacity is adequate for its present needs. The Company believes that its
properties have been adequately maintained, are generally in good condition and
are suitable for the Company's business as presently conducted.
S-33
<PAGE> 226
Greenfield's headquarters are located in Augusta, Georgia. Greenfield owns
significant manufacturing facilities in Arkansas, Georgia, Indiana,
Massachusetts, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina and
Virginia, and leases significant facilities in Illinois, Massachusetts,
Missouri, Vermont and Wisconsin. Greenfield also maintains, through ownership or
leases, smaller manufacturing, office, warehouse and research facilities, as
well as property held for sale, in eight other states and seven other countries.
In the event of a cancellation or termination of a lease relating to any of
Greenfield's leased properties, Greenfield anticipates no difficulty in
connection with leasing alternate space at reasonable rates.
LEGAL MATTERS
There are no material legal proceedings pending against the Company.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Robert L. McGeehan........................ 60 President, Chief Executive Officer and
Director
William R. Newlin......................... 56 Chairman of the Board and Director
David B. Arnold........................... 58 Vice President and Chief Technical Officer
David T. Cofer............................ 52 Vice President, Secretary and General
Counsel
Richard C. Hendricks...................... 58 Vice President and Director of Corporate
Business Development
H. Patrick Mahanes, Jr.................... 54 Vice President and Chief Operating Officer
Richard J. Orwig.......................... 56 Vice President and Chief Financial and
Administrative Officer
Michael W. Ruprich........................ 41 President of JLK Direct Distribution Inc.
A. David Tilstone......................... 43 Vice President and Director of Global
Marketing
Richard C. Alberding...................... 66 Director
Peter B. Bartlett......................... 62 Director
A. Peter Held............................. 53 Director
Warren H. Hollinshead..................... 60 Director
Aloysius T. McLaughlin, Jr................ 62 Director
Larry Yost................................ 58 Director
</TABLE>
The following table sets forth information with respect to the senior
officers of Greenfield, all of whom are expected to continue in such capacity
with Greenfield.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Paul W. Jones............................. 49 President and Chief Executive Officer
Peter K. Hunt............................. 51 Senior Vice President--Business
Development
Henry G. Libby............................ 57 Senior Vice President--Consumer Products
Group
Roger B. Farley........................... 53 Senior Vice President--Human Resources
Ajita G. Rajendra......................... 45 Senior Vice President--Industrial Products
Group
Mark R. Richards.......................... 37 Vice President--Electronics Products Group
J. Robert Quinlan......................... 59 Vice President--Energy and Construction
Products Group
Bart A. Aiken............................. 38 Vice President--Engineered Products Group
</TABLE>
S-34
<PAGE> 227
DESCRIPTION OF COMMON STOCK
The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Pennsylvania
law and to the provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") and its By-Laws (the "By-Laws"), copies
of which have been filed with the Commission.
COMMON STOCK
The Company has authorized 70,000,000 shares of capital stock, par value
$1.25 per share ("Common Stock"). As of November 30, 1997, there were 26,284,093
shares of Common Stock outstanding. Holders of Common Stock are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor after payment of dividends on any outstanding Preferred Stock
and are entitled to one vote for each share of Common Stock held by them with
respect to all matters upon which they are entitled to vote.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of Class A Preferred Stock, no
par value per share (the "Preferred Stock"). At present, there are no shares of
Preferred Stock outstanding. The Board of Directors of the Company, without
further action by the stockholders, is authorized to designate and issue in
series Preferred Stock and to fix as to any series the dividend rate, redemption
prices, preferences on dissolution, the terms of any sinking fund, conversion
rights, voting rights, and any other preferences or special rights and
qualifications. The Board of Directors of the Company has authorized 200,000
shares of Series One Preferred Stock for use in the Rights Agreement. See
"Rights Agreement."
Any Preferred Stock so issued may rank senior to the Common Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights. Issuances of Preferred Stock, while providing the
Company with flexibility in connection with general corporate purposes, may,
among other things, have an adverse effect on the rights of holders of Common
Stock. The Company has no present plans to issue any Preferred Stock.
COVENANT RESTRICTIONS
The Company's New Bank Credit Facility contains financial and operating
covenants, including restrictions on the ability of the Company to, among other
things, incur additional debt, make advances and investments, create, incur or
permit the existence of certain liens, make loans or guarantees and requires the
Company to achieve and maintain certain financial ratios, including minimum net
worth, maximum leverage ratio and minimum fixed charge coverage ratio.
The terms of the indenture, and a related guarantee, under which the
Company will issue $ ,000,000 of % Debentures which mature on
, 2003, in connection with the FELINE PRIDES Offering prohibit the
Company from declaring or paying any dividends on or making any distributions
with respect to its Common Stock if an event of default exists under the
agreement of trust or the guarantee agreement to be entered into in connection
with the FELINE PRIDES Offering, or during any period in which the Company has
exercised its option to defer the payment of interest on the Debentures. See
"Description of Other Offerings--FELINE PRIDES Offering."
CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Restated Articles and By-Laws could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and in the policies formulated by the Board and to discourage an unsolicited
takeover of the Company if the Board determines that such takeover is not in the
best interests of the Company and its shareholders. However, these provisions
could have the effect of discouraging certain attempts to acquire the Company or
remove incumbent management even if some or a majority of shareholders deemed
such an attempt to be in their best interests.
S-35
<PAGE> 228
The provisions in the Restated Articles and By-Laws include: (i) the
classification of the Board of Directors into three classes; (ii) a procedure
which requires shareholders to nominate directors in advance of a meeting to
elect such directors; and (iii) the authority to issue additional shares of
Common Stock or Preferred Stock without shareholder approval.
The Restated Articles also include a provision requiring a 75 percent
shareholder vote for certain mergers or other business combinations or
transactions with five percent shareholders; a provision requiring a 75 percent
shareholder vote to remove the entire Board, a class of the Board, any
individual member of the Board without cause, or to increase the size of the
Board to more than twelve members or decrease the size of the Board to fewer
than eight members; a provision requiring disinterested shareholder approval of
stock repurchases at a premium over market by the Company from certain four
percent Shareholders (as defined in the Restated Articles); and a provision
requiring a majority of disinterested shareholders to approve certain business
combinations involving a stockholder who beneficially owns more than 10 percent
of the voting power of the Company, unless certain minimum price, form of
consideration and procedural requirements are satisfied or the transaction is
approved by a majority of disinterested directors.
Pursuant to the Restated Articles, the Board of Directors is permitted to
consider the effects of a change in control on non-shareholder constituencies of
the Company, such as its employees, suppliers, creditors, customers and the
communities in which it operates. Pursuant to this provision, the Board may be
guided by factors in addition to price and other financial considerations.
PBCL Anti-Takeover Provisions. The Pennsylvania Business Corporation Law
(the "PBCL") contains a number of statutory "anti-takeover" provisions,
including Subchapters E, F, G and H of Chapter 25 and Section 2538 of the PBCL,
which apply automatically to a Pennsylvania registered corporation (usually a
public company) unless such corporation elects to opt-out as provided in such
provisions. The Company, as a Pennsylvania registered corporation, has elected
in its By-Laws to opt-out of certain of the anti-takeover provisions entirely,
namely Subchapters G and H.
The following descriptions are qualified in their entirety by reference to
such provisions of the PBCL:
Subchapter E (relating to control transactions) generally provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person
or group the fair value of their shares, including a proportionate amount
of any control premium.
Subchapter F (relating to business combinations) generally delays for
five years and imposes conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions between a
corporation and an interested shareholder including mergers, sales or
leases of specified amounts of assets, liquidations, reclassifications and
issuances of specified amounts of additional shares of stock of the
corporation. An "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Section 2538 of the PBCL generally establishes certain shareholder
approval requirements with respect to specified transactions with
"interested shareholders."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is the Transfer Agent and
Registrar for the Common Stock.
RIGHTS AGREEMENT
The Company has adopted a rights plan pursuant to which the Board of
Directors authorized and the Company distributed one preferred stock purchase
right (each a "right") for each outstanding share of Common Stock of the
Company. The terms of the rights are governed by a Rights Agreement between the
Company and Mellon Bank, N.A., as Rights Agent, dated as of October 25, 1990
(the "Rights Agreement"). The rights, which currently are automatically
transferred with the related shares of Common Stock and are not separately
transferable, will entitle the holder thereof to purchase one-hundredth of a
share of a new series of preferred stock of the Company at a price of $105
(subject to certain adjustments).
S-36
<PAGE> 229
Subject to certain restrictions, the rights become exercisable only if a
person or group of persons acquires or intends to make a tender offer for 20
percent or more of the Company's Common Stock. If any person acquires 20 percent
of the Common Stock, each right will entitle the shareholder to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price. If the Company is acquired in a merger or certain
other business combinations, each right then will entitle the shareholder to
purchase at the exercise price, that number of shares of the acquiring company
having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption
in certain circumstances by the Company at a redemption price of $0.01 per
right.
The foregoing summary description of the Rights Agreement does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, a copy of which has been filed with the Commission as an exhibit in
the Registration Statement of which this Prospectus Supplement forms a part. For
a more detailed description of the Rights Agreement, see the Company's Form 8-A
filed with the Commission with respect to the rights and incorporated by
reference into the Prospectus.
DESCRIPTION OF OTHER OFFERINGS
FELINE PRIDES OFFERING
Concurrently with the Offerings, the Company and Kennametal Financing I
(the "Trust") are offering 4,500,000 FELINE PRIDES(SM). The net proceeds from
the FELINE PRIDES Offering are expected to be approximately $ million
($ million if the underwriters for the FELINE PRIDES Offering exercise their
over-allotment option in full).
Each FELINE PRIDES(SM) offered hereby initially will consist of a unit
(referred to as an "Income PRIDES") with a Stated Amount of $50 (the "Stated
Amount") comprised of (a) a stock purchase contract (a "Purchase Contract")
under which (i) the holder will purchase from the Company on February 16, 2001
(the "Purchase Contract Settlement Date"), for an amount of cash equal to the
Stated Amount, a number of newly issued shares of the Common Stock of the
Company equal to the Settlement Rate described herein, and (ii) the Company will
pay the holder unsecured, subordinated contract adjustment payments ("Contract
Adjustment Payments") at the rate of % of the Stated Amount per annum,
provided that if such rate is 0%, then the Company will not make any Contract
Adjustment Payments, and (b) either beneficial ownership (i) of a % Trust
Originated Preferred Security(SM) (a "Trust Preferred Security"), having a
stated liquidation amount per Trust Preferred Security equal to the Stated
Amount, representing a preferred undivided beneficial interest in the assets of
the Trust, (ii) in the case of a dissolution of the Trust, the Debentures
hereafter described, having a principal amount equal to the Stated Amount, to be
held by the Trust or (iii) upon the occurrence of a tax event redemption prior
to the Purchase Contract Settlement Date, the applicable ownership interest in a
treasury security portfolio.
The number of new shares of Common Stock issuable upon settlement of each
Purchase Contract on the Purchase Contract Settlement Date (the "Settlement
Rate") will range from to shares and be calculated as follows
(subject to adjustment under certain circumstances): (a) if the Applicable
Market Value is equal to or greater than $ (the "Threshold Appreciation
Price"), the Settlement Rate will be (b) if the Applicable Market
Value is less than the Threshold Appreciation Price but greater than
$ , the Settlement Rate will equal the Stated Amount divided by the
Applicable Market Value, and (c) if the Applicable Market Value is less than or
equal to $ , the Settlement Rate will be . "Applicable Market
Value" means the average of the Closing Prices (as defined) per share of Common
Stock on each of the twenty consecutive Trading Days (as defined) ending on the
third Trading Day immediately preceding the Purchase Contract Settlement Date.
The Trust Preferred Securities have a stated liquidation amount per Trust
Preferred Security equal to the Stated Amount, and represent a preferred
undivided beneficial interest in the assets of Kennametal Financing I, a
Delaware business trust (the "Trust"). Kennametal owns all of the common equity
interests in the Trust. Holders of the Trust Preferred Securities are entitled
to receive cumulative cash distributions payable at the rate of % of the
Stated Amount per annum. The sole asset of the Trust will consist of the
Company's % Debentures,
S-37
<PAGE> 230
due February 16, 2003 (the "Debentures") and it will make distributions only to
the extent that the Company makes a corresponding payment on the Debentures. The
terms of the indenture pursuant to which the Debentures will be issued permits
the Company to defer quarterly payments of interest on the Debentures by
extending the payment dates for a period not to exceed the maturity date of the
Debentures. Any such deferred payments will accrue interest at a compounded
rate. During any such extension period, the indenture, and a related guarantee,
provide that the Company may not declare or pay dividends on, make distributions
with respect to or repurchase (other than in certain limited circumstances) its
capital stock (including its Common Stock). In addition, the terms of the
guaranty agreement to be entered into by the Company to guaranty payment of
amounts due on the Trust Preferred Securities to the extent of the assets of the
Trust, provide that during any event of default under the guaranty agreement or
under the agreement of trust, the Company may not declare or pay any dividends
on, make distributions with respect to or repurchase (other than in certain
limited circumstances) its capital stock (including its Common Stock). The
Company has no present intention of exercising its right to defer interest
payments by extending the interest payment period on the Debentures.
The applicable distribution rate on the Trust Preferred Securities and the
interest rate on the related Debentures on and after the Purchase Contract
Settlement Date will be reset on the third Business Day (as defined) immediately
preceding the Purchase Contract Settlement Date to a rate per annum (the "Reset
Rate") to be determined by the Reset Agent (as defined herein) equal to the sum
of (x) a spread amount (the "Reset Spread") to be determined by the Reset Agent
on the tenth Business Day prior to the Purchase Contract Settlement Date and (y)
the rate of interest on the Two-Year Benchmark Treasury (as defined) in effect
on the third Business Day immediately preceding the Purchase Contract Settlement
Date, such sum being the distribution rate the Trust Preferred Securities should
bear in order for a Trust Preferred Security to have an approximate market value
of 100.5% of the Stated Amount on the third Business Day immediately preceding
the Purchase Contract Settlement Date, provided that the Company may limit such
Reset Spread to be no higher than the rate on the Two-Year Benchmark Treasury
(as defined) on the Purchase Contract Settlement Date plus 200 basis points
(2%). Such market value may be less than 100.5% if the Reset Spread is so
limited. The consummation of the FELINE PRIDES Offering is not a condition to
consummation of the Offerings.
SENIOR DEBT OFFERING
Concurrently with the Offerings, the Company is offering $150,000,000
aggregate principal amount of the 2001 Notes, $150,000,000 aggregate principal
amount of the 2008 Notes and $150,000,000 aggregate principal amount of the 2028
Debentures. The net proceeds from the Senior Debt Offering are expected to be
approximately $ million. The Senior Debt Securities will be senior unsecured
obligations of the Company and will rank equally with all other existing and
future senior unsecured and unsubordinated indebtedness of the Company,
including the Debentures. Interest on the Senior Debt Securities will be payable
semi-annually. The consummation of the Senior Debt Offering is not a condition
to consummation of the Offerings.
S-38
<PAGE> 231
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CIBC
Oppenheimer Corp., Goldman, Sachs & Co. and Lehman Brothers Inc. are acting as
representatives (the "U.S. Representatives") of each of the underwriters named
below (the "U.S. Underwriters"). Subject to the terms and conditions set forth
in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the Company
and the U.S. Underwriters, and concurrently with the sale of 860,000 shares of
Common Stock to the International Managers (as defined below), the Company has
agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters
severally and not jointly has agreed to purchase from the Company, the number of
shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................
CIBC Oppenheimer Corp....................................................
Goldman, Sachs & Co......................................................
Lehman Brothers Inc......................................................
----------
Total........................................................ 3,440,000
========
</TABLE>
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the United
States and Canada (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters") for whom Merrill Lynch International, CIBC
Oppenheimer Corp., Goldman Sachs International and Lehman Brothers International
(Europe) are acting as lead managers (the "Lead Managers"). Subject to the terms
and conditions set forth in the International Purchase Agreement, and
concurrently with the sale of 3,440,000 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers severally
have agreed to purchase from the Company, an aggregate of 860,000 shares of
Common Stock. The public offering price per share of Common Stock and the total
underwriting discount per share of Common Stock are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments of
non-defaulting Underwriters may be increased. The closings with respect to the
sale of shares of Common Stock to be purchased by the U.S. Underwriters and the
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock offered
hereby to the public at the public offering price set forth on the cover page of
this Prospectus Supplement, and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After
the public offering, the public offering price, concession and discount may be
changed.
The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus Supplement, to purchase up to an
aggregate of 516,000 additional shares of Common Stock at the
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<PAGE> 232
public offering price set forth on the cover page of this Prospectus Supplement,
less the underwriting discount. The U.S. Underwriters may exercise this option
only to cover over-allotments, if any, made on the sale of the shares of Common
Stock offered hereby. To the extent that the U.S. Underwriters exercise this
option, each U.S. Underwriter will be obligated, subject to certain conditions,
to purchase a number of additional shares of Common Stock proportionate to such
U.S. Underwriter's initial amount reflected in the foregoing table. The Company
also has granted an option to the International Managers, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to an
aggregate of 129,000 additional shares of Common Stock to cover over-allotments,
if any, on terms similar to those granted to the U.S. Underwriters.
The Company 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 Common Stock or any securities
convertible into or exercisable or exchangeable for 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 Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise, for a period of
90 days from the date of this Prospectus Supplement without the prior written
consent of Merrill Lynch, other than any shares of Common Stock: (i) to be sold
pursuant to the U.S. Purchase Agreement or the International Purchase Agreement;
(ii) issuable upon early settlement of the shares of FELINE PRIDES(SM); (iii)
issued by the Company upon exercise of an option, warrant, or the conversion of
a security described herein; (iv) issued, or options to purchase such shares
granted, pursuant to existing employee benefit plans described herein or (v)
issued pursuant to any non-employee director stock plan or dividend reinvestment
plan.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the public offering price,
less an amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to U.S. or Canadian
persons, except in the case of transactions pursuant to the Intersyndicate
Agreement.
Each International Manager has agreed that: (i) it has not offered or sold
and, for a period of six months following consummation of the Offerings, will
not offer or sell any Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied with and will comply with all
applicable provisions of the Public Offers of Securities Regulations 1995 and
the Financial Services Act 1986 with respect to anything done by it in relation
to the Common Stock in, from, or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue or sale
of the Common Stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or to a person to whom the document may otherwise lawfully be issued or
passed on.
The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the U.S.
Underwriters and the International Managers may be required to make in respect
hereof.
Until the distribution of the shares of Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase
S-40
<PAGE> 233
the Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
shares of Common Stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of shares of Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the U.S.
Representatives may reduce that short position by purchasing shares of Common
Stock in the open market. The U.S. Representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the shares of Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the shares of Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Merrill Lynch has from time to time provided investment banking advisory
services to the Company, for which it has received customary compensation, and
may continue to do so in the future. Merrill Lynch has acted as financial
advisor to the Company in connection with the Merger, including serving as
dealer manager with respect to the Tender Offer. In this regard, the Company has
agreed to indemnify Merrill Lynch against certain liabilities. CIBC Oppenheimer
Corp., Goldman, Sachs & Co. and Lehman Brothers Inc. have from time to time
provided investment banking or financial advisory services to the Company, and
may continue to do so in the future. An affiliate of CIBC Oppenheimer Corp. is a
lender under the New Bank Credit Facility.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. William R. Newlin, Chairman of the Board of the
Company, is a shareholder in Buchanan Ingersoll Professional Corporation. As of
July 30, 1997, Mr. Newlin owned 24,385 shares of Common Stock, stock credits
representing the right to acquire 9,260 shares of Common Stock pursuant to the
Company's directors deferred fee plan, 20,000 shares of JLK common stock and
held options to acquire 1,500 shares of Common Stock and 15,000 shares of JLK
common stock. Certain legal matters in connection with the Offerings will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York. Simpson Thacher &
Bartlett will rely on Buchanan Ingersoll Professional Corporation with respect
to matters of Pennsylvania law.
S-41
<PAGE> 234
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and June 30, 1997 and for each of the three years in the period ended June 30,
1997, included in this Prospectus Supplement and elsewhere in the Registration
Statement, of which this Prospectus Supplement is a part, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in the Registration Statement in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. The consolidated financial statements of Greenfield as
of December 31, 1995, and December 31, 1996, and for each of the three years in
the period ended December 31, 1996, included in this Prospectus Supplement, have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants given on the authority of said firm as experts in auditing and
accounting.
S-42
<PAGE> 235
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KENNAMETAL INC.
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Income..................................................... F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Cash Flows................................................. F-5
Consolidated Statements of Shareholders' Equity....................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
GREENFIELD INDUSTRIES, INC.
Report of Independent Accountants..................................................... F-22
Consolidated Statements of Operations................................................. F-23
Consolidated Balance Sheets........................................................... F-24
Consolidated Statements of Changes in Stockholders' Equity............................ F-25
Consolidated Statements of Cash Flows................................................. F-26
Notes to Consolidated Financial Statements............................................ F-27
</TABLE>
F-1
<PAGE> 236
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kennametal Inc.
We have audited the accompanying consolidated balance sheets of Kennametal Inc.
and subsidiaries as of June 30, 1996 and 1997, 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 Kennametal Inc. and
subsidiaries as of June 30, 1996 and 1997, and the results of their operations
and their 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
Pittsburgh, Pennsylvania
July 21, 1997 (except with respect
to the matters discussed in Note 18,
as to which the date is November 18, 1997)
F-2
<PAGE> 237
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales........................ $983,873 $1,079,963 $1,156,343 $275,203 $310,792
Cost of goods sold............. 560,867 625,473 668,415 160,493 178,569
-------- ---------- ---------- -------- --------
Gross profit..................... 423,006 454,490 487,928 114,710 132,223
Research and development
expenses.................... 18,744 20,585 24,105 5,739 5,227
Selling, marketing and
distribution expenses....... 219,271 242,375 263,980 63,019 68,571
General and administrative
expenses.................... 55,853 65,417 69,911 18,206 24,720
Restructuring charge........... -- 2,666 -- -- --
Amortization of intangibles.... 2,165 1,596 2,907 546 1,052
-------- ---------- ---------- -------- --------
Operating income................. 126,973 121,851 127,025 27,200 32,653
Interest expense............... 12,793 11,296 10,393 2,642 1,180
Other income (expense)......... 54 4,821 1,531 627 (440)
-------- ---------- ---------- -------- --------
Income before income taxes and
minority interest.............. 114,234 115,376 118,163 25,185 31,033
Provision for income taxes..... 45,000 43,900 44,900 9,800 12,100
Minority interest.............. 940 1,744 1,231 182 1,385
-------- ---------- ---------- -------- --------
Net income....................... $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
======== ========== ========== ======== ========
PER SHARE DATA
Earnings per share............... $ 2.58 $ 2.62 $ 2.71 $ 0.57 $ 0.67
======== ========== ========== ======== ========
Dividends per share.............. $ 0.60 $ 0.60 $ 0.66 $ 0.15 $ 0.17
======== ========== ========== ======== ========
Weighted average shares
outstanding.................... 26,486 26,635 26,575 26,729 26,171
======== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 238
KENNAMETAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 17,090 $ 21,869 $ 45,409
Accounts receivable, less allowance for doubtful accounts
of $9,296, $7,325 and $7,370........................... 189,820 200,515 202,144
Inventories.............................................. 204,934 210,111 214,068
Deferred income taxes.................................... 24,620 25,384 24,949
--------- --------- ---------
Total current assets.............................. 436,464 457,879 486,570
--------- --------- ---------
Property, plant and equipment:
Land and buildings....................................... 156,064 156,292 160,474
Machinery and equipment.................................. 415,443 473,850 494,466
Less accumulated depreciation............................ (304,400) (329,756) (344,377)
--------- --------- ---------
Net property, plant and equipment................. 267,107 300,386 310,563
--------- --------- ---------
Other assets:
Investments in affiliated companies...................... 8,742 11,736 14,648
Intangible assets, less accumulated amortization of
$20,795, $23,960 and $25,031........................... 33,756 49,915 57,691
Deferred income taxes.................................... 41,757 34,307 31,644
Other.................................................... 11,665 15,086 18,473
--------- --------- ---------
Total other assets................................ 95,920 111,044 122,456
--------- --------- ---------
TOTAL ASSETS...................................... $ 799,491 $ 869,309 $ 919,589
========= ========= =========
LIABILITIES
Current liabilities:
Current maturities of term debt and capital leases....... $ 17,543 $ 13,853 $ 14,010
Notes payable to banks................................... 57,549 120,166 46,784
Accounts payable......................................... 64,663 60,322 61,306
Accrued vacation pay..................................... 19,228 18,176 17,818
Other.................................................... 59,830 69,485 88,217
--------- --------- ---------
Total current liabilities......................... 218,813 282,002 228,135
--------- --------- ---------
Term debt and capital leases, less current maturities.... 56,059 40,445 40,464
Deferred income taxes.................................... 20,611 21,055 21,138
Other liabilities........................................ 52,559 57,060 55,621
--------- --------- ---------
Total liabilities................................. 348,042 400,562 345,358
--------- --------- ---------
Minority interest in consolidated subsidiaries........... 12,500 9,139 44,162
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued.... -- -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
29,370 shares issued................................... 36,712 36,712 36,712
Additional paid-in capital............................... 87,417 91,049 148,438
Retained earnings........................................ 351,594 406,083 419,174
Treasury shares, at cost; 2,667, 3,263 and 3,153 shares
held................................................... (35,734) (62,400) (61,101)
Cumulative translation adjustments....................... (1,040) (11,836) (13,154)
--------- --------- ---------
Total shareholders' equity........................ 438,949 459,608 530,069
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 799,491 $ 869,309 $ 919,589
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 239
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................... $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
Adjustments for noncash items:
Depreciation and amortization...... 39,315 40,240 41,399 9,948 10,326
Other.............................. 11,953 9,000 5,356 2,335 1,091
Changes in certain assets and
liabilities:
Accounts receivable................ (23,815) (20,359) (8,032) 9,647 (4,077)
Inventories........................ (34,389) (9,758) 1,379 (2,551) (2,319)
Accounts payable and accrued
liabilities..................... (9,340) (1,342) (600) 2,702 8,903
Other.............................. 4,615 (2,034) (11,684) (344) 9,150
-------- -------- -------- -------- --------
Net cash flow from operating
activities......................... 56,633 85,479 99,850 36,940 40,622
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.......................... (43,371) (57,556) (73,779) (14,615) (16,695)
Disposals of property, plant and
equipment.......................... 3,725 6,348 1,063 16 193
Acquisitions, net of cash............ (1,948) (1,441) (18,995) (14,102) (17,031)
Other................................ (3,320) 2,614 907 1,938 1,116
-------- -------- -------- -------- --------
Net cash flow used in investing
activities......................... (44,914) (50,035) (90,804) (26,763) (32,417)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt............................... (5,721) 5,019 55,689 (1,406) (72,733)
Increase in term debt................ 8,163 7,780 943 403 --
Reduction in term debt............... (9,721) (28,278) (19,359) (312) (939)
Net proceeds from issuance and sale
of subsidiary stock................ -- -- -- -- 90,462
Purchase of treasury stock........... -- -- (28,657) -- --
Dividend reinvestment and employee
stock plans........................ 4,439 2,652 5,623 1,230 4,062
Cash dividends paid to
shareholders....................... (15,884) (15,976) (17,543) (4,009) (4,457)
-------- -------- -------- -------- --------
Net cash flow from (used for)
financing activities............... (18,724) (28,803) (3,304) (4,094) 16,395
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash............................... 642 (378) (963) 254 (1,060)
-------- -------- -------- -------- --------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and
equivalents........................ (6,363) 6,263 4,779 6,337 23,540
Cash and equivalents, beginning of
period............................. 17,190 10,827 17,090 17,090 21,869
-------- -------- -------- -------- --------
Cash and equivalents, end of
period............................. $ 10,827 $ 17,090 $ 21,869 $ 23,427 $ 45,409
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid........................ $ 12,569 $ 11,436 $ 10,563 $ 1,288 $ 520
Income taxes paid.................... 23,125 39,521 45,307 3,994 2,257
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 240
KENNAMETAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of period............ $ 36,712 $ 36,712 $ 36,712 $ 36,712
-------- -------- -------- --------
Balance at end of period.................. 36,712 36,712 36,712 36,712
-------- -------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............ 83,839 85,768 87,417 91,049
Dividend reinvestment and stock purchase
plan................................... 1,015 882 1,132 189
Employee stock plans...................... 914 767 2,500 2,173
Issuance of stock by subsidiary........... -- -- -- 55,027
-------- -------- -------- --------
Balance at end of period.................. 85,768 87,417 91,049 148,438
-------- -------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............ 245,428 297,838 351,594 406,083
Net income................................ 68,294 69,732 72,032 17,548
Cash dividends............................ (15,884) (15,976) (17,543) (4,457)
-------- -------- -------- --------
Balance at end of period.................. 297,838 351,594 406,083 419,174
-------- -------- -------- --------
TREASURY SHARES
Balance at beginning of period............ (39,247) (36,737) (35,734) (62,400)
Purchase of treasury stock................ -- -- (28,657) --
Dividend reinvestment and stock purchase
plan................................... 938 537 708 74
Employee stock plans...................... 1,572 466 1,283 1,225
-------- -------- -------- --------
Balance at end of period.................. (36,737) (35,734) (62,400) (61,101)
-------- -------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of period............ (3,360) 8,304 (1,040) (11,836)
Current year translation adjustments...... 11,664 (9,344) (10,796) (1,318)
-------- -------- -------- --------
Balance at end of period.................. 8,304 (1,040) (11,836) (13,154)
-------- -------- -------- --------
PENSION LIABILITY ADJUSTMENT
Balance at beginning of period............ (536) -- -- --
Minimum pension liability adjustment...... 536 -- -- --
-------- -------- -------- --------
Balance at end of period.................. -- -- -- --
-------- -------- -------- --------
Total shareholders' equity.................. $391,885 $438,949 $459,608 $ 530,069
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 241
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
The Company is a global enterprise engaged in the manufacture, purchase and
distribution of a broad range of tools, tooling systems, supplies and services
for the metalworking, mining and highway construction industries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist
in evaluating the Company's consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
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. Temporary cash investments having original maturities of
three months or less are considered cash equivalents. Cash equivalents consist
principally of investments in money market funds and certificates of deposit.
ACCOUNTS RECEIVABLE included $16.6 million and $12.8 million of receivables
from affiliates at June 30, 1996 and 1997, respectively.
INVENTORIES are carried at the lower of cost or market. The Company uses
the last-in, first-out (LIFO) method for determining the cost of a significant
portion of its U.S. inventories. The remainder of inventories is determined
under the first-in, first-out (FIFO) or average cost methods.
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 income. Interest is capitalized
during the construction of major facilities. Capitalized interest is included in
the cost of the constructed asset and is amortized over its estimated useful
life.
Depreciation for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets ranging from
3 to 40 years. Leased property and equipment under capital leases are amortized
using the straight-line method over the terms of the related leases.
INTANGIBLE ASSETS, which include the excess of cost over net assets of
acquired companies, are amortized using the straight-line method over periods
ranging from 3 to 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 entities.
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.
INCOME TAXES. 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. For the most part, assets and liabilities of
international operations are translated into U.S. dollars using year-end
exchange rates, while revenues and expenses are translated at average
F-7
<PAGE> 242
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
exchange rates throughout the year. The resulting net translation adjustments
are recorded as a separate component of shareholders' equity.
PENSION PLANS cover substantially all employees. Pension benefits are based
on years of service and, for certain plans, on average compensation immediately
preceding retirement. Pension costs are determined in accordance with Statement
of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions." The Company funds pension costs in accordance with the funding
requirements of the Employee Retirement Income Security Act of 1974 (ERISA) for
U.S. plans and in accordance with local regulations or customs for non-U.S.
plans.
EARNINGS PER SHARE is computed using the weighted average number of shares
outstanding during the year.
REVENUE RECOGNITION. The Company recognizes revenue from product sales upon
transfer of title to the customer.
NEW ACCOUNTING STANDARDS. Effective July 1, 1996, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." 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.
Additionally on July 1, 1996, the Company adopted 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. The Company will continue to use the
intrinsic-value-based method, which does not result in compensation cost. The
Company's stock compensation plans are discussed in Note 13.
The Financial Accounting Standards Board 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 disclosures.
Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130
is effective for years ending after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company will adopt
SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have
a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the effect of applying this statement.
F-8
<PAGE> 243
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
RECLASSIFICATIONS. Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
INTERIM UNAUDITED FINANCIAL INFORMATION. The consolidated financial
statements as of, and for the three months ended September 30, 1996 and 1997 are
unaudited; however, in the opinion of management all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation have
been made. The results of interim periods are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 3. ISSUANCE OF SUBSIDIARY STOCK
On July 2, 1997, an initial public offering (IPO) of approximately 4.9
million shares of common stock at a price of $20 per share of JLK Direct
Distribution Inc. (JLK), a newly formed subsidiary of the Company, was
consummated. JLK operates the industrial supply operations consisting of the
Company's wholly owned J&L Industrial Supply (J&L) subsidiary and its Full
Service Supply programs. The net proceeds from the offering were approximately
$90 million and represented approximately 20 percent of JLK's common stock. The
transaction was accounted for as an equity transaction in the consolidated
financial statements. The net proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and $20 million related to
intercompany obligations to the Company. The Company used these proceeds to
repay short-term debt. In connection with the IPO, the remaining net proceeds
were loaned to the Company, under an intercompany debt/investment and cash
management agreement at a fluctuating rate of interest equal to the Company's
short-term borrowing costs. The Company will maintain unused lines of credit to
enable it to repay any portion of the borrowed funds as the amounts are due on
demand by JLK.
The Company owns approximately 80 percent of the outstanding common stock
of JLK and intends to retain a majority of both the economic and voting
interests of JLK.
NOTE 4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Finished goods................................... $169,108 $183,961 $ 184,628
Work in process and powder blends................ 59,326 50,351 51,027
Raw materials and supplies....................... 16,514 16,494 17,016
-------- -------- ---------
Inventories at current cost...................... 244,948 250,806 252,671
Less LIFO valuation.............................. (40,014) (40,695) (38,603)
-------- -------- ---------
Total inventories................................ $204,934 $210,111 $ 214,068
======== ======== =========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for a significant portion of U.S.
inventories and the first-in, first-out (FIFO) method or average cost for other
inventories. The Company used the LIFO method of valuing its inventories for
approximately 55 and 56 percent of total inventories at June 30, 1996 and 1997,
respectively, and for approximately 45 percent of total inventories at September
30, 1997. The Company uses the LIFO method for valuing the majority of its
inventories in order to more closely match current costs with current revenues,
thereby reducing the effects of inflation on earnings.
F-9
<PAGE> 244
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal and state income taxes.................................. $16,898 $17,563
Accrued compensation............................................ 7,259 8,522
Accrued benefits................................................ 3,613 6,894
Payroll, state and local taxes.................................. 7,910 6,098
Accrued product warranty costs.................................. 5,119 4,621
Accrued advertising expenses.................................... 906 1,363
Accrued professional fees....................................... 1,013 1,284
Accrued interest expense........................................ 996 766
Accrued restructuring charge.................................... 2,666 --
Other accrued expenses.......................................... 13,450 22,374
------- -------
Total other current liabilities................................. $59,830 $69,485
======= =======
</TABLE>
NOTE 6. TERM DEBT AND CAPITAL LEASES
Term debt and capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes, 9.64%, due in installments through 2000.......... $ 40,000 $ 30,000
Borrowings outside the U.S., varying from 6.60% to 10.25% in
1996 and 1997, due in installments through 2003.............. 13,472 6,750
Lease of office facilities with terms expiring through 2011 at
6.75% to 7.55%............................................... 12,654 11,068
Other.......................................................... 7,476 6,480
------- -------
Total term debt and capital leases............................. 73,602 54,298
------- -------
Less current maturities:
Term debt.................................................... (16,016) (12,287)
Capital leases............................................... (1,527) (1,566)
------- -------
Total current maturities..................................... (17,543) (13,853)
------- -------
Long-term debt and capital leases.............................. $ 56,059 $ 40,445
======= =======
</TABLE>
Future principal maturities of term debt are $12.3 million, $12.2 million,
$12.1 million, $1.1 million and $1.1 million, respectively, in fiscal years 1998
through 2002.
Certain of the term debt agreements contain various restrictions relating
to, among other things, minimum net worth, maximum indebtedness, fixed charge
coverage and debt guarantees.
F-10
<PAGE> 245
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Future minimum lease payments under capital leases for the next five years
and in total are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30: (IN THOUSANDS)
- ------------------------------------------------------
<S> <C>
1998................................................ $ 1,566
1999................................................ 1,511
2000................................................ 1,355
2001................................................ 1,355
2002................................................ 1,355
After 2002.......................................... 8,770
-------
Total future minimum lease payments................... 15,912
Less amount representing interest..................... (4,844)
-------
Present value of minimum lease payments............... $ 11,068
=======
</TABLE>
Future minimum lease payments under operating leases with noncancelable
terms beyond one year were not significant at June 30, 1997.
NOTE 7. NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $57.5 million and $120.2 million at June 30, 1996
and 1997, respectively, represent short-term borrowings under U.S. and
international credit lines with commercial banks. These credit lines totaled
approximately $280 million at June 30, 1997, of which $160 million was unused.
The weighted average interest rate for short-term borrowings was 5.6 percent and
6.3 percent at June 30, 1996 and 1997, respectively.
The Company has available U.S. credit lines totaling $175 million that are
covered by a revolving credit agreement that amounts to $150 million and another
agreement totaling $25 million. The revolving credit agreement allows the
Company to borrow up to $150 million at fixed or variable interest rates. This
credit line expires during fiscal 2001 and requires the Company to pay a
facility fee on the total line. The Company has the option to terminate this
agreement in whole or in part at any time.
During 1997, the Company's J&L subsidiary obtained a $25 million line of
credit with a bank and borrowed $20 million under the line of credit to fund a
dividend to the Company. Interest payable under the line of credit was based on
LIBOR plus 25 basis points. The Company guaranteed repayment of the line of
credit in the event of default by J&L. The line of credit was repaid and
canceled in full during July 1997.
F-11
<PAGE> 246
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. INCOME TAXES
Income before income taxes and the provision for income taxes consisted of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes:
United States..................................... $ 83,401 $ 76,020 $ 95,029
International..................................... 29,893 37,612 21,903
-------- -------- --------
Total income before income taxes.................... $113,294 $113,632 $116,932
======== ======== ========
Current income taxes:
Federal........................................... $ 26,500 $ 28,100 $ 30,600
State............................................. 6,100 5,500 6,000
International..................................... 4,000 1,800 4,400
-------- -------- --------
Total............................................. 36,600 35,400 41,000
Deferred income taxes............................... 8,400 8,500 3,900
-------- -------- --------
Provision for income taxes.......................... $ 45,000 $ 43,900 $ 44,900
======== ======== ========
Effective tax rate.................................. 39.7% 38.6% 38.4%
======== ======== ========
</TABLE>
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at U.S. statutory rate.................... $39,653 $39,772 $40,926
State income taxes, net of federal tax benefits........ 3,981 3,575 3,917
Combined tax effects of international income........... 1,288 (2,942) (1,990)
International losses with no related tax benefits...... 219 421 102
Other.................................................. (141) 3,074 1,945
------- ------- -------
Provision for income taxes............................. $45,000 $43,900 $44,900
======= ======= =======
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.............................. $35,985 $27,160
Other postretirement benefits................................. 14,649 15,153
Inventory valuation and reserves.............................. 6,836 7,981
Accrued vacation compensation................................. 3,965 4,316
Property and equipment........................................ 2,547 1,259
Other accruals................................................ 6,571 7,436
Pension benefits.............................................. (1,053) (2,133)
Accumulated depreciation...................................... (19,558) (18,922)
------- -------
Total........................................................... 49,942 42,250
Less valuation allowance...................................... (4,176) (3,614)
------- -------
Net deferred tax assets......................................... $45,766 $38,636
======= =======
</TABLE>
Deferred income taxes have not been provided on cumulative undistributed
earnings of international subsidiaries and affiliates. Any U.S. income taxes on
such earnings, if distributed, would generally be offset by available foreign
tax credits. In addition, there were no significant undistributed earnings of
unconsolidated affiliates at June 30, 1997.
F-12
<PAGE> 247
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Included in deferred tax assets at June 30, 1997, are unrealized tax
benefits totaling $27.2 million related to net operating loss carryforwards. The
realization of these tax benefits is contingent on future taxable income in
certain international operations. Of this amount, approximately $23.6 million
relates to net operating loss carryforwards in Germany, which can be carried
forward indefinitely. The Company's operations in Germany are profitable.
The remaining unrealized tax benefits relate to net operating loss
carryforwards in certain other international operations, which expire at various
dates through 2002. The Company established a valuation allowance of $3.6
million to offset the deferred tax benefits that may not be realized before the
expiration of the carryforward periods.
NOTE 9. PENSION BENEFITS
The components of net pension credit for the Company's U.S. defined benefit
pension plans were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................... $ 5,906 $ 6,722 $ 7,728
Interest cost........................................ 13,016 13,688 14,569
Return on plan assets................................ (37,746) (45,888) (46,845)
Net amortization and deferral........................ 17,628 24,682 22,457
-------- -------- --------
Net pension credit................................... $ (1,196) $ (796) $ (2,091)
======== ======== ========
</TABLE>
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Plan assets, at fair value.................................... $269,380 $318,229
Present value of accumulated benefit obligations:
Vested benefits............................................. 151,209 161,160
Nonvested benefits.......................................... 2,144 2,271
-------- --------
Accumulated benefit obligations............................... 153,353 163,431
Effect of future salary increases............................. 44,369 48,054
-------- --------
Projected benefit obligations................................. 197,722 211,485
-------- --------
Plan assets in excess of projected benefit obligations........ 71,658 106,744
Amounts not recognized in the financial statements:
Unrecognized net assets from July 1, 1986................... (14,509) (12,329)
Unrecognized prior service costs............................ 826 672
Unrecognized net gains...................................... (52,312) (87,118)
-------- --------
Prepaid pension costs......................................... $ 5,663 $ 7,969
======== ========
</TABLE>
Prepaid pension costs are included in other noncurrent assets.
F-13
<PAGE> 248
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Plan assets consist principally of common stocks, corporate bonds and U.S.
government securities. The significant actuarial assumptions used to determine
the present value of pension benefit obligations were as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Discount rate....................................................... 7.50% 7.50%
Rate of future salary increases..................................... 4.50% 4.50%
Rate of return on plan assets....................................... 9.00% 9.00%
</TABLE>
Pension plans of international subsidiaries are not required to report to
U.S. government agencies pursuant to ERISA. The components of net pension cost
for the Company's significant international defined benefit pension plans were
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ 231 $ 735 $ 877
Interest cost............................................. 967 1,573 1,480
Return on plan assets..................................... -- (661) (709)
Net amortization and deferral............................. -- (45) (45)
-------- -------- --------
Net pension cost.......................................... $1,198 $1,602 $1,603
======== ======== ========
</TABLE>
The return on plan assets and the net amortization and deferral in 1995
were not significant.
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997
------------------ ------------------
ASSETS ABO ASSETS ABO
EXCEED EXCEED EXCEED EXCEED
ABO ASSETS ABO ASSETS
------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Plan assets, at fair value............................. $8,274 $ -- $9,417 $ --
------ -------- ------ --------
Present value of accumulated benefit obligations
(ABO):...............................................
Vested benefits...................................... 5,602 10,922 5,643 11,863
Nonvested benefits................................... 13 2,618 13 1,465
------ -------- ------ --------
Accumulated benefit obligations........................ 5,615 13,540 5,656 13,328
Effect of future salary increases...................... 1,383 584 1,393 210
------ -------- ------ --------
Projected benefit obligations.......................... 6,998 14,124 7,049 13,538
------ -------- ------ --------
Plan assets greater (less) than projected benefit
obligations.......................................... 1,276 (14,124) 2,368 (13,538)
Amounts not recognized in the financial statements:
Unrecognized net assets.............................. (905) -- (850) --
Unrecognized net gains............................... (413) -- (1,550) --
------ -------- ------ --------
Net pension liability.................................. $ (42) $(14,124) $ (32) $(13,538)
====== ======== ====== ========
</TABLE>
Accrued pension costs are included in other noncurrent liabilities. Plan
assets consist principally of common stocks, corporate bonds and government
securities.
F-14
<PAGE> 249
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The significant actuarial assumptions used to determine the present value
of pension benefit obligations for international plans were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Discount rate.......................................... 8.00%-7.50% 8.00%-7.00%
Rate of future salary increases........................ 5.50%-4.50% 5.50%-4.00%
Rate of return on plan assets.......................... 9.00% 9.00%
</TABLE>
Total pension cost for U.S. and international plans amounted to $0.8
million, $2.1 million and $0.6 million in 1995, 1996 and 1997, respectively.
NOTE 10. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company presently provides varying levels of postretirement health care
and life insurance benefits to most U.S. employees. Postretirement health care
benefits are available to employees and their spouses retiring at or after age
65 with five or more years of service after age 40. Employees (and their
spouses) retiring under age 65 before January 1, 1998, with 20 or more years of
service after age 40 also are eligible to receive postretirement health care
benefits. Beginning with retirements on or after January 1, 1998, Kennametal's
portion of the costs of postretirement health care benefits will be capped at
1996 levels.
The components of other postretirement benefit costs for the Company's U.S.
plans were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................ $ 959 $1,100 $1,220
Interest cost........................................... 2,626 2,661 2,427
Net amortization and deferral........................... (32) -- (70)
------ ------ ------
Other postretirement benefit costs...................... $3,553 $3,761 $3,577
====== ====== ======
</TABLE>
Accumulated postretirement benefit obligations and amounts recognized in
the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Present value of accumulated benefit obligations:
Retirees..................................................... $21,333 $17,446
Fully eligible active participants........................... 6,862 2,742
Other active participants.................................... 9,321 14,392
------- -------
Accumulated benefit obligations................................ 37,516 34,580
Plan assets, at fair value..................................... -- --
------- -------
Accumulated benefit obligations in excess of plan assets....... 37,516 34,580
Unrecognized net gains......................................... 626 4,340
------- -------
Accrued postretirement benefits................................ $38,142 $38,920
======= =======
</TABLE>
Included in other noncurrent liabilities were accrued postretirement
benefits of $35.1 million and $36.0 million at June 30, 1996 and 1997,
respectively.
F-15
<PAGE> 250
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The significant actuarial assumptions used to determine the present value
of accumulated postretirement benefit obligations were as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Discount rate...................................................... 7.50% 7.50%
Rate of increase in health care costs:
Initial rate..................................................... 8.50% 8.00%
Ultimate rate in 2003 and after.................................. 5.00% 5.00%
</TABLE>
A 1 percent increase in the health care cost trend rate would have
increased other postretirement benefit costs by $0.1 million in 1997 and the
accumulated benefit obligation by $1.0 million at June 30, 1997.
The Company provides for postemployment benefits pursuant to SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The Company accrues the
cost of separation and other benefits provided to former or inactive employees
after employment but before retirement. Postemployment benefit costs were not
significant in 1995, 1996 and 1997, respectively.
NOTE 11. RESTRUCTURING CHARGE
On April 29, 1996, the Board of Directors approved the Company's plan (the
Plan) to relocate its North America Metalworking Headquarters from Raleigh,
North Carolina, to Latrobe, Pennsylvania. In connection with the Plan, the
Company is constructing a new world headquarters at an estimated cost of $20
million. The relocation was made to globalize key functions and to provide a
more efficient corporate structure. The action affected approximately 300
employees in Raleigh, North Carolina, all of whom were offered the opportunity
to move to Latrobe, Pennsylvania. As a result, a pretax charge of $2.0 million
was recorded in the fourth quarter of fiscal 1996. The charge was taken to cover
the one-time costs of employee separation arrangements and early retirement
costs.
The costs resulting from the relocation of employees, hiring and training
new employees, and other costs resulting from the temporary duplication of
certain operations were not included in the one-time charge and will be included
in operating expenses as incurred. The costs related to these items were
estimated to be approximately $9.0 million pretax, $4.7 million that was
recorded in fiscal 1997 and the remainder that will be incurred in fiscal 1998.
During the fourth quarter of fiscal 1996, the Company also recorded a
one-time pretax charge of $0.7 million related to the closure of a manufacturing
facility in Canada. The supply of products produced at this location will be
continued from other Company locations. The restructuring was substantially
complete in 1997.
NOTE 12. FINANCIAL INSTRUMENTS
FAIR VALUE. The Company had $21.9 million in cash and equivalents at June
30, 1997, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of term debt was $44.9 million at June 30, 1997.
Fair value was determined using discounted cash flow analysis and the Company's
incremental borrowing rates for similar types of arrangements.
OFF-BALANCE-SHEET RISK. The Company uses forward foreign exchange
contracts in the normal course of business to hedge foreign currency exposures
of underlying receivables and payables. These financial instruments involve
credit risk in excess of the amount recognized in the financial statements. The
Company controls credit risk through credit evaluations, limits and monitoring
procedures. There were no financial instruments with significant
off-balance-sheet risk at June 30, 1997.
F-16
<PAGE> 251
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
temporary cash investments and trade receivables. By policy, the Company makes
temporary cash investments with high credit quality financial institutions. With
respect to trade receivables, concentrations of credit risk are significantly
reduced because the Company serves numerous customers in many industries and
geographic areas. As of June 30, 1997, the Company had no significant
concentrations of credit risk.
NOTE 13. STOCK OPTIONS
Under stock option plans approved by shareholders in 1996, 1992 and 1988,
stock options generally are granted to eligible employees at fair market value
at the date of grant. Options are exercisable under specified conditions for up
to 10 years from the date of grant. No options may be granted under the 1988
plan after October 1998, no options may be granted under the 1992 plan after
October 2002, and no options may be granted under the 1996 plan after October
2006. No charges to income have resulted from the operation of the plans.
Under provisions of the plans, participants may deliver Kennametal stock in
payment of the option price and receive credit for the fair market value of the
shares on the date of delivery. Shares valued at $0.4 million (13,728 shares),
$0.9 million (22,740 shares) and $0.5 million (11,684 shares) were delivered in
1995, 1996 and 1997, respectively.
Under the 1996, 1992 and 1988 plans, shares may be awarded to eligible
employees without payment. The respective plans specify such shares are awarded
in the name of the employee, who has all the rights of a shareholder, subject to
certain restrictions or forfeitures. Such awards were not significant in 1995,
1996 and 1997.
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
Opinion 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 expense had been determined
based on the estimated fair value of options granted in 1996 and 1997,
consistent with the methodology in SFAS No. 123, the effect on the Company's
1996 and 1997 net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income:
As reported.................................................. $69,732 $72,032
Pro forma.................................................... 65,610 70,140
Earnings per share:
As reported.................................................. $ 2.62 $ 2.71
Pro forma.................................................... 2.46 2.64
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate............................................ 6.28% 6.64%
Expected life (years).............................................. 5 5
Expected volatility................................................ 30.2% 27.9%
Expected dividend yield............................................ 1.9% 2.0%
</TABLE>
F-17
<PAGE> 252
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Stock option activity for 1995, 1996 and 1997 is set forth below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER OF SHARES OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ---------------------------------------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year.................................. 475,650 $20.53 521,148 $20.55 994,244 $30.41
Granted................................. 204,950 24.75 580,500 36.86 327,000 31.42
Exercised............................... (157,452) 16.94 (105,904) 17.16 (116,877) 22.65
Lapsed and forfeited.................... (2,000) 16.94 (1,500) 37.06 (35,000) 36.45
-------- -------- -------- -------- --------- --------
Options outstanding, end of year........ 521,148 $20.55 994,244 $30.41 1,169,367 $30.85
-------- -------- -------- -------- --------- --------
Options exercisable, end of year........ 281,482 $24.75 960,970 $30.88 1,132,111 $31.16
-------- -------- -------- -------- --------- --------
Weighted average fair value of options
granted during the year............... N/A $11.56 $ 9.48
======== ======== ========
</TABLE>
Stock options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF LIFE EXERCISE EXERCISE
EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
------------------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$14.06-$16.34 6,463 1.94 $15.73 6,463 $15.73
16.94 102,000 2.59 16.94 74,744 16.94
20.53 100,000 6.35 20.53 100,000 20.53
24.75 163,904 7.15 24.75 163,904 24.75
30.81 260,000 9.08 30.81 250,000 30.81
31.06 20,000 8.33 31.06 20,000 31.06
34.06 61,000 9.33 34.06 61,000 34.06
37.06 456,000 8.08 37.06 456,000 37.06
--------- ---- ------ --------- ------
1,169,367 7.62 $30.85 1,132,111 $31.16
========= ==== ====== ========= ======
</TABLE>
NOTE 14. ENVIRONMENTAL MATTERS
The Company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In addition,
the Company has been named as a potentially responsible party at several
Superfund sites in the United States. However, it is management's opinion, based
on its evaluations and discussions with outside counsel and independent
consultants, that the ultimate resolution of these environmental matters will
not have a material adverse effect on the results of operations, financial
position or cash flows of the Company.
The Company maintains a Corporate Environmental, Health and Safety (EH&S)
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the Company has established an EH&S administrator at each of its
domestic manufacturing facilities. The Company's financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of environmental
projects and contingencies. On a quarterly and annual basis, management
establishes or adjusts financial provisions and reserves for environmental
contingencies in accordance with SFAS No. 5, "Accounting for Contingencies."
F-18
<PAGE> 253
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. SHAREHOLDER RIGHTS PLAN
Pursuant to the Company's Shareholder Rights Plan, one-half of a right is
associated with each share of capital stock. Each right entitles a shareholder
to buy 1/100th of a share of a new series of preferred stock at a price of $105
(subject to adjustment).
The rights will be exercisable only if a person or group of persons
acquires or intends to make a tender offer for 20 percent or more of the
Company's capital stock. If any person acquires 20 percent of the capital stock,
each right will entitle the shareholder to receive that number of shares of
capital stock having a market value of two times the exercise price. If the
Company is acquired in a merger or other business combination, each right will
entitle the shareholder to purchase at the exercise price that number of shares
of the acquiring Company having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption by the
Company at $0.01 per right.
NOTE 16. ACQUISITIONS
Fiscal 1997 results included sales of approximately $16 million from five
companies acquired during the year for a total consideration of approximately
$19 million. The acquisitions were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating results
of each business from the date of acquisition. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
significant.
F-19
<PAGE> 254
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17. SEGMENT DATA
The Company operates predominantly as a tooling supplier specializing in
powder metallurgy, which represents a single business segment. The following
table presents the Company's operations by geographic area:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
United States............................................ $ 726,977 $ 784,295 $ 867,321
Europe................................................... 311,178 328,732 306,065
Other international...................................... 91,269 114,432 125,856
---------- ---------- ----------
Total.................................................... 1,129,424 1,227,459 1,299,242
---------- ---------- ----------
Intersegment transfers:
United States............................................ 92,939 97,343 100,000
Europe................................................... 41,252 38,452 33,629
Other international...................................... 11,360 11,701 9,270
---------- ---------- ----------
Total.................................................... 145,551 147,496 142,899
---------- ---------- ----------
Net sales.................................................. $ 983,873 $1,079,963 $1,156,343
========== ========== ==========
Operating income:
United States............................................ $ 95,228 $ 79,517 $ 90,421
Europe................................................... 22,977 27,614 18,876
Other international...................................... 13,792 15,247 15,949
Eliminations............................................. (5,024) (527) 1,779
---------- ---------- ----------
Total operating income..................................... 126,973 121,851 127,025
---------- ---------- ----------
Interest expense......................................... (12,793) (11,296) (10,393)
Other income............................................. 54 4,821 1,531
---------- ---------- ----------
Income before income taxes and minority interest........... $ 114,234 $ 115,376 $ 118,163
========== ========== ==========
Identifiable assets:
United States............................................ $ 462,812 $ 495,452 $ 560,631
Europe................................................... 284,378 239,594 210,711
Other international...................................... 64,233 83,130 79,477
Eliminations............................................. (43,419) (37,884) (10,390)
Corporate................................................ 13,605 19,199 28,880
---------- ---------- ----------
Total assets............................................... $ 781,609 $ 799,491 $ 869,309
========== ========== ==========
</TABLE>
Intersegment transfers are accounted for at arm's-length prices, reflecting
prevailing market conditions within the various geographic areas. Such sales and
associated costs are eliminated in the consolidated financial statements.
Identifiable assets are those assets that are identified with the
operations in each geographic area. Corporate assets consist mainly of cash and
cash equivalents, investments in affiliated companies and other assets.
Sales to a single customer did not aggregate 10 percent or more of total
sales. Export sales from U.S. operations to unaffiliated customers were $27.4
million, $21.4 million and $15.1 million in 1995, 1996 and 1997, respectively.
F-20
<PAGE> 255
KENNAMETAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18. SUBSEQUENT EVENTS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom, and Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. The companies had
aggregate annual sales of approximately $66 million in 1996. The acquisitions
were accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results of each business from the
date of acquisition.
On October 10, 1997, Kennametal and Kennametal Acquisition Corp.
(Acquisition Corp.) entered into the Merger Agreement with Greenfield pursuant
to which Acquisition Corp. purchased at $38 per share on November 17, 1997,
approximately 16,179,976 shares (98% of the outstanding) of Greenfield's common
stock. The Merger occurred on November 18, 1997, and Greenfield became a
wholly-owned subsidiary of Kennametal on that date. The total purchase price for
the acquisition of Greenfield (including estimated transaction costs and assumed
Greenfield debt and convertible redeemable preferred securities of approximately
$320 million) is estimated to be $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November
18, 1997, entered into the New Bank Credit Facility. As of November 18, 1997,
the Company had borrowed $500 million in term loans and approximately $300
million in revolving credit loans under the New Bank Credit Facility. The
proceeds from these loans were principally used to pay for the shares of common
stock of Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of Greenfield and to
refinance certain indebtedness of the Company. Subject to certain conditions,
the New Bank Credit Facility permits revolving credit loans of up to $900
million for working capital requirements, capital expenditures, and general
corporate purposes. The New Bank Credit Facility is secured by all of the stock
of certain of Kennametal's significant domestic subsidiaries, by guarantees of
certain of such subsidiaries and by 65% of the stock of Kennametal's significant
foreign subsidiaries. The New Bank Credit Facility contains various restrictive
covenants and affirmative covenants requiring the maintenance of certain
financial ratios. The term loans under the New Bank Credit Facility are subject
to mandatory amortization commencing on November 30, 1998, and all loans mature
on August 31, 2002. Proceeds from anticipated common stock offerings, a FELINE
PRIDES offering and a senior debt offering will be used to prepay loans and,
correspondingly, permanently reduce commitments of the lenders under the New
Bank Credit Facility. If all such offerings are consummated, the Company intends
to replace the New Bank Credit Facility with a $500 million senior unsecured
credit facility, although there can be no assurance that the Company will be
able to replace the New Bank Credit Facility.
F-21
<PAGE> 256
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Greenfield Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Greenfield Industries, Inc. and its subsidiaries at December 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
January 30, 1997
F-22
<PAGE> 257
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $271,787 $420,188 $510,094 $384,089 $419,480
Cost of sales................................. 180,974 288,158 357,203 266,835 295,167
-------- -------- -------- -------- --------
Gross profit.................................. 90,813 132,030 152,891 117,254 124,313
Selling, general and administrative
expenses.................................... 50,229 70,952 88,944 66,367 77,777
Restructuring costs........................... 1,300 -- 4,000 4,000 --
-------- -------- -------- -------- --------
Operating income.............................. 39,284 61,078 59,947 46,887 46,536
Interest expense.............................. 3,169 8,223 11,049 8,729 9,699
Dividends at 6% per annum on
Company-obligated, mandatorily redeemable
convertible preferred securities of
subsidiary Greenfield Capital Trust holding
solely convertible subordinated debentures
of the Company.............................. -- -- 4,734 3,009 5,175
-------- -------- -------- -------- --------
Income before provision for income taxes...... 36,115 52,855 44,164 35,149 31,662
Provision for income taxes.................... 14,106 21,390 17,975 14,264 13,003
-------- -------- -------- -------- --------
Net income.................................... $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
======== ======== ======== ======== ========
Earnings per common share:
Primary..................................... $ 1.35 $ 1.94 $ 1.60 $ 1.28 $ 1.14
Fully diluted(1)............................ $ -- $ -- $ 1.59 $ 1.25 $ 1.13
Weighted average common and common equivalent
shares outstanding:
Primary..................................... 16,250 16,252 16,328 16,313 16,404
Fully diluted(1)............................ -- -- 18,247 17,941 19,192
Dividends per common share.................... $ 0.09 $ 0.13 $ 0.17 $ 0.12 $ 0.15
</TABLE>
- ---------
(1) For the years ended December 31, 1994 and 1995, there was no dilutive
effect.
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE> 258
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 5,258 $ 1,721 $ --
Accounts receivable, net................................. 63,618 83,199 98,100
Inventories, net......................................... 109,769 152,659 182,524
Prepaid expenses and other............................... 4,069 8,034 5,875
------- ------- -------
Total current assets.................................. 182,714 245,613 286,499
Property, plant and equipment, net......................... 109,022 144,300 169,179
Goodwill, net.............................................. 98,795 169,958 180,187
Other assets, net.......................................... 7,932 2,773 2,302
------- ------- -------
$398,463 $562,644 $ 638,167
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 633 $ 513 $ 6,632
Accounts payable......................................... 24,586 22,392 31,026
Accrued liabilities...................................... 33,688 35,411 41,561
------- ------- -------
Total current liabilities............................. 58,907 58,316 79,219
Long-term debt............................................. 140,198 162,625 197,734
Deferred taxes............................................. 4,207 9,524 10,302
Other long-term liabilities................................ 15,891 16,451 18,891
------- ------- -------
Total liabilities..................................... 219,203 246,916 306,146
------- ------- -------
Commitments and contingencies (Note 14)....................
Company-obligated, mandatorily redeemable convertible
preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures
of the Company........................................... -- 115,000 115,000
------- ------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, no shares issued and outstanding..........
Common stock, $.01 par value, 100,000,000 shares
authorized, 16,260,377, 16,374,925 and 16,445,757
shares issued and outstanding, respectively........... 163 164 164
Additional paid-in capital and other..................... 111,615 109,759 111,331
Retained earnings........................................ 69,014 92,425 108,622
Cumulative translation adjustment........................ (1,532) (1,620) (3,096)
------- ------- -------
Total stockholders' equity............................ 179,260 200,728 217,021
------- ------- -------
$398,463 $562,644 $ 638,167
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE> 259
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN CAPITAL RETAINED TRANSLATION
STOCK AND OTHER EARNINGS ADJUSTMENT TOTAL
-------- --------------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............. $ 159 $ 107,338 $ 19,075 $ (862) $125,710
Net income............................. -- -- 22,009 -- 22,009
Exercise of stock options and tax
benefits
relating thereto..................... 1 1,288 -- -- 1,289
Dividends declared and paid............ -- -- (1,435) -- (1,435)
Partial repayment of stock
subscriptions receivable............. -- 128 -- -- 128
Cumulative translation adjustment...... -- -- -- 202 202
-------- -------- -------- -------- --------
Balance, December 31, 1994............. 160 108,754 39,649 (660) 147,903
Net income............................. -- -- 31,465 -- 31,465
Exercise of stock options and tax
benefits relating thereto............ 3 3,520 -- -- 3,523
Dividends declared and paid............ -- -- (2,100) -- (2,100)
Additional minimum pension liability... -- (783) -- -- (783)
Partial repayment of stock
subscriptions receivable............. -- 124 -- -- 124
Cumulative translation adjustment...... -- -- -- (872) (872)
-------- -------- -------- -------- --------
Balance, December 31, 1995............. 163 111,615 69,014 (1,532) 179,260
Net income............................. -- -- 26,189 -- 26,189
Exercise of stock options and tax
benefits relating thereto............ 1 1,218 -- -- 1,219
Dividends declared and paid............ -- -- (2,778) -- (2,778)
Partial repayment of stock
subscriptions receivable and other... -- (115) -- -- (115)
Executive restricted stock awards...... -- 761 -- -- 761
Issuance costs of mandatorily
redeemable convertible preferred
securities........................... -- (4,254) -- -- (4,254)
Additional minimum pension liability... -- 534 -- -- 534
Cumulative translation adjustment...... -- -- -- (88) (88)
-------- -------- -------- -------- --------
Balance, December 31, 1996............. 164 109,759 92,425 (1,620) 200,728
Net income (unaudited)................. -- -- 18,659 -- 18,659
Exercise of stock options and tax
benefits relating thereto
(unaudited).......................... -- 753 -- -- 753
Dividends declared and paid
(unaudited).......................... -- -- (2,462) -- (2,462)
Partial repayment of stock
subscriptions receivable
(unaudited).......................... -- 133 -- -- 133
Executive restricted stock awards
(unaudited).......................... -- 686 -- -- 686
Cumulative translation adjustment
(unaudited).......................... -- -- -- (1,476) (1,476)
-------- -------- -------- -------- --------
Balance, September 30, 1997
(unaudited).......................... $ 164 $ 111,331 $108,622 $ (3,096) $217,021
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-25
<PAGE> 260
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- --------- --------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the
effects of acquisitions:
Depreciation.......................................... 9,305 11,319 14,259 10,967 13,423
Amortization.......................................... 1,491 2,908 4,620 3,274 3,755
Deferred income taxes................................. 3,606 5,759 8,390 2,514 3,848
Tax benefits relating to stock options................ 1,210 3,210 315 302 197
Other................................................. 664 (811) 1,356 (821) 1,625
Changes in operating assets and liabilities:
Accounts receivable, net............................ (3,859) (6,080) (7,126) (2,874) (7,683)
Inventories......................................... (1,137) (21,452) (22,073) (17,242) (19,327)
Prepaid expenses and other.......................... 3,251 (1,440) (2,639) (2,411) 2,479
Accounts payable.................................... 1,244 3,912 (9,513) (17,949) 306
Accrued liabilities................................. 2,641 (11,403) (11,620) (1,358) 1,282
-------- -------- --------- --------- --------
Net cash provided by (used in) operating
activities...................................... 40,425 17,387 2,158 (4,713) 18,564
-------- -------- --------- --------- --------
Cash flows from investing activities:
Capital expenditures.................................... (13,141) (26,847) (29,185) (21,789) (26,189)
Proceeds from the sale of fixed assets.................. 325 1,219 2,018 2,352 1,733
Purchase of businesses, net of cash acquired............ (73,639) (24,434) (111,183) (96,503) (33,725)
Investment in Rule...................................... -- (5,611) -- -- --
-------- -------- --------- --------- --------
Net cash used in investing activities............. (86,455) (55,673) (138,350) (115,940) (58,181)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Proceeds from borrowings................................ 71,800 123,950 140,743 128,375 49,673
Payments on borrowings.................................. (25,915) (82,148) (117,559) (116,660) (7,258)
Net proceeds from issuance of 6% Company-obligated
mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust
holding solely convertible junior subordinated
debentures of the Company............................. -- -- 110,746 110,775 --
Dividends paid on common stock.......................... (1,435) (2,100) (2,778) (1,959) (2,462)
Other................................................... (26) (299) 1,381 2,571 650
-------- -------- --------- --------- --------
Net cash provided by financing activities......... 44,424 39,403 132,533 123,102 40,603
-------- -------- --------- --------- --------
Effect of exchange rate changes on cash................... (1,160) 145 122 (970) (2,707)
-------- -------- --------- --------- --------
Net (decrease) increase in cash........................... (2,766) 1,262 (3,537) 1,479 (1,721)
-------- -------- --------- --------- --------
Cash at beginning of period............................... 6,762 3,996 5,258 5,258 1,721
-------- -------- --------- --------- --------
Cash at end of period..................................... $ 3,996 $ 5,258 $ 1,721 $ 6,737 $ --
======== ======== ========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 2,643 $ 7,317 $ 10,937
Dividends on mandatorily redeemable convertible
preferred securities................................ -- -- 4,734
Income taxes.......................................... 7,699 16,797 18,601
Supplemental schedule of noncash investing and financing
activities:
Assets obtained under capital leases.................... 241 -- --
The Company purchased several companies as detailed in
Note 3 in 1994, 1995 and 1996. In conjunction with the
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired....................... $ 56,284 $ 26,199 $ 59,370
Fair value assigned to goodwill..................... 60,940 6,009 76,379
Cash paid........................................... (73,639) (24,434) (111,183)
-------- -------- ---------
Liabilities assumed................................. $ 43,585 $ 7,774 $ 24,566
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-26
<PAGE> 261
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS
Greenfield Industries, Inc. (Greenfield or the Company) is a global
manufacturer of expendable products for material cutting, material removal and
wear applications used in various industries. The Company also manufactures a
limited number of products (primarily bilge pumps) for the marine industry. The
Company markets its products through six product groups which are as follows:
(1) industrial products, (2) engineered products, (3) energy and construction
products, (4) electronics products, (5) consumer products, and (6) marine
products. The majority of the Company's products are made from either high-speed
steel or tungsten carbide. The Company's largest concentration of business is in
North America but it sells its products throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the consolidated
financial statements conform to generally accepted accounting principles, and
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
The significant accounting policies followed by the Company are described
below.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL INFORMATION
The interim consolidated financial information at September 30, 1997 and
for the nine months ended September 30, 1996 and 1997 and related disclosures in
the notes herein (including Note 18) is unaudited. However, in the opinion of
management, such information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the periods presented. The interim results, however,
are not necessarily indicative of the results for any future period.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign subsidiaries are maintained in their
respective local currencies. The accompanying consolidated financial statements
have been translated and adjusted to reflect U.S. dollars on the bases presented
below.
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. Adjustments resulting from the process of
translating the consolidated amounts into U.S. dollars are accumulated in a
separate translation adjustment account included in stockholders' equity. Common
stock and additional paid-in capital are translated at historical U.S. dollar
equivalents in effect at the date of acquisition. Foreign currency transaction
gains and losses are included in earnings currently. The Company recognized net
foreign currency transaction gains of $227, $540 and $599 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-27
<PAGE> 262
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CASH
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash. Cash overdrafts, if any, on the Company's
disbursement accounts are included in the balances outstanding under the
Company's revolving credit facilities.
CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors and end-users in the
industrial, energy and construction, electronics, engineered products, consumer
and marine markets. While most of the Company's business activity is with
customers located within North America, the Company also serves customers in
Europe and the Far East. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses have been
within management's expectations. At December 31, 1996, the Company had no
significant concentrations of credit risk.
RELATIONSHIPS WITH SUPPLIERS
The Company purchases tungsten carbide materials from multiple suppliers,
for which alternative suppliers also exist and are adequate. Although the
Company purchases the majority of its domestic high-speed steel requirements
from a single supplier, the Company believes that the supply of steel and the
number of alternative suppliers are adequate. The Company considers its
relationships with its primary suppliers to be strong.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, for substantially all domestic
inventories. For various tax and statutory reasons, inventories of the Company's
foreign subsidiaries are stated at first-in, first-out (FIFO) cost. The effects
on the consolidated financial position and results of operations from applying
the FIFO method (versus the LIFO method) to certain inventories are immaterial.
If the FIFO method (which approximates replacement cost) had been used in
determining cost for all inventories, inventories would have been approximately
$5,181 and $5,675 higher at December 31, 1995 and 1996, respectively.
Inventories include the cost of materials, direct labor and manufacturing
overhead. Obsolete or unsaleable inventories are reflected at their estimated
net realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 40 years. Properties held under capital leases are recorded at
the present value of the noncancelable lease payments over the term of the lease
and are amortized over the shorter of the lease term or the estimated useful
lives of the assets. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of net assets acquired
in business combinations is capitalized and amortized on a straight-line basis
over the estimated period benefited. The amortization period for all
acquisitions to date is 40 years. Amortization expense for the years ended
December 31, 1994, 1995 and 1996 was approximately $1,221, $2,636 and $4,279,
respectively. Accumulated amortization at December 31, 1995 and 1996 was
approximately $7,592 and $11,849, respectively. The carrying value of goodwill
is assessed for recoverability by management based on current and anticipated
conditions, including expected cash flows and
F-28
<PAGE> 263
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
operating results generated by the underlying tangible assets. Management
believes that there has been no impairment at December 31, 1996.
OTHER ASSETS
Other assets are primarily comprised of debt issuance and trademark costs.
At December 31, 1995, other assets also included an investment in Rule
Industries, Inc. stock as further described in Note 3. Debt issuance costs are
being amortized on a straight-line basis over the life of the related obligation
and trademarks are being amortized on a straight-line basis over 40 years.
Amortization expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $270, $272 and $341, respectively. Accumulated amortization at
December 31, 1995 and 1996 was $3,471 and $3,568, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS
109, the deferred tax provision is determined using the liability method,
whereby deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted tax rates.
EARNINGS PER SHARE
Fully diluted earnings per share primarily reflect the effects of
conversion of the Company's mandatorily redeemable convertible preferred
securities and elimination of the related dividends, net of applicable income
taxes (see Note 5). Primary earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
and common equivalent shares outstanding during the period. Options under the
Company's employee and directors stock option plans are not included as common
stock equivalents for earnings per share purposes since they did not have a
material dilutive effect.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for using the
intrinsic value method, no compensation expense is recognized because the
options are granted with an exercise price equal to the market value of the
stock on the date of grant. For variable stock awards accounted for using the
intrinsic value method, compensation cost is estimated and recorded each period
from the date of grant to the measurement date based on the market value of the
stock at the end of each period.
During 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), became effective for the
Company. FAS 123 prescribes the recognition of compensation expense based on the
fair value of options or stock awards determined on the date of grant. However,
FAS 123 allows companies to continue to apply the valuation methods set forth in
APB 25. For companies that continue to apply the valuation methods set forth in
APB 25, FAS 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. See Note 12 for additional discussion.
F-29
<PAGE> 264
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS
The following table summarizes certain information regarding the Company's
acquisitions during the past three years:
<TABLE>
<CAPTION>
NET CASH
DATE BUSINESS PURCHASE PRICE
- --------------- ------------------------------------------------------- --------------
<S> <C> <C>
October 1994 Threads, Inc. and Hendersonville Industrial Tool Co.,
Inc.................................................... $ 5,272
November 1994 The Cleveland Twist Drill Company (CTD)................ $ 45,867
November 1994 Carbidie Corporation (Carbidie)........................ $ 22,500
January 1995 American Mine Tool Division of Valenite, Inc. (AMT).... $ 14,676
June 1995 Van Keuren, Inc........................................ $ 2,500
December 1995 Cleveland Europe Limited............................... $ 7,258
January 1996 Rule Industries, Inc. (Rule)........................... $ 84,046
June 1996 Boride Products, Inc................................... $ 8,768
July 1996 Arkansas Cutting Tools, a division of Production
Carbide & Steel Company................................ $ 4,872
December 1996 Bassett Rotary Tool Company............................ $ 13,497
March 1997 Hanita Metal Works, Ltd................................ $ 33,725
</TABLE>
During the past three years, the Company has made several acquisitions
which have significantly expanded its product lines. These acquisitions were
each accounted for using the purchase method of accounting and financed
primarily through bank borrowings, resulting in an increase in the Company's
outstanding debt. Results of operations of each acquired company have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of each acquisition was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the date
of acquisition. The excess of purchase price over the estimated fair value of
net assets acquired was, in each instance, recorded as goodwill. Except for
Rule, CTD and Carbidie, the pro forma effects, individually and collectively, of
the acquisitions on the Company's consolidated results of operations and
financial position are not material.
The following table sets forth pro forma information for the Company as if
the acquisitions of Rule, CTD and Carbidie had taken place on January 1, 1994
and the acquisition of Rule had taken place on January 1, 1995, respectively.
This information is unaudited and does not purport to represent actual revenue,
net income and earnings per share had the acquisitions actually occurred on
January 1, 1994 and 1995, respectively. The pro forma effects of Rule, had the
acquisition taken place on January 1, 1996, are not material.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1994 1995
-------- --------
<S> <C> <C>
Net sales................................................ $419,662 $484,600
Net income............................................... $ 24,917 $ 31,479
Primary earnings per common share........................ $ 1.53 $ 1.94
</TABLE>
In connection with a definitive merger agreement between Rule and the
Company, on September 11, 1995 Greenfield exercised its option to acquire
630,000 shares of Rule common stock for approximately $5,611, including
acquisition costs. The cost of the Rule common stock is reflected as other
assets on the December 31, 1995 consolidated balance sheet. On January 12, 1996,
Greenfield acquired the remaining outstanding shares of Rule common stock as
discussed further below.
F-30
<PAGE> 265
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with the Company's acquisition of Rule in January 1996, the
Company recorded a restructuring reserve of $2,600 in purchase accounting
primarily related to the closing of two Rule facilities (including the corporate
office) and the involuntary termination of a substantial number of Rule
employees. Of the $2,600 reserve, $1,240 related to employee severance costs,
$346 related to the closure of the two facilities, and $1,014 related to other
nonrecurring costs associated with terminating certain Rule operations. This
restructuring has resulted in a reduction in personnel and the elimination of
certain duplicate functions. The employee severance costs related to the
reduction of approximately 62 employees from the acquisition date. Of the total
$2,600 reserve, substantially all of the costs had been paid as of December 31,
1996.
The Company, as part of the acquisition of CTD, recorded a restructuring
and plant consolidation liability of $10,480 in purchase accounting relating to
the consolidation of certain facilities of CTD into existing facilities of the
Company. The $10,480 liability included $8,430 in costs associated with plant
closures, $2,000 in severance pay and $50 in other costs. Substantially all of
these costs had been paid as of December 31, 1996.
On March 27, 1997, the Company acquired the outstanding shares of Hanita
Metal Works, Ltd., an Israeli-based company, and its U.S. subsidiary Hanita
Cutting Tools, Inc. (collectively, Hanita) for approximately $20,800 (including
cash acquired) and assumed indebtedness of approximately $14,600. Hanita, with
its primary manufacturing, sales and distribution operations in Israel, is a
leading manufacturer of high-quality, high performance end mills and other
cutting tools for the metalworking industry. Hanita also sells and distributes
products around the world, including the United States. The acquisition was
accounted for using the purchase method of accounting and was financed through
the Company's existing unsecured credit facility. For the year ended December
31, 1996, Hanita had net sales of approximately $27,000. The pro forma effects
of the acquisition on the Company's results of operations are not material. The
results of operations of Hanita are included in the Company's consolidated
financial statements from the date of acquisition.
F-31
<PAGE> 266
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
SENIOR NOTES PAYABLE TO INSTITUTIONAL INVESTORS:
Principal payable in annual installments of $10,715
commencing October 15, 1999 with a final payment of
$10,710 on October 15, 2005; interest payable
semi-annually at 7.31%; unsecured........................ $ 75,000 $ 75,000 $ 75,000
INDUSTRIAL REVENUE BONDS:
Principal due March 1, 2015; interest payable monthly at
4.3% at December 31, 1996; secured by related property
and equipment (repaid May 1997).......................... 4,178 5,602 --
Principal due August 1, 2015; interest payable monthly at
4.5% at December 31, 1996; secured by related property
and equipment............................................ 3,287 3,751 4,737
Principal due April 3, 2009; interest payable monthly at
3.85% at September 30, 1997; secured by related property
and equipment............................................ -- -- 1,222
NOTES PAYABLE TO BANKS:
Principal due in annual installments of approximately $37;
interest payable semi-annually at 6.0%; secured by the
mortgage on the property of Kemmer AG, an indirect,
wholly-owned subsidiary.................................. 1,802 1,334 1,036
Principal due in varying installments through 2001;
interest at rates ranging from 5.6% to 8.85%; secured by
property and equipment................................... -- 14 14,224
Foreign currency denominated notes due in varying
installments through 2001; interest at rates ranging from
2% to 16.5%; secured by property and equipment........... -- -- 2,445
REVOLVING CREDIT FACILITIES:
Multi-currency facility; payable in full on December 9,
2001; interest payable quarterly at LIBOR plus a
specified percentage, or at a base rate as set forth
within the loan agreement. The interest rate under each
option is determined by the Company's ratio of total
indebtedness to cash flow (6.3% to 8.3% at December 31,
1996); unsecured
Domestic.............................................. -- 60,500 89,600
Foreign currency...................................... -- 15,930 15,407
Domestic facility (replaced in December 1996).............. 34,400 -- --
Foreign currency denominated facility (replaced in December
1996).................................................... 20,709 -- --
CAPITAL LEASE OBLIGATIONS.................................... 1,455 1,007 695
-------- -------- --------
140,831 163,138 204,366
Less current portion of long-term debt and amounts due on
demand, including $590, $462 and $316 of capital lease
obligations at December 31, 1995, and 1996 and at
September 30, 1997, respectively......................... (633) (513) (6,632)
-------- -------- --------
$140,198 $162,625 $ 197,734
======== ======== ========
</TABLE>
On April 3, 1997, the Company issued $7,000 City of Pine Bluff, Arkansas
Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Greenfield
Industries, Inc. Project), Series 1997 (Arkansas Bonds) to pay for the planned
equipment purchases for its facility in Pine Bluff, Arkansas. The Arkansas Bonds
mature on
F-32
<PAGE> 267
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
April 3, 2009 and bear interest at 3.8% at September 30, 1997. The proceeds from
the Arkansas Bonds are held in trust until needed for the equipment purchases.
Approximately $1,222 has been received from the Arkansas Bonds as of September
30, 1997.
During December 1996, the Company replaced its existing foreign and
domestic unsecured revolving credit facilities. The new agreement provides for a
$130,000 multi-currency unsecured revolving facility and a $50,000 U.S. dollar
acquisition facility. The multi-currency revolving facility provides for loans
of up to DM 30,000 and Sterling 15,000. The facility requires commitment fees of
0.20% or 0.25% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the multi-
currency facility. As of December 31, 1996 and September 30, 1997, interest on
borrowings under the multi-currency facility ranged from 6.3% to 8.3% per annum
and from 4.0% to 8.2% per annum, respectively. At December 31, 1996 and
September 30, 1997, there was $53,570 and $24,993, respectively, available under
the multi-currency facility and $50,000 available under the acquisition
facility.
On October 23, 1995, the Company completed the private placement of $75,000
of senior unsecured notes (Notes) with various institutional investors. The
Notes, bearing interest payable quarterly at 7.31%, are due in 2005 with equal
payments beginning in 1999. The proceeds from the Notes were used to refinance
existing indebtedness and for general corporate purposes.
On August 16, 1995, the Company, through CTD, issued $7,200 in City of
Solon, Ohio Industrial Development Revenue Bonds (The Cleveland Twist Drill
Company Project) Series 1995 (Ohio Bonds) to pay for the construction of a new
manufacturing facility in Solon, Ohio. The Ohio Bonds mature on August 1, 2015
and bear interest at 4.5% at December 31, 1996. The proceeds from the Ohio Bonds
are held in trust until needed for the construction. Approximately $3,751 has
been received from the Ohio Bonds as of December 31, 1996.
On March 31, 1995, the Company, in conjunction with the South Carolina
Jobs-Economic Development Authority, issued $7,200 in Tax-Exempt Adjustable Mode
Economic Development Revenue Bonds (South Carolina Bonds) to pay for the
expansion of its facility in Clemson, South Carolina. The South Carolina Bonds
mature on March 1, 2015 and bear interest at 4.3% at December 31, 1996. The
proceeds from the South Carolina Bonds are held in trust until needed for the
expansion. Approximately $5,602 has been received from the South Carolina Bonds
as of December 31, 1996. The South Carolina Bonds were repaid in May 1997.
On March 15, 1995, the Company amended its existing $20,000 unsecured
foreign credit facility. The amended agreement provided for a DM 21 million
unsecured credit facility and a Sterling 4.5 million unsecured credit facility.
In connection with the acquisition of Cleveland Europe Limited, during December
1995, the Company amended the unsecured foreign credit facility, increasing the
Sterling Facility to Sterling 9.5 million. As discussed above, this foreign
revolving credit facility was replaced in December 1996.
During November 1994, the Company amended its existing unsecured credit
facility. The amended agreement provided for a $110,000 domestic revolving
facility and a $20,000 acquisition facility. The facility required commitment
fees of 0.25% or 0.375% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the
domestic and foreign revolving credit facilities. As discussed above, the
domestic revolving facility and the acquisition facility were replaced in
December 1996.
The financing agreements contain provisions which limit additional
borrowings and capital expenditures, require maintenance of certain debt to
capital and debt to cash flow ratios and net worth levels. At December 31, 1995
and 1996, and at September 30, 1997, the Company was in compliance with such
provisions.
F-33
<PAGE> 268
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1996, the minimum principal payments of long-term debt,
excluding capital lease obligations, for the five subsequent fiscal years are as
follows:
<TABLE>
<CAPTION>
INDUSTRIAL REVOLVING
NOTES REVENUE CREDIT
PAYABLE BONDS FACILITY TOTAL
------- ---------- --------- --------
<S> <C> <C> <C> <C>
1997.................................... $ 51 $ -- $ -- $ 51
1998.................................... 37 -- -- 37
1999.................................... 10,752 -- -- 10,752
2000.................................... 10,752 -- -- 10,752
2001.................................... 10,752 -- 76,430 87,182
2002 and thereafter..................... 44,004 9,353 -- 53,357
------- ------ ------- --------
$76,348 $9,353 $76,430 $162,131
======= ====== ======= ========
</TABLE>
The book value of long-term debt at December 31, 1996 approximates fair
value.
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
On April 24, 1996, the Company completed a private placement to
institutional investors of $115,000 of 6% Convertible Preferred Securities
(liquidation preference of $50 per Convertible Preferred Security). The
placement was made through the Company's wholly-owned subsidiary, Greenfield
Capital Trust (Trust), a newly-formed Delaware business trust. The securities
represent undivided beneficial ownership interests in the Trust. The sole asset
of the Trust is the $118,557 aggregate principal amount of the 6% Convertible
Junior Subordinated Deferrable Interest Debentures Due 2016 which were acquired
with the proceeds from the private placement of the Convertible Preferred
Securities and the offering and sale of Common Securities to the Company. The
Company's obligations under the Convertible Junior Subordinated Debentures, the
Indenture pursuant to which they were issued, the Amended and Restated
Declaration of Trust of the Trust and the Guarantee of Greenfield, taken
together, constitute a full and unconditional guarantee by Greenfield of amounts
due on the Convertible Preferred Securities. The Convertible Preferred
Securities are convertible at the option of the holders at any time into the
common stock of Greenfield at an effective conversion price of $41.25 per share
and are redeemable at Greenfield's option after April 15, 1999. The net proceeds
of the offering of approximately $110,746 were used by Greenfield to retire
indebtedness. A registration statement relating to resales of such Convertible
Preferred Securities was declared effective by the Securities and Exchange
Commission on September 26, 1996.
Upon consummation of the merger described in Note 18, the effective
conversion price of the Convertible Preferred Securities was adjusted to
approximately $36.05.
6. LEASE COMMITMENTS
The Company leases certain of its equipment under noncancelable lease
agreements. These agreements extend for a period of up to 42 months and contain
purchase or renewal options on a month-to-month basis. The leases are reflected
in the consolidated financial statements as capitalized leases in accordance
with the requirements of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases."
F-34
<PAGE> 269
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In addition, the Company has manufacturing facilities, office space and
certain equipment leased under noncancelable operating leases having remaining
terms of up to 14 years. Minimum lease payments under long-term capital and
operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997............................................................. $ 494 $ 4,989
1998............................................................. 274 5,359
1999............................................................. 141 2,638
2000............................................................. 246 2,285
2001............................................................. -- 1,881
2002 and thereafter.............................................. -- 10,283
------ -------
Total minimum lease payments..................................... 1,155 $27,435
=======
Less amount representing interest................................ (148)
------
Present value of net minimum lease payments, including current
portion of $462................................................ $ 1,007
======
</TABLE>
Rental expense incurred on the operating leases in 1994, 1995 and 1996
approximated $2,291, $2,840 and $6,070, respectively.
7. INCOME TAXES
Income (loss) before provision (benefit) for income taxes for the years
ended December 31 was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Domestic.............................................. $36,594 $45,213 $34,694
Foreign............................................... (479) 7,642 9,470
------- ------- -------
Total................................................. $36,115 $52,855 $44,164
======= ======= =======
</TABLE>
The provision (benefit) for income taxes charged to operations was as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current tax provision (benefit):
U.S. federal........................................ $ 7,940 $10,383 $ 8,587
State and local..................................... 1,660 2,101 1,471
Foreign............................................. 900 3,147 (473)
------- ------- -------
Total current provision............................... 10,500 15,631 9,585
======= ======= =======
Deferred tax provision (benefit):
U.S. federal........................................ 4,504 4,637 3,820
State and local..................................... 602 785 695
Foreign............................................. (1,500) 337 3,875
------- ------- -------
Total deferred provision.............................. 3,606 5,759 8,390
------- ------- -------
Total provision for income taxes...................... $14,106 $21,390 $17,975
======= ======= =======
</TABLE>
F-35
<PAGE> 270
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Depreciation................................................... $ 14,226 $ 18,705
LIFO inventory................................................. 7,424 7,300
Foreign deferred tax liabilities, primarily related to
depreciation................................................. 2,334 3,437
Other.......................................................... 105 135
------- -------
Gross deferred tax liabilities................................. 24,089 29,577
------- -------
Property, plant and equipment basis differences................ (1,547) (2,253)
Restructuring costs............................................ (2,517) (2,093)
Inventory reserves and costing capitalization.................. (1,772) (4,174)
Retiree health................................................. (3,490) (3,578)
Pension........................................................ (2,309) (2,301)
Workers' compensation reserves................................. (651) (726)
Environmental reserves......................................... (998) (1,053)
Other accruals................................................. (2,331) (3,266)
Foreign deferred tax assets, primarily loss carryforwards and
other reserves............................................... (3,708) (936)
Other.......................................................... (866) (1,327)
------- -------
Gross deferred tax assets...................................... (20,189) (21,707)
------- -------
Deferred tax assets valuation allowance........................ 975 975
------- -------
Net deferred tax liability..................................... $ 4,875 $ 8,845
======= =======
</TABLE>
The deferred tax asset valuation allowance at December 31, 1996 primarily
represents excess deductible temporary differences over taxable temporary
differences for foreign operations and potential nonrealization of certain other
deferred tax assets. The tax benefits, if any, from the future recognition of
certain deductible temporary differences present at the date of the acquisition
of CTD and Rule, but not recognized at that time, will be applied to reduce
goodwill.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. rate................................... $12,640 $18,499 $15,457
Increase (decrease) in rate resulting from:
Foreign taxes, net.................................. (432) 809 172
State/local taxes, net.............................. 1,471 1,876 1,532
Nondeductible goodwill amortization................. 282 957 1,258
Other............................................... 145 (751) (444)
------- ------- -------
Effective tax rate.................................. $14,106 $21,390 $17,975
======= ======= =======
</TABLE>
8. RESTRUCTURING COSTS
The results of operations for the year ended December 31, 1996 included
restructuring costs of $4,000 (approximately $2,400 net of related tax benefits,
or $0.15 per common share), on a primary basis. These costs were primarily
related to employee severance and certain other nonrecurring charges resulting
from the effects of the reorganization of the Company's business groups. The
restructuring costs included the costs associated with the combination or
elimination of certain functions or operations which were identified as
redundant. The $4,000 restructuring charge recorded in the third quarter
included $2,727 for employee-related costs consisting primarily
F-36
<PAGE> 271
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of severance costs, $585 for the noncash write-down of plant assets where
operations have been or will be terminated, and $688 for other nonrecurring
severance costs for personnel that have been terminated or will be terminated in
future periods. The employee severance costs relate to the reduction of
approximately 42 employees as of December 31, 1996 and future reductions of
approximately 28 employees. Of the total $4,000 charge, approximately $777 had
been incurred through December 31, 1996. The remaining accrual primarily relates
to employee severance costs and costs associated with the closure of two
facilities.
During 1994, the Company recorded restructuring costs of $1,300 relating to
the consolidation of the plant in Switzerland into a plant in Germany. The
$1,300 charge is comprised of $700 in costs associated with plant closures and
relocation of machinery and equipment, $500 in severance costs related to
approximately 35 administrative staff and plant personnel at the closed Swiss
facility and $100 in other costs. The Company substantially completed the
restructuring by the end of 1994.
The Company continues to evaluate its operations with an intent to
streamline operations, improve productivity and reduce costs and may implement
additional rationalization programs in the future.
9. RETIREMENT PLANS
The Company offers substantially all of its domestic employees a retirement
savings plan under Section 401(k) of the Internal Revenue Code. Employees may
elect to enter a written salary deferral agreement under which a maximum of 15%
of their salaries may be contributed to the plan, subject to aggregate limits
required under the Internal Revenue Code. The Company is required to make a
mandatory contribution of 2% of qualified employee earnings. In addition, the
Company will match a percentage of the employees' contribution up to a specified
maximum percentage of their salaries and may make a discretionary contribution
from profits upon resolution of its Board of Directors. For the years ended
December 31, 1994, 1995 and 1996, the Company made contributions to the defined
contribution plans of approximately $2,448, $3,406 and $3,923, respectively.
CTD, Carbidie and AMT had defined benefit pension plans covering
substantially all domestic employees with the exception of AMT non-union
employees when they were acquired by the Company. All of these plans were frozen
in 1995, and benefits were frozen at 1995 levels. In addition, Rule had a
defined benefit pension plan for certain employees for which the benefits had
been frozen prior to the Company's acquisition of Rule in January 1996. The
Company's funding policy with respect to such plans is to contribute annually
the minimum amount required under ERISA. Plan assets include marketable equity
securities, U.S. government securities, federal agency obligations, corporate
debt instruments, money market funds and other fixed income securities.
In connection with the CTD and Carbidie acquisitions in 1994, the Company
recorded an aggregate net liability of $6,051 in purchase accounting
representing the excess of the estimated projected benefit obligation (PBO) over
the fair value of plan assets. During 1996, the Company recorded a net liability
of $700 in purchase accounting for the excess of the PBO over the fair value of
the plan assets in connection with the Rule acquisition.
The following tables set forth the defined benefit pension plans' net
periodic pension costs for the years ended December 31, 1995 and 1996 and the
plans' net funded status, amounts recorded in the consolidated balance sheet,
and other summary information at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
--------------------------------------------------------------- -------- --------
<S> <C> <C>
NET PERIODIC PENSION COST:
Service cost................................................... $ 502 $ 30
Interest cost.................................................. 2,334 2,297
Other.......................................................... 583 (732)
Less: Actual return on plan assets............................. (2,842) (1,560)
-------- --------
Net periodic pension cost...................................... $ 577 $ 35
======== ========
</TABLE>
F-37
<PAGE> 272
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1996
--------------------------------------------------------------- -------- --------
<S> <C> <C>
NET PENSION LIABILITY:
Vested accumulated benefit obligation.......................... $ 30,288 $ 32,226
======= =======
Nonvested accumulated benefit obligation....................... $ 1,622 $ 751
======= =======
PBO............................................................ $ 31,910 $ 33,228
Fair value of plan assets...................................... (27,361) (29,570)
Unrecognized prior service cost................................ -- (30)
Unrecognized net loss.......................................... (519) (29)
Additional minimum pension liability........................... 783 279
-------- --------
Net pension liability.......................................... $ 4,813 $ 3,878
======= =======
Discount rate used to determine the PBO........................ 7.5% 8.0%
Assumed long-term rate of return on plan assets................ 9.0% 9.0%
</TABLE>
10. POSTRETIREMENT BENEFITS
Under Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," the Company is
required to recognize the cost of providing health care and other benefits to
retirees over the term of the employees' service. Prior to the acquisitions of
CTD and Carbidie, the Company provided no postretirement benefits other than
those related to the 401(k) plans described in Note 9. CTD and a certain other
subsidiary provides health care insurance benefits to certain of its retired
employees. All of these plans were frozen in 1995, and benefits were frozen at
1995 levels. In connection with the CTD acquisition in 1994, the Company
recorded a liability of $11,939 in purchase accounting representing the
estimated discounted present value of the expected future retiree benefits
attributed to employees' service rendered in periods prior to Greenfield's
acquisition.
The following tables set forth the plans' net periodic postretirement
benefit cost for the years ended December 31, 1995 and 1996, the accumulated
postretirement benefit obligation (APBO) at December 31, 1995 and 1996 and other
summary information:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
---------------------------------------------------------------- ------- -------
<S> <C> <C>
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost.................................................... $ 55 $ --
Interest cost................................................... 873 765
-------- --------
Net periodic postretirement benefit cost........................ $ 928 $ 765
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1996
---------------------------------------------------------------- ------- -------
<S> <C> <C>
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
APBO (consisting solely of retirees and dependents)............. $11,692 $ 9,653
Unrecognized net gain (loss).................................... (3) 754
------- -------
Net APBO........................................................ $11,689 $10,407
======= =======
Discount rate used in measuring the APBO........................ 7.5% 8.0%
Assumed health care cost trend rate used in measuring the
APBO.......................................................... 8.5% 8.5%
</TABLE>
The assumed health care cost trend rate used in measuring the APBO for 1995
and 1996 decreased gradually to 6% (until 2002 and thereafter). If the assumed
health care cost trend rates were increased by 1%, the APBO for 1995 and 1996
would have increased approximately $558 and $434, respectively.
F-38
<PAGE> 273
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
There are no plan assets and the Company expects to continue to fund these
benefit costs on a pay-as-you-go basis. During 1995 and 1996, the Company made
payments of approximately $1,018 and $1,400, respectively, related to these
benefits.
11. 1993 EXECUTIVE STOCK OPTIONS
In 1993, the Company established the 1993-1 Executive Stock Option Plan
(1993-1 Plan) and granted to certain officers of Rogers Tool Works, Inc., a
wholly-owned subsidiary of the Company (RTW), non-qualified stock options to
purchase an aggregate of 438,258 shares of common stock at a price of $0.51 per
share, subject to adjustment, in exchange for the cancellation of RTW shares
held by these officers. In addition, the Company cancelled the promissory notes
of each of these officers issued to finance the purchase of their RTW shares.
The exercise price with respect to the options granted was determined to
preserve the original purchase price per share of the RTW shares cancelled. The
options became exercisable as to 25% of the shares issuable thereunder on
January 26, 1994, and as to a cumulative 35%, 50% and 100% of the shares
issuable thereunder on each succeeding six-month anniversary thereof. As of
December 31, 1995 all of the options had been exercised. During the years ended
December 31, 1994 and 1995, 153,367 and 284,891 shares, respectively, were
issued in connection with the 1993-1 Plan.
In 1993, the Company also adopted the 1993-2 Executive Stock Option Plan
(1993-2 Plan) pursuant to which nonqualified stock options were granted to
certain existing shareholders prior to the initial public offering to acquire an
aggregate 453,350 shares of the Company's common stock, subject to adjustment,
by tendering existing common stock in payment thereof. The exercise price of all
options was the current market price on the date of exercise and all options
were exercised only by exchanging shares of previously owned common stock. The
grant and exercise of options under the 1993-2 Plan did not result in any
increase in the beneficial ownership of common stock by the plan participants
from the number of shares owned immediately after the initial public offering.
Under the terms of the 1993-2 Plan, the options were exercised immediately after
the initial public offering and the shares of common stock issued thereunder
became freely transferable by each participant as to 25% of the shares issuable
to such participants on January 31, 1994 and as to a cumulative 35%, 50% and
100% of the shares issuable to such participant on each succeeding six-month
anniversary thereof. The shares tendered in exercise of options granted under
the 1993-2 Plan were issued under promissory notes due in 1998 through 2002. The
notes are reflected in stock subscriptions receivable, included in additional
paid-in capital and other, in the accompanying consolidated financial
statements.
12. STOCK OPTION AND STOCK INCENTIVE PLANS
STOCK OPTION PLANS
The Company has three stock options plans: the Employee Stock Option Plan
(Employee Plan), the 1995 Directors Non-Qualified Stock Option Plan (Directors
Plan) and the 1993 Directors Non-Qualified Stock Option Plan (1993 Directors
Plan).
The Employee Plan provides for the granting of options to purchase up to
1,000,000 shares of common stock to the Company's executive officers and key
employees at prices equal to the fair market value of the stock on the date of
grant. The Employee Plan was amended effective May 6, 1997, to, among other
things, increase the number of options to purchase shares of common stock from
1,000,000 to 2,000,000. Options outstanding at December 31, 1996 entitle the
holders to purchase common stock at prices ranging between $16.00 and $37.00 per
share, subject to adjustment. Options shall become exercisable with respect to
one-fourth of the shares covered thereby on each anniversary of the date of
grant, commencing on the second anniversary of such date. The right to exercise
the options expires ten years from the date of grant, or earlier if an option
holder ceases to be employed by the Company.
F-39
<PAGE> 274
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Directors Plan provides for the granting of options to purchase up to
125,000 shares of common stock to the Company's Directors who are not employees
of the Company at prices equal to the fair market value of the stock on the date
of grant. Options are granted to each eligible Director on the date such person
is first elected to the board of directors of the Company and on each subsequent
re-election date. The Directors Plan was approved in May 1996 by the
stockholders. Options outstanding at December 31, 1996 entitle the holders to
purchase common stock at a price of $37.00 per share, subject to adjustment.
Options granted upon re-election shall become exercisable in full on the first
anniversary of such date. All other options shall become exercisable with
respect to one-fourth of the shares covered thereby on each anniversary date of
the date of grant, commencing on the second anniversary of such date. The right
to exercise the options expires ten years from the date of grant, or earlier, if
an option holder ceases to be a Director of the Company.
The 1993 Directors Plan provides for the granting of options to purchase up
to 100,000 shares of common stock to the Company's Directors who are not
employees of the Company at prices equal to the fair market value of the stock
on the date of grant. Options are granted to each eligible Director on the date
such person is first elected to the board of directors of the Company. Options
outstanding at December 31, 1996 entitle the holders to purchase common stock at
prices ranging between $15.50 and $25.75 per share, subject to adjustment.
Options shall become exercisable with respect to one-fourth of the shares
covered thereby on each anniversary of the date of grant, commencing on the
second anniversary of such date. The right to exercise the options expires ten
years from the date of grant, or earlier if an option holder ceases to be a
Director of the Company. Subsequent to the May 1996 approval of the Directors
Plan, no further grants will be issued under the 1993 Directors Plan.
A summary of the status of the Company's stock option plans as of December
31, 1994, 1995 and 1996, and changes during the years then ended are presented
below:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 368,500 $ 15.98 578,500 $ 18.76 788,175 $ 21.95
Granted.................. 217,500 $ 23.36 244,300 $ 29.07 255,400 $ 28.58
Exercised................ -- -- (10,375) $ 16.07 (55,000) $ 16.53
Forfeited................ (7,500) $ 16.18 (24,250) $ 19.93 (34,175) $ 27.21
------- ------- -------
Outstanding at end of
year................... 578,500 $ 18.76 788,175 $ 21.95 954,400 $ 23.85
======= ======= =======
Exercisable at end of
year................... -- -- 77,125 $ 15.98 158,875 $ 18.12
======= ======= =======
</TABLE>
The following table summarizes information for options currently
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$14-21 308,000 7 $16.24 118,015 $16.13
$22-29 360,150 9 $25.23 40,860 $23.85
$30-37 286,250 9 $30.31 --
------- -------
$14-37 954,400 8 $23.85 158,875 $18.12
======= =======
</TABLE>
F-40
<PAGE> 275
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with the resignation of a member of the Company's Board of
Directors, in 1994 the Company exchanged options for 10,000 shares of common
stock previously granted to the Director with a warrant to purchase 10,000
shares of common stock at an exercise price equal to the exercise price of the
options.
STOCK INCENTIVE PLANS
The Company has two stock incentive plans: the 1995 Equity Incentive Plan
(Incentive Plan) and the 1995 Restricted Stock Bonus Plan (Ownership Plan). Both
plans were approved in May 1996 by the stockholders of the Company.
The Incentive Plan provides for the granting of up to 273,000 shares of
common stock to certain senior executives of the Company in time-lapse
restricted stock, performance contingent restricted stock and performance
shares. Time-lapse restricted stock vests in one-third increments over a
three-year period commencing four years after the date of the award. Performance
contingent restricted stock is earned when the price for the Company's stock
reaches certain predetermined levels, and then vests over a three- or five-year
period. Performance shares are earned based on attainment of a predetermined
four-year cumulative earnings per share level. Attainment of between 50% and
200% of the predetermined objective will entitle the participants to receive
restricted performance shares of between 50% and 200% of the target award, which
then vest over a three-year period. No performance shares are earned if less
than 50% of the performance objective is obtained.
The Ownership Plan provides for the issuance of up to 250,000 shares of
common stock to certain employees, by allowing such employees to elect to defer
up to 50% of their annual cash bonus and receive, in lieu thereof, shares of the
Company's common stock. The Company will increase the employees' deferred bonus
by either 20% or 35% (depending on the employees' selection of 3 or 5 years,
respectively, for the restriction period).
Shares issued under these plans are restricted and are subject to
forfeiture upon termination of employment. During the period that the shares are
restricted, award holders have the right to vote and to receive dividends on
such shares.
A summary of stock earned and issued pursuant to the Incentive Plan and
Ownership Plan for the year ended December 31, 1996 follows:
<TABLE>
<CAPTION>
MARKET VALUE
SHARES OF DATE EARNED VESTING PERIOD
------ -------------- ---------------------
<S> <C> <C> <C>
Incentive Plan
Time-lapse Restricted Stock.......... 26,000 $ 30.50 Nov 1999-Nov 2001
Time-lapse Restricted Stock.......... 8,000 $ 31.625 July 2000-July 2002
Performance Contingent Restricted
Stock............................. 7,700 $ 37.75 Nov 2000
------
41,700
Ownership Plan......................... 17,848 $ 30.50 Feb 1997-Feb 2001
------
Total restricted shares earned and
issued in 1996....................... 59,548
======
</TABLE>
The Company awarded up to 273,000 shares of restricted stock to certain
senior executives under the Incentive Plan, subject to the attainment of certain
performance levels, as discussed above. The weighted average fair value of the
shares on the grant date was $30.73. The Company applies APB 25 and related
interpretations in accounting for stock awards under the Incentive and Ownership
Plans. Under APB 25, the Company recorded $1,500 of compensation expense during
1996 attributable to these awards, which is included in selling, general and
administrative expenses in the 1996 consolidated statement of operations.
F-41
<PAGE> 276
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Shares which have been issued but which remain restricted are recorded as
deferred compensation, a reduction to additional paid-in capital. The increase
in additional paid-in capital of $761 during 1996 represents the issuance of
executive stock awards and is net of this deferred compensation. As the shares
vest and become unrestricted, the deferred compensation will be recorded as
compensation expense and additional paid-in capital will increase.
PRO FORMA DISCLOSURES
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Accordingly, except for the Incentive and Ownership
Plans as described above, no compensation cost has been recognized for the stock
options because the options were granted with an exercise price equal to the
stock price on the date of grant. Had compensation costs for the Company's stock
option plans been determined based on the fair value of the options on the grant
dates consistent with the methodology prescribed by FAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. Due to the adoption of the methodology prescribed by FAS 123,
the pro forma results shown below only reflect the impact of options and stock
awards granted in 1995 and 1996. Because future options and stock awards may be
granted, the pro forma impact for 1995 and 1996 is not necessarily indicative of
the impact in future years.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C> <C>
Net income As reported $31,465 $26,189
Pro forma $31,336 $25,614
Primary earnings per As reported $ 1.94 $ 1.60
share....................
Pro forma $ 1.90 $ 1.55
</TABLE>
The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact), is estimated on the date of
grant using the Black-Scholes multiple option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Expected life of options................................. 5 years 5 years
Risk-free interest rates................................. 5.69--7.76% 5.39--6.69%
Expected volatility of stock............................. 29% 32%
Expected dividend yield.................................. 0.5% 0.5%
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996 was $10.34 and $10.84 per share, respectively.
13. RELATED PARTIES
Harbour Group Investments, L.P. (HGI, L.P.) was the Company's principal
stockholder prior to HGI, L.P.'s sale of substantially all of its shares in a
secondary stock offering in March 1994. Under terms of a corporate development
consulting and advisory services agreement, the Company incurred fees totaling
$1,109, $445 and $580 in 1994, 1995 and 1996, respectively, payable to an
affiliate of HGI, L.P. related to corporate development services provided in
identifying, negotiating and consummating certain acquisitions.
Under terms of a management consulting and advisory services agreement,
Harbour Group, Ltd. (HGL), an affiliate of HGI, L.P., charges the Company for
direct management and administrative services provided to the Company based on
HGL's approximate costs for such services. These charges totaled approximately
$250, $182 and $53 for the years ended December 31, 1994, 1995 and 1996,
respectively, and are reflected in selling, general and administrative expenses
in the accompanying consolidated financial statements.
F-42
<PAGE> 277
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1995 and 1996, a member of HGL management owned 80,000
shares of the Company's common stock partially financed with promissory notes
totaling $101 due in 1998 through 2003. The notes are reflected in stock
subscriptions receivable, included in additional paid-in capital and other, in
the accompanying consolidated financial statements.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal proceedings in which
monetary damages are sought. The Company is vigorously contesting these claims.
However, resolution of these claims is not expected to occur quickly and their
ultimate outcome presently cannot be predicted. It is the opinion of management
that any liability of the Company for claims or proceedings will not materially
affect its financial position.
In connection with the acquisition of CTD, the Company recorded a liability
of $2,600 in purchase accounting for certain estimated environmental clean-up
costs to be incurred relative to acquired CTD facilities. This estimated
potential liability, which is included in other accrued liabilities, has not
been reduced for any expected proceeds from other potentially responsible third
parties. At December 31, 1996, the liability balance was approximately $2,200.
15. SEGMENT INFORMATION
Worldwide operations data, as required by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
are listed below. Profitability of the Company's foreign operations by
geographic area was determined based on ultimate sales to unaffiliated
customers. Income from operations was included in the geographic area of the
entity transacting the final sale. Intercompany sales have been eliminated in
consolidation.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
NET SALES TO INCOME
UNAFFILIATED FROM IDENTIFIABLE CAPITAL
CUSTOMERS OPERATIONS ASSETS EXPENDITURES
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
1994
North America.......................... $240,809 $ 38,223 $289,610 $ 12,345
Europe................................. 30,978 1,061 30,325 1,037
-------- ------- -------- -------
$271,787 $ 39,284 $319,935 $ 13,382
======== ======= ======== =======
1995
North America.......................... $377,314 $ 52,112 $352,532 $ 26,177
Europe................................. 42,874 8,966 45,931 670
-------- ------- -------- -------
$420,188 $ 61,078 $398,463 $ 26,847
======== ======= ======== =======
1996
North America.......................... $451,383 $ 50,463 $514,163 $ 27,175
Europe................................. 58,711 9,484 48,481 2,010
-------- ------- -------- -------
$510,094 $ 59,947 $562,644 $ 29,185
======== ======= ======== =======
</TABLE>
F-43
<PAGE> 278
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Export revenues included in the North American net sales to unaffiliated
customers were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994 1995 1996
------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Geographic Areas:
Far East............................................. $ 9,113 $19,837 $20,091
Canada/Latin America................................. 6,521 5,749 10,534
Europe............................................... 3,572 7,601 15,340
Other................................................ 36 665 1,343
------- ------- -------
$19,242 $33,852 $47,308
======= ======= =======
</TABLE>
16. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- ------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Trade receivables................................ $ 66,242 $ 86,962 $102,792
Allowance for doubtful accounts and customer
rebates....................................... (2,624) (3,763) (4,692)
-------- -------- --------
$ 63,618 $ 83,199 $ 98,100
======== ======== ========
INVENTORIES:
Raw materials and component parts................ $ 28,248 $ 49,500 $ 68,988
Work in process.................................. 31,648 38,055 43,060
Finished goods................................... 49,873 65,104 70,476
-------- -------- --------
$109,769 $152,659 $182,524
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment.......................... $108,077 $143,664 $172,781
Buildings........................................ 20,531 33,125 37,985
Land and land improvements....................... 2,445 4,159 4,095
Property held under capital leases............... 4,579 4,496 4,496
-------- -------- --------
Total property, plant and equipment at
cost..................................... 135,632 185,444 219,357
Less accumulated depreciation and amortization,
including $3,241 and $3,715, respectively,
related to property held under capital
leases........................................ (46,833) (59,902) (71,931)
-------- -------- --------
88,799 125,542 147,426
Construction in progress......................... 18,558 17,338 20,231
Property held for sale........................... 1,665 1,420 1,522
-------- -------- --------
$109,022 $144,300 $169,179
======== ======== ========
ACCRUED LIABILITIES:
Employee compensation and benefits............... $ 18,676 $ 19,151 $ 22,566
Restructuring costs.............................. 4,919 3,371 2,363
Interest......................................... 1,544 1,656 3,395
Other............................................ 8,549 11,233 13,237
-------- -------- --------
$ 33,688 $ 35,411 $ 41,561
======== ======== ========
</TABLE>
F-44
<PAGE> 279
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1994, 1995 and 1996 appears below
(in thousands, except per share data):
<TABLE>
<CAPTION>
NET SALES
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 62,631 $106,419 $132,698
Second quarter...................................... 62,213 104,799 130,021
Third quarter....................................... 65,679 104,147 121,370
Fourth quarter...................................... 81,264 104,823 126,005
-------- -------- --------
$271,787 $420,188 $510,094
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS PROFIT
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 20,802 $ 34,007 $ 40,570
Second quarter...................................... 21,451 31,469 41,685
Third quarter....................................... 22,051 32,683 34,999
Fourth quarter...................................... 26,509 33,871 35,637
-------- -------- --------
$ 90,813 $132,030 $152,891
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NET INCOME
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ 5,040 $ 7,055 $ 8,569
Second quarter...................................... 4,798 7,915 8,357
Third quarter....................................... 5,975 8,085 3,959
Fourth quarter...................................... 6,196 8,410 5,304
-------- -------- --------
$ 22,009 $ 31,465 $ 26,189
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRIMARY EARNINGS PER SHARE
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
First quarter....................................... $ .31 $ .43 $ .53
Second quarter...................................... .29 .49 .51
Third quarter....................................... .37 .50 .24
Fourth quarter...................................... .38 .52 .32
-------- -------- --------
$ 1.35 $ 1.94 $ 1.60
======== ======== ========
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED)
On October 10, 1997, the Company entered into a definitive merger agreement
with Kennametal Inc. (Kennametal), whereby Kennametal Acquisition Corp. (a
wholly-owned subsidiary of Kennametal) commenced a tender offer on October 17,
1997 for all of the outstanding shares of the Company for $38 per share. The
tender offer expired on November 14, 1997 and approximately 98% of the Company's
shares were tendered. The merger was completed on November 18, 1997. Under the
terms of the merger agreement, all outstanding options to acquire shares of the
Company were cancelled in exchange for a payment equal to the difference between
$38 per share and the strike price.
In the fourth quarter of 1997, pursuant to a plan approved by the Company's
board of directors, the Company recorded a $11.5 million charge for nonrecurring
expenses primarily related to the restructuring of the Company's South
Deerfield, Massachusetts operations. These costs primarily included write-downs
of inventory
F-45
<PAGE> 280
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and machinery and equipment to estimated net realizable values, severance costs
and other miscellaneous expenses relative to the Company's decision to
discontinue the manufacture and sale of certain low margin product lines. The
restructuring will result in a reduction in personnel, thereby eliminating
excessive costs and redundancies in future periods. The Company expects to
record additional nonrecurring expenses of approximately $2.0 million in 1998
related to the rearrangement of the remaining operations at its South Deerfield,
Massachusetts facility.
F-46
<PAGE> 281
======================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY KENNAMETAL OR THE UNDERWRITERS. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............ S-3
Summary Condensed Consolidated Financial
Information............................ S-7
Recent Developments...................... S-8
Use of Proceeds.......................... S-10
Price Range of Common Stock and Dividend
Policy................................. S-10
Capitalization........................... S-11
Pro Forma Condensed Consolidated
Financial Information.................. S-12
Selected Condensed Consolidated Financial
Data................................... S-19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-20
Business................................. S-27
Management............................... S-34
Description of Common Stock.............. S-35
Description of Other Offerings........... S-37
Underwriting............................. S-39
Legal Matters............................ S-41
Experts.................................. S-42
Index to Consolidated Financial
Statements............................. F-1
PROSPECTUS
Available Information.................... 4
Incorporation of Certain Documents by
Reference.............................. 4
Kennametal Inc........................... 5
The Trust................................ 5
Ratio of Earnings to Fixed Charges....... 6
Use of Proceeds.......................... 6
Description of Debt Securities........... 7
Description of Preferred Securities...... 15
Description of the Guarantee............. 26
Relationship Among the Preferred
Securities, the Trust Debentures and
the Guarantee.......................... 29
Description of Common Stock.............. 30
Description of Stock Purchase Contracts
and Stock Purchase Units............... 32
Book Entry Issuance...................... 33
Plan of Distribution..................... 34
Legal Matters............................ 35
Experts.................................. 36
</TABLE>
======================================================
======================================================
4,300,000 SHARES
KENNAMETAL LOGO
KENNAMETAL INC.
COMMON STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
CIBC OPPENHEIMER
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
, 1998
======================================================
<PAGE> 282
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE
BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998 [ALTERNATE PAGE]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
4,300,000 SHARES
KENNAMETAL INC. KENNAMETAL LOGO
COMMON STOCK
------------------------
Of the 4,300,000 shares of capital stock, par value $1.25 per share (the
"Common Stock"), hereby offered by Kennametal Inc., a Pennsylvania corporation
("Kennametal" or the "Company"), 860,000 shares are being offered initially
outside the United States and Canada by the International Managers (the
"International Offering") and 3,440,000 shares are being offered in a concurrent
offering in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering"). The offering price and the underwriting discount per share in the
International Offering and the U.S. Offering will be identical. Such offerings
are collectively referred to as the "Offerings." See "Underwriting."
The Company and Kennametal Financing I, a related statutory business trust
formed under the laws of the State of Delaware (the "Trust"), are concurrently
offering 4,500,000 FELINE PRIDES(SM), stated amount $50 per FELINE PRIDES(SM)
(5,175,000 if the underwriters for the FELINE PRIDES(SM) exercise their
over-allotment option in full) issued by the Company and the Trust in the United
States and Canada (the "FELINE PRIDES Offering") and offering $150,000,000
aggregate principal amount of % Senior Notes due 2001 (the "2001 Notes") and
$150,000,000 aggregate principal amount of % Senior Notes due 2008 (the
"2008 Notes") and $150,000,000 aggregate principal amount of % Senior
Debentures due 2028 (the "2028 Debentures," and together with the 2001 Notes and
the 2008 Notes, the "Senior Debt Securities") (the "Senior Debt Offering"). The
combined gross proceeds of the FELINE PRIDES Offering and the Senior Debt
Offering are expected to be approximately $ million ($ million if the
underwriters for the FELINE PRIDES Offering exercise their over-allotment option
in full). The Offerings, the FELINE PRIDES Offering, and the Senior Debt
Offering are independent offerings and consummation of none of such offerings is
conditioned upon consummation of any of the other offerings.
The Common Stock is listed on the New York Stock Exchange ("NYSE") and is
traded under the symbol "KMT." On December 31, 1997, the last reported sale
price of the Common Stock on the NYSE was $52 1/16 per share. See "Price Range
of Common Stock and Dividend Policy."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
PRICE TO UNDERWRITING
PUBLIC DISCOUNT(2) PROCEEDS TO
COMPANY(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(1)........................ $ $ $
- ---------------------------------------------------------------------------------------------------
Total(4)............................ $ $ $
===================================================================================================
</TABLE>
(1) Each share is issued with a nontransferable Preferred Stock Purchase Right.
See "Description of Common Stock-- Rights Plan."
(2) Kennametal has agreed to indemnify the several International Managers and
the U.S. Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,400,000.
(4) The Company has granted the several International Managers and the U.S.
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to 129,000 and 516,000 additional shares, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock offered hereby will
be made in New York, New York on or about , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
CIBC OPPENHEIMER
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
------------------------
The date of this Prospectus Supplement is , 1998.
- ------------------
(SM)Service Mark of Merrill Lynch & Co., Inc.
<PAGE> 283
[ALTERNATE PAGE]
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person
who is, for United States federal income tax purposes, a foreign corporation, a
non-resident alien individual, a foreign partnership or a foreign estate or
trust. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a trade or business
by the Non-U.S. Holder within the United States or, where certain tax treaties
apply, are attributable to a United States permanent establishment of the
Non-U.S. Holder, are not subject to the withholding tax, but instead are subject
to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Certain certification and disclosure
requirements must be complied with in order to be exempt from withholding under
such effectively connected income exemption. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under recently
finalized United States Treasury regulations (the "Final Regulations"), a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate (and avoid back-up withholding as discussed below) for dividends
paid after December 31, 1998, will be required to satisfy applicable
certification and other requirements.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, or, where certain tax
treaties apply, is attributable to a United States permanent establishment of
the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (iii) the Company is or has
been a "U.S. real property holding corporation" for United States federal income
tax purposes. The Company does not believe that it is or will become a U.S. real
property holding corporation.
An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-U.S. Holder described in
clause (ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States source capital losses (even though
the individual is not considered a resident of the United States). If a Non-U.S.
Holder that is a foreign corporation falls under clause (i) above, it will be
subject to tax on
S-39
<PAGE> 284
[ALTERNATE PAGE]
its gain under regular graduated United States federal income tax rates and, in
addition, may be subject to the branch and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, back-up withholding at the rate of 31% generally will
not apply to dividends paid to a Non-U.S. Holder at an address outside the
United States (unless the payer has knowledge that the payee is a U.S. person).
Under the Final Regulations, however, a Non-U.S. Holder will be subject to
back-up withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both back-up withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a Non-U.S. Holder or otherwise establishes an exemption. In general,
back-up withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a broker.
If, however, such person, a controlled foreign corporation, or a foreign person
that derives 50% or more of its gross income for a certain period from the
conduct of a trade or business in the United States, such payments will be
subject to information reporting, but not back-up withholding, unless (1) such
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other conditions are met, or (2) the beneficial
owner otherwise establishes an exemption.
Any amounts withheld under the back-up withholding rules may be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
S-40
<PAGE> 285
[ALTERNATE PAGE]
UNDERWRITING
Merrill Lynch International, CIBC Oppenheimer Corp., Goldman Sachs
International and Lehman Brothers International (Europe) are acting as lead
managers (the "Lead Managers") for certain underwriters outside the United
States and Canada (the "International Managers"). Subject to the terms and
conditions set forth in an international purchase agreement (the "International
Purchase Agreement") among the Company and the International Managers, and
concurrently with the sale of 3,440,000 shares of Common Stock to the U.S.
Underwriters (as defined below), the Company has agreed to sell to the
International Managers, and each of the International Managers severally and not
jointly has agreed to purchase from the Company, the number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------
<S> <C>
Merrill Lynch International................................................
CIBC Oppenheimer Corp......................................................
Goldman Sachs International................................................
Lehman Brothers International (Europe).....................................
---------
Total.......................................................... 860,000
=======
</TABLE>
The Company has also entered into a U.S. purchase agreement (the "U.S.
Purchase Agreement") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), CIBC Oppenheimer Corp., Goldman, Sachs & Co. and Lehman
Brothers Inc. are acting as representatives (the "U.S. Representatives") of each
of the U.S. Underwriters. Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, and concurrently with the sale of 860,000 shares of
Common Stock to the International Managers, the Company has agreed to sell to
the U.S. Underwriters, and each of the U.S. Underwriters severally and not
jointly has agreed to purchase from the Company, an aggregate of 3,440,000
shares of Common Stock. The public offering price per share of Common Stock and
the total underwriting discount per share of Common Stock are identical under
the International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock offered hereby to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement, and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The International Managers
may allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.
The Company has granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus Supplement, to
purchase up to an aggregate of 129,000 additional shares of Common Stock at the
public offering price set forth on the cover page of this Prospectus Supplement,
less the underwriting discount. The International Managers may exercise this
option only to cover over-allotments, if any, made on the sale of the shares of
Common Stock offered hereby. To the extent that the International Managers
exercise this option, each International Manager will be obligated, subject to
certain conditions, to purchase a number of additional shares
S-41
<PAGE> 286
[ALTERNATE PAGE]
of Common Stock proportionate to such International Manager's initial amount
reflected in the foregoing table. The Company also has granted an option to the
U.S. Underwriters, exercisable for 30 days after the date of this Prospectus
Supplement, to purchase up to an aggregate of 516,000 additional shares of
Common Stock to cover over-allotments, if any, on terms similar to those granted
to the International Managers.
The Company 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 Common Stock or any securities
convertible into or exercisable or exchangeable for 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 Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise, for a period of
90 days from the date of this Prospectus Supplement without the prior written
consent of Merrill Lynch, other than any shares of Common Stock: (i) to be sold
pursuant to the International Purchase Agreement or the U.S. Purchase Agreement;
(ii) issuable upon early settlement of the shares of FELINE PRIDES; (iii) issued
by the Company upon exercise of an option, warrant, or the conversion of a
security described herein (iv) issued, or options to purchase such shares
granted, pursuant to existing employee benefit plans described herein or (v)
issued pursuant to any non-employee director stock plan or dividend reinvestment
plan.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the public offering price,
less an amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. or Canadian persons, and the U.S. Underwriters and any dealer
to whom they sell shares of Common Stock will not offer to sell or sell shares
of Common Stock to persons who are non-U.S. or non-Canadian persons or to
persons they believe intend to resell to persons who are non-U.S. or
non-Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
Each International Manager has agreed that: (i) it has not offered or sold
and, for a period of six months following consummation of the Offerings, will
not offer or sell any Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied with and will comply with all
applicable provisions of the Public Offers of Securities Regulations 1995 and
the Financial Services Act 1986 with respect to anything done by it in relation
to the Common Stock in, from, or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue or sale
of the Common Stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or to a person to whom the document may otherwise lawfully be issued or
passed on.
The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
International Managers and the U.S. Underwriters may be required to make in
respect hereof.
Until the distribution of the shares of Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the shares of Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of shares of Common Stock.
S-42
<PAGE> 287
[ALTERNATE PAGE]
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the
Underwriters may reduce that short position by purchasing shares of Common Stock
in the open market. The Underwriters may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.
The Lead Managers may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Lead Managers purchase shares of
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the shares of Common Stock, they may reclaim the amount
of the selling concession from the Underwriters and selling group members who
sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the shares of Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Merrill Lynch, an affiliate of Merrill Lynch International, has from time
to time provided investment banking advisory services to the Company, for which
it has received customary compensation, and may continue to do so in the future.
Merrill Lynch has acted as financial advisor to the Company in connection with
the Merger, including serving as dealer manager with respect to the Tender
Offer. In this regard, the Company has agreed to indemnify Merrill Lynch against
certain liabilities. CIBC Oppenheimer Corp., Goldman, Sachs & Co. and Lehman
Brothers Inc. have from time to time provided investment banking or financial
advisory services to the Company, and may continue to do so in the future. An
affiliate of CIBC Oppenheimer Corp. is a lender under the New Bank Credit
Facility.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. William R. Newlin, Chairman of the Board of the
Company, is a shareholder in Buchanan Ingersoll Professional Corporation. As of
July 30, 1997, Mr. Newlin owned 24,385 shares of Common Stock, stock credits
representing the right to acquire 9,260 shares of Common Stock pursuant to the
Company's directors deferred fee plan, 20,000 shares of JLK common stock and
held options to acquire 1,500 shares of Common Stock and 15,000 shares of JLK
common stock. Certain legal matters in connection with the Offerings will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York. Simpson Thacher &
Bartlett will rely on Buchanan Ingersoll Professional Corporation with respect
to matters of Pennsylvania law.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and June 30, 1997 and for each of the three years in the period ended June 30,
1997, included in this Prospectus Supplement and elsewhere in the Registration
Statement, of which this Prospectus Supplement is a part, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in the Registration Statement in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. The consolidated financial statements of Greenfield as
of December 31, 1995, and December 31, 1996, and for each of the three years in
the period ended December 31, 1996, included in this Prospectus Supplement, have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants given on the authority of said firm as experts in auditing and
accounting.
S-43
<PAGE> 288
[ALTERNATE PAGE]
======================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY KENNAMETAL OR THE UNDERWRITERS. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............... S-3
Summary Condensed Consolidated Financial
Information............................... S-7
Recent Developments......................... S-8
Use of Proceeds............................. S-10
Price Range of Common Stock and Dividend
Policy.................................... S-10
Capitalization.............................. S-11
Pro Forma Condensed Consolidated Financial
Information............................... S-12
Selected Condensed Consolidated Financial
Data...................................... S-19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ S-20
Business.................................... S-27
Management.................................. S-34
Description of Common Stock................. S-35
Description of Other Offerings.............. S-37
Certain U.S. Tax Consequences to Non-U.S.
Holders................................... S-39
Underwriting................................ S-41
Legal Matters............................... S-43
Experts..................................... S-43
Index to Consolidated Financial
Statements................................ F-1
PROSPECTUS
Available Information....................... 4
Incorporation of Certain Documents by
Reference................................. 4
Kennametal Inc.............................. 5
The Trust................................... 5
Ratio of Earnings to Fixed Charges.......... 6
Use of Proceeds............................. 6
Description of Debt Securities.............. 7
Description of Preferred Securities......... 15
Description of the Guarantee................ 26
Relationship Among the Preferred Securities,
the Trust Debentures and the Guarantee.... 29
Description of Common Stock................. 30
Description of Stock Purchase Contracts and
Stock Purchase Units...................... 32
Book Entry Issuance......................... 33
Plan of Distribution........................ 34
Legal Matters............................... 35
Experts..................................... 36
</TABLE>
======================================================
======================================================
4,300,000 SHARES
KENNAMETAL LOGO
KENNAMETAL INC.
COMMON STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH INTERNATIONAL
CIBC OPPENHEIMER
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
, 1998
======================================================
<PAGE> 289
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
$450,000,000
KENNAMETAL INC. KENNAMETAL LOGO
$150,000,000 % SENIOR NOTES DUE 2001
$150,000,000 % SENIOR NOTES DUE 2008
$150,000,000 % SENIOR DEBENTURES DUE 2028
------------------------
The % Senior Notes due 2001 (the "2001 Notes"), the % Senior Notes due
2008 (the "2008 Notes") and the % Senior Debentures due 2028 (the "2028
Debentures;" and together with the 2001 Notes and the 2008 Notes, the "Senior
Debt Securities") are being offered (the "Offering") by Kennametal Inc., a
Pennsylvania corporation ("Kennametal" or the "Company"). Interest on the Senior
Debt Securities will be payable semi-annually in arrears on and
of each year, beginning , 1998. The 2008 Notes and the 2028
Debentures may be redeemed at any time at the option of the Company, in whole or
in part, at the redemption prices set forth herein. See "Description of Senior
Debt Securities."
The Company and Kennametal Financing I, a related statutory business trust
formed under the laws of the State of Delaware (the "Trust"), are concurrently
offering 4,500,000 FELINE PRIDES(SM) stated amount $50 per FELINE PRIDES(SM)
(5,175,000 if the underwriters for the FELINE PRIDES(SM) exercise their
over-allotment option in full), issued by the Company and the Trust (the "FELINE
PRIDES Offering") and 4,300,000 shares of capital stock (4,945,000 shares if the
underwriters for the capital stock exercise their over-allotment options in
full, the "Common Stock Offerings") issued by the Company. The gross proceeds of
the FELINE PRIDES Offering are expected to be approximately $ million ($
million if the underwriters exercise their over-allotment option in full) and of
the Common Stock Offerings are expected to be approximately $ million ($
million if the underwriters exercise their over-allotment options in full). The
Offering, the FELINE PRIDES Offering, and the Common Stock Offerings are
independent offerings and consummation of none of such offerings is conditioned
upon consummation of any of the other offerings.
The Senior Debt Securities will be senior unsecured obligations of the
Company and will rank equally with all other existing and future senior
unsecured and unsubordinated indebtedness of the Company. At September 30, 1997,
on a pro forma basis giving effect to the acquisition of Greenfield Industries,
Inc., ("Greenfield"), the FELINE PRIDES Offering, the Common Stock Offerings and
the Offering, the Company would have had approximately $603.4 million of senior
unsecured indebtedness (including $146.9 million under the New Bank Credit
Facility).
Each series of the Senior Debt Securities will be issued in book-entry form
and be represented by one or more global notes (a "Global Debt Security") in
fully registered form, without coupons, which will be deposited with a custodian
for, and registered in the name of a nominee of, The Depository Trust Company
(the "Depositary") in New York, New York, as depositary for the accounts of its
participants. Beneficial interests in the Global Debt Securities will be
represented, and transfers thereof will be effected, only through book-entry
accounts maintained by DTC and its direct or indirect participants. Initial
settlement for the Senior Debt Securities will be made in immediately available
funds and secondary market trading activity in beneficial interests therein will
therefore settle in such funds. Except in limited circumstances, definitive
notes and debentures will not be issued in exchange for beneficial interests in
the Global Debt Securities. See "Description of Senior Debt Securities--Global
Debt Securities."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================
PRICE TO UNDERWRITING
PUBLIC(1) DISCOUNT(2) PROCEEDS TO
COMPANY(1)(3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per 2001 Note.............................. % % %
- -------------------------------------------------------------------------------------------------------------------
Total...................................... $ $ $
===================================================================================================================
Per 2008 Note.............................. % % %
- -------------------------------------------------------------------------------------------------------------------
Total...................................... $ $ $
===================================================================================================================
Per 2028 Debenture......................... % % %
- -------------------------------------------------------------------------------------------------------------------
Total...................................... $ $ $
===================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) Kennametal has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,000,000.
------------------------
The Senior Debt Securities offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the Senior Debt Securities offered hereby will
be made in book-entry form through the facilities of the Depositary in New York,
New York, against payment therefore in immediately available funds, on or about
, 1998.
------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
CIBC OPPENHEIMER DEUTSCHE MORGAN GRENFELL
------------------------
The date of this Prospectus Supplement is , 1998.
- ------------------
(SM)Service Mark of Merrill Lynch & Co., Inc.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 290
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Senior Debt
Securities. Such transactions may include stabilizing and the purchase of Senior
Debt Securities to cover syndicate short positions. For a description of these
activities, see "Underwriting."
S-2
<PAGE> 291
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and the related notes
thereto appearing elsewhere in the accompanying Prospectus or in this Prospectus
Supplement. On November 17, 1997, Kennametal Acquisition Corp. ("Acquisition
Corp."), a wholly-owned subsidiary of Kennametal, purchased in accordance with
its tender offer (the "Tender Offer") approximately 98% of the outstanding
common stock of Greenfield pursuant to an Agreement and Plan of Merger dated as
of October 10, 1997 (the "Merger Agreement"), among Kennametal, Greenfield and
Acquisition Corp. and, on November 18, 1997, Acquisition Corp. was merged into
Greenfield and Greenfield became a wholly-owned subsidiary of Kennametal. Except
as otherwise noted or unless the context otherwise requires, "fiscal" in
connection with a year means the 12 months ended June 30 of the calendar year
specified. Unless the context indicates otherwise, any reference in this
Prospectus Supplement to the "Company" or "Kennametal" refers to Kennametal Inc.
and its consolidated subsidiaries other than Greenfield.
This Prospectus Supplement contains certain forward-looking statements (as
such term is defined in the Securities Act) concerning the Company's operations,
performance and financial condition, including, in particular, the likelihood of
the Company's success in integrating the acquisition of Greenfield. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements to the extent that
economic conditions in the United States, Europe and, to a lesser extent, the
Asia Pacific region change from the Company's expectations and to the extent
that the Company does not effectively integrate the acquisition of Greenfield
and achieve expected synergistic benefits.
THE COMPANY
The Company is a vertically integrated global manufacturer, marketer and
distributor of a broad range of consumable tools, supplies and services for the
metalworking, mining and highway construction industries. Kennametal specializes
in developing and manufacturing tools utilizing tungsten carbide powder
metallurgy for the three primary metalcutting methods--turning, milling and
drilling. In addition, through its 80%-owned subsidiary, JLK Direct Distribution
Inc. ("JLK"), the Company markets and distributes a broad line of consumable
metalcutting tools, as well as abrasives, machine tool accessories, hand tools,
measuring equipment and other industrial supplies used in the metalworking
industry. The Company is a recognized leader in turning and milling consumable
metalcutting tools and believes it is the largest North American and the second
largest global provider of consumable metalcutting tools and supplies.
Leveraging its expertise in tungsten carbide powder metallurgy, the Company has
developed innovative consumable tools for the mining and construction industries
and believes it is the largest global manufacturer, marketer and distributor of
such tools to these markets.
In November 1997, the Company acquired Greenfield, the leading North
American manufacturer of drilling and other rotary high-speed steel consumable
metalcutting tools for the metalworking industry. Kennametal believes that
Greenfield's operations strongly complement its core businesses and that the
acquisition of Greenfield, in addition to providing the Company with
opportunities for substantial cost savings, offers significant strategic
benefits, including: (i) providing an important new channel of traditional
industrial distributors through which to sell the Company's products; (ii)
expanding and enhancing the Company's line of drilling products; (iii) allowing
the Company to diversify into new markets such as certain wear products by
leveraging its material science expertise in tungsten carbide powder metallurgy;
and (iv) providing the opportunity to introduce and sell each company's products
into the markets served by the other company.
End users of the Company's metalworking products include manufacturers and
suppliers in the aerospace, automotive, construction and farm machinery,
railroad equipment, power generation and transmission equipment, home appliance,
electrical equipment, and oil field services and gas exploration industries. The
Company markets its products through: a technically skilled direct sales force;
JLK's catalogs, showrooms and other direct marketing efforts; JLK's integrated
industrial supply programs; and, with the acquisition of Greenfield, a network
of traditional industrial distributors. This multi-channel marketing approach
enables the Company to meet the varying needs of metalworking customers of all
sizes which range from same-day ordering and rapid delivery of products to
outsourcing the entire procurement and inventory management process for
metalworking and related products. The Company estimates there are approximately
250,000 metalworking industrial sites in the United
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<PAGE> 292
States. The Company's multi-channel distribution network, comprehensive product
offering and global presence allow customers of all sizes the advantage of a
single source of supply for most metalworking needs.
The Company believes five significant trends are currently impacting the
metalworking industry: (i) consolidation of fragmented distribution channels as
customers seek a single source of supply for their metalworking needs; (ii)
increasing demand from large customers to outsource procurement and inventory
management processes through integrated supply programs; (iii) growing demand
for suppliers that can provide a complete selection of tools, supplies and
services globally; (iv) demand for world class capabilities including customer
service, technical application support and information and product technology
while, at the same time, maintaining or reducing costs; and (v) continuing
advances in customers' metalworking manufacturing technology requiring more
technically advanced tools. These factors are resulting in a restructuring and
consolidation in the metalworking industry as tooling manufacturers and
distributors are forced to either become more competitive or seek stronger
partners. The Company's business strategy is designed to capitalize on these and
other trends.
BUSINESS STRATEGY
The Company's objective is to become the supplier of first choice of
consumable tools, related supplies, and services to the worldwide metalworking
industry and to other industries which can benefit from tungsten carbide
products. The Company believes its market-leadership position results from the
successful implementation of its business strategy, the major elements of which
include:
- Expanding Customer Base Through Multi-Channel Distribution. The Company
seeks to access potential customers through all primary distribution
channels. The Company serves its traditional base of large and
medium-sized metalworking customers through a direct sales force. JLK
direct markets a broad range of tiered ("good," "better" and "best")
metalworking consumables and other related products targeted at small and
medium-sized metalworking customers and offers integrated supply programs
targeted at large industrial metalworking customers. The acquisition of
Greenfield, which sells its consumable tools, related products and
services through a network of more than 2,500 traditional industrial
distributors, provides Kennametal with access to approximately 50% of the
North American metalworking market.
- Providing Most Complete Product Offering. The Company seeks to provide
the most complete and comprehensive product offering in the metalworking
industry. As a result of various acquisitions and internal development,
the Company markets and distributes what it believes is one of the
broadest lines of tools and services typically used by metalworking
customers. The recent acquisition of Greenfield and its consumable
high-speed steel rotary cutting tools and related products provides the
Company with the capability to manufacture all of the major consumable
tools needed by customers in their metalcutting manufacturing processes.
- Expanding Strong Global Presence. Kennametal is committed to growing its
global presence as demonstrated by its position as the second largest
provider of tools to the European metalworking industry, the world's
largest metalworking market, as well as its plans to expand its presence
in the Asia Pacific region. The Company recently completed construction
of a cutting tool manufacturing facility in Shanghai, China, for a total
investment of about $20 million, and has increased to 100% its ownership
interest in a sales and marketing subsidiary in Japan. The Company also
has targeted marketing efforts in Eastern Europe and Russia and other
developing countries.
- Providing Superior Customer Service, Product Availability, and Technical
Support. The Company's skills in rapidly filling orders, maintaining
high levels of product availability and providing technical product
application support are vital to the ability of its metalworking
customers to meet their production and delivery schedules in a cost
effective manner. Kennametal's sophisticated order entry and inventory
management systems enable the Company to ship more than 90 percent of its
products from stock. In addition, the Company's technically skilled
direct sales force of more than 700 persons provide on-site product
selection and application support to enable customers to optimize their
metalcutting processes. The addition of Greenfield's more than 70
technical specialists broadens the Company's technical support capability
into high-speed steel drilling applications.
- Maintaining Leadership in Product Innovation. As a result of its
commitment to research and development, the Company has brought to market
during the past few years a number of new or improved metalcutting
products. The exacting requirements of modern high-precision
metalcutting, along with advances in manufacturing technology, exacting
manufacturing specifications, and new workpiece
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<PAGE> 293
materials are driving the demand for new and improved consumable tools
and systems capable of achieving superior technical performance with high
and uniform quality. The Company believes that its reputation for
supplying high quality and technologically innovative consumable
metalcutting tools and supplies to the metalworking industry has been a
very significant factor in its achieving its market position.
- Leveraging Use of Information Technology. The Company's decision to
invest nearly $40 million in a business information system utilizing SAP
R-3 software demonstrates its commitment to the use of information
technology. This system, which is expected to be fully operational in
fiscal 1999, will link sales, distribution, manufacturing, purchasing and
accounting activities at all major sites throughout Kennametal and is
designed to enhance customer service, operational effectiveness and
management decision-making.
In addition to the above business strategies, the Company seeks to continue
to improve operating efficiencies as well as to pursue selected acquisitions
that enhance its distribution channels, complement its existing product
offerings and strengthen its geographic presence.
RECENT DEVELOPMENTS
GREENFIELD ACQUISITION
On November 17, 1997, the Company purchased in the Tender Offer
approximately 98% of Greenfield's common stock and acquired the balance by a
merger (the "Merger") on the following day. The total purchase price for the
acquisition of Greenfield (including estimated transaction costs and assumed
Greenfield debt and convertible redeemable preferred securities of approximately
$320 million) is estimated to be $1.0 billion. Greenfield is the largest North
American manufacturer of consumable rotary metalcutting tools as well as a
leading manufacturer of consumable tools and related products, wear products and
marine products.
NEW BANK CREDIT FACILITY
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into a $1.4 billion secured credit agreement with the banks
named therein (the "New Bank Credit Facility") under which, as of December 18,
1997, the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans. The proceeds from the loans were principally
used to pay for the shares of common stock of Greenfield purchased in the Tender
Offer and the Merger, to pay transaction costs, to refinance certain
indebtedness of Greenfield and to refinance certain indebtedness of the Company.
If the Offering, the FELINE PRIDES Offering and the Common Stock Offerings are
consummated, the Company intends to replace the New Bank Credit Facility with a
$500 million senior unsecured credit facility, although there can be no
assurance that the Company will be able to replace the New Bank Credit Facility.
OTHER ACQUISITIONS
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom, Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. The companies had
aggregate sales of approximately $66 million in 1996.
OTHER OFFERINGS
Concurrently with the Offering, (i) the Company and Kennametal Financing I,
a Delaware business trust the common securities of which are owned by the
Company, are undertaking the FELINE PRIDES Offering of 4,500,000 FELINE
PRIDES(SM) (5,175,000 if the underwriters for the FELINE PRIDES Offering
exercise their over-allotment option in full) and (ii) the Company is
undertaking the Common Stock Offerings of 4,300,000 shares (4,945,000 shares if
the underwriters for the Common Stock Offerings exercise their over-allotment
options in full). The Offering, the FELINE PRIDES Offering, and the Common Stock
Offerings are independent offerings and consummation of none of such offerings
is conditioned upon consummation of any of the other offerings. The net proceeds
to the Company from the FELINE PRIDES Offering and the Common Stock Offerings
will be used to prepay loans and, correspondingly, permanently reduce
commitments of the lenders under the New Bank Credit Facility. This Prospectus
Supplement does not constitute an offer to buy or the solicitation of an offer
to sell the FELINE PRIDES(SM) or the Common Stock being offered by the FELINE
PRIDES Offering or the Common Stock Offerings, respectively. The FELINE PRIDES
Offering and the Common Stock Offerings will be made only by means of
prospectuses, as amended or supplemented, relating to such offerings.
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THE OFFERING
Issuer..................... Kennametal Inc.
Securities Offered......... $150,000,000 % Senior Notes due 2001;
$150,000,000 % Senior Notes due 2008; and
$150,000,000 % Senior Debentures due 2028.
Interest................... The 2001 Notes will bear interest at the rate of
% per annum. The 2008 Notes will bear interest at
the rate of % per annum. The 2028 Debentures will
bear interest at the rate of % per annum.
Interest will be payable semi-annually, in cash, on
, and , of each year,
commencing , 1998.
Maturity................... The 2001 Notes will mature on , 2001.
The 2008 Notes will mature on , 2008. The
2028 Debentures will mature on , 2028.
Ranking.................... The Senior Debt Securities will be senior
obligations of Kennametal and rank pari passu in
right of payment with all existing and future
senior unsecured indebtedness of Kennametal.
However, the Senior Debt Securities will be
effectively subordinated to indebtedness and other
liabilities of Kennametal's subsidiaries. At
November 30, 1997, the aggregate principal amount
of indebtedness of Kennametal's subsidiaries
(excluding trade payables and other accrued
liabilities) was $261 million. In addition, unless
Kennametal refinances its New Bank Credit Facility
(which Kennametal intends to refinance if it
consummates the Offering, the FELINE PRIDES
Offering and the Common Stock Offerings), the
Senior Debt Securities will be effectively
subordinated to borrowings under the New Bank
Credit Facility which are guaranteed by certain of
Kennametal's principal subsidiaries. At December
18, 1997, the aggregate amount outstanding under
the New Bank Credit Facility was $882 million.
Optional Redemption........ The 2008 Notes and the 2028 Debentures may be
redeemed, in whole or in part, at the option of the
Company at a price equal to the principal thereof,
plus accrued interest and a Make Whole Premium (as
defined herein).
Covenants.................. The Senior Debt Securities Indenture, pursuant to
which the Senior Debt Securities will be issued,
will contain covenants that limit the ability of
the Company to grant liens, to engage in sale and
leaseback transactions and to enter into certain
consolidations or mergers or to sell all or
substantially all of its assets.
Use of Proceeds............ To repay indebtedness under the Company's New Bank
Credit Facility, which indebtedness was incurred by
the Company in connection with the acquisition of
Greenfield. See "Use of Proceeds."
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<PAGE> 295
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Senior
Debt Securities, after deducting estimated underwriting discounts and expenses
of the Offering payable by the Company, are expected to be approximately $
million. See "Underwriting." The net proceeds from the FELINE PRIDES Offering
(assuming it is completed and the over-allotment option is not exercised) are
estimated to be $ million and the net proceeds from the Common Stock
Offerings (assuming they are completed and the over-allotment options are not
exercised) are estimated to be $ million. The net proceeds from the
Offering, the FELINE PRIDES Offering and the Common Stock Offerings will be used
to prepay loans and, correspondingly, permanently reduce commitments of the
lenders under the New Bank Credit Facility, which indebtedness was incurred by
the Company in connection with the acquisition of Greenfield, and had a weighted
average interest rate, as of November 30, 1997, of 7.1%. If the Company
consummates the Offering, the FELINE PRIDES Offering and the Common Stock
Offerings, the Company intends to replace the New Bank Credit Facility with a
$500 million senior unsecured credit facility, although there can be no
assurance that the Company will be able to replace the New Bank Credit Facility.
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<PAGE> 296
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the consummation of the
acquisition of Greenfield (including borrowings under the New Bank Credit
Facility), the Offering, the FELINE PRIDES Offering and the Common Stock
Offerings and the application of the net proceeds therefrom, after deducting
estimated underwriting commissions and expenses of the Offering. See "Use of
Proceeds" and "Description of Other Offerings." The information set forth in
this table should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
the accompanying Prospectus. See "Pro Forma Condensed Consolidated Balance
Sheet."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Short-term debt................................................ $ 60,794 $ 37,069
======== ==========
Long-term debt:
2001 Notes offered hereby.................................... $ -- $ 150,000
2008 Notes offered hereby.................................... -- 150,000
2028 Debentures offered hereby............................... -- 150,000
Other........................................................ 40,464 185,110
-------- ----------
Total long-term debt...................................... 40,464 635,110
Minority interest in consolidated subsidiaries................. 44,162 44,162
Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures.......... -- 222,300
Shareholders' equity:
Preferred stock, 5,000 shares authorized; none issued........ -- --
Capital stock, $1.25 par value per share;
70,000 shares authorized; 29,370 and 33,670 shares
issued(a)................................................. 36,712 42,087
Additional paid-in capital................................... 148,438 346,663
Retained earnings............................................ 419,174 411,314
Less treasury shares, at cost; 3,153 shares held............. (61,101) (61,101)
Cumulative translation adjustments........................... (13,154) (13,154)
-------- ----------
Total shareholders' equity................................ 530,069 725,809
-------- ----------
Total capitalization...................................... $614,695 $1,627,381
======== ==========
</TABLE>
- ---------
(a) Does not include: (i) 1,567,185 shares of Common Stock as of September 30,
1997, issuable upon exercise of outstanding options of which options
covering 1,539,929 shares were exercisable as of that date; (ii) 63,804
shares issuable as of September 30, 1997, pursuant to the Company's deferred
stock plans; (iii) shares which may be issued pursuant to the Company's
dividend reinvestment and stock purchase plan; or (iv) from to
shares which will be issued on , 2001 pursuant to the
FELINE PRIDES Offering depending upon the average trading price of the
Common Stock prior to issuance (or from to shares if the
underwriters for the FELINE PRIDES Offering exercise their over-allotment
option in full).
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<PAGE> 297
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Statements of Income and the
Pro Forma Condensed Consolidated Balance Sheet are based on the historical
financial statements of the Company and Greenfield adjusted to give effect to
the acquisition of Greenfield, the Offering, the FELINE PRIDES Offering and the
Common Stock Offerings. The Pro Forma Condensed Consolidated Statements of
Income for the year ended June 30, 1997, and for the three months ended
September 30, 1997, assume that the acquisition of Greenfield occurred as of the
first day of the Company's 1997 fiscal year (July 1, 1996). Since Greenfield has
a fiscal year-end of December 31, the historical information included in the Pro
Forma Condensed Consolidated Statement of Income for the year ended June 30,
1997 has been derived from Greenfield's operating results for the twelve months
ended June 30, 1997. The Pro Forma Condensed Consolidated Balance Sheet gives
effect to the acquisition of Greenfield, the Offering, the FELINE PRIDES
Offering and the Common Stock Offerings as if they had occurred on September 30,
1997.
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Greenfield, and accordingly is based on
estimated purchase accounting adjustments that are subject to further revision
depending upon completion of appraisals or other studies of the fair value of
Greenfield's assets and liabilities. Final purchase accounting adjustments will
differ from the pro forma adjustments presented herein and described in the
accompanying notes due to the results of operations of Greenfield from September
30, 1997, to the date of closing (November 18, 1997).
The pro forma financial information reflects certain assumptions described
above and in the Notes to Pro Forma Condensed Consolidated Statements of Income
and Pro Forma Condensed Consolidated Balance Sheet which follow. The pro forma
financial information, including notes thereto, should be read in conjunction
with the consolidated financial statements of the Company and of Greenfield, and
the related notes thereto, incorporated by reference to the accompanying
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus Supplement. The pro
forma financial information is provided for informational purposes only and does
not purport to present what the Company's results of operations would actually
have been if the acquisition of Greenfield had occurred on the assumed dates, as
specified above, or to project the Company's financial condition or results of
operations for any future period.
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PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $1,156,343 $ 527,019 $ -- $ -- $ 1,683,362
Cost of goods sold.............. 668,415 373,133 2,000(a) -- 1,043,548
---------- -------- -------- -------- ----------
Gross profit...................... 487,928 153,886 (2,000) -- 639,814
Operating expenses.............. 357,996 92,421 -- -- 450,417
Amortization of intangibles..... 2,907 4,946 10,557(b) -- 18,410
---------- -------- -------- -------- ----------
Operating income.................. 127,025 56,519 (12,557) -- 170,987
Interest expense................ 10,393 10,916 64,922(c) (28,858)(d) 57,373
Other income.................... 1,531 -- -- -- 1,531
Dividends on
Greenfield-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield................... -- 6,900 (6,900)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures.... -- -- -- 15,165(f) 15,165
---------- -------- -------- -------- ----------
Income before income taxes and
minority interest............... 118,163 38,703 (70,579) 13,693 99,980
Provision for income taxes...... 44,900 15,876 (26,261) 5,477 39,992(g)
Minority interest............... 1,231 -- -- -- 1,231
---------- -------- -------- -------- ----------
Net income........................ $ 72,032 $ 22,827 $ (44,318) $ 8,216 $ 58,757
========== ======== ======== ======== ==========
PER SHARE DATA:
Net income........................ $ 2.71 $ 1.90(h)
========== ==========
Weighted average shares
outstanding..................... 26,575 30,875(h)
========== ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
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<PAGE> 299
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $15.5 million less the elimination of historical
Greenfield goodwill amortization of approximately $4.9 million.
(c) Reflects (i) an increase in interest expense of approximately $69.1 million
associated with the New Bank Credit Facility, (ii) the elimination of
historical interest expense of approximately $17.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield and (iii)
the amortization of deferred financing costs of approximately $13.1 million
to establish the New Bank Credit Facility, which includes a charge to
reflect repayments of the New Bank Credit Facility using the net proceeds of
the Offering, the FELINE PRIDES Offering and the Common Stock Offerings.
(d) Reflects a decrease in interest expense of approximately $28.9 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offering, the FELINE PRIDES Offering and the
Common Stock Offerings.
(e) Reflects the elimination of historical dividends of approximately $6.9
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $14.6 million in connection with Company-obligated,
mandatorily redeemable securities of subsidiary holding solely parent
company debentures, and amortization of transaction costs related to the
trust preferred securities of approximately $0.5 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
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PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $310,792 $ 139,836 $ -- $ -- $ 450,628
Cost of goods sold............... 178,569 98,773 500(a) -- 277,842
-------- -------- -------- ------- --------
Gross profit....................... 132,223 41,063 (500) -- 172,786
Operating expenses............... 98,518 25,769 -- -- 124,287
Amortization of intangibles...... 1,052 1,263 2,721(b) -- 5,036
-------- -------- -------- ------- --------
Operating income................... 32,653 14,031 (3,221) -- 43,463
Interest expense................. 1,180 3,670 12,955(c) (7,215)(d) 10,590
Other (expense).................. (440) -- -- -- (440)
Dividends on
Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield.................... -- 1,725 (1,725)(e) -- --
Minority interest on Company-
obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures..... -- -- -- 3,791(f) 3,791
-------- -------- -------- ------- --------
Income before income taxes and
minority interest................ 31,033 8,636 (14,451) 3,424 28,642
Provision for income taxes....... 12,100 3,541 (5,554) 1,370 11,457(g)
Minority interest................ 1,385 -- -- -- 1,385
-------- -------- -------- ------- --------
Net income......................... $ 17,548 $ 5,095 $ (8,897) $ 2,054 $ 15,800
======== ======== ======== ======= ========
PER SHARE DATA:
Net income......................... $ 0.67 $ 0.52(h)
======== ========
Weighted average shares
outstanding...................... 26,171 30,471(h)
======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
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<PAGE> 301
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $3.9 million less the elimination of historical
Greenfield goodwill amortization of approximately $1.2 million.
(c) Reflects: (i) an increase in interest expense of approximately $17.3 million
associated with the New Bank Credit Facility and (ii) the elimination of
historical interest expense of approximately $4.3 million as a result of
repayment of outstanding indebtedness of Kennametal and Greenfield.
(d) Reflects a decrease in interest expense of approximately $7.2 million for a
reduction in borrowings under the New Bank Credit Facility upon application
of the net proceeds of the Offering, the FELINE PRIDES Offering and the
Common Stock Offerings.
(e) Reflects the elimination of historical dividends of approximately $1.7
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield Capital
Trust holding solely convertible subordinated debentures of Greenfield.
(f) Reflects an increase in distributions on trust preferred securities of
approximately $3.7 million in connection with Company-obligated, mandatorily
redeemable securities of subsidiary holding solely parent company
debentures, and amortization of transaction costs related to the trust
preferred securities of approximately $0.1 million.
(g) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
(h) Represents the sale and issuance of 4.3 million shares of Common Stock.
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<PAGE> 302
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACQUISITION OFFERINGS
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents............ $ 45,409 $ -- $ -- $ -- $ 45,409
Accounts receivable, net of
allowance..................... 202,144 98,100 -- -- 300,244
Inventories..................... 214,068 182,524 5,700(a) -- 396,292
-- -- (6,000)(b) -- --
Other current assets............ 24,949 5,875 -- -- 30,824
-------- -------- ---------- --------- ----------
Total current assets.......... 486,570 286,499 (300) -- 772,769
Net property, plant and
equipment..................... 310,563 169,179 20,000(a) -- 497,242
-- -- (2,500)(b) -- --
Intangible assets............... 57,691 180,187 439,952(a) -- 677,830
Other assets.................... 64,765 2,302 13,100(c) (13,100)(c) 71,029
-- -- -- 3,962(d) --
-------- -------- ---------- --------- ----------
Total assets.................. $919,589 $ 638,167 $ 470,252 $ (9,138) $ 2,018,870
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Short-term debt................. $ 60,794 $ 6,632 $ (30,357)(e) $ -- $ 37,069
Accounts payable................ 61,306 31,026 -- -- 92,332
Other current liabilities....... 106,035 41,561 3,000(b) 5,100(f) 150,456
-- -- -- (5,240)(c) --
-------- -------- ---------- --------- ----------
Total current liabilities..... 228,135 79,219 (27,357) (140) 279,857
Term debt and capital leases,
less current maturities....... 40,464 197,734 (200,000)(e) 450,000(d) 635,110
-- -- 1,023,950(e) (877,038)(d) --
Other liabilities............... 76,759 29,193 5,680(a) -- 111,632
-------- -------- ---------- --------- ----------
Total liabilities............. 345,358 306,146 802,273 (427,178) 1,026,599
Minority interest in
consolidated subsidiaries..... 44,162 -- -- -- 44,162
Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield.................... -- 115,000 (115,000)(e) -- --
Company-obligated, mandatorily
redeemable securities of
subsidiary holding solely
parent company debentures..... -- -- -- 222,300(g) 222,300
Shareholders' equity............ 530,069 217,021 (217,021)(a) 214,000(d) 725,809
-- -- -- (7,860)(c) --
-- -- -- (10,400)(h) --
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity....... $919,589 $ 638,167 $ 470,252 $ (9,138) $ 2,018,870
======== ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet.
S-14
<PAGE> 303
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(a) The preliminary allocation of the estimated purchase price to assets
acquired and liabilities assumed as of September 30, 1997 is as follows:
<TABLE>
<S> <C>
Purchase price........................................................ $ 624,960
Buy-out of stock options and warrants................................. 16,333
Estimated acquisition costs........................................... 24,200
---------
Total purchase price......................................... $ 665,493
=========
Net book value of assets acquired..................................... $ 217,021
Less: goodwill of Greenfield.......................................... (180,187)
Adjustments to fair value:
Inventories, eliminate LIFO reserve.......................... 5,700
Property, plant and equipment................................ 20,000
Net deferred income tax liabilities.......................... (5,680)
Impact of restructuring of Greenfield........................ (11,500)
Goodwill..................................................... 620,139
---------
$ 665,493
=========
</TABLE>
(b) Reflects the costs related to the restructuring of Greenfield's South
Deerfield, Massachusetts operations. In November 1997, Greenfield recorded
an $11.5 million charge for non-recurring expenses primarily related to the
restructuring of its South Deerfield operations. These costs primarily
included inventory and machinery and equipment reserves, severance costs and
other miscellaneous expenses relative to Greenfield's decision to
discontinue the manufacture and sale of certain low-margin product lines.
The restructuring will result in a reduction in personnel, thereby
eliminating excessive costs and redundancies in future periods. Greenfield
also expects to record additional non-recurring expenses of approximately
$2.0 million in 1998 related to the restructuring of its South Deerfield
operations. These amounts are not included in the restructuring charge.
<TABLE>
<S> <C>
The components of the restructuring charge are recorded as follows:
Inventory write-down......................................... $ 6,000
Property, plant and equipment write-down..................... 2,500
Severance costs and other current liabilities................ 3,000
-------
Impact of restructuring of Greenfield............................. $11,500
=======
</TABLE>
(c) Represents payment of estimated deferred financing costs of approximately
$13.1 million to establish the New Bank Credit Facility. Such costs are
subsequently charged to interest expense, with a related tax benefit of
approximately $5.2 million, upon payment of the New Bank Credit Facility
using the net proceeds of the Offering, the FELINE PRIDES Offering and the
Common Stock Offerings.
(d) Reflects the net proceeds of approximately $877.0 million from: (i)
approximately $214.0 million from the issuance of 4.3 million shares of
Common Stock, net of related transaction costs of approximately $11.0
million; (ii) approximately $217.0 million from the issuance of $225.0
million of Company-obligated, mandatorily redeemable securities of
subsidiary holding solely parent company debentures, net of related
transaction costs of approximately $8.0 million; and (iii) an aggregate of
approximately $446.0 million from the issuance of $450.0 million of the
2001 Notes, the 2008 Notes and the 2028 Debentures, net of the estimated
portion of the anticipated transaction costs of approximately $4.0 million.
(e) Reflects borrowings under the New Bank Credit Facility of approximately
$1,024.0 million to: (i) acquire Greenfield (approximately $665.5 million);
(ii) repay approximately $230.4 million of certain debt of Greenfield and
Kennametal; (iii) repay $115.0 million of outstanding indebtedness of
Greenfield-obligated, mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust holding solely convertible
subordinated debentures of Greenfield; and (iv) pay transaction fees of
approximately $13.1 million related to the New Bank Credit Facility.
(f) Reflects the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering.
(g) Reflects the proceeds of approximately $225.0 million from the issuance of
Company-obligated, mandatorily redeemable securities of subsidiary holding
solely parent company debentures, net of the estimated portion of the
anticipated transaction costs related solely to the trust preferred
securities of approximately $2.7 million.
(h) Reflects: (i) the contract adjustment payments of approximately $5.1 million
related to the FELINE PRIDES Offering; and (ii) the estimated portion of
anticipated transaction costs related to the stock purchase contract
component of the FELINE PRIDES Offering of approximately $5.3 million.
S-15
<PAGE> 304
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
The selected condensed 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, 1993, 1994, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP. The consolidated financial statements as of and
for the three months ended September 30, 1996 and 1997 are derived from the
Company's unaudited interim financial statements incorporated by reference in
this Prospectus Supplement, which in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the data included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the three
months ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected for the full fiscal year. 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 of the Company and the related notes thereto included elsewhere in
the accompanying Prospectus, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information set forth
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------------ --------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $598,496 $802,513 $983,873 $1,079,963 $1,156,343 $275,203 $310,792
Cost of goods sold.................. 352,773 472,533 560,867 625,473 668,415 160,493 178,569
-------- -------- -------- ---------- ---------- -------- --------
Gross profit.......................... 245,723 329,980 423,006 454,490 487,928 114,710 132,223
Research and development expenses... 14,714 15,201 18,744 20,585 24,105 5,739 5,227
Selling, marketing and distribution
expenses.......................... 144,850 189,487 219,271 242,375 263,980 63,019 68,571
General and administrative
expenses.......................... 41,348 58,612 55,853 65,417 69,911 18,206 24,720
Restructuring charge................ -- 24,749 -- 2,666 -- -- --
Patent litigation income............ (1,738) -- -- -- -- -- --
Amortization of intangibles......... 3,425 3,996 2,165 1,596 2,907 546 1,052
-------- -------- -------- ---------- ---------- -------- --------
Operating income...................... 43,124 37,935 126,973 121,851 127,025 27,200 32,653
Interest expense.................... 9,549 13,811 12,793 11,296 10,393 2,642 1,180
Other income (expense).............. 519 1,860 54 4,821 1,531 627 (440)
-------- -------- -------- ---------- ---------- -------- --------
Income before income taxes and
minority interest................... 34,094 25,984 114,234 115,376 118,163 25,185 31,033
Provision for income taxes............ 14,000 15,500 45,000 43,900 44,900 9,800 12,100
Minority interest..................... -- (431) 940 1,744 1,231 182 1,385
-------- -------- -------- ---------- ---------- -------- --------
Income before cumulative effect of
accounting changes.................. 20,094 10,915 68,294 69,732 72,032 15,203 17,548
Cumulative effect of accounting
changes............................. -- (15,003) -- -- -- -- --
-------- -------- -------- ---------- ---------- -------- --------
Net income (loss)..................... $ 20,094 $ (4,088) $ 68,294 $ 69,732 $ 72,032 $ 15,203 $ 17,548
======== ======== ======== ========== ========== ======== ========
PER SHARE AND OTHER DATA:
Income before cumulative effect of
accounting changes.................. $ 0.93 $ 0.45 $ 2.58 $ 2.62 $ 2.71 $ 0.57 $ 0.67
Net income (loss)..................... 0.93 (0.17) 2.58 2.62 2.71 0.57 0.67
Dividends............................. 0.58 0.58 0.60 0.60 0.66 0.15 0.17
Weighted average shares outstanding... 21,712 24,304 26,486 26,635 26,575 26,729 26,171
Ratio of earnings to fixed
charges(a).......................... 3.75 2.47 8.02 8.62 8.75 7.65 14.94
EBITDA(b)............................. 74,570 83,027 166,342 166,912 169,955 37,775 42,539
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
-------------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $120,877 $130,777 $184,072 $217,651 $175,877 $ 258,435
Total assets................................. 448,263 697,532 781,609 799,491 869,309 919,589
Long-term debt (less current maturities)..... 87,891 90,178 78,700 56,059 40,445 40,464
Shareholders' equity......................... 255,141 322,836 391,885 438,949 459,608 530,069
</TABLE>
- ---------
(a) For the purposes of the calculation of this ratio, earnings represent income
from continuing operations before fixed charges, minority interest,
provision for income taxes and the cumulative effect of accounting changes.
Fixed charges include interest expense, including amounts capitalized and
the portion (one-third) of rental expenses deemed to be representative of
interest expense.
(b) Earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") are commonly used to analyze and compare companies
on the basis of operating performance, leverage, and liquidity. While EBITDA
is not an alternative indicator of operating performance to operating income
or an alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles, and while
EBITDA may not be comparable to other similarly titled measures of other
companies, the Company's management believes EBITDA is a meaningful measure
of performance.
S-16
<PAGE> 305
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
SALES AND MARKETS. During the quarter ended September 30, 1997,
consolidated sales were $310.8 million, up 13 percent from $275.2 million in the
same quarter last year. Sales rose 16 percent excluding unfavorable foreign
currency translation effects. The increase in sales was primarily attributable
to higher sales of metalworking products in North America and from higher sales
of industrial supplies sold by J&L Industrial Supply ("J&L") and by integrated
industrial supply programs ("Full Service Supply programs"), both operating
within JLK.
Net income for the first quarter ended September 30, 1997, was $17.5
million, or $0.67 per share, as compared with net income of $15.2 million, or
$0.57 per share, in the same quarter last year. The results included expenses of
$5.2 million, or $0.12 per share, for the completion of the relocation and
related expenses incurred in connection with the construction of the new world
headquarters. Earnings benefited from higher sales of metalcutting and related
products in North America and Europe as well as from higher production levels
and productivity improvements related to its focused factory initiative of
rearranging manufacturing layout to improve productivity. This was partially
offset by unfavorable foreign currency translation effects.
During the September 1997 quarter, sales in the North America Metalworking
market increased 7 percent from the previous year. Sales of metalcutting inserts
and toolholding devices in North America increased due to improved economic
conditions in the United States in most major end markets and from continued
emphasis on milling and drilling products. Additionally, sales of metalcutting
and toolholding devices sold through all sales channels in North America,
including sales through the industrial supply market, increased 11 percent.
Sales in the Europe Metalworking market on a local currency basis increased
13 percent over the same quarter a year ago. Including unfavorable foreign
currency translation effects, sales in the Europe Metalworking market were flat.
Demand for metalworking products continued to show improvement during the
quarter in most key end markets as a result of improved market conditions in
Europe, principally in Germany. Sales in the European market have posted
double-digit order gains for four consecutive months.
In the Asia Pacific Metalworking market, sales decreased slightly as
results were affected by weak economic conditions in Korea, Singapore and
Thailand. Excluding unfavorable foreign currency translation effects, sales in
the Asia Pacific Metalworking market increased 3 percent. Additionally,
effective August 1, 1997, the Company acquired 100 percent of Kobe Kennametal
K.K. from its joint venture partner, Kobe Steel.
Sales in the industrial supply market rose 35 percent as a result of
increased sales through mail order, Full Service Supply programs and from
acquisitions. Excluding the acquisitions, sales increased approximately 24
percent. Sales increased because of four additional showrooms, from the
integration of new showroom locations from acquired companies, from further
penetration of existing customers, and from an expanded product offering of more
than 10,000 new stock keeping units ("SKUs") in J&L's 1998 master catalog issued
September 1, 1997.
During the September 1997 quarter, sales in the mining and construction
market increased 10 percent from the previous year as a result of increased
domestic demand for highway construction tools. International sales of mining
and highway construction tools also improved as a result of strong market demand
in South Africa and China.
The Company recently acquired Rubig G.m.b.H. of Munich, Germany, Presto
Engineers Cutting Tools Limited of Sheffield, United Kingdom ("Presto"), Car-Max
Tool & Cutter Sales, Inc. and GRS Industrial Supply Company ("GRS"). The
companies had aggregate sales of approximately $66 million in 1996. The
acquisitions were accounted for using the purchase method of accounting. The
consolidated financial statements include the operating results of each business
from the date of acquisition, except for the acquisitions of Presto and GRS
which were acquired after September 30, 1997. Pro forma results of operations
have not been presented because the effects of the acquisitions were not
significant.
S-17
<PAGE> 306
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
September 1997 quarter was 42.5 percent as compared with 41.7 percent in the
prior year. The gross profit margin increased primarily as a result of
productivity improvements related in part to the focused factory initiative and
from higher production levels. This increase was partially offset by unfavorable
foreign currency translation effects.
Operating expenses as a percentage of sales were 31.7 percent compared to
31.6 percent last year. Operating expenses increased 13 percent primarily
because of relocation and related costs incurred in connection with the
construction of the new world headquarters, which amounted to approximately $5.2
million during the first quarter. The project is now successfully completed.
Operating expenses also increased because of higher costs related to
acquisitions, and from the JLK showroom expansion program, including higher
direct mail costs and increased direct marketing costs in new territories in the
United States and in Europe.
Interest expense for the September 1997 quarter was $1.2 million compared
to $2.6 million in the same quarter of a year ago. Interest expense decreased as
a result of lower debt balances as the Company used the proceeds received from
the initial public offering ("IPO") of approximately 4.9 million shares of
common stock of JLK to reduce indebtedness.
The effective tax rate for the September 1997 quarter was 39.0 percent
compared to an effective tax rate of 38.9 percent in the prior year.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
OVERVIEW. Net income for 1997 was $72.0 million, compared to $69.7 million
last year. While revenues and earnings rose to record highs, earnings were
affected by weakness in the European market, primarily in Germany, and from
negative effects of foreign currency translations due to the strength of the
U.S. dollar. Earnings for 1997 also were affected by additional costs related to
the J&L showroom expansion program, integration of new client-server information
systems and relocation and related costs associated with the construction of a
new world headquarters in Latrobe, Pennsylvania. Earnings in 1997 benefited from
slightly higher sales of metalworking products in North America and from higher
sales of metalworking products and industrial supplies sold to the Industrial
Supply market through mail order and Full Service Supply programs.
<TABLE>
<CAPTION>
SALES BY MARKET AND GEOGRAPHIC AREA
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------
1995 1996 1997
-------------------- --------------------------------- ---------------------------------
(IN THOUSANDS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL AMOUNT CHANGE OF TOTAL AMOUNT CHANGE
-------- -------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MARKET
Metalworking:
North America..... 37% $367,807 34% $ 368,481 --% 33% $ 378,679 3%
Europe............ 26 254,037 25 271,004 7 22 251,304 (7)
Asia Pacific...... 3 24,579 3 35,854 46 4 41,425 16
Industrial
Supply............ 20 201,152 24 256,703 28 28 328,531 28
Mining
and
Construction... 14 136,298 14 147,921 9 13 156,404 6
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
BY GEOGRAPHIC AREA
Within the
United States..... 62% $606,623 62% $ 665,510 10% 65% $ 752,268 13%
International....... 38 377,250 38 414,453 10 35 404,075 (3)
---- -------- ---- ---------- --- ---- ---------- ---
Net sales........... 100% $983,873 100% $1,079,963 10% 100% $1,156,343 7%
==== ======== ==== ========== === ==== ========== ===
</TABLE>
SALES AND MARKETS. Sales for the year ended June 30, 1997, were $1.2
billion, up 7 percent from $1.1 billion last year. Sales primarily increased in
1997 because of higher sales of metalworking products and industrial
S-18
<PAGE> 307
supplies sold to the Industrial Supply market by J&L and by Full Service Supply
programs. The increase in sales was offset in part by lower sales of
metalworking products in Europe due to weak economic conditions, especially the
German market, and from negative foreign currency translation effects.
Sales in the North America Metalworking market increased 3 percent over
1996, despite the transfer of small customer accounts to J&L, as a result of
improved economic conditions in the United States and from the continued
emphasis on milling and drilling products. Sales in Canada rose 15 percent
because of increased sales of metalworking products to aerospace and automotive
companies. Additionally, sales of traditional metalworking products sold through
all sales channels in North America, including sales through the Industrial
Supply market, increased 7 percent.
Sales in the Europe Metalworking market decreased 7 percent. Demand for
metalworking products continued to be slow due to weak economic conditions in
Europe, primarily in the German market. Demand in Europe was weak for most of
1997 but began to show improvement during the fourth quarter of fiscal 1997.
Despite the economic situation in Europe, sales continued to post gains in the
United Kingdom and France. In the Asia Pacific Metalworking market, sales rose
16 percent as a result of increased demand in China, Japan and Taiwan, although
sales were affected by soft economic conditions in Korea and Thailand. Excluding
foreign currency translation effects, sales in the Europe Metalworking market
decreased 2 percent, while sales in the Asia Pacific Metalworking market
increased 21 percent.
The Industrial Supply market was the major contributor to the overall sales
increase because of the continued growth of mail order and Full Service Supply
programs. Sales rose 28 percent primarily because of the expanded product
offering of over 20,000 new SKUs in the J&L 1997 master catalog, from the
addition of five new showrooms and from innovative marketing programs. Full
Service Supply programs increased, to a lesser extent, from the continued
ramp-up of existing Full Service Supply programs. Also contributing to the sales
increase was the acquisition of two industrial supply companies during the
fourth quarter of 1997. The acquired companies had annual sales of $36 million
in their latest fiscal year and will provide four additional showroom locations
in the Midwest. Excluding these acquisitions, the Industrial Supply market sales
increased 26 percent. 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 around 60
customers covering about 120 different facilities.
Sales in the Mining and Construction market increased 6 percent from 1996
as a result of increased domestic and international demand for mining tools.
Highway construction tool sales were flat in the United States, while
international sales declined slightly as a result of weak economic conditions in
Europe.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1997, was 42.2 percent, compared to 42.1 percent last year.
The gross profit margin improved slightly as a result of the positive effects of
productivity improvements related to the focused factory initiative. These
benefits were partially offset by a less favorable sales mix coupled with
unfavorable foreign currency translation effects.
Operating expenses as a percentage of sales were 31.0 percent, compared to
30.4 percent last year, excluding the effects of the one-time restructuring
charge in fiscal 1996. Operating expenses increased primarily because of higher
costs related to the J&L showroom expansion program, including higher direct
mail costs and increased direct marketing in new territories in the United
States and in Europe. Operating expenses also increased from higher costs to
support new and existing Full Service Supply programs, from the integration of
new client-server information systems, from higher research and development
costs and from relocation and related costs of $4.7 million associated with the
construction of a new world headquarters.
Interest expense decreased 8 percent because of lower average borrowings
coupled with slightly lower interest rates. The effective tax rate was 38.4
percent in 1997, compared to 38.6 percent in 1996. The decrease in the effective
tax rate resulted from additional tax benefits derived from international
operations.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
OVERVIEW. Net income for 1996 was $69.7 million, up 2 percent from $68.3
million in 1995. The 1996 results included a restructuring charge totaling $2.7
million ($0.06 per share) for the relocation of the North
S-19
<PAGE> 308
America Metalworking Headquarters and for the closure of a manufacturing
facility in Canada. Excluding the restructuring charge, net income for 1996 was
up 5 percent.
Earnings for 1996 increased because of the rapid growth in industrial
supply sales, primarily through mail order and Full Service Supply programs and
from slightly higher sales of metalcutting products in each of the three
metalworking markets. Earnings were affected by a less favorable sales mix and
lower production levels. Further, costs associated with the implementation of
new client-server information systems and focused factory programs reduced
pretax earnings by $10.4 million during 1996.
SALES AND MARKETS. Sales for the year ended June 30, 1996, were $1.1
billion, up 10 percent from $984 million in 1995. Sales increased in each of the
five markets over 1995. Sales increased in 1996 because of slightly higher sales
volumes and modest price increases.
Sales in the North America Metalworking market were flat compared to the
prior year. Sales of metalcutting inserts and toolholding devices in the United
States were flat, as sales growth was affected by weak economic conditions.
Sales of metalworking products in Canada increased 11 percent because of
increased demand.
In the Europe Metalworking market, sales increased 7 percent because of
higher sales volumes. Demand for metalworking products was slow in Germany,
while sales grew at a faster pace in the United Kingdom and France. Demand in
Europe was stronger in the first half of the fiscal year but slowed as the year
progressed. In the Asia Pacific Metalworking market, sales rose 11 percent as a
result of increased demand. Sales also increased because, effective July 1,
1995, Kennametal began to consolidate its majority-owned subsidiaries in China
and Japan. Excluding foreign currency translation effects, sales in the Europe
and Asia Pacific Metalworking markets increased 6 and 7 percent, respectively.
The Industrial Supply market accounted for the largest percentage sales
gain because of the rapid growth of mail order and Full Service Supply programs.
Sales rose 28 percent as a result of aggressive marketing programs, the
successful geographic showroom expansion program at J&L and new and existing
Full Service Supply programs with large customers. During fiscal 1996, J&L
opened seven showroom locations and at the end of fiscal 1996 operated a total
of 18 showrooms in the United States and one location in the United Kingdom.
Full Service Supply added 18 new contracts, bringing the total number to
slightly more than 50 contracts covering more than 100 plant locations in 1996.
Also, during June 1996, the Company began transferring small customer accounts
from the North America Metalworking market to J&L to provide added customer
service and to further leverage J&L's full complement of metalcutting supplies.
Sales in the Mining and Construction market increased 9 percent over 1995
as a result of strong domestic demand for both mining and highway construction
tools. International sales rose only slightly because of increased competition.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the
year ended June 30, 1996, was 42.1 percent, compared to 43.0 percent in 1995.
The gross profit margin benefited from higher sales volumes and modest price
increases. These benefits were offset by a less favorable sales mix, slightly
higher raw material costs, costs associated with the implementation of focused
factory programs and reduced manufacturing efficiencies because of lower
production levels.
Operating expenses as a percentage of sales were 30.4 percent, compared to
29.9 percent in 1995. Operating expenses increased 12 percent primarily because
of costs related to the implementation of new client-server information systems,
costs necessary to support the higher sales levels, and marketing and showroom
expansion programs at J&L. Results of operations also included a restructuring
charge related to the consolidation of the North America Metalworking
headquarters from Raleigh, North Carolina, to Latrobe, Pennsylvania, and the
closure of a manufacturing facility in Canada. These pretax items were recorded
during the fourth quarter of fiscal 1996 and amounted to $2.7 million.
Interest expense decreased 12 percent because of lower average borrowings
and slightly lower interest rates. The effective tax rate was 38.6 percent in
1996, compared to 39.7 percent in 1995. The decrease in the effective tax rate
resulted from additional tax benefits derived from international operations.
S-20
<PAGE> 309
RESTRUCTURING CHARGE. During the fourth quarter of fiscal 1996, the
Company recorded a pretax charge of $2.7 million to relocate its North America
Metalworking headquarters from Raleigh, North Carolina, to Latrobe,
Pennsylvania, and to close a manufacturing facility in Canada. The relocation
was made to globalize key functions and to provide a more efficient corporate
structure. As a result, a pretax charge of $2.7 million was recorded to cover
the related one-time costs of employee separation arrangements and early
retirements. In connection with the relocation, the Company is constructing a
new world headquarters building estimated to cost $20 million.
Certain costs resulting from the relocation of employees, hiring and
training new employees, and other costs resulting from the temporary duplication
of certain operations were not included in the one-time charge and will be
included in operating expenses as incurred. The costs related to these items
were estimated to be $9 million pretax and will be incurred during fiscal 1997
and 1998.
LIQUIDITY AND CAPITAL RESOURCES
On October 10, 1997, Kennametal and Acquisition Corp. entered into the
Merger Agreement with Greenfield pursuant to which Acquisition Corp. purchased
at $38 per share on November 17, 1997 approximately 16,179,976 shares (98
percent of the outstanding) of Greenfield's common stock. The Merger occurred on
November 18, 1997 and Greenfield became a wholly-owned subsidiary of Kennametal
on that date. The total purchase price for the acquisition of Greenfield
(including estimated transaction costs and assumed Greenfield debt and
convertible redeemable preferred securities of approximately $320 million) is
estimated to be $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November
17, 1997, entered into the New Bank Credit Facility. As of December 18, 1997,
the Company had borrowed $500 million in term loans and approximately $382
million in revolving credit loans under the New Bank Credit Facility. The
proceeds from the loans were principally used to pay for the shares of common
stock of Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of Greenfield and to
refinance certain indebtedness of the Company. Subject to certain conditions,
the New Bank Credit Facility permits revolving credit loans of up to $900
million for working capital requirements, capital expenditures, and general
corporate purposes. The New Bank Credit Facility initially was secured by all of
the stock of certain of Kennametal's significant domestic subsidiaries, by
guarantees of certain of such subsidiaries and by 65 percent of the stock of
Kennametal's significant foreign subsidiaries. On December 24, 1997, the stock
held as security was released. The New Bank Credit Facility contains various
restrictive covenants and affirmative covenants requiring the maintenance of
certain financial ratios. The term loans under the New Bank Credit Facility are
subject to mandatory amortization commencing on November 30, 1998 and all loans
mature on August 31, 2002. Proceeds from the Offering, the FELINE PRIDES
Offering and the Common Stock Offerings will be used to prepay loans and,
correspondingly, permanently reduce the commitments of the lenders under the New
Bank Credit Facility. If all of such offerings are consummated, the Company
intends to replace the New Bank Credit Facility with a $500 million senior
unsecured credit facility, although there can be no assurance that the Company
will be able to replace the New Bank Credit Facility.
Kennametal's cash flow from operations is the primary source of financing
for capital expenditures and internal growth. The Company and its subsidiaries
generally obtain local financing through credit lines with commercial banks.
During 1997, the Company generated $99.9 million in cash from operations.
Cash provided by operations increased from 1996 primarily because of lower
working capital requirements and slightly higher net income. Capital
expenditures, totaling $73.8 million, were made to construct a new world
headquarters in Latrobe, Pennsylvania, and a manufacturing facility in China,
for new client-server information systems and to upgrade machinery and
equipment. Additionally, the Company paid $17.5 million of cash dividends and
paid $19 million to acquire five small companies throughout 1997. The effects of
the acquisitions were not significant to the Company. During the quarter ended
September 30, 1997, the Company generated $40.6 million in cash from operations.
The increase in cash provided by operations resulted primarily from higher net
income and slightly lower incremental working capital requirements. Net cash
used in investing activities during the quarter ended
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September 30, 1997 was $32.4 million. The increase in net cash used in investing
activities resulted from higher capital expenditures and from the acquisition of
Rubig G.m.b.H. and the remaining interest in Kobe Kennametal K.K. from its joint
venture partner, Kobe Steel.
On January 31, 1997, the Company initiated a stock repurchase program to
repurchase from time to time up to a total of 1.6 million shares of its
outstanding capital stock. During the year ended June 30, 1997, the Company
repurchased approximately 781,000 shares of its Common Stock at a total cost of
approximately $28.7 million. The repurchases were made in the open market or in
negotiated or other permissible transactions. The repurchase of Common Stock was
financed principally by cash from operations and short-term borrowings.
On July 2, 1997, an IPO of approximately 4.9 million shares of common stock
of JLK at a price of $20 per share was consummated. JLK operates the industrial
supply operations consisting of the Company's wholly owned J&L subsidiary and
its Full Service Supply programs. The net proceeds from the offering were
approximately $90 million and represented the sale of approximately 20 percent
of JLK's common stock. The net proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and $20 million related to
intercompany obligations to the Company. The Company used these proceeds to
repay short-term debt. In connection with the IPO, the remaining net proceeds
were loaned to the Company, under an intercompany debt/investment and cash
management agreement at a fluctuating rate of interest equal to the Company's
short-term borrowing costs. The Company will maintain unused lines of credit to
enable it to repay any portion of the borrowed funds as the amounts are due on
demand by JLK. The Company owns approximately 80 percent of the outstanding
common stock of JLK and intends to retain a majority of both the economic and
voting interests of JLK.
During 1996, the Company generated $85 million in cash from operations,
which was used primarily to finance $58 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment, and to acquire new information
systems. In January 1996, the Company announced plans to build a $20 million
facility in Shanghai, China to manufacture cemented carbide metalcutting tools.
Pilot production commenced in the second quarter of fiscal 1998 with full
production beginning in the third quarter of fiscal 1998.
During 1995, the Company generated $57 million in cash from operations,
which was used primarily to finance $43 million of capital expenditures and to
pay $16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment and to acquire new information
systems.
Capital expenditures for fiscal 1998 (excluding) Greenfield are estimated
to be $70-$80 million of which $16.7 million has been spent through September
30, 1997, and will be used primarily to complete the construction of a new world
headquarters in Latrobe, Pennsylvania and a manufacturing facility in China, to
acquire additional client-server information systems, to construct or acquire a
new Midwest distribution center and to upgrade machinery and equipment.
FINANCIAL CONDITION
Kennametal's financial condition remains strong. Total assets were $869
million in 1997, up 9 percent from $799 million in 1996. Net working capital was
$176 million, down 19 percent from the previous year. The ratio of current
assets to current liabilities was 1.6 in 1997, compared with 2.0 in 1996. Total
assets were $920 million at September 30, 1997, up 6 percent from $869 million
at June 30, 1997. Net working capital was $258 million, up 47 percent from $176
million from the previous quarter and the ratio of current assets to current
liabilities was 2.1 as of September 30, 1997 and 1.6 as of June 30, 1997.
Accounts receivable increased 6 percent to $201 million because of
increased sales and from the effects of acquisitions. Inventories rose slightly
to $210 million due to the growth of sales to the Industrial Supply market, the
effects of acquisitions, offset by the Company's inventory reduction efforts of
manufactured products. Inventory turnover was 3.2 in 1997 and 3.0 in 1996. The
Company will continue to focus on ways to improve inventory turnover and overall
asset utilization.
Total debt (including capital lease obligations) increased 33 percent to
$174 million in 1997. In 1997, total debt increased principally because of the
stock repurchase program and increased capital expenditures. The ratio of total
debt to total capital (i.e., total debt divided by the sum of total debt,
minority interest and shareholders' equity) was 27.1 percent in 1997 as compared
with 22.5 percent in 1996. Total debt decreased 42 percent to
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$101 million and the Company's debt-to-capital ratio was 15.0 percent at
September 30, 1997. Total debt decreased as a result of the application of net
proceeds of $90 million received from the IPO of approximately 4.9 million
shares of common stock of JLK.
After the acquisition of Greenfield, the Offering, the FELINE PRIDES
Offering and the Common Stock Offerings and the application of the net proceeds
therefrom, total debt will increase to approximately $672.2 million and the
debt-to-capital ratio will increase to approximately 40.4 percent. To maintain
financial flexibility and to optimize the cost of capital, Kennametal's
financial objective, over the long term, is to maintain a total debt-to-capital
ratio of not more than 40 percent. Cash from operations and the Company's debt
capacity are expected to continue to be sufficient to fund capital expenditures,
dividend payments, stock repurchases, acquisitions and operating requirements.
ENVIRONMENTAL MATTERS
Compliance with Environmental Laws did not have a material effect on the
Company's capital expenditures, earnings or competitive position for fiscal
1997, nor is the Company currently aware of any compliance requirement that it
expects will have a material effect in the future. The Company has been involved
in various environmental cleanup and remediation activities at several of its
manufacturing facilities. In addition, the Company has been named as a
potentially responsible party at several Superfund sites in the United States.
However, management believes that, based on its evaluations and discussions with
outside counsel and independent consultants, that the ultimate resolution of
these environmental matters will not have a material adverse effect on the
results of operations, financial position or cash flows of the Company. See Note
14 to the consolidated financial statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("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 year 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 disclosures.
Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130
is effective for years ending after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company will adopt
SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have
a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the effect of applying this statement.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect
the Company's operations throughout the world. Kennametal strives to minimize
the effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
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DESCRIPTION OF SENIOR DEBT SECURITIES
The 2001 Notes, 2008 Notes and 2028 Debentures offered hereby constitute
separate series of Debt Securities (which are more fully described in the
accompanying Prospectus) to be issued pursuant to an indenture dated
, 1998, as supplemented by the second supplemental indenture, as amended or
supplemented (the "Senior Debt Securities Indenture"), between the Company and
The First National Bank of Chicago, as trustee (the "Trustee"). The following
description of the particular terms of the Senior Debt Securities offered hereby
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Debt Securities set forth in the
accompanying Prospectus, to which description reference is hereby made. The
terms of the Senior Debt Securities include those provisions contained in the
Senior Debt Securities Indenture and those made part of the Senior Debt
Securities Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "TIA"). The Senior Debt Securities are subject to all such terms, and
holders of Senior Debt Securities are referred to the Senior Debt Securities
Indenture and the TIA for a statement thereof. Capitalized terms not otherwise
defined herein shall have the meanings given to them in the Prospectus and the
Senior Debt Securities Indenture. The following summary of certain provisions of
the Senior Debt Securities Indenture does not purport to be complete and is
subject to and qualified in its entirety by reference to the Senior Debt
Securities Indenture, including the definitions therein of certain defined terms
used below and not otherwise defined below. As used in this section the
"Company" refers to Kennametal, exclusive of its subsidiaries.
GENERAL
The 2001 Notes will be limited to $150 million aggregate principal amount,
the 2008 Notes will be limited to $150 million aggregate principal amount, and
the 2028 Debentures will be limited to $150 million aggregate principal amount.
The Senior Debt Securities will be senior unsecured obligations of the Company
and rank equally with all other existing and future senior unsecured and
unsubordinated indebtedness of the Company. At September 30, 1997, on a pro
forma basis giving effect to the acquisition of Greenfield, the Offering, the
FELINE PRIDES Offering and the Common Stock Offerings, the Company would have
had approximately $603.4 million of senior unsecured indebtedness.
A substantial portion of Kennametal's business is conducted through
subsidiaries and the Senior Debt Securities will be effectively subordinated to
all liabilities (including trade payables) of the Company's subsidiaries. At
September 30, 1997, on a pro forma basis giving effect to the to the acquisition
of Greenfield, the Offering, the FELINE PRIDES Offering and the Common Stock
Offerings and giving effect to the guarantees of the New Bank Credit Facility by
certain of the Company's subsidiaries, the Company's subsidiaries would have had
approximately $215.7 million of indebtedness, of which $146.9 million would have
represented obligations of subsidiaries as guarantors under the New Bank Credit
Facility. If the Offering, the FELINE PRIDES Offering and the Common Stock
Offerings are consummated, the Company anticipates that following the closing of
such offerings, the Company will terminate the New Bank Credit Facility and
enter into a new unsecured revolving credit facility providing for borrowings of
up to $500 million at any one time outstanding which will not be guaranteed by
any subsidiaries of the Company, although subsidiaries may be borrowers under
such facility. There can be no assurance that the Company will consummate the
Offering, the FELINE PRIDES Offering or the Common Stock Offerings or terminate
the New Bank Credit Facility and enter into an unsecured credit facility not
guaranteed by its subsidiaries.
Other than the limitations described under the section "--Certain
Covenants", the Senior Debt Securities Indenture will permit the Company and its
Subsidiaries to incur additional secured and unsecured indebtedness. Subject to
the limitations described under the section "--Consolidation, Merger, Conveyance
or Transfer of Assets", the Senior Debt Securities Indenture does not contain
any other provisions that would afford holders of the Senior Debt Securities
protection in the event of (i) a highly leveraged or similar transaction
involving the Company, (ii) a change of control or (iii) a reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect the holders of the Senior Debt Securities. In addition, subject
to the limitations set forth under "--Consolidation, Merger, Conveyance or
Transfer of Assets", the Company may, in the future, enter into certain
transactions such as the sale of all or substantially all of its assets or the
merger or consolidation of the Company with another entity that would increase
the amount of the Company's indebtedness
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or substantially reduce or eliminate the Company's assets, which may have an
adverse effect on the Company's ability to service its indebtedness, including
the Senior Debt Securities.
The Senior Debt Securities will be issued only in fully registered
book-entry form without coupons in denominations of $1,000 and integral
multiples thereof, except under the limited circumstances described below under
"--Global Debt Securities." The Senior Debt Securities may be transferred or
exchanged without any service charge at the corporate trust office of the
Trustee in The City of New York, or at any other office or agency maintained by
the Company for such purpose.
INTEREST RATE AND MATURITY
The 2001 Notes will bear interest at the rate of % per annum, the 2008
Notes will bear interest at the rate of % per annum and the 2028 Debentures
will bear interest at the rate of % per annum, in each case from
, 1998, or from the most recent interest payment date to which interest has
been paid or duly provided for, payable semiannually on and
, commencing , 1998 (each an "Interest Payment Date"), to the
persons in whose names the Senior Debt Securities are registered at the close of
business on and , as the case may be, preceding such
Interest Payment Date. Principal of and interest on the Senior Debt Securities
will be payable at the office or agency of the Company maintained for such
purposes in The City of New York; provided, however, that at the option of the
Company, payment of interest may be made by check mailed to the address of the
person entitled thereto as such address shall appear in the security register.
The 2001 Notes will mature on , 2001. The 2008 Notes will mature
on , 2008, and the 2028 Debentures will mature on , 2028.
The Senior Debt Securities will not have the benefit of any sinking fund.
REDEMPTION
The 2008 Notes and the 2028 Debentures may be redeemed at any time at the
option of the Company, in whole or from time to time in part, upon not less than
30 and not more than 60 days' notice to the Holders thereof as provided in the
Senior Debt Securities Indenture, on any date prior to maturity (the "Redemption
Date") at a price (the "Redemption Price") equal to (i) 100% of the principal
amount of the applicable series of Senior Debt Securities, plus (ii) accrued
interest to the Redemption Date (subject to the right of Holders of record of
such Senior Debt Securities on the relevant record date to receive interest due
on an Interest Payment Date that is on or prior to the Redemption Date) plus
(iii) a Make-Whole Premium (as defined herein), if any. In no event will the
Redemption Price of the Senior Debt Securities be less than 100% of the
principal amount of the applicable series of Senior Debt Securities being
redeemed, respectively, plus accrued interest to the applicable Redemption Date.
The amount of the "Make-Whole Premium," with respect to any 2008 Note or
2028 Debenture, as the case may be, (or portion thereof) to be redeemed will be
equal to the excess, if any, of:
(i) the sum of the present values, calculated as of the applicable
Redemption Date, of:
(A) each interest payment that, but for such redemption, would have been
payable on any such Senior Debt Security (or portion thereof) being
redeemed on each Interest Payment Date occurring after the
Redemption Date (excluding any accrued interest for the period prior
to the Redemption Date); and
(B) the principal amount that, but for such redemption, would have been
payable at the final maturity of any such Senior Debt Security (or
portion thereof) being redeemed; over
(ii) the principal amount of such Senior Debt Security (or portion thereof)
being redeemed.
The present values of interest and principal payments referred to in clause
(i) above will be determined in accordance with generally accepted principles of
financial analysis. Such present values will be calculated by discounting the
amount of each payment of interest or principal from the date that each such
payment would have been payable, but for the redemption, to the applicable
Redemption Date at a discount rate equal to the applicable Treasury Yield (as
defined herein) plus basis points for the 2008 Notes or the applicable
Treasury Yield plus basis points for the 2028 Debentures.
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The Make-Whole Premium will be calculated by an independent investment
banking institution of national standing appointed by the Company; provided,
that if the Company fails to make such appointment at least 45 business days
prior to the Redemption Date, or if the institution so appointed is unwilling or
unable to make such calculation, such calculation will be made by Merrill Lynch,
Pierce, Fenner & Smith Incorporated or, if such firm is unwilling or unable to
make such calculation, by an independent investment banking institution of
national standing appointed by the Trustee (in any such case, an "Independent
Investment Banker").
For purposes of determining the Make-Whole Premium with respect to the 2008
Notes and the 2028 Debentures, "Treasury Yield" means a rate of interest per
annum equal to the weekly average yield to maturity of United States Treasury
securities that have a constant maturity that corresponds to the remaining term
to maturity of such Senior Debt Security, calculated to the nearest 1/12th of a
year (the "Remaining Term"). The Treasury Yield will be determined as of the
third business day immediately preceding the applicable Redemption Date.
The weekly average yields to maturity of United States Treasury securities
will be determined by reference to the most recent statistical release published
by the Federal Reserve Bank of New York and designated "H.15(519) Selected
Interest Rates" or any successor release (the "H.15 Statistical Release"). If
the H.15 Statistical Release sets forth a weekly average yield to maturity for
United States Treasury securities having a constant maturity that is the same as
the Remaining Term, then the Treasury Yield will be equal to such weekly average
yield to maturity. In all other cases, the Treasury Yield will be calculated by
interpolation, on a straight-line basis, between the weekly average yields to
maturity on the United States Treasury securities that have a constant maturity
closest to and greater than the Remaining Term and the United States Treasury
securities that have a constant maturity closest to and less than the Remaining
Term (in each case as set forth in the H.15 Statistical Release). Any weekly
average yields to maturity as calculated by interpolation will be rounded to the
nearest 1/100th of 1%, with any figure of 1/200th of 1% or above being rounded
upward. If weekly average yields to maturity for United States Treasury
securities are not available in the H.15 Statistical Release or otherwise, then
the Treasury Yield will be calculated by interpolation of comparable rates
selected by the Independent Investment Banker.
If less than all of the Senior Debt Securities of a series are to be
redeemed, the Trustee will select the Senior Debt Securities to be redeemed by
such method as the Trustee shall deem fair and appropriate. The Trustee may
select for redemption Senior Debt Securities and portions of Senior Debt
Securities in amounts of whole multiples of $1,000.
CERTAIN COVENANTS
LIMITATION ON LIENS. The Senior Debt Securities Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
create, incur or otherwise cause or suffer to exist or become effective any
Liens of any kind upon any Principal Property or any shares of stock or
indebtedness of any Restricted Subsidiary (whether such Principal Property,
shares of stock or indebtedness are now owned or hereafter acquired) unless all
payments due under the Senior Debt Securities Indenture and the Senior Debt
Securities are secured on an equal and ratable basis with the obligations so
secured until such time as such obligation is no longer secured by a Lien,
except for Permitted Liens. See also "Exempted Indebtedness" below.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Senior Debt Securities
Indenture provides that neither the Company nor any Restricted Subsidiary will
enter into any sale and leaseback transaction with respect to any Principal
Property (except for temporary leases of a term, including renewals, not
exceeding five years) unless either (a) the Company or such Restricted
Subsidiary would be entitled, pursuant to the provisions of the Senior Debt
Securities Indenture, to incur Indebtedness secured by a lien on the property to
be leased without equally and ratably securing the Senior Debt Securities, or
(b) the Company within 180 days after the effective date of such transaction
applies to the voluntary retirement of its funded debt an amount equal to the
value of such transaction, defined as the greater of the net proceeds of the
sale of the property leased in such transaction or the fair value, in the
opinion of the Board of Directors, of the leased property at the time such
transaction was entered into. See also "Exempted Indebtedness" below.
EXEMPTED INDEBTEDNESS. Notwithstanding the foregoing limitations on Liens
and sale and leaseback transactions, the Company and its Restricted Subsidiaries
may issue, assume, suffer to exist or guarantee Indebtedness secured by a Lien
without securing the Senior Debt Securities, or may enter into sale and
leaseback
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transactions without retiring funded debt, or enter into a combination of such
transactions, if the sum of the principal amount of all such Indebtedness and
the aggregate value of all such sale and leaseback transactions does not at any
such time exceed 10% of the consolidated total assets of the Company and its
consolidated subsidiaries as shown in the consolidated balance sheet contained
in the latest annual or quarterly report filed with the Securities and Exchange
Commission (the "Commission").
Compliance with the foregoing covenants may not be waived by the Trustee
unless the holders of at least a majority in aggregate principal amount of all
Senior Debt Securities consent to such waiver; provided, however, that the
Company need not comply with such covenants in the event it elects to comply
with the defeasance or covenant defeasance provisions of the Senior Debt
Securities Indenture described under "Description of Senior Debt
Securities--Defeasance and Covenant Defeasance".
CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER OF ASSETS
The Senior Debt Securities Indenture provides that the Company will not
consolidate or merge with or into, or sell, lease, convey or otherwise dispose
of all or substantially all of its assets or assign any of its obligations under
the Senior Debt Securities or Senior Debt Securities Indenture unless (i) the
entity formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, lease, conveyance or other disposition
shall have been made (the "Surviving Entity"), is a corporation organized and
existing under the laws of the United States, any state thereof, or the District
of Columbia; (ii) the Surviving Entity assumes by supplemental indenture all of
the obligations of the Company under the Senior Debt Securities and the Senior
Debt Securities Indenture; and (iii) immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing. With respect to the sale of assets, the phrase "all or substantially
all" as used in the Senior Debt Securities Indenture varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which governs the Senior Debt Securities Indenture)
and is subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of a person, and therefore it may be unclear as to whether a disposition
of assets comes within the terms of this provision.
SAME DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Debt Securities will be made by the Underwriters
in immediately available funds. All payments of principal and interest will be
made by the Company in immediately available funds. The Senior Debt Securities
will trade in the Depositary's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Senior Debt Securities will
therefore be required by the Depositary to settle in immediately available
funds.
DEFEASANCE AND COVENANT DEFEASANCE
The Senior Debt Securities Indenture provides that the Company may elect
either (a) to terminate (and be deemed to have satisfied) all its obligations
with respect to any series of Senior Debt Securities (except for the obligations
to register the transfer or exchange of such Senior Debt Securities, to replace
mutilated, destroyed, lost or stolen Senior Debt Securities, to maintain an
office or agency in respect of the Senior Debt Securities, to compensate and
indemnify the Trustee and to punctually pay or cause to be paid the principal of
and interest on and any other amounts payable in respect of all Senior Debt
Securities of such series when due) ("defeasance") or (b) to be released from
its obligations with respect to certain covenants, including those described
above under "Certain Covenants--Limitation on Liens" and "--Limitation on Sale
and Leaseback Transactions" above ("covenant defeasance"), upon the deposit with
the Trustee (and in the case of a discharge, 121 days after such discharge), in
trust for such purpose, of money and/or U.S. Government Obligations (as defined
in the Senior Debt Securities Indenture) which throughout the payment of
principal and interest in accordance with their terms will provide money, in an
amount sufficient (in the opinion of a nationally recognized firm of independent
public accountants) to pay the principal of, interest on and any other amounts
payable in respect of the outstanding Senior Debt Securities of such series.
Such a trust may be established only if, among other things, the Company has
delivered to the Trustee an opinion of counsel (as specified in the Senior Debt
Securities Indenture) with regard to certain matters, including an opinion to
the effect that the holders of such Senior Debt Securities will
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not recognize income, gain or loss for Federal income tax purposes as a result
of such deposit and discharge and will be subject to Federal income tax on the
same amounts and in the same manner and at the same times as would have been the
case if such deposit and defeasance or covenant defeasance, as the case may be,
had not occurred.
GLOBAL DEBT SECURITIES
The Company has established a depositary arrangement with The Depository
Trust Company with respect to the Senior Debt Securities, the terms of which are
summarized below.
Upon issuance, all Senior Debt Securities will be represented by Global
Debt Securities. The Global Debt Securities representing the Senior Debt
Securities will be deposited with, or on behalf of, the Depositary and will be
registered in the name of the Depositary or a nominee of the Depositary. No
Global Debt Securities may be transferred except as a whole by a nominee of the
Depositary to the Depositary or to another nominee of the Depositary, or by the
Depositary or such nominee to a successor of the Depositary or a nominee of such
successor.
So long as the Depositary or its nominee is the registered owner of a
Global Debt Security, the Depositary or its nominee, as the case may be, will be
the sole Holder of the Senior Debt Securities represented thereby for all
purposes under the Senior Debt Securities Indenture. Except as otherwise
provided in this section, each actual purchaser of each Senior Debt Security
represented by a Global Debt Security ("Beneficial Owner") will not be entitled
to receive physical delivery of certificated Senior Debt Securities and will not
be considered the holders thereof for any purpose under the Senior Debt
Securities Indenture, and no Global Debt Security representing the Senior Debt
Securities shall be exchangeable or transferable. Accordingly, each Beneficial
Owner must rely on the procedures of the Depositary and, if such Beneficial
Owner is not a Participant, on the procedures of the Participant through which
such Beneficial Owner owns its interest in order to exercise any rights of a
Holder under such Global Debt Security or the Senior Debt Securities Indenture.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in certificated form. Such limits and
such laws may impair the ability to transfer beneficial interests in a Global
Debt Security representing the Senior Debt Securities.
The Global Debt Securities representing the Senior Debt Securities will be
exchangeable for certificated Senior Debt Securities of like tenor and terms and
of differing authorized denominations aggregating a like principal amount, only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for the Global Debt Securities, (ii) the Depositary
ceases to be a clearing agency registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (iii) the Company in its sole discretion
determines that the Global Debt Securities shall be exchangeable for
certificated Senior Debt Securities or (iv) there shall have occurred and be
continuing an Event of Default under the Senior Debt Securities Indenture with
respect to the Senior Debt Securities. Upon any such exchange, the certificated
Senior Debt Securities shall be registered in the names of the Beneficial Owners
of the Global Debt Securities representing the Senior Debt Securities, which
names shall be provided by the Depositary's relevant Participants (as identified
by the Depositary) to the Trustee.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the Senior Debt
Securities. The Senior Debt Securities will be issued as fully registered
securities registered in the name of Cede & Co. (the Depositary's
partnership nominee). Fully registered Global Debt Securities will be
issued for the Senior Debt Securities, in the aggregate principal amount of
such issue, and will be deposited with the Depositary.
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes to Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants of the Depositary
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("Direct Participants") include securities brokers and dealers (including
the Underwriters), banks, trust companies, clearing corporations and
certain other organizations. The Depositary is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers,
Inc. Access to the Depositary's system is also available to others such as
securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules
applicable to the Depositary and its Participants are on file with the
Securities and Exchange Commission (the "Commission").
Purchases of Senior Debt Securities under the Depositary's system must
be made by or through Direct Participants, which will receive a credit for
such Senior Debt Securities on the Depositary's records. The ownership
interest of each Beneficial Owner is in turn to be recorded on the Direct
and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from the Depositary of their purchase, but Beneficial
Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which such Beneficial Owner entered
into the transaction. Transfers of ownership interests in the Global Debt
Securities representing the Senior Debt Securities are to be accomplished
by entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners of the Global Debt Securities representing the
Senior Debt Securities will not receive certificated Senior Debt Securities
representing their ownership interests therein, except in the event that
use of the book-entry system for such Senior Debt Securities is
discontinued.
To facilitate subsequent transfers, all Global Debt Securities
representing the Senior Debt Securities which are deposited with, or on
behalf of, the Depositary are registered in the name of the Depositary's
nominee, Cede & Co. The deposit of Global Debt Securities with, or on
behalf of, the Depositary and their registration in the name of Cede & Co.
effect no change in beneficial ownership. The Depositary has no knowledge
of the actual Beneficial Owners of the Global Debt Securities representing
the Senior Debt Securities; the Depositary's records reflect only the
identity of the Direct Participants to whose accounts such Senior Debt
Securities are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Global Debt Securities representing the Senior Debt
Securities. Under its usual procedure, the Depositary mails an omnibus
proxy to the Company as soon as possible after the applicable record date.
The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Senior Debt Securities are
credited on the applicable record date (identified in a listing attached to
the omnibus proxy).
Principal, premium, if any, and/or interest, if any, on the Global
Debt Securities representing the Senior Debt Securities will be made to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the applicable payment date in accordance with their respective
holdings shown on the Depositary's records unless the Depositary has reason
to believe that it will not receive payment on such date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the
accounts of customers registered in "street name," and will be the
responsibility of such Participant and not of the Depositary, the Trustee
or the Company, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of principal, premium, if any,
and/or interest, if any, to the Depositary is the responsibility of the
Company or the Trustee, disbursement of such payments to Direct
Participants shall be the responsibility of the Depositary, and
disbursement of such payments to the Beneficial Owners shall be the
responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities
depository with respect to the Senior Debt Securities at any time by giving
reasonable notice to the Company or the Trustee. Under such
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circumstances, in the event that a successor securities depositary is not
obtained, certificated Senior Debt Securities are required to be printed
and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through the Depositary (or a successor securities depositary). In
that event, certificated Senior Debt Securities will be printed and
delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Company believes to
be reliable, but the Company takes no responsibility for the accuracy thereof.
THE TRUSTEE
The First National Bank of Chicago is the Trustee under the Senior Debt
Securities Indenture. The Company maintains normal commercial banking relations
with The First National Bank of Chicago.
CERTAIN DEFINITIONS
"Affiliate" shall mean another Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such first Person.
For the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that Person, whether through the ownership of voting securities or by contract
or otherwise.
"Capitalized Lease Obligation" shall mean an obligation that is required to
be classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with generally accepted accounting principles, and the
amount of Indebtedness represented by such obligation shall be the capitalized
amount of such obligation determined in accordance with such principles; and the
Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"Consolidated Net Worth" shall mean the excess of assets over liabilities
of the Company and its consolidated Subsidiaries, plus Minority Interests, as
determined from time to time in accordance with generally accepted accounting
principles.
"Indebtedness" shall mean, with respect to any Person, at any date, any of
the following, without duplication, (i) any liability, contingent or otherwise,
of such Person (A) for borrowed money (whether or not the recourse of the lender
is to the whole of the assets of such Person or only to a portion thereof), (B)
evidenced by a note, bond, debenture or similar instrument or (C) for the
payment of money relating to a Capitalized Lease Obligation or other obligation
(whether issued or assumed) relating to the deferred purchase price of property;
(ii) all conditional sale obligations and all obligations under any title
retention agreement (even if the rights and remedies of the seller under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary course
of business; (iii) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction other than
entered into in the ordinary course of business; (iv) all indebtedness of others
secured by (or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on any asset or property
(including, without limitation, leasehold interests and any other tangible or
intangible property) of such Person, whether or not such indebtedness is assumed
by such Person or is not otherwise such Person's legal liability; provided, that
if the obligations so secured have not been assumed in full by such Person or
are otherwise not such Person's legal liability in full, the amount of such
indebtedness for the purposes of this definition shall be limited to the lesser
of the amount of such indebtedness secured by such Lien or the fair market value
of the assets of the property securing such Lien; (v) all indebtedness of others
(including all interest and dividends on any Indebtedness or preferred stock of
any other Person for the payment of which is) guaranteed, directly or
indirectly, by such Person or that is otherwise its legal liability or which
such Person has agreed to purchase or repurchase or in respect of which such
Person has agreed contingently to supply or advance funds; and (vi) obligations
in respect of Currency Agreements and Interest Swap Obligations (as such
capitalized terms are defined in the Senior Debt Securities Indenture).
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"Issue Date" shall mean the first date on which a Senior Debt Security is
authenticated by the Trustee pursuant to the Senior Debt Securities Indenture .
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien, charge or adverse claim affecting title or resulting in an encumbrance
against real or personal property or a security interest of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof other than a lease which is not a Capitalized Lease
Obligation).
"Minority Interest" is defined as any shares of stock of any class of a
Subsidiary that are not owned by the Company or a Subsidiary.
"Permitted Liens" shall mean, with respect to any Person: (i) Liens
existing on the Issue Date; (ii) Liens on property or assets of, or any shares
of stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or any of its
Restricted Subsidiaries or at the time such corporation is merged into the
Company or any of its Restricted Subsidiaries; (iii) Liens in favor of the
Company or any of its Restricted Subsidiaries; (iv) Liens in favor of
governmental bodies to secure progress or advance payments; (v) Liens securing
industrial revenue or pollution control bonds; (vi) Liens on Property to secure
Indebtedness incurred for the purpose of (a) financing all or any part of the
purchase price of such Property incurred prior to, at the time of, or within 180
days after, the acquisition of such Property or (b) financing all or any part of
the cost of construction, improvement, development or expansion of any such
Property; (vii) statutory liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provisions, if any, as shall be required in
conformity with generally accepted accounting principles shall have been made
therefor; (viii) Liens on current assets of the Company or its Restricted
Subsidiaries securing Indebtedness of the Company or its Restricted
Subsidiaries; and (ix) any extensions, substitutions, replacements or renewals
in whole or in part of a Lien (an "existing Lien") enumerated in clauses (i)
through (viii) above; provided that the Lien may not extend beyond (A) the
Property or Indebtedness subject to the existing Lien and (B) improvements and
construction on such Property and the Indebtedness secured by the Lien may not
exceed the Indebtedness secured at the time by the existing Lien.
"Person" shall mean any individual, corporation, partnership, limited
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity.
"Principal Property" means any manufacturing plant or warehouse owned or
leased by the Company or any Subsidiary, the gross book value of which exceeds
four percent of Consolidated Net Worth, other than manufacturing plants and
warehouses which the Board of Directors by resolution declares, together with
all other plants and warehouses previously so declared, is not of material
importance to the total business conducted by the Company and its Restricted
Subsidiaries as an entirety.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of the Company and its Subsidiaries under
generally accepted accounting principles.
"Restricted Subsidiary" shall mean any Subsidiary of the Company that is
not an Unrestricted Subsidiary.
"Stated Maturity," when used with respect to any security or any
installment of interest thereon, shall mean the date specified in such security
as the fixed date on which the principal of such security or such installment of
interest is due and payable.
"Subsidiary" of any Person shall mean (i) any Person of which more than 50%
of the total voting power of shares of capital stock entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more of the Restricted Subsidiaries of that
Person or a combination thereof, and (ii) any partnership, joint venture or
other Person in which such Person or one or more of the Restricted Subsidiaries
of that Person or a combination thereof has the power to control by contract or
otherwise the board of directors or equivalent governing body or otherwise
controls such entity.
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"Unrestricted Subsidiary" means (i) any Subsidiary not organized under the
laws of a state of the United States or the District of Columbia and any
Subsidiary of such Subsidiary which is not organized under the laws of a state
of the United States or the District of Columbia and (ii) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors of the Company in the manner provided below
and any Subsidiary of such Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly-acquired or newly-formed
Subsidiary) organized under the laws of a state of the United States or of the
District of Columbia to be an Unrestricted Subsidiary unless such Subsidiary
owns any capital stock of, or owns or holds any Property of, the Company or any
other Subsidiary of the Company that is not a Subsidiary of the Subsidiary so
designated; provided, however, that the Subsidiary to be so designated has total
assets of $35,000,000 or less.
DESCRIPTION OF OTHER OFFERINGS
FELINE PRIDES OFFERING
Concurrently with the Offering, the Company and Kennametal Financing I (the
"Trust") are offering 4,500,000 FELINE PRIDES(SM). The net proceeds from the
FELINE PRIDES Offering are expected to be approximately $ million ($
million if the underwriters for the FELINE PRIDES Offering exercise their
over-allotment option in full). The consummation of the FELINE PRIDES Offering
is not a condition to the consummation of the Offering.
Each FELINE PRIDES(SM) offered hereby initially will consist of a unit
(referred to as an "Income PRIDES") with a Stated Amount of $50 (the "Stated
Amount") comprised of (a) a stock purchase contract (a "Purchase Contract")
under which (i) the holder will purchase from the Company on February 16, 2001
(the "Purchase Contract Settlement Date"), for an amount of cash equal to the
Stated Amount, a number of newly issued shares of the Common Stock of the
Company equal to the Settlement Rate described herein, and (ii) the Company will
pay the holder unsecured, subordinated contract adjustment payments ("Contract
Adjustment Payments") at the rate of % of the Stated Amount per annum,
provided that if such rate is 0%, then the Company will not make any Contract
Adjustment Payments, and (b) either beneficial ownership of (i) a % Trust
Originated Preferred Security(SM) (a "Trust Preferred Security"), having a
stated liquidation amount per Trust Preferred Security equal to the Stated
Amount, representing a preferred undivided beneficial interest in the assets of
the Trust, (ii) in the case of a dissolution of the Trust, the Debentures
hereafter described, having a principal amount equal to the Stated Amount, to be
held by the Trust, or (iii) upon the occurrence of a tax event redemption prior
to the Purchase Contract Settlement Date, the applicable ownership interest in a
treasury security portfolio.
The number of new shares of Common Stock issuable upon settlement of each
Purchase Contract on the Purchase Contract Settlement Date (the "Settlement
Rate") will range from to shares and be calculated as follows
(subject to adjustment under certain circumstances): (a) if the Applicable
Market Value is equal to or greater than $ (the "Threshold Appreciation
Price"), the Settlement Rate will be , (b) if the Applicable Market
Value is less than the Threshold Appreciation Price but greater than
$ , the Settlement Rate will equal the Stated Amount divided by the
Applicable Market Value, and (c) if the Applicable Market Value is less than or
equal to $ , the Settlement Rate will be . "Applicable Market
Value" means the average of the Closing Prices (as defined) per share of Common
Stock on each of the twenty consecutive Trading Days (as defined) ending on the
third Trading Day immediately preceding the Purchase Contract Settlement Date.
The Trust Preferred Securities have a stated liquidation amount per Trust
Preferred Security equal to the Stated Amount, and represent a preferred
undivided beneficial interest in the assets of Kennametal Financing I, a
Delaware business trust (the "Trust"). Kennametal owns all of the common equity
interests in the Trust. Holders of the Trust Preferred Securities are entitled
to receive cumulative cash distributions payable at the rate of % of the
Stated Amount per annum. The sole asset of the Trust will consist of the
Company's % Debentures, due February 16, 2003 (the "Debentures") and it
will make distributions only to the extent that the Company makes a
corresponding payment on the Debentures. The terms of the indenture pursuant to
which the Debentures will be issued permits the Company to defer quarterly
payments of interest on the Debentures by extending the payment dates for a
period not to exceed the maturity date of the Debentures. Any such deferred
payments will
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accrue interest at a compounded rate. During any such extension period, the
indenture, and a related guarantee provide that the Company may not declare or
pay dividends on, make distributions with respect to or repurchase (other than
in certain limited circumstances) its capital stock (including its Common
Stock). In addition, the terms of the guaranty agreement to be entered into by
the Company to guaranty payment of amounts due on the Trust Preferred Securities
to the extent of the assets of the Trust, provide that during any event of
default under the guaranty agreement or under the agreement of trust, the
Company may not declare or pay any dividends on, make distributions with respect
to or repurchase (other than in certain limited circumstances) its capital stock
(including its Common Stock). The Company has no present intention of exercising
its right to defer interest payments by extending the interest payment period on
the Debentures.
The applicable distribution rate on the Trust Preferred Securities and the
interest rate on the related Debentures on and after the Purchase Contract
Settlement Date will be reset on the third Business Day (as defined) immediately
preceding the Purchase Contract Settlement Date to a rate per annum (the "Reset
Rate") to be determined by the Reset Agent (as defined herein) equal to the sum
of (x) a spread amount (the "Reset Spread") to be determined by the Reset Agent
on the tenth Business Day prior to the Purchase Contract Settlement Date and (y)
the rate of interest on the Two-Year Benchmark Treasury (as defined) in effect
on the third Business Day immediately preceding the Purchase Contract Settlement
Date, such sum being the distribution rate the Trust Preferred Securities should
bear in order for a Trust Preferred Security to have an approximate market value
of 100.5% of the Stated Amount on the third Business Day immediately preceding
the Purchase Contract Settlement Date, provided that the Company may limit such
Reset Spread to be no higher than the rate on the Two-Year Benchmark Treasury
(as defined) on the Purchase Contact Settlement Date plus 200 basis points (2%).
Such market value may be less than 100.5% if the Reset Spread is so limited. The
consummation of the FELINE PRIDES Offering is not a condition to consummation of
the Offering.
COMMON STOCK OFFERINGS
Concurrently with the Offering, the Company is offering 4,300,000 shares of
its capital stock, par value $1.25 per share (4,945,000 shares if the
underwriters for the shares exercise their over-allotment options in full). The
net proceeds from the Common Stock Offerings are expected to be approximately
$ million ($ million if the underwriters for the Common Stock
Offerings exercise their over-allotment options in full). The consummation of
the Common Stock Offerings is not a condition to the consummation of the
Offering.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Goldman, Sachs & Co., CIBC Oppenheimer Corp. and Deutsche Morgan Grenfell Inc.
are acting as representatives (the "Representatives") of each of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
the Company and the Underwriters, the Company has agreed to sell to the
Underwriters, and each of the Underwriters severally and not jointly has agreed
to purchase from the Company, the principal amount of Senior Debt Securities set
forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITERS OF 2001 NOTES OF 2008 NOTES OF 2028 DEBENTURES
--------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner &
Smith Incorporated...
Goldman, Sachs & Co..............
CIBC Oppenheimer Corp. ..........
Deutsche Morgan Grenfell Inc. ...
------------------- ------------------- -------------------
Total................ $ 150,000,000 $ 150,000,000 $ 150,000,000
=============== =============== ===============
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Senior Debt
Securities being sold hereby if any of the Senior Debt Securities are purchased.
Under certain circumstances, under the Purchase Agreement, the commitments of
non-defaulting Underwriters may be increased.
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<PAGE> 322
The Representatives have advised the Company that the Underwriters propose
initially to offer the Senior Debt Securities offered hereby to the public at
the public offering price set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in excess
of %, %, and % of the principal amount of the 2001 Notes, the
2008 Notes and the 2028 Debentures, respectively. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of % per Senior Debt
Security on sales to certain other dealers. After the public offering, the
public offering price, concession and discount may be changed.
The Company has agreed not to directly or indirectly, issue, sell, offer or
contract to sell, grant any option for the sale of or otherwise transfer or
dispose of any debt securities of the Company for a period of 90 days from the
date of this Prospectus Supplement without the prior written consent of Merrill
Lynch.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
hereof.
Until the distribution of the Senior Debt Securities is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Senior Debt
Securities. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Senior Debt
Securities. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of Senior Debt Securities.
If the Underwriters create a short position in the Senior Debt Securities
in connection with the Offering, i.e., if they sell more Senior Debt Securities
than are set forth on the cover page of the Prospectus Supplement, the
Representatives may reduce that short position by purchasing Senior Debt
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Senior Debt Securities. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Company does not intend to apply for listing of the Senior Debt
Securities on a national securities exchange but has been advised by the
Underwriters that they presently intend to make a market in the Senior Debt
Securities, as permitted by applicable laws and regulations. The Underwriters
are not obligated however, to make a market in the Senior Debt Securities and
any such market making may be discontinued at any time at the sole discretion of
the Underwriters. Accordingly, no assurance can be given as to the liquidity of
or trading markets for the Senior Debt Securities.
The Offering is being made pursuant to the provisions of Section 2710(c)(8)
of the Conduct Rules of the National Association of Securities Dealers, Inc.
Merrill Lynch has from time to time provided investment banking advisory
services to the Company, for which it has received customary compensation, and
may continue to do so in the future. Merrill Lynch has acted as financial
advisor to the Company in connection with the Merger, including serving as
dealer manager with respect to the Tender Offer. In this regard, the Company has
agreed to indemnify Merrill Lynch against certain liabilities. Goldman, Sachs &
Co., CIBC Oppenheimer Corp. and Deutsche Morgan Grenfell Inc. have from time to
time provided investment banking or financial advisory services to the Company,
and may continue to do so in the future. An affiliate of Deutsche Morgan
Grenfell Inc. has acted as an agent and a lender in various banking transactions
of the Company. An affiliate of CIBC Oppenheimer Corp. is a lender under the New
Bank Credit Facility.
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<PAGE> 323
LEGAL MATTERS
The validity of the Senior Debt Securities being offered hereby will be
passed upon for the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. William R. Newlin, Chairman of the Board of the
Company, is a shareholder in Buchanan Ingersoll Professional Corporation. As of
July 30, 1997, Mr. Newlin owned 24,385 shares of Common Stock, stock credits
representing the right to acquire 9,260 shares of Common Stock pursuant to the
Company's directors deferred fee plan, 20,000 shares of JLK common stock and
held options to acquire 1,500 Shares of Common Stock and 15,000 shares of JLK
common stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York. Simpson Thacher &
Bartlett will rely on Buchanan Ingersoll Professional Corporation with respect
to matters of Pennsylvania law.
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<PAGE> 324
======================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KENNAMETAL,
OR THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
ACCOMPANYING PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.......... S-3
Recent Developments.................... S-5
Use of Proceeds........................ S-7
Capitalization......................... S-8
Pro Forma Condensed Consolidated
Financial Information................ S-9
Selected Condensed Consolidated
Financial Data....................... S-16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... S-17
Description of Senior Debt
Securities........................... S-24
Description of Other Offerings......... S-32
Underwriting........................... S-33
Legal Matters.......................... S-35
PROSPECTUS
Available Information.................. 4
Incorporation of Certain Documents by
Reference............................ 4
Kennametal Inc......................... 5
The Trust.............................. 5
Ratio of Earnings to Fixed Charges..... 6
Use of Proceeds........................ 6
Description of Debt Securities......... 7
Description of Preferred Securities.... 15
Description of the Guarantee........... 26
Relationship Among the Preferred
Securities, the Trust Debentures and
the Guarantee........................ 29
Description of Common Stock............ 30
Description of Stock Purchase Contracts
and Stock Purchase Units............. 32
Book Entry Issuance.................... 33
Plan of Distribution................... 34
Legal Matters.......................... 35
Experts................................ 36
</TABLE>
======================================================
======================================================
$450,000,000
KENNAMETAL LOGO
KENNAMETAL INC.
$150,000,000 % SENIOR NOTES
DUE 2001
$150,000,000 % SENIOR NOTES
DUE 2008
$150,000,000 % SENIOR
DEBENTURES DUE 2028
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
CIBC OPPENHEIMER
DEUTSCHE MORGAN GRENFELL
, 1998
======================================================
<PAGE> 325
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the
Commission registration fee and the listing fee.
<TABLE>
<S> <C>
Commission Registration Fee............................................. $ 424,242
NYSE Listing Fee........................................................ 41,513
Blue Sky Fees and Expenses.............................................. 10,000
Transfer Agent, Trustee and Registrar Fees and Expenses................. 120,000
Accounting Fees and Expenses............................................ 425,000
Legal Fees and Expenses................................................. 700,000
Printing and Engraving Expenses......................................... 750,000
Rating Agency Fees...................................................... 600,000
Miscellaneous Expenses.................................................. 579,245
----------
Total.............................................................. $3,650,000
=========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
(the "PBCL") provides in general that a corporation may indemnify any person,
including its directors, officers and employees who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative (including
actions by or in the right of the corporation) by reason of the fact that he or
she is or was a representative of or serving at the request of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
the action or proceedings if he or she is determined by the board of directors,
or in certain circumstances by independent legal counsel to the shareholders, to
have acted in good faith and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal proceeding, had no reason to believe his conduct was unlawful. In
the case of actions by or in the right of the corporation, indemnification is
not permitted in respect of any claim, issue or matter as to which the person
has been adjudged to be liable to the corporation except to the extent a court
determines that the person is fairly and reasonably entitled to indemnification.
In any case, to the extent that the person has been successful on the merits or
otherwise in defense of any claim, issue or matter, he or she shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him or her in connection therewith. Subchapter D also provides that
the indemnification permitted or required by Subchapter D is not exclusive of
any other rights to which a person seeking indemnification may be entitled.
The Company's By-Laws provide that except as prohibited by law, every
director and officer of the Company is entitled to be indemnified by the Company
against reasonable expenses and any liability paid or incurred by such person in
connection with any actual or threatened claim, action, suit or proceeding,
civil, criminal, administrative, investigative or other in which he or she may
be involved by reason of being or having been a Director or Officer of the
Company or by reason that such person is or was serving at the request of the
Company as a director, officer, employee, fiduciary or other representative of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity. Such indemnification includes the right to have expenses incurred
paid in advance by the Company prior to final disposition, subject to such
conditions as may be prescribed by law. Persons who are not directors or
officers of the Company may be similarly indemnified in respect of service to
the Company or to another such entity at the request of the Company, to the
extent the Board of Directors designates. Expenses included fees and expenses of
counsel selected by such person, and liability includes amount of judgments,
excise taxes, fines and penalties, and amounts paid in settlement.
Indemnification pursuant to this provision of the Company's By-laws is not
permitted in any case in which the act or failure to act
II-1
<PAGE> 326
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. There may be other circumstances
where indemnification may not be permitted as a matter of public policy.
The By-Laws of the Company also provide that to the fullest extent that the
laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter
amended, permit elimination of limitation of the liability of directors, no
director of the Company shall be personally liable for monetary damages as such
for any action taken, or any failure to take any action, as a director. Under
Section 1713 of the PBCL, the personal liability of a director may not be
eliminated or limited if: (1) the director has breached or failed to perform the
duties of his office under Subchapter B of Chapter 17 of the PBCL (relating to
the fiduciary duties of directors); and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. Furthermore, this
limitation to the personal liability of directors of the Company does not apply
to (1) the responsibility or liability of a director pursuant to any criminal
statute; or (2) the liability of a director for the payment of taxes pursuant to
local, state or federal law.
The Company purchases director and officer liability insurance covering its
directors and officers with respect to liability which they may incur in
connection with their serving as such. Under the insurance, the Company will
receive reimbursement for amounts as to which the directors and officers are
indemnified under the Company's By-Laws. The insurance may also provide certain
additional coverage for the directors and officers against certain liability
even though such liability is not subject to indemnification under the Company's
By-Laws.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
- ------ ---------------------------------------- ----------------------------------------
<C> <S> <C>
1.1 Form of U.S. Purchase Agreement for the
Common Stock Offering*
1.2 Form of International Purchase Agreement
for the Common Stock Offering*
1.3 Form of Purchase Agreement for the
FELINE PRIDES Offering*
1.4 Form of Purchase Agreement for the
Senior Debt Securities Offering*
2.1 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit
October 10, 1997 (c)(1) to the Company's Schedule 14D-1
dated October 17, 1997, as amended.
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1
Incorporation of Kennametal, as amended of the Company's September 30, 1994 Form
10-Q.
3.2 By-Laws of Kennametal Incorporated by reference to Exhibit 3.1
of the Company's March 31, 1991 Form
10-Q.
3.3 Rights Agreement dated October 25, 1990 Incorporated by reference to Exhibit 4
of the Company's Form 8-K dated October
23, 1990.
4.1 Specimen Certificate of the Company's
FELINE PRIDES*
4.2 Form of Purchase Contract Agreement
(including as Exhibit A the form of the
Income PRIDES and as Exhibit B the form
of the Growth PRIDES)*
4.3 Form of Pledge Agreement*
</TABLE>
II-2
<PAGE> 327
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
- ------ ---------------------------------------- ----------------------------------------
<C> <S> <C>
4.4 Certificate of Trust of Kennametal
Financing I**
4.5 Declaration of Trust of Kennametal
Financing I*
4.6 Form of Trust Preferred Security
Certificate for Kennametal Financing I*
4.7 Form of First Supplemental Indenture
between Kennametal and The First
National Bank of Chicago, as Trustee.*
4.8 Form of Debentures of Kennametal*
4.9 Form of Preferred Securities Guarantee
Agreement in respect of Kennametal
Financing I, with respect to the Trust
Preferred Securities*
4.10 Form of Remarketing Agreement*
4.11 Form of Remarketing Underwriting
Agreement*
4.12 Form of Second Supplemental Indenture
between Kennametal and The First
National Bank of Chicago, as trustee of
the Debt Securities*
4.13 Form of Senior Notes due 2001
4.14 Form of Senior Notes due 2008
4.15 Form of Senior Debentures due 2028
5.1 Opinion of Buchanan Ingersoll
Professional Corporation*
5.2 Opinion of Skadden, Arps, Slate Meagher
& Flom, LLP, special Delaware counsel to
the Trust*
8.1 Opinion of Buchanan Ingersoll
Professional Corporation*
10.1 Credit Agreement dated as of November Incorporated by reference to Exhibit
17, 1997 (b)(2) to the Company's Schedule 14D-1
dated October 17, 1997, as amended.
10.2 Guaranty and Suretyship Agreement dated Incorporated by reference to Exhibit
as of November 17, 1997, as supplemented (b)(3) of the Company's Schedule 14D-1,
by the Additional Subsidiary Guarantor as amended, and Exhibit 10.2 of
Supplement dated as of November 18, 1997 Greenfield's Current Report on Form 8-K
dated November 17, 1997, respectively.
10.3 Borrower Pledge Agreement dated as of Incorporated by reference to Exhibit
November 17, 1997, as supplemented by (b)(4) of the Company's Schedule 14D-1,
the Additional Designated Collateral as amended, and Exhibit 10.5 of
Supplement dated as of November 18, 1997 Greenfield's Current Report on Form 8-K
dated November 17, 1997, respectively.
10.4 Subsidiary Pledge Agreement dated as of Incorporated by reference to Exhibit
November 18, 1997 10.3 of Greenfield's current Report on
Form 8-K dated November 17, 1997.
</TABLE>
II-3
<PAGE> 328
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
- ------ ---------------------------------------- ----------------------------------------
<C> <S> <C>
12.1 Computation of Ratio of Earnings to
Fixed Charges**
23.1 Consent of Arthur Andersen LLP Filed herewith
23.2 Consent of Buchanan Ingersoll
Professional Corporation***
23.3 Consent of Price Waterhouse LLP Filed herewith
23.4 Consent of Skadden, Arps, Slate Meagher
& Flom, LLP***
24 Powers of Attorney (included as part of Filed herewith and previously filed
the signature page hereof)
25.1 Form T-1 Statement of Eligibility of The
First National Bank of Chicago, as
Trustee under the Indenture*
25.2 Form T-1 Statement of Eligibility of The
First National Bank of Chicago, as
Institutional Trustee under the
Declaration of Trust*
25.3 Form T-1 Statement of Eligibility The
First National Bank of Chicago, as
Guarantee Trustee under the Guarantee
for Kennametal Financing I
27.1 Financial Data Schedule Filed herewith
27.2 Financial Data Schedule Filed herewith
</TABLE>
- ---------
*--to be filed by amendment
**--previously filed
***--included in their opinion filed as Exhibit 5
ITEM 17. UNDERTAKINGS
(A) RULE 415 OFFERING.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 329
(B) FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE.
The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Company's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(C) EQUITY OFFERINGS OF NONREPORTING REGISTRANT.
Kennametal Financing I hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(H) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
a final adjudication of such issue.
(I) REGISTRATION STATEMENTS PERMITTED BY RULE 430A.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(J) TRUST INDENTURE APPLICATION.
The undersigned Registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of section 310 of the Trust Indenture Act ("Act") in accordance with the
rules and regulations prescribed by the Commission under section 305(b)(2) of
the Act.
II-5
<PAGE> 330
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Kennametal Inc.
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in Latrobe, Pennsylvania, on January 2, 1998.
KENNAMETAL INC.
By: /s/ DAVID T. COFER
------------------------------------
David T. Cofer
Vice President, Secretary and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
and on the date indicated.
KNOW ALL MEN BY THESE PRESENTS that each person whose signature below
constitutes and appoints William R. Newlin and David T. Cofer, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any and all related Registration
Statements (including amendments thereto) filed pursuant to Rule 462 promulgated
under the Securities Act of 1933, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATES
- ------------------------------------ ------------------------------------ ------------------
<S> <C> <C>
* Chairman of the Board
- ------------------------------------
William R. Newlin
* President and Director (Principal
- ------------------------------------ Executive Officer)
Robert L. McGeehan
* Vice President, Controller and Chief
- ------------------------------------ Accounting Officer (Principal
James R. Breisinger Accounting Officer)
* Vice President, Chief Financial and
- ------------------------------------ Administrative Officer (Principal
Richard J. Orwig Financial Officer)
/s/ RICHARD C. ALBERDING Director January 2, 1998
- ------------------------------------
Richard C. Alberding
* Director
- ------------------------------------
Peter B. Bartlett
</TABLE>
II-6
<PAGE> 331
<TABLE>
<CAPTION>
SIGNATURES TITLES DATES
- ------------------------------------ ------------------------------------ ------------------
<S> <C> <C>
* Director
- ------------------------------------
A. Peter Held
/s/ WARREN H. HOLLINSHEAD Director January 2, 1998
- ------------------------------------
Warren H. Hollinshead
/s/ ALOYSIUS T. MCLAUGHLIN, JR. Director January 2, 1998
- ------------------------------------
Aloysius T. McLaughlin, Jr.
* Director
- ------------------------------------
Larry Yost
*By: /s/ DAVID T. COFER January 2, 1998
- ------------------------------------
Attorney-in-fact
</TABLE>
II-7
<PAGE> 332
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Kennametal
Financing I certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Latrobe, Pennsylvania, on January 2,
1998.
KENNAMETAL FINANCING I
BY: KENNAMETAL INC., as Depositor
By: /s/ DAVID T. COFER
------------------------------------
Name: David T. Cofer
Title: Vice President, Secretary
and General Counsel
II-8
<PAGE> 333
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
- ------ ---------------------------------------- ----------------------------------------
<C> <S> <C>
1.1 Form of U.S. Purchase Agreement for the
Common Stock Offering*
1.2 Form of International Purchase Agreement
for the Common Stock Offering*
1.3 Form of Purchase Agreement for the
FELINE PRIDES Offering*
1.4 Form of Purchase Agreement for the
Senior Debt Securities Offering*
2.1 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit
October 10, 1997 (c)(1) to the Company's Schedule 14D-1
dated October 17, 1997, as amended.
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1
Incorporation of Kennametal, as amended of the Company's September 30, 1994 Form
10-Q.
3.2 By-Laws of Kennametal Incorporated by reference to Exhibit 3.1
of the Company's March 31, 1991 Form
10-Q.
3.3 Rights Agreement dated October 25, 1990 Incorporated by reference to Exhibit 4
of the Company's Form 8-K dated October
23, 1990.
4.1 Specimen Certificate of the Company's
Feline PRIDES*
4.2 Form of Purchase Contract Agreement
(including as Exhibit A the form of the
Income PRIDES and as Exhibit B the form
of the Growth PRIDES)*
4.3 Form of Pledge Agreement*
4.4 Certificate of Trust of Kennametal
Financing I**
4.5 Declaration of Trust of Kennametal
Financing I*
4.6 Form of Trust Preferred Security
Certificate for Kennametal Financing I*
4.7 Form of First Supplemental Indenture
between Kennametal and The First
National Bank of Chicago, as Trustee.*
4.8 Form of Debentures of Kennametal*
4.9 Form of Preferred Securities Guarantee
Agreement in respect of Kennametal
Financing I, with respect to the Trust
Preferred Securities*
4.10 Form of Remarketing Agreement*
4.11 Form of Remarketing Underwriting
Agreement*
4.12 Form of Second Supplemental Indenture
between Kennametal and The First
National Bank of Chicago, as trustee of
the Debt Securities*
4.13 Form of Senior Notes due 2001
4.14 Form of Senior Notes due 2008
4.15 Form of Senior Debentures due 2028
</TABLE>
<PAGE> 334
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
- ------ ---------------------------------------- ----------------------------------------
<C> <S> <C>
5.1 Opinion of Buchanan Ingersoll
Professional Corporation*
5.2 Opinion of Skadden, Arps, Slate Meagher
& Flom, LLP, special Delaware counsel to
the Trust*
8.1 Opinion of Buchanan Ingersoll
Professional Corporation*
10.1 Credit Agreement dated as of November Incorporated by reference to Exhibit
17, 1997 (b)(2) to the Company's Schedule 14D-1
dated October 17, 1997, as amended.
10.2 Guaranty and Suretyship Agreement dated Incorporated by reference to Exhibit
as of November 17, 1997, as supplemented (b)(3) of the Company's Schedule 14D-1,
by the Additional Subsidiary Guarantor as amended, and Exhibit 10.2 of
Supplement dated as of November 18, 1997 Greenfield's Current Report on Form 8-K
dated November 17, 1997, respectively.
10.3 Borrower Pledge Agreement dated as of Incorporated by reference to Exhibit
November 17, 1997, as supplemented by (b)(4) of the Company's Schedule 14D-1,
the Additional Designated Collateral as amended, and Exhibit 10.5 of
Supplement dated as of November 18, 1997 Greenfield's Current Report on Form 8-K
dated November 17, 1997, respectively.
10.4 Subsidiary Pledge Agreement dated as of Incorporated by reference to Exhibit
November 18, 1997 10.3 of Greenfield's current Report on
Form 8-K dated November 17, 1997.
12.1 Computation of Ratio of Earnings to
Fixed Charges**
23.1 Consent of Arthur Andersen LLP Filed herewith
23.2 Consent of Buchanan Ingersoll
Professional Corporation***
23.3 Consent of Price Waterhouse LLP Filed herewith
23.4 Consent of Skadden, Arps, Slate Meagher
& Flom, LLP***
24 Powers of Attorney (included as part of Filed herewith and previously filed
the signature page hereof)
25.1 Form T-1 Statement of Eligibility of The
First National Bank of Chicago, as
Trustee under the Indenture*
25.2 Form T-1 Statement of Eligibility of The
First National Bank of Chicago, as
Institutional Trustee under the
Declaration of Trust*
25.3 Form T-1 Statement of Eligibility The
First National Bank of Chicago, as
Guarantee Trustee under the Guarantee
for Kennametal Financing I
27.1 Financial Data Schedule Filed herewith
27.2 Financial Data Schedule Filed herewith
</TABLE>
- ---------
*--to be filed by amendment
**--previously filed
***--included in their opinion filed as Exhibit 5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
January 2, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion and incorporation by reference in the
Prospectuses constituting part of this Registration Statement on Form S-3 of our
report dated January 30, 1997 appearing on page 24 of the Greenfield Industries,
Inc. 1996 Annual Report, which is incorporated by reference in the Greenfield
Industries, Inc. Annual Report on Form 10-K for the year ended December 31,
1996. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page S-1 of Such Annual Report on
Form 10-K. We also consent to the reference to us under the heading "Experts" in
such Prospectuses.
/s/ PRICE WATERHOUSE LLP
- ------------------------------------------------------
PRICE WATERHOUSE LLP
St. Louis, Missouri
January 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1997 Pro-Forma Condensed Consolidated Financial Statements and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000055242
<NAME> Kennametal Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,683,362
<TOTAL-REVENUES> 1,683,362
<CGS> 1,043,548
<TOTAL-COSTS> 1,043,548
<OTHER-EXPENSES> 120,379
<LOSS-PROVISION> 304
<INTEREST-EXPENSE> 57,373
<INCOME-PRETAX> 99,980
<INCOME-TAX> 39,992
<INCOME-CONTINUING> 58,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,757
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1997 Pro-Forma Condensed Consolidated Financial Statements
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000055242
<NAME> Kennametal Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 45,409
<SECURITIES> 0
<RECEIVABLES> 312,967
<ALLOWANCES> 12,723
<INVENTORY> 396,292
<CURRENT-ASSETS> 772,769
<PP&E> 916,050
<DEPRECIATION> 418,808
<TOTAL-ASSETS> 2,018,870
<CURRENT-LIABILITIES> 279,857
<BONDS> 450,000
222,300
0
<COMMON> 36,876
<OTHER-SE> 688,933
<TOTAL-LIABILITY-AND-EQUITY> 2,018,870
<SALES> 450,628
<TOTAL-REVENUES> 450,628
<CGS> 277,842
<TOTAL-COSTS> 277,842
<OTHER-EXPENSES> 33,311
<LOSS-PROVISION> 304
<INTEREST-EXPENSE> 10,590
<INCOME-PRETAX> 28,642
<INCOME-TAX> 11,457
<INCOME-CONTINUING> 15,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,800
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
</TABLE>
