0001104659-06-056573.txt : 20060822 0001104659-06-056573.hdr.sgml : 20060822 20060822171816 ACCESSION NUMBER: 0001104659-06-056573 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060608 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060822 DATE AS OF CHANGE: 20060822 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSC INDUSTRIAL DIRECT CO INC CENTRAL INDEX KEY: 0001003078 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 113289165 STATE OF INCORPORATION: NY FISCAL YEAR END: 0827 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-14130 FILM NUMBER: 061049313 BUSINESS ADDRESS: STREET 1: 75 MAXESS RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 516-812-2000 MAIL ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 8-K/A 1 a06-18400_18ka.htm AMENDMENT TO FORM 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 8, 2006

MSC Industrial Direct Co., Inc.

(Exact name of registrant as specified in its charter)

New York	1-14130	11-3289165
(State or other jurisdiction	(Commission	(I.R.S. Employer
of incorporation)	File Number)	Identification No.)

75 Maxess Road, Melville, New York	11747
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (516) 812-2000

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13a-4(c))

ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

As previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2006 (the “Initial Form 8-K”), on June 8, 2006, the Registrant through its wholly-owned subsidiary, MSC Acquisition Corp. VI, (the “Acquisition Sub”) completed its previously announced acquisition of 100% of the outstanding equity securities of J&L America, Inc. and Subsidiary (“J&L”) from JLK Direct Distribution, Inc. (the “Seller”), a wholly-owned subsidiary of Kennametal, Inc. (“Kennametal”), pursuant to a Stock Purchase Agreement (the “Agreement”) among the Registrant, the Acquisition Sub, Kennametal and the Seller dated as of March 15, 2006. The Initial Form 8-K is incorporated by reference herein.

The purchase price paid on June 8, 2006 ($349,500,000) is subject to post closing adjustments based on the “Closing Reference Net Assets” (as defined in the Agreement) of the acquired business at June 8, 2006, as determined subsequent to August 30, 2006. Kennametal has advised the Company that it believes the purchase price should be subject to upward adjustments based on an increase in net assets acquired. The Company is in the process of reviewing such adjustments. Any such incremental purchase price to be paid by the Company is not anticipated to be material in relation to the size of the overall transaction.

This Form 8-K/A is being filed to amend Item 9.01 of the Initial Form 8-K. This amendment provides the audited historical financial statements of the business acquired as required by Item 9.01(a) and the unaudited pro forma financial information required by Item 9.01(b), which financial statements and information were not included in the Initial Form 8-K pursuant to applicable regulation.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements of Business Acquired

The required audited financial statements of J&L as of June 30, 2005 and 2004 and for each of the three years in the period ended June 30, 2005 are attached hereto as Exhibit 99.1 and are incorporated by reference herein.

The required unaudited interim financial statements of J&L as of March 31, 2006 and for the nine months ended March 31, 2006 and 2005 are attached hereto as Exhibit 99.2 and are incorporated by reference herein.

(b) Pro Forma Financial Information

The required pro forma financial information of the Registrant as of and for the period ended May 27, 2006 and fiscal year ended August 27, 2005 is attached hereto as Exhibit 99.3 and is incorporated by reference herein.

(d) Exhibits.

Exhibit 2.1		Stock Purchase Agreement by and among JLK Direct Distribution, Inc., Kennametal Inc., MSC Industrial Direct Co., Inc. and MSC Acquisition Corp. VI dated as of March 15, 2006 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 16, 2006).

Exhibit 23.1		Consent of Independent Registered Public Accounting Firm.

Exhibit 99.1		Consolidated audited financial statements of J&L America, Inc. and Subsidiary as of June 30, 2005 and 2004 and for each of the three years in the period ended June 30, 2005.

Exhibit 99.2		Consolidated unaudited interim financial statements of J&L America, Inc. and Subsidiary as of March 31, 2006 and for the nine months ended March 31, 2006 and 2005.

Exhibit 99.3		Pro forma financial information of the Registrant as of and for the period ended May 27, 2006 and fiscal year ended August 27, 2005.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	MSC Industrial Direct Co., Inc.


Date: August 22, 2006	By:	/s/ Charles Boehlke
		Name:	Charles Boehlke
		Title:	Executive Vice President and Chief Financial Officer

EX-23.1 2 a06-18400_1ex23d1.htm EX-23

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-03256, No. 333-46273, No. 333-48901, No. 333-84124, No. 333-70293 and No. 333-130899) and Form S-3 (No. 333-31837, No. 333-110357 and No. 333-117514) of MSC Industrial Direct Co., Inc. of our report dated May 26, 2006 relating to the financial statements of J&L America, Inc. and Subsidiary, which appears in the Current Report on form 8-K of MSC Industrial Direct Co., Inc. dated August 22, 2006.

/s/ PricewaterhouseCoopers LLP

Detroit, MI
August 22, 2006

EX-99.1 3 a06-18400_1ex99d1.htm EX-99

Exhibit 99.1

J&L America, Inc. and Subsidiary

Consolidated Financial Statements

Table of Contents

FINANCIAL INFORMATION
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended June 30, 2005, 2004 and 2003		7
Consolidated Balance Sheets as of June 30, 2005 and 2004		8
Consolidated Statements of Cash Flows for the Years Ended June 30, 2005, 2004 and 2003		9
Consolidated Statement of Shareowner’s Equity for the Years Ended June 30, 2005, 2004 and 2003		10
Notes to Consolidated Financial Statements		11

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholder of
J&L America, Inc. and Subsidiary

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareowner’s equity and cash flows present fairly, in all material respects, the financial position of J&L America, Inc. and Subsidiary (the Company) at June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 the 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 our opinion.

PricewaterhouseCoopers LLP
Detroit, MI
May 26, 2006

J&L America, Inc. and Subsidiary
Consolidated Statements of Income

Year ended June 30 (in thousands)	2005		2004		2003
Sales	$	257,500	$	219,797	$	197,633
Cost of goods sold	182,297		156,466		142,829
Gross profit	75,203		63,331		54,804
Operating expense	50,556		46,260		49,002
Restructuring charge (Note 9)	—		—		1,203
Operating income	24,647		17,071		4,599
Other expense, net	2,031		847		406
Income before provision for income taxes	22,616		16,224		4,193
Provision for income taxes (Note 7)	8,355		5,936		1,627
Net income	$	14,261	$	10,288	$	2,566

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

J&L America, Inc. and Subsidiary
Consolidated Balance Sheets

As of June 30 (in thousands, except share and per share data)	2005			2004
ASSETS
Current assets:
Cash	$	4,606		$	—
Accounts receivable, less allowance for doubtful accounts of $528 and $289 (Note 4)	12,030			10,761
Inventories	43,264			40,289
Deferred income taxes (Note 7)	1,577			1,373
Other current assets	3,113			2,562
Total current assets	64,590			54,985
Property, plant and equipment:
Land and buildings	4,427			4,419
Machinery and equipment	19,119			18,314
Less accumulated depreciation	(14,007		)	(12,476		)
Property, plant and equipment, net	9,539			10,257
Other assets:
Goodwill	39,670			39,670
Deferred income taxes (Note 7)	—			286
Other	786			797
Total other assets	40,456			40,753
Total assets	$	114,585		$	105,995
LIABILITIES
Current liabilities:
Accounts payable (Note 5)	$	21,686		$	23,876
Other current liabilities (Note 6)	2,660			2,221
Total current liabilities	24,346			26,097
Deferred income taxes (Note 7)	16			—
Other liabilities	—			29
Total liabilities	24,362			26,126
Commitments and contingencies (Note 12)
SHAREOWNER’S EQUITY
Capital stock, $1 par value; 50,000 shares authorized and issued	50			50
Net investment by parent	11,363			15,222
Retained earnings	77,376			63,115
Accumulated other comprehensive income	1,434			1,482
Total shareowner’s equity	90,223			79,869
Total liabilities and shareowner’s equity	$	114,585		$	105,995

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

J&L America, Inc. and Subsidiary
Consolidated Statements of Cash Flows

Year ended June 30 (in thousands)	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	14,261		$	10,288		$	2,566
Adjustments for non-cash items:
Depreciation and amortization	3,447			3,312			4,363
Provision for doubtful accounts	1,085			837			2,983
Provision for inventory reserve	924			456			485
Loss (gain) on disposal of property, plant and equipment	12			(30		)	59
Deferred income tax provision	98			1,224			1,297
Related party charges and other	2,931			1,666			1,357
Changes in certain assets and liabilities:
Accounts receivable	(1,875		)	(6,414		)	(554		)
(Repayment of) proceeds from accounts receivable securitization	(479		)	4,329			1,437
Inventories	(3,899		)	(4,095		)	3,427
Accounts payable and accrued liabilities	(398		)	4,677			(84		)
Other	(1,509		)	(2,970		)	(145		)
Net cash flow provided by operating activities	14,598			13,280			17,191
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(1,829		)	(1,392		)	(2,281		)
Proceeds from sale of property, plant and equipment	48			931			6
Other	14			64			(206		)
Net cash flow used for investing activities	(1,767		)	(397		)	(2,481		)
FINANCING ACTIVITIES
Payments to parent, net	(6,795		)	(16,288		)	(14,967		)
Increase (decrease) in cash overdraft	(1,249		)	1,249			—
Other	(133		)	(170		)	91
Net cash flow used for financing activities	(8,177		)	(15,209		)	(14,876		)
Effect of exchange rate changes on cash	(48		)	1,108			834
CASH
Net increase (decrease) in cash	4,606			(1,218		)	668
Cash, beginning of year	—			1,218			550
Cash, end of year	$	4,606		$	—		$	1,218
SUPPLEMENTAL DISCLOSURES
Income taxes paid	$	8,048		$	4,606		$	332
Contributions of stock to employee defined contribution benefit plan	1,617			514			185

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

J&L America, Inc. and Subsidiary
Consolidated Statements of Shareowner’s Equity

Year ended June 30 (in thousands)	2005			2004			2003
CAPITAL STOCK	$	50		$	50		$	50
NET INVESTMENT BY PARENT
Balance at beginning of year	15,222			29,683			43,150
Return of capital to shareowner (Note 3)	(3,859		)	(14,461		)	(13,467		)
Balance at end of year	11,363			15,222			29,683
RETAINED EARNINGS
Balance at beginning of year	63,115			52,827			50,261
Net income	14,261			10,288			2,566
Balance at end of year	77,376			63,115			52,827
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year	1,482			374			(460		)
Foreign currency translation adjustments	(48		)	1,108			834
Balance at end of year	1,434			1,482			374
Total shareowner’s equity, end of year	$	90,223		$	79,869		$	82,934
COMPREHENSIVE INCOME
Net income	$	14,261		$	10,288		$	2,566
Other comprehensive (loss) income	(48		)	1,108			834
Comprehensive income	$	14,213		$	11,396		$	3,400

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

J&L America, Inc. and Subsidiary
Notes to Consolidated Financial Statements

NOTE 1 — NATURE OF OPERATIONS

J&L America, Inc. (Company) is a leading supplier of industrial metalworking products and services. The Company’s ultimate parent is Kennametal Inc. (Kennametal). The Company provides metalworking consumables, related products and related technical and supply chain related productivity services to small and medium sized durable goods manufacturers in the United States of America and the United Kingdom. The Company markets products and services through a number of channels, including field sales, telesales, wholesalers and direct marketing. All channels are supported by catalogs, direct mail flyers and the internet. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. When used in this financial report, unless the context requires otherwise, the terms “J&L,” “we,” “our” and “us” refer to J&L America, Inc. and its subsidiary.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of our significant accounting policies is presented below to assist in evaluating our consolidated financial statements.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of our subsidiary. All significant intercompany balances and transactions are eliminated.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develop estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our consolidated financial statements.

CASH Cash includes cash on hand and cash in banks. Cash management for the Company is conducted by Kennametal. As a result, the net amount of intercompany receivables/payables outstanding at year-end, is considered by the Company to be a capital contribution or a return of capital from Kennametal. The effect is to increase/decrease net investment by parent and/or retained earnings as appropriate on the balance sheet.

ACCOUNTS RECEIVABLE We market our products to small and medium sized durable goods manufacturers. Trade credit is extended based upon periodically updated evaluations of each customer’s ability to satisfy its obligations. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Accounts receivable reserves are determined based upon an aging of accounts and a review of specific accounts. A significant portion of our accounts receivable are securitized. See Note 4 for details regarding the securitization program.

INVENTORIES Inventories are stated at the lower of cost or market. We use the first-in, first-out method for determining the cost of our inventories. When market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market provision is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand. The excess and obsolete inventory reserve at June 30, 2005 and 2004 was $1.7 million and $1.2 million, respectively.

ADVERTISING AND CATALOG COSTS Advertising costs are expensed as incurred. The costs of producing and distributing the Company’s catalog are initially deferred and included in other assets. These catalog costs are amortized to expense over the projected life of a catalog, typically two years.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income.

Depreciation for financial reporting purposes is computed using the straight-line method over the following estimated useful lives:

Building and improvements		15-40 years
Machinery and equipment		4-15 years
Furniture and fixtures		5-10 years
Computer hardware and software		3-5 years

Leased property and equipment under capital leases are amortized using the straight-line method over the terms of the related leases.

LONG-LIVED ASSETS We periodically perform ongoing reviews of long-lived assets for impairment pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). These reviews may include an analysis of the current operations and capacity utilization, in conjunction with the markets in which we operate. A comparison is performed of the undiscounted projected cash flows of the current operating forecasts to the net book value of the related assets. If it is determined that the full value of the assets may not be recoverable, an appropriate charge to adjust the carrying value of the long-lived assets to fair value may be required.

GOODWILL Goodwill represents the excess of cost over the fair value of acquired companies. Goodwill is tested at least annually for impairment. On an ongoing basis, absent any impairment indicators, we perform our impairment tests during the June quarter, in connection with our planning process.

REVENUE RECOGNITION We recognize revenue upon shipment of our products. Our general conditions of sale explicitly state that the delivery of our products is free on board shipping point and that title and all risks of loss and damages pass to the buyer upon delivery of the sold products to the common carrier.

Our general conditions of sale explicitly state that acceptance of the conditions of shipment are considered to have occurred unless written notice of objection is received by the Company within 10 calendar days of the date specified on the invoice. We do not ship product unless we have confirmation authorizing shipment to our customers. Our products are consumed by our customers in the manufacture of their products. Historically, we have experienced very low levels of returned product and do not consider the effect of returned product to be material. As a result, an immaterial amount has been recorded as an allowance for any potential product returns.

We warrant that products and services sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer, and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to the Company only after inspection and approval by the Company and upon receipt by the customer of shipping instructions from the Company. Based upon the Company’s favorable warranty return experience, we have not recorded a warranty return allowance.

SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.

STOCK-BASED COMPENSATION Certain employees of the Company participate in the Kennametal Inc. Stock and Incentive Plan of 2002 (2002 Plan). Stock options generally are granted to eligible employees with a stock price equal to fair market value at the date of grant. Options are exercisable under specific conditions for up to 10 years from the date of grant. As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), Kennametal has elected to measure compensation expense related to stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, which uses the intrinsic value method. In addition to stock option grants, the 2002 Plan permits the award of restricted stock to directors, officers and key employees. Expense associated with restricted stock grants is amortized over the vesting period. The expense for these awards is the same under the fair value method or intrinsic value method. Kennametal follows a nominal vesting approach for both options and restricted stock. If compensation expense was determined by Kennametal based on the estimated fair value of options granted in 2005, 2004 and 2003, consistent with the methodology in SFAS 123, our 2005, 2004 and 2003 our net income would be reduced to the pro forma amounts indicated below:

Fiscal year ended (in thousands)	2005			2004			2003
Net income, as reported	$	14,261		$	10,288		$	2,566
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(673		)	(559		)	(437		)
Add: Total stock-based employee compensation expense determined under intrinsic value based method for all awards, net of related tax effects	238			145			78
Total incremental pro forma stock-based compensation	(435		)	(414		)	(359		)
Pro forma net income	$	13,826		$	9,874		$	2,207

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:

	2005		2004		2003
Risk-free interest rate	3.7	%	3.0	%	3.3	%
Expected life (years)	5		5		5
Expected volatility	28.4	%	35.1	%	34.2	%
Expected dividend yield	1.6	%	1.7	%	2.1	%

INCOME TAXES The Company is included in the consolidated federal income tax return of Kennametal. Income taxes are calculated as if the Company had filed a tax return on a separate company basis. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company’s financial statements or separate tax return that would be filed on a separate company basis. Deferred income taxes are recognized based on the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized.

FOREIGN CURRENCY TRANSLATION Assets and liabilities of our United Kingdom operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive income.

NEW ACCOUNTING STANDARDS In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment (revised 2004)” (SFAS 123(R)). SFAS 123(R) is a revision of SFAS 123, and supersedes APB 25. SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of stock options under Kennametal’s 2002 Plan. SFAS 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This standard established a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees.

The Company adopted SFAS 123(R) effective July 1, 2005. The Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Beginning July 1, 2005, the Company recorded stock-based compensation expense for the cost of stock options and restricted stock issued under the 2002 Plan. Pretax stock-based compensation expense for 2006 related to unvested awards as of July 1, 2005 and awards granted through March 31, 2006 is estimated to be approximately $1.1 million.

SFAS 123(R) requires that stock-based compensation expense be recognized over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). Kennametal’s 2002 Plan provides that stock option awards for employees vest up to 2 years after retirement and restricted stock awards vest immediately upon retirement for employees and directors. In periods prior to the adoption of SFAS 123(R) (pro forma disclosure only), the Company recorded stock-based compensation for awards to retirement-eligible employees over the awards’ stated vesting period (nominal vesting period). With the adoption of SFAS 123(R), the Company will continue to follow the nominal vesting period approach for the unvested portion of awards granted before the adoption of SFAS 123(R) and follow the substantive vesting period approach for awards granted after the adoption of SFAS 123(R). The transition to the substantive vesting approach did not have a material impact on pro forma disclosures previously made under SFAS 123.

NOTE 3 — RELATED PARTY TRANSACTIONS

The Company sells and purchases products to/from certain business units of Kennametal. The Company believes the prices charged reflect the current market prices. The following table reflects the amounts of these transactions:

Fiscal year ended (in thousands)	2005		2004		2003
Sales to affiliated companies	$	1,663	$	1,502	$	1,461
Purchases of inventory from affiliated companies	38,320		27,709		26,326

The Company utilizes certain services and engages in operating transactions in the normal course of business with Kennametal. In certain cases, related party expenses allocated to the Company have not required reimbursement in cash and, accordingly, have been treated as capital contributions. The following represents a summary of the significant transactions of this nature:

Cash management for the Company is conducted by Kennametal. This arrangement allows the Company to obtain funds from Kennametal at any time and repay them with cash it receives. These amounts are considered to be capital contributions from or a return of capital to Kennametal. No interest has been charged or paid under this arrangement.

Operating expenses include charges of $3.2 million, $2.7 million and $2.3 million for the years ended June 30, 2005, 2004 and 2003, respectively, for certain accounting and administrative services provided by Kennametal. These charges are allocated to the Company based upon an estimate of the value of services provided to the Company versus total services provided to all business units of Kennametal.

Employees participate in a non-contributory defined benefit pension plan administered by Kennametal. Benefits for this plan are based primarily on years of service and the employee’s compensation near retirement. The Company’s allocation of the pension expense under this plan was $0.1 million, $1.2 million and $1.2 million for the years ended June 30, 2005, 2004 and 2003, respectively. The Company’s allocation of the expense for this plan is based on the percentage of the Company plan participants to the total number of employees covered by the plan.

Employees may also elect to participate in a defined contribution retirement plan administered by Kennametal. Amounts charged to expense by the Company for these plans were $1.6 million, $0.5 million and $0.2 million for the years ended June 30, 2005, 2004 and 2003, respectively. Kennametal charges the Company the actual amounts contributed by Kennametal on behalf of the Company’s employees. Company contributions to U.S. defined contribution plans are made primarily in Kennametal stock.

Certain executives of the Company participate in a supplemental executive retirement plan administered by Kennametal. Amounts charged to expense by the Company for these plans were immaterial for the years ended June 30, 2005, 2004 and 2003. Kennametal charges the Company the actual amounts contributed by Kennametal on behalf of the Company’s employees.

Domestic employees participate in a non-contributory postretirement other than pension benefit plan administered by Kennametal. Postretirement health care benefits are available to retired employees and their spouses based upon age and years of service. The Company’s allocation of the (income) expense under this plan was ($0.2) million, ($0.1) million and $0.2 million for the years ended June 30, 2005, 2004 and 2003, respectively. The Company’s allocation of the (income) expense for this plan is based on the percentage of the Company plan participants to the total number of employees covered by the plan.

Certain employees of the Company participate in various incentive compensation programs administered by Kennametal. Amounts charged to expense by the Company for these plans were $1.3 million, $1.0 million and $0.1 million for the years ended June 30, 2005, 2004 and 2003, respectively. Kennametal charges the Company the actual amounts paid by Kennametal to the Company’s employees.

Certain employees are eligible to receive restricted stock awards and/or stock options under plans administered by Kennametal. These awards are in the capital stock of Kennametal. Amounts charged to expense by the Company for these awards were $0.4 million, $0.2 million and $0.1 million for the years ended June 30, 2005, 2004 and 2003, respectively. Kennametal charges the Company the actual amounts awarded to eligible Company employees.

Employees of the Company participate in the group insurance and workers’ compensation insurance programs administered by Kennametal. The Company’s allocation of the insurance expense under these programs was $2.7 million, $2.7 million and $3.1 million for the years ended June 30, 2005, 2004 and 2003, respectively. The Company’s allocation of the expense for these programs are based on the percentage of the Company’s covered participants to the total number of employees covered by these programs.

The Company is party to an agreement with Kennametal whereby certain financial institutions securitize, on a continuous basis, an undivided interest in a specific pool of our domestic trade accounts receivable. The financial institutions charge Kennametal fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs allocated to the Company are based upon the amount of the Company’s accounts receivable as a percentage of total accounts receivable in the program. Amounts charged to expense under this program were $0.6 million, $0.3 million and $0.3 million in 2005, 2004 and 2003, respectively and were accounted for as a component of other expenses, net.

The Company utilizes a portion of Kennametal’s office facility in Charlotte, North Carolina. Rent is charged based upon square footage at market rates. The amount charged to expense by the Company was $0.1 million for each of the years ended June 30, 2005, 2004 and 2003.

Kennametal is a party to the 2006 Credit Agreement, which amends and restates the 2004 Credit Agreement. Like the 2004 Credit Agreement, the 2006 Credit Agreement is a revolving credit facility. Under the 2006 Credit Agreement, the Company is considered a significant domestic subsidiary. As such, the Company serves as a co-guarantor of the outstanding obligation under this credit facility. As of June 30, 2005 outstanding borrowings under the agreement were $72.9 million.

The historical financial statements of the Company were prepared to reflect the impact of these arrangements with Kennametal. As a result, management believes the financial statements present, in all material respects, the results of operations and financial position of the Company as if it were operating as an autonomous entity.

NOTE 4 — ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

The Company is party to an agreement with Kennametal whereby certain financial institutions securitize, on a continuous basis, an undivided interest in a specific pool of our domestic trade accounts receivable. This agreement permits Kennametal to securitize up to $125 million of accounts receivable. This program provides for a co-purchase arrangement, whereby two financial institutions participate in the purchase of our accounts receivable. Pursuant to this agreement, we sell our domestic accounts receivable to Kennametal Receivables Corporation (KRC), a wholly-owned, bankruptcy-remote subsidiary of Kennametal. A bankruptcy-remote subsidiary is a company that has been structured to make it highly unlikely that it would be drawn into a bankruptcy of Kennametal, or any of its other subsidiaries. KRC was formed to purchase these accounts receivable and sell participating interests in such accounts receivable to the financial institutions, which in turn purchase and receive ownership and security interests in those assets. As collections reduce the amount of accounts receivable included in the pool, we sell new accounts receivable to KRC, which in turn securitizes these new accounts receivable with the financial institutions. The actual amount of accounts receivable securitized each month is a function of the net change (new billings less collections) in the specific pool of domestic accounts receivable, the impact of detailed eligibility requirements in the agreement (e.g., the aging, terms of payment, quality criteria and customer concentrations), and the application of various reserves which are typical in trade receivable securitization transactions. A decrease in the amount of eligible accounts receivable could result in our inability to continue to securitize all or a portion of our accounts receivable.

The financial institutions charge fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs incurred under this program, $0.6 million, $0.3 million and $0.3 million in 2005, 2004 and 2003, respectively, are accounted for as a component of other expenses, net.

At June 30, 2005 and 2004, the Company securitized accounts receivable of $21.7 million and $22.1 million, respectively, under this program. Our subordinated retained interests in accounts receivable available for securitization and recorded as a component of accounts receivable were $6.4 million and $4.5 million at June 30, 2005 and 2004, respectively. We estimate the fair value of our retained interests using a discounted cash flow analysis. As of June 30, 2005, key economic assumptions applied in the discounted cash flow analysis were a discount rate of 2.99 percent and an assumed life of the receivables of 30 days. Fair value of our retained interests approximates carrying value. A hypothetical change of 20 percent in the discount rate or the estimated life of the receivables securitized does not have a material effect on the fair value of our retained interests. The Company continues to service the sold receivables and is compensated at what we believe to be market rates. Accordingly, no servicing asset or liability has been recorded. Delinquencies and write-offs related to these receivables were not material for the years ended June 30, 2005, 2004 and 2003.

Cash flows related to our securitization program represent collections of previously securitized receivables and proceeds from the securitization of new receivables. Collections and sales occur on a daily basis. As a result, net cash flows vary based on the ending balance of receivables securitized. The net (repayments) proceeds from accounts receivable securitization for the years ended June 30, 2005, 2004 and 2003 were ($0.5) million, $4.3 million and $1.4 million, respectively.

The 2003 Securitization Program is a three-year program, which contains certain provisions that require annual approval. It is Kennametal’s intention to continuously obtain such approval when required. Non-renewal of this securitization program would result in our requirement to otherwise finance the amounts securitized. In the event of a decrease of our eligible accounts receivable or non-renewal or non-annual approval of Kennametal’s securitization program, we would have to utilize alternative sources of capital to fund that portion of our working capital needs.

NOTE 5 — ACCOUNTS PAYABLE

Accounts payable consisted of the following:

As of June 30 (in thousands)	2005		2004
Trade payables	$	21,686	$	22,627
Cash overdraft	—		1,249
Total accounts payable	$	21,686	$	23,876

NOTE 6 — OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:

As of June 30 (in thousands)	2005		2004
Accrued insurance	$	625	$	804
Accrued freight	737		542
Accrued sales and use tax audit	380		188
Accrued vacations	294		281
Other accrued expenses	624		406
Total other current liabilities	$	2,660	$	2,221

NOTE 7 — INCOME TAXES
Income before income taxes and the provision for income taxes consisted of the following:

Fiscal year ended (in thousands)	2005			2004			2003
Income before provision for income taxes:
United States	$	21,397		$	16,608		$	4,319
International	1,219			(384		)	(126		)
Total income before provision for income taxes	$	22,616		$	16,224		$	4,193
Current income taxes:
Federal	$	7,450		$	4,294		$	193
State	587			418			137
International	220			—			—
Total current income taxes	8,257			4,712			330
Deferred income taxes	98			1,224			1,297
Provision for income taxes	$	8,355		$	5,936		$	1,627
Effective tax rate	36.9		%	36.6		%	38.8		%

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows:

Fiscal year ended (in thousands)	2005		2004			2003
Income taxes at U.S. statutory rate	$	7,915	$	5,678		$	1,468
State income taxes, net of federal tax benefits	387		317			134
Other	53		(59		)	25
Provision for income taxes	$	8,355	$	5,936		$	1,627

The components of net deferred tax assets and liabilities are as follows:

As of June 30 (in thousands)	2005		2004
Deferred tax assets:
Inventory valuation and reserves	$	971	$	971
Accrued employee benefits	260		220
Other accrued liabilities	522		322
Intangible assets	642		912
Total	2,395		2,425
Valuation allowance	—		—
Total deferred tax assets	$	2,395	$	2,425

Deferred tax liabilities:
Tax depreciation in excess of book	$	834	$	766
Total net deferred tax assets/liabilities	$	1,561	$	1,659

NOTE 8 — PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

The Company provides a non-contributory defined benefit pension plan and a non-contributory postretirement and postemployment benefit plan covering substantially all of our employees through Kennametal. These plans are administered by Kennametal and costs are allocated to the Company based on the number of participating employees. They have been treated as multi-employer plans for purposes of these financial statements. As a result, there is no related asset or liability recorded for these plans.

We also participate in a contributory defined contribution retirement plan and a supplemental executive retirement plan. These plans are administered by Kennametal. Company contributions to U.S. defined contribution plans are made primarily in Kennametal stock.

The following allocated costs have been reported as operating expenses:

Fiscal year ended (in thousands)	2005			2004			2003
Defined benefit pension expense	$	93		$	1,172		$	1,197
Defined contribution pension expense	1,631			522			186
Executive retirement expense	20			31			20
Other postretirement and postemployment benefits expense/(credit)	(160		)	(38		)	155

NOTE 9 — RESTRUCTURING CHARGE

In 2003, the Company’s implemented a global salaried workforce reduction program. This program resulted in 2003 charges of $1.2 million. Cash expenditures for substantially all of these charges were paid in 2003. Cash expenditures in 2005 and 2004 were immaterial.

NOTE 10 — FINANCIAL INSTRUMENTS

Financial Instruments The Company’s financial instruments include accounts receivable and accounts payable. Based upon their short term nature, the carrying value of these financial instruments closely approximates their fair value.

Concentrations of Credit Risk With respect to trade receivables, concentrations of credit risk are significantly reduced because we serve numerous customers throughout the United States of America and the United Kingdom.

NOTE 11 — STOCK OPTIONS AND AWARDS

Eligible Company employees may be granted stock awards under the Kennametal Stock and Incentive Plan of 2002. 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.

Under provisions of the 2002 Plan, participants may deliver Kennametal stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. No shares were delivered during 2003, 2004 or 2005.

Stock option activity for fiscal years ending 2005, 2004 and 2003 is set forth below:

	2005				2004				2003
Number of Options	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding, beginning of year	184,482		$	34.94	183,817		$	33.63	123,283		$	35.58
Granted	58,075		41.43		30,550		38.47		80,600		30.80
Exercised	(35,755	)	34.02		(29,335	)	30.40		(334	)	32.10
Lapsed and forfeited	(12,783	)	37.09		(550	)	32.89		(19,732	)	34.35
Options outstanding, end of year	194,019		$	36.91	184,482		$	34.94	183,817		$	33.63
Options exercisable, end of year	118,203		$	34.91	84,926		$	34.84	53,786		$	33.86
Weighted average fair value of options granted during the year			$	11.08			$	11.62			$	8.83

Stock options outstanding at June 30, 2005:

Options Outstanding					Options Exercisable
Range of Exercise Prices	Options	Weighted Remaining Contractual Life (years)	Weighted Average Exercise Price		Options	Weighted Average Exercise Price
$29.28 — $29.76	13,333	5.80	$	29.33	12,667	$	29.31
$29.81	39,000	7.06	$	29.81	36,334	$	29.81
$29.82 — $38.30	17,833	7.40	$	34.61	12,334	$	34.87
$38.44	22,962	6.08	$	38.44	22,962	$	38.44
$38.48 — $40.05	20,216	8.24	$	38.84	8,822	$	38.79
$40.26 — $40.69	24,250	6.72	$	40.53	24,250	$	40.53
$40.98	48,425	9.07	$	40.98	—	—
$41.20 — $46.81	8,000	9.27	$	44.55	834	$	41.81
	194,019	7.56	$	36.91	118,203	$	34.91

In addition to stock option grants, the 2002 Plan permits the award of restricted stock to directors, officers and key employees. During 2005, 2004 and 2003, Kennametal granted restricted stock awards which vest over periods of one to four years from the grant date. The actual number of shares granted was not material. For some grants, vesting may accelerate due to achieving certain performance goals. Compensation expense related to these awards was $0.4 million, $0.2 million and $0.1 million in 2005, 2004 and 2003, respectively. The unamortized portion is reported on the consolidated balance sheets of Kennametal as unearned compensation.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Legal Matters Various lawsuits arising during the normal course of business are pending against the Company. In our opinion, the ultimate liability, if any, resulting from these matters will have no significant effect on our consolidated financial position or results of operations.

Lease Commitments We lease various warehouse and office facilities, vehicles and equipment under operating leases. Lease expense under these rental agreements amounted to $3.8 million, $3.5 million and $3.7 million in 2005, 2004 and 2003, respectively. Future minimum lease payments for non-cancelable operating leases are $3.9 million, $3.0 million, $2.6 million, $1.2 million and $0.9 million for the years 2006 through 2010, respectively, and an aggregate of $1.8 million thereafter.

Other Contractual Obligations We do not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our liquidity.

NOTE 13 — SUBSEQUENT EVENT

On March 15, 2006, Kennametal entered into a Stock Purchase Agreement to divest of J&L. Pursuant to this agreement, the buyer agreed to purchase 100% of the outstanding equity of the Company from Kennametal for a purchase price of $349.5 million, subject to certain pre-and post-closing adjustments.

This transaction, which is expected to close in the fourth quarter of 2006, is subject to regulatory approval and customary closing conditions.

EX-99.2 4 a06-18400_1ex99d2.htm EX-99

Exhibit 99.2

J&L America, Inc. and Subsidiary
Unaudited Consolidated Financial Statements

FINANCIAL INFORMATION
Consolidated Financial Statements
Consolidated Statements of Income for the Nine Months Ended March 31, 2006 and 2005		20
Consolidated Balance Sheets as of March 31, 2006 and June 30, 2005		21
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005		22
Consolidated Statement of Shareowner’s Equity for the Nine Months Ended March 31, 2006 and 2005		23
Notes to Consolidated Financial Statements		24

J&L America, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)

Nine months ended March 31 (in thousands)	2006		2005
Sales	$	205,344	$	191,169
Cost of goods sold	144,466		135,832
Gross profit	60,878		55,337
Operating expense	41,023		37,211
Operating income	19,855		18,126
Other expense, net	1,052		1,537
Income before provision for income taxes	18,803		16,589
Provision for income taxes (Note 7)	7,116		6,128
Net income	$	11,687	$	10,461

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

J&L America, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)

In thousands, except share and per share data	March 31, 2006			June 30, 2005
ASSETS
Current assets:
Cash	$	1,392		$	4,606
Accounts receivable, less allowance for doubtful accounts of $713 and $528 (Note 5)	14,399			12,030
Inventories	44,249			43,264
Deferred income taxes	1,715			1,577
Other current assets	4,670			3,113
Total current assets	66,425			64,590
Property, plant and equipment:
Land and buildings	4,291			4,427
Machinery and equipment	20,519			19,119
Less accumulated depreciation	(15,208		)	(14,007		)
Property, plant and equipment, net	9,602			9,539
Other assets:
Goodwill	39,670			39,670
Other	697			786
Total other assets	40,367			40,456
Total assets	$	116,394		$	114,585
LIABILITIES
Current liabilities:
Accounts payable	$	25,131		$	21,686
Other current liabilities	2,957			2,660
Total current liabilities	28,088			24,346
Deferred income taxes	181			16
Total liabilities	28,269			24,362
SHAREOWNER’S EQUITY
Capital stock, $1 par value; 50,000 shares authorized and issued	50			50
Net investment by parent	—			11,363
Retained earnings	86,982			77,376
Accumulated other comprehensive income	1,093			1,434
Total shareowner’s equity	88,125			90,223
Total liabilities and shareowner’s equity	$	116,394		$	114,585

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

J&L America, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)

Nine months ended March 31 (in thousands)	2006			2005
OPERATING ACTIVITIES
Net income	$	11,687		$	10,461
Adjustments for non-cash items:
Depreciation and amortization	2,503			2,520
Provision for doubtful accounts	1,285			854
Provision for inventory reserve	577			628
Loss on disposal of property, plant and equipment	29			8
Deferred income tax provision	27			74
Related party charges and other	1,565			1,657
Changes in certain assets and liabilities:
Accounts receivable	(7,631		)	(3,851		)
Proceeds from accounts receivable securitization	3,977			3,044
Inventories	(1,562		)	(3,995		)
Accounts payable and accrued liabilities	3,745			188
Other	(2,258		)	(246		)
Net cash flow provided by operating activities	13,944			11,342
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(1,966		)	(1,496		)
Proceeds from sale of property, plant and equipment	24			9
Other	89			(173		)
Net cash flow used for investing activities	(1,853		)	(1,660		)
FINANCING ACTIVITIES
Payments to parent, net	(14,961		)	(9,338		)
Decrease in cash overdraft	—			(644		)
Other	(3		)	(108		)
Net cash flow used for financing activities	(14,964		)	(10,090		)
Effect of exchange rate changes on cash	(341		)	408
CASH
Net decrease in cash	(3,214		)	—
Cash, beginning of period	4,606			—
Cash, end of period	$	1,392		$	—
SUPPLEMENTAL DISCLOSURES
Income taxes paid	$	6,001		$	5,898
Contributions of stock to employee defined contribution benefit plan	911			909

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

J&L America, Inc. and Subsidiary
Consolidated Statements of Shareowner’s Equity (Unaudited)

Nine months ended March 31 (in thousands)	2006			2005
CAPITAL STOCK	$	50		$	50
NET INVESTMENT BY PARENT
Balance at beginning of period	11,363			15,222
Return of capital to shareowner (Note 3)	(11,363		)	(7,616		)
Balance at end of period	—			7,606
RETAINED EARNINGS
Balance at beginning of period	77,376			63,115
Net income	11,687			10,461
Return of capital to shareowner (Note 3)	(2,081		)	—
Balance at end of period	86,982			73,576
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period	1,434			1,482
Foreign currency translation adjustments	(341		)	408
Balance at end of period	1,093			1,890
Total shareowner’s equity, end of period	$	88,125		$	83,122
COMPREHENSIVE INCOME
Net income	$	11,687		$	10,461
Other comprehensive (loss) income	(341		)	408
Comprehensive income	$	11,346		$	10,869

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

J&L America, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements

NOTE 1 — NATURE OF OPERATIONS

NOTE 2 — BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiary, should be read in conjunction with the 2005 Consolidated Financial Statements. The condensed consolidated balance sheet as of June 30, 2005 was derived from the audited balance sheet included in our 2005 Consolidated Financial Statements. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal, recurring adjustments. The results for the nine months ended March 31, 2006 and 2005 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2006 is to the fiscal year ending June 30, 2006. When used in this financial report, unless the context requires otherwise, the terms “J&L,” “we,” “our” and “us” refer to J&L America, Inc. and its subsidiary.

NOTE 3 — RELATED PARTY TRANSACTIONS

The Company sells and purchases products to/from certain business units of Kennametal. The Company believes the prices charged reflect the current market prices and therefore are included in sales and cost of goods sold as arms-length transactions. The following table reflects the amounts of these transactions:

Nine months ended March 31 (in thousands)	2006		2005
Sales to affiliated companies	$	619	$	1,357
Purchases of inventory from affiliated companies	29,857		29,056

Operating expenses include charges of $1.8 million and $2.3 million for the nine months ended March 31, 2006 and 2005, respectively, for certain accounting and administrative services provided by Kennametal. These charges are allocated to the Company based upon an estimate of the value of services provided to the Company versus total services provided to all business units of Kennametal.

Employees participate in a non-contributory defined benefit pension plan administered by Kennametal. Benefits for this plan are based primarily on years of service and employee’s compensation near retirement. The Company’s allocation of the pension expense under this plan was less than $0.1 million for each of the nine months ended March 31, 2006 and 2005. The Company’s allocation of the expense for this plan is based on the percentage of the Company plan participants to the total number of employees covered by the plan.

Employees may also elect to participate in a defined contribution retirement plan administered by Kennametal. Amounts charged to expense by the Company for these plans were $0.9 million for each of the nine months ended March 31, 2006 and 2005. Kennametal charges the Company the actual amounts contributed by Kennametal on behalf of the Company’s employees. Company contributions to U.S. defined contribution plans are made primarily in Kennametal stock.

Certain executives of the Company participate in a supplemental executive retirement plan administered by Kennametal. Amounts charged to expense by the Company for this plan were immaterial for the nine months ended March 31, 2006 and 2005. Kennametal charges the Company the actual amounts contributed by Kennametal on behalf of the Company’s employees.

Domestic employees participate in a non-contributory postretirement other than pension benefit plan administered by Kennametal. Postretirement health care benefits are available to retired employees and their spouses based upon age and years of service. The Company’s allocation of the (income) expense under this plan was ($0.3) million and ($0.1) million for the nine months ended March 31, 2006 and 2005, respectively. The Company’s allocation of the (income) expense for this plan is based on the percentage of the Company plan participants to the total number of employees covered by the plan.

Certain employees of the Company participate in various incentive compensation programs administered by Kennametal. Amounts charged to expense by the Company for these plans were $1.8 million and $1.0 million for the nine months ended March 31, 2006 and 2005, respectively. Kennametal charges the Company the actual amounts paid by Kennametal to the Company’s employees.

Certain employees are eligible to receive restricted stock awards and/or stock options under plans administered by Kennametal. These awards are in the capital stock of Kennametal. Amounts charged to expense by the Company for these awards were $1.0 million and $0.3 million for the nine months ended March 31, 2006 and 2005, respectively. Kennametal charges the Company the actual amounts awarded to eligible Company employees.

Employees of the Company participate in the group insurance and workers’ compensation insurance programs administered by Kennametal. The Company’s allocation of the insurance expense under these programs were $2.4 million and $2.0 million for the nine months ended March 31, 2006 and 2005, respectively. The Company’s allocation of the expense for these programs are based on the percentage of the Company’s covered participants to the total number of employees covered by these programs.

The Company is party to an agreement with Kennametal whereby certain financial institutions securitize, on a continuous basis, an undivided interest in a specific pool of our domestic trade accounts receivable. The financial institutions charge Kennametal fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs allocated to the Company are based upon the amount of the Company’s accounts receivable as a percentage of total accounts receivable in the program. Amounts charged to expense under this program were $0.8 million and $0.4 million for the nine months ended March 31, 2006 and 2005, respectively, and were accounted for as a component of other expense, net.

The Company utilizes a portion of Kennametal’s office facility in Charlotte, North Carolina. Rent is charged based upon square footage at market rates. The amount charged to expense by the Company was less than $0.1 million for each of the nine months ended March 31, 2006 and 2005.

Kennametal is a party to the 2006 Credit Agreement, which amends and restates the 2004 Credit Agreement. Like the 2004 Credit Agreement, the 2006 Credit Agreement is a revolving credit facility. Under these agreements, the Company is considered a significant domestic subsidiary. As such, the Company serves as a co-guarantor of the outstanding obligation under this credit facility. As of March 31, 2006 outstanding borrowings under this agreement were $56.2 million.

NOTE 4 — DIVESTITURE AGREEMENT

This transaction, which is expected to close in the fourth quarter of 2006, is subject to regulatory approval and customary closing conditions.

NOTE 5 — ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

actual amount of accounts receivable securitized each month is a function of the net change (new billings less collections) in the specific pool of domestic accounts receivable, the impact of detailed eligibility requirements in the agreement (e.g., the aging, terms of payment, quality criteria and customer concentrations), and the application of various reserves which are typically in trade receivable securitization transactions. A decrease in the amount of eligible accounts receivable could result in our inability to continue to securitize all or a portion of our accounts receivable.

The financial institutions charge fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs incurred under this program, $0.8 million and $0.4 million for the nine months ended March 31, 2006 and 2005, respectively, are accounted for as a component of other expenses, net.

At March 31, 2006 and 2005, the Company securitized accounts receivable of $25.6 million and $25.2 million, respectively, under this program. Our subordinated retained interests in accounts receivable available for securitization and recorded as a component of accounts receivable were $8.0 million and $4.7 million at March 31, 2006 and 2005, respectively. We estimate the fair value of our retained interests using a discounted cash flow analysis. As of March 31, 2006, key economic assumptions applied in the discounted cash flow analysis were a discount rate of 2.99 percent and an assumed life of the receivables of 30 days. Fair value of our retained interests approximates carrying value. A hypothetical change of 20 percent in the discount rate or the estimated life of the receivables securitized does not have a material effect on the fair value of our retained interests. The Company continues to service the sold receivables and is compensated at what we believe to be market rates. Accordingly, no servicing asset or liability has been recorded. Delinquencies and write-offs related to these receivables were not material for the nine months ended March 31, 2006 and 2005.

Cash flows related to our securitization program represent collections of previously securitized receivables and proceeds from the securitization of new receivables. Collections and sales occur on a daily basis. As a result, net cash flows vary based on the ending balance of receivables securitized. The net proceeds from accounts receivable securitization for the nine months ended March 31, 2006 and 2005 were $4.0 million and $3.0 million, respectively.

NOTE 6 — STOCK-BASED COMPENSATION

Eligible Company employees may be granted stock awards under the Kennametal Stock and Incentive Plan of 2002 (the 2002 Plan). 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.

In addition to stock option grants, the 2002 Plan permits the award of restricted stock to directors, officers and key employees.

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment (revised 2004)” (SFAS 123(R)) effective July 1, 2005. As of the date of adoption, the fair value of unvested stock options, previously granted, was $0.5 million. Expense associated with restricted stock grants, subsequent to July 1, 2005, is amortized over the substantive vesting period.

Prior to the adoption of SFAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force Issue No. 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option” (EITF 00-15). SFAS 123(R) supersedes EITF 00-15, amends SFAS No. 95, “Statement of Cash Flows” and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. Tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes was $1.1 million for the nine months ended March 31, 2006.

SFAS 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. Stock-based compensation expense for the nine months ended March 31, 2006 includes $0.8 million, of stock option expense recorded as a result of the adoption of SFAS 123(R).

SFAS 123(R) established a fair-value-based method of accounting for generally all share-based payment transactions with employees. Kennametal utilizes the Black-Scholes valuation method to establish fair value of all awards. The assumptions used in Kennametal’s Black-Scholes valuation related to grants made during the period were as follows: risk free interest rate — 4.0 percent, expected life — 5 years, volatility — 24.8 percent and dividend yield — 1.6 percent.

Changes in our stock options for the nine months ended March 31, 2006 were as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, June 30, 2005	194,019		$	36.91
Granted	34,229		50.61
Exercised	(137,078	)	35.59
Lapsed and forfeited	(5,235	)	41.48
Options outstanding, March 31, 2006	85,935		$	44.19	8.4	$	1,460
Options exercisable, March 31, 2006	22,849		$	39.28	7.4	$	501
Weighted average fair value of options granted during the period			$	12.50

The total intrinsic value of options exercised during the nine months ended March 31, 2006 was $3.0 million. As of March 31, 2006, the total unrecognized compensation cost related to options outstanding was $0.1 million and will be recognized over the next two months.

Changes in our restricted stock for the nine months ended March 31, 2006 were as follows:

	Shares		Weighted Average Fair Value
Unvested restricted stock, June 30, 2005	28,924		$	38.49
Granted	10,819		50.61
Vested	(9,716	)	36.88
Lapsed and forfeited	(1,407	)	47.11
Unvested restricted stock, March 31, 2006	28,620		$	43.19

During the nine months ended March 31, 2006, compensation expense related to restricted stock awards was $0.2 million. As of March 31, 2006, the total unrecognized compensation cost related to unvested restricted stock was $0.1 million and will be recognized over the next two months.

The divestiture agreement entered into by Kennametal requires, among other things, the acceleration of vesting of certain employee awards and options. The results for the nine months ended March 31, 2006 include a charge of $1.1 million related to this accelerated vesting.

Prior to the adoption of SFAS 123(R) and as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS -123) we measured compensation expense related to stock options in accordance with APB 25 and related interpretations which use the intrinsic value method. If compensation expense were determined based on the estimated fair value of options granted, consistent with the methodology in SFAS 123, our net income for the nine months ended March 31, 2005 would be reduced to the pro forma amounts indicated below:

In thousands	Nine Months Ended March 31, 2005

Net income, as reported	$	10,461
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(544		)

Add: Total stock-based employee compensation expense determined under the intrinsic value based method for all awards, net of related tax effects	176

Total pro forma stock-based compensation	$	(368	)

Pro forma net income	$	10,093

NOTE 7 — INCOME TAXES
The Company is included in the consolidated federal income tax return of Kennametal. Income taxes are calculated as if the Company had filed a tax return on a separate company basis. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company’s financial statements or separate tax return that would be filed on a separate company basis. The effective tax rate for the nine months ended March 31, 2006 was 37.8% versus 36.9% for the comparable period a year ago. This difference is attributable to the adoption of SFAS 123(R).

NOTE 8 — PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides a non-contributory defined benefit pension plan and a non-contributory postretirement and postemployment benefit plan covering substantially all of our employees through Kennametal. These plans are administered by Kennametal and costs are allocated to the Company based on the number of participating employees. They have been treated as multi-employer plans for purpose of these financial statements. As a result, there is no related asset or liability recorded for these plans.

We also participate in a contributory defined contribution retirement plan and an executive retirement plan. These plans are administered by Kennametal. Company contributions to U.S. defined contribution plans are made primarily in Kennametal stock.

The following allocated costs have been reported as operating expenses:

Nine months ended March 31, (in thousands)	2006			2005
Defined benefit pension expense	$	39		$	72
Defined contribution pension expense	911			909
Executive retirement expense	51			15
Other postretirement and postemployment benefits expense (credit)	(258		)	(120		)

EX-99.3 5 a06-18400_1ex99d3.htm EX-99

Exhibit 99.3

MSC INDUSTRIAL DIRECT CO., INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

On June 8, 2006, MSC Industrial Direct Co., Inc (“MSC” or the “Company”) acquired, through our wholly owned subsidiary, MSC Acquisition Corp. VI, all of the outstanding common stock of J&L America, Inc. and Subsidiary (“J&L”) for $349.5 million subject to certain post-closing purchase price adjustments. We financed $205 million of the purchase price with a portion of the proceeds of a new unsecured credit facility, which was closed simultaneously with the acquisition. The new credit facility includes a $205 million term loan, which was drawn in entirety to provide the funding for the acquisition, and a $75 million revolver which is available for working capital purposes. There are currently no borrowings outstanding under the revolving credit facility. The loan is due for repayment in full on June 8, 2011. Principal payments will begin on June 30, 2007, and will be made in quarterly installments in accordance with the credit agreement. Optional prepayments may be made at any time, or from time to time, in whole or part, without premium or penalty. The interest rate payable for all borrowings is based on the Company’s leverage and is currently 50 basis points over LIBOR rates. Under the terms of the credit facility, we will be subject to various operating and financial covenants.

J&L provides metalworking consumables, related products and related technical and supply chain-related productivity services to small and medium-sized manufacturers in the United States and the United Kingdom. J&L markets products and services through mail-order catalogs and monthly sales flyers, telemarketing, the Internet and field sales. J&L distributes a broad range of metalcutting tools, abrasives, drills, machine tool accessories, precision measuring tools, gages, hand tools and other supplies used in metalcutting operations.

Certain officers of J&L entered into employment agreements at the closing. On July 20, 2006 the Company announced a restructuring of the management team of J&L. As part of the restructuring, these executives have left or will be leaving the Company and their responsibilities will be transitioned to the executive management team of MSC, certain of whom are executives of J&L.

The following unaudited pro forma condensed consolidated balance sheet as of May 27, 2006 was prepared by combining the unaudited historical balance sheet of the Company at May 27, 2006 (the end of the Company’s third quarter of fiscal 2006), with the unaudited historical balance sheet of J&L at March 31, 2006 (the end of J&L’s third quarter of fiscal 2006), giving effect to the acquisition as though it was completed on May 27, 2006. Adjustments include borrowings made in connection with an unsecured credit facility pursuant to a Credit Agreement, as discussed above, and applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed consolidated financial statements, as if such acquisition had occurred as of May 27, 2006 for pro forma balance sheet purposes and at the beginning of the fiscal years presented for pro forma income statement purposes.

The following unaudited pro forma condensed consolidated statement of income for the period ended May 27, 2006 was prepared by combining the unaudited historical statements of income of the Company and J&L for the periods ended May 27, 2006 and March 31, 2006, respectively, giving effect to the acquisition as though it was completed at the beginning of the fiscal periods presented.

The following unaudited pro forma condensed consolidated statement of income for the year ended August 27, 2005 was prepared by combining the audited historical statements of income of the Company and J&L for the years ended August 27, 2005 and June 30, 2005, respectively, giving effect to the acquisition as though it was completed at the beginning of the fiscal years presented.

The unaudited pro forma condensed consolidated financial information is presented in accordance with Article 11 of Regulation S-X. The acquisition has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed consolidated financial statements, is allocated to the net tangible and intangible assets acquired and liabilities assumed of J&L in connection with the acquisition, based on their estimated fair values at the acquisition date. Management has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. MSC has engaged an independent third-party valuation firm to assist in determining the fair values of identifiable intangible assets and certain tangible assets. Such a valuation requires significant estimates and assumptions including but not limited to estimating future cash flows and developing appropriate discount rates. The preliminary work performed by the independent third-party valuation firm has been considered in management’s estimates of the fair values reflected in these unaudited condensed consolidated financial statements. The allocation of the estimated purchase price is preliminary pending finalization of those estimates and analyses. Final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein.

The unaudited pro forma condensed consolidated financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had MSC and J&L been a combined company during the specified periods. The unaudited pro forma condensed consolidated financial statements do not reflect any operating efficiencies and cost savings MSC may achieve with respect to the combined companies nor do they include the effects of MSC’s repayment of the borrowings under the Loan Agreement. The unaudited pro forma condensed consolidated financial statements also do not reflect any post closing purchase price adjustments to be resolved by the Company and Kennametal pursuant to the Agreement in future periods. These adjustments could have the effect of the Company paying incremental purchase price, but which amount is not expected to be material in relation to the size of the overall transaction. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable at this point in time. The unaudited pro forma condensed consolidated financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, MSC’s historical consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended August 27, 2005 and in its Form 10-Q for the period ended May 27, 2006, and J&L’s historical consolidated financial statements for the fiscal year ended June 30, 2005 and for the nine months ended March 31, 2006, which are included as Exhibits 99.1 and 99.2, respectively, to this Form 8-K/A.

MSC Industrial Direct Co., Inc.
Pro Forma Condensed Consolidated Balance Sheet as of May 27, 2006
(In thousands)
(Unaudited)

	MSC Industrial Direct Co., Inc. as of May 27, 2006		J&L America, Inc. and Subsidiary as of March 31, 2006		Pro forma Adjustments			MSC Industrial Direct Co., Inc. Pro Forma as of May 27, 2006

ASSETS
Current Assets:
Cash and cash equivalents	$	133,020	$	1,392	$	(129,708	)(a)	$	4,704
Available-for-sale securities	2,131		—		(2,131		)(a)	—
Accounts receivable, net of allowance for doubtful accounts	145,269		14,399		25,630		(f)	185,298
Inventories	254,400		44,249		—			298,649
Prepaid expenses and other current assets	20,463		4,670		—			25,133
Deferred income taxes	12,149		1,715		(1,715		)(b)	12,149
Total current assets	567,432		66,425		(107,924		)	525,933
Available-for-sale securities	21,738		—		(21,738		)(a)	—
Property, Plant and Equipment, net	108,669		9,602		—			118,271
Identifiable intangible assets, net	—		—		83,300		(e)	83,300
Goodwill	63,202		39,670		163,056		(d)	265,928
Other assets	7,355		697		—			8,052
Total Assets	$	768,396	$	116,394	$	116,694		$	1,001,484

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	48,945	$	25,131	$	—		$	74,076
Accrued liabilities	53,416		2,957		—			56,373
Current portion of long-term notes payable	154		—		—			154
Total current liabilities	102,515		28,088		—			130,603
Long-term notes payable	713		—		205,000		(a)	205,713
Deferred income tax liabilities	27,968		181		(181		)(b)	27,968
Total liabilities	131,196		28,269		204,819			364,284
Shareholders’ equity	637,200		88,125		(88,125		)(c)	637,200
Total Liabilities and Shareholders’ Equity	$	768,396	$	116,394	$	116,694		$	1,001,484

The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.

MSC Industrial Direct Co., Inc.
Pro Forma Condensed Consolidated Statement of Income for the Period Ended May 27, 2006
(In thousands, except per share data)
(Unaudited)

	MSC Industrial Direct Co., Inc. for the Period Ended May 27, 2006			J&L America Inc. and Subsidiary for the Period Ended March 31, 2006			Pro Forma Adjustments			MSC Industrial Direct Co., Inc. Pro Forma for the Period Ended May 27, 2006

Net sales	$	931,650		$	205,344		$	—		$	1,136,994
Cost of goods sold	491,345			144,466			(17,284		)(1)	618,527
Gross profit	440,305			60,878			17,284			518,467
Operating expenses	275,671			41,023			17,284		(1)	333,978
Intangible asset amortization							6,248		(4)	6,248
Income from operations	164,634			19,855			(6,248		)	178,241

Other income:
Interest income	3,185			—			(3,185		)(2)	—
Interest (expense)	(21		)	—			(10,542		)(3)	(10,563		)
Other income (expense), net	207			(1,052		)	1,124		(6)	279
Total other income (expense)	3,371			(1,052		)	(12,603		)	(10,284		)
Income before provision for income taxes	168,005			18,803			(18,851		)	167,957
Provision for income taxes	65,723			7,116			(7,375		)(5)	65,464
Net income	$	102,282		$	11,687		$	(11,476	)	$	102,493

Per Share Information:
Net income per common share:
Basic	$	1.53								$	1.54
Diluted	$	1.50								$	1.50

Weighted average shares used in computing net income per common share:
Basic	66,743									66,743
Diluted	68,283									68,283

Cash dividend paid per common share	$	0.40								$	0.40

The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.

MSC Industrial Direct Co., Inc.

Pro Forma Condensed Consolidated Statement of Income for the Year Ended August 27, 2005

(In thousands, except per share data)

(Unaudited)

	MSC Industrial Direct Co., Inc. for the Year Ended August 27, 2005			J&L America Inc. and Subsidiary for the Year Ended June 30, 2005			Pro Forma Adjustments			MSC Industrial Direct Co., Inc. Pro Forma for the Year Ended August 27, 2005

Net sales	$	1,099,915		$	257,500		$	—		$	1,357,415
Cost of goods sold	595,840			182,297			(22,356		)(1)	755,781
Gross profit	504,075			75,203			22,356			601,634
Operating expenses	326,415			50,556			22,356		(1)	399,327
Intangible asset amortization							8,330		(4)	8,330
Income from operations	177,660			24,647			(8,330		)	193,977

Other income:
Interest income	4,008			—			(2,674		)(2)	1,334
Interest (expense)	(35		)	—			(11,937		)(3)	(11,972		)
Other income (expense), net	121			(2,031		)	2,069		(6)	159
Total other income (expense)	4,094			(2,031		)	(12,542		)	(10,479		)
Income before provision for income taxes	181,754			22,616			(20,872		)	183,498
Provision for income taxes	69,484			8,355			(7,979		)(5)	69,860
Net income	$	112,270		$	14,261		$	(12,893	)	$	113,638

Per Share Information:
Net income per common share:
Basic	$	1.65								$	1.67
Diluted	$	1.61								$	1.63

Weighted average shares used in computing net income per common share:
Basic	67,934									67,934
Diluted	69,889									69,889

Cash dividend paid per common share	$	1.94								$	1.94

The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.

MSC Industrial Direct Co., Inc.

Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

On June 8, 2006, MSC Industrial Direct Co., Inc (“MSC” or the “Company”) acquired, through our wholly owned subsidiary, MSC Acquisition Corp. VI, all of the outstanding common stock of J&L America, Inc. and Subsidiary (“J&L”) for $349.5 million subject to certain post-closing purchase price adjustments. We financed $205 million of the purchase price with a portion of the proceeds of a new unsecured credit facility, which was closed simultaneously with the acquisition. The new credit facility includes a $205 million term loan, which was drawn in entirety to provide the funding for the acquisition, and a $75 million revolver which is available for working capital purposes. There are currently no borrowings outstanding under the revolving credit facility. The loan is due for repayment in full on June 8, 2011. Principal payments will begin on June 30, 2007, and will be made in quarterly installments in accordance with the credit agreement. Optional prepayments made be made at any time, or from time to time, in whole or part, without premium or penalty. The interest rate payable for all borrowings is based on the Company’s leverage and is currently 50 basis points over LIBOR rates. Under the terms of the credit facility, we will be subject to various operating and financial covenants.

The accompanying unaudited and audited condensed consolidated financial statements for the Company and J&L are presented for each company’s reporting periods. The Company’s fiscal year is on a 52 or 53 week basis, ending on a Saturday close to August 31. For the fiscal year ended August 27, 2005, the reporting period was 52 weeks. J&L’s fiscal reporting period is based on a calendar month, and the fiscal year ends on June 30 of each year.

The accompanying unaudited pro forma condensed consolidated financial information presents the pro forma results of operations and financial position of MSC and J&L on a combined basis based on the historical financial information of each company and after giving effect to the acquisition of J&L by MSC on June 8, 2006. The acquisition was recorded using the purchase method of accounting.

Certain reclassifications have been made to the historical financial statements of J&L to conform to the presentation used in MSC’s historical financial statements. Such reclassifications had no effect on J&L’s previously reported results from operations.

The unaudited pro forma condensed consolidated balance sheet has been prepared assuming the acquisition occurred as of May 27, 2006. The unaudited pro forma condensed consolidated statements of income have been prepared assuming the acquisition occurred as of the beginning of the years presented.

For the pro forma condensed consolidated balance sheet, the $357.2 million purchase price, including an estimate of $7.7 million of costs incurred by the Company directly as a result of the acquisition, has been allocated based on management’s preliminary estimate of the fair values of assets acquired and liabilities assumed as of June 8, 2006. The purchase price allocation is considered preliminary, particularly as it relates to the final valuation of certain identifiable intangible assets and there could be significant adjustments when the valuation is finalized. In addition certain post-closing purchase price adjustments underway between the Company and Kennametal will result in the company paying incremental purchase price, although such amount is not anticipated to be material in relation to the overall transaction and does not relate to intangible assets and the values accorded thereto. The preliminary estimate of the purchase price allocation is as follows (in thousands):

Total current assets	$	88,948
Intangible assets	83,300
Goodwill	202,726
Property, plant and equipment, net	9,602
Other assets	697
Total liabilities	(28,088		)
Total purchase price	$	357,185

The acquired intangible assets consist primarily of contract rights related to the Kennametal distribution agreement and customer relationships which totaled $83.3 million. These intangible assets will be amortized over 10 years using the straight-line method.

The goodwill recorded is based on the benefits the Company expects to generate from the future cash flows of the ongoing J&L business.

Note 2. Pro Forma Adjustments

Certain reclassifications have been made to the J&L historical financial statements to conform to the Company’s financial statement presentation. In addition, certain reclassifications have been made to J&L’s statement of income to conform to the current financial statement presentation.

The following are the descriptions of the pro forma condensed consolidated balance sheet adjustments:

(a) To finance the acquisition, the Company borrowed $205.0 million under its new unsecured credit facility, which was closed simultaneously with the acquisition, and the remaining amount was funded from available cash reserves of $128.3 million and the liquidation of investments in available-for-sale securities of $23.9 million. The J&L cash balance of $1.4 million was retained by the Seller.

(b) This adjustment is to eliminate J&L’s deferred taxes as a result of the Company’s 338(h)(10) election.

(d) This adjustment is made to eliminate J&L’s goodwill of $39.7 million and reestablish new goodwill of $202.7 million.

(e) These adjustments are made to reflect the estimated fair value of the intangible assets which consist of contract rights related to the Kennametal distribution agreement and customer relationships which totaled $83.3 million.

(f) This adjustment was made to add back receivables securitized by the Seller, as MSC does not currently participate in a securitization program.

The following are descriptions of the pro forma condensed consolidated statements of operations adjustments:

(1) These adjustments represent the reclassification of the J&L warehouse costs, which J&L records in cost of sales to operating expenses to conform to the Company’s presentation.

(2) These adjustments reflect the decrease in interest income earned by the Company on its cash and available-for-sale securities which were used to finance the acquisition.

(3) These adjustments represent the increase in interest expense associated with the $205.0 million borrowing under the Company’s new credit facility. These adjustments also reflect additional interest expense on borrowings that would have been required had the acquisition occurred at the beginning of fiscal 2005. Assumed additional borrowings were $22.4 million at May 27, 2006 and $83.2 million at August 27, 2005. A change of one-eighth of one percent in the interest rate on the Company’s borrowing would impact interest expense by $0.3 million for the fiscal year ended August 27, 2005 and the period ended May 27, 2006. The interest rate payable for all borrowings is based on the Company’s leverage and is currently 50 basis points over LIBOR rates. At June 8, 2006, the interest rate was 5.65%.

(4) This adjustment records the amortization expense of intangible assets subject to amortization estimated on a straight-line basis over 10 years.

(5) This adjustment is based on the pre-tax income effect of the pro forma adjustments using MSC’s historical statutory tax rate.

(6) These adjustments reflect the fees and loss on the sale of the accounts receivable securitization program.