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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
Commission file number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title Of Each Class Outstanding at February 1, 2000
- ------------------------------------ -------------------------------
Class A Common Stock, par value $.01 4,273,390
Class B Common Stock, par value $.01 20,237,000
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JLK DIRECT DISTRIBUTION INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended December 31, 1999 and 1998......... 1
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1999 and June 30, 1999........................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 1999 and 1998................... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders........... 12
6. Exhibits and Reports on Form 8-K.............................. 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
OPERATIONS
Net sales $119,729 $133,735 $238,044 $265,497
Cost of goods sold 81,715 90,738 161,452 179,710
-------- -------- -------- --------
Gross profit 38,014 42,997 76,592 85,787
Operating expenses 30,925 34,060 62,524 70,436
-------- -------- -------- --------
Operating income 7,089 8,937 14,068 15,351
Interest (income) expense and other (42) 325 75 615
-------- -------- -------- --------
Income before provision for income taxes 7,131 8,612 13,993 14,736
Provision for income taxes 2,819 3,400 5,527 5,800
-------- -------- -------- --------
Net income $ 4,312 $ 5,212 $ 8,466 $ 8,936
======== ======== ======== ========
PER SHARE DATA
Basic earnings per share $ 0.18 $ 0.21 $ 0.35 $ 0.36
======== ======== ======== ========
Diluted earnings per share $ 0.18 $ 0.21 $ 0.35 $ 0.36
======== ======== ======== ========
Basis weighted average shares outstanding 24,510 24,510 24,510 24,510
======== ======== ======== ========
Diluted weighted average shares outstanding 24,510 24,510 24,510 24,510
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(in thousands)
December 31, June 30,
1999 1999
---- ----
ASSETS
Current assets:
Cash and equivalents $ 4,807 $ 2,807
Notes receivable from Kennametal 14,078 11,611
Accounts receivable, less allowance for doubtful
accounts of $1,022 and $981 48,402 53,680
Inventories 117,507 101,770
Deferred income taxes 6,818 6,818
Other current assets 3,028 52
--------- ---------
Total current assets 194,640 176,738
--------- ---------
Property, plant and equipment:
Land and buildings 6,429 6,318
Machinery and equipment 31,302 27,419
Less accumulated depreciation (10,442) (8,400)
--------- ---------
Net property, plant and equipment 27,289 25,337
--------- ---------
Other assets:
Intangible assets, less accumulated
amortization of $15,882 and $13,592 61,456 64,383
Deferred tax assets 7,095 7,377
Other 813 1,154
--------- ---------
Total other assets 69,364 72,914
--------- ---------
Total assets $ 291,293 $ 274,989
========= =========
LIABILITIES
Current liabilities:
Notes payable to banks $ 131 $ 7,737
Accounts payable 31,986 21,025
Due to Kennametal and affiliates 11,030 4,609
Income taxes payable 3,979 4,903
Accrued payroll and vacation pay 2,895 3,220
Other 6,787 6,927
--------- ---------
Total current liabilities 56,808 48,421
--------- ---------
Deferred income taxes 5,515 5,519
Other liabilities 4,819 5,175
--------- ---------
Total liabilities 67,142 59,115
--------- ---------
SHAREOWNERS' EQUITY
Preferred stock, $.01 par value; 25,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value; 75,000 shares authorized;
4,917 shares issued, 4,273 shares outstanding 49 49
Class B Common Stock, $.01 par value; 50,000 shares authorized;
20,237 shares issued and outstanding 202 202
Additional paid-in capital 182,822 182,822
Retained earnings 55,902 47,436
Treasury stock, at cost; 644 shares of Class A Common Stock held (14,529) (14,529)
Accumulated other comprehensive loss (295) (106)
--------- ---------
Total shareowners' equity 224,151 215,874
--------- ---------
Total liabilities and shareowners' equity $ 291,293 $ 274,989
========= =========
See accompanying notes to condensed consolidated financial statements.
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
Six Months Ended
December 31,
------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 8,466 $ 8,936
Adjustments for noncash items:
Depreciation and amortization 4,470 4,175
Loss (gain) on sale of assets 584 (6)
Changes in certain assets and liabilities:
Accounts receivable (10,411) (3,766)
Proceeds from the sale of accounts receivable 15,227 --
Inventories (16,064) (7,553)
Accounts payable and accrued liabilities 16,174 (16,712)
Other (2,580) 2,566
-------- --------
Net cash flow from (used for) operating activities 15,866 (12,360)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,778) (5,546)
Notes Receivable from Kennametal (2,467) 1,169
Other 64 31
-------- --------
Net cash flow used for investing activities (6,181) (4,346)
-------- --------
FINANCING ACTIVITIES
Borrowings under (repayments of) notes payable to banks (7,606) 7,454
Notes payable to Kennametal -- 5,835
Purchase of treasury stock -- (332)
-------- --------
Net cash flow from (used for) financing activities (7,606) 12,957
-------- --------
Effect of exchange rate changes on cash (79) (23)
-------- --------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 2,000 (3,772)
Cash and equivalents, beginning 2,807 4,715
-------- --------
Cash and equivalents, ending $ 4,807 $ 943
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 6,335 $ 934
Interest paid 199 198
See accompanying notes to condensed consolidated financial statements.
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to the Consolidated Financial Statements
included in the company's 1999 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 1999 has been derived from the
audited balance sheet included in the company's 1999 Annual Report on Form
10-K. These accompanying interim statements are unaudited; however,
management believes that all adjustments necessary for a fair presentation
have been made and all adjustments are normal, recurring adjustments. The
results for the three and six months ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal
year.
2. The accompanying condensed consolidated financial statements of JLK Direct
Distribution Inc. include the operations of J&L America, Inc. (J&L), a
previously wholly-owned subsidiary of Kennametal Inc. (Kennametal), and
Full Service Supply (FSS), which previously had been operated as a program
of Kennametal. Prior to April 1, 1997, the company had no separate legal
status or existence. Kennametal incorporated the company as a Pennsylvania
corporation under the name "JLK Direct Distribution Inc." in April 1997.
Kennametal currently owns 83 percent of the outstanding stock of the
company.
3. During the December 1999 quarter, Kennametal announced that it engaged an
investment bank to explore strategic alternatives regarding its ownership
in the company, including a possible divestiture. Kennametal management
believes a divestiture may enhance growth prospects for both Kennametal and
the company by allowing each company to focus on its core competencies.
Kennametal management intends to conclude the evaluation of its
alternatives by June 30, 2000. Kennametal is currently not a party to any
written or oral agreement regarding the divestiture of the company.
4. Comprehensive income for the three and six months ended December 31, 1999
and 1998 is as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $4,312 $5,212 $8,466 $8,936
Foreign currency translation adjustments (55) (14) (189) (22)
------ ------ ------ ------
Comprehensive income $4,257 $5,198 $8,277 $8,914
====== ====== ====== ======
Accumulated other comprehensive loss consists solely of cumulative foreign
currency translation adjustments.
5. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by the
beginning of the first quarter of fiscal 2001. SFAS No. 133 establishes
accounting and reporting standards requiring all derivative instruments
(including certain derivative instruments imbedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
their fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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accounting. The company currently is evaluating the effects of SFAS No. 133
and does not believe that the adoption will have a material effect on the
financial statements or results of operations of the company.
6. In connection with fiscal 1998 and 1997 acquisitions, the company entered
into employee retention and non-compete agreements. The remaining liability
for these agreements, and other similar agreements from previous
acquisitions, recorded in other current liabilities at December 31, 1999
and June 30, 1999 was $2.0 million and $2.5 million, respectively, and in
other liabilities was $2.0 million and $2.9 million, respectively.
7. The company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries and sales to these entities were as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Purchases from Kennametal and subsidiaries $17,310 $14,069 $44,968 $26,178
Sales to Kennametal and subsidiaries 2,187 3,444 4,523 6,215
The company receives from Kennametal certain warehouse, management
information systems, financial and administrative services pursuant to
certain agreements between the company and Kennametal. Other agreements
between the company and Kennametal include a non-competition and corporate
opportunities allocation agreement, tax-sharing agreement, trademark
license agreement, product supply agreement and others, as more fully
described in the company's 1999 Annual Report on Form 10-K. All amounts
incurred by Kennametal on behalf of the company are reflected in operating
expenses in the accompanying statements of income. Net costs charged to the
company by Kennametal under these agreements were as follows (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Administrative services agreement $1,251 $1,979 $2,660 $3,242
Warehousing agreement 132 1,057 252 2,024
Shared facilities agreement (178) 101 (194) 260
Lease agreement 27 27 53 53
------ ------ ------ ------
Total costs charged by Kennametal $1,232 $3,164 $2,771 $5,579
====== ====== ====== ======
Under the Intercompany Debt/Investment and Cash Management Agreement with
Kennametal, the company earned interest income of $0.3 million and $0.6
million for the three and six months ended December 31, 1999. The company
incurred interest expense of $0.2 million and $0.4 million for the three
and six months ended December 31, 1998.
8. On March 31, 1999, the company sold the assets of the steel mill business
of its subsidiary, Strong Tool Company, for approximately $1.6 million.
There was no significant impact on earnings as a result of this sale. The
steel mill business had annual sales of approximately $18.0 million. As
this business was marginally profitable, the effect on net income and
diluted earnings per share as a result of this sale is not material.
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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9. On June 18, 1999, Kennametal entered into an agreement with a financial
institution whereby Kennametal securitizes, on a continuous basis, an
undivided interest in a pool of Kennametal's domestic trade accounts
receivable. Pursuant to this agreement, at December 31, 1999, the company
sold $34.3 million of its domestic accounts receivable to Kennametal, in
exchange for a note receivable from Kennametal consistent with the
Intercompany Debt/Investment and Cash Management Agreement. The costs
incurred by the company under this program were $0.3 million and $0.6
million for the three and six months ended December 31, 1999, respectively,
as a result of the discount on the sale of the accounts receivable. These
costs are accounted for as a component of Interest Expense and Other.
10. The company reports two segments consisting of J&L and FSS. The company's
corporate level expenses are included entirely in the J&L segment. The
company's external sales, intersegment sales and operating income by
segment for the three and six months ended December 31, 1999 and 1998 are
as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
External sales:
J&L $ 87,375 $100,992 $175,082 $202,238
FSS 32,354 32,743 62,962 63,259
-------- -------- -------- --------
Total external sales $119,729 $133,735 $238,044 $265,497
======== ======== ======== ========
Intersegment sales:
J&L $ 781 $ 604 $ 1,361 $ 1,133
FSS -- -- -- --
-------- -------- -------- --------
Total intersegment sales $ 781 $ 604 $ 1,361 $ 1,133
======== ======== ======== ========
Total sales:
J&L $ 88,156 $101,596 $176,443 $203,371
FSS 32,354 32,743 62,962 63,259
-------- -------- -------- --------
Total sales $120,510 $134,339 $239,405 $266,630
======== ======== ======== ========
Operating income:
J&L $ 4,486 $ 6,267 $ 9,419 $ 9,895
FSS 2,603 2,670 4,649 5,456
-------- -------- -------- --------
Total operating income $ 7,089 $ 8,937 $ 14,068 $ 15,351
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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RESULTS OF OPERATIONS
NET SALES
Net sales for the December 1999 quarter were $119.7 million, a decrease of ten
percent from $133.7 million last year, reflecting the continuing weakness in
industrial demand. For the six months ended December 31, 1999, sales were $238.0
million, a decline of ten percent from $265.5 million in the same period a year
ago. Excluding the sales of the Strong Tool steel mill business, which was
divested in the March 1999 quarter, sales were down seven percent for both the
quarter and the six months.
J&L sales totaled $87.4 million for the December quarter, a decrease of 13
percent from the same quarter in prior year. In North America, the J&L catalog
business continues to be affected by weak conditions in the markets served and
from a competitive price environment, while in Europe, J&L continued to grow.
Excluding the divestiture of the Strong Tool steel mill business, sales were
down nine percent from last year. For the six months ended December 31, 1999,
sales were $175.1 million, a decline of 13 percent from $202.2 million in the
same period a year ago due to the factors mentioned above.
Sales for FSS were $32.4 million for the December quarter and declined one
percent when compared to the same quarter in prior year. FSS growth continued to
be curtailed by the implementation of its new business system and from weakness
in some accounts. Management has delayed the implementation of new programs in
order to focus attention on keeping existing customers serviced. For the six
months ended December 31, 1999, sales of $63.0 million were flat compared to
sales of $63.3 million in the same period a year ago due to the factors
mentioned above. The company provided FSS programs to 154 customers covering 247
different facilities at December 31, 1999, compared to 135 customers covering
210 different facilities at December 31, 1998.
GROSS PROFIT
Gross profit for the December 1999 quarter was $38.0 million, a decrease of 12
percent from $43.0 million in the prior year due to the sales decline and the
competitive price environment. The gross profit margin for the December 1999
quarter was 31.8 percent compared to 32.2 percent in the prior year due to a
decline in the higher-margin J&L catalog sales. This was partially offset by the
elimination of lower margin sales from the Strong Tool steel mill business. The
gross profit margin in the FSS business was relatively flat compared to a year
ago. For the six months ended December 31, 1999, gross profit was $76.6 million,
a decline of 11 percent from $85.8 million in the same period a year ago due to
the factors mentioned above.
OPERATING EXPENSES
Operating expenses declined nine percent to $30.9 million for the December 1999
quarter from $34.1 million in the same period a year ago. Operating expenses
decreased primarily as a result of cost-reduction actions implemented in both
September 1999 and November 1998. These cost-reduction actions involved selected
workforce reductions, facility consolidations and closings, and other measures.
As a percentage of sales, operating expenses were 25.8 percent compared to 25.5
percent in the prior year due to the decline in sales levels. For the six months
ended December 31, 1999, operating expenses were $62.5 million, a decline of 11
percent from $70.4 million in the same period a year ago due to the factors
mentioned above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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Also included in operating expenses were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the company. Net charges from Kennametal were $1.2 million
in the December 1999 quarter, a decrease of 61 percent from $3.2 million in the
prior year due to a reduction in warehouse and administrative charges. The
decline in warehouse charges from Kennametal is due to the company taking over
the operation of several warehouses previously operated by Kennametal and the
closure of a commonly-operated facility in the September 1999 quarter. The
decline in the administrative charges is due to the assumption of more
administrative functions by the company in fiscal 2000. For the six months ended
December 31, 1999, net charges from Kennametal were $2.8 million, a decrease of
50 percent from $5.6 million in the same period a year ago due to the factors
mentioned above.
INTEREST (INCOME) EXPENSE AND OTHER
Included in interest (income) expense and other is net interest income from
Kennametal of $0.3 million and $0.6 million for the three and six months ended
December 31, 1999, respectively. The company generated other net interest income
of $0.1 million during the three months ended December 31, 1998 and incurred
other net interest expense of $0.1 million during the six months ended December
31, 1998. Also included in interest expense and other is the loss on the sale of
accounts receivable to Kennametal of $0.3 million and $0.6 million for the three
and six months ended December 31, 1999, respectively, in connection with
Kennametal's accounts receivable securitization program.
INCOME TAXES
The effective tax rate for the three and six months ended December 31, 1999 was
39.5 percent, which remained constant when compared to the same periods in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary capital needs have been to fund working capital
requirements, add new products and FSS programs, and implement the new business
system. The company's primary sources of financing have been cash from
operations and the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal. The company anticipates that cash flows from operations and the
Intercompany Debt/Investment and Cash Management Agreement with Kennametal will
be adequate to support its operations for the foreseeable future.
Compared to the prior year, the increase in net cash from operations was
realized due to the sale of accounts receivable to Kennametal and improved
working capital requirements, despite a $12.7 million investment in inventory
purchased from Kennametal during the first quarter of fiscal 2000. This purchase
was necessary in order for JLK to have access to Kennametal's branded inventory
for sale to FSS customers subsequent to the implementation of the new business
system for FSS.
Net cash used for investing activities was $6.2 million for the six months ended
December 31, 1999. The change in net cash used for investing activities resulted
from an increase in a note receivable from Kennametal as a result of the
accounts receivable securitization program, partially offset by decreased
capital expenditures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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Net cash flow used for financing activities was $7.6 million for the six months
ended December 31, 1999 and reflected the repayment of amounts borrowed under
notes payable to banks. Financing activities in the prior year include amounts
borrowed under notes payable to banks and a note payable to Kennametal, which
were used to fund working capital needs.
In June 1998, the company initiated a stock repurchase program to repurchase,
from time-to-time, up to a total of 20 percent, or approximately 1.0 million
shares, of its outstanding Class A Common Stock. During the six months ended
December 31, 1998, the company repurchased 15,000 Class A shares at a total cost
of approximately $0.3 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 available funds and short-term borrowings.
FINANCIAL CONDITION
The company's financial condition continues to remain strong. Total assets were
$291.3 million at December 31, 1999, up six percent from $275.0 million at June
30, 1999. Net working capital increased to $137.8 million at December 31, 1999,
up seven percent from $128.3 million at June 30, 1999. The company decreased its
debt levels to $0.1 million at December 31, 1999 due to increased cash from
operations.
YEAR 2000
Management believes that the company substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The transition into the year 2000 resulted in no significant impact to
the financial position or operations of the company. A committee actively
monitored the status of the readiness program of the company and its
subsidiaries.
The company completed an assessment regarding the impact of this issue on its
existing information systems and determined that while not all systems were year
2000 compliant, those non-compliant systems could be modified to become year
2000 compliant. Due to the fact that the company was operating on several
different information systems, the company decided to implement a new business
system, HK System's Enterprise Information System (Enterprise System), in order
to have all existing operations on one integrated system. The Enterprise System
also is year 2000 compliant. The company is implementing the Enterprise System
in two phases and, in August 1999, completed all of the tasks identified to
remediate the year 2000 exposure in the FSS business.
The second phase is expected to be initiated in early 2000, and tested and
completed thereafter. Due to the timing of the completion of this phase, the
company modified the existing non-compliant business systems to ensure the
catalog operations are supported by a year 2000 compliant information system.
Successful testing of these modifications was performed in September 1999.
The company also completed an assessment of the impact of this issue on its
non-information technology systems, including the company's personal computers,
embedded technology in equipment used in operations, and other non-information
technology items. Any non-compliant systems were identified and remediated,
either through replacement of or modification to the existing systems.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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The company estimates the total year 2000 expenditures were approximately $11.5
million, with the majority being spent on the implementation of the company's
new business system. Of the total costs, $9.6 million related to software
licenses and hardware. Included in the total costs are expenditures to rectify
non-compliant personal computers, embedded technology in equipment used in
operations, and various non-information technology items, which were
approximately $0.2 million. These costs included both internal and external
personnel costs related to the assessment, remediation and implementation
processes, as well as the cost of purchasing certain hardware and software.
Cash flows from operating and financing activities have provided funding for
these expenditures. Expenditures incurred to date in fiscal 2000 approximate
$2.2 million. The company does not anticipate incurring additional expenditures
related to year 2000 issues.
Management believed the most significant risk of the year 2000 issue would have
been an interrupted supply of goods and services from the company's vendors. The
company had an ongoing effort to gain assurances and certifications of
suppliers' readiness programs. To date, the company's suppliers continue to
provide the company with sufficient goods and services in the year 2000. There
were no failures by major third-party businesses and public and private
providers of infrastructure services, such as utilities, communications services
and transportation that affected the company during the transition to the year
2000.
The company had developed contingency plans and actions for the year 2000 issues
related to both internal and external systems. Contingency plans involved
consideration of a number of possible actions, including, to the extent
necessary or justified, the selection of alternative service providers,
purchasing inventory from alternative certified vendors, the increase of safety
stock of major product lines and adjustment to staffing strategies. The company
was not required to employ these contingency plans.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate any year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue remediation of any newly discovered year 2000 problem.
STRATEGIC ALTERNATIVES
During the December 1999 quarter, Kennametal announced that it engaged an
investment bank to explore strategic alternatives regarding its ownership in the
company, including a possible divestiture. Kennametal management believes a
divestiture may enhance growth prospects for both Kennametal and the company by
allowing each company to focus on its core competencies. Kennametal management
intends to conclude the evaluation of its alternatives by June 30, 2000.
Kennametal is currently not a party to any written or oral agreement regarding
the divestiture of the company.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements," as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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not limited to, the extent that the economic conditions in the United States
and, to a lesser extent, Europe, are not sustained, risks associated with
integrating businesses, demands on management resources, risks associated with
international markets such as currency exchange rates, competition and the
effect of third party or company failures to achieve timely remediation of year
2000 issues. The company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The information set forth in Part II, Item 4 of the company's September 30, 1999
Form 10-Q is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
(10) Material Contracts
10.1 Employment Agreement with Richard J. Orwig dated January
21, 2000. Filed herewith.
10.2 Employment Agreement with John M. Beaudoin dated January
21, 2000. Filed herewith.
10.3 Employment Agreement with Charles G. Lendvoyi dated
January 21, 2000. Filed herewith.
10.4 Employment Agreement with Paul E. Fuller dated
January 21, 2000. Filed herewith.
10.5 Employment Agreement with Diana L. Scott dated
January 21, 2000. Filed herewith.
10.6 Deferred Fee Plan for Outside Directors. Filed herewith.
10.7 Directors Stock Incentive Plan. Filed herewith.
(27) Financial Data Schedule for the six months ended
December 31, 1999, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
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SIGNATURES
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, thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
Date: February 11, 2000 By: /s/ DIANA L. SCOTT
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Diana L. Scott
Vice President,
Chief Financial Officer,
and Treasurer
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