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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
Commission File Number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 TECHNOLOGY WAY
P. O. BOX 231
LATROBE, PENNSYLVANIA 15650
(Address of principal executive offices)
Registrant's telephone number, including area code: 724-539-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 5, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant, estimated solely for the
purposes of this Form 10-K, was approximately $11,900,000. For purposes of the
foregoing calculation only, all directors and executive officers of the
registrant and each person who may be deemed to own beneficially more than 5% of
the registrant's Common Stock have been deemed affiliates.
As of September 5, 2000, there were 4,288,410 shares of Class A Common Stock and
20,237,000 shares of Class B Common Stock outstanding.
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TABLE OF CONTENTS
Item No. Page
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PART I
1. Business...................................................................................... 3
2. Properties.................................................................................... 7
3. Legal Proceedings............................................................................. 7
4. Submission of Matters to a Vote of Security Holders........................................... 7
PART II
5. Market for the Registrant's Common Stock and Related Shareowner Matters....................... 8
6. Selected Financial Data....................................................................... 8
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
7a. Quantitative and Qualitative Disclosures About Market Risk.................................... 16
8. Financial Statements and Supplementary Data................................................... 17
9. Changes in and Disagreements on Accounting and Financial Disclosure........................... 36
PART III
10. Directors and Executive Officers of the Registrant............................................ 37
11. Executive Compensation........................................................................ 38
12. Security Ownership of Certain Beneficial Owners and Management................................ 45
13. Certain Relationships and Related Transactions................................................ 47
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 54
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
JLK Direct Distribution Inc. (the company or JLK) was incorporated in
Pennsylvania in 1997 and is one of the largest suppliers of a broad range of
metalworking consumables and related products to customers in the United States,
offering a full line of cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies. To meet the varying supply needs of small-, medium- and large-sized
customers, the company offers: (i) a direct-marketing program, through J&L
Industrial Supply (J&L), whereby the company supplies small- to large-sized
customers through mail-order catalogs, retail showrooms, a distributor-based
direct field sales force, and e-commerce, and (ii) integrated industrial supply
or Full Service Supply (FSS) programs, whereby medium- and large-sized
industrial manufacturers engage the company to carry out all aspects of complex
metalworking supply processes, including needs assessment, cost analysis,
procurement planning, supplier selection, "just-in-time" restocking of supplies
and ongoing technical support. The company also conducts its direct-marketing
program for small- and medium-sized customers in the United Kingdom and Germany.
The company reports two operating segments consisting of J&L and FSS. The
company's sales and operating income by segment are presented in the Notes to
the Consolidated Financial Statements contained herein in Item 8 - Financial
Statements and Supplementary Data. Unless otherwise specified, any reference to
a "year" is to a fiscal year ended June 30.
The company is a subsidiary of Kennametal Inc. (Kennametal). Kennametal is a
global leader engaged in the manufacture, purchase and distribution of a broad
range of tools, tooling systems, and solutions to the metalworking, mining, oil
and energy industries, and wear-resistant parts for a wide range of industries.
Kennametal's metalworking tools are made of cemented tungsten carbides,
ceramics, cermets, high-speed steel and other hard materials. Kennametal also
manufactures and markets a complete line of toolholders, toolholding systems and
rotary cutting tools by machining and fabricating steel bars and other metal
alloys. Kennametal also manufactures tungsten carbide products used in
engineered applications, mining and highway construction, and other similar
applications, including circuit board drills, compacts and metallurgical
powders.
This Form 10-K 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 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 risks associated with the
implementation of restructuring actions. The company undertakes no obligation to
publicly release any revisions to forward-looking statements to reflect events
or circumstances occurring after the date hereof.
Disclosure materials, including a tender offer statement describing the
definitive merger agreement for Kennametal for acquiring the outstanding shares
of JLK that Kennametal does not already own, and the structure of the
transaction, will be filed with the Securities and Exchange Commission (SEC) and
transmitted to the minority shareholders of JLK for their careful review.
Investors and security holders of JLK are urged to read these disclosure
materials when they become available because they will contain important
information. When these and other documents are filed with the SEC, they may be
obtained for free at the SEC's website at www.sec.gov. Copies of these
documents, when available, may also be obtained free of charge from Kennametal
and JLK.
INDUSTRY OVERVIEW
The company operates in a large, fragmented industry characterized by multiple
channels of distribution. The company believes that there are numerous small
retailers, dealers and distributors, substantially most having annual sales of
less than $10.0 million that supply a majority of this market. The distribution
channels in the metalworking consumables and related products markets include
retail outlets, small dealers, regional and national distributors utilizing
direct sales forces and manufacturers' representatives.
The company believes that increasing numbers of industrial manufacturers are
searching for ways to reduce costs by eliminating the inefficiencies of
traditional industrial supply distribution. This growing recognition by
customers of the high costs and operational inefficiencies associated with
purchasing industrial supplies from traditional distributors has increased
demand for alternative methods of distribution, leading to the development of
programs that are generally referred to as integrated supply.
The traditional model for the distribution of industrial supplies is burdened by
both the duplication and the inefficient performance of multiple functions. In
the traditional model, the industrial distributor must (i) source and absorb the
freight costs for the item, (ii) receive, warehouse and account for the item,
(iii) invest in inventory and
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incur the associated carrying costs and (iv) market and sell the item to the end
user. Once the need for the item arises, the manufacturing facility requiring
the item must repeat many of the above steps.
Through the company's integrated FSS programs, which focus on the acquisition,
possession and use of metalworking consumables and related products, each
activity is performed only once. The procurement of industrial supplies is
generally outside the core activity of most manufacturers. For example,
industrial supplies generally are purchased by personnel whose expertise in
purchasing these items is limited. In addition, supplies typically are stored in
a number of locations within an industrial facility, resulting in excess
inventories and duplicate purchase orders. Finally, the company believes
industrial supplies are frequently purchased by multiple personnel in uneconomic
quantities, and a substantial portion of most facilities' industrial supplies
are one-time purchases that entail higher per item prices and time-consuming
administrative efforts. As a result, the company believes there often is
potential to manage the industrial supply procurement process more efficiently
and with greater cost savings.
Despite the apparent inefficiencies of the traditional industrial supply
purchasing process, long-standing relationships with local retailers and
distributors have generally perpetuated the status quo. Due to limited capital
availability, high operating cost structures and smaller sales volumes,
suppliers to the industrial market are experiencing increasing pressure to
consolidate and curtail services and certain product lines in order to remain
competitive. Even distributors with extensive field sales forces are finding it
increasingly difficult to visit all buyers cost-effectively and to provide the
support necessary to satisfy their demands for cost containment and improved
efficiency. The company believes that the relative inability of traditional
distribution channels to respond to these changing industry dynamics has created
a continuing opportunity for the growth of direct marketing and integrated
supply organizations such as the company. As a result of these dynamics,
non-traditional distributors, such as the company, have captured an increasing
share of sales by providing lower total purchasing costs, better product
selection and a higher level of service. As a leading non-traditional supplier
with proven capabilities both in direct marketing and integrated supply, the
company believes it is well positioned to take advantage of present market
dynamics and enjoy growth in market share.
BUSINESS STRATEGY
The company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a one-stop shop for metalworking products for customers of any size and by
offering managed solutions for larger customers. The company's products are
marketed under various trademarks and tradenames, such as JLK Direct*, JLK*,
J&L*, Full Service Supply*, FSS* and Kennametal*.
J&L serves the needs of predominantly small- and medium-sized metalworking
customers by offering 145,000 stock keeping units (SKUs) through the company's
2,372-page master catalog, monthly promotional sales flyers, additional mailings
and advertisements, telemarketing efforts and direct sales efforts. The company
has 30 showrooms, including five distribution centers in the United States and
one distribution center in the United Kingdom. Additionally, the company has one
distribution center in Germany, and 12 other locations added through
acquisitions. These other locations will be reported as such until they have
been converted into a showroom or a distribution center, or closed.
The company offers customers the advantages of (i) a single source of supply for
all metalworking consumables and related products, (ii) a tiered product
offering (such as "good," "better" and "best"), (iii) same-day pickup or
delivery for the most popular products stocked at showrooms, (iv) same-day
direct shipping and (v) an order entry system that tracks product availability
and pricing, provides technical product information and results in an order
being completed in an average time of three minutes. The company has a dedicated
sales force based in each showroom who actively call on targeted customers. In
addition, the company serves the needs of medium- and large-sized customers
through a technically oriented outside sales force. This sales force is largely
comprised of employees of acquired companies.
FSS programs allow customers to achieve substantial cost savings in metalworking
consumables and overall manufacturing processes by outsourcing the entire
process of acquiring and possessing metalworking and related products at
manufacturing facilities. Customers, such as General Motors Corporation, Allied
Signal and Baker Hughes, use FSS programs at designated manufacturing facilities
to (i) consolidate all metalworking consumables and related product purchases
with one vendor, (ii) eliminate a significant portion of the administrative
overhead
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burden associated with the internal purchasing function, (iii) ensure
appropriate technical expertise in the selection and use of supplies for complex
metalworking processes and (iv) minimize the level of investment in tooling
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* Trademark owned by Kennametal Inc. or its subsidiaries, including JLK Direct
Distribution Inc.
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inventory, thereby reducing inventory carrying costs. The company's technical
experts customize and manage a comprehensive computerized product
identification, tracking and purchasing system that analyzes and optimizes
supply usage, helps select appropriate products and allows for "just-in-time"
replacement of inventory. To increase efficiency and maximize cost savings for
its customers, the company also provides ongoing application assistance in the
usage of metalworking tools. The company believes FSS programs typically reduce
customers' costs of acquiring, possessing and using metalworking products by
approximately 5 to 20 percent per year.
Two important trends are now affecting the industrial supply industry. First,
the industrial supply industry is experiencing consolidation of currently
fragmented distribution channels, as customers seek and technology makes
possible the convenience, cost savings and economies of scale associated with
single sources of supplies. Second, to achieve even greater cost savings and
efficiencies, manufacturers are outsourcing complex procurement and possession
processes needed to supply metalworking products that are critical to their
manufacturing operations. As a market leader with a broad range of products and
services and proven capabilities, the company is well-positioned to continue to
take advantage of these industry trends.
COMPETITION
The metalworking supply industry is large, fragmented and highly competitive.
The company faces competition (i) in the small- and medium-sized metalworking
markets from traditional channels of distribution such as retail outlets, small
dealers, regional or national distributors utilizing direct sales forces, and
manufacturers' representatives and (ii) in the large industrial metalworking
market from large distributors and other companies, offering varying degrees and
types of integrated industrial supply programs. The company believes sales of
metalworking products will become more concentrated over the next few years,
which may make the industry more competitive. Certain of the company's
competitors offer a greater variety of products (including nonmetalworking
products) and have greater financial and other resources than the company. The
company believes customer purchasing decisions are primarily based on one or
more of the following criteria: product price, product selection, product
availability, superior customer service, total cost of acquisition, possession
and use of products and convenience. The company seeks to distinguish itself
from other direct marketers and distributors of industrial supplies through its
national presence and metalworking focus, its application of information
technology and its attractive, modern showrooms.
SUPPLIERS
The company purchases substantially all products for direct marketing and FSS
programs from approximately 800 vendors. Approximately 19 percent, 15 percent
and 16 percent of the company's sales were of Kennametal products in 2000, 1999
and 1998, respectively. Other than Kennametal, the company is not materially
dependent on any one supplier or small group of suppliers. If an FSS program
customer desires to continue ordering a particular brand of metalworking tool or
obtains or has a contract providing for more favorable pricing than the company
generally obtains, the company will assume that contract or enter into a similar
contract for the limited purpose of supplying such product to that customer.
Other than Kennametal, no single supplier accounted for more than 5 percent of
the company's total purchases in 2000, 1999, or 1998.
ACQUISITIONS AND DIVESTITURE
During 1998, the company acquired the following distributors of metalcutting
tools and industrial supplies:
Date Acquired Acquisition Acquisition Headquarters
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October 1997 Car-Max Tool & Cutter, Inc. Rockford, Ill.
December 1997 GRS Industrial Supply Co. Grand Rapids, Mich.
January 1998 Production Tools Sales, Inc. Dallas, Texas
March 1998 Dalworth Tool & Supply, Inc. Arlington, Texas
March 1998 ATS Industrial Supply Company Salt Lake City, Utah
May 1998 Strong Tool Co. Cleveland, Ohio
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There were no acquisitions during 2000 or 1999. All acquisitions were accounted
for under the purchase method of accounting. In the March 1999 quarter, the
company sold the assets of the steel mill business of its subsidiary, Strong
Tool Co. Because this business was marginally profitable, the company incurred a
slightly unfavorable impact on earnings as a result of this sale.
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As the industrial supply industry continues to consolidate, the company will
consider acquisitions to supplement its growth strategy if opportunities arise.
The Company may also consider strategic alternatives with its businesses,
including divestitures, to increase financial performance. From time to time,
the company has engaged in, and will continue to engage in, preliminary
discussions with respect to potential acquisitions or divestitures. The company
is not currently a party to any oral or written acquisition agreement with
respect to any material acquisition or divestiture candidate.
SEASONALITY
Seasonal variations do not have a major effect on the company's business.
However, to varying degrees, traditional summer vacations and holidays often
affect the company's sales levels during the first and second quarters of its
fiscal year.
INFORMATION SYSTEMS
The sophisticated information systems used by the company allow centralized
management of key functions, including communication links between distribution
centers, inventory and accounts receivable management, purchasing, pricing,
sales and distribution, and the preparation of daily operating control reports
which provide concise and timely information regarding key aspects of its
business. These systems enable the company to ship to customers on a same-day
basis, respond quickly to order changes and provide a high level of customer
service. In addition, these systems enable the company to achieve cost savings,
deliver exceptional customer service, manage its operations centrally and manage
its FSS programs. Certain of the company's information systems operate over a
wide-area network and represent real-time systems that allow each distribution
center to share information and monitor daily progress relating to sales
activity, credit approval, inventory levels, stock balancing, vendor returns,
order fulfillment and other performance measures. The company also maintains
buying and inventory management systems that monitor substantially all its SKUs
and produces requisitions to purchase inventory from vendors for replenishment
based on projected customer ordering models. The company has invested
significant resources in developing an extensive customer and prospect database,
which includes detailed information, including customer size, industry of
operation, various demographic and geographic characteristics and purchase
histories of company products. The company also provides EDI invoicing, funds
transfer, ordering, shipping and acknowledgment to large customers.
In order to handle the company's future growth and to prepare for the year 2000,
the company implemented a new business system, HK System's Enterprise
Information System (Enterprise System) in the FSS business. The Enterprise
System interfaces with Kennametal's SAP system and provides the pre-existing
functionality of FSS' legacy system, as well as numerous enhancements. In
addition, the Enterprise System can enable all areas of the company to function
on one common business system, including the direct marketing program, the FSS
programs and all acquisitions.
EMPLOYEES
As of June 30, 2000, the company employed approximately 1,320 employees, none of
whom are represented by a labor union. The company considers its relationships
with employees to be good and has experienced no work stoppages.
CORPORATE SUBSIDIARIES
The following is a summary of the company's consolidated subsidiaries at June
30, 2000:
J&L Industrial Supply Ltd., Canada
J&L Industrial Supply U.K., England (branch)
J&L Werkzeuge und Industriebedarf GmbH, Germany
Abrasive & Tool Specialties Company, United States
GRS Industrial Supply Company, United States
J&L America, Inc., United States
Production Tools Sales, Inc., United States
Strong Tool Co., United States
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ITEM 2. PROPERTIES
PROPERTIES
The company's principal executive offices are located at 1600 Technology Way,
P.O. Box 231, Latrobe, Pennsylvania 15650. The company's headquarters and
distribution centers, all of which are leased, are as follows:
LEASE APPROXIMATE
LOCATION DESCRIPTION EXPIRATION SQUARE FEET
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Charlotte, N.C. Distribution Center & Showroom June 2007 46,000
Elk Grove Village, Ill. Distribution Center & Showroom May 2005 128,000
Carrollton, Texas Distribution Center & Showroom July 2001 44,000
Wednesbury, West Midlands, Distribution Center, Showroom & European June 2013 93,000
United Kingdom Headquarters
Livonia, Mich. (1) Distribution Center, Showroom & North Feb. 2001 - 187,000
American Headquarters Feb. 2004
Los Angeles, Calif. Distribution Center & Showroom June 2007 47,000
Neunkirchen, Germany (2) Distribution Center Sept. 2000 2,200
(1) The company maintains its North American Headquarters and Livonia
Distribution Center in four separate locations in Livonia, Mich.
(2) Shared location with Kennametal. The approximate square feet noted
herein only represents the square footage of the office space leased by
the company at this location. This warehouse is managed by Kennametal.
Therefore, a portion of the operating costs of this warehouse is billed
to the company through warehousing agreements with Kennametal.
In addition, the company maintains 24 other showrooms, all but one of which is
leased, in 15 states, ranging in size from 6,000 to 24,000 square feet. The
leases for these showrooms will expire at various periods between July 2000 and
April 2004.
The company also leases 11 locations and owns one location, in six states, as a
result of recent acquisitions. These locations range in size from 3,500 to
30,000 square feet, with the leases expiring at various periods between
September 2000 and June 2002.
ITEM 3. LEGAL PROCEEDINGS
In July 2000, the company, its directors (including one former director) and
Kennametal were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with Kennametal's proposal to acquire the outstanding stock of the
company not owned by Kennametal. The company believes the actions lack merit and
will defend them vigorously. The amount of any ultimate exposure cannot be
determined with certainty at this time. Management believes that any losses
derived from the final outcome of these actions and proceedings will not be
material in the aggregate to the company's financial condition.
Other than noted above, there are no material pending legal proceedings, other
than litigation incidental to the ordinary course of business, to which the
company or any of its subsidiaries is a party or of which any of their property
is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, there were no matters submitted to a vote of
security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREOWNER MATTERS
The company's Class A Common Stock is traded on the New York Stock Exchange
(symbol JLK). As of September 5, 2000 the approximate number of holders of
record of the Class A Common Stock was 75 and Class B Common Stock was one.
Stock price ranges are as follows:
QUARTER ENDED: SEP. 30 DEC. 31 MAR. 31 JUN. 30
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2000:
High $10 5/8 $10 5/8 $11 11/16 $9 1/4
Low 7 7 1/4 8 1/4 4 1/2
1999:
High $22 3/8 $13 1/8 $13 1/2 $12 3/8
Low 10 1/2 9 1/4 7 7/8 8 3/8
The company has not declared cash dividends on either the Class A or Class B
Common Stock and does not have any plans to pay any cash dividends on either
issue in the foreseeable future. The company anticipates that any earnings that
might be available to pay dividends on either issue will be retained to finance
the business of the company.
USE OF PROCEEDS FROM REGISTERED SECURITIES
On July 2, 1997, the company consummated the initial public offering of
4,897,000 shares of its Class A Common Stock at a price of $20.00 per share (the
Offering). The net proceeds from the Offering, after deducting underwriting
discounts and estimated expenses, were $90.4 million and represented
approximately 20 percent of the company's outstanding common stock. The net
proceeds were used by the company to repay $20.0 million of short-term debt
related to a dividend paid to Kennametal and to repay $20.0 million to
Kennametal for acquisitions in 1997 and income taxes paid on behalf of the
company. The remaining net proceeds of $50.4 million were used to pay for 1998
acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated income statement and balance sheet data for the
company presented below are derived from the company's Consolidated Financial
Statements. The selected financial information presented below should be read in
conjunction with, and is qualified by reference to, the more detailed
information in the Consolidated Financial Statements and notes thereto included
elsewhere in this document, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information set forth
herein.
Year Ended June 30,
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(in thousands, except per share data) 2000 1999 1998 1997 1996
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INCOME STATEMENT DATA:
Net sales $499,293 $531,642 $425,348 $316,189 $243,969
Cost of goods sold 340,334 361,717 277,417 213,020 166,326
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Gross profit 158,959 169,925 147,931 103,169 77,643
Operating expense 130,785 135,393 106,623 70,976 52,761
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Operating income 28,174 34,532 41,308 32,193 24,882
Interest expense (income) and other (162) 881 (3,068) 368 --
-------- -------- -------- -------- --------
Income before provision for income taxes 28,336 33,651 44,376 31,825 24,882
Provision for income taxes 10,993 13,291 17,300 12,518 9,819
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Net income $ 17,343 $ 20,360 $ 27,076 $ 19,307 $ 15,063
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Year Ended June 30,
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(in thousands, except per share data) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
PER SHARE DATA:
Basic earnings per share $ 0.71 $ 0.83 $ 1.08 -- --
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.71 $ 0.83 $ 1.07 -- --
========== ========== ========== ========== ==========
Basic weighted average shares outstanding 24,513 24,510 25,138 -- --
========== ========== ========== ========== ==========
Diluted weighted average shares outstanding 24,515 24,513 25,277 -- --
========== ========== ========== ========== ==========
Pro forma basic and diluted
earnings per share (1) -- -- -- $ 0.92 $ 0.72
========== ========== ========== ========== ==========
Pro forma weighted and diluted weighted
average shares outstanding (1) -- -- -- 20,897 20,897
========== ========== ========== ========== ==========
June 30,
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(dollars in thousands) 2000 1999 1998 1997 1996
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BALANCE SHEET DATA:
Working capital $ 149,587 $ 128,317 $ 109,314 $ 61,472 $ 73,263
Total assets 290,227 274,989 275,586 165,488 121,045
Shareowners' equity 232,477 215,874 195,935 92,731 97,991
Year Ended June 30,
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(dollars in thousands) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED OPERATING DATA:
Active direct marketing customers (2)(3) 126,000 123,000 112,000 96,000 77,000
Number of SKUs (3)(4) 145,000 130,000 110,000 100,000 80,000
Number of publications per year 92 62 48 26 19
Total number of publications mailed 8,500,000 9,100,000 6,400,000 4,100,000 3,700,000
Direct-mail costs (5) $ 6,864 $ 9,982 $ 6,974 $ 6,301 $ 4,249
Showroom and distribution facilities (3) 31 32 34 24 19
Acquisition locations (3)(6) 12 13 21 4 --
Full Service Supply programs:
Customers (2)(3) 188 150 115 60 42
Site locations (3) 283 231 194 120 86
(1) Gives effect to the issuance of 20,897,000 shares of Class B Common
Stock to Kennametal for the periods presented.
(2) Number of customers that have purchased products from the company
within the 12 months preceding the relevant period end.
(3) Represents data at period end.
(4) Represents the number of SKUs offered in the United States. The number
of SKUs offered in European markets range from 70,000 to 75,000;
45,000 to 75,000; and 45,000 to 60,000 SKUs for 2000, 1999 and 1998,
respectively.
(5) Direct-mail costs include direct production and mailing costs.
(6) Represents locations acquired through acquisitions that have not yet
been converted into a showroom or a distribution center, or closed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The accompanying financial information of the company includes the operations of
J&L America, Inc. d/b/a J&L Industrial Supply (J&L), a previously wholly owned
subsidiary of 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.
In April 1997, the company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission with respect
to an initial public offering (IPO) of the company's Class A Common Stock. In
anticipation of the IPO, Kennametal contributed to the company the stock of J&L,
including the J&L United Kingdom operations, and the assets and liabilities of
FSS. Immediately prior to the effective date of the IPO, Kennametal exchanged
its currently outstanding investment for 20,897,000 shares of Class B Common
Stock.
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On July 2, 1997, the company consummated the IPO whereby 4,897,000 shares of its
Class A Common Stock were issued at a price of $20.00 per share. The net
proceeds from the IPO were $90.4 million and represented the sale of
approximately 20 percent of the company's outstanding common stock. The net
proceeds were used by the company to repay $20.0 million of short-term debt
related to a dividend paid to Kennametal and to repay $20.0 million to
Kennametal for acquisitions in 1997 and income taxes paid on behalf of the
company. The remaining net proceeds of $50.4 million were used to pay for 1998
acquisitions.
In connection with the IPO, Kennametal surrendered to the company 640,000 shares
of Class B Common Stock equal to the number of additional shares of Class A
Common Stock purchased by the underwriters upon exercise of the underwriters'
over-allotment option. In addition, Kennametal sold 20,000 shares of Class B
Common Stock at $20.00 per share to one of the members of its and the company's
board of directors. The 20,000 shares of Class B Common Stock were subsequently
converted on a one-to-one basis to Class A Common Stock. Subsequent to the IPO,
4,917,000 shares of Class A Common Stock were outstanding, and Kennametal held
20,237,000 shares of Class B Common Stock. Kennametal's ownership increased to
approximately 83 percent due to treasury stock purchases made by the company
since the IPO. The company and Kennametal operate as separate companies.
In the December 1999 quarter, Kennametal announced that it engaged an investment
bank to explore strategic alternatives regarding its ownership interest in the
company, including a possible divestiture. At that time, Kennametal management
indicated that it believed a divestiture might enhance growth prospects for both
Kennametal and the company by allowing each company to focus on its core
competencies. Kennametal completed a thorough and disciplined process of
evaluating strategic alternatives and on May 2, 2000, decided to terminate
consideration of a possible divestiture at that time, although Kennametal
management has indicated that it continues to believe there may be better owners
for the company.
On July 20, 2000, Kennametal made a proposal to the company to acquire the
outstanding shares of the company that it does not already own. The proposal is
not conditioned on financing. Kennametal reserved the right to amend or withdraw
this proposal at any time at its sole discretion.
In July 2000, the company, its directors (including a former director) and
Kennametal were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the proposal of Kennametal to acquire the outstanding stock of
the company not owned by Kennametal. The company believes the actions lack merit
and will defend them vigorously. The amount of any ultimate exposure cannot be
determined with certainty at this time. Management believes that any losses
derived from the final outcome of these actions and proceedings will not be
material in the aggregate to the company's financial condition.
On September 11, 2000, the company and Kennametal announced that they have
entered into a definitive merger agreement for Kennametal to acquire the
outstanding shares of the company that Kennametal does not already own. Pursuant
to the agreement, the company has agreed to commence a cash tender offer for all
of its shares of Class A Common Stock at a price of $8.75 per share. Following
the company's purchase of shares in the tender offer, Kennametal will acquire
the remainder of the minority shares at the same price in a merger. The
aggregate value to acquire the minority interest of approximately 4.3 million
shares would be approximately $37 million. The transaction has been unanimously
approved by JLK's Board of Directors, including its special committee comprised
of independent directors of the JLK Board.
RESULTS OF OPERATIONS
The following discussion should be read in connection with the consolidated
financial statements of JLK and the related footnotes. Unless otherwise
specified, any reference to a "year" is to a fiscal year ended June 30.
OVERVIEW
Operating results for 2000 were disappointing due to, among other things,
start-up issues related to the implementation of the new business system that
hampered the ability to ramp-up new FSS programs and inflated operating
expenses, and problems with processing and shipping orders in the U.S. catalog
operations in the June quarter. Management believes the company is a good
franchise and expects to improve operational efficiency and financial
performance through its business improvement plan. See Business Improvement Plan
herein.
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12
JUNE 30, 2000 COMPARED TO JUNE 30, 1999
NET SALES. Net sales for 2000 were $499.3 million, a decrease of six percent
from $531.6 million in 1999. Net sales declined four percent due to weakness in
the end markets served by the J&L catalog business, three percent due to the
divestiture of the Strong Tool Co. steel mill business, offset by increased FSS
sales due to growth from new and existing programs.
J&L external sales for 2000 were $362.0 million, a decline of six percent from
$400.3 million in 1999 excluding the effects of the divestiture. Net sales
decreased primarily due to weakness in the industrial end markets in both the
catalog business and the acquired distributors, particularly oil field services
and aerospace. At June 30, 2000, J&L operated 30 showrooms, including six
distribution centers, a distribution center in Germany and 12 other locations
added through acquisitions. In the previous year, J&L operated 31 showrooms,
including seven distribution centers, a distribution center in Germany and 13
other locations added through acquisitions.
FSS external sales for 2000 were $137.3 million, an increase of five percent
from $131.3 million in 1999 due to growth in new and existing FSS programs.
Sales growth in 2000 was hampered by start-up issues related to the
implementation of the new business system. At June 30, 2000, FSS provided
programs to 188 customers covering 283 different facilities, compared to 150
customers covering 231 different facilities at June 30, 1999.
GROSS PROFIT. Gross profit for 2000 was $159.0 million, a decrease of six
percent from $169.9 million in 1999 due to lower sales levels. Gross margin for
2000 was 31.8 percent compared to 32.0 percent in 1999. The decline in the gross
margin is due to a higher percentage of FSS sales, which carry lower margins,
compared to the J&L catalog sales. This was partially offset by the reduction of
lower-margin sales from divestiture of the steel mill business.
OPERATING EXPENSE. Operating expense for 2000 was $130.8 million, a decrease of
three percent from $135.4 million in 1999. Operating expense as a percentage of
sales was 26.2 percent in 2000 compared to 25.5 percent in 1999. In 2000, the
company recorded a charge of $0.6 million for employee separation and $0.2
million related to costs incurred associated with the evaluation of strategic
alternatives. Excluding these charges, operating expense at J&L declined $9.2
million due to on-going cost-reduction actions, while operating expense at FSS
increased $3.8 million due to the implementation of the new business system and
higher sales levels.
Included in the company's operating expense were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the company. Charges from Kennametal were $5.1 million in
2000, a decrease of 46 percent from $9.5 million in 1999. Charges from
Kennametal as a percentage of sales declined to 1.0 percent in 2000 compared to
1.8 percent in 1999, due to reductions of warehouse and administrative services
charges of $3.8 million and $1.0 million, respectively, partially offset by a
$0.4 million increase in shared facility charges from Kennametal. The decline in
warehouse charges from Kennametal is due to the company assuming 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
administrative charges is due to the assumption of more administrative and
management information systems functions by the company in 2000.
INTEREST EXPENSE (INCOME) AND OTHER. This primarily represents net interest
income from Kennametal of $1.2 million and net interest expense from Kennametal
of $0.3 million in 2000 and 1999, respectively, and the net expense in
connection with Kennametal's accounts receivable securitization program. The
company's participation in this program resulted in the recording of the loss on
the sale of accounts receivable to Kennametal of $1.2 million and $0.2 million
in 2000 and 1999, respectively, and servicing revenue of $0.1 million in 2000.
The interest income generated in 2000 and the increase in the loss on sale are
both due to an additional 11 months of participation in the securitization
program in 2000.
INCOME TAXES. The effective tax rate was 38.8 percent in 2000 compared to 39.5
percent in 1999 due to a decline in the company's effective state tax rates.
JUNE 30, 1999 COMPARED TO JUNE 30, 1998
NET SALES. Net sales for 1999 were $531.6 million, an increase of 25 percent
from $425.3 million in 1998. The overall increase in sales was predominately
attributable to acquisitions and growth from new FSS programs, which positively
affected sales by 28 and six percent, respectively. This increase was offset by
a reduction in FSS sales
12
13
from the General Electric contract (GE Contract) disengagement, and the
divestiture of the Strong Tool Co. steel mill business, which reduced sales by
six and three percent respectively.
J&L external sales for 1999 were $400.3 million, an increase of 35 percent from
$295.6 million in 1998. This increase in sales was primarily due to
acquisitions, which generated $117.9 million in sales, and to a lesser extent,
increased sales in Europe, which contributed two percent to sales growth. This
increase was offset in part by the divestiture and lower sales of certain
acquired companies due to the reduction of lower-margin business, which reduced
sales by four and two percent, respectively. At June 30, 1999, J&L operated a
total of 31 showrooms, including seven distribution centers, a distribution
center in Germany and 13 other locations added through acquisitions, compared to
33 showrooms, including eight distribution centers, a distribution center in
Germany and 21 other locations added through acquisitions at June 30, 1998.
FSS external sales for 1999 were $131.3 million, a one percent increase from
$129.7 million in 1998. Excluding the effect of the GE Contract disengagement,
sales increased approximately 20 percent, due to the growth in new and existing
FSS programs. At June 30, 1999, FSS provided programs to 150 customers covering
231 different facilities, compared to 115 customers covering 194 different
facilities at June 30, 1998.
GROSS PROFIT. Gross profit for 1999 was $169.9 million, an increase of 15
percent from $147.9 million in 1998 due to the sales increase. Gross margin for
1999 was 32.0 percent compared to 34.8 percent in 1998. The decline in the gross
margin was predominately due to the lower-margin sales from acquisitions, as the
gross margin in the J&L catalog business and in FSS were approximately the same
as in 1998.
OPERATING EXPENSE. Operating expense for 1999 was $135.4 million, an increase of
27 percent from $106.6 million in 1998. Operating expense as a percentage of
sales was 25.5 percent in 1999 compared to 25.1 percent in 1998. Operating
expense at J&L increased while operating expense at FSS remained relatively
flat.
J&L operating expense increased primarily as a result of increased costs from
acquisitions, including higher amortization of intangible assets, which
accounted for over half of the total increase. The remainder of the increase was
due to the opening of new showrooms, the relocation of the United Kingdom office
and distribution center, and higher direct mail costs. This was partially offset
by cost-reduction actions implemented in November 1998. These cost-reduction
actions involved selected workforce reductions, facility consolidations and
closings and other measures. The GE Contract disengagement resulted in lower
operating expense at FSS, which was offset by additional expense related to new
FSS programs for customers covering more than 35 different facilities.
Included in the company's operating expense were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the company. Charges from Kennametal were $9.5 million in
1999, a decrease of 22 percent from $12.1 million in 1998. Charges from
Kennametal as a percentage of sales were 1.8 percent in 1999 compared to 2.8
percent in 1998. The decline in total charges from Kennametal resulted from the
reduction in warehouse charges of $1.6 million in 1999 due to the company
assuming the operation of several warehouses previously operated by Kennametal,
the closure of another commonly-operated facility that reduced expense by $0.2
million and a reduction in administration charges of $0.8 million due to the
assumption of more administrative functions by the company. Such charges are
expected to continue to decline slightly in coming years.
INTEREST EXPENSE (INCOME) AND OTHER. The company incurred net interest expense
from Kennametal of approximately $0.3 million and net interest income of $2.9
million during 1999 and 1998, respectively. The decrease in interest income from
1998 is due to prior year's investments made from the residual proceeds the
company received from its IPO and from increased costs due to prior year
acquisitions.
INCOME TAXES. The effective tax rate was 39.5 percent in 1999 compared to 39.0
percent in 1998 due, predominately, to higher amounts of non-deductible
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
In 2000, 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. In addition, in 1999, the company's capital needs also included funding
for direct marketing programs in the United Kingdom and in Germany. In 1998, the
company used capital to fund acquisitions, as well as for the capital needs
discussed above. The company's primary sources of financing have been cash from
operations and the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal, and in 1998, the net proceeds from the IPO. The company
anticipates that its cash
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14
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.
Pursuant to the definitive merger agreement between the company and Kennametal,
the company has agreed to commence a cash tender offer for all of its shares of
Class A Common Stock at a price of $8.75 per share. The aggregate value to
acquire the minority interest of approximately 4.3 million shares would be
approximately $37 million. The company will obtain the funds necessary for the
purchases from the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal.
Net cash from operating activities was $13.7 million, $10.0 million and $30.0
million in 2000, 1999 and 1998, respectively. Compared to 1999, the increase in
net cash from operations was realized due to improved working capital
requirements of $13.7 million, due to management's initiatives to reduce working
capital, and higher non-cash items of $1.9 million. This was partially offset by
a decline in the sale of additional accounts receivable to Kennametal of $8.9
million and lower net income of $3.0 million. The working capital improvement
was generated despite a $12.7 million investment in inventory purchased from
Kennametal during the first quarter of 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 by FSS.
In 1999, the decrease in cash from operations compared to 1998 was due to higher
working capital requirements of $35.2 million due primarily to a reduction of
accounts payable and accrued liabilities, and from lower net income of $6.7
million. This was offset by proceeds of $18.3 million from the sale of accounts
receivable to Kennametal as a part of Kennametal's accounts receivable
securitization program and higher non-cash items of $3.6 million.
Net cash used for investing activities was $6.9 million, $17.8 million and $70.6
million in 2000, 1999, and 1998, respectively. The reduction in net cash used
for investing activities in 2000 resulted from no significant change in the
balance of the note receivable from Kennametal, as the note receivable increased
$10.4 million in 1999, and reduced capital expenditures of $2.0 million. This
was partially offset by the $1.6 million of proceeds from the divestiture of the
Strong Tool Co. steel mill business unit realized in 1999.
Compared to 1998, the decrease in cash used from investing activities in 1999
was due to a lack of acquisition activity in 1999, reduced capital expenditures
of $2.6 million, and divestiture proceeds of $1.6 million. This was partially
offset by incremental growth in the note receivable from Kennametal of $9.3
million due to the accounts receivable securitization program. In 1999, the
balance of the note receivable from Kennametal increased $10.4 million
predominately as a result of the participation in Kennametal's accounts
receivable securitization program. In 1998, the company acquired six industrial
supply companies for $57.3 million.
Net cash from (used for) financing activities was $(6.9) million, $5.5 million
and $32.4 million in 2000, 1999 and 1998, respectively. Net cash used for
financing activities in 2000 solely reflected the repayment of amounts borrowed
under notes payable to banks. Compared to 1999, the change is due to borrowings
of $5.8 million, compared to the repayments in 2000, and treasury stock
purchases of $0.3 million.
Compared to 1998, the decline in cash flow from financing activities for 1999
was due to the reduction in proceeds from the IPO, offset by $5.8 million of the
bank borrowings in 1999 compared to $28.1 million of repayments in 1998, the
$15.8 million repayment of notes payable to Kennametal and a reduction in the
purchase of treasury stock of $13.9 million. In 1999, the bank borrowings were
used to fund capital expenditures. In 1998, the company realized proceeds of
$90.4 million from the IPO, while the repayments to Kennametal were for amounts
previously advanced to the company.
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 the company's domestic trade accounts receivable. Pursuant
to this agreement, the company sold $29.1 million and $18.4 million at June 30,
2000 and 1999, respectively, 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 company will
continue to sell receivables to Kennametal under this program as collections
reduce the accounts receivable previously sold. The company will receive
incremental interest income under the Intercompany Debt/Investment and Cash
Management Agreement, as well as servicing revenue from the transaction. The
costs incurred by the company under this program were $1.2 million and $0.2
million in 2000 and 1999, respectively, as a result of the
14
15
discount on the sale of the accounts receivable. The company generated servicing
revenue of $0.1 million in 2000. Both the income and expense are accounted for
as a component of interest expense (income) and other.
There were no acquisitions during 2000 and 1999. During 1998, JLK acquired six
companies that are engaged in the distribution of metalcutting tools and
industrial supplies. The acquisitions were accounted for using the purchase
method of accounting. The consolidated financial statements include the
operating results from the date of acquisition. Of the proceeds from the
company's IPO, $50.4 million were used to fund these acquisitions.
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. There were no repurchases in
2000. In 1999 and 1998, the company repurchased 15,000 and 628,700 shares,
respectively, of its Class A Common Stock at a total cost of $0.3 million and
$14.2 million, respectively. The repurchases were made in the open market or in
negotiated or other permissible transactions. The repurchases of common stock
were financed principally by available funds and short-term borrowings.
On July 2, 1997, the company consummated an IPO whereby 4,897,000 shares of its
Class A Common Stock were issued at a price of $20.00 per share. The net
proceeds from the IPO were $90.4 million and represented the sale of
approximately 20 percent of the company's outstanding common stock. The net
proceeds were used by the company to repay $20.0 million of short-term debt
related to the dividend paid to Kennametal and $20.0 million to repay Kennametal
for the recent acquisitions and income taxes paid for on behalf of the company.
Additional net proceeds of $50.4 million were used to make acquisitions in 1998.
Pending such uses, the net proceeds were loaned to Kennametal under an
Intercompany Debt/Investment and Cash Management Agreement at a fluctuating rate
of interest equal to Kennametal's short-term borrowing costs. Kennametal
maintains unused lines of credit to enable it to repay any portion or all of
such loans on demand by the company.
The company anticipates that its accounts receivable will continue to increase
due to increased sales levels and that inventory levels also will increase due
to the addition of new products and FSS programs. The company believes that cash
flows from operations will be sufficient to fund future growth and meet planned
capital expenditure needs. However, if the company was to make any material
acquisitions, the company may be required to utilize the Intercompany
Debt/Investment and Cash Management Agreement with Kennametal or obtain debt or
equity financing.
BUSINESS IMPROVEMENT PLAN
On September 12, 2000, the company announced that it expects to recognize
special charges of $15 to $20 million as part of its business improvement plan.
The plan is expected to be completed during the first half of 2002. Plans will
include the closing and consolidation of warehouses, satellite operations and
call centers, asset writedowns and associated workforce reductions.
YEAR 2000
Management believes that the company mitigated its exposure relative to year
2000 issues for both information and non-information technology systems. The
company's non-compliant systems were either replaced or modified to become year
2000 compliant prior to December 31, 1999. The transition into the year 2000
resulted in no significant impact to the financial position or operations of the
company. To date, the company's suppliers continue to provide the company with
sufficient goods and services in the year 2000.
Cash flows from operating and financing activities provided funding for these
expenditures. Expenditures incurred in 2000 and 1999 approximate $3.5 million
and $8.0 million, respectively. The company does not anticipate incurring
additional expenditures related to year 2000 issues.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect the
company's business. However, the company does not believe that inflation has had
a material effect on its results of operations in recent years. The company
strives to minimize the effects of inflation through cost containment and price
increases under highly competitive conditions.
15
16
TERMINATION OF GE CONTRACT
During 1997, the company finalized its plan of disengagement from an FSS program
contract with General Electric Corporation (GE) for services provided at certain
metalworking manufacturing facilities within GE's Aircraft Engine Group (GE
Contract). The operating margin related to the GE Contract was lower than the
company's other FSS program contracts. In addition, many of the products
provided by the company to GE under the GE Contract fell outside of the
company's core focus on metalworking consumables and related products.
As such, after careful evaluation, the company concluded that it was not in its
best interest to accede to certain price concessions requested by GE. As a
result, GE served notice to the company that the GE Contract would not be
renewed for a significant portion of the manufacturing facilities served by the
company.
During 1998, the company completed its disengagement from the GE manufacturing
sites that were discontinued. Sales to these GE sites totaled $22.9 million in
1998. In 2000 and 1999, the company did not have sales to GE for those
manufacturing sites that were discontinued. The company has redeployed its
resources related to the GE Contract to take advantage of requests by certain
current FSS program customers to ramp-up their existing programs at an increased
rate as well as to offer FSS programs to new customers.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. 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 accounting. SFAS No. 133 was adopted on July 1, 2000 and had no effect on
the financial condition of the company.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition, however, it does not change existing accounting pronouncements on
revenue recognition, but rather clarifies the SEC's position on pre-existing
rules. SAB No. 101 did not require the company to change existing revenue
recognition policies and, therefore, had no impact on the company's financial
condition at June 30, 2000.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary quarterly financial information for 2000
and 1999. In the opinion of management, such information has been prepared on
the same basis as the consolidated financial statements and reflects all
necessary adjustments (consisting of only normal recurring adjustments) for a
fair presentation of such unaudited quarterly results when read in conjunction
with the consolidated financial statements and notes hereto. The operating
results are not necessarily indicative of results for any future period as there
can be no assurance that any trends reflected in such results will continue in
the future.
Quarter Ended
-------------
(in thousands, except per share data) Sep. 30 Dec. 31 Mar. 31 Jun. 30
------- ------- ------- -------
2000:
Net sales $118,315 $119,729 $133,524 $127,725
Gross profit 38,578 38,014 42,987 39,380
Net income 4,154 4,312 6,279 2,598
Basic earnings per share 0.17 0.18 0.26 0.11
Diluted earnings per share 0.17 0.18 0.26 0.11
1999:
Net sales $131,762 $133,735 $138,306 $127,839
Gross profit 42,790 42,997 44,066 40,072
Net income 3,724 5,212 6,357 5,067
Basic earnings per share 0.15 0.21 0.26 0.21
Diluted earnings per share 0.15 0.21 0.26 0.21
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17
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the year.
In the June 2000 quarter, the company recorded a charge of $0.6 million for
employee separation and $0.2 million related to costs incurred associated with
the evaluation of strategic alternatives.
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18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 10 to the financial statements for required disclosures.
18
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Selected Quarterly Financial Data (Unaudited) 15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants 18
Consolidated Statements of Income 19
Consolidated Balance Sheets 20
Consolidated Statements of Cash Flows 21
Consolidated Statements of Shareowners' Equity 22
Consolidated Statements of Comprehensive Income 23
Notes to Consolidated Financial Statements 24
19
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREOWNERS OF JLK DIRECT DISTRIBUTION INC.
We have audited the accompanying consolidated balance sheets of JLK Direct
Distribution Inc. (a Pennsylvania corporation) and subsidiaries as of June 30,
2000 and 1999, and the related consolidated statements of income, comprehensive
income, shareowners' equity and cash flows for each of the three years in the
period ended June 30, 2000. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JLK Direct Distribution Inc.
and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 24, 2000 (except with respect to the matter discussed in Note 1, as to
which the date is September 11, 2000)
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21
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
-------------------
(in thousands, except per share data) 2000 1999 1998
---- ---- ----
OPERATIONS:
Net sales $499,293 $531,642 $425,348
Cost of goods sold 340,334 361,717 277,417
-------- -------- --------
Gross profit 158,959 169,925 147,931
Operating expense 130,785 135,393 106,623
-------- -------- --------
Operating income 28,174 34,532 41,308
Interest expense (income) and other (162) 881 (3,068)
-------- -------- --------
Income before provision for income taxes 28,336 33,651 44,376
Provision for income taxes 10,993 13,291 17,300
-------- -------- --------
Net income $ 17,343 $ 20,360 $ 27,076
======== ======== ========
PER SHARE DATA:
Basic earnings per share $ 0.71 $ 0.83 $ 1.08
======== ======== ========
Diluted earnings per share $ 0.71 $ 0.83 $ 1.07
======== ======== ========
Basic weighted average shares outstanding 24,513 24,510 25,138
======== ======== ========
Diluted weighted average shares outstanding 24,515 24,513 25,277
======== ======== ========
The accompanying notes are an integral part of these statements.
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22
CONSOLIDATED BALANCE SHEETS
JUNE 30,
--------
(in thousands) 2000 1999
---- ----
ASSETS:
Current assets:
Cash and equivalents $ 2,888 $ 2,807
Notes receivable from Kennametal 11,159 11,611
Accounts receivable, less allowance for doubtful
accounts of $995 and $981, respectively 49,961 53,680
Inventories 123,436 101,770
Deferred income taxes 12,077 6,818
Other current assets 762 52
-------- --------
Total current assets 200,283 176,738
-------- --------
Property, plant and equipment:
Land and buildings 6,394 6,318
Machinery and equipment 34,206 27,419
Less accumulated depreciation (12,464) (8,400)
-------- --------
Net property, plant and equipment 28,136 25,337
-------- --------
Other assets:
Intangible assets, net 59,088 64,383
Deferred income taxes 2,064 7,377
Other assets 656 1,154
-------- --------
Total other assets 61,808 72,914
-------- --------
Total assets $290,227 $274,989
======== ========
LIABILITIES:
Current liabilities:
Notes payable to banks $ 790 $ 7,737
Accounts payable 30,389 21,025
Due to Kennametal and affiliates 7,020 4,609
Income taxes payable 2,923 4,903
Accrued payroll and vacation pay 2,938 3,220
Other 6,636 6,927
-------- --------
Total current liabilities 50,696 48,421
-------- --------
Deferred income taxes 2,530 5,519
Other liabilities 4,524 5,175
-------- --------
Total liabilities 57,750 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 issued, 4,288 and 4,273 outstanding 49 49
Class B Common Stock, $.01 par value; 50,000 shares
authorized; 20,237 issued and outstanding 202 202
Additional paid-in capital 182,604 182,822
Retained earnings 64,779 47,436
Treasury stock, at cost, 629 and 644 shares of Class A common stock held (14,204) (14,529)
Unearned compensation (91) --
Accumulated other comprehensive loss (862) (106)
-------- --------
Total shareowners' equity 232,477 215,874
-------- --------
Total liabilities and shareowners' equity $290,227 $274,989
======== ========
The accompanying notes are an integral part of these statements.
22
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------
(in thousands) 2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 17,343 $ 20,360 $ 27,076
Adjustments for noncash items:
Depreciation 4,659 3,366 1,902
Amortization 4,727 5,383 3,283
Loss on sale of assets 1,483 177 112
Changes in certain assets and liabilities, net of effects from acquisitions
and divestiture:
Accounts receivable (7,237) (811) (7,799)
Proceeds from sale of accounts receivable 9,409 18,266 --
Inventories (22,570) (6,208) (10,609)
Accounts payable and accrued liabilities 9,603 (28,115) 16,971
Other (3,739) (2,465) (951)
-------- -------- --------
Net cash flow from operating activities 13,678 9,953 29,985
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,699) (9,681) (12,286)
Notes receivable from Kennametal 690 (10,442) (1,169)
Acquisitions, net of cash -- -- (57,341)
Divestiture -- 1,617 --
Other 82 709 179
-------- -------- --------
Net cash flow used for investing activities (6,927) (17,797) (70,617)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds from initial public offering of
Class A Common Stock -- -- 90,430
Borrowings under (repayments of) notes
payable to banks (6,947) 5,822 (28,064)
Repayments of notes payable to Kennametal -- -- (15,805)
Purchase of treasury stock -- (332) (14,197)
-------- -------- --------
Net cash flow from (used for) financing activities (6,947) 5,490 32,364
-------- -------- --------
Exchange rate effect on cash 277 446 (105)
-------- -------- --------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents 81 (1,908) (8,373)
Cash and equivalents, beginning of year 2,807 4,715 13,088
-------- -------- --------
Cash and equivalents, end of year $ 2,888 $ 2,807 $ 4,715
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 8,663 $ 17,491 $ 15,831
Interest paid 395 471 49
The accompanying notes are an integral part of these statements.
23
24
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
YEAR ENDED JUNE 30,
-------------------
(in thousands) 2000 1999 1998
---- ---- ----
CLASS A COMMON STOCK:
Balance at beginning of year $ 49 $ 49 $ --
Initial public offering of 4,897 shares of Class A Common Stock, including
surrender of 640 shares of Class B Common Stock by Kennametal -- -- 48
Sale and exchange of 20 shares of Class B Common Stock for Class A
Common Stock by Kennametal -- -- 1
-------- -------- --------
Balance at end of year 49 49 49
-------- -------- --------
CLASS B COMMON STOCK:
Balance at beginning of year 202 202 --
Exchange of investment by and advances from Kennametal for 20,897 shares of
Class B Common Stock -- -- 209
Surrender of 640 shares of Class B Common Stock by Kennametal -- -- (6)
Sale and exchange of 20 shares of Class B Common Stock for Class A
Common Stock by Kennametal -- -- (1)
-------- -------- --------
Balance at end of year 202 202 202
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 182,822 182,822 --
Issuance of Class A Common Stock under employee stock plan (218) -- --
Initial public offering of 4,897 shares of Class A Common Stock, including
surrender of 640 shares of Class B Common Stock by Kennametal -- -- 90,388
Exchange of investment by and advances from Kennametal for 20,897 shares of
Class B Common Stock -- -- 92,434
-------- -------- --------
Balance at end of year 182,604 182,822 182,822
-------- -------- --------
RETAINED EARNINGS:
Balance at beginning of year 47,436 27,076 --
Net income 17,343 20,360 27,076
-------- -------- --------
Balance at end of year 64,779 47,436 27,076
-------- -------- --------
TREASURY STOCK:
Balance at beginning of year (14,529) (14,197) --
Issuance of Class A Common Stock under employee stock plan 325 -- --
Purchase of treasury stock, 15 and 629 shares of Class A Common Stock
in 1999 and 1998 -- (332) (14,197)
-------- -------- --------
Balance at end of year (14,204) (14,529) (14,197)
-------- -------- --------
UNEARNED COMPENSATION:
Balance at beginning of year -- -- --
Issuance of Class A Common Stock under employee stock plan (106) -- --
Amortization of unearned compensation 15 -- --
-------- -------- --------
Balance at end of year (91) -- --
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year (106) (17) 88
Foreign currency translation adjustments (756) (89) (105)
-------- -------- --------
Balance at end of year (862) (106) (17)
-------- -------- --------
INVESTMENTS BY AND ADVANCES FROM KENNAMETAL:
Balance at beginning of year -- -- 92,643
Exchange of investment by and advances from Kennametal for 20,897 shares of
Class B Common Stock -- -- (92,643)
-------- -------- --------
Balance at end of year -- -- --
-------- -------- --------
Total shareowners' equity, June 30 $232,477 $215,874 $195,935
======== ======== ========
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED JUNE 30,
-------------------
(in thousands) 2000 1999 1998
---- ---- ----
COMPREHENSIVE INCOME:
Net income $ 17,343 $ 20,360 $ 27,076
Foreign currency translation adjustments (756) (89) (105)
-------- -------- --------
Comprehensive income $ 16,587 $ 20,271 $ 26,971
======== ======== ========
The accompanying notes are an integral part of these statements.
25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: FORMATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements of JLK Direct Distribution
Inc. (the company) include the operations of J&L America, Inc. d/b/a J&L
Industrial Supply (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.
In April 1997, the company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission with respect
to an initial public offering (IPO) of the company's Class A Common Stock. In
anticipation of the IPO, Kennametal contributed to the company the stock of J&L,
including the J&L United Kingdom operations, and the assets and liabilities of
FSS. Immediately prior to the effective date of the IPO, Kennametal exchanged
its currently outstanding investment for 20,897,000 shares of Class B Common
Stock.
On July 2, 1997, the company consummated the IPO whereby 4,897,000 shares of its
Class A Common Stock were issued at a price of $20.00 per share. The net
proceeds from the IPO were $90.4 million and represented the sale of
approximately 20 percent of the company's outstanding common stock. The net
proceeds were used by the company to repay $20.0 million of short-term debt
related to a dividend paid to Kennametal and to repay $20.0 million to
Kennametal for acquisitions in 1997 and income taxes paid on behalf of the
company. The remaining net proceeds of $50.4 million were used to pay for 1998
acquisitions.
In connection with the IPO, Kennametal surrendered to the company 640,000 shares
of Class B Common Stock equal to the number of additional shares of Class A
Common Stock purchased by the underwriters upon exercise of the underwriters'
over-allotment option. In addition, Kennametal sold 20,000 shares of Class B
Common Stock at $20.00 per share to one of the members of its and the company's
board of directors. The 20,000 shares of Class B Common Stock were subsequently
converted on a one-to-one basis to Class A Common Stock. Subsequent to the IPO,
4,917,000 shares of Class A Common Stock were outstanding, and Kennametal held
20,237,000 shares of Class B Common Stock. Kennametal's ownership increased to
approximately 83 percent due to treasury stock purchases made by the company
since the IPO.
In the December 1999 quarter, Kennametal announced that it engaged an investment
bank to explore strategic alternatives regarding its ownership interest in the
company, including a possible divestiture. At that time, Kennametal management
indicated that it believed a divestiture might enhance growth prospects for both
Kennametal and the company by allowing each company to focus on its core
competencies. Kennametal completed a thorough and disciplined process of
evaluating strategic alternatives and on May 2, 2000, decided to terminate
consideration of a possible divestiture at that time, although Kennametal
management has indicated that it continues to believe there may be better owners
for the company.
On July 20, 2000, Kennametal made a proposal to the company to acquire the
outstanding shares of the company that it does not already own. The proposal is
not conditioned on financing. Kennametal reserved the right to amend or withdraw
this proposal at any time at its sole discretion.
In July 2000, the company, its directors (including a former director) and
Kennametal were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the proposal of Kennametal to acquire the outstanding stock of
the company not owned by Kennametal. The company believes the actions lack merit
and will defend them vigorously. The amount of any ultimate exposure cannot be
determined with certainty at this time. Management believes that any losses
derived from the final outcome of these actions and proceedings will not be
material in the aggregate to the company's financial condition.
On September 11, 2000, the company and Kennametal announced that they have
entered into a definitive merger agreement for Kennametal to acquire the
outstanding shares of the company that Kennametal does not already own. Pursuant
to the agreement, the company has agreed to commence a cash tender offer for all
of its shares of Class A Common Stock at a price of $8.75 per share. Following
the company's purchase of shares in the tender offer,
26
27
Kennametal will acquire the remainder of the minority shares at the same price
in a merger. The aggregate value to acquire the minority interest of
approximately 4.3 million shares would be approximately $37 million. The
transaction has been unanimously approved by JLK's Board of Directors, including
its special committee comprised of independent directors of the JLK Board.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist in
evaluating the company's financial statements. Unless otherwise specified, any
references to a "year" is to a fiscal year ended June 30.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Temporary cash investments having original maturities of three months or less
are considered cash equivalents. Cash equivalents consist principally of
investments in money market funds and certificates of deposit.
NOTES RECEIVABLE FROM KENNAMETAL
For 2000 and 1999, notes receivable from Kennametal reflect the company's
position in Kennametal's centralized cash management system (see Note 12).
INVENTORIES
Inventories are carried at the lower of cost using the first-in, first-out
(FIFO) method or market.
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 net income. Depreciation for financial reporting
purposes is computed using the straight-line method over the estimated useful
lives of the assets ranging from three to 40 years.
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 in the company's balance sheet. These catalog costs are amortized to
expense over the projected life of a catalog, typically one year.
INTANGIBLE ASSETS
Goodwill includes an allocation from Kennametal for the excess of costs over the
fair value of net assets acquired related to the historical acquisition costs of
the company and includes the excess of cost over net assets of acquired
companies. Goodwill is being amortized on a straight-line basis over periods
ranging from 20 to 40 years. The company assesses the recoverability of goodwill
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The carrying value of goodwill would be adjusted to
the present value of the future operating cash flows if the asset cannot be
recovered over its remaining life. Other intangible assets arising from
acquisitions consist of employee retention and non-compete agreements and are
being amortized over the life of the agreements, which range from three to five
years.
COMMON STOCK
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share, while holders of Class B Common Stock are entitled to ten
votes per share on all matters to be voted on by the company's shareowners.
27
28
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists solely of cumulative foreign
currency translation adjustments.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
outstanding during the period, while diluted earnings per share is calculated to
reflect the potential dilution that occurs related to issuance of common stock
under stock option grants. The difference between basic and diluted earnings per
share relates solely to the effect of common stock options.
For purposes of determining the number of dilutive shares outstanding, weighted
average shares outstanding for basic earnings per share calculations were
increased by 2,630; 2,622; and 139,283 in 2000, 1999 and 1998, respectively, due
to the dilutive effect of unexercised stock options. Earnings per share amounts
for each quarter are required to be computed independently and, therefore, may
not equal the amount computed for the year.
REVENUE RECOGNITION
The company recognizes revenue from product sales upon shipment to the customer.
PRE-OPENING COSTS
Pre-opening costs related to showrooms, distribution centers and new integrated
supply contracts are expensed as incurred.
INCOME TAXES
The provision for federal and state income taxes has been calculated as if the
company were a stand-alone corporation filing separate tax returns. The company
is included in Kennametal's federal consolidated income tax group and in certain
circumstances, certain of the company's subsidiaries may be included with
certain subsidiaries of Kennametal in combined, consolidated or unitary income
tax groups for state and local tax purposes.
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 international operations are translated into U.S.
dollars using year-end exchange rates, while sales and expenses are translated
at average exchange rates throughout the year. The resulting net translation
adjustments are recorded as a component of accumulated other comprehensive loss.
NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. 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
accounting. SFAS No. 133 was adopted on July 1, 2000 and had no effect on the
financial condition of the company.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition, however, it does not change existing accounting pronouncements on
revenue recognition, but rather clarifies the SEC's position on pre-existing
rules. SAB No. 101 did not require the company to change existing revenue
recognition policies and, therefore, had no impact on the company's financial
condition at June 30, 2000.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the current year presentation.
28
29
NOTE 3: ACQUISITIONS AND DIVESTITURE
During 1998, the company acquired the following distributors of metalcutting
tools and industrial supplies:
Acquisition
Date Acquired Acquisition Headquarters
---------------------------------------------------------------------------------------
October 1997 Car-Max Tool & Cutter, Inc. Rockford, Ill.
December 1997 GRS Industrial Supply Co. Grand Rapids, Mich.
January 1998 Production Tools Sales, Inc. Dallas, Texas
March 1998 Dalworth Tool & Supply, Inc. Arlington, Texas
March 1998 ATS Industrial Supply Company Salt Lake City, Utah
May 1998 Strong Tool Co. Cleveland, Ohio
---------------------------------------------------------------------------------------
There were no acquisitions during 2000 or 1999. All acquisitions were accounted
for under the purchase method of accounting. The excess of the purchase price
over the fair values of the net assets acquired for the acquisitions was
approximately $39.9 million, which has been recorded as goodwill. The net
purchase price of the acquisitions in 1998 was allocated as follows (in
thousands):
Current assets $ 38,360
Property, plant & equipment 3,431
Other long-term assets 590
Goodwill 39,850
Current liabilities (24,890)
--------
Purchase price, net of cash $ 57,341
========
The results of operations of the acquired businesses have been included in the
consolidated financial statements from the date of acquisition. On a pro forma
basis, as if the acquisitions had taken place at the beginning of 1998,
consolidated net sales would have been $531.5 million. The pro forma impact on
net income and diluted earnings per share would not be materially different from
the amounts reported in 1998.
In connection with the acquisitions, the company also entered into employee
retention and non-compete agreements which amounted to approximately $6.6
million and $4.1 million for the acquisitions consummated in 1998 and 1997,
respectively, which have been accounted for as noncash transactions. The
liability for these agreements at June 30, 2000 and 1999 recorded in other
current liabilities was $1.5 million and $2.5 million, respectively, and in
other liabilities was $1.1 million and $2.9 million, respectively.
On March 31, 1999, the company sold the assets of the steel mill business of its
subsidiary, Strong Tool Co., for $1.6 million. There was no significant impact
on earnings as a result of this sale. This business had annual sales of
approximately $18.0 million. As this business was marginally profitable, the
effect of this sale on net income and diluted earnings per share, for all
periods presented, was not material.
NOTE 4: ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
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 the company's domestic trade accounts receivable. Pursuant
to this agreement, the company sold $29.1 million and $18.4 million at June 30,
2000 and 1999, respectively, 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 (see Note 12).
The costs incurred by the company under this program were $1.2 million and $0.2
million in 2000 and 1999, respectively, from the discount on the sale of the
receivables. The company generated servicing revenue of $0.1 million in 2000.
Both the income and expense and are accounted for as a component of interest
expense (income) and other.
29
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NOTE 5: INTANGIBLE ASSETS
Intangible assets consisted of the following:
(in thousands) 2000 1999
---- ----
Goodwill $ 68,772 $ 68,772
Other intangible assets 8,493 9,203
-------- --------
77,265 77,975
Accumulated amortization (18,177) (13,592)
-------- --------
Intangible assets - net $ 59,088 $ 64,383
======== ========
NOTE 6: NOTES PAYABLE TO BANKS
Notes payable to banks represent short-term borrowings under credit lines
obtained with United States and international commercial banks. These credit
lines totaled approximately $27.4 million at June 30, 2000, of which $26.6
million was unused.
The company and Kennametal are co-guarantors on a British pound 13.5 million
($20.5 million equivalent) line of credit with a bank, that matures June 30,
2001. This line of credit supports Kennametal's and the company's operations in
the United Kingdom. Interest payable under the line of credit is based on one of
the following rates, depending upon the manner in which the credit facility is
used: the Bank's base rate, as defined in the credit facility, plus 1%, for
overdrafts; or LIBOR plus 0.9%, for short-term borrowings. The effective rate
was 7.0 percent and 6.0 percent at June 30, 2000 and 1999, respectively. At June
30, 2000 and 1999, total outstanding borrowings under this facility were $0.8
million and $11.9 million, respectively, of which $0.8 million and $7.7 million,
respectively, were borrowed directly by the company, and are included in notes
payable to banks.
The company has a DM 10.0 million ($4.9 million equivalent) line of credit with
a bank to support its German operations. This line of credit is guaranteed by
Kennametal, is due 30 days subsequent to any termination of this guarantee by
Kennametal, and bears interest at 5.0 percent. The company also has available a
credit facility with a bank aggregating $2.0 million, with interest payable at
the prevailing prime interest rate. The credit facility may be terminated at the
option of the bank or the company. At June 30, 2000 and 1999, no amounts were
outstanding under these credit facilities.
NOTE 7: LEASES
The majority of the operations of the company are conducted on leased premises,
some of which are leased from related parties. The leases (most of which provide
for the payment of real estate taxes, insurance and other operating costs) are
for varying periods, the longest extending to June 2013. At June 30, 2000, the
minimum annual rentals on such leases are as follows:
TOTAL (INCLUDING
RELATED PARTY RELATED PARTY
(in thousands) COMMITMENTS) COMMITMENTS
------------ -----------
2001 $5,118 $353
2002 3,746 325
2003 2,958 279
2004 2,295 242
2005 1,154 205
2006 and thereafter 4,631 205
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for the years ended 2000, 1999 and
1998 was $5.9 million, $6.0 million and $5.6 million, respectively, including
$0.5 million, $1.4 million and $1.8 million, respectively, paid to related
parties. In the opinion of the company's management, these leases with related
parties are on terms that approximate fair market value.
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31
NOTE 8: INCOME TAXES
Income (loss) before income taxes and the provision for income taxes consisted
of the following:
(in thousands) 2000 1999 1998
---- ---- ----
Income (loss) before provision for income taxes:
United States $29,340 $36,491 $45,786
International (1,004) (2,840) (1,410)
------- ------- -------
Total income before provision for income taxes $28,336 $33,651 $44,376
======= ======= =======
Current income taxes:
Federal $12,426 $13,100 $17,600
State 1,191 1,500 2,100
------- ------- -------
Total 13,617 14,600 19,700
Deferred income taxes (2,624) (1,309) (2,400)
------- ------- -------
Provision for income taxes $10,993 $13,291 $17,300
======= ======= =======
Effective tax rate 38.8% 39.5% 39.0%
======= ======= =======
The reconciliation of income taxes computed using the statutory U.S. income tax
rate and the provision for income taxes was as follows:
(in thousands) 2000 1999 1998
---- ---- ----
Income taxes at U.S. statutory rate $ 9,917 $11,777 $15,532
State income taxes, net of Federal tax benefits 352 901 1,445
Nondeductible goodwill 509 509 409
Foreign earnings rate differential (44) (100) (240)
Other 259 204 154
------- ------- -------
Provision for income taxes $10,993 $13,291 $17,300
======= ======= =======
Deferred tax assets and liabilities consisted of the following:
(in thousands) 2000 1999
---- ----
Deferred tax assets (liabilities):
Inventory valuation and reserves $ 4,663 $4,078
Net operating loss carryforwards 1,741 1,572
State taxes 977 948
Accrued vacation and workers compensation 877 853
Deductible goodwill 626 585
Pension benefits 739 455
Postretirement benefits 323 347
Bad debts 402 335
Other 1,172 247
Property, plant and equipment (441) (744)
------- ------
Net deferred tax asset $11,079 $8,676
======= ======
Included in deferred tax assets at June 30, 2000 are unrealized tax benefits
totaling $1.7 million related to net operating loss carryforwards in Germany,
which can be carried forward indefinitely.
NOTE 9: PENSION AND OTHER POSTRETIREMENT BENEFITS
For pension benefits, the company participates in Kennametal's Retirement Income
Plan (the Plan) which covers substantially all of the company's employees. The
benefits provided by the Plan are measured by length of service, compensation
and other factors and are funded by a trust established under the Plan. The Plan
is currently overfunded and complies with the funding requirements of the
Employee Retirement Income Security Act of 1974, as amended. Plan assets consist
principally of common stocks, corporate bonds and U.S. government securities. It
is not practicable to determine the funded status of the portion of the Plan
that relates to the company, as the assets of the plan are not specifically
allocated to individual participants. On an overall basis, the funded assets of
the Plan were in excess of the projected benefit obligation as of June 30, 2000
and 1999. The company recognized pension cost of $0.8 million, $0.2 million and
$0.2 million in 2000, 1999 and 1998, respectively.
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32
For postretirement benefits, the company participates in Kennametal's sponsored
plan whereby Kennametal provides varying levels of postretirement health care
and life insurance benefits for retired employees. Substantially all employees
may become eligible for these benefits if they reach normal retirement age while
working for the company. These benefits are currently unfunded. The funded
status of the company's portion of this plan is as follows:
OTHER POSTRETIREMENT BENEFITS
(in thousands) 2000 1999
---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $ 650 $ 454
Service cost 111 114
Interest cost 44 44
Plan amendments -- 19
Actuarial (gains) losses 351 19
Benefits paid -- --
------- -----
Benefit obligation, end of year 1,156 650
Plan assets -- --
------- -----
Funded status of plans (1,156) (650)
Unrecognized prior service cost 11 14
Unrecognized actuarial gains 322 (28)
------- -----
Net accrued obligation $ (823) $(664)
======= =====
The obligation is recorded as a component of other liabilities. The components
of other postretirement benefits cost for the company's portion of this plan is
as follows:
(in thousands) 2000 1999 1998
---- ---- ----
Service cost $111 $114 $ 55
Interest cost 44 44 26
Net amortization and deferral 3 12 (3)
---- ---- ----
Net other postretirement benefits cost $158 $170 $ 78
==== ==== ====
The discount rate used to determine the present value of the other
postretirement benefit obligation was 8.0%, 7.5% and 7.0% for 2000, 1999 and
1998, respectively. The annual assumed rate of increase in the per capita cost
of covered benefits (the health care cost trend rate) for health care plans was
7.5% in 2000 and was assumed to decrease gradually to 5.5% in 2002 and remain at
that level thereafter. A change of one percentage point in the assumed health
care cost trend rates would not materially affect the total service and interest
cost components of other postretirement benefits cost or the other
postretirement benefit obligation at June 30, 2000.
The company also participates in Kennametal's 401(k) Thrift Plan for employees.
The charge to operations incurred by the company for contributions totaled $1.0
million, $1.0 million and $0.7 million in 2000, 1999 and 1998, respectively.
NOTE 10: FINANCIAL INSTRUMENTS
FAIR VALUE
The company had $2.9 million and $2.8 million in cash and equivalents at June
30, 2000 and 1999, respectively, which approximates fair value because of the
short maturity of these investments. The estimated fair value of notes payable
to banks approximated $0.8 million and $7.7 million at June 30, 2000 and 1999,
respectively. Fair value was determined using discounted cash flow analysis and
the company's incremental borrowing rates for similar types of arrangements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. With respect to trade accounts receivable, concentrations of credit
risk are somewhat reduced because the company serves numerous customers in many
industries and geographic areas. As of June 30, 2000 and 1999, receivables with
the company's five largest accounts represented 10 percent and 12 percent,
respectively, of total accounts receivable.
NOTE 11: SIGNIFICANT CUSTOMERS
During 1997, the company finalized its plan of disengagement from an FSS program
contract with General Electric Corporation (GE) for services provided at certain
metalworking manufacturing facilities within GE's Aircraft Engine Group (the GE
Contract). The operating margin related to the GE Contract was lower than the
company's
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other FSS program contracts. In addition, many of the products provided by the
company to GE under the GE Contract fell outside of the company's core focus on
metalworking consumables and related products.
As such, after careful evaluation, the company concluded that it was not in its
best interest to accede to certain price concessions requested by GE. As a
result, GE served notice to the company that the GE Contract would not be
renewed for a significant portion of the manufacturing facilities served by the
company.
During 1998, the company completed its disengagement from the GE manufacturing
sites that were discontinued. Sales to these GE sites totaled $22.9 million in
1998. In 2000 and 1999, the company did not have any sales to GE for those
manufacturing sites that were discontinued. The company has redeployed its
resources related to the GE Contract to take advantage of requests by certain
current FSS program customers to ramp-up their existing programs at an increased
rate as well as to offer FSS programs to new customers.
NOTE 12: RELATED PARTY TRANSACTIONS
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) 2000 1999 1998
---- ---- ----
Purchases from Kennametal and subsidiaries $78,190 $55,283 $40,700
Sales to Kennametal and subsidiaries 8,912 13,130 10,583
The company and Kennametal have entered into a number of agreements, which
became effective upon completion of the IPO, for the purpose of defining certain
relationships between the two companies. As a result of Kennametal's ownership
interest in the company, the terms of such agreements were not, and the terms of
any future amendments to those agreements may not be, the result of arm's-length
negotiations. Management believes that the fees charged by Kennametal are
reasonable and such fees are representative of the expense that the company
would incur on a stand-alone basis. The agreements primarily have initial terms
of ten years. Net costs charged to the company by Kennametal under these
agreements were as follows:
(in thousands) 2000 1999 1998
---- ---- ----
Administrative services agreement $4,572 $5,555 $ 6,308
Warehousing agreement (64) 3,705 5,352
Shared facilities agreement 499 109 329
Lease agreement 106 106 106
------ ------ -------
Net costs charged by Kennametal $5,113 $9,475 $12,095
====== ====== =======
Descriptions of these agreements, and the material terms of which, are set forth
below.
ADMINISTRATIVE SERVICES AGREEMENT
The company and Kennametal entered into an intercompany administrative services
agreement with respect to services to be provided by Kennametal to the company.
The administrative services agreement provides that such services will be
provided in exchange for fees which, generally, (i) in the case of services
purchased by Kennametal from third parties for the company, are based upon the
incremental cost charged by such third parties to Kennametal for such services
provided to the company and (ii) in the case of services directly provided by
Kennametal, are based on the estimated costs, including a reasonable allocation
of direct and indirect overhead costs, incurred by Kennametal for the services
it provides directly to the company. The services initially provided by
Kennametal to the company include, among other things, certain treasury, general
accounting and administrative services including, tax, risk management, human
resources, legal, internal audit, marketing, executive time and space, and
information system services. The administrative services agreement also provides
that Kennametal will arrange and administer all existing insurance arrangements
and may continue coverage of the company under Kennametal's insurance policies
and will allow eligible employees of the company to participate in all of
Kennametal's benefit plans.
WAREHOUSING AGREEMENTS
The company and Kennametal entered into separate warehousing agreements with
respect to (i) Kennametal distribution centers and warehouses that store
products for the company and (ii) company distribution centers and warehouses,
that store products for Kennametal. The terms of each warehousing agreement
provide for the
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warehouser to store the warehousee's products in the warehouses, segregated and
separate from the warehouser's products and upon request by the warehousee to
ship its products from these warehouses to the warehousee's customers. The
warehousee pays to the warehouser a charge for each of the products picked,
packed and shipped based upon an allocation of costs (including overhead)
incurred by the warehouser at these warehouses.
SHARED FACILITIES AGREEMENT
The company and Kennametal entered into shared facilities agreements pursuant to
which each company subleases to the other company the facilities, which are
leased by either of the companies and shared with the other company. The shared
facilities agreements provide that the relevant sublessor leases space to the
sublessee at a rental rate equal to a pro rata share (based on square feet
occupied) of all costs and expenses (principally fixed rent) under the relevant
lease. The company's management believes that the rental rates payable by the
company are commensurate with market rates.
LEASE AGREEMENT
The company and Kennametal entered into a lease agreement pursuant to which
Kennametal subleases to the company space within buildings located on
Kennametal's premises.
PRODUCT SUPPLY AGREEMENT
The company and Kennametal entered into a product supply agreement pursuant to
which Kennametal supplies and the company purchases from Kennametal all of the
company's requirements for metalworking consumables and related products
direct-marketed by the company, and Kennametal further agreed to supply all
metalworking consumables and related products requested pursuant to FSS
programs, except as otherwise agreed from time to time between the company and
Kennametal. The company is entitled to purchase products for its
direct-marketing business at prices discounted from Kennametal's published price
for each such product depending upon the volume of each such product purchased
by the company.
TAX-SHARING AGREEMENT
Pursuant to the tax-sharing agreement, the company makes payments to Kennametal
determined as though the company were to file separate federal, state and local
income tax returns.
TRADEMARK LICENSE AGREEMENT
The company and Kennametal entered into a trademark license agreement which
provides, among other things, for the grant to the company by Kennametal of a
non-exclusive license to use the trademarks service marks, trade names and other
intellectual property of Kennametal in connection with the company's business.
The company has also granted to Kennametal a non-exclusive license to use the
company's trademarks service marks and trade names on terms similar to those
granted by Kennametal to the company.
INDEMNIFICATION AGREEMENT
Under the indemnification agreement, subject to limited exceptions, the company
is required to indemnify Kennametal and its directors, officers, employees,
agents and representatives for liabilities under federal or state securities
laws as a result of the IPO, including liabilities arising out of or based upon
alleged misrepresentations in or omissions from the IPO registration statement.
The indemnification agreement also provides that each party thereto (the
Indemnifying Party) will indemnify the other party thereto and its directors,
officers, employees, agents and representatives (the Indemnified Party) for
liabilities that may be incurred by the Indemnified Party relating to, resulting
from or arising out of: (i) the businesses and operations conducted or formerly
conducted, or assets owned or formerly owned, by the Indemnifying Party and its
subsidiaries (except, in the case where Kennametal is the Indemnifying Party,
such businesses, operations and assets of the company and its subsidiaries); or
(ii) the failure by the Indemnifying Party to comply with any other agreements
executed in connection with the IPO, except to the extent caused by the
Indemnified Party. The indemnification agreement also provides that the company
will indemnify Kennametal for any liabilities incurred under guarantees of
leases.
NON-COMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT
Pursuant to a non-competition and corporate opportunities allocation agreement
(the Corporate Opportunities Agreement) entered into between Kennametal and the
company: (i) Kennametal agrees for as long as the other intercompany agreements
remain in effect (whose term is 10 years) (A) not to compete with the company in
the business of direct marketing of a broad range of metalworking consumables
and related products through catalogs, monthly promotional flyers, additional
mailings and advertisements, telemarketing efforts, direct-sales efforts and
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showrooms targeted at small- and medium-sized metalworking shops, as well as the
supply of consumable tooling and related metalworking products at designated
manufacturing plants of large industrial customers through integrated supply
programs (the Base Business), except where the company has been offered by
Kennametal or its affiliates or a third party, the right to acquire a business
which falls under the Base Business at fair market value, and the company's
Board of Directors has determined, for whatever reason, that the company shall
not acquire such business, and (B) not to sell, offer to sell, distribute or
otherwise make available Kennametal manufactured and branded products to anyone
who intends to direct market such products and therefore competes with the
company's direct-marketing program except, with respect to those contracts,
arrangements or relationships in existence on the date of the Corporate
Opportunities Agreement or with the prior written consent of the company; and
(ii) the company has agreed for as long as the other intercompany agreements
remain in effect not to sell, offer to sell, distribute or otherwise make
available any products which compete directly or indirectly with Kennametal
without the prior written consent of Kennametal, except in connection with the
provision of integrated industrial supply programs as may be required
specifically by customers thereof.
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT
The company and Kennametal entered into an Intercompany Debt/Investment and Cash
Management Agreement (the Cash Management Agreement) under which the company
will continue to participate in Kennametal's centralized cash management system.
The Cash Management Agreement provides for a daily transfer from the company's
cash accounts to Kennametal's centralized cash accounts and daily funding of the
disbursements of the company from such Kennametal cash account. The company
receives interest on net cash flows to Kennametal's centralized cash accounts
and is charged interest on net borrowings from the Kennametal centralized cash
accounts at a rate equal to the interest rate available to Kennametal from
outside sources for short-term borrowings or investments, depending upon the
overall position of the centralized cash accounts. The company pays for this
service pursuant to the Administrative Services Agreement and reimburses
Kennametal for an allocable portion of Kennametal's facility and/or commitment
fees under its credit lines. Total net interest income under the Cash Management
Agreement amounted to $1.2 million and $2.9 million in 2000 and 1998, while
interest expense amounted to $0.3 million in 1999.
CORPORATE AGREEMENT
The company and Kennametal entered into a corporate agreement under which the
company grants to Kennametal a continuing option, transferable, in whole or in
part, to any of its affiliates, to purchase, under certain circumstances,
additional shares of Class B Common Stock or Class A Common Stock (the Stock
Option). The Stock Option may be exercised by Kennametal simultaneously with the
issuance of any equity security of the company or immediately prior to a
Tax-Free Spin-Off to the extent necessary to maintain its then existing
percentage of the total voting power and economic value of the company at 80
percent of all outstanding Common Stock or, in connection with a Tax-Free
Spin-Off, in order to acquire stock ownership necessary to effect a Tax-Free
Spin-Off. The purchase price of the shares of Common Stock purchased upon any
exercise of the Stock Option, subject to certain exceptions, will be based on
the market price of the Class A Common Stock.
Kennametal will continue to provide services to the company in the future in
accordance with the terms of the intercompany agreements. The amounts charged
pursuant to these intercompany agreements reflect the actual costs of providing
these services. The company periodically remits cash to Kennametal in payment of
such operating expense allocations.
NOTE 13: STOCK OPTION AND INCENTIVE PLAN
Effective June 27, 1997, the company adopted a stock option and incentive plan
(the Plan) under which directors, officers and employees of the company or
Kennametal may be granted options to purchase shares of Class A Common Stock.
The Plan authorizes the issuance of up to 2,000,000 shares of Class A Common
Stock. Options are granted at fair market value at the date of grant and are
exercisable under specified conditions for up to ten years from the date of
grant. Under provisions of the Plan, participants may deliver to the company
stock in payment of the option price and receive credit for the fair market
value of the shares of Class A Common Stock delivered on the date of delivery.
Under the Plan, shares may also be awarded to eligible employees without
payment. The Plan specifies that such shares are to be awarded in the name of
the employee, who will then have all the rights of a shareowner, subject to
certain restrictions or forfeitures.
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The company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation", but elected to continue to measure compensation
expense in accordance with Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation expense for stock
options has been recognized in the accompanying consolidated financial
statements.
If compensation cost had been determined based on the value of options granted,
consistent with the methodology in SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts) 2000 1999 1998
---- ---- ----
Net income:
As reported $17,343 $20,360 $27,076
Pro forma 17,127 20,268 26,890
Basic earnings per share:
As reported 0.71 0.83 1.08
Pro forma 0.70 0.83 1.07
Diluted earnings per share:
As reported 0.71 0.83 1.07
Pro forma 0.70 0.83 1.06
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:
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.18% 4.37% 5.85%
Expected life (years) 5 5 5
Expected volatility 48.04% 40.00% 35.00%
Expected dividend yield -- -- --
A summary of stock option activity for 2000, 1999 and 1998 is set forth below:
2000 1999 1998
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ------ ------- ------ ------- ------
Options outstanding, beginning of year 543,500 $18.02 553,500 $20.90 513,500 $20.00
Granted 216,500 7.70 144,000 11.17 40,000 32.42
Exercised -- -- -- -- -- --
Lapsed and forfeited (3,500) 16.37 (154,000) 21.96 -- --
------- ------ -------- ------ ------- ------
Options outstanding, end of year 756,500 $15.09 543,500 $18.02 553,500 $20.90
======= ====== ======== ====== ======= ======
Options exercisable, end of year 474,673 $18.92 439,500 $19.56 513,500 $20.00
======= ====== ======== ====== ======= ======
Weighted average fair value of
options granted during the year $ 3.83 $ 4.65 $13.19
====== ====== ======
Stock options outstanding at June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- --------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE REMAINING CONTRACTUAL AVERAGE AVERAGE
PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ------- ------------ -------------- ------- --------------
$ 7.09 150,000 9.84 $ 7.09 -- $ --
9.13-11.00 96,500 9.19 9.39 33,000 9.89
11.53 102,500 8.33 11.53 34,173 11.53
20.00 391,500 6.99 20.00 391,500 20.00
26.94 16,000 7.07 26.94 16,000 26.94
------- ---- ------ ------- ------
756,500 8.02 $15.09 474,673 $18.92
======= ==== ====== ======= ======
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In addition to stock option grants, the Plan permits the award of restricted
stock to directors, officers and key employees of the company. During 2000,
15,000 shares of restricted stock were awarded to a director of the company.
This award vests on January 1, 2001 and accordingly, a portion of the total
compensation expense of $0.1 million is considered unearned compensation.
Unearned compensation is amortized to expense over the vesting period.
Compensation expense related to this award was not significant in 2000.
NOTE 14: SEGMENT DATA
The company reports two segments consisting of J&L Industrial Supply (J&L) and
Full Service Supply (FSS). Segment selection was based upon internal
organization structure, the way in which management organizes segments for
making operating decisions and assessing performance, the availability of
separate financial results and materiality considerations.
Intersegment sales are accounted for at cost plus a percentage to cover expenses
to distribute the product. Corporate level expenses and certain capital
expenditures and the related depreciation expense are not allocated to the two
segments and are included entirely in the J&L segment.
In the J&L segment, the company provides metalworking consumables and related
products to small-, medium-, and large-sized manufacturers in the United States,
the United Kingdom and Germany. J&L markets products and services through annual
mail-order catalogs and monthly sale flyers, telemarketing, retail stores, the
Internet and field sales. In the FSS segment, the company provides metalworking
consumables and related products to medium- and large-sized manufacturers in the
United States and Canada. FSS offers integrated supply programs that provide
inventory management systems, just-in-time availability and programs that focus
on total cost savings.
Segment detail is summarized as follows:
(in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
External sales:
J&L $361,953 $400,340 $295,618
FSS 137,340 131,302 129,730
----------------------------------------------------------------------------------------------------------------
Total external sales $499,293 $531,642 $425,348
----------------------------------------------------------------------------------------------------------------
Intersegment sales:
J&L $ 3,953 $ 2,435 $ 1,505
FSS -- -- --
----------------------------------------------------------------------------------------------------------------
Total intersegment sales $ 3,953 $ 2,435 $ 1,505
----------------------------------------------------------------------------------------------------------------
Total sales:
J&L $365,906 $402,775 $297,123
FSS 137,340 131,302 129,730
----------------------------------------------------------------------------------------------------------------
Total sales $503,246 $534,077 $426,853
----------------------------------------------------------------------------------------------------------------
Operating income:
J&L $ 18,362 $ 21,762 $ 27,854
FSS 9,812 12,770 13,454
----------------------------------------------------------------------------------------------------------------
Total operating income 28,174 34,532 41,308
Interest expense (income) and other (162) 881 (3,068)
----------------------------------------------------------------------------------------------------------------
Income before provision for income taxes $ 28,336 $ 33,651 $ 44,376
----------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
J&L $ 9,044 $ 8,458 $ 4,969
FSS 342 291 216
----------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 9,386 $ 8,749 $ 5,185
----------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------
Total assets:
J&L $220,563 $205,803 $212,457
FSS 69,664 69,186 63,129
----------------------------------------------------------------------------------------------------------------
Total assets $290,227 $274,989 $275,586
----------------------------------------------------------------------------------------------------------------
Capital expenditures:
J&L $ 6,939 $ 9,441 $ 12,222
FSS 760 240 64
----------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 7,699 $ 9,681 $ 12,286
----------------------------------------------------------------------------------------------------------------
Sales outside of the United States were approximately $24.5 million, $21.8
million and $17.1 million during 2000, 1999, and 1998, respectively. Total
assets outside of the United States were approximately $19.6 million, $18.2
million and $14.1 million at June 30, 2000, 1999 and 1998, respectively. These
sales were principally to customers in the United Kingdom, Germany and Canada,
and the assets were located principally in the United Kingdom and Germany. J&L
operating income for 2000 was reduced by a charge of $0.6 million for employee
separation and $0.2 million related to costs incurred associated with the
evaluation of strategic alternatives.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information concerning each director of JLK
Direct Distribution Inc. (the Corporation):
PRINCIPAL OCCUPATION
NAME, AGE AND YEAR AND DIRECTORSHIPS OF OTHER
FIRST ELECTED (1) PUBLICLY-TRADED CORPORATIONS (2)
- -------------------------- -----------------------------------------------------------------------------
Richard C. Alberding Retired, having served as Executive Vice President, Marketing and
Age: 69 International, of Hewlett-Packard Company (a designer and manufacturer of
Director since 1997 electronic products for measurement and computation). Director of Walker
Interactive Systems, Inc., Sybase, Inc., Digital Microwave Corp., Paging
Network, Inc., Digital Link Corporation and Kennametal. Former director of
Quickturn Design Systems Inc. and Storm Technology, Inc.
Jeffery M. Boetticher Chief Executive Officer of Frances Meyer Inc. (a specialty paper company)
Age: 49 since January 1999. Served as Chief Executive Officer of Black Box
Director since 1997 Corporation (a leading worldwide direct marketer of computer communications
and technical service provider of networking solutions) from June 1997
through July 1998, having also served as President of Black Box Corporation
from June 1994 through May 1997. From March 1991 through May 1994, he served
as President and Chief Executive Officer of Black Box Corporation of
Pennsylvania, a wholly-owned subsidiary of Black Box Corporation.
Irwin L. Elson Retired, a co-founder of J&L America, Inc. ("J&L"), having served as
Age: 61 President of J&L from July 1996 until June 1997 and as a Vice President of
Director since 1997 Kennametal from 1990, when it acquired J&L, to August 1994.
H. Patrick Mahanes, Jr. Executive Vice President, Global Strategic Initiatives of Kennametal Inc.
Age: 57 Served as a Vice President of Kennametal since 1987, he was Chief Operating
Director since 1998 Officer of Kennametal from 1995 through August 2000, and Director of
Operations of Kennametal from 1991 to 1995.
Aloysius T. McLaughlin, Jr. Retired, having served as Vice Chairman of Dick Corporation (a general
Age: 65 contractor) from 1993 to 1995 and as President and Chief Operating Officer
Director since 1997 from 1985 until 1993. Director of Kennametal Inc.
William R. Newlin (3) Managing Partner of Buchanan Ingersoll Professional Corporation (attorneys
Age: 59 at law) since 1980. Managing General Partner of CEO Venture Funds (private
Director since 1997 venture capital funds). Director of Black Box Corporation, National City
Bank of Pennsylvania, Parker/Hunter Incorporated and the Pittsburgh
Technology Council. Chairman of the Board of Directors of the Corporation
and of Kennametal Inc.
Markos I. Tambakeras President and Chief Executive Officer of Kennametal since July 1999. From
Age: 50 1997 to June 1999, served as President, Industrial Controls Business of
Director since 1999 Honeywell Incorporated (provider of control technologies), having previously
served as President, Industrial Automation and Control, Honeywell Incorporated
from 1995 to 1996 and as President, Honeywell Asia Pacific in Hong Kong from
1992 to 1994. Director of Kennametal Inc.
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- -------------------------------
(1) Each current director has served continuously since he was first elected.
(2) Unless otherwise shown in the table, each person named has served in his
principal occupation during the past five years.
(3) The Corporation engaged Buchanan Ingersoll Professional Corporation, the
law firm of which William R. Newlin is Managing Partner, to perform
services for the Corporation during fiscal 2000 and fiscal 2001.
The following table provides certain information pertaining to executive
officers of the Corporation:
NAME, AGE, AND POSITION EXPERIENCE DURING PAST FIVE YEARS
- ---------------------------- --------------------------------------------------------------------------
John M. Beaudoin Elected Vice President--Marketing in 1997. Formerly, Director of Product
Age: 37 Management for J&L from 1992 to 1997.
Vice President-- Marketing
Stanley B. Duzy, Jr. Acting Chief Operating Officer since July 2000. Vice President, Business
Age: 53 Development and Administration since November 1999, Kennametal, Inc.
Acting Chief Operating Formerly, Vice President of Finance, Industrial Controls Business from
Officer 1998 to 1999 and Vice President of Finance, Asia Pacific from 1992 to 1997
for Honeywell Inc.
Paul E. Fuller Elected Vice President--Sales in 1998. Formerly, Eastern U.S. Regional
Age: 57 Business Manager for Kennametal Inc. from 1994 to 1998.
Vice President-- Sales
Diana L. Scott Named Chief Financial Officer in 1999. Elected Vice President in 1998 and
Age: 46 Treasurer in 1997. Secretary and Director of Finance from 1997 to 1998.
Vice President, Chief Controller for J&L from 1996 to 1997. Formerly, Director of Finance for
Financial Officer and Kennametal Hertel Europe from 1993 to 1996.
Treasurer
ITEM 11. EXECUTIVE COMPENSATION
BOARD OF DIRECTORS AND BOARD COMMITTEES
JLK Direct Distribution Inc.'s (the Corporation) Board of Directors held five
(5) meetings during the year ended June 30, 2000. The committees of the Board of
Directors include an Audit Committee, a Compensation Committee and a Search
Committee. Each director attended at least 75% of the meetings of the Board of
Directors and any committee of which he is a member.
Audit Committee: The Audit Committee met four (4) times during the past fiscal
year. The Audit Committee adopted a new Audit Committee Charter during fiscal
2000. The Committee's primary function is to evaluate management's performance
of its financial reporting responsibilities including the annual report and
proxy materials. The Committee also reviews the internal financial and
operational controls of the Corporation, monitors the fees, results and
effectiveness of the annual audit and compliance with the Corporation's code of
business conduct and the independence of the public accountants. The Committee
also reviews compliance with intercompany agreements with Kennametal Inc.
(Kennametal), legal and regulatory and employee benefit plan reporting
requirements and monitors critical management information systems. The Committee
recommends to the Board of Directors for approval by the Board of Directors and
shareowners the election of the independent public accountant. The following
directors currently comprise the Committee: Aloysius T. McLaughlin, Jr. and
Jeffery M. Boetticher (Chairman).
Compensation Committee: The Compensation Committee met three (3) times during
the past fiscal year. The Committee's duties include the establishment of
salaries, bonuses and other compensation for the Corporation's executive
officers (excluding the President whose compensation is recommended by the
Committee but determined by the Board of Directors) and the administration of
the Corporation's compensation plans, including the 1997 JLK Direct Distribution
Inc. Stock Option and Incentive Plan and the JLK Direct Distribution Inc.
Management Bonus Plan (the "JLK Bonus Plan"). The following directors currently
comprise the Committee: Markos I. Tambakeras, Jeffery M. Boetticher and Richard
C. Alberding (Chairman).
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Search Committee: The Search Committee, comprised of three (3) members of the
Board of Directors, was established as a committee of the Board of Directors on
July 25, 2000. The purposes of the Search Committee include: (i) to investigate,
study and make recommendations to the Board as to the engagement of a President
and CEO of the Corporation, including the compensation package and such other
terms and conditions of employment; and (ii) to engage and/or terminate any
other officers for or of the Corporation including the timing of such engagement
or termination, and the compensation package or severance benefits, as the case
may be. The following directors currently comprise the Committee: William R.
Newlin, Markos I. Tambakeras (Chairman) and Jeffery M. Boetticher.
Directors who are not employees of the Corporation or Kennametal each receive
compensation from the Corporation for services as a director at an annual rate
of $20,000. Members of the Audit Committee, the Compensation Committee and the
Search Committee who are not employees of the Corporation or Kennametal each
receive additional compensation of $1,000 per meeting. Directors who are
employees of the Corporation or Kennametal do not receive any compensation for
services as a director or as a member of any committee of the Board of
Directors. Under the Corporation's Deferred Fee Plan for Outside Directors (the
"Deferred Fee Plan"), directors are permitted annually to request that the
payment of any compensation that may be payable to them for services as a
director or committee member be deferred for payment, with interest, at a later
time. Such deferred payments may be invested at a stated interest rate or in
stock credits ("Stock Credits") representing the Corporation's Class A Common
Stock or the Capital Stock, par value $1.25 per share, of Kennametal (the
"Kennametal Capital Stock").
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Corporation to its
former President and Chief Executive Officer, Mr. Orwig, and its former Vice
President-Full Service Supply, Mr. Lendvoyi and to each of the other three most
highly compensated executive officers of the Corporation (the "Named Executive
Officers"), during the last two fiscal years; and the compensation paid by the
Corporation to Ms. Scott and Messrs. Lendvoyi and Beaudoin in the fiscal year
ended 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION ALL OTHER
FISCAL ----------------------------- AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(3) BONUS($) OPTIONS(#) ($)(6)(7)
--------------------------- ---- ------------ -------- ---------- ---------
Paul E. Fuller, 2000 178,180 0 14,500 4,835
Vice President--Sales 1999 117,981(4) 15,000 12,500 5,090
John M. Beaudoin, 2000 161,866 0 34,500 4,856
Vice President--Marketing 1999 159,996 15,000 7,500 4,960
1998 170,039 72,000 0 3,640
Diana L. Scott, 2000 151,000 0 29,500 4,890
Vice President, 1999 136,000 15,000 2,500 5,160
Chief Financial Officer and 1998 123,619 48,000 0 2,803
Treasurer
Richard J. Orwig, 2000 350,004 40,000 0 59,173
Former President and Chief 1999 264,584(5) 50,000 50,000 8,964
Executive Officer (1)
Charles G. Lendvoyi, 2000 137,020 0 22,000 4,561
Former Vice President--Full 1999 136,104 15,000 5,000 4,916
Service Supply (2) 1998 128,443 30,000 0 3,049
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- --------------------------------------
(1) Mr. Orwig was named CEO and President of the Corporation effective
September 17, 1998. Mr. Orwig ceased to serve as a director of the
Corporation on May 2, 2000, and as CEO and President effective May 2, 2000.
(2) Mr. Lendvoyi ceased to serve as Vice President-Full Service Supply of the
Corporation on August 1, 2000.
(3) Each of the Named Executive Officers, except Mr. Orwig, received a base
salary increase in fiscal 2000.
(4) Represents salary paid from November 1998 through June 30, 1999.
(5) Represents salary paid from October 1998 through June 30, 1999.
(6) This figure includes amounts contributed by Kennametal under the Kennametal
Inc. Thrift Plan. Eligible employees may elect to contribute 2% to 12% of
their monthly compensation (salary and, if applicable, bonus) to this plan;
however, the Corporation is required to reimburse Kennametal for the
amounts contributed. Kennametal contributes to each participant's account
an amount equal to one-half of that portion of the employee's contribution,
which does not exceed 6% of the employee's compensation. Contributed sums
are invested in proportions as directed by the employee in a fixed income
fund and various equity funds (including Kennametal Capital Stock) and
balanced funds (consisting of both equity and fixed income securities),
each managed by investment management companies, and can be withdrawn by
the employee only upon the occurrence of certain events. Certain terms of
the plan are designed to make available to participants the provisions of
section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which permit elective employee contributions on a pre-tax basis.
(7) This figure includes imputed income based upon premiums paid by the
Corporation to secure and maintain for certain executive officers of the
Corporation, who are eligible and elect to participate, a $500,000 term
life insurance policy on the life of such officer until he or she reaches
age 65. For Mr. Orwig, this figure also includes amounts paid for
relocation expenses, financial planning and tax services and income
gross-up, Medicare tax and income gross-up on supplemental pension benefit
accrual.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Corporation has agreements with Messrs. Beaudoin, Fuller and Ms. Scott
whereby, subject to review by the Board of Directors and a provision for
termination without cause by either party upon written notice, each will be
employed by the Corporation. The agreements generally provide that the officers
will devote their entire time and attention to the business of the Corporation,
will refrain during employment and for three years thereafter from competing
with the Corporation (unless employment is terminated by the Corporation without
cause or following a change in control) and will not disclose confidential or
trade secret information belonging to the Corporation. These agreements also
require the officers to assign to the Corporation all inventions conceived or
made during their employment by the Corporation. The agreements provide for
severance payments upon termination of employment occurring either before or
after a change in control of the Corporation.
In the event of termination of employment by the officer's employer prior to a
change in control, each officer would receive as severance pay an amount equal
to three months' base salary at the time of such termination. In the event of
termination by the officer prior to a change in control, or without good reason
following a change in control, no severance payments will be made. In general,
in the event of termination of employment after a change in control by the
officer for good reason or by the employer other than for cause or disability,
each officer would receive as severance pay 2.8 times the sum of (i) his/her
respective annual base salary at the date of termination or, at the officer's
election, his/her salary as of the beginning of the month preceding the month in
which the change in control occurs, and (ii) the average of any bonuses which
he/she was entitled to or paid during the three most recent fiscal years ending
prior to the date of termination or, at the officer's election, the average of
any bonuses which the officer was entitled to or paid for the three fiscal years
preceding the fiscal year in which the change in control occurred. In addition,
for a three-year period the officer would receive the same medical and group
insurance benefits that he/she received at the date of termination. The officer
would also receive three years of additional credit for purposes of computing
benefits under the Corporation's retirement and supplemental retirement plans.
In connection with Mr. Orwig's departure from the Corporation, the Corporation,
Kennametal and Mr. Orwig entered into a separation agreement. Pursuant to the
separation agreement, Mr. Orwig is entitled to receive severance payments equal
to the amount of his current base salary, less applicable withholdings and
deductions,
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through November 2, 2001. Until November 2, 2001 or until Mr. Orwig is entitled
to or eligible for similar benefits from a new employer, the Corporation will
continue to provide Mr. Orwig with benefits similar to the coverage in place at
the time of his departure. If Mr. Orwig is employed by or provides consultation
for a competitor on or before November 2, 2001, the payments and benefits
described above will cease. Mr. Orwig is also entitled to receive the following
payments: (1) a bonus in the amount of $40,000 for fiscal year 2000; (2) up to
$25,000 for moving expenses and /or real estate commissions on an after-tax
basis, under specified circumstances; and (3) a payment of $26,923 for accrued
but unused vacation time. Mr. Orwig will receive credit for employment service
under the Kennametal Supplemental Early Retirement Plan (SERP) until November 2,
2001. The separation agreement provides that options to acquire the
Corporation's Class A Common Stock held by Mr. Orwig will continue to vest
through November 2, 2001 and Mr. Orwig may exercise any vested options through
February 2, 2002. Additionally, options to purchase Kennametal's Capital Stock
ceased to vest on May 2, 2000 and must be exercised by August 2, 2000. In the
separation agreement, Mr. Orwig provided the Corporation and Kennametal with
certain releases and agreed to certain confidentiality and non-competition
provisions.
In connection with Mr. Lendvoyi's departure from the Corporation, the
Corporation and Mr. Lendvoyi entered into a separation agreement. Pursuant to
the separation agreement, Mr. Lendvoyi is entitled to receive severance payments
equal to the amount of his current base salary, less applicable withholdings and
deductions, through January 31, 2001. If Mr. Lendvoyi is not employed,
self-employed or otherwise, by January 31, 2001, and the Corporation is
satisfied that he has made reasonable efforts to become employed, Mr. Lendvoyi
will continue to receive severance payments equal to the amount of his current
base salary, less applicable withholdings and deductions, through July 31, 2001,
or the date he becomes otherwise employed. The Corporation will continue to
provide Mr. Lendvoyi with group medical insurance until the Corporation's
obligation to pay him monthly compensation ceases. In addition to the separation
agreement, Mr. Lendvoyi provided the Corporation with certain releases and
agreed to certain confidentiality provisions.
JLK DIRECT DISTRIBUTION INC. MANAGEMENT BONUS PLAN
The Corporation's Board of Directors has adopted the JLK Bonus Plan for
executives, managers and other employees which is designed to tie bonus awards
to Corporation performance, unit performance and individual contribution,
relative to the Corporation's business plans, strategies and shareowner value
creation. This bonus plan also is intended to maintain management compensation
at a competitive level, as indicated by published compensation surveys. Each of
the Named Executive Officers is eligible to receive bonuses under this plan. The
annual bonus awarded to each of the Named Executive Officers under this plan for
1998, 1999 and 2000 is specified above under "Compensation of Executive
Officers."
JLK DIRECT DISTRIBUTION INC. 1997 STOCK OPTION AND INCENTIVE PLAN
The JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan (the "1997
Plan") provides for the granting of nonstatutory and incentive stock options or
share awards covering 2,000,000 shares of Class A Common Stock, although the
maximum number of shares that can take the form of share awards is 100,000,
subject to adjustment. Under the 1997 Plan, the price at which each share
covered by an option may be purchased will be determined in each case by the
Plan Administrator, but must not be less than the fair market value of such
shares at the time the option is granted. The purchase price must be paid in
full at the time of exercise, either in cash or, in the discretion of the Plan
Administrator, by delivering shares of the Corporation's Class A Common Stock or
a combination of shares and cash having an aggregate fair market value equal to
the purchase price. Under the 1997 Plan, any shares of the Corporation's Class A
Common Stock delivered as payment, in whole or in part, must have been held for
at least six months.
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The following table sets forth information concerning options granted to the
Named Executive Officers during the fiscal year ended June 30, 2000:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANT
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL EXERCISE OR GRANT DATE
OPTIONS GRANTED OPTIONS GRANTED BASE PRICE PRESENT VALUE
NAME (1)(#) IN FISCAL YEAR ($/SHARE) EXPIRATION DATE (2)($)
---- ------ --------------- --------- --------------- ------
John M. Beaudoin 9,500 4.3880 9.12500 11/15/2009 43,150
25,000 11.5473 7.09375 05/04/2010 88,275
Paul E. Fuller 4,500 2.0785 9.12500 11/15/2009 20,439
10,000 4.6189 7.09375 05/04/2010 35,310
Diana L. Scott 14,500 6.6975 9.12500 11/15/2009 65,860
15,000 6.9284 7.09375 05/04/2010 52,965
Richard J. Orwig 0 0 0 0 0
Charles G. Lendvoyi 12,000 5.5427 9.12500 11/15/2009 54,505
10,000 4.6189 7.09375 05/04/2010 35,310
- --------------------------
(1) Options with respect to the Corporation's Class A Common Stock were granted
with exercise prices equal to the fair market value of the Corporation's
Class A Common Stock on the dates of grant. The options with an expiration
date of November 15, 2009 vest on November 16, 2001, and the options with
an expiration date of May 4, 2010, vest on May 1, 2001.
(2) Based on the Black-Scholes Option Valuation model adjusted for dividends to
determine grant date present value of the options. The Corporation does not
advocate or necessarily agree that the Black-Scholes model properly
reflects the value of an option. The assumptions used in calculating the
option value with respect to the Corporation's Class A Common Stock include
the following: a risk-free interest rate of 6.180% (the rate applicable to
a five-year treasury security at the time of the award); no dividend yield;
volatility of 48.04% (calculated using daily stock returns for the
twelve-month period preceding the option award); and a stock price at date
of grant of $9.125 and $7.09375 for grants with expiration dates of
November 15, 2009 and May 4, 2010, respectively (the exercise price at
which these options were granted was equal to the fair market value of the
Corporation's Class A Common Stock on the date of grant). The value of
these options under the Black-Scholes model of option valuation applying
the preceding assumptions are $4.5421 and $3.5310 per share for grants with
expiration dates of November 15, 2009 and May 4, 2010, respectively.
The ultimate value of the options will depend on the future market price of the
stock of the Corporation, which cannot be forecast with reasonable accuracy. The
actual value, if any, an optionee will realize upon exercise of an option will
depend on the excess of the market value of the relevant stock over the exercise
price on the date the option is exercised. No adjustments were made for
forfeitures or vesting restrictions on exercise.
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The following table sets forth information concerning options to purchase the
Corporation's Class A Common Stock held by the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR END(#) YEAR-END($)
ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE) UNEXERCISABLE)
---- --------------- ------------ -------------- --------------
John M. Beaudoin 0 -- 52,500/39,500 0/0
Paul E. Fuller 0 -- 4,167/22,833 0/0
Diana L. Scott 0 -- 20,834/31,166 0/0
Richard J. Orwig 0 -- 16,667/33,333 0/0
Charles G. Lendvoyi 0 -- 11,667/25,333 0/0
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RETIREMENT BENEFITS
The Named Executive Officers and certain other Corporation employees are
entitled to receive benefits pursuant to the Kennametal Inc. Retirement Income
Plan. The following table indicates, for purposes of illustration, the
approximate annual retirement benefits that would be payable at the present time
on a straight life annuity basis pursuant to the Kennametal Inc. Retirement
Income Plan. The amounts shown below have not been adjusted for Social Security
offset.
PENSION PLAN TABLE
ANNUALIZED ANNUAL BENEFIT UPON RETIREMENT WITH YEARS OF CREDITED SERVICE INDICATED
COVERED --------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------ -- -- -- -- --
$ 75,000 $ 22,500 $ 30,000 $ 37,500 $ 41,250 $ 45,000
100,000 30,000 40,000 50,000 55,000 60,000
150,000 45,000 60,000 75,000 82,500 90,000
200,000 60,000 80,000 100,000 110,000 120,000
250,000 75,000 100,000 125,000 137,500 150,000
300,000 90,000 120,000 150,000 165,000 180,000
400,000 120,000 160,000 200,000 240,000 280,000
500,000 150,000 200,000 250,000 300,000 350,000
Annualized Covered Compensation is based on average monthly earnings, consisting
solely of base salary and bonus (which amounts for the past three fiscal years
are included in the Salary and Bonus columns of the Summary Compensation Table),
for the nine years out of the last twelve years of service immediately preceding
retirement during which the highest compensation was received. The entire cost
of this plan is paid by Kennametal, however, the Corporation is required to
reimburse Kennametal for the incremental cost of providing the benefit to
employees of the Corporation. Under the Code, certain limits are imposed on
payments under the plan. Payments in excess of the maximum annual pension
benefits payable under this plan to certain executive officers of the
Corporation would be paid pursuant to the Kennametal SERP. The Corporation will
reimburse Kennametal for any supplemental retirement benefit amounts paid by
Kennametal to former employees of the Corporation under the SERP.
As of June 30, 2000, the credited years of service under the Kennametal Inc.
Retirement Income Plan for the Named Executive Officers were approximately: John
M. Beaudoin, 20 years; Charles G. Lendvoyi, 7 years; Diana L. Scott, 13 years;
Paul E. Fuller, 29 years; and Richard J. Orwig, 16 years.
Annualized Covered Compensation as of June 30, 2000, for purposes of the
retirement benefits under the Kennametal Inc. Retirement Income Plan for the
Named Executive Officers is as follows: John M. Beaudoin, $113,476; Charles G.
Lendvoyi, $139,859; Diana L. Scott, $119,347; Paul E. Fuller, $106,909; and
Richard J. Orwig, $153,333. Pursuant to his separation agreement, Mr. Orwig's
annual benefit based on full vesting of the SERP, the above Annualized Covered
Compensation and his credited years of service would approximate $190,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Markos I. Tambakeras, who serves on the Compensation Committee, effective July
1, 1999 is President and Chief Executive Officer of Kennametal.
The Corporation engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its subsidiaries
totaled $78.2 million in fiscal 2000, $55.3 million in fiscal 1999 and $40.7
million in fiscal 1998. Sales by the Corporation to Kennametal and its
subsidiaries totaled $8.9 million in fiscal 2000, $13.1 million in fiscal 1999
and $10.6 million in fiscal 1998.
The Corporation receives from Kennametal certain warehouse, management
information systems, financial and administrative services. All amounts incurred
by Kennametal on behalf of the Corporation are reflected in operating expenses
in the Corporation's statements of income. In addition, costs charged to the
Corporation by Kennametal, totaled $5.1 million in fiscal 2000, $9.5 million in
fiscal 1999, $12.1 million in fiscal 1998. The Corporation charged approximately
$1.2 million in interest expense to Kennametal in fiscal 2000, paid
approximately $0.3 million in interest expense to Kennametal in fiscal 1999 and
charged approximately $2.9 million in interest expense to Kennametal in fiscal
1998 under the Cash Management Agreement. Kennametal intends to continue to
provide services to the Corporation in the future in accordance with the terms
of the
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intercompany agreements described in Item 13 -- Certain Relationships and
Related Transactions -- Relationship with Kennametal. The amounts charged
pursuant to these intercompany agreements reflect the actual costs incurred by
Kennametal in providing these services.
COMPARISON OF CUMULATIVE TOTAL RETURN
The following paragraph compares cumulative total shareowners return on the
Corporation's Class A Common Stock with the cumulative total shareowner return
on the common equity of the companies in the Standard & Poor's Small Cap 600
Market Index (the "S&P Small Cap") and a peer group of companies determined by
the Corporation (the "Peer Group") for the period from June 27, 1997 (when the
Corporation listed the Class A Common Stock on the NYSE) to June 30, 2000. The
Peer Group consists of the following companies: Airgas, Inc., Barnett Inc.,
Fastenal Company, MSC Industrial Direct Co., Inc., Strategic Distribution, Inc.
and Industrial Distribution Group, Inc. subsequent to the date it became
publicly traded (September 1997). Wilmar Industries, Inc. ceased to be a
publicly traded entity during fiscal 2000 and therefore, has been removed from
the peer group for all periods presented.
JLK DIRECT DISTRIBUTION S&P SMALLCAP PEER GROUP
----------------------- ------------- ----------
6/27/97 100.00 100.00 100.00
6/30/97 128.13 104.42 110.31
6/30/98 109.38 124.74 111.17
6/30/99 46.57 126.84 78.89
6/30/00 25.63 145.09 83.01
The above graph assumes a $100 investment on June 27, 1997 in each of JLK Direct
Distribution Inc. Class A Common Stock, the S&P Small Cap and the Peer Group,
and further assumes the reinvestment of all dividends.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF COMMON STOCK BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of JLK Direct
Distribution Inc.'s (the Corporation) Class A Common Stock as of June 30, 2000,
by each director, each nominee for director, each Named Executive Officer (as
hereinafter defined) and all directors and executive officers as a group.
AMOUNT AND NATURE TOTAL BENEFICIAL
OF BENEFICIAL OWNERSHIP AND
NAME OF BENEFICIAL OWNER OWNERSHIP (1)(2) STOCK CREDITS (8) STOCK CREDITS
- -----------------------------------------------------------------------------------------------------------
Richard C. Alberding..................... 16,000 0 16,000
Jeffery M. Boetticher.................... 31,000(3) 7,468 38,468
Irwin L. Elson........................... 25,100 6,597 31,697
H. Patrick Mahanes, Jr................... 10,000(4) 0 10,000
Aloysius T. McLaughlin, Jr............... 17,500 2,693 20,193
William R. Newlin........................ 82,600 23,665 106,265
Markos I. Tambakeras..................... 0 0 0
John M. Beaudoin......................... 54,700(5) 0 54,700
Paul E. Fuller........................... 4,917 0 4,917
Diana L. Scott........................... 22,834 0 22,834
Richard J. Orwig......................... 26,667(6) 0 26,667
Charles G. Lendvoyi...................... 12,667(7) 0 12,667
Directors And Executive Officers
As A Group (12 Persons).................. 303,985 40,423 344,408
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- -------------------------------------------
(1) Except for Mr. Newlin (2.1%) and Mr. Beaudoin (1.1%) no other director or
executive officer beneficially owned in excess of one percent of any class
of the Corporation's stock. Directors and executive officers as a group
beneficially own 6.8% of the outstanding Class A Common Stock of the
Corporation. Unless otherwise noted, the shares shown are subject to the
sole voting and investment power of the person named.
(2) The figures shown include 52,500, 4,167, 20,834, 16,667, 11,667 and 210,835
shares of the Corporation's Class A Common Stock over which Messrs.
Beaudoin and Fuller, Ms. Scott, Messrs. Orwig and Lendvoyi and all
directors and executive officers of the Corporation as a group,
respectively, have the right to acquire as of June 30, 2000 or the right to
acquire within 60 days thereafter. The figures shown include 15,000 shares
of the Corporation's Class A Common Stock over which each of Messrs.
Alberding, Boetticher, Elson and McLaughlin have the right to acquire as of
June 30, 2000 or the right to acquire within 60 days thereafter, 45,000
shares of the Corporation's Class A Common Stock over which Mr. Newlin has
the right to acquire as of June 30, 2000 or the right to acquire within 60
days thereafter, and 15,000 shares of the Corporation's Class A Common
Stock over which Mr. Boetticher has sole voting power but no investment
power.
(3) On May 4, 2000, Mr. Boetticher received a restricted stock award for 15,000
shares of the Corporation's Class A Common Stock for his service as
Chair of the Executive Office of the Corporation. The Executive Office was
established on May 2, 2000 to review the operations of the Corporation and
its management.
(4) The figure includes 10,000 shares owned by Mr. Mahanes' wife. Mr. Mahanes
disclaims beneficial ownership of shares owned by his wife.
(5) The figure includes 2,100 shares owned by Mr. Beaudoin and his wife.
(6) Mr. Orwig ceased to serve as a director and as CEO and President of the
Corporation, effective May 2, 2000.
(7) Mr. Lendvoyi ceased to serve as Vice President of the Corporation on August
1, 2000. The figure includes 1,000 shares owned by Mr. Lendvoyi and his
wife.
(8) These amounts represent Stock Credits to which non-employee directors of
the Corporation are entitled pursuant to the Deferred Fee Plan.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information with respect to the beneficial
ownership of the Corporation's Class B Common Stock as of September 5, 2000:
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF OUTSTANDING
OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS B COMMON STOCK
---------------------- ----------------------- --------------------
Kennametal Inc.(3) 20,237,000 100.00%
(1) The address of Kennametal is 1600 Technology Way, Latrobe, Pennsylvania
15650.
(2) Because the Class B Common Stock is convertible by Kennametal into Class A
Common Stock on a one-for-one basis, such ownership also represents
beneficial ownership of Class A Common Stock.
(3) See Item 13 -- Certain Relationships and Related Transactions --
Relationship with Kennametal for a description of transactions and
arrangements between Kennametal and the Corporation.
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The following table sets forth each person or entity who may be deemed to have
beneficial ownership of more than 5% of the outstanding Class A Common Stock of
the Corporation based upon information available to the Corporation as of
September 5, 2000.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS A COMMON STOCK
------------------- -------------------- --------------------
First Pacific Advisors, Inc. 898,100(1) 21.00%
11400 West Olympic Blvd.,
Suite 1200
Los Angeles, California 90064
Putnam Investments, Inc. 491,354(2) 11.50%
One Post Office Square
Boston, Massachusetts 02109
Dimensional Ford Advisors, Inc. 282,900(3) 6.60%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Reich & Tang Asset Management L.P. 322,000(4) 7.50%
600 Fifth Avenue
New York, New York 10020
Atlantic Investment Management, Inc. 379,300(5) 8.80%
750 Lexington Avenue
New York, New York 10022
(1) According to a 13G filed by First Pacific Advisors, Inc., the company has
shared voting power over 57,500 shares and shared dispositive power over
all shares.
(2) According to a 13G filed by Putnam Investments, Inc., the Company has
shared voting power over 141,012 shares and shared dispositive power over
all shares.
(3) According to a 13F filed by Dimensional Fund Advisors Inc., the company has
sole voting and dispositive power over all of the shares.
(4) According to a 13D filed by Reich & Tang Asset Management L.P., the company
has shared voting power over all shares and shared dispositive power over
all shares.
(5) According to a 13D filed by Atlantic Investment Management, Inc., the
company has sole voting and sole dispositive power over all shares by
reason of serving as the investment advisor to: (i) AJR International Inc.,
a British Virgin Islands company; (ii) Quest Capital Partners, L.P., a
Delaware limited partnership; and (iii) the Managed Accounts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH KENNAMETAL
Kennametal Inc. (Kennametal) currently holds 100% of the outstanding Class B
Common Stock of JLK Direct Distribution Inc. (the Corporation). As of September
5, 2000, 4,917,000 shares of Class A Common Stock were issued, of which
4,288,410 were outstanding, and 628,590 were held as treasury shares.
Accordingly, as of such date Kennametal owned Common Stock representing
approximately 82.5% of the economic interest in the Corporation and representing
approximately 97.9% of the combined voting power of the Corporation's
outstanding Common Stock.
For so long as Kennametal continues to own shares of Class B Common Stock
representing more than 50% of the combined voting power of the Common Stock of
the Corporation, Kennametal will be able, among other things, to
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determine any corporate action requiring approval of holders of Common Stock
representing a majority of the combined voting power of the Common Stock,
including the election of the entire Board of Directors of the Corporation,
certain amendments to the Articles of Incorporation and By-Laws of the
Corporation and approval of certain mergers and other control transactions,
without the consent of the other shareowners of the Corporation.
In addition, through its control of the Board of Directors and beneficial
ownership of Class B Common Stock, Kennametal will be able to control certain
decisions, including decisions with respect to the Corporation's dividend
policy, the Corporation's access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), mergers
or other business combinations involving the Corporation, the acquisition or
disposition of assets by the Corporation and any change in control of the
Corporation. Kennametal has advised the Corporation that its current intention
is to continue to hold all of the Class B Common Stock beneficially owned by it.
Kennametal has no agreement with the Corporation not to sell or distribute such
shares. There can be no assurance concerning the period of time during which
Kennametal will maintain its beneficial ownership of Class B Common Stock.
Beneficial ownership of at least 80% of the total voting power and value of the
outstanding Common Stock is required in order for Kennametal to continue to
include the Corporation in its consolidated group for federal income tax
purposes and ownership of at least 80% of the total voting power and 80% of any
class of nonvoting capital stock is required in order for Kennametal to be able
to effect a tax-free spin-off.
INTERCOMPANY AGREEMENTS
The Corporation's relationship with Kennametal is also governed by agreements
entered into in connection with the Corporation's initial public offering of its
Class A Common Stock which was consummated in July 1997 (the "Offering") with
Kennametal, including an administrative services agreement, a lease agreement,
shared facilities agreements (subleases), a product supply agreement, a
tax-sharing agreement, a trademark license agreement, an indemnification
agreement, a non-competition and corporate opportunities allocation agreement,
an intercompany debt/investment and cash management agreement, warehousing
agreements and a corporate agreement, the material terms of which are described
below.
The descriptions set forth below are intended to be summaries, and while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the forms of the relevant agreement
which are incorporated herein by reference to the exhibits to Amendment No. 1 to
the Corporation's Registration Statement on Form S-1, filed with the Commission
on June 4, 1997. The Articles of Incorporation also contain provisions relating
to the allocation of business opportunities that may be suitable for either of
Kennametal or the Corporation and to the approval of transactions between the
Corporation and Kennametal.
ADMINISTRATIVE SERVICES AGREEMENT
The Corporation and Kennametal have entered into an intercompany Administrative
Services Agreement (the "Services Agreement") with respect to services provided
by Kennametal to the Corporation. The Services Agreement provides that such
services are provided in exchange for fees which, generally: (i) in the case of
services purchased by Kennametal from third parties for the Corporation, are
based upon the incremental cost charged by such third parties to Kennametal for
such services provided to the Corporation; and (ii) in the case of services
directly provided by Kennametal, are based on the estimated costs, including a
reasonable allocation of direct and indirect overhead costs, incurred by
Kennametal for the services it provides directly to the Corporation. Such fees
are paid monthly in arrears. The Corporation may request an expansion or
termination of services, in which case the parties discuss, without obligation,
the provision or termination of such services and an appropriate charge or
reduction in charges for such services. The purpose of the Services Agreement is
to ensure that Kennametal continues to provide to the Corporation the range of
services that Kennametal provided to the Corporation prior to the Offering. With
respect to matters covered by the Services Agreement, the relationship between
Kennametal and the Corporation is intended to continue in a manner generally
consistent with prior practices. The services initially provided by Kennametal
to the Corporation include, among other things, certain treasury, general
accounting and administrative services including, tax, risk management, human
resources, legal, internal audit, marketing, executive time and space, and
information systems services.
The Services Agreement also provides that Kennametal will arrange and administer
all existing insurance arrangements and may continue coverage of the Corporation
under Kennametal's insurance policies and will allow eligible employees of the
Corporation to participate in all of Kennametal's benefit plans. In addition,
under the
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Services Agreement, the Corporation will reimburse Kennametal for the portion of
Kennametal's premium cost with respect to such insurance that is attributable to
coverage of the Corporation and reimburse Kennametal for Kennametal's costs
(including any contributions and premium costs and including certain third-party
expenses and allocation of certain personnel expenses of Kennametal), generally
in accordance with past practice, relating to participation by the Corporation's
employees in any of Kennametal's benefit plans.
The Services Agreement has an initial term of 10 years and will be renewed
automatically thereafter for successive one-year terms, provided however, that
after the initial 10-year term or any renewal term, the Services Agreement may
be terminated at the end of such initial term or any subsequent renewal term by
either party upon six months' prior written notice. The Services Agreement also
provides that it is subject to early termination by Kennametal if: (i)
Kennametal or its affiliates own Common Stock representing less than a majority
of the voting power of all Common Stock; (ii) any person or group, other than
Kennametal or its affiliates, directly or indirectly has the power to exercise a
controlling influence over the Corporation; or (iii) a majority of the directors
of the Corporation were neither nominated by Kennametal or by the Corporation's
Board of Directors nor appointed by directors so nominated. The Services
Agreement also may be terminated by the non-breaching party if the other party
materially breaches its terms.
Pursuant to the Services Agreement, for the term of and for a period of five
years following the termination of the Services Agreement, each party agrees to
indemnify the other, except in certain limited circumstances, against
liabilities that the other may incur by reason of or related to such party's
failure to perform its obligations under the Services Agreement. Under the
Services Agreement, the fees for services provided by Kennametal to the
Corporation during fiscal 2000 were approximately $4.6 million.
LEASE AGREEMENT
The Corporation and Kennametal have entered into a Lease Agreement (the "Lease
Agreement") pursuant to which Kennametal leases to the Corporation space within
buildings located on Kennametal's premises. The Corporation uses such space for
the display and retail sale of metalworking consumables and related products, as
well as for ancillary office and storage use. The Corporation may not use the
premises for any other purpose or business without the prior consent of
Kennametal. The Corporation is required to indemnify Kennametal against certain
liabilities in respect of the use of the premises. The Lease Agreement will
remain in effect for a term of 10 years but may be extended for successive
one-year terms by the Corporation upon written notice to Kennametal. Kennametal
may terminate the Lease Agreement if: (i) the Corporation owns shares
representing less than a majority of the voting power of the outstanding common
stock of J&L; (ii) Kennametal or its affiliates, own Common Stock representing
less than a majority of the voting power of all Common Stock; (iii) any person
or group, other than Kennametal or its affiliates, directly or indirectly has
the power to exercise a controlling influence over the Corporation; or (iv) a
majority of the directors of the Corporation were neither nominated by
Kennametal or by the Corporation's Board of Directors nor appointed by directors
so nominated. The Lease Agreement also may be terminated by the non-breaching
party if the other party materially breaches its terms. The Corporation paid
approximately $106,000 in lease payments during fiscal 2000 under the Lease
Agreement.
SHARED FACILITIES AGREEMENTS
The Corporation and Kennametal have entered into Shared Facilities Agreements
(the "Shared Facilities Agreements") pursuant to which each company subleases to
the other company the facilities, which are leased by either of the companies
and shared with the other company. The Shared Facilities Agreements provide that
the relevant sublessor will lease space to the sublessee at a rental rate equal
to a pro rata share (based on square feet occupied) of all costs and expenses
(principally fixed rent) under the relevant lease. The Shared Facilities
Agreements provide for a term, with respect to each subleased facility, equal to
the term of the underlying lease. Under the Shared Facilities Agreement, the
Corporation paid Kennametal approximately $624,000 for the portion of the costs
and expenses attributable to it under the relevant leases during fiscal 2000.
Kennametal paid the Corporation approximately $125,000 for the portion of the
costs and expenses attributable to it under the relevant leases during fiscal
2000.
PRODUCT SUPPLY AGREEMENT
The Corporation and Kennametal have entered into a Product Supply Agreement (the
"Supply Agreement") which has a term of 10 years pursuant to which Kennametal
agrees to supply and the Corporation agrees to purchase from Kennametal all of
the Corporation's requirements for metalworking consumables and related products
direct-marketed by the Corporation, and Kennametal further agrees to supply all
metalworking consumables and related
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products requested pursuant to Full Service Supply programs, except as otherwise
agreed from time to time between the Corporation and Kennametal. The Corporation
is entitled to purchase products for its direct-marketing business at prices
discounted from Kennametal's published price for each such product depending
upon the volume of each such product purchased by the Corporation. The gross
margin realized by the Corporation from the sale of products purchased from
Kennametal and resold in the Corporation's direct-marketing program slightly
exceeds the gross margin which the Corporation realizes on all products resold
in the direct-marketing program. The Corporation's Articles of Incorporation
contain similar provisions regarding product supply. Pursuant to the Corporate
Opportunities Agreement (see below), Kennametal has agreed that, with the
exception of existing relationships, Kennametal will not sell, distribute or
otherwise make available Kennametal products to any person that competes with
the Corporation. The Supply Agreement will remain in effect for a term of 10
years, but may be earlier terminated by either party if Kennametal or its
affiliates own Common Stock representing less than a majority of the voting
power of all Common Stock or if the other party materially breaches the Supply
Agreement or the Corporate Opportunities Agreement. Under the Supply Agreement,
the Corporation paid Kennametal approximately $78.2 million for products
supplied during fiscal 2000.
TAX-SHARING AGREEMENT
The Corporation is included in Kennametal's federal consolidated income tax
group, and the Corporation's tax liability is included in the consolidated
federal income tax liability of Kennametal and its subsidiaries. In certain
circumstances, certain of the Corporation's subsidiaries may be included with
certain subsidiaries of Kennametal in combined, consolidated or unitary income
tax groups for state and local tax purposes. Pursuant to the Tax-Sharing
Agreement, the Corporation makes payments to Kennametal such that, with respect
to any period, the amount of taxes to be paid by the Corporation, subject to
certain adjustments, are determined as though the Corporation were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Kennametal arising from an audit or
otherwise) as the common parent of an affiliated group of corporations filing
combined, consolidated or unitary (as applicable) federal, state and local
returns rather than a consolidated subsidiary of Kennametal with respect to
federal, state and local income taxes. The Corporation is reimbursed, however,
for tax attributes that it generates, such as net operating losses, if and when
they are used on a consolidated basis.
Kennametal has all the rights of a parent of a consolidated group (and similar
rights provided for by applicable state and local law with respect to a parent
of a combined, consolidated or unitary group), is the sole and exclusive agent
for the Corporation in any and all matters relating to the income, franchise and
similar tax liabilities of the Corporation, has sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined state income tax returns (or amended returns), and has
the power, in its sole discretion, to contest or compromise any asserted tax
adjustment or deficiency and to file, litigate or compromise any claim for
refund on behalf of the Corporation. In addition, Kennametal has agreed to
undertake to provide the aforementioned services with respect to the
Corporation's separate state and local income tax returns and the Corporation's
foreign income tax returns. Under the Services Agreement, the Corporation pays
Kennametal a fee intended to reimburse Kennametal for all direct and indirect
costs and expenses incurred with respect to the Corporation's share of the
overall costs and expenses incurred by Kennametal with respect to tax related
services.
In general, the Corporation will be included in Kennametal's consolidated group
for federal income tax purposes for so long as Kennametal beneficially owns at
least 80% of the total voting power and value of the outstanding Common Stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Corporation and Kennametal, during the period in which the
Corporation is included in Kennametal's consolidated group, the Corporation
could be liable in the event that any federal tax liability is incurred, but not
discharged, by any other member of Kennametal's consolidated group.
TRADEMARK LICENSE AGREEMENT
The Corporation and Kennametal have entered into a Trademark License Agreement
(the "License Agreement"). The License Agreement provides, among other things,
for the grant to the Corporation by Kennametal of a non-exclusive license to use
the trademarks, service marks, trade names and other intellectual property
(collectively, the "Marks") of Kennametal identified therein in connection with
the Corporation's business and for the grant to Kennametal by the Corporation of
a non-exclusive license to use the Corporation's Marks on similar terms. Under
the terms of the License Agreement, each party shall indemnify the other and its
affiliates against certain liabilities in respect of the use of the Marks. The
License Agreement shall remain in effect for a term of 10 years, but may be
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earlier terminated by Kennametal if Kennametal or its affiliates own Common
Stock representing less than a majority of the voting power of all Common Stock
or by either party if the other party materially breaches the License Agreement
or any of the other intercompany agreements. A termination of the License
Agreement could have a material adverse effect on the business, financial
condition or results of operation of the Corporation.
INDEMNIFICATION AGREEMENT
The Corporation and Kennametal have entered into an Indemnification Agreement
(the "Indemnification Agreement"). Under the Indemnification Agreement, subject
to limited exceptions, the Corporation is required to indemnify Kennametal and
its directors, officers, employees, agents and representatives for liabilities
under federal or state securities laws as a result of the Offering, including
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the Corporation's Rule 424(b) Prospectus, filed with the
Commission on June 27, 1997. The Indemnification Agreement also provides that
each party thereto (the "Indemnifying Party") will indemnify the other party
thereto and its directors, officers, employees, agents and representatives (the
"Indemnified Party") for liabilities that may be incurred by the Indemnified
Party relating to, resulting from or arising out of: (i) the businesses and
operations conducted or formerly conducted, or assets owned or formerly owned,
by the Indemnifying Party and its subsidiaries (except, in the case where
Kennametal is the Indemnifying Party, such businesses, operations and assets of
the Corporation and its subsidiaries); or (ii) the failure by the Indemnifying
Party to comply with any other agreements executed in connection with the
Offering, except to the extent caused by the Indemnified Party. The
Indemnification Agreement also provides that the Corporation will indemnify
Kennametal for any liabilities incurred under guarantees of leases.
NON-COMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT
Pursuant to a Non-Competition and Corporate Opportunities Allocation Agreement
(the "Corporate Opportunities Agreement") entered into between Kennametal and
the Corporation: (i) Kennametal has agreed for as long as the other intercompany
agreements remain in effect (whose term is 10 years); (A) not to compete with
the Corporation in the business of direct marketing of a broad range of
metalworking consumables and related products through catalogs, monthly
promotional flyers, additional mailings and advertisements, telemarketing
efforts, direct-sales efforts and showrooms targeted at small and medium-sized
metalworking shops, as well as the supply of consumable tooling and related
metalworking products at designated manufacturing plants of large industrial
customers through integrated industrial supply programs (the "Base Business"),
except where the Corporation has been offered by Kennametal or its affiliates or
a third party the right to acquire a business which falls under the Base
Business at fair market value and the Corporation's Board of Directors has
determined, for whatever reason, that the Corporation shall not acquire such
business; and (B) not to sell, offer to sell, distribute or otherwise make
available Kennametal manufactured and branded products to anyone who intends to
direct market such products and therefore competes with the Corporation's
direct-marketing program, except with respect to those contracts, arrangements
or relationships in existence on the date of the Corporate Opportunities
Agreement or with the prior written consent of the Corporation; and (ii) the
Corporation has agreed for as long as the other intercompany agreements remain
in effect not to sell, offer to sell, distribute or otherwise make available any
products which compete directly or indirectly with Kennametal without the prior
written consent of Kennametal, except in connection with the provision of
integrated industrial supply programs as may be required specifically by
customers thereof. Similar provisions are contained in the Articles of
Incorporation.
The Corporate Opportunities Agreement provides that Kennametal has the right to
any future business opportunities outside the scope of the Base Business and has
the right as to any future business opportunities outside the scope of the Base
Business but which are reasonably related to the Base Business, to determine the
allocation thereof based solely upon Kennametal's evaluation of what is in the
best interests of Kennametal under the circumstances. Under such agreement, the
good faith determination of Kennametal as to the scope of the Base Business, the
applicability of any exceptions discussed above to its agreement not to compete
or the allocation of any corporate opportunities outside the scope of the Base
Business, will be conclusive and binding. The Corporate Opportunities Agreement
will remain in effect for a term of 10 years but may be earlier terminated by
Kennametal if Kennametal or its affiliates own Common Stock representing less
than a majority of the voting power of all Common Stock or if the Corporation
materially breaches the Corporate Opportunities Agreement or the Product Supply
Agreement. The Articles of Incorporation also restrict the Corporation's ability
to pursue future business opportunities.
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT
The Corporation and Kennametal have entered into an Intercompany Debt/Investment
and Cash Management Agreement (the "Cash Management Agreement") under which the
Corporation participates in Kennametal's
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centralized cash management system. The Cash Management Agreement provides for a
daily transfer from the Corporation's cash accounts to Kennametal's centralized
cash accounts and daily funding of the disbursements of the Corporation from
such Kennametal cash accounts. The Corporation receives interest on net cash
flows to Kennametal's centralized cash accounts and is charged interest on net
borrowings from the Kennametal centralized cash accounts at a rate equal to the
interest rate available to Kennametal from outside sources for short term
borrowings or investments, depending upon the overall position of the
centralized cash accounts. The Corporation pays for this service pursuant to the
Services Agreement and reimburses Kennametal for an allocable portion of
Kennametal's facility and/or commitment fees under its credit lines. The Cash
Management Agreement will remain in effect for a term of 10 years, but may be
earlier terminated by Kennametal if Kennametal or its affiliates own Common
Stock representing less than a majority of the voting power of all Common Stock
or by either party if the other party materially breaches the Cash Management
Agreement or any of the other intercompany agreements. The Corporation charged
approximately $1.2 million in interest expense to Kennametal during fiscal 2000
under the Cash Management Agreement.
WAREHOUSING AGREEMENTS
The Corporation and Kennametal have entered into separate Warehousing Agreements
("Warehousing Agreements") with respect to: (i) Kennametal distribution centers
and warehouses that store products for the Corporation; and (ii) Corporation
distribution centers and warehouses that store products for Kennametal. The
terms of each Warehousing Agreement provide for the warehouser to store the
warehousee's products in the warehouses segregated and separate from the
warehouser's products and, upon request by the warehousee, to ship its products
from these warehouses to the warehousee's customers. The warehousee pays to the
warehouser a charge for each of the products picked, packed and shipped based
upon an allocation of costs (including overhead) incurred by the warehouser at
these warehouses. The Warehousing Agreements shall remain in effect for a term
of 10 years but may be earlier terminated by Kennametal if: (i) Kennametal or
its affiliates own Common Stock representing less than a majority of the voting
power of all Common Stock; or (ii) if the Corporation owns shares representing
less than a majority of the voting power of the outstanding common stock of J&L.
The Warehousing Agreements may also be terminated by either party if the other
party materially breaches such Warehousing Agreement or any of the other
intercompany agreements. Under the Warehousing Agreement, the Corporation paid
Kennametal approximately $422,000 for its allocation of costs during fiscal 2000
and Kennametal paid the Corporation approximately $486,000 for its allocation of
costs during fiscal 2000.
CORPORATE AGREEMENT
The Corporation and Kennametal have entered into a Corporate Agreement (the
"Corporate Agreement") under which the Corporation granted to Kennametal a
continuing option, transferable, in whole or in part, to any of its affiliates,
to purchase, under certain circumstances, additional shares of Class B Common
Stock or Class A Common Stock (the "Stock Option"). The Stock Option may be
exercised by Kennametal simultaneously with the issuance of any equity security
of the Corporation or immediately prior to a Tax-Free Spin-Off to the extent
necessary to maintain its then existing percentage of the total voting power and
economic value of the Corporation at 80% of all outstanding Common Stock or, in
connection with a Tax-Free Spin-Off, in order to acquire stock ownership
necessary to effect a Tax-Free Spin-Off. The purchase price of the shares of
Common Stock purchased upon any exercise of the Stock Option, subject to certain
exceptions, shall be based on the market price of the Class A Common Stock. The
Stock Option expires on the Control Termination Date. The Corporation does not
intend to issue additional shares of Class B Common Stock except pursuant to the
exercise of the Stock Option and as permitted by any law, rule or regulation to
which the Corporation is subject.
The Corporate Agreement further provides that, upon the request of Kennametal,
the Corporation shall use its best efforts to effect the registration under the
applicable federal and state securities laws of any of the shares of Common
Stock (and any other securities issued in respect of or in exchange for either)
held by Kennametal for sale in accordance with Kennametal's intended method of
disposition thereof and will take such other actions necessary to permit the
sale thereof in other jurisdictions, subject to certain limitations specified in
the Corporate Agreement. Although as of the date hereof, Kennametal has no
current plan or intention other than to hold its shares of Class B Common Stock
for the foreseeable future, Kennametal also has the right, which it may exercise
at any time and from time to time, to include the shares of Class A Common Stock
(and any other securities issued in respect of or in exchange for either) held
by it in certain other registrations of common equity securities of the
Corporation initiated by the Corporation on its own behalf or on behalf of its
other shareowners. The Corporation agrees to pay all out-of-pocket costs and
expenses (other than underwriting discounts and commissions) in connection with
each such registration that Kennametal requests or in which Kennametal
participates. Subject to certain limitations
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specified in the Corporate Agreement, such registration rights will be
assignable by Kennametal and its assigns. The Corporate Agreement contains
indemnification and contribution provisions: (i) by Kennametal and its permitted
assigns for the benefit of the Corporation and related persons; and (ii) by the
Corporation for the benefit of Kennametal and the other persons entitled to
effect registrations of Common Stock and related persons.
The Corporate Agreement provides that for so long as Kennametal maintains
beneficial ownership of at least 40% of the number of outstanding shares of
Common Stock, the Corporation may not take any action or enter into any
commitment or agreement that may reasonably be anticipated to result, with or
without notice and with or without lapse of time or otherwise, in a
contravention or an event of default by Kennametal of: (i) any provision of
applicable law or regulation, including but not limited to provisions pertaining
to the Internal Revenue Code of 1986, as amended or the Employee Retirement
Income Security Act of 1974, as amended; (ii) any provision of Kennametal's
Articles of Incorporation or Kennametal's By-Laws; (iii) any credit agreement or
other material instrument binding upon Kennametal; or (iv) any judgment, order
or decree of any governmental body, agency or court having jurisdiction over
Kennametal or any of its affiliates or any of their respective assets.
RECEIVABLES SALE AGREEMENT
In June 1999, the Corporation and Kennametal entered into a Receivables Sale
Agreement under which the Corporation sells a portion of its accounts
receivables to Kennametal as part of a receivables sale program that Kennametal
has entered into with third parties. Kennametal purchased approximately $129
million of receivables from the Corporation during fiscal 2000. The proceeds
from collection of these receivables are used to purchase additional
receivables. The receivables are sold by the Corporation at a price equal to
their face value less a discount factor (presently 1%) determined by Kennametal
and the Corporation from time to time. Losses incurred by the Corporation from
these sales were approximately $1.2 million in fiscal 2000. Cash received by the
Corporation from the sale is returned to Kennametal under the Cash Management
Agreement. Kennametal paid the Corporation approximately $161,000 in fiscal 2000
for servicing the sold receivables on behalf of Kennametal.
CONFLICTS OF INTEREST
Conflicts of interest may arise between the Corporation and Kennametal in a
number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, potential competitive
business activities, the election of new or additional directors, payment of
dividends, incurrence of indebtedness, tax matters, financial commitments,
marketing functions, indemnity arrangements, registration rights, administration
of benefits plans, service arrangements, issuances of capital stock of the
Corporation, sales or distributions by Kennametal of its remaining shares of
Common Stock and the exercise by Kennametal of its ability to control the
management and affairs of the Corporation. The Corporation cannot engage in the
manufacture of metal cutting tools and inserts and other related products in
which Kennametal is engaged. The Articles of Incorporation and the Corporate
Opportunities Agreement contain certain noncompete provisions. Circumstances
could arise, however, in which the Corporation and Kennametal would engage in
activities in competition with one another.
The Corporation and Kennametal may enter into material transactions and
agreements in the future in addition to those described above. The Board will
utilize such procedures in evaluating the terms and provisions of any material
transactions between the Corporation and Kennametal or its affiliates as the
Board may deem appropriate in light of its fiduciary duties under state law.
Depending on the nature and size of the particular transaction, in any such
evaluation, the Board may rely on management's statements and opinions and may
or may not utilize outside experts or consultants or obtain independent
appraisals or opinions.
Four of the seven current directors of the Corporation are also directors of
Kennametal, including Kennametal's Chairman, William R. Newlin, and Kennametal's
President and Chief Executive Officer, Markos I. Tambakeras. Directors of the
Corporation who are also directors of Kennametal will have conflicts of interest
with respect to matters potentially or actually involving or affecting the
Corporation and Kennametal, such as acquisitions, financing and other corporate
opportunities that may be suitable for the Corporation and Kennametal. To the
extent that such opportunities arise, such directors may consult with their
legal advisors and make a determination after consideration of a number of
factors, including whether such opportunity is presented to any such director in
his capacity as a director of the Corporation, whether such opportunity is
within the Corporation's line of business or consistent with its strategic
objectives and whether the Corporation will be able to undertake or benefit from
such opportunity. In addition, determinations may be made by the Board, when
appropriate, by the vote of the disinterested directors only. Notwithstanding
the foregoing, there can be no assurance that conflicts will be resolved in
favor of the Corporation. So long as the Corporation remains a subsidiary of
Kennametal, the directors and officers of the Corporation will, subject to
certain limitations, be indemnified by Kennametal and insured under
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insurance policies maintained by Kennametal against liability for actions taken
or omitted to be taken in their capacities as directors and officers of the
Corporation, including actions or omissions that may be alleged to constitute
breaches of the fiduciary duties owed by such persons to the Corporation and its
shareowners. This insurance may not be applicable to certain of the claims that
Kennametal may have against the Corporation pursuant to the Indemnification
Agreement or otherwise. It is contemplated that, in the event that Kennametal
ceases to own in excess of a majority of the voting power of the Common Stock,
the Corporation will obtain its own insurance coverage for its directors and
officers in respect of such matters comparable to that currently provided by
Kennametal.
RELOCATION LOAN
On September 17, 1998, Mr. Orwig became President and Chief Executive Officer of
the Corporation and ceased to serve as the Vice President and Chief Financial
and Administrative Officer of Kennametal. In connection with Mr. Orwig's new
position, Mr. Orwig received a loan from the Corporation on March 10, 1999, for
relocation purposes, in the amount of $175,000, which was interest-free until
September 10, 1999. The entire amount of the loan, including accrued interest
was repaid in full in fiscal 2000.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements
Financial statements filed as a part of this report are listed on the
"Index to Financial Statements" herein.
2. Financial Statement Schedules
The financial statement schedule shown below should be read in
conjunction with the financial statements contained in this Form 10-K.
Other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts for the Three Years
Ended June 30, 2000
3. Exhibits
(3) Articles of Incorporation and By-laws
(3.1) Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.a of Amendment No. 1 to the
company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(3.2) By-laws (incorporated by reference to Exhibit 3.b of
Amendment No. 1 to the company's Registration Statement on Form S-1 (No.
333-25989) filed with the Commission on June 4, 1997).
(10) Material Contracts
(10.1) Administrative Services Agreement (incorporated by
reference to Exhibit 10.a of Amendment No. 1 to the company's Registration
Statement on Form S-1 (No. 333-25989) filed with the Commission on June 4,
1997).
(10.2) Corporate Agreement (incorporated by reference to Exhibit
10.b of Amendment No. 1 to the company's Registration Statement on Form S-1 (No.
333-25989) filed with the Commission on June 4, 1997).
(10.3) Indemnification Agreement (incorporated by reference to
Exhibit 10.c of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.4) Intercompany Debt/Investment and Cash Management Agreement
(incorporated by reference to Exhibit 10.d of Amendment No. 1 to the company's
Registration Statement on Form S-1 (No. 333-25989) filed with the Commission on
June 4, 1997).
(10.5) Non-Competition and Corporate Opportunities Allocation
Agreement (incorporated by reference to Exhibit 10.e of Amendment No. 1 to the
company's Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.6) Shared Facilities Agreements (incorporated by reference to
Exhibit 10.f of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
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(10.7) Tax Sharing Agreement (incorporated by reference to
Exhibit 10.g of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.8) Trademark License Agreement (incorporated by reference to
Exhibit 10.h of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.9) Warehousing Agreements (incorporated by reference to
Exhibit 10.i of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.10) Lease Agreement (incorporated by reference to Exhibit
10.j of Amendment No. 1 to the company's Registration Statement on Form S-1 (No.
333-25989) filed with the Commission on June 4, 1997).
(10.11) Product Supply Agreement (incorporated by reference to
Exhibit 10.k of Amendment No. 1 to the company's Registration Statement on Form
S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.12) 1997 JLK Direct Distribution Inc. Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.i of the company's
December 31, 1997 Form 10-Q).
(10.13) Kennametal Inc. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.m of Amendment No. 1 to the company's
Registration Statement on Form S-1 (No. 333-25989) filed with the Commission on
June 4, 1997).
(10.14) JLK Direct Distribution Inc. Management Bonus Plan
(incorporated by reference to Exhibit 10.s of Amendment No. 2 to the company's
Registration Statement on Form S-1 (No. 333-25989) filed with the Commission on
June 24, 1997).
(10.15) Employment Agreement with Richard J. Orwig dated January
21, 2000 (incorporated by reverence to Exhibit 10.1 of the company's December
31, 1999 Form 10-Q).
(10.16) Employment Agreement with John M. Beaudoin dated January
21, 2000 (incorporated by reverence to Exhibit 10.2 of the company's December
31, 1999 Form 10-Q).
(10.17) Employment Agreement with Charles G. Lendvoyi dated
January 21, 2000 (incorporated by reverence to Exhibit 10.3 of the company's
December 31, 1999 Form 10-Q).
(10.18) Employment Agreement with Paul E. Fuller dated January
21, 2000 (incorporated by reverence to Exhibit 10.4 of the company's December
31, 1999 Form 10-Q).
(10.19) Employment Agreement with Diana L. Scott dated January
21, 2000 (incorporated by reverence to Exhibit 10.5 of the company's December
31, 1999 Form 10-Q).
(10.20) Deferred Fee Plan for Outside Directors (incorporated by
reverence to Exhibit 10.6 of the company's December 31, 1999 Form 10-Q).
(10.21) Directors Stock Incentive Plan (incorporated by reverence
to Exhibit 10.7 of the company's December 31, 1999 Form 10-Q).
(10.22) Severance Agreement with Richard J. Orwig dated May 2,
2000, filed herewith.
(10.23) Severance Agreement with Charles G. Lendvoyi dated July
26, 2000, filed herewith.
(21) Subsidiaries of the Registrant Filed herewith.
(27) Financial Data Schedule Filed herewith.
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(b) Reports on Form 8-K.
A report on Form 8-K, containing Item 5, was filed on May 9, 2000
regarding the announcement of the resignation of Mr. Richard J. Orwig
as president and CEO of JLK Direct Distribution Inc.
A report on Form 8-K was filed on July 21, 2000 regarding the
announcement of a proposal by Kennametal Inc. to acquire the
outstanding shares of JLK Direct Distribution Inc., an 83 percent-owned
subsidiary of Kennametal Inc., that it does not already own for $6.70
per share in cash.
A report on Form 8-K was filed on July 25, 2000 regarding Kennametal
Inc. and all the directors of JLK Direct Distribution Inc., an 83
percent-owned subsidiary of Kennametal Inc., being named as defendants
in civil action No. GD00-12565, filed in the Court of Common Pleas in
Allegheny County, Pennsylvania.
A report on Form 8-K was filed on August 8, 2000 regarding JLK Direct
Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc.,
Kennametal Inc. and all the directors of JLK Direct Distribution Inc.,
being named in two additional class action lawsuits filed in the Court
of Common Pleas in Allegheny County, Pennsylvania.
A report on Form 8-K was filed on September 11, 2000 regarding the
announcement that Kennametal Inc. and JLK Direct Distribution Inc., an
83 percent-owned subsidiary of Kennametal Inc., have entered into a
definitive merger agreement for Kennametal to acquire the outstanding
shares of JLK that Kennametal does not already own.
A report on Form 8-K was filed on September 12, 2000 regarding the
announcement that JLK Direct Distribution Inc., an 83 percent-owned
subsidiary of Kennametal Inc., expects to recognize special charges of
$15 - $20 million associated with its business improvement plan.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
By /s/ DIANA L. SCOTT
-------------------------
Diana L. Scott
Vice President,
Chief Financial Officer
and Treasurer
Date: September 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM R. NEWLIN Chairman of the Board September 27, 2000
- --------------------------------
William R. Newlin
/s/ STANLEY B. DUZY, JR. Acting Chief September 27, 2000
- -------------------------------- Operating Officer
Stanley B. Duzy, Jr.
/s/ DIANA L. SCOTT Vice President, September 27, 2000
- -------------------------------- Chief Financial Officer
Diana L. Scott and Treasurer
/s/ RICHARD C. ALBERDING Director September 27, 2000
- --------------------------------
Richard C. Alberding
/s/ JEFFERY M. BOETTICHER Director September 27, 2000
- --------------------------------
Jeffery M. Boetticher
/s/ IRWIN L. ELSON Director September 27, 2000
- --------------------------------
Irwin L. Elson
/s/ H. PATRICK MAHANES, JR. Director September 27, 2000
- --------------------------------
H. Patrick Mahanes, Jr.
/s/ ALOYSIUS T. MCLAUGHLIN, JR. Director September 27, 2000
- --------------------------------
Aloysius T. McLaughlin, Jr.
/s/ MARKOS I. TAMBAKERAS Director September 27, 2000
- --------------------------------
Markos I. Tambakeras
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of JLK Direct Distribution
Inc. and have issued our report thereon dated July 24, 2000. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This schedule listed in Item 14-a2 of this Form 10-K is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 24, 2000
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SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 2000
- --------------------------------------------------------------------------------
Balance at Charged to Deductions Balance at
Beginning Costs and Other from End of
Description of Year Expenses Recoveries Adjustments(a) Reserves(b) Year
- ----------- ------- -------- ---------- -------------- ----------- ----
2000
Allowance for
doubtful accounts $980,838 $768,684 $70,882 $(12,895) $(812,056) $995,453
1999
Allowance for
doubtful accounts $827,416 $856,894 $68,328 $ 5,709 $(777,509) $980,838
1998
Allowance for
doubtful accounts $285,950 $515,002 $26,176 $499,538 $(499,250) $827,416
(a) Represents foreign currency translation adjustment and reserves acquired
through business combinations in 1998.
(b) Represents uncollected accounts charged against the allowance.
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