FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
Commission file number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
STATE ROUTE 981 SOUTH
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT JANUARY 30, 1998
------------------- -------------------------------
Class A Common Stock, par value $.01 4,917,000
Class B Common Stock, par value $.01 20,237,000
<PAGE>
TABLE OF CONTENTS
Item No.
- --------
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1997 and June 30, 1997
Condensed Consolidated Statements of Income Unaudited)
Three and six months ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
2. Changes in Securities and Use of Proceeds
6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------
(in thousands) December 31, June 30,
1997 1997
-------- --------
ASSETS
Current Assets:
Cash and equivalents $ 8,253 $ 13,088
Notes receivable from Kennametal 49,994 -
Accounts receivable, less allowance for
doubtful accounts of $311 and $186 50,579 42,589
Inventories 76,862 70,332
Deferred income taxes 3,314 3,260
-------- --------
Total current assets 189,002 129,269
-------- --------
Property, Plant and Equipment:
Land and buildings 2,416 1,761
Machinery and equipment 12,278 9,475
Less accumulated depreciation (4,967) (4,204)
-------- --------
Net property, plant and equipment 9,727 7,032
-------- --------
Other Assets:
Intangible assets, less accumulated
amortization of $6,006 and $4,948 36,416 27,927
Other 1,250 1,260
-------- --------
Total other assets 37,666 29,187
-------- --------
Total assets $236,395 $165,488
======== ========
LIABILITIES
Current Liabilities:
Notes payable to banks $ 114 $ 20,295
Notes payable to Kennametal - 15,805
Accounts payable 21,013 15,460
Due to Kennametal and affiliates 3,966 7,641
Accrued payroll 2,029 1,308
Income taxes payable 1,839 4,055
Other 5,025 3,233
-------- --------
Total current liabilities 33,986 67,797
-------- --------
Other Liabilities 5,483 4,960
-------- --------
Total liabilities 39,469 72,757
-------- --------
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Investments by and advances from Kennametal - 92,643
Preferred stock, $.01 par value; 25,000 shares
authorized; none issued - -
Class A Common Stock, $.01 par value; 75,000 shares
authorized; 4,917 shares issued and outstanding 49 -
Class B Common Stock, $.01 par value; 50,000 shares
authorized; 20,237 shares issued and outstanding 202 -
Additional paid-in capital 182,837 -
Retained earnings 13,746 -
Cumulative translation adjustments 92 88
-------- --------
Total shareholders' equity 196,926 92,731
-------- --------
Total liabilities and shareholders' equity $236,395 $165,488
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
OPERATIONS:
Net sales $93,693 $70,744 $189,114 $140,762
Cost of goods sold 59,156 47,634 122,328 95,707
-------- -------- -------- --------
Gross profit 34,537 23,110 66,786 45,055
Operating expenses 24,231 16,609 46,311 32,019
-------- -------- -------- --------
Operating income 10,306 6,501 20,475 13,036
Interest income 1,171 - 2,171 -
-------- -------- -------- --------
Income before income taxes 11,477 6,501 22,646 13,036
Provision for income taxes 4,500 2,554 8,900 5,119
-------- -------- -------- --------
Net income $ 6,977 $ 3,947 $ 13,746 $ 7,917
======== ======== ======== ========
PER SHARE DATA:
Basic earnings per share $ 0.28 - $ 0.55 -
======== ======== ======== ========
Diluted earnings per share $ 0.28 - $ 0.54 -
======== ======== ======== ========
Weighted average shares
outstanding 25,154 - 25,154 -
======== ======== ======== ========
Diluted average shares
outstanding 25,317 - 25,295 -
======== ======== ======== ========
Pro forma net income per share - $ 0.19 - $ 0.38
======== ======== ======== ========
Pro forma weighted average
shares outstanding - 20,932 - 20,932
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------
(in thousands)
Six Months Ended
December 31,
----------------------
1997 1996
------- -------
OPERATING ACTIVITIES:
Net income $13,746 $ 7,917
Adjustments for noncash items:
Depreciation and amortization 1,822 794
Loss on sale of assets 144 -
Noncash transactions with Kennametal - 3,083
Changes in certain assets and liabilities,
net of effects of acquisitions:
Accounts receivable (5,127) 3,996
Inventories (3,046) (168)
Accounts payable and accrued liabilities 2,221 (1,264)
Other (2,773) 931
------- -------
Net cash flow from operating activities 6,987 15,289
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,259) (1,300)
Notes receivable from Kennametal (49,994) -
Acquisitions, net of cash (14,032) -
------- -------
Net cash flow used for investing activities (66,285) (1,300)
------- -------
FINANCING ACTIVITIES:
Net proceeds from initial public offering
of Class A Common Stock 90,445 -
Decrease in short-term debt (20,181) -
Notes Payable to Kennametal (15,805) -
Net cash advances by (payments to) Kennametal - (7,815)
------- -------
Net cash flow from (used for) financing activities 54,459 (7,815)
------- -------
Effect of exchange rate changes on cash 4 292
------- -------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents (4,835) 6,466
Cash and equivalents, beginning 13,088 690
------- -------
Cash and equivalents, ending $ 8,253 $ 7,156
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------
1. The accompanying condensed consolidated financial statements of JLK
Direct Distribution Inc. (the "Company") include the operations of J&L
America, Inc. ("J&L"), a previously wholly-owned subsidiary of Kennametal Inc.
("Kennametal"), and Full Service Supply ("Full Service Supply"), 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 anticipation of the initial
public offering ("IPO"), Kennametal contributed to the Company the stock of
J&L, including the J&L United Kingdom operations, and the assets and
liabilities of Full Service Supply. Immediately prior to the effective date of
the IPO (see Note 2), Kennametal exchanged its currently outstanding
investment for 20,897,000 shares of Class B Common Stock.
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 per share to one of the members
of its and the Company's board of directors. The 20,000 shares of Class B
Common Stock were subsequently converted to Class A Common Stock. 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.
2. On July 2, 1997, the Company consummated an IPO of approximately
4.9 million shares of Class A Common Stock at a price of $20 per share. The
net proceeds from the IPO were approximately $90 million and represented
approximately 20% of the Company's outstanding common stock. The net proceeds
were used by the Company to repay $20 million of short-term debt related to a
dividend paid to Kennametal and $20 million to repay Kennametal for
acquisitions and income taxes paid for on behalf of the Company.
Additional net proceeds of $14 million have been used to make acquisitions
(see Note 6). The remaining net proceeds are 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 of the
borrowed funds as the amounts are due on demand by the Company.
3. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the Company's 1997 Annual Report on Form 10-K. The condensed consolidated
balance sheet as of June 30, 1997 has been derived from the audited balance
sheet included in the Company's 1997 Annual Report on Form 10-K. These
interim statements are unaudited; however, management believes that all
adjustments necessary for a fair presentation have been made and all
adjustments are normal, recurring adjustments. The results for the three and
six months ended December 31, 1997 are not necessarily indicative of the
results to be expected for the full fiscal year.
4. Basic earnings per share for fiscal 1998 was computed using the weighted
average number of shares outstanding during the period, while diluted earnings
per share was 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. Pro forma earnings per share for fiscal 1997 was computed
using the weighted average number of shares outstanding during the period.
Pro forma weighted average common shares outstanding are presented on a basis
that gives pro forma effect to (i) the issuance of the Class B Common Stock
and (ii) the assumed issuance of 34,650 shares of Class A Common Stock to fund
the excess of dividends over net income.
5. The Financial Accounting Standards Board ("FASB") recently issued SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128") and SFAS No. 129, "Disclosure
of Information about Capital Structures" ("SFAS No. 129"). SFAS No. 128 was
issued in February 1997 and is effective for periods ending after December 15,
1997. This statement requires all prior earnings per share ("EPS") data to be
restated to conform to the provisions of the statement. This statement's
objective is to simplify the computations of EPS and to make the U.S. standard
for EPS computations more compatible with that of the International Accounting
Standards Committee. The Company adopted SFAS No. 128 in the second quarter
of fiscal 1998.
SFAS No. 129 was issued in February 1997 and is effective for periods ending
after December 15, 1997. This statement requires all companies to provide
specific disclosure regarding their capital structure. SFAS No. 129 will
specify the disclosure for all companies, including descriptions of their
capital structure and the contractual rights of the holders of such
securities. The Company adopted SFAS No. 129 in the second quarter of fiscal
1998.
6. During the quarter ended December 31, 1997, JLK acquired Car-Max Tool &
Cutter Sales, Inc. and GRS Industrial Supply Company. Both companies are
engaged in the distribution of metalcutting tools and industrial supplies. The
two acquired companies had combined annual sales of approximately
$23.9 million. The net purchase price of the acquisitions was allocated as
follows (in thousands):
Current assets, net of cash $ 6,400
Property, plant & equipment 1,345
Other assets 215
Goodwill 7,790
Liabilities (1,718)
-------
Purchase price, net of cash $14,032
The acquisitions were accounted for using the purchase method of accounting.
The consolidated financial statements include the operating results from the
date of acquisition. Pro forma results of operations have not been presented
because the effects of these acquisitions were not significant.
Additionally, on January 5, 1998, JLK acquired Production Tools Sales, Inc.
("PTS"), a metalworking distributor headquartered in Dallas, Texas. PTS had
annual sales of $23 million in its latest fiscal year.
7. Information related to the Company's shareholders' equity during the six
months ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands) Class A Common Stock Class B Common Stock Additional Investments by
-------------------- -------------------- Paid-In Retained Translation and Advances
Shares Amount Shares Amount Capital Earnings Adjustments from Kennametal Total
------ ------ ------ ------ ------- -------- ----------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 - $ - - $ - $ - $ - $88 $92,643 $ 92,731
Exchange of investment by
and advances from
Kennametal for 20,897
shares of Class B Common
Stock - - 20,897 209 92,434 - - (92,643) -
Initial public offering
of Class A Common Stock
including surrender of
640 shares of Class B
Common Stock 4,897 48 (640) (6) 90,403 - - - 90,445
Sale and exchange of
Class B Common Stock for
Class A Common Stock by
Kennametal 20 1 (20) (1) - - - - -
Translation adjustments - - - - - - 4 - 4
Net Income - - - - - 13,746 - - 13,746
Balance, December 31, 1997 4,917 $49 20,237 $202 $182,837 $13,746 $92 $ - $196,926
===== === ====== ==== ======== ======= === ======= ========
</TABLE>
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 $20 per share to one of the members
of its and the Company's board of directors. The 20,000 shares of Class B
Common Stock were subsequently converted to Class A Common Stock. Subsequent
to the IPO, 4,917,000 shares of Class A Common Stock were outstanding, and
Kennametal held 20,237,000 shares of Class B Common Stock.
8. The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries and sales to these entities for the three and six months ended
December 31, 1997 and 1996 were as follows ($ in thousands):
Three months ended Six months ended
December 31, December 31,
------------------ -----------------
1997 1996 1997 1996
------- ------ ------- -------
Purchases from Kennametal
and subsidiaries $8,863 $6,987 $19,100 $12,843
Sales to Kennametal
and subsidiaries $2,561 $3,530 $ 5,192 $ 7,129
The Company also receives from Kennametal certain warehouse, management
information systems, financial and administrative services. All amounts
incurred by Kennametal on behalf of the Company are reflected in operating
expenses in the accompanying statements of income. Costs charged to the
Company by Kennametal totaled $2.6 million and $1.9 million, and $5.1 million
and $3.8 million for the three and six months ended December 31, 1997 and
1996, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET SALES
- ---------
Net sales for the December 1997 quarter were $93.7 million, an increase of 32%
from $70.7 million last year. Net sales primarily increased because of the
expanded product offering in the 1998 master catalog issued September 1, 1997,
from acquisitions and from further penetration of existing customers. These
increases in sales were realized despite a significant reduction in sales due
to the General Electric Full Service Supply contract (GE Contract)
disengagement. Excluding the acquisitions, net sales increased 17%.
During the six-month period ended December 31, 1997, consolidated sales were
$189.1 million, up 34% from $140.8 million last year.
GROSS PROFIT
- ------------
Gross profit for the December 1997 quarter was $34.5 million, an increase of
49% from $23.1 million in the prior year. Gross profit margin for the
December 1997 quarter was 36.9% compared to 32.7% in the prior year. The
gross profit margin improved due to a more favorable sales mix as well as
improved contract pricing on new Full Service Supply programs and the positive
impact of the GE Contract disengagement.
During the six-month period ended December 31, 1997, gross profit was
$66.8 million, up 48% from $45.1 million last year. Gross profit margin for
the six-month period ended December 31, 1997 was 35.3% compared to 32.0% in
the prior year.
OPERATING EXPENSES
- ------------------
Operating expenses for the December 1997 quarter were $24.2 million, an
increase of 46% from $16.6 million in the prior year. Operating expenses as a
percentage of net sales were 25.9% in the December 1997 quarter compared to
23.5% in the prior year. Operating expenses rose primarily as a result of
increased costs from acquisitions, higher costs associated with the addition
of new showroom locations and increased direct mail costs, and new customer
marketing campaigns.
Also included in operating expenses were charges from Kennametal Inc.
("Kennametal") for warehousing, administrative, financial and management
information systems services provided to the Company. Charges from Kennametal
were $2.6 million in the December 1997 quarter, an increase of 36.9% from
$1.9 million in the prior year. The increase in total charges from Kennametal
resulted partly from increased costs to support higher sales volumes.
During the six-month period ended December 31, 1997, operating expenses were
$46.3 million, up 45% from $32.0 million last year. Charges from Kennametal
were $5.1 million for the six-month period ended December 31, 1997 compared to
$3.8 million in the prior year.
INTEREST INCOME
- ---------------
The Company earned interest income of approximately $1.2 million during the
December 1997 quarter. This was primarily from investments made from excess
cash and from the residual proceeds the Company received from its initial
public offering ("IPO").
During the six-month period ended December 31, 1997, interest income was
approximately $2.2 million.
INCOME TAXES AND NET INCOME
- ---------------------------
The effective tax rate was 39.2% for the December 1997 quarter compared to
39.3% in the prior year. Net income increased 77% to $7.0 million for the
December 1997 quarter as a result of higher sales and an improved gross
margin, offset by higher operating expenses.
For the six-month period ended December 31, 1997, the effective tax rate was
39.3%, the same as in the prior year. Net income increased 74% to
$13.7 million from $7.9 million in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, its showroom expansion program
in the United States, acquisitions, the addition of new products and Full
Service Supply Programs. The Company's primary sources of financing have been
cash from operations and the net proceeds from the IPO. The Company
anticipates that its cash flows from operations, coupled with the net proceeds
from the IPO, will be adequate to support its operations for the foreseeable
future.
Net cash provided by operating activities was $7.0 million for the six months
ended December 31, 1997. The decrease in net cash from operations resulted
from slightly higher working capital requirements, offset in part by higher
net income.
Net cash used in investing activities was $66.3 million for the six months
ended December 31, 1997. The increase in net cash used in investing
activities resulted from a portion of the net proceeds from the IPO being
loaned to Kennametal under an intercompany debt/investment and cash management
agreement, from recent acquisitions and from investments related primarily to
capital expenditures for improved information systems and office and computer
equipment to accommodate new product offerings and showroom openings.
During the December quarter, the Company acquired GRS Industrial Supply
Company and Car-Max Tool & Cutter Sales, Inc. Both companies are engaged in
the distribution of metalcutting tools and industrial supplies. Additionally,
on January 5, 1998, JLK acquired Production Tools Sales, Inc., a metalworking
distributor headquartered in Dallas, Texas. The three acquired companies had
combined annual sales of approximately $47 million. The acquisitions were
accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results from the date of
acquisition. Pro forma results of operations have not been presented because
the effects of these acquisitions were not significant.
Net cash provided by financing activities was $54.5 million for the six months
ended December 31, 1997. The increase in net cash provided by financing
activities was a result of proceeds received from the issuance of common stock
in connection with the Company's IPO. This was partially offset by repayments
to Kennametal for amounts previously advanced to the Company for two
acquisitions in the June 1997 quarter and by the repayment of short-term
borrowings that were made under the Company's line of credit primarily to fund
the $20 million dividend paid to Kennametal.
On July 2, 1997, the Company consummated its IPO of approximately 4.9 million
shares of common stock at a price of $20 per share. The net proceeds from the
IPO were approximately $90 million and represented approximately 20% of the
Company's outstanding common stock. The net proceeds were used by the Company
to repay $20 million of short-term debt related to the dividend paid to
Kennametal and to repay $20 million to Kennametal for the recent acquisitions
and income taxes paid for on behalf of the Company.
The remaining proceeds will be used to acquire or construct a new
$15-20 million Midwest distribution center, to provide working capital for new
showrooms and Full Service Supply Programs and to fund acquisitions.
Additional net proceeds of $14 million have been used to make acquisitions.
The remaining net proceeds are 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.
Additionally, the Company finalized its plan of disengagement from those sites
that are not being continued under the General Electric Full Service Supply
contract ("GE Contract"). In fiscal 1998, Full Service Supply sales will
experience a gradual reduction as a result of this event. In fiscal 1998, in
conjunction with such disengagement, the Company expects sales to General
Electric to amount to approximately 30% of the total amount received by the
Company in fiscal 1997 under the GE Contract which amounted to $54.7 million.
FINANCIAL CONDITION
- -------------------
The Company's financial condition remains strong. Total assets were
$236 million at December 31, 1997, up 43% from $165 million at June 30, 1997.
Net working capital was $155 million, up from $61 million at June 30, 1997.
Additionally, the Company had no outstanding long-term debt at December 31,
1997.
The most significant events that impacted the Company's financial condition
during the quarter were the acquisition of two industrial supply companies and
the remaining effects of the Company's IPO of approximately 4.9 million shares
of common stock at $20 per share. The net proceeds received from the offering
was approximately $90 million. A portion of the net proceeds was used to
repay short-term debt and advances from Kennametal, and the remaining net
proceeds were loaned to Kennametal.
OUTLOOK
- -------
In looking to the third quarter ending March 31, 1998, management expects
JLK's sales to continue to benefit from further expansion of locations,
increased mail order sales as a result of the expanded product offering in the
new master catalog and from acquisitions. Sales should also benefit from the
further development of international business, offset in part by the loss of
the General Electric Full Service Supply Contract.
This Form 10-Q contains forward-looking statements as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results can materially differ
from those in the forward-looking statements to the extent that the
anticipated economic conditions in the United States and Europe are not
sustained. The Company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ---------------------------------------------------------------------------
The information set forth in Note 2 to the condensed consolidated financial
statements, contained in Part I. of this Form 10-Q, and the information set
forth in Part I, Item 2 of this Form 10-Q, is incorporated by reference herein
and supplements the information previously reported in Part II, Item 5 of the
Company's Form 10-K for the year ended June 30, 1997, which is also
incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) Exhibits
(10) Material Contracts
10.1 JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan Filed herewith.
(27) Financial Data Schedule for six months ended
December 31, 1997, submitted to the Securities and Exchange
Commission in electronic format Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
Date: February 12, 1998 By: /s/ MICHAEL J. MUSSOG
---------------------
Michael J. Mussog
Vice President and
Chief Financial Officer
EXHIBIT 10.1
JLK DIRECT DISTRIBUTION INC.
1997 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. ESTABLISHMENT. There is hereby established the JLK Direct
Distribution Inc. 1997 Stock Option and Incentive Plan (hereinafter called the
"Plan") pursuant to which directors, officers and employees of JLK Direct
Distribution Inc. (hereinafter called the "Company") and its subsidiaries who
are mainly responsible for its continued growth and development and future
financial success may be granted options to purchase shares of Class A Common
Stock, par value $0.01 per share (the "Common Stock") of the Company and/or
may receive awards of shares of Common Stock in order to secure to the Company
the advantage of the incentive and sense of proprietorship inherent in stock
ownership by such persons, to reward such persons for services previously
performed and/or as an added inducement to continue to provide service to the
Company.
SECTION 2. DURATION. Options and share awards under this Plan may be
granted only within the ten-year period beginning on the date on which the
Plan is adopted by the stockholders. Any options or share awards outstanding
after the expiration of such ten-year period may be exercised within the
periods prescribed by Section 7.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the full
Board of Directors or a committee constituted so as to permit transactions
under the Plan to comply with Rule 16b-3 (or any successor rule) promulgated
under the Securities Exchange Act of 1934, as amended (the "Plan
Administrator"). Subject to the provisions of the Plan, the Plan Administrator
is authorized to adopt such rules and regulations and to take such action in
the administration of the Plan as it shall deem proper.
SECTION 4. ELIGIBILITY. Directors, officers and employees of the
Company and its subsidiaries and Kennametal Inc., a Pennsylvania corporation
("Kennametal"), and its subsidiaries who, in the opinion of the Plan
Administrator, are mainly responsible for the continued growth and development
and future financial success of the business shall be eligible to participate
in the Plan. The Plan Administrator shall, in its sole discretion, from time
to time, select from such eligible persons those to whom options shall be
granted or shares awarded and determine the number of shares to be included in
such option or award; provided, however, that no option may be granted in
substitution for an outstanding option except as provided in Section 12(d).
No participant shall have any right to receive an option or share award,
except as the Plan Administrator in its discretion shall determine. The terms
"parent" and "subsidiary," where used in the Plan or in any stock option
agreement entered into under the Plan, mean a "parent corporation" and a
"subsidiary corporation," respectively, as defined in Section 425 of the
Internal Revenue Code of 1986, as it may be amended from time to time (the
"Code").
SECTION 5. SHARES SUBJECT TO THE PLAN. The total number of shares of
stock which may be issued pursuant to the Plan shall be 2,000,000 shares of
Common Stock provided, however, that: (i) the number of shares of Common Stock
to be issued pursuant to the Plan is subject to adjustment as provided in
Section 12; and (ii) to the extent that options granted under the Plan shall
expire or terminate without being exercised or shares awarded under the Plan
shall be forfeited, such shares shall remain available for purposes of the
Plan. Common Stock to be issued under the Plan may be either authorized and
unissued shares or shares held in treasury by the Company, including shares of
Common Stock acquired by the Company in the open market.
SECTION 6. TYPES OF OPTIONS. Options granted pursuant to the Plan may
be either options which are incentive stock options under Section 422 of the
Code (hereinafter called "Incentive Stock Options") or other options
(hereinafter called "Nonstatutory Stock Options"). Incentive Stock Options
and Nonstatutory Stock Options shall be granted separately hereunder. The
Plan Administrator, in its discretion, shall determine whether and to what
extent options granted under the Plan shall be Incentive Stock Options or
Nonstatutory Stock Options. The provisions of the Plan and any stock option
agreement pursuant to which Incentive Stock Options shall be issued shall be
construed in a manner consistent with Section 422 of the Code and rules and
regulations promulgated or proposed thereunder.
SECTION 7. TERMS OF OPTIONS. Each option granted under the Plan shall
be evidenced by a stock option agreement between the Company and the person to
whom such option is granted and shall be subject to the following terms and
conditions:
(a) Subject to adjustment as provided in Section 12 of this Plan, the
price at which each share covered by an option may be purchased shall be
determined in each case by the Plan Administrator; provided, however, that
such price shall not be less than the fair market value thereof at the time
the option is granted. If an optionee owns (or is deemed to own under
applicable provisions of the Code and rules and regulations promulgated
thereunder) more than ten percent (10%) of the combined voting power of all
classes of the stock of the Company (or any parent or subsidiary of the
Company) and an option granted to such optionee is intended to qualify as an
Incentive Stock Option, the option price shall be no less than 110% of the
fair market value of the shares covered by the option on the date the option
is granted.
(b) The aggregate fair market value of shares of Common Stock with
respect to which Incentive Stock Options are first exercisable by the optionee
in any calendar year (under all Plans of the Company and its subsidiaries)
shall not exceed the limitations, if any, imposed by Section 422(d) of the
Code (or any successor provision). If any option designated as an Incentive
Stock Option, either alone or in conjunction with any other option or options,
exceeds the foregoing limitation, the portion of such option in excess of such
limitation shall automatically be reclassified (in whole share increments and
without fractional share portions) as a Nonstatutory Stock Option, with later
granted options being so reclassified first.
(c) During the lifetime of the optionee the option may be exercised
only by the optionee. The option shall not be transferable by the optionee
otherwise than by will or by the laws of descent and distribution or, if in
compliance with Rule 16b-3 (or any successor rule), pursuant to a domestic
relations order. After the death of the optionee, the option may be
transferred to the Company upon such terms and conditions, if any, as the Plan
Administrator and the personal representative or other person entitled to the
option may agree within the period specified in subsection 7(d)(iii) hereof.
(d) An option may be exercised in whole at any time, or in part from
time to time, within such period or periods (not to exceed ten years from the
granting of the option in the case of an Incentive Stock Option) as may be
determined by the Plan Administrator and set forth in the stock option
agreement (such period or periods being hereinafter referred to as the "option
period"), provided that:
(i) If the optionee who is an employee of the Company or its
parent or any of its subsidiaries shall cease to be employed by the Company or
its parent or any of its subsidiaries, the option may be exercised only within
three months after the termination of employment and within the option period
or, if such termination was due to disability or retirement (as hereinafter
defined), within one year after termination of employment and within the
option period, unless such termination of employment shall be for cause or in
violation of an agreement by the optionee to remain in the employ of the
Company or its parent or one of its subsidiaries, in which case the option
shall forthwith terminate; provided, however, that the Plan Administrator may
in its sole discretion extend the option period of any option for up to three
years from the date of termination of employment regardless of the original
option period. For purposes of the Plan, retirement shall mean the
termination of employment with the Company at a time when the participant in
the Plan is eligible to receive immediately payable retirement benefits under
the Company's then existing retirement plan or under any other retirement plan
that is maintained by a Company subsidiary.
(ii) If the optionee who is a director of the Company or
Kennametal or any of their subsidiaries shall cease to serve as a director of
the Company and Kennametal or any of their subsidiaries, the option may be
exercised only within three months after the cessation of service and within
the option period or, if such cessation was due to disability, within one year
after cessation of service and within the option period, unless such cessation
of service as a director was the result of removal for cause, in which case
the option shall forthwith terminate; provided, however, that the Plan
Administrator may in its sole discretion extend the option period of any
option for up to three years from the date of cessation of service regardless
of the original option period.
(iii) If the optionee shall die, the option may be exercised
only within 450 calendar days after the optionee's death and within the option
period and only by the optionee's personal representative or persons entitled
thereto under the optionee's will or the laws of descent and distribution;
(iv) The option may not be exercised for more shares (subject to
adjustment as provided in Section 12) after the termination of the optionee's
employment, cessation of service as a director or the optionee's death (as the
case may be) than the optionee was entitled to purchase thereunder at the time
of the termination of the optionee's employment or the optionee's death;
(v) If an optionee owns (or is deemed to own under applicable
provisions of the Code and rules and regulations promulgated thereunder) more
than 10% of the combined voting power of all classes of stock of the Company
(or any parent or subsidiary corporation of the Company) and an option granted
to such optionee is intended to qualify as an Incentive Stock Option, the
option by its terms may not be exercisable after the expiration of five years
from the date such option is granted; and
(vi) No option granted to an optionee subject to Section 16(b)
may be exercised during the six-month period beginning on the date of grant.
(e) The option price of each share purchased pursuant to an option
shall be paid in full at the time of each exercise (the "Payment Date") of the
option (i) in cash; (ii) by delivering to the Company a notice of exercise
with an irrevocable direction to a registered broker-dealer under the
Securities Exchange Act of 1934, as amended, to sell a sufficient portion of
the shares and deliver the sale proceeds directly to the Company to pay the
exercise price; (iii) in the discretion of the Plan Administrator, through the
delivery to the Company of previously owned shares of Common Stock having an
aggregate fair market value equal to the option price of the shares being
purchased pursuant to the exercise of the option; provided, however, that
shares of Common Stock delivered in payment of the option price must have been
held by the participant for at least six (6) months in order to be utilized to
pay the option price; (iv) through an election pursuant to Section 8 hereof to
have shares of Common Stock otherwise issuable to the optionee withheld to pay
the exercise price of such option; or (v) in the discretion of the Plan
Administrator, through any combination of the payment procedures set forth in
subsections (i)-(iv) of this Section 7(e).
(f) The Plan Administrator, in its discretion, may authorize "stock
retention options" which provide, upon the exercise of an option granted under
this Plan, the Stock Option Plan of 1982, the Stock Option and Incentive Plan
of 1988 or the Stock Option and Incentive Plan of 1992 (a "prior option")
using previously owned shares, for the automatic issuance of a new option
under this Plan with an exercise price equal to the current fair market value
and for up to the number of shares equal to the number of previously owned
shares delivered in payment of the exercise price of the prior option. Such
stock retention option shall have the same option period as the prior option.
(g) In consideration for the granting of each option, the optionee
shall agree to remain in the employment of the Company or one of its
subsidiaries, at the pleasure of the Company or such subsidiary, for at least
one year from the date of the granting of such option or until the first day
of the month coinciding with or next following the optionee's sixty-fifth
birthday, whichever may be earlier. Nothing contained in the Plan nor in any
stock option agreement shall confer upon any optionee any right with respect
to the continuance of employment by the Company or any of its subsidiaries nor
interfere in any way with the right of the Company or any subsidiary to
terminate his employment or change his compensation at any time.
(h) The Plan Administrator may include such other terms and
conditions not inconsistent with the foregoing as the Plan Administrator shall
approve. Without limiting the generality of the foregoing sentence, the Plan
Administrator shall be authorized to determine that options shall be
exercisable in one or more installments during the term of the option and the
right to exercise may be cumulative as determined by the Plan Administrator.
SECTION 8. SHARE WITHHOLDING.
(a) An optionee may, in the discretion of the Plan Administrator,
elect to pay the exercise price of an option, in whole or in part, by
requesting that the Company withhold shares of stock otherwise issuable to the
optionee having a fair market value equal to the portion of the exercise price
of the option being paid pursuant to such election (a "Share Withholding
Election").
(b) A Share Withholding Election must be in writing and must be
delivered to the Company no later than with the delivery of the notice of
exercise of the option.
SECTION 9. SHARE AWARDS.
(a) The Plan Administrator may, from time to time, subject to the
provisions of the Plan, award shares to participants; provided, however, that
the maximum number of shares of Common Stock that may take the form of share
awards is 100,000.
(b) The award of shares shall be evidenced by a share award agreement
executed by the Company and the grantee setting forth the number of shares of
Common Stock awarded, the vesting period, the vesting schedule or criteria and
such other terms and conditions as the Plan Administrator may determine.
(c) The grantee of a share award shall receive shares of Common Stock
without payment to the Company immediately upon grant; provided, however,
that the grantee's ownership of such shares shall be subject to the following
terms and conditions:
(i) Any single award of shares to a participant in an amount
greater than 100 shares shall vest in installments upon achievement by the
Company or grantee of specified performance goals as determined by the Plan
Administrator and as provided in the share award agreement;
(ii) If the grantee or the Company, as the case may be, fails to
achieve the designated goals or the grantee ceases to be employed by the
Company for any reason (including death, permanent disability or retirement)
prior to the expiration of the vesting period, the grantee shall forfeit all
shares so awarded which have not then vested;
(iii) A grantee who has received a share award pursuant to the
Plan shall have all rights of a stockholder in such Common Stock, including
but not limited to the right to vote and receive dividends with respect
thereto; provided, however, that shares awarded pursuant to the Plan which
have not vested may not be sold or otherwise transferred by the grantee and
stock certificates representing such shares shall bear a restrictive legend to
that effect; and
(iv) No share award (or portion thereof) granted to a person
subject to Section 16(b) shall vest within the six-month period beginning on
the date of grant of such share award.
SECTION 10. LIMITATION ON OPTIONS AND AWARDS. The aggregate number of
shares covered by any options or share awards to one person shall not exceed
fifteen percent (15%) of the aggregate number of shares subject to the Plan as
provided in Section 5 hereof.
SECTION 11. TAX WITHHOLDING.
(a) Whenever shares are to be issued under the Plan, the Company
shall have the right to require the grantee to remit to the Company an amount
sufficient to satisfy federal, state and local tax withholding requirements
prior to the delivery of any certificate for such shares; provided, however,
that in the case of a grantee who receives an award of shares under the Plan
which is not fully vested, the grantee shall remit such amount on the first
business day following the Tax Date. The "Tax Date" for purposes of this
Section 11 shall be the date on which the amount of tax to be withheld is
determined. If an optionee makes a disposition of shares acquired upon the
exercise of an Incentive Stock Option within either two years after the option
was granted or one year after the receipt of stock by the optionee, the
optionee shall promptly notify the Company and the Company shall have the
right to require the optionee to pay to the Company an amount sufficient to
satisfy federal, state and local tax withholding requirements.
(b) A grantee who is obligated to pay the Company an amount required
to be withheld under applicable tax withholding requirements may pay such
amount (i) in cash; (ii) in the discretion of the Plan Administrator, through
the delivery to the Company of previously owned shares of Common Stock having
an aggregate fair market value on the Tax Date equal to the tax obligation
provided that the previously owned shares delivered in satisfaction of the
withholding obligations must have been held by the participant for at least
six (6) months; or (iii) in the discretion of the Plan Administrator, through
a combination of the procedures set forth in subsections (i) an (ii) of this
Section 11(b).
(c) A grantee who is obligated to pay to the Company an amount
required to be withheld under applicable tax withholding requirements in
connection with either the exercise of a Nonstatutory Stock Option or a share
award under the Plan may, in the discretion of the Plan Administrator, elect
to satisfy this withholding obligation, in whole or in part, by requesting
that the Company withhold shares of stock otherwise issuable to the grantee
having a fair market value on the Tax Date equal to the amount of the tax
required to be withheld; provided, however, that shares may be withheld by the
Company only if such withheld shares have vested. Any fractional amount shall
be paid to the Company by the optionee in cash or shall be withheld from the
optionee's next regular paycheck.
(d) An election by a grantee to have shares of stock withheld to
satisfy federal, state and local tax withholding requirements pursuant to
Section 11(c) (a "Tax Withholding Election") must be in writing and delivered
to the Company prior to the Tax Date.
SECTION 12. ADJUSTMENT OF NUMBER AND PRICE OF SHARES.
(a) In the event that a dividend shall be declared upon the Common
Stock of the Company payable in shares of said stock, the number of shares of
Common Stock covered by each outstanding option and the number of shares which
may be issued pursuant to the Plan but are not yet covered by outstanding
options shall be adjusted by adding thereto the number of shares of Common
Stock which would have been distributable thereon if such shares had been
outstanding on the date fixed for determining the stockholders entitled to
receive such stock dividend.
(b) In the event that the outstanding shares of Common Stock of the
Company shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of the Company or of another corporation,
whether through reorganization, recapitalization, stock split-up, combination
of shares, merger or consolidation, then there shall be substituted for the
shares of Common Stock covered by each outstanding option, and the shares
which may be issued pursuant to the Plan but are not yet covered by
outstanding options, the number and kind of shares of stock or other
securities which would have been substituted therefor if such shares had been
outstanding on the date fixed for determining the stockholders entitled to
receive such changed or substituted stock or other securities.
(c) In the event there shall be any change, other than specified in
this Section 12, in the number or kind of outstanding shares of Common Stock
of the Company or of any stock or other securities into which such Common
Stock shall be changed or for which it shall have been exchanged, then, if the
Board of Directors shall determine, in its discretion, that such change
equitably requires an adjustment in the number or kind of shares covered by
outstanding options and the shares which may be issued pursuant to the Plan
but are not yet covered by outstanding options, such adjustment shall be made
by the Board of Directors and shall be effective and binding for all purposes
of the Plan and on each outstanding stock option agreement.
(d) In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation, the Board of Directors shall authorize the issuance or assumption
of a stock option or stock options in a transaction to which Section 424(a) of
the Code applies, then, notwithstanding any other provision of the Plan, the
Plan Administrator may grant an option or options upon such terms and
conditions as it may deem appropriate for the purpose of assumption of the old
option, or substitution of a new option for the old option, in conformity with
the provisions of Code Section 424(a) and the rules and regulations
thereunder, as they may be amended from time to time.
(e) No adjustment or substitution provided for in this Section 12
shall require the Company to issue or to sell a fractional share under any
stock option agreement or share award agreement and the total adjustment or
substitution with respect to each stock option and share award agreement shall
be limited accordingly.
(f) In the case of any adjustment or substitution provided for in
this Section 12, the option price per share in each stock option agreement
shall be equitably adjusted by the Board of Directors to reflect the greater
or lesser number of shares of stock or other securities into which the stock
covered by the option may have been changed or which may have been substituted
therefor.
SECTION 13. FAIR MARKET VALUE. In any determination of fair market
value hereunder, fair market value shall be deemed to be the mean between the
highest and lowest sales prices for the Common Stock of the Company as
reported in the New York Stock Exchange -- Composite Transactions reporting
system for the date in question, or if no sales were made on that date, on the
next preceding date on which sales were made.
SECTION 14. CHANGE IN CONTROL.
(a) In the event of a Change in Control, as hereinafter defined, of
the Company or Kennametal, the following provisions shall apply to options and
share awards previously awarded under the Plan, notwithstanding any provision
herein or in any agreement to the contrary:
(i) All options which provide for exercise in one or more
installments shall become immediately exercisable in full;
(ii) If any optionee shall cease to be employed by the Company
or any of its subsidiaries within one (1) year following a Change in Control,
then the option may in all events be exercised for a period of three months
after such termination of employment and within the option period; and
(iii) All awards of shares under the Plan which have not
previously vested shall become vested.
(b) The term "Change in Control" shall mean a change in control of
the Company or Kennametal of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A promulgated under the Exchange Act as in
effect on the date thereof or, if Item 6(e) is no longer in effect, any
regulations issued by the Securities and Exchange Commission pursuant to the
Exchange Act which serve similar purposes; provided that, without limitation,
such a Change in Control shall be deemed to have occurred if: (i) the Company
or Kennametal shall be merged or consolidated with another corporation or
entity, other than a corporation or entity which is an "affiliate" of the
Company or Kennametal, as the case may be (as such term is defined in
Rule 144(a) promulgated under the Securities Act of 1933), or (ii) the Company
or Kennametal shall sell all or substantially all of its operating properties
and assets to another person, group of associated persons or corporation,
excluding affiliates of the Company or Kennametal, if any, or (iii) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes a beneficial owner, directly or indirectly, of securities
of the Company or Kennametal representing 25% or more of the combined voting
power of the Company's or Kennametal's, as the case may be, then outstanding
securities coupled with or followed by the election as directors of the
Company or Kennametal, as the case may be, of persons who were not directors
at the time of such acquisition if such person shall elect a majority of the
Board of Directors of the Company or Kennametal, as the case may be.
SECTION 15. AMENDMENT AND DISCONTINUANCE. The Board of Directors may
alter, amend, suspend or discontinue the Plan, provided that no such action
shall deprive any person without such person's consent of any rights
theretofore granted pursuant hereto.
SECTION 16. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Notwithstanding
any provision of the Plan or the terms of any agreement entered into pursuant
to the Plan, the Company shall not be required to issue any shares hereunder
prior to registration of the shares subject to the Plan under the Securities
Act of 1933 or the Exchange Act, if such registration shall be necessary, or
before compliance by the Company or any participant with any other provisions
of either of those acts or of regulations or rulings of the Securities and
Exchange Commission thereunder, or before compliance with other federal and
state laws and regulations and rulings thereunder, including the rules of the
New York Stock Exchange, Inc. The Company shall use its best efforts to
effect such registrations and to comply with such laws, regulations and
rulings forthwith upon advice by its counsel that any such registration or
compliance is necessary.
SECTION 17. COMPLIANCE WITH SECTION 16. With respect to persons subject
to Section 16 of the Exchange Act, transactions under this Plan are intended
to comply with all applicable conditions of Rule 16b-3 (or its successor
rule). To the extent that any grant of an option or share award fails to so
comply, it shall be deemed null and void to the extent permitted by law and to
the extent deemed advisable by the Plan Administrator.
SECTION 18. PARTICIPATION BY FOREIGN NATIONALS. The Plan Administrator
may, in order to fulfill the purposes of the Plan and without amending the
Plan, modify grants to foreign nationals or United States citizens employed
abroad in order to recognize differences in local law, tax policy or custom.
SECTION 19. EFFECTIVE DATE OF PLAN. The Plan shall become effective
upon approval and adoption of the Plan by the affirmative vote of holders of a
majority of the outstanding shares of stock of the Company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the December 31, 1997 Condensed Consolidated Financial Statements
(unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,253
<SECURITIES> 0
<RECEIVABLES> 100,884
<ALLOWANCES> 311
<INVENTORY> 76,862
<CURRENT-ASSETS> 189,002
<PP&E> 14,694
<DEPRECIATION> 4,967
<TOTAL-ASSETS> 236,395
<CURRENT-LIABILITIES> 33,986
<BONDS> 0
0
0
<COMMON> 251
<OTHER-SE> 196,675
<TOTAL-LIABILITY-AND-EQUITY> 236,395
<SALES> 189,114
<TOTAL-REVENUES> 189,114
<CGS> 122,328
<TOTAL-COSTS> 122,328
<OTHER-EXPENSES> 1,054
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,646
<INCOME-TAX> 8,900
<INCOME-CONTINUING> 13,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,746
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.54
</TABLE>
