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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission file number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title Of Each Class Outstanding at October 30, 1998
- ------------------------------------ -------------------------------
Class A Common Stock, par value $.01 4,273,300
Class B Common Stock, par value $.01 20,237,000
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JLK DIRECT DISTRIBUTION INC.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1998 and June 30, 1998.............................. 1
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1998 and 1997.................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 1998 and 1997.................... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)....................................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 7
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders...............11
6. Exhibits and Reports on Form 8-K..................................11
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,134 $ 4,715
Notes receivable from Kennametal -- 1,169
Accounts receivable, less allowance for doubtful
accounts of $881 and $827 74,032 71,426
Inventories 99,733 97,299
Deferred income taxes 5,853 5,853
--------- ---------
Total current assets 183,752 180,462
--------- ---------
Property, plant and equipment:
Land and buildings 5,743 5,152
Machinery and equipment 23,860 21,379
Less accumulated depreciation (6,701) (6,014)
--------- ---------
Net property, plant and equipment 22,902 20,517
--------- ---------
Other assets:
Intangible assets, less accumulated
amortization of $9,619 and $8,231 69,702 71,090
Other 5,544 3,517
--------- ---------
Total other assets 75,246 74,607
--------- ---------
Total assets $ 281,900 $ 275,586
========= =========
LIABILITIES
Current liabilities:
Notes payable to banks $ 5,575 $ 1,915
Notes payable to Kennametal 12,244 --
Accounts payable 24,846 36,393
Due to Kennametal and affiliates 12,334 15,144
Income taxes payable 10,338 8,252
Accrued payroll and vacation pay 3,183 3,567
Other 5,747 5,877
--------- ---------
Total current liabilities 74,267 71,148
--------- ---------
Other liabilities 8,314 8,503
--------- ---------
Total liabilities 82,581 79,651
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value; 75,000 shares authorized;
4,917 shares issued, 4,273 and 4,288 shares outstanding 49 49
Class B Common Stock, $.01 par value; 50,000 shares authorized;
20,237 shares issued and outstanding 202 202
Additional paid-in capital 182,822 182,822
Retained earnings 30,800 27,076
Treasury stock, at cost; 644 and 629 shares of Class A Common
Stock held (14,529) (14,197)
Accumulated other comprehensive income (25) (17)
--------- ---------
Total shareholders' equity 199,319 195,935
--------- ---------
Total liabilities and shareholders' equity $ 281,900 $ 275,586
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATIONS
Net sales $ 131,762 $ 95,420
Cost of goods sold 88,972 63,171
----------- -----------
Gross profit 42,790 32,249
Operating expenses 36,376 22,079
----------- -----------
Operating income 6,414 10,170
Interest expense (income) and other 290 (999)
----------- -----------
Income before provision for income taxes 6,124 11,169
Provision for income taxes 2,400 4,400
----------- -----------
Net income $ 3,724 $ 6,769
=========== ===========
PER SHARE DATA
Basic earnings per share $ 0.15 $ 0.27
=========== ===========
Diluted earnings per share $ 0.15 $ 0.26
=========== ===========
Weighted average shares outstanding 24,511 25,154
=========== ===========
Diluted weighted average shares outstanding 24,511 25,273
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,724 $ 6,769
Adjustments for noncash items:
Depreciation and amortization 2,099 824
Other (10) --
Changes in certain assets and liabilities:
Accounts receivable (2,606) (6,003)
Inventories (2,434) (810)
Accounts payable and accrued liabilities (14,869) 4,830
Other (130) 3,198
-------- --------
Net cash flow from operating activities (14,226) 8,808
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,112) (958)
Notes receivable from Kennametal 1,169 (73,934)
Other 24 --
-------- --------
Net cash flow from investing activities (1,919) (74,892)
-------- --------
FINANCING ACTIVITIES
Net proceeds from initial public offering of
Class A Common Stock -- 90,430
Borrowings under (repayments of) notes payable to banks 3,660 (20,038)
Notes payable to Kennametal 12,244 (15,805)
Purchase of treasury stock (332) --
-------- --------
Net cash flow from financing activities 15,572 54,587
-------- --------
Effect of exchange rate changes on cash (8) --
-------- --------
CASH AND EQUIVALENTS
Net decrease in cash and equivalents (581) (11,497)
Cash and equivalents, beginning 4,715 13,088
-------- --------
Cash and equivalents, ending $ 4,134 $ 1,591
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 162 $ 4
Income taxes paid 367 3,363
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the company's 1998 Annual Report on Form 10-K. The condensed consolidated
balance sheet as of June 30, 1998 has been derived from the audited balance
sheet included in the company's 1998 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
months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year. Certain amounts in the
prior years' consolidated financial statements have been reclassified to
conform with the current year presentation.
2. The accompanying condensed consolidated financial statements of JLK Direct
Distribution Inc. include the operations of J&L America, Inc. (J&L), a
previously wholly-owned subsidiary of Kennametal Inc. (Kennametal), and
Full Service Supply, 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 an initial public offering (IPO) of the Class A Common
Stock of the company, 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, Kennametal exchanged its currently outstanding investment for
20,897,000 shares of Class B Common Stock.
On July 2, 1997, the company consummated an IPO of approximately 4.9
million shares of Class A Common Stock at a price of $20.00 per share. The
net proceeds from the IPO were approximately $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 $20.0 million to repay
Kennametal for acquisitions in fiscal 1997 and income taxes paid on behalf
of the company. The remaining net proceeds of $50.4 million were used to
pay for fiscal 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 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.
3. For purposes of determining the average number of dilutive shares
outstanding for the three months ended September 30, 1997, weighted average
shares outstanding for the basic earnings per share calculation were
increased due to the dilutive effect of unexercised stock options by
118,500. There was no dilutive effect of unexercised stock options for the
three months ended September 30, 1998.
4
<PAGE> 7
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
4. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which requires the presentation of comprehensive income in a
company's financial statement disclosures. Comprehensive income represents
all changes in the equity of a company during the reporting period,
including net income, as well as charges and credits directly to retained
earnings which are excluded from net income. The components of
comprehensive income consist of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 3,724 $ 6,769
Foreign currency translation adjustments (8) (71)
----------- -----------
Comprehensive income $ 3,716 $ 6,698
=========== ===========
</TABLE>
Accumulated other comprehensive income consists solely of cumulative
foreign currency translation adjustments.
5. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by the
beginning of the first quarter of fiscal year 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments imbedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its 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 allow 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. The company believes the adoption of SFAS
No. 133 will not have a material effect on the financial statements or
results of operations of the company.
6. During fiscal 1998, the company acquired the following distributors of
metalcutting tools and industrial supplies:
<TABLE>
<CAPTION>
Acquisition
Date Acquired Acquisition Headquarters
---------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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 has been recorded as goodwill. The
net purchase price of the acquisitions was allocated as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 38,360
Property, plant and equipment 3,431
Other long-term assets 590
Goodwill 39,850
Current liabilities (24,890)
--------
Purchase price, net of cash $ 57,341
========
</TABLE>
5
<PAGE> 8
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The results of operations of the acquired businesses have been included in
the consolidated financial statements from the date of acquisition.
Estimated annualized sales for these acquisitions are approximately $137.0
million. On a pro forma basis, as if the acquisitions had taken place at
the beginning of the three-month period ended September 30, 1997,
consolidated net sales would have been $131.6 million. The pro forma impact
on net income and diluted earnings per share would not be materially
different from the amount reported for the three months ended September 30,
1997.
In connection with these acquisitions, the company also entered into
employee retention and non-compete agreements that amounted to
approximately $6.6 million. The liability for these agreements, and other
similar agreements, at September 30, 1998 and June 30, 1998 recorded in
other current liabilities was $2.8 million and $2.8 million, respectively,
and in other liabilities was $6.3 million and $6.5 million, respectively.
7. The company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries and sales to these entities were as follows (in thousands):
Three Months Ended
September 30,
---------------------
1998 1997
---- ----
Purchases from Kennametal and subsidiaries $ 8,584 $10,402
Sales to Kennametal and subsidiaries 2,743 2,631
The company receives from Kennametal certain warehouse, management
information systems, financial and administrative services pursuant to
certain agreements between the company and Kennametal. Other agreements
between the company and Kennametal include a non-competition and corporate
opportunities allocation agreement, tax-sharing agreement, trademark
license agreement, product supply agreement and others, as more fully
described in the company's 1998 Annual Report on Form 10-K. All amounts
incurred by Kennametal on behalf of the company are reflected in operating
expenses in the accompanying statements of income. Costs charged to the
company by Kennametal under these agreements were as follows (in
thousands):
Three Months Ended
September 30,
-------------------
1998 1997
---- ----
Administrative services agreement $ 1,263 $1,772
Warehousing agreement 967 850
Shared facilities agreement 159 67
Lease agreement 26 --
Under the Intercompany Debt/Investment and Cash Management Agreement with
Kennametal, the company incurred interest expense of $0.2 million for the
three months ended September 30, 1998, and earned $1.0 million in interest
income for the three months ended September 30, 1997.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET SALES
Net sales for the September 1998 quarter were $131.8 million, an increase of 38
percent from $95.4 million last year. The overall increase in sales was
attributed to acquisitions, an expanded product offering in the J&L Industrial
Supply 1998 master catalog and continued penetration of existing customers. This
increase was realized despite a $14.7 million reduction in sales due to the
previously disclosed General Electric Full Service Supply contract (GE Contract)
disengagement. This sales increase was further offset by the General Motors
strike. Excluding acquisitions and the effect of the GE Contract disengagement,
net sales would have increased 12 percent. Sales from the acquired companies for
the quarter were approximately $41.7 million. Full Service Supply sales
increased 23 percent excluding the effect of the GE Contract disengagement.
During the quarter, JLK opened a new showroom in Boston, Mass. and launched the
new 1999 J&L Industrial Supply master catalog in late September. This new
catalog contains more than 130,000 stock keeping units (SKUs), an 18 percent
increase from the 1998 master catalog.
GROSS PROFIT
Gross profit for the September 1998 quarter was $42.8 million, an increase of 33
percent from $32.2 million in the prior year. As a percentage of sales, gross
profit margin for the September 1998 quarter was 32.5 percent, down from 33.8
percent in the September quarter a year ago. The gross profit margin declined
primarily as a result of lower-margin sales generated by recent acquisitions and
from an unfavorable sales mix. Additionally, softer than expected economic
conditions resulted in weaker demand in the higher-margin mail order business.
OPERATING EXPENSES
Operating expenses for the September 1998 quarter were $36.4 million, an
increase of 65 percent from $22.1 million in the prior year. Operating expenses
as a percentage of net sales were 27.6 percent in the September 1998 quarter
compared to 23.1 percent in the prior year. Operating expenses rose primarily as
a result of increased costs from acquisitions, including higher levels of
amortization of intangible assets, the opening of additional showroom locations
during fiscal year 1998, the new Chicago distribution center, the relocation of
the United Kingdom office and distribution center, and higher direct mail costs.
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 $2.4 million in the September 1998 quarter, a decrease of 10 percent from
$2.7 million in the prior year. The decrease in total charges from Kennametal
resulted from costs incurred directly by the company in fiscal 1999, where in
fiscal 1998, such costs were incurred by Kennametal and billed to the company.
This decrease was partially offset by increased costs to support higher sales
volumes.
INTEREST (INCOME) EXPENSE AND OTHER
The company incurred interest expense from Kennametal of approximately $0.2
million during the September 1998 quarter due to amounts borrowed under a note
payable to Kennametal.
The company earned interest income of approximately $1.0 million during the
September 1997 quarter. This was primarily from investments of excess cash and
from the residual proceeds the company received from its initial public offering
(IPO).
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
INCOME TAXES AND NET INCOME
The effective tax rate was 39.2 percent for the September 1998 quarter compared
to 39.4 percent in the prior year. Net income decreased 45 percent to $3.7
million for the September 1998 quarter from $6.8 million in the same quarter a
year ago. This decline is attributed to lower-margin sales from acquired
companies, an unfavorable product mix and higher operating expense levels.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary capital needs have been to fund acquisitions, working
capital requirements necessitated by sales growth, a showroom expansion program
in the United States, the addition of new products and Full Service Supply
programs, and direct marketing programs in the United Kingdom and Germany. The
company's primary sources of financing have been cash from operations, the net
proceeds from the IPO and the Intercompany Debt/Investment and Cash Management
Agreement with Kennametal. The company anticipates that cash flows from
operations and the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal will be adequate to support its operations for the foreseeable
future.
Net cash used in operating activities was $14.2 million for the September 1998
quarter. The decrease in net cash from operations resulted from lower net income
and higher working capital requirements.
Net cash used in investing activities was $1.9 million for the September 1998
quarter. The decrease in net cash used in investing activities resulted from
capital expenditures offset by the repayment of a note receivable from
Kennametal subsequent to the September 1997 quarter. Capital expenditures in the
September 1998 quarter related primarily to improved information systems, and
office and computer equipment to accommodate new product offerings and a
showroom opening.
Net cash provided by financing activities was $15.6 million for the September
1998 quarter. In the September 1998 quarter, net cash flows include amounts
borrowed under notes payable to banks and a note payable to Kennametal, which
were used to fund working capital needs. Financing activities in the September
1997 quarter include proceeds received from the issuance of common stock in
connection with the company's IPO. These amounts were partially offset by
repayments to Kennametal for funds previously advanced to the company for two
acquisitions in the June 1997 quarter and by the repayment of short-term
borrowings made under the company's line of credit primarily to fund the $20.0
million dividend paid to Kennametal.
On July 2, 1997, the company consummated its IPO of approximately 4.9 million
shares of Class A Common Stock at a price of $20.00 per share. The net proceeds
from the IPO were approximately $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 the dividend
paid to Kennametal and $20.0 million to repay Kennametal for the 1997
acquisitions and income taxes paid on behalf of the company. The remaining net
proceeds of $50.4 million were used to make acquisitions in fiscal 1998.
In June 1998, the company initiated a stock repurchase program to repurchase,
from time-to-time, up to a total of 20 percent, or approximately 1.0 million
shares, of its outstanding Class A Common Stock. During the three months ended
September 30, 1998, the company repurchased 15,000 shares at a total cost of
approximately $0.3 million. The repurchases were made in the open market or in
negotiated or other permissible transactions. The repurchase of common stock was
financed principally by available funds and short-term borrowings.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
The company's financial condition continues to remain strong. Total assets were
$282 million at September 30, 1998, up 2 percent from $276 million at June 30,
1998. Net working capital remained unchanged at $109 million. The company
increased its debt levels to $18 million at September 30, 1998 to fund working
capital needs.
TERMINATION OF LARGE CONTRACT
During the September 1997 quarter, the company finalized its plan of
disengagement from those sites that are not being continued under the General
Electric Full Service Supply contract. Accordingly, Full Service Supply sales
experienced a gradual reduction as a result of this event. Sales to these
discontinued sites totaled $22.9 million in fiscal 1998. In fiscal 1999, the
company does not anticipate any sales to occur to GE for those manufacturing
sites that were discontinued.
YEAR 2000
The company continues to address its exposure relative to year 2000 issues for
both information and non-information technology systems. A committee actively
monitors the status of the readiness program of the company and its
subsidiaries. Overall, the company believes that 30 percent of the tasks
identified to remediate the year 2000 exposure have been completed for both
information and non-information technology systems. The company has completed an
assessment of the impact of this issue on its information systems and has
determined that some of the systems are not year 2000 compliant, although those
systems could be modified to become year 2000 compliant. However, the company is
implementing a new business system, Endura's Enterprise Information System, in
order to have all existing operations on one integrated system that is year 2000
compliant. The company also has substantially completed an assessment of the
impact of this issue on its non-information technology systems, including the
company's personal computers and other non-information technology items, and has
determined that the majority of these systems are year 2000 compliant. The
company is currently taking action to remedy these non-complaint systems.
The company estimates the total year 2000 expenditures to be approximately $8.0
to $12.0 million, with the majority being spent on the implementation of the
company's new business system. Cash flows from operations should provide funding
for these expenditures. These costs include both internal and external personnel
costs related to the assessment process, as well as the cost of purchasing
certain hardware and software. Included in the total costs are expenditures to
rectify non-compliant personal computers and various non-information technology
items, which are estimated to be $0.2 million. There can be no guarantee that
these estimates will be achieved and actual results could differ from those
planned. Through September 1998, the company has incurred approximately $4.2
million of the total costs of which approximately $3.4 million relate to
software licenses and hardware. The balance of the expenditures are expected to
be incurred in the remainder of fiscal 1999 and fiscal 2000.
The company is implementing the new business system in two phases and has
completed more than 25 percent of the tasks identified to remediate the year
2000 exposure in the initial phase. This phase is expected to be tested and
completed in March 1999. The second phase is expected to be initiated, tested
and completed by October 1999. Contingency plans include the modification of
existing business systems to remediate the year 2000 exposure. The company does
not anticipate employing this contingency plan.
Management believes the most significant risk of the year 2000 issues could be
an interrupted supply of goods and services from our vendors. The company has an
ongoing effort to gain assurances and certifications of suppliers' readiness
programs. Contingency plans include the search for alternate certified vendors
and the increase of safety stock of major product lines.
At September 30, 1998, management currently believes the company continues to
make progress toward achieving a timely completion of the tasks identified to
remediate the year 2000 exposure.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
OUTLOOK
In looking to the second quarter ending December 31, 1998, management expects
JLK's sales to increase over the same period of a year ago. Sales should benefit
from additional showrooms recently opened, from new distribution centers,
increased mail-order sales as a result of the expanded product offering in the
new U.S. and U.K. master catalogs, and from recent acquisitions.
Certain information set forth herein 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 anticipated economic conditions in the United States and, to a lesser
extent, Europe are not sustained, and the effect of third party or company
failures to achieve timely remediation of year 2000 issues. The company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances occurring after the date hereof.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
At the Annual Meeting of Stockholders on October 27, 1998, the stockholders of
the company voted on the election of directors and independent public
accountants. The following is the number of shares voted in favor of and against
each matter, and the number of shares having authority to vote on each matter
but withheld.
1. With respect to the votes cast for directors whose terms expire in 1999:
<TABLE>
<CAPTION>
For Withheld Broker Non-Vote
------------------------------------------------
<S> <C> <C> <C>
Richard C. Alberding 205,877,526 140,384 --
Jeffery M. Boetticher 206,012,351 5,559 --
Irwin L. Elson 205,879,225 138,685 --
H. Patrick Mahanes, Jr. 205,879,225 138,685 --
Robert L. McGeehan 205,879,225 138,685 --
Aloysius T. McLaughlin, Jr. 205,878,451 139,459 --
William R. Newlin 205,879,125 138,785 --
Richard J. Orwig 205,869,225 148,685 --
</TABLE>
2. With respect to the election of the firm of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of
the company and its subsidiary companies for the fiscal year ending
June 30, 1999:
<TABLE>
<CAPTION>
For Against Abstained Broker Non-Vote
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Arthur Andersen LLP 206,009,556 4,554 3,800 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(a) Exhibits
(27) Financial Data Schedule for three months ended September
30, 1998 and 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
September 30, 1998.
11
<PAGE> 14
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: November 12, 1998 By: /s/ MICHAEL J. MUSSOG
--------------------------------------
Michael J. Mussog
Vice President and
Chief Financial and Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), AND
THE SEPTEMBER 30, 1997 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED),
AS RESTATED, FOR THE ADOPTION OF SFAS NO. 128, "EARNINGS PER SHARE," AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,134 1,591
<SECURITIES> 0 0
<RECEIVABLES> 74,913 122,802
<ALLOWANCES> 881 302
<INVENTORY> 99,733 71,088
<CURRENT-ASSETS> 183,752 198,439
<PP&E> 29,603 13,192
<DEPRECIATION> 6,701 5,563
<TOTAL-ASSETS> 281,900 234,951
<CURRENT-LIABILITIES> 74,267 40,763
<BONDS> 0 0
0 0
0 0
<COMMON> 251 251
<OTHER-SE> 199,068 189,640
<TOTAL-LIABILITY-AND-EQUITY> 281,900 234,951
<SALES> 131,762 95,420
<TOTAL-REVENUES> 131,762 95,420
<CGS> 88,972 63,171
<TOTAL-COSTS> 88,972 63,171
<OTHER-EXPENSES> 1,388 463
<LOSS-PROVISION> 0 12
<INTEREST-EXPENSE> 233 0
<INCOME-PRETAX> 6,124 11,169
<INCOME-TAX> 2,400 4,400
<INCOME-CONTINUING> 3,724 6,769
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,724 6,769
<EPS-PRIMARY> 0.15 0.27
<EPS-DILUTED> 0.15 0.26
</TABLE>
