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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 February 1, 1999
- ------------------------------------ -------------------------------
Class A Common Stock, par value $.01 4,273,310
Class B Common Stock, par value $.01 20,237,000
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JLK DIRECT DISTRIBUTION INC.
FORM 10-Q
FOR QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1998 and June 30, 1998.............................................................. 1
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended December 31, 1998 and 1997............................................ 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 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.............................................. 12
6. Exhibits and Reports on Form 8-K................................................................. 12
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 943 $ 4,715
Notes receivable from Kennametal -- 1,169
Accounts receivable, less allowance for doubtful
accounts of $1,129 and $827 75,192 71,426
Inventories 104,852 97,299
Deferred income taxes 5,853 5,853
-------- --------
Total current assets 186,840 180,462
-------- --------
Property, plant and equipment:
Land and buildings 6,022 5,152
Machinery and equipment 26,011 21,379
Less accumulated depreciation (7,470) (6,014)
-------- --------
Net property, plant and equipment 24,563 20,517
-------- --------
Other assets:
Intangible assets, less accumulated
amortization of $10,931 and $8,231 67,043 71,090
Other 5,160 3,517
-------- --------
Total other assets 72,203 74,607
-------- --------
Total assets $283,606 $275,586
======== ========
LIABILITIES
Current liabilities:
Notes payable to banks $ 9,369 $ 1,915
Notes payable to Kennametal 5,835 --
Accounts payable 21,669 36,393
Due to Kennametal and affiliates 13,405 15,144
Income taxes payable 13,477 8,252
Accrued payroll and vacation pay 3,061 3,567
Other 5,924 5,877
-------- --------
Total current liabilities 72,740 71,148
-------- --------
Other liabilities 6,349 8,503
-------- --------
Total liabilities 79,089 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 36,012 27,076
Treasury stock, at cost; 644 and 629 shares of Class A Common
Stock held (14,529) (14,197)
Accumulated other comprehensive income (39) (17)
-------- --------
Total shareholders' equity 204,517 195,935
-------- --------
Total liabilities and shareholders' equity $283,606 $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)
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(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATIONS
Net sales $133,735 $93,693 $265,497 $189,114
Cost of goods sold 90,738 59,156 179,710 122,328
-------- ------- -------- --------
Gross profit 42,997 34,537 85,787 66,786
Operating expenses 34,060 24,231 70,436 46,311
-------- ------- -------- --------
Operating income 8,937 10,306 15,351 20,475
Interest expense (income) and other 325 (1,171) 615 (2,171)
-------- ------- -------- --------
Income before provision for income taxes 8,612 11,477 14,736 22,646
Provision for income taxes 3,400 4,500 5,800 8,900
-------- ------- -------- --------
Net income $ 5,212 $ 6,977 $ 8,936 $ 13,746
======== ======= ======== ========
PER SHARE DATA
Basic earnings per share $ 0.21 $ 0.28 $ 0.36 $ 0.55
======== ======= ======== ========
Diluted earnings per share $ 0.21 $ 0.28 $ 0.36 $ 0.54
======== ======= ======== ========
Weighted average shares outstanding 24,510 25,154 24,510 25,154
======== ======= ======== ========
Diluted weighted average shares outstanding 24,510 25,317 24,510 25,295
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,936 $ 13,746
Adjustments for noncash items:
Depreciation and amortization 4,175 1,822
(Gain) loss on sale of assets (6) 144
Changes in certain assets and liabilities, net of effects of acquisitions:
Accounts receivable (3,766) (5,127)
Inventories (7,553) (3,046)
Accounts payable and accrued liabilities (16,712) 2,236
Other 2,566 (2,773)
-------- --------
Net cash flow (used for) from operating activities (12,360) 7,002
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,546) (2,259)
Notes receivable from Kennametal 1,169 (49,994)
Acquisitions, net of cash -- (14,032)
Other 31 --
-------- --------
Net cash flow used for investing activities (4,346) (66,285)
-------- --------
FINANCING ACTIVITIES
Net proceeds from initial public offering of
Class A Common Stock -- 90,430
Borrowings under (repayments of) notes payable to banks 7,454 (20,181)
Notes payable to Kennametal 5,835 (15,805)
Purchase of treasury stock (332) --
-------- --------
Net cash flow from financing activities 12,957 54,444
-------- --------
Effect of exchange rate changes on cash (23) 4
-------- --------
CASH AND EQUIVALENTS
Net decrease in cash and equivalents (3,772) (4,835)
Cash and equivalents, beginning 4,715 13,088
-------- --------
Cash and equivalents, ending $ 943 $ 8,253
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 198 $ 4
Income taxes paid 934 11,013
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to 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 and six months ended
December 31, 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 and six months ended December 31,
1997, weighted average shares outstanding for the basic earnings per
share calculation were increased due to the dilutive effect of
unexercised stock options by 163,331 and 140,916, respectively. There
was no dilutive effect of unexercised stock options for the three
months or six months ended December 31, 1998.
4
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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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
company's components of comprehensive income consist of the following
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net income $5,212 $6,977 $8,936 $13,746
Foreign currency translation adjustments (14) 75 (22) 4
------ ------ ------ -------
Comprehensive income $5,198 $7,052 $8,914 $13,750
====== ====== ====== =======
</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 all derivative
instruments (including certain derivative instruments imbedded in other
contracts) to 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 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>
<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
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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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 and six-month periods ended
December 31, 1997, consolidated net sales would have been $128.0
million and $259.6 million, respectively. The pro forma impact on net
income and diluted earnings per share would not be materially different
from the amount reported for the three-month and six-month periods
ended December 31, 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 remaining liability for these
agreements, and other similar agreements from previous acquisitions, at
December 31, 1998 and June 30, 1998 recorded in other current
liabilities was $2.5 million and $2.8 million, respectively, and in
other liabilities was $4.3 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Purchases from Kennametal and subsidiaries $10,137 $8,996 $18,721 $19,398
Sales to Kennametal and subsidiaries 3,476 2,561 6,219 5,192
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Administrative services agreement $1,979 $1,797 $3,242 $3,569
Warehousing agreement 1,057 994 2,024 1,844
Shared facilities agreement 101 53 260 120
Lease agreement 27 -- 53 --
------ ------ ------ ------
Total costs charged by Kennametal $3,164 $2,844 $5,579 $5,533
====== ====== ====== ======
</TABLE>
Under the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal, the company incurred interest expense of $0.2 million
and $0.4 million for the three and six months ended December 31, 1998,
respectively, and earned $1.2 million and $2.2 million in interest
income for the three and six months ended December 31, 1997,
respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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RESULTS OF OPERATIONS
NET SALES
Net sales for the December 1998 quarter were $133.7 million, an increase of 43
percent from $93.7 million last year. The overall increase in sales was
predominately attributable to acquisitions, which had sales of approximately
$39.0 million, and to a lesser extent, growth in Full Service Supply. This
increase was realized despite a $3.8 million reduction in sales due to the
previously disclosed General Electric Full Service Supply contract (GE Contract)
disengagement. The December 1997 quarter was the last quarter significantly
affected by this contract disengagement. Excluding acquisitions and the effect
of the GE Contract disengagement, net sales increased 5 percent.
Sales at J&L Industrial Supply rose 62 percent during the quarter due to recent
acquisitions. Sales were negatively affected by reduced industrial activity
across North America and weakness in the oil and gas industries. Sales benefited
from the expanded product offering in the new master catalogs and recent
showroom openings. During the quarter, JLK opened a new showroom in Buffalo, New
York.
Full Service Supply sales increased 19 percent excluding the effect of the GE
Contract disengagement. Under Full Service Supply contracts, the company
recognized sales to approximately 135 corporate customers in the December 1998
quarter, an increase of 35 percent compared to the same period a year ago. The
number of plant sites served increased to 210 from 170 a year ago. This growth
is attributable to additional focus and the company's reputation for providing
significant cost savings to its customers.
For the six-month period ended December 31, 1998, consolidated sales were $265.5
million, an increase of 40 percent from $189.1 million last year.
GROSS PROFIT
Gross profit for the December 1998 quarter was $43.0 million, an increase of 24
percent from $34.5 million in the prior year. As a percentage of sales, gross
profit margin for the December 1998 quarter was 32.2 percent, down from 36.9
percent in the prior year. The gross profit margin declined primarily as a
result of lower-margin sales from acquisitions, the growth in the Full Service
Supply business, and weaker demand in the higher-margin mail order business.
For the six-month period ended December 31, 1998, gross profit was $85.8
million, up 28 percent from $66.8 million last year. Gross profit margin for the
six-month period ended December 31, 1998 was 32.3 percent compared to 35.3
percent in the prior year.
OPERATING EXPENSES
Operating expenses for the December 1998 quarter were $34.1 million, an increase
of 41 percent from $24.2 million in the prior year. Operating expenses as a
percentage of net sales were 25.5 percent in the December 1998 quarter compared
to 25.9 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, the new Chicago
distribution center, and higher direct mail costs, 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.
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 $3.2 million in the December 1998 quarter, an increase of 11 percent from
$2.8 million in the prior year. The increase in total charges from Kennametal
resulted from increased costs to support higher sales volumes.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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During the six-month period ended December 31, 1998, operating expenses were
$70.4 million, up 52 percent from $46.3 million last year. Charges from
Kennametal were $5.6 million for the six-month period ended December 31, 1998,
compared to $5.5 million in the prior year.
INTEREST EXPENSE (INCOME) AND OTHER
The company incurred interest expense from Kennametal of approximately $0.2
million and $0.4 million during the three-month and six-month periods ended
December 31, 1998, respectively, due to amounts borrowed under notes payable to
Kennametal.
The company earned interest income of approximately $1.2 million and $2.2
million during the three-month and six-month periods ended December 31, 1997,
respectively. This was primarily from investments of excess cash and from the
residual proceeds the company received from its initial public offering (IPO).
INCOME TAXES AND NET INCOME
The effective tax rate was 39.5 percent for the December 1998 quarter compared
to 39.2 percent in the prior year. Net income decreased 25 percent to $5.2
million for the December 1998 quarter from $7.0 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.
For the six-month period ended December 31, 1998, the effective tax rate was
39.4 percent, relatively unchanged from the prior year. Net income decreased 35
percent to $8.9 million from $13.7 million in the prior year.
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 for operating activities was $12.4 million for the six months
ended December 31, 1998. Compared to the prior year, the decrease in net cash
from operations resulted primarily from lower net income and higher working
capital requirements.
Net cash used for investing activities was $4.3 million for the six months ended
December 31, 1998. The change in net cash used in investing activities compared
to the same period a year ago resulted from the repayment of a note receivable
from Kennametal, reduced acquisition activity and increased capital expenditures
related primarily to the new information systems, and office and computer
equipment to accommodate new product offerings and showroom openings.
Net cash flow from financing activities was $13.0 million for the six months
ended December 31, 1998 and reflected amounts borrowed under notes payable to
banks and notes payable to Kennametal which were used to fund working capital
needs. Financing activities in the prior year 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.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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 six months ended
December 31, 1998, the company repurchased 15,000 Class A shares at a total cost
of approximately $0.3 million. The repurchases were made in the open market or
in negotiated or other permissible transactions. The repurchase of common stock
was financed principally by available funds and short-term borrowings.
FINANCIAL CONDITION
The company's financial condition continues to remain strong. Total assets were
$284 million at December 31, 1998, up 3 percent from $276 million at June 30,
1998. Net working capital increased to $114 million at December 31, 1998, up 4
percent from $109 million at June 30, 1998. The company increased its debt
levels to $15 million at December 31, 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 35 percent of the tasks
identified to remediate the year 2000 exposure have been completed for both
information and non-information technology systems, with the majority of the
remaining tasks targeted for September 1999 completion.
The company completed an assessment regarding the impact of this issue on its
existing information systems and determined that while not all systems were year
2000 compliant, these non-compliant systems could be modified to become year
2000 compliant. Due to the fact that the company was operating on several
different information systems, the company decided to implement a new business
system, HK Systems' Enterprise Information System, in order to have all existing
operations on one integrated system. This information system also is year 2000
compliant. The company is implementing this new business system in two phases
and has completed more than 40 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 June 1999.
The second phase is expected to be initiated in late 1999, and tested and
completed thereafter. Due to the timing of the completion of this phase, the
company is currently modifying the existing non-compliant business systems to
ensure these operations are supported by a year 2000 compliant information
system. Testing of these modifications will be performed by August 1999.
Management has determined that sufficient internal resources are available and
adequate time exists to implement these procedures.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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, embedded technology in equipment used in operations, 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 the non-compliant systems identified through replacement of, or
modification to, the existing systems. Such remedies will be subsequently tested
for year 2000 compliance prior to September 30, 1999.
The company estimates the total year 2000 expenditures to be approximately $8.0
to $13.0 million, with the majority being spent on the implementation of the
company's new business system. Included in the total costs are expenditures to
rectify non-compliant personal computers, embedded technology in equipment used
in operations, and various non-information technology items, which are estimated
to be $0.2 million. These costs include both internal and external personnel
costs related to the assessment, remediation and implementation processes, as
well as the cost of purchasing certain hardware and software. There can be no
guarantee that these estimates will be achieved and actual results could differ
from those planned.
Cash flows from operations have provided, and should continue to provide,
funding for these expenditures. Through December 1998, the company has incurred
approximately $4.8 million of the total costs, of which approximately $4.0
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.
Management believes the most significant risk of the year 2000 issue could be an
interrupted supply of goods and services from the company's vendors. The company
has an ongoing effort to gain assurances and certifications of suppliers'
readiness programs. To date, the results of this effort indicate that the
company's suppliers should be able to provide the company with sufficient goods
and services in the year 2000. The company will continue to expand its efforts
to ensure that major third-party businesses and public and private providers of
infrastructure services, such as utilities, communications services and
transportation, will also be prepared for the year 2000, and address any
failures on their part to become year 2000 compliant. Contingency plans may
include purchasing inventory from alternate certified vendors and the increase
of safety stock of major product lines. The company does not anticipate
employing this contingency plan.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate a year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue all of the year 2000 remediation activities discussed
herein.
OUTLOOK
In looking to the third quarter ending March 31, 1999, management expects to
show sequential quarterly improvement in sales and earnings over the first half
of the year. 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. The company's results should continue to benefit from the
cost-reduction actions implemented in November 1998. Management does not expect
overall economic conditions to strengthen in North America, but will remain
focused on improving the operating performance of the company.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
This Form 10-Q contains "forward-looking statements," as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results can differ materially
from those in the forward-looking statements to the extent that anticipated
economic conditions in the United States and, to a lesser extent, Europe, and
the effect of third party or company failures to achieve timely remediation of
year 2000 issues change from the company's expectations. The company undertakes
no obligation to publicly release any revisions to forward-looking statements to
reflect events or circumstances occurring after the date hereof.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
The information set forth in Part II, Item 4 of the company's September 30, 1998
Form 10-Q is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
(27) Financial Data Schedule for six months ended December 31,
1998, 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, 1998.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
Date: February 11, 1999 By: /s/ MICHAEL J. MUSSOG
----------------------
Michael J. Mussog
Vice President and
Chief Financial and Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
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