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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 MARCH 31, 2000
Commission file number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction (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 April 28, 2000
- ------------------------------------ -----------------------------
Class A Common Stock, par value $.01 4,273,410
Class B Common Stock, par value $.01 20,237,000
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JLK DIRECT DISTRIBUTION INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 2000 and 1999.............................. 1
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2000 and June 30, 1999................................................. 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 2000 and 1999........................................ 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
6. Exhibits and Reports on Form 8-K................................................. 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Net sales $133,524 $138,306 $371,568 $403,803
Cost of goods sold 90,537 94,240 251,989 273,950
-------- -------- -------- --------
Gross profit 42,987 44,066 119,579 129,853
Operating expenses 32,624 33,382 95,148 103,818
-------- -------- -------- --------
Operating income 10,363 10,684 24,431 26,035
Interest expense (income) and other (16) 127 59 742
-------- -------- -------- --------
Income before provision for income taxes 10,379 10,557 24,372 25,293
Provision for income taxes 4,100 4,200 9,627 10,000
-------- -------- -------- --------
Net income $ 6,279 $ 6,357 $ 14,745 $ 15,293
======== ======== ======== ========
PER SHARE DATA
Basic earnings per share $ 0.26 $ 0.26 $ 0.60 $ 0.62
======== ======== ======== ========
Diluted earnings per share $ 0.26 $ 0.26 $ 0.60 $ 0.62
======== ======== ======== ========
Basic weighted average shares outstanding 24,510 24,510 24,510 24,510
======== ======== ======== ========
Diluted weighted average shares outstanding 24,516 24,510 24,511 24,515
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(in thousands)
March 31, June 30,
2000 1999
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,624 $ 2,807
Notes receivable from Kennametal 18,727 11,611
Accounts receivable, less allowance for doubtful
accounts of $932 and $981 53,602 53,680
Inventories 121,993 101,770
Deferred income taxes 6,818 6,818
Other current assets 3,277 52
--------- ---------
Total current assets 209,041 176,738
--------- ---------
Property, plant and equipment:
Land and buildings 6,396 6,318
Machinery and equipment 32,879 27,419
Less accumulated depreciation (11,723) (8,400)
--------- ---------
Net property, plant and equipment 27,552 25,337
--------- ---------
Other assets:
Intangible assets, less accumulated
amortization of $17,063 and $13,592 60,206 64,383
Deferred tax assets 7,436 7,377
Other 936 1,154
--------- ---------
Total other assets 68,578 72,914
--------- ---------
Total assets $ 305,171 $ 274,989
========= =========
LIABILITIES
Current liabilities:
Notes payable to banks $ 420 $ 7,737
Accounts payable 30,707 21,025
Due to Kennametal and affiliates 17,278 4,609
Income taxes payable 6,325 4,903
Accrued payroll and vacation pay 2,907 3,220
Other 7,281 6,927
--------- ---------
Total current liabilities 64,918 48,421
--------- ---------
Deferred income taxes 5,514 5,519
Other liabilities 4,485 5,175
--------- ---------
Total liabilities 74,917 59,115
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SHAREOWNERS' EQUITY
Preferred stock, $.01 par value; 25,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value; 75,000 shares authorized;
4,917 shares issued, 4,273 shares outstanding 49 49
Class B Common Stock, $.01 par value; 50,000 shares authorized;
20,237 shares issued and outstanding 202 202
Additional paid-in capital 182,822 182,822
Retained earnings 62,181 47,436
Treasury stock, at cost; 644 shares of Class A Common Stock held (14,529) (14,529)
Accumulated other comprehensive loss (471) (106)
--------- ---------
Total shareowners' equity 230,254 215,874
--------- ---------
Total liabilities and shareowners' equity $ 305,171 $ 274,989
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
<CAPTION>
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
Nine Months Ended
March 31,
---------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,745 $ 15,293
Adjustments for noncash items:
Depreciation and amortization 7,035 6,414
Loss (gain) on sale of assets 876 (6)
Changes in certain assets and liabilities:
Accounts receivable (11,210) (8,896)
Proceeds from the sale of accounts receivable 10,351 --
Inventories (20,769) (7,021)
Accounts payable and accrued liabilities 23,718 (3,609)
Other (3,409) (2,139)
-------- --------
Net cash flow from operating activities 21,337 36
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,403) (6,913)
Notes receivable from Kennametal (6,889) (3,521)
Divestiture -- 1,617
Other 64 266
-------- --------
Net cash flow used for investing activities (12,228) (8,551)
-------- --------
FINANCING ACTIVITIES
Borrowings under (repayments of) notes payable to banks (7,317) 5,991
Purchase of treasury stock -- (332)
-------- --------
Net cash flow from (used for) financing activities (7,317) 5,659
-------- --------
Effect of exchange rate changes on cash 25 319
-------- --------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 1,817 (2,537)
Cash and equivalents, beginning 2,807 4,715
-------- --------
Cash and equivalents, ending $ 4,624 $ 2,178
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 8,489 $ 1,089
Interest paid 291 344
</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 the Consolidated Financial Statements
included in the company's 1999 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 1999 has been derived from the
audited balance sheet included in the company's 1999 Annual Report on Form
10-K. These accompanying interim statements are unaudited; however,
management believes that all adjustments necessary for a fair presentation
have been made and all adjustments are normal, recurring adjustments. The
results for the three and nine months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full fiscal
year.
2. The accompanying condensed consolidated financial statements of JLK Direct
Distribution Inc. include the operations of J&L America, Inc. (J&L), a
previously wholly-owned subsidiary of Kennametal Inc. (Kennametal), and
Full Service Supply (FSS), which previously had been operated as a program
of Kennametal. Prior to April 1, 1997, the company had no separate legal
status or existence. Kennametal incorporated the company as a Pennsylvania
corporation under the name "JLK Direct Distribution Inc." in April 1997.
Kennametal currently owns approximately 83 percent of the outstanding stock
of the company.
3. During the December 1999 quarter, Kennametal announced that it engaged an
investment bank to explore strategic alternatives regarding its ownership
in the company, including a possible divestiture. At that time, Kennametal
management believed a divestiture might enhance growth prospects for both
Kennametal and the company by allowing each company to focus on its core
competencies. Kennametal completed a thorough and disciplined process of
evaluating strategic alternatives and on May 2, 2000, decided to terminate
consideration of a possible divestiture at this time, although Kennametal
management continues to believe there may be better owners for the company.
4. For purposes of determining the average number of dilutive shares
outstanding for the three and nine months ended March 31, 2000, weighted
average shares outstanding for the basic earnings per share calculation
were increased due to the dilutive effect of unexercised stock options by
5,753 and 325, respectively. The dilutive effect of unexercised stock
options for the nine months ended March 31, 1999 was 4,254. There was no
dilutive effect from unexercised stock options for the three months ended
March 31, 1999. Earnings per share amounts for each quarter are required to
be computed independently and, therefore, may not equal the amount computed
for the year.
5. Comprehensive income for the three and nine months ended March 31, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $6,279 $6,357 $14,745 $15,293
Foreign currency translation adjustments (176) 53 (365) 31
------ ------ ------- -------
Comprehensive income $6,103 $6,410 $14,380 $15,324
====== ====== ======= =======
</TABLE>
Accumulated other comprehensive loss consists solely of cumulative foreign
currency translation adjustments.
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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6. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by the
beginning of the first quarter of fiscal 2001. SFAS No. 133 establishes
accounting and reporting standards requiring all derivative instruments
(including certain derivative instruments imbedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
their fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. The company currently is evaluating the effects
of SFAS No. 133 and does not believe that the adoption will have a material
effect on the financial statements or results of operations of the company.
7. In connection with fiscal 1998 and 1997 acquisitions, the company entered
into employee retention and non-compete agreements. The remaining liability
for these agreements, and other similar agreements from previous
acquisitions, recorded in other current liabilities at March 31, 2000 and
June 30, 1999 was $1.9 million and $2.5 million, respectively, and in other
liabilities was $1.6 million and $2.9 million, respectively.
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 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Purchases from Kennametal and subsidiaries $16,252 $13,815 $61,220 $39,993
Sales to Kennametal and subsidiaries 2,197 4,134 6,720 10,349
</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 1999 Annual Report on Form 10-K. All amounts
incurred by Kennametal on behalf of the company are reflected in operating
expenses in the accompanying statements of income. Net costs charged to the
company by Kennametal under these agreements were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Administrative services agreement $1,008 $1,686 $3,668 $4,928
Warehousing agreement 72 915 324 2,939
Shared facilities agreement 42 105 (152) 365
Lease agreement 26 26 79 79
------ ------ ------ ------
Total costs charged by Kennametal $1,148 $2,732 $3,919 $8,311
====== ====== ====== ======
</TABLE>
5
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Under the Intercompany Debt/Investment and Cash Management Agreement with
Kennametal, the company earned interest income of $0.3 million and $0.9
million for the three and nine months ended March 31, 2000, respectively.
The company incurred interest expense of $0.1 million and $0.5 million for
the three and nine months ended March 31, 1999, respectively.
9. On March 31, 1999, the company sold the assets of the steel mill business
of its subsidiary, Strong Tool Co., for approximately $1.6 million. There
was no significant impact on earnings as a result of this sale. The steel
mill business had annual sales of approximately $18.0 million. As this
business was marginally profitable, the effect on net income and diluted
earnings per share as a result of this sale is not material.
10. On June 18, 1999, Kennametal entered into an agreement with a financial
institution whereby Kennametal securitizes, on a continuous basis, an
undivided interest in a pool of Kennametal's domestic trade accounts
receivable. Pursuant to this agreement, at March 31, 2000, the company sold
$29.7 million of its domestic accounts receivable to Kennametal, in
exchange for a note receivable from Kennametal consistent with the
Intercompany Debt/Investment and Cash Management Agreement. The costs
incurred by the company under this program were $0.3 million and $0.9
million for the three and nine months ended March 31, 2000, respectively,
as a result of the discount on the sale of the accounts receivable. These
costs are accounted for as a component of Interest Expense (Income) and
Other.
11. The company reports two segments consisting of J&L and FSS. The company's
corporate level expenses are included entirely in the J&L segment. The
company's external sales, intersegment sales and operating income by
segment for the three and nine months ended March 31, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
External sales:
J&L $ 96,507 $103,232 $271,589 $305,470
FSS 37,017 35,074 99,979 98,333
-------- -------- -------- --------
Total external sales $133,524 $138,306 $371,568 $403,803
======== ======== ======== ========
Intersegment sales:
J&L $ 1,417 $ 625 $ 2,778 $ 1,758
FSS -- -- -- --
-------- -------- -------- --------
Total intersegment sales $ 1,417 $ 625 $ 2,778 $ 1,758
======== ======== ======== ========
Total sales:
J&L $ 97,924 $103,857 $274,367 $307,228
FSS 37,017 35,074 99,979 98,333
-------- -------- -------- --------
Total sales $134,941 $138,931 $374,346 $405,561
======== ======== ======== ========
Operating income:
J&L $ 7,060 $ 6,749 $ 16,479 $ 16,644
FSS 3,303 3,935 7,952 9,391
-------- -------- -------- --------
Total operating income $ 10,363 $ 10,684 $ 24,431 $ 26,035
======== ======== ======== ========
</TABLE>
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 March 2000 quarter were $133.5 million, a decrease of three
percent from $138.3 million last year, due solely to the divestiture of the
Strong Tool Co. steel mill business on March 31, 1999. For the nine months ended
March 31, 2000, sales were $371.6 million, a decline of eight percent from
$403.8 million in the same period a year ago. Excluding the sales of the Strong
Tool Co. steel mill business, sales were down five percent for the nine months
ended March 31, 2000.
J&L sales totaled $96.5 million for the March quarter, a decrease of seven
percent from the same quarter in the prior year. Excluding the divestiture of
the Strong Tool Co. steel mill business, sales were down two percent from last
year. The remainder of the decline is due to continued weakness in the end
markets, predominately energy. For the nine months ended March 31, 2000, sales
were $271.6 million, a decline of 11 percent from $305.5 million in the same
period a year ago due to the factors mentioned above.
Full Service Supply (FSS) sales were $37.0 million for the March quarter, an
increase of six percent from the same quarter in the prior year. FSS sales
growth is due to the year-over-year increase in the number of customers served
as the company implemented new programs in the current quarter. For the nine
months ended March 31, 2000, sales of $100.0 million increased two percent
compared to sales of $98.3 million in the same period a year ago due to the
factor mentioned above. However, growth was curtailed by the implementation of a
new business system in the September 1999 quarter, as management delayed the
start of new programs in order to focus attention on keeping existing customers
serviced. Sales growth in FSS has resumed as the company completed the business
system implementation in the FSS segment. The company provided FSS programs to
162 customers covering 252 different facilities at March 31, 2000, compared to
139 customers covering 220 different facilities at March 31, 1999.
GROSS PROFIT
Gross profit for the March 2000 quarter was $43.0 million, a decrease of two
percent from $44.1 million in the prior year due to the sales decline. The gross
profit margin for the March 2000 quarter was 32.2 percent compared to 31.9
percent in the prior year due to elimination of lower margin sales from the
Strong Tool Co. steel mill business. For the nine months ended March 31, 2000,
gross profit was $119.6 million, a decline of eight percent from $129.9 million
in the same period a year ago due to the factors mentioned above.
OPERATING EXPENSES
Operating expenses declined two percent to $32.6 million for the March 2000
quarter from $33.4 million in the same period a year ago. Operating expenses
decreased primarily as a result of ongoing cost-reduction actions and workforce
reductions implemented in September 1999. As a percentage of sales, operating
expenses were 24.4 percent compared to 24.1 percent in the prior year due to the
decline in sales levels. For the nine months ended March 31, 2000, operating
expenses were $95.1 million, a decline of eight percent from $103.8 million in
the same period a year ago due to the factors mentioned above and cost reduction
actions implemented in November 1998.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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Also included in operating expenses were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the company. Net charges from Kennametal were $1.1 million
in the March 2000 quarter, a decrease of 58 percent from $2.7 million in the
prior year due to a reduction in warehouse and administrative charges. The
decline in warehouse charges from Kennametal of $0.8 million is due to the
company assuming the operation of several warehouses previously operated by
Kennametal and the closure of a commonly-operated facility in the September 1999
quarter. The decline in the administrative charges of $0.7 million is due to the
assumption of more administrative functions by the company in fiscal 2000. For
the nine months ended March 31, 2000, net charges from Kennametal were $3.9
million, a decrease of 53 percent from $8.3 million in the same period a year
ago due to the factors mentioned above.
INTEREST EXPENSE (INCOME) AND OTHER
Included in interest expense (income) and other is net interest income from
Kennametal of $0.3 million and $0.9 million for the three and nine months ended
March 31, 2000, respectively. The company incurred interest expense from
Kennametal of $0.1 million and $0.5 million during the three and nine months
ended March 31, 1999, respectively, due to amounts borrowed under notes payable
to Kennametal. Also included in interest expense and other is the loss on the
sale of accounts receivable to Kennametal of $0.3 million and $0.9 million for
the three and nine months ended March 31, 2000, respectively, in connection with
Kennametal's accounts receivable securitization program.
INCOME TAXES
The effective tax rate for the three and nine months ended March 31, 2000 was
39.5 percent, which remained relatively constant when compared to the same
periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary capital needs have been to fund working capital
requirements, add new products and FSS programs, and implement the new business
system. The company's primary sources of financing have been cash from
operations and the Intercompany Debt/Investment and Cash Management Agreement
with Kennametal. The company anticipates that cash flows from operations and the
Intercompany Debt/Investment and Cash Management Agreement with Kennametal will
be adequate to support its operations for the foreseeable future.
Net cash from operating activities was $21.3 million for the nine months ended
March 31, 2000. Compared to the prior year, the increase in net cash from
operations was realized due to the sale of additional accounts receivable of
$10.4 million to Kennametal and improved working capital requirements of $10.0
million, despite a $12.7 million investment in inventory purchased from
Kennametal during the first quarter of fiscal 2000. This purchase was necessary
in order for JLK to have access to Kennametal's branded inventory for sale to
FSS customers subsequent to the implementation of the new business system for
FSS.
Net cash used for investing activities was $12.2 million for the nine months
ended March 31, 2000. The increase in net cash used for investing activities
compared to the prior year resulted from a further increase of $3.4 million in a
note receivable from Kennametal as a result of the accounts receivable
securitization program, partially offset by a decline in capital expenditures of
$1.5 million. Net cash
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
used for investing activities for the nine months ended March 31, 1999 includes
proceeds of $1.6 million from the divestiture of the Strong Tool Co. steel mill
business.
Net cash used for financing activities was $7.3 million for the nine months
ended March 31, 2000 and solely reflected the repayment of amounts borrowed
under notes payable to banks. Financing activities in the prior year include
$6.0 million borrowed under notes payable to banks to fund working capital
needs.
In June 1998, the company initiated a stock repurchase program to repurchase,
from time-to-time, up to a total of 20 percent, or approximately 1.0 million
shares, of its outstanding Class A Common Stock. During the nine months ended
March 31, 1999, the company repurchased 15,000 Class A shares at a total cost of
$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
$305.2 million at March 31, 2000, up 11 percent from $275.0 million at June 30,
1999. Net working capital increased to $144.1 million at March 31, 2000, up 12
percent from $128.3 million at June 30, 1999. The company decreased its debt
level to $0.4 million at March 31, 2000 due to increased cash from operations.
YEAR 2000
Management believes that the company substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The transition into the year 2000 resulted in no significant impact to
the financial position or operations of the company. A committee actively
monitored the status of the readiness program of the company and its
subsidiaries.
The company completed an assessment regarding the impact of this issue on its
existing information systems and determined that while not all systems were year
2000 compliant, those non-compliant systems could be modified to become year
2000 compliant. Due to the fact that the company was operating on several
different information systems, the company decided to implement a new business
system, HK System's Enterprise Information System (Enterprise System), in order
to have all existing operations on one integrated system. The Enterprise System
also is year 2000 compliant. The company is implementing the Enterprise System
in two phases and, in August 1999, completed all of the tasks identified to
remediate the year 2000 exposure in the FSS business.
The second phase is expected to be initiated in mid-2000, and tested and
completed thereafter. Due to the timing of the completion of this phase, the
company modified the existing non-compliant business systems to ensure the
catalog operations are supported by a year 2000 compliant information system.
Successful testing of these modifications was performed in September 1999.
The company also completed an assessment of the impact of this issue on its
non-information technology systems, including the company's personal computers,
embedded technology in equipment used in operations, and other non-information
technology items. Any non-compliant systems were identified and remediated,
either through replacement of or modification to the existing systems.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The company estimates the total year 2000 expenditures were approximately $11.5
million, with the majority being spent on the implementation of the company's
new business system. Of the total costs, $9.6 million related to software
licenses and hardware. Included in the total costs are expenditures to rectify
non-compliant personal computers, embedded technology in equipment used in
operations, and various non-information technology items, which were
approximately $0.2 million. These costs included both internal and external
personnel costs related to the assessment, remediation and implementation
processes, as well as the cost of purchasing certain hardware and software.
Cash flows from operating and financing activities have provided funding for
these expenditures. Expenditures incurred to date in fiscal 2000 approximate
$2.2 million. The company does not anticipate incurring additional expenditures
related to year 2000 issues.
Management believed the most significant risk of the year 2000 issue would have
been an interrupted supply of goods and services from the company's vendors. The
company had an ongoing effort to gain assurances and certifications of
suppliers' readiness programs. To date, the company's suppliers continue to
provide the company with sufficient goods and services in the year 2000. There
were no failures by major third-party businesses and public and private
providers of infrastructure services, such as utilities, communications services
and transportation that affected the company during the transition to the year
2000.
The company had developed contingency plans and actions for the year 2000 issues
related to both internal and external systems. Contingency plans involved
consideration of a number of possible actions, including, to the extent
necessary or justified, the selection of alternative service providers,
purchasing inventory from alternative certified vendors, the increase of safety
stock of major product lines and adjustment to staffing strategies. The company
was not required to employ these contingency plans.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate any year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue remediation of any newly discovered year 2000 problem.
STRATEGIC ALTERNATIVES
During the December 1999 quarter, Kennametal announced that it engaged an
investment bank to explore strategic alternatives regarding its ownership in the
company, including a possible divestiture. At that time, Kennametal management
believed a divestiture might enhance growth prospects for both Kennametal and
the company by allowing each company to focus on its core competencies.
Kennametal completed a thorough and disciplined process of evaluating strategic
alternatives and on May 2, 2000, decided to terminate consideration of a
possible divestiture at this time, although Kennametal management continues to
believe there may be better owners for the company.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements," as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States and, to a lesser
extent, Europe, are not sustained, risks associated with integrating businesses,
demands on management resources, risks associated with international markets
such as currency exchange rates, competition and the effect of third party or
company failures to achieve timely remediation of year 2000 issues. The company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances occurring after the date hereof.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
(27) Financial Data Schedule for the nine months ended
March 31, 2000, 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
March 31, 2000.
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: May 12, 2000 By: /s/ DIANA L. SCOTT
------------------------
Diana L. Scott
Vice President,
Chief Financial Officer,
and Treasurer
13
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 54,534
<ALLOWANCES> 932
<INVENTORY> 121,993
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