<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650
(Address of principal executive offices)
Registrant's telephone number, including area code: 724-539-5000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Class A Common Stock, par value $.01 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 9, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant, estimated solely for the
purposes of this Form 10-K, was approximately $25,800,000. For purposes of the
foregoing calculation only, all directors and executive officers of the
registrant and each person who may be deemed to own beneficially more than 5% of
the registrant's Common Stock have been deemed affiliates.
As of September 9, 1998, there were 4,273,300 shares of Class A Common Stock and
20,237,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are
incorporated by reference into Parts III and IV.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PAGE
<S> <C>
PART I
1. Business 17
2. Properties 21
3. Legal Proceedings 21
4. Submission of Matters to a Vote of Security Holders 21
PART II
5. Market for the Registrant's Capital Stock and Related Stockholder Matters 22
6. Selected Financial Data 22
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
7A. Quantitative and Qualitative Disclosures About Market Risk 28
8. Financial Statements and Supplementary Data 28
9. Changes in and Disagreements on Accounting and Financial Disclosure 43
PART III
10. Directors and Executive Officers of the Registrant 44
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners and Management 44
13. Certain Relationships and Related Transactions 44
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
</TABLE>
<PAGE> 3
PART I
ITEM 1: BUSINESS
COMPANY OVERVIEW
JLK Direct Distribution Inc. (the "Company" or "JLK") is one of the largest
suppliers of a broad range of metalworking consumables and related products to
customers in the United States, offering a full line of cutting tools, carbide
and other tool inserts, abrasives, drills, machine tool accessories, hand tools
and other industrial supplies. To meet the varying supply needs of small-,
medium- and large-sized customers, the Company offers: (i) a direct-marketing
program, whereby the Company supplies predominately small- and medium-sized
customers through catalog and showroom sales, and a direct field sales force,
and (ii) integrated industrial supply programs or Full Service Supply programs,
whereby large industrial manufacturers engage the Company to carry out all
aspects of complex metalworking supply processes, including needs assessment,
cost analysis, procurement planning, supplier selection, "just-in-time"
restocking of supplies and ongoing technical support. The Company also conducts
its direct-marketing program for small- and medium-sized customers in the United
Kingdom and Germany.
The Company is a subsidiary of Kennametal Inc. ("Kennametal"). Kennametal
manufactures, purchases and distributes a broad range of tools, tooling systems,
supplies and services for the metalworking, mining and highway construction
industries. Kennametal specializes in developing and manufacturing metalcutting
tools and wear-resistant parts using a specialized type of powder metallurgy.
Kennametal's metalcutting tools are made of cemented carbides, ceramics,
cermets, high-speed steel and other hard materials. Kennametal manufactures a
complete line of toolholders, toolholding systems and rotary cutting tools by
machining and fabricating steel bars and other metal alloys.
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 and the effect of third party or Company failures to achieve
timely remediation of year 2000 issues are not sustained. The Company undertakes
no obligation to publicly release any revisions to forward-looking statements to
reflect events or circumstances occurring after the date hereof.
INDUSTRY OVERVIEW
The Company operates in a large, fragmented industry characterized by multiple
channels of distribution. The Company believes that there are numerous small
retailers, dealers and distributors, substantially all of which have annual
sales of less than $10.0 million, that supply a majority of this market. The
distribution channels in the metalworking consumables and related products
market include retail outlets, small dealers, regional and national distributors
utilizing direct sales forces and manufacturers' representatives.
The Company believes that increasing numbers of industrial manufacturers are
searching for ways to reduce costs by eliminating the inefficiencies of
traditional industrial supply distribution. This growing recognition by
customers of the high costs and operational inefficiencies associated with
purchasing industrial supplies from traditional distributors has increased
demand for alternative methods of distribution, leading to the development of
programs that generally are referred to as "integrated supply." These programs
vary widely, but include such concepts as corporate purchasing cards, industrial
supply consortiums and direct-mail supply.
The traditional model for the distribution of industrial supplies is burdened by
both the duplication and the inefficient performance of multiple functions. In
the traditional model, the industrial distributor must (i) source and absorb the
freight costs for the item, (ii) receive, warehouse and account for the item,
(iii) invest in inventory and incur the associated carrying costs and (iv)
market and sell the item to the end user. Once the need for the item arises, the
manufacturing facility requiring the item must repeat many of these steps,
including (i) sourcing and absorbing the freight costs for the item, (ii)
receiving, warehousing and accounting for the item, (iii) investing in inventory
and incurring the associated carrying costs and (iv) issuing the item to the
user in the manufacturing facility.
Through the Company's integrated Full Service Supply programs, which focus on
the acquisition, possession and use of metalworking consumables and related
products, each activity is performed only once. The procurement of industrial
supplies is generally outside the core activity of most manufacturers. For
example, industrial supplies are generally purchased by personnel whose
expertise in purchasing these items is limited. In addition, supplies are
typically stored in a number of locations within an industrial facility,
resulting in excess inventories and duplicate purchase orders. Finally,
1
<PAGE> 4
the Company believes that industrial supplies frequently are purchased by
multiple personnel in uneconomic quantities, and a substantial portion of most
facilities' industrial supplies are one-time purchases that entail higher
per-item prices and time-consuming administrative efforts. As a result, the
Company believes that there often is potential to manage the industrial supply
procurement process more efficiently and with greater cost savings.
Despite the apparent inefficiencies of the traditional industrial supply
purchasing process, long-standing relationships with local retailers and
distributors generally have perpetuated the status quo. Due to limited capital
availability, high operating cost structures and smaller sales volumes,
suppliers to the industrial market are experiencing increasing pressure to
consolidate and curtail services and certain product lines in order to remain
competitive. Even large suppliers with extensive field sales forces are finding
it increasingly difficult to visit all buyers cost-effectively and to provide
the support necessary to satisfy their demands for cost containment and improved
efficiency. The Company believes that the relative inability of traditional
distribution channels to respond to these changing industry dynamics has created
a continuing opportunity for the growth of direct marketing and integrated
supply organizations such as the Company. As a result of these dynamics,
non-traditional distributors, such as the Company, have captured an increasing
share of sales by providing lower total purchasing costs, better product
selection and a higher level of service. As a leading non-traditional supplier
with proven capabilities both in direct marketing and integrated supply, the
Company believes it is well-positioned to continue to take advantage of present
market dynamics and enjoy continued growth in market share.
BUSINESS STRATEGY
The Company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a "one-stop shop" for metalworking products for small- and medium-sized
customers and by offering managed solutions for large customers.
The Company's direct-marketing program serves the needs of predominantly small-
and medium-sized metalworking customers by offering 110,000 stock keeping units
("SKUs") through the Company's 1,714-page master catalog, monthly promotional
sales flyer (the "Advantage"), additional mailings and advertisements,
telemarketing efforts, direct sales efforts and 33 showrooms, including seven
distribution centers in the United States and one in the United Kingdom, one
distribution center in Germany, and 21 other locations recently acquired by the
Company. These other locations will be reported as such until they have been
converted into a showroom or a distribution center, or closed.
The Company offers customers the advantages of (i) a single source of supply for
all metalworking consumables and related products, (ii) a tiered product
offering (such as "good," "better" and "best"), (iii) same-day pickup for the
most popular products stocked at showrooms, (iv) same-day direct shipping and
(v) a state-of-the-art order entry system that tracks product availability and
pricing, provides technical product information and results in an order being
completed in an average time of three minutes. The Company has a dedicated sales
force based in each showroom that actively calls on targeted customers. In
addition, the Company serves the needs of medium- and large-sized customers
through a technically oriented outside sales force. This sales force is largely
comprised of employees of companies recently acquired by the Company.
Full Service Supply programs allow customers to achieve substantial cost savings
in metalworking consumables and overall manufacturing processes by outsourcing
the entire process of acquiring and possessing metalworking and related products
at manufacturing facilities. Customers, such as General Motors Corporation,
Allied Signal and Emerson Electric, use Full Service Supply programs at
designated manufacturing facilities to (i) consolidate all their metalworking
consumables and related product purchases with one vendor, (ii) eliminate a
significant portion of the administrative overhead burden associated with the
internal purchasing function, (iii) ensure appropriate technical expertise in
the selection and use of supplies for complex metalworking processes and (iv)
minimize the level of investment in tooling inventory, thereby reducing
inventory carrying costs. The Company's technical experts customize and manage a
comprehensive computerized product identification, tracking and purchasing
system that analyzes and optimizes supply usage, helps select appropriate
products and allows for "just-in-time" replacement of inventory. To increase
efficiency and maximize cost savings for its customers, the Company also
provides ongoing application assistance in the usage of metalworking tools. The
Company believes that its Full Service Supply programs typically reduce
customers' costs of acquiring, possessing and using metalworking products by
approximately 5 to 20 percent per year.
2
<PAGE> 5
Two important trends are now affecting the industrial supply industry. First,
the industrial supply industry is experiencing consolidation of currently
fragmented distribution channels, as customers seek and technology makes
possible the convenience, cost savings and economies of scale associated with
single sources of supplies. Second, to achieve even greater cost savings and
efficiencies, manufacturers are outsourcing complex procurement and possession
processes needed to supply metalworking products that are critical to their
manufacturing operations. As a market leader with a broad range of products and
services and proven capabilities, the Company is well-positioned to continue
taking advantage of these industry trends.
The Company has grown rapidly due to acquisitions, geographic expansion,
expanded product offerings, increased direct mailings and an increased demand
for both single-source supply and integrated industrial supply programs such as
its Full Service Supply programs. From fiscal 1994 through fiscal 1998, the
Company's net sales increased from $144.9 million to $425.3 million,
representing a compound annual growth rate ("CAGR") of 31.2 percent. Operating
income during this period increased from $11.2 million to $41.3 million,
representing a CAGR of 52.4 percent.
COMPETITION
The metalworking supply industry is a large, fragmented industry that is highly
competitive. The Company faces competition (i) in the small- and medium-sized
metalworking markets from traditional channels of distribution such as retail
outlets, small dealers, regional or national distributors utilizing direct sales
forces, and manufacturers' representatives and (ii) in the large industrial
metalworking market from large distributors and other companies that offer
varying degrees and types of integrated industrial supply programs. The Company
believes that sales of metalworking products will become more concentrated over
the next few years, which may make the industry more competitive. Certain of the
Company's competitors offer a greater variety of products (including
nonmetalworking products) and have greater financial and other resources than
the Company. The Company believes that customer purchasing decisions are
primarily based on one or more of the following criteria: product price, product
selection, product availability, superior customer service, total cost of
acquisition, possession and use of products and convenience. The Company seeks
to distinguish itself from other direct marketers and distributors of industrial
supplies through its national presence and metalworking focus, its application
of information technology and its attractive, modern showrooms.
SUPPLIERS
The Company purchases substantially all its products for its direct marketing
and Full Service Supply programs from approximately 800 vendors. In both fiscal
1998 and 1997 approximately 16 percent of the Company's sales were of Kennametal
products. Other than Kennametal, the Company is not materially dependent on any
one supplier or small group of suppliers. If a Full Service Supply program
customer desires to continue ordering a particular brand of metalworking tool or
obtains or has a contract providing for more favorable pricing than the Company
generally obtains, the Company will assume that contract or enter into a similar
contract for the limited purpose of supplying such product to that customer.
Other than Kennametal, no single supplier accounted for more than 5 percent of
the Company's total purchases in fiscal 1998, 1997 or 1996.
ACQUISITIONS
During fiscal 1998 and 1997, the Company acquired the following distributors of
metalcutting tools and industrial supplies:
Acquisition
Date Acquired Acquisition Headquarters
- ---------------------------------------------------------------------------
FISCAL 1998
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 Salt Lake City, Utah
Supply Company
May 1998 Strong Tool Co. Cleveland, Ohio
- ---------------------------------------------------------------------------
FISCAL 1997
April 1997 Strelinger Company Troy, Mich.
May 1997 Mill & Abrasive Supply, Inc. Roseville, Mich.
- ---------------------------------------------------------------------------
All acquisitions were accounted for under the purchase method of accounting. As
the industrial supply industry continues to consolidate, the Company will
consider acquisitions to supplement its growth strategy if opportunities arise.
From time to time, the Company has engaged in, and will continue to engage in,
preliminary discussions with respect to potential acquisitions. The Company is
not currently a party to any oral or written acquisition agreement with respect
to any material acquisition candidate.
3
<PAGE> 6
INFORMATION SYSTEMS
The sophisticated information systems used by the Company allow centralized
management of key functions, including communication links between distribution
centers, inventory and accounts receivable management, purchasing, pricing,
sales and distribution, and the preparation of daily operating control reports
that provide concise and timely information regarding key aspects of its
business. These information systems enable the Company to ship to customers on a
same-day basis, respond quickly to order changes and provide a high level of
customer service. These systems enable the Company to achieve cost savings,
deliver exceptional customer service, manage its operations centrally and manage
its Full Service Supply programs. Certain of the Company's information systems
operate over a wide-area network and represent real-time information systems
that allow each distribution center to share information and monitor daily
progress relating to sales activity, credit approval, inventory levels, stock
balancing, vendor returns, order fulfillment and other performance measures. The
Company also maintains a sophisticated buying and inventory management system
that monitors substantially all of its SKUs and automatically purchases
inventory from vendors for replenishment based on projected customer ordering
models. The Company has invested significant resources in developing an
extensive customer and prospect database that includes detailed information,
including customer size, industry of operation, various demographic and
geographic characteristics and purchase histories of Company products. The
Company also provides EDI invoicing, funds transfer, ordering, shipping and
acknowledgment to large customers.
In order to handle the Company's future growth and to prepare for the year 2000,
the Company is in the process of implementing a new business system, Endura's
Enterprise Information System. This business system will interface with
Kennametal's SAP system and will provide the existing functionality of the
Company's current business systems, as well as numerous enhancements, and will
also provide the ability to have all areas of the Company function on one common
business system, including the direct marketing program, the Full Service Supply
programs and all acquisitions. This new business system will provide the
platform for future growth and the flexibility for future enhancements.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 1,350 employees, none of
whom is represented by a labor union. The Company considers its relationships
with employees to be good and has experienced no work stoppages.
CORPORATE SUBSIDIARIES
The following is a summary of the Company's consolidated subsidiaries at June
30, 1998:
J&L Industrial Supply UK (branch) England
J&L Werkzeuge und Industriebedarf G.m.b.H. Germany
Abrasive & Tool Specialties Company, United States
ATS Industrial Supply Company, United States
Dalworth Tool & Supply, Inc., United States
GRS Industrial Supply Co., United States
J&L America, Inc., United States
Production Tools Sales, Inc., United States
Strong Tool Co., United States
4
<PAGE> 7
ITEM 2. PROPERTIES
PROPERTIES
The Company's principal executive offices are located at 1600 Technology Way,
P.O. Box 231, Latrobe, Pennsylvania 15650. The Company's headquarters and
distribution centers, all of which are leased, are as follows:
<TABLE>
<CAPTION>
Location Description Lease Expiration Approximate Square Feet
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charlotte, N.C.(1) Distribution Center & Showroom 06/30/07 10,000
Elk Grove Village, Ill. Distribution Center & Showroom 02/27/05 127,500
Carrollton, Texas(1) Distribution Center & Showroom 08/31/00 5,200
Windsor, Conn.(1) Distribution Center & Showroom 05/31/99 1,500
Wednesbury, Distribution Center, Showroom 06/24/13 93,000
West Midlands, U.K. & European Headquarters
Livonia, Mich.(2) Distribution Center, Showroom 12/01/99 - 02/28/01 196,000
& North American Headquarters
Los Angeles, Calif.(1) Distribution Center & Showroom 06/30/07 7,000
Neunkirchen, Germany(1) Distribution Center 09/30/99 2,200
Kent, Wash.(1) Distribution Center & Showroom 07/31/02 3,200
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Shared location with Kennametal. The approximate square feet noted
herein only represents the square footage of the office space leased by
the Company at these locations. The warehouses at these locations are
managed by Kennametal. A portion of the operating costs of these
warehouses are billed to the Company through warehousing agreements
with Kennametal.
(2) The Company maintains its North American Headquarters and Livonia
Distribution Center in five separate locations in Livonia, Mich.
The company maintains 25 other showrooms, all of which are leased, in 13 states,
ranging in size from 6,000 to 42,000 square feet. The leases for these showrooms
will expire at various periods between November 1998 and April 2003.
The Company also leases 18 locations and owns three locations, in 8 states, that
have been acquired through recent acquisitions. These acquired locations range
in size from 2,500 to 25,000 square feet, with the leases expiring at various
periods between January 1999 and March 2002.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than litigation
incidental to the ordinary course of business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1998, there were no matters submitted
to a vote of security holders through the solicitation of proxies or otherwise.
5
<PAGE> 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S CAPITAL
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "JLK." The following table sets forth the range of the
high and low sales price as reported by the NYSE for the period from June 27,
1997 (when the Company listed the Class A Common Stock on the NYSE) to June 30,
1998:
<TABLE>
<CAPTION>
Quarter Ended: Sept. 30 Dec. 31 March 31 June 30
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998
High $30 1/4 $32 15/16 $39 1/2 $39 3/8
Low 22 3/4 26 1/2 28 20
- --------------------------------------------------------------------------------------
Fiscal 1997
High N/A N/A N/A $25 5/8
Low N/A N/A N/A 24 3/8
- --------------------------------------------------------------------------------------
</TABLE>
The Company's Class B Common Stock is not publicly traded. As of September 9,
1998, the approximate number of holders of record of the Class A Common Stock
was 43 and Class B Common Stock was one.
The Company has not declared cash dividends on either the Class A Common Stock
or the Class B Common Stock and does not have any plans to pay any cash
dividends on either issue in the foreseeable future. The Company anticipates
that any earnings that might be available to pay dividends on either issue will
be retained to finance the business of the Company.
USE OF PROCEEDS FROM REGISTERED SECURITIES
On July 2, 1997, the Company consummated the initial public offering of
4,897,000 shares of its Class A Common Stock at a price of $20.00 per share (the
"Offering"). The net proceeds from the Offering, after deducting underwriting
discounts and estimated expenses, were $90.4 million and represented
approximately 20 percent of the Company's outstanding common stock. The net
proceeds were used by the Company to repay $20.0 million of short-term debt
related to a dividend paid to Kennametal and to repay $20.0 million to
Kennametal for acquisitions in fiscal 1997 and income taxes paid on behalf of
the Company. Pending such uses, the net proceeds were loaned to Kennametal under
an Intercompany Debt/Investment and Cash Management Agreement at a fluctuating
rate of interest equal to Kennametal's short-term borrowing costs. The remaining
net proceeds of $50.4 million were used to pay for fiscal 1998 acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated income statement and balance sheet data for the
Company presented below are derived from the Company's Consolidated Financial
Statements. The selected financial information presented below should be read in
conjunction with, and is qualified by reference to, the more detailed
information in the Consolidated Financial Statements and notes thereto included
elsewhere in this document, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information set forth
herein.
6
<PAGE> 9
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $425,348 $316,189 $243,969 $188,202 $144,933
Cost of goods sold 277,417 213,020 166,326 127,917 100,672
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 147,931 103,169 77,643 60,285 44,261
Operating expenses 106,623 70,976 52,761 40,658 33,026
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 41,308 32,193 24,882 19,627 11,235
Interest (income) expense and other (3,068) 368 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 44,376 31,825 24,882 19,627 11,235
Provision for income taxes 17,300 12,518 9,819 7,799 4,522
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 27,076 $ 19,307 $ 15,063 $ 11,828 $ 6,713
===========================================================================================================================
PER SHARE DATA:
Basic earnings per share $ 1.08 -- --
===========================================================================================
Diluted earnings per share $ 1.07 -- --
===========================================================================================
Weighted average shares outstanding 25,138 -- --
===========================================================================================
Diluted average shares outstanding 25,277 -- --
===========================================================================================
Pro forma basic and diluted
earnings per share(1) -- $ 0.92 $ 0.72
===========================================================================================
Pro forma weighted and diluted
average shares outstanding(1) -- 20,897 20,897
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 109,314 $ 61,472 $ 73,263 $ 51,945 $ 50,670
Total assets 275,586 165,488 121,045 98,893 92,059
Shareholders' equity 195,935 92,731 97,991 76,722 76,807
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Active direct marketing customers(2)(3) 112,000 96,000 77,000 64,000 48,000
Number of SKUs(4) 110,000 100,000 80,000 70,000 60,000
Number of publications per year 48 26 19 16 6
Total number of publications mailed 6,400,000 4,100,000 3,700,000 2,900,000 1,700,000
Direct-mail costs(5) $6,974,000 $6,301,000 $4,249,000 $2,613,000 $1,401,000
Showroom and distribution facilities(3) 34 24 19 12 7
Acquisition locations(3)(6) 21 4 -- -- --
Full Service Supply programs:
Customers(2)(3) 115 60 42 29 21
Site locations(3) 194 120 86 69 54
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Gives effect to the issuance of 20,897,000 shares of Class B Common
Stock to Kennametal for the periods presented.
(2) Number of customers that have purchased products from the Company
within the 12 months preceding the relevant period end.
(3) Represents data at period end.
(4) Represents the number of SKUs offered in the United States. The number
of SKUs offered in European markets range from 45,000 to 60,000 SKUs
for 1998.
(5) Direct-mail costs include direct production and mailing costs.
(6) Represents locations acquired through acquisitions that have not yet
been converted into a showroom or a distribution center, or closed.
7
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The accompanying financial information of the Company includes the operations of
J&L America, Inc. ("J&L"), a previously wholly-owned subsidiary of Kennametal,
and Full Service Supply ("Full Service Supply"), which previously had been
operated as a program of Kennametal. Prior to April 1, 1997, the Company had no
separate legal status or existence. Kennametal incorporated the Company as a
Pennsylvania corporation under the name "JLK Direct Distribution Inc." in April
1997.
In April 1997, the Company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission with respect
to an initial public offering ("IPO") of the Company's Class A Common Stock. In
anticipation of the IPO, Kennametal contributed to the Company the stock of J&L,
including the J&L United Kingdom operations, and the assets and liabilities of
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 the IPO whereby 4,897,000 shares of
Class A Common Stock were issued at a price of $20.00 per share. The net
proceeds from the IPO totaled $90.4 million and represented approximately 20
percent of the Company's outstanding common stock. The net proceeds were used by
the Company to repay $20.0 million of short-term debt related to a dividend paid
to Kennametal and to repay $20.0 million to Kennametal for acquisitions in
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 on a one-to-one basis to Class A Common Stock. Subsequent to the IPO,
4,917,000 shares of Class A Common Stock were outstanding, and Kennametal held
20,237,000 shares of Class B Common Stock. The Company and Kennametal operate as
separate companies.
RESULTS OF OPERATIONS
The following discussion should be read in connection with the consolidated
financial statements of JLK and the related footnotes.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1997
NET SALES. Net sales for fiscal 1998 were $425.3 million, an increase of 34.5
percent from $316.2 million in fiscal 1997. Net sales increased primarily
because of the acquisition of six industrial supply companies during fiscal
1998, the opening of four new showrooms, including one distribution center, and
the opening of a new distribution center in Germany. Sales also benefitted from
the addition of over 10,000 SKUs to the 1998 master catalog, which expanded the
product offering to 110,000 SKUs, and further penetration of existing customers.
The six acquired companies had annual sales of approximately $137.0 million in
their latest fiscal year and provided 21 additional locations, located primarily
in the Midwestern United States and Texas. Net sales also rose to a lesser
extent because of increased sales to new customers in the United Kingdom.
Excluding the acquisitions, net sales increased 8.8 percent. Additionally, the
increase in sales was realized despite a $31.8 million reduction in sales due to
the General Electric Full Service Supply contract ("GE Contract") disengagement.
At June 30, 1998, the Company operated a total of 33 showrooms, including seven
distribution centers in the United States and one in the United Kingdom, one
distribution center in Germany, and 21 other locations acquired in fiscal 1998
through the Company's six acquisitions. The Company also provided Full Service
Supply programs to approximately 115 customers covering approximately 194
different facilities. In the previous year, the Company operated 24 showrooms,
including six distribution centers in the United States and one in the United
Kingdom, operated four other locations acquired in fiscal 1997 through the
Company's two acquisitions, and provided Full Service Supply programs for 60
customers covering 120 facilities at June 30, 1997.
GROSS PROFIT. Gross profit for fiscal 1998 was $147.9 million, an increase of
43.4 percent from $103.2 million in fiscal 1997. Gross margin for fiscal 1998
was 34.8 percent compared to 32.6 percent in fiscal 1997. The gross margin
improved due to a more favorable sales mix as well as improved contract pricing
on new Full Service Supply programs and the positive impact of the GE Contract
disengagement. These benefits were partially offset by acquisition-related
effects.
OPERATING EXPENSES. Operating expenses for fiscal 1998 were $106.6 million, an
increase of 50.2 percent from $71.0 million in fiscal 1997. Operating expenses
as a percentage of net sales were 25.1 percent in fiscal 1998 compared to 22.4
percent in fiscal 1997. Operating expenses as a percentage of net sales
increased as a result of acquisitions, including higher amortization of
intangible assets, and from higher costs associated with the opening of new
showrooms and new distribution centers, and new Full Service Supply programs for
customers covering over 70 different facilities. New showroom
8
<PAGE> 11
and distribution center opening costs also include additional product
promotions, increased direct-mail costs and new customer marketing campaigns.
Also included in operating expenses were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the Company. Charges from Kennametal were $12.1 million in
fiscal 1998, an increase of 30.3 percent from $9.3 million in fiscal 1997.
Charges from Kennametal as a percentage of net sales were 2.8 percent in fiscal
1998 compared to 2.9 percent in fiscal 1997. The increase in total charges from
Kennametal resulted primarily from increased costs to support higher sales
volume. Such charges are expected to continue to decline slightly as a
percentage of net sales in coming years.
INTEREST (INCOME) EXPENSE AND OTHER. The Company earned interest income from
Kennametal of approximately $2.9 million during fiscal 1998 due to investments
made from the residual proceeds the Company received from its IPO and from
excess cash.
INCOME TAXES AND NET INCOME. The effective tax rate was 39.0 percent in fiscal
1998 compared to 39.3 percent in fiscal 1997. Net income increased 40.2 percent
to $27.1 million in fiscal 1998, as a result of higher sales and an improved
gross margin, offset by higher operating expenses.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1996
NET SALES. Net sales for fiscal 1997 were $316.2 million, an increase of 29.6
percent from $244.0 million in fiscal 1996. Net sales increased primarily
because of the addition of five new showrooms, including a new distribution
center, the addition of over 20,000 SKUs to the 1997 master catalog, which
expanded the product offering to 100,000 SKUs, and from the implementation of
Full Service Supply programs to new customers. Also contributing to the increase
in sales revenue was the acquisition of two industrial supply companies during
the fourth quarter of fiscal 1997. The acquired companies had annual sales of
approximately $36.0 million in their latest fiscal year and provided four
additional showrooms in the Midwestern United States. Net sales also rose to a
lesser extent because of increased sales to new customers in the United Kingdom
and the continued ramp-up of existing Full Service Supply programs. Excluding
the acquisitions, net sales increased 27.4 percent.
At June 30, 1997, the Company operated a total of 24 showrooms, including six
distribution centers in the United States and one in the United Kingdom,
operated four other locations acquired in fiscal 1997 through the Company's two
acquisitions, and provided Full Service Supply programs to approximately 60
customers covering approximately 120 different facilities. This compares to 19
showrooms, including five distribution centers in the United States and one in
the United Kingdom, and Full Service Supply programs for 42 customers covering
86 facilities at June 30, 1996.
GROSS PROFIT. Gross profit for fiscal 1997 was $103.2 million, an increase of
32.9 percent from $77.6 million in fiscal 1996. Gross margin for fiscal 1997 was
32.6 percent compared to 31.8 percent in fiscal 1996. The gross margin improved
slightly due to a higher percentage of metalworking products rather than related
products sold to Full Service Supply program customers. This was partly offset
by more frequent product promotions and limited introductory pricing on products
related to the opening of five new showrooms.
OPERATING EXPENSES. Operating expenses for fiscal 1997 were $71.0 million, an
increase of 34.5 percent from $52.8 million in fiscal 1996. Operating expenses
as a percentage of net sales were 22.4 percent in fiscal 1997 compared to 21.6
percent in fiscal 1996. Operating expenses as a percentage of net sales
increased as a result of higher costs associated with the start-up of five new
showrooms, including a new distribution center, and new Full Service Supply
programs for customers covering over 30 different facilities and from effects
related to acquisitions. Such start-up costs included those for additional
product promotions, increased direct-mail costs and new customer marketing
campaigns. Total costs for these items also rose due to increased sales volume.
Also included in operating expenses were charges from Kennametal for
warehousing, administrative, financial and management information systems
services provided to the Company. Charges from Kennametal were $9.3 million in
fiscal 1997, an increase of 26.4 percent from $7.3 million in fiscal 1996.
Charges from Kennametal as a percentage of net sales were 2.9 percent in fiscal
1997 compared to 3.0 percent in fiscal 1996. The increase in total charges from
Kennametal resulted partly from increased costs associated with higher sales
volume. Such charges are expected to decline slightly as a percentage of net
sales in coming years. Charges from Kennametal could increase in the future due
to the additional costs associated with operating as a public company.
INCOME TAXES AND NET INCOME. The effective tax rate was 39.3 percent in fiscal
1997 compared to 39.5 percent in fiscal 1996. Net income increased 28.2 percent
to $19.3 million in fiscal 1997, as a result of higher sales and an improved
gross margin, offset by higher operating expenses.
9
<PAGE> 12
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary quarterly financial information for
fiscal 1998 and 1997. In the opinion of management, such information has been
prepared on the same basis as the consolidated financial statements and reflects
all necessary adjustments (consisting of only normal recurring adjustments) for
a fair presentation of such unaudited quarterly results when read in conjunction
with the consolidated financial statements and notes hereto. The operating
results are not necessarily indicative of results for any future period as there
can be no assurance that any trends reflected in such results will continue in
the future.
Quarter Ended
---------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
- ----------------------------------------------------------------------------
(in thousands, except per share data)
FISCAL 1998
Net sales $95,420 $93,693 $109,945 $126,290
Gross profit 32,249 34,537 39,146 41,999
Net income 6,769 6,977 7,338 5,992
Basic earnings
per share 0.27 0.28 0.29 0.24
Diluted earnings
per share 0.26 0.28 0.29 0.24
- -----------------------------------------------------------------------------
FISCAL 1997
Net sales $70,018 $70,744 $ 84,433 $ 90,994
Gross profit 21,945 23,110 27,801 30,313
Net income 3,970 3,947 5,702 5,688
Pro forma basic
and diluted net
income per share 0.19 0.19 0.27 0.27
- -----------------------------------------------------------------------------
Pro forma net income per share gives effect to the issuance of 20,897,000 shares
of Class B Common Stock to Kennametal for the periods presented.
SEASONALITY
Seasonal variations do not have a major effect on the Company's business.
However, to varying degrees, traditional summer vacations and holidays often
affect the Company's sales levels during the first and second quarters of its
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the Company's
acquisitions, working capital requirements necessitated by its sales growth, its
showroom expansion program in the United States, the addition of new products
and Full Service Supply programs, and its direct marketing activities in the
United Kingdom and Germany. The Company's primary sources of financing have been
the proceeds from the IPO and cash from operations. The Company anticipates that
its cash flows from operations and its Intercompany Debt/Investment and Cash
Management Agreement with Kennametal will be adequate to support its operations
for the foreseeable future.
Net cash provided by (used in) operating activities was $30.0 million, $22.6
million and $(5.0) million in fiscal 1998, 1997 and 1996, respectively. The
increase in cash from operations in fiscal 1998 resulted from higher net income
and from lower working capital requirements. The increase in cash from
operations in fiscal 1997 resulted from higher net income and noncash
transactions for services provided by and paid for by Kennametal and from lower
working capital requirements.
Net cash used in investing activities was $70.6 million, $7.4 million and $1.7
million in fiscal 1998, 1997 and 1996, respectively. The acquisition of six
industrial supply companies for $57.3 million and capital expenditures for $12.3
million accounted for the majority of the net cash used in investing activities
in fiscal 1998. The increase in capital expenditures from $2.3 million in fiscal
1997 resulted from the opening of the distribution centers in Seattle, Wash. and
Germany, coupled with expenditures related to the installation of
state-of-the-art conveyor and order selection systems in the newly relocated
Chicago, Ill. and United Kingdom distribution centers. Similarly, the increase
in net cash used in investing activities in fiscal 1997 resulted from the
acquisition of two industrial supply companies. The remaining cash used in
investing activities in fiscal 1997 and 1996 was for investments related
primarily to capital expenditures for improved information systems and office
and computer equipment to accommodate new product offerings and showroom and
distribution center openings.
Net cash provided by (used in) financing activities was $32.4 million, $(3.0)
million and $0.6 million in fiscal 1998, 1997 and 1996, respectively. The
increase in net cash provided by financing activities in fiscal 1998 was a
result of the net proceeds received from the issuance of common stock in
connection with the Company's IPO. This amount was offset by repayments to
Kennametal for amounts previously advanced to the Company, repayments of
short-term debt and the purchase of treasury stock. The increase in net cash
used for financing activities in fiscal 1997 was due to repayments to Kennametal
for amounts previously advanced to the Company for working capital needs, a
dividend paid to Kennametal offset by short-term borrowings. The short-term
borrowings were made under the Company's line of credit primarily to fund the
dividend paid to Kennametal.
During the year, JLK acquired six companies that are engaged in the distribution
of metalcutting tools and industrial supplies. The acquired companies have
combined annual sales of approximately $137.0 million. The acquisitions were
accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results from the respective date of
acquisition. Of the proceeds from the Company's IPO, $50.4 million were used to
fund these acquisitions.
10
<PAGE> 13
On July 2, 1997, the Company consummated an IPO of approximately 4.9 million
shares of 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 recent acquisitions
and income taxes paid for on behalf of the Company. Pending such uses, the net
proceeds were loaned to Kennametal under an Intercompany Debt/Investment and
Cash Management Agreement at a fluctuating rate of interest equal to
Kennametal's short-term borrowing costs. Kennametal maintains unused lines of
credit to enable it to repay any portion or all of such loans on demand by the
Company. Additional net proceeds of $50.4 million have been 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. In 1998, the Company
repurchased 628,700 shares of its Class A Common Stock at a total cost of $14.2
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.
The Company anticipates that its accounts receivable will continue to increase
due to increased sales levels and from the effects of acquisitions, and that
inventory levels will also increase due to the addition of new products,
showrooms, Full Service Supply programs and from acquisitions. The Company
believes that cash flow from operations will be sufficient to fund future growth
and meet planned capital expenditure needs. However, if the Company were to make
any material acquisitions, the Company may be required to utilize the
Intercompany Debt/Investment and Cash Management Agreement with Kennametal or
obtain debt or equity financing.
YEAR 2000
The Company is currently addressing 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. 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, Endura's Enterprise
Information System. Most of the expenditures are expected to be incurred in
fiscal 1999. 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. There can be no guarantee that these estimates will be
achieved and actual results could differ from those planned. The Company has
currently completed more than 20 percent of the tasks identified to remediate
the year 2000 exposure, with the majority of the remaining tasks to be completed
by June 1999.
Management currently believes the most significant impact of the year 2000 issue
could be an interrupted supply of goods and services from our vendors. The
Company has an on going 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.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect the
Company's business. However, the Company does not believe that inflation has had
a material effect on its results of operations in recent years. The Company
strives to minimize the effects of inflation through cost containment and price
increases under highly competitive conditions.
TERMINATION OF LARGE CONTRACT
For the fiscal year ended June 30, 1997, the Company had $316.2 million in net
sales, of which $54.7 million of net sales were related to a Full Service Supply
program contract with General Electric Corporation ("GE") for services provided
at certain metalworking manufacturing facilities within GE's Aircraft Engine
Group (the "GE Contract"). The operating margin related to the GE Contract was
lower than the Company's other Full Service Supply program contracts. Many of
the products provided by the Company to GE under the GE Contract fell outside of
the Company's core focus on metalworking consumables and related products.
In April 1997, the Company conducted extensive negotiations with GE relating to
the continuation of the GE Contract. After careful evaluation, the Company
concluded that it was not in its best interest to accede to certain price
concessions requested by GE. As a result, GE served notice to the Company that
the GE Contract would not be renewed for a significant portion of the
manufacturing facilities served by the Company.
During fiscal 1998, the Company completed its disengagement from the GE
manufacturing sites that were discontinued. Sales to these GE sites totaled
$22.9 million in fiscal 1998, or 42 percent of the fiscal 1997 level. After
fiscal 1998, estimated sales to GE for those manufacturing sites that will
continue to be served by the Full Service Supply programs are expected to amount
to approximately 15 percent to 20 percent of the total amount received in fiscal
1998 under the GE Contract.
11
<PAGE> 14
The Company has redeployed its resources related to the GE Contract to take
advantage of requests by certain current Full Service Supply program customers
to ramp-up their existing programs at an increased rate as well as to offer Full
Service Supply programs to new customers. Sales to all Full Service Supply
customers, including sales to the disengaged GE sites, decreased 7.4 percent in
fiscal 1998, as compared to sales to all Full Service Supply customers in fiscal
1997. As a result of these redeployment efforts, sales to Full Service Supply
customers in fiscal 1998, excluding the effect of the disengaged GE sites,
increased by 30.3 percent over the comparable sales in fiscal 1997.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Statements ("SFAS") No.
128, "Earnings per Share," issued in February 1997. This statement requires the
disclosure of basic and diluted earnings per share and revises the method
required to calculate these amounts. The adoption of this standard did not have
a material impact on previously reported earnings per share amounts. The Company
also adopted SFAS No. 129, "Disclosure of Information about Capital Structure,"
issued in February 1997. This statement requires specific disclosure
requirements related to a Company's capital structure. The adoption of this
standard did not have a material impact on the Company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," were
issued by the Financial Accounting Standards Board requiring implementation for
periods beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company will adopt SFAS No. 130 in fiscal 1999 and does not anticipate that
the statement will have a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a Company for making operating
decisions and assessing performance. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company is in the process of evaluating
the effect of applying this statement.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 will
revise certain footnote disclosure requirements related to pension and other
retiree benefits, but will not have a financial impact on the Company.
Implementation is required for fiscal 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Selected Quarterly Financial Data (Unaudited) 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants 29
Consolidated Statements of Income 30
Consolidated Balance Sheets 31
Consolidated Statements of Cash Flows 32
Consolidated Statements of Shareholders' Equity 33
Notes to Consolidated Financial Statements 34
12
<PAGE> 15
Report of Independent Public Accountants
TO THE SHAREHOLDERS OF JLK DIRECT DISTRIBUTION INC.
We have audited the accompanying consolidated balance sheets of JLK Direct
Distribution Inc. (a Pennsylvania corporation) and subsidiaries as of June 30,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JLK Direct Distribution Inc.
and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1998
13
<PAGE> 16
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 425,348 $316,189 $243,969
Cost of goods sold 277,417 213,020 166,326
- -------------------------------------------------------------------------------------------------------------------
Gross profit 147,931 103,169 77,643
Operating expenses 106,623 70,976 52,761
- -------------------------------------------------------------------------------------------------------------------
Operating income 41,308 32,193 24,882
Interest (income) expense and other (3,068) 368 --
- -------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 44,376 31,825 24,882
Provision for income taxes 17,300 12,518 9,819
- -------------------------------------------------------------------------------------------------------------------
Net income $ 27,076 $ 19,307 $ 15,063
===================================================================================================================
PER SHARE DATA:
Basic earnings per share $ 1.08 -- --
===================================================================================================================
Diluted earnings per share $ 1.07 -- --
===================================================================================================================
Weighted average shares outstanding 25,138 -- --
===================================================================================================================
Diluted average shares outstanding 25,277 -- --
===================================================================================================================
Pro forma basic and diluted net income per share -- $ 0.92 $ 0.72
===================================================================================================================
Pro forma weighted and diluted average shares outstanding -- 20,897 20,897
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and equivalents $ 4,715 $ 13,088
Notes receivable from Kennametal 1,169 --
Accounts receivable, less allowance for doubtful accounts of $827 and $286, respectively 71,426 42,589
Inventories 97,299 70,332
Deferred income taxes 5,853 3,260
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 180,462 129,269
- ------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and buildings 5,152 1,761
Machinery and equipment 21,379 9,475
Less accumulated depreciation (6,014) (4,204)
- ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 20,517 7,032
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets:
Intangible assets, net 71,090 27,927
Other 3,517 1,260
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 74,607 29,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 275,586 $ 165,488
====================================================================================================================================
LIABILITIES:
Current liabilities:
Notes payable to banks $ 1,915 $ 20,295
Notes payable to Kennametal -- 15,805
Accounts payable 36,393 15,460
Due to Kennametal and affiliates 15,144 7,641
Income taxes payable 8,252 4,055
Accrued payroll and vacation pay 3,567 1,735
Other 5,877 2,806
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 71,148 67,797
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 8,503 4,960
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 79,651 72,757
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Investments by and advances from Kennametal -- 92,643
Preferred Stock, $.01 par value; 25,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value; 75,000 shares authorized;
4,917 issued, 4,288 outstanding at June 30, 1998 49 --
Class B Common Stock, $.01 par value; 50,000 shares authorized;
20,237 issued and outstanding at June 30, 1998 202 --
Additional paid-in capital 182,822 --
Retained earnings 27,076 --
Treasury stock, at cost, 629 shares of Class A Common Stock at June 30, 1998 (14,197) --
Cumulative translation adjustment (17) 88
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 195,935 92,731
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 275,586 $ 165,488
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 27,076 $ 19,307 $ 15,063
Adjustments for noncash items:
Depreciation and amortization 5,185 1,768 1,458
Loss on sale of assets 112 -- --
Noncash transactions with Kennametal -- 6,266 5,660
Changes in certain assets and liabilities, net of effects from acquisitions:
Accounts receivable (7,799) (4,074) (12,252)
Inventories (10,609) (4,390) (14,914)
Accounts payable and accrued liabilities 16,971 1,377 1,278
Other (951) 2,383 (1,287)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) operating activities 29,985 22,637 (4,994)
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (12,286) (2,287) (2,053)
Notes receivable from Kennametal (1,169) -- --
Acquisitions, net of cash (57,341) (5,106) --
Other 179 -- 337
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (70,617) (7,393) (1,716)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds from initial public offering of Class A Common Stock 90,430 -- --
(Repayments to) borrowings under notes payable to banks (28,064) 27,987 --
Notes payable to Kennametal (15,805) -- --
Cash dividend paid to Kennametal -- (20,000) --
Purchase of treasury stock (14,197) -- --
Net cash advances by (repayments to) Kennametal -- (10,968) 590
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) financing activities 32,364 (2,981) 590
- ----------------------------------------------------------------------------------------------------------------------------------
Exchange rate effect on cash (105) 135 (44)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents (8,373) 12,398 (6,164)
Cash and equivalents, beginning 13,088 690 6,854
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, ending $ 4,715 $ 13,088 $ 690
==================================================================================================================================
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 15,831 $ 12,518 $ 10,891
Interest paid 49 368 --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A COMMON STOCK:
Balance at beginning of year $ -- $ -- $ --
Initial public offering of 4,897 shares of
Class A Common Stock, including surrender of
640 shares of Class B Common Stock by Kennametal 48 -- --
Sale and exchange of 20 shares of Class B
Common Stock for Class A Common Stock by Kennametal 1 -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year 49 -- --
- --------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK:
Balance at beginning of year -- -- --
Exchange of investment by and advances
from Kennametal for 20,897 shares of
Class B Common Stock 209 -- --
Surrender of 640 shares of Class B Common
Stock by Kennametal (6) -- --
Sale and exchange of 20 shares of Class B
Common Stock for Class A Common Stock by Kennametal (1) -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year 202 -- --
- --------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year -- -- --
Initial public offering of 4,897 shares of
Class A Common Stock, including surrender of
640 shares of Class B Common Stock by Kennametal 90,388 -- --
Exchange of investment by and advances from
Kennametal for 20,897 shares of
Class B Common Stock 92,434 -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year 182,822 -- --
- --------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year -- -- --
Net Income 27,076 -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year 27,076 -- --
- --------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year -- -- --
Purchase of treasury stock, 629 shares of
Class A Common Stock (14,197) -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year (14,197) -- --
- --------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance at beginning of year 88 (47) (3)
Current year translation adjustments (105) 135 (44)
- --------------------------------------------------------------------------------------------------------
Balance at end of year (17) 88 (47)
- --------------------------------------------------------------------------------------------------------
INVESTMENTS BY AND ADVANCES FROM KENNAMETAL:
Balance at beginning of year 92,643 98,038 76,725
Net income -- 19,307 15,063
Dividend -- (20,000) --
Net cash advances by (repayments to) Kennametal -- (10,968) 590
Other noncash transactions -- 6,266 5,660
Exchange of investment by and advances from
Kennametal for 20,897 shares of Class B Common
Stock (92,643) -- --
- --------------------------------------------------------------------------------------------------------
Balance at end of year -- 92,643 98,038
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity, June 30 $ 195,935 $ 92,731 $ 97,991
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
(NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
NOTE 1: FORMATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements of JLK Direct Distribution
Inc. (the "Company") include the operations of J&L America, Inc. ("J&L"), a
previously wholly-owned subsidiary of Kennametal Inc. ("Kennametal"), and Full
Service Supply ("Full Service Supply"), which previously had been operated as a
program of Kennametal. Prior to April 1, 1997, the Company had no separate legal
status or existence. Kennametal incorporated the Company as a Pennsylvania
corporation under the name "JLK Direct Distribution Inc." in April 1997.
In April 1997, the Company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission with respect
to an initial public offering ("IPO") of the Company's Class A Common Stock
("the Offering"). In anticipation of the IPO, Kennametal contributed to the
Company the stock of J&L, including the J&L United Kingdom operations, and the
assets and liabilities of 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 the IPO whereby 4,897,000 shares of
Class A Common Stock were issued at a price of $20.00 per share. The net
proceeds from the IPO totaled $90.4 million and represented approximately 20
percent of the Company's outstanding common stock. The net proceeds were used by
the Company to repay $20.0 million of short-term debt related to a dividend paid
to Kennametal and to repay $20.0 million to Kennametal for acquisitions in
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 on a one-to-one basis to Class A Common Stock. Subsequent to the IPO,
4,917,000 shares of Class A Common Stock were outstanding, and Kennametal held
20,237,000 shares of Class B Common Stock.
The Company is a global distributor of metalworking consumables and related
products to the metalworking industry utilizing mail-order catalogs, showrooms,
a direct field sales force and integrated industrial supply programs, which
constitutes a single business segment.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist in
evaluating the Company's financial statements.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
For periods prior to fiscal 1998, the accompanying consolidated financial
statements consist of the financial statements of the Company as described in
Note 1. These statements are presented as if the Company had existed as a
corporation separate from Kennametal and include the historical assets,
liabilities, sales and expenses directly related to the Company's operations
that were either specifically identifiable or allocable. Shareholders' equity
(which represents Kennametal's 100 percent interest prior to the IPO) comprises
both investments by and non-interest bearing advances from Kennametal. In
connection with the IPO which was consummated on July 2, 1997, such amounts were
included as part of the Company's permanent equity capitalization. All operating
expenses related to the Company have been appropriately reflected in the
Company's consolidated financial statements. All material transactions between
entities included in the consolidated financial statements have been eliminated.
For all periods presented, certain operating expenses reflected in the
consolidated financial statements include charges for certain services provided
by Kennametal. These charges are based on personnel, business volume or other
appropriate bases and generally include expenses related to warehousing,
information management and other administrative services. These charges are
estimates based on Kennametal management's best estimate of actual expenses. It
is management's opinion that the expenses charged to the Company are reasonable
and are representative of the expenses the Company would have incurred on a
stand-alone basis. The accompanying financial statements do not include
Kennametal's general corporate debt or an allocation of interest expense.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
18
<PAGE> 21
CASH EQUIVALENTS. Temporary cash investments having original maturities of three
months or less are considered cash equivalents. Cash equivalents consist
principally of investments in money market funds and certificates of deposit.
For periods prior to fiscal 1998, cash equivalents include the Company's
position in Kennametal's centralized cash management system (see Note 12).
NOTES RECEIVABLE FROM KENNAMETAL. For fiscal 1998, notes receivable from
Kennametal reflects the Company's position in Kennametal's centralized cash
management system (see Note 12).
INVENTORIES are carried at the lower of cost using the first-in, first-out
(FIFO) method or market.
PROPERTY, PLANT AND EQUIPMENT are carried at cost. Major improvements are
capitalized, while maintenance and repairs are generally expensed as incurred.
Retirements and disposals are removed from cost and accumulated depreciation
accounts, with the gain or loss reflected in net income. Depreciation for
financial reporting purposes is computed using the straight-line method over the
estimated useful lives of the assets ranging from three to 40 years.
ADVERTISING AND CATALOG COSTS. Advertising costs are expensed as incurred. The
costs of producing and distributing the Company's catalog are initially deferred
and included in other assets in the Company's balance sheet. These catalog costs
are generally amortized to expense in the year incurred.
INTANGIBLE ASSETS. Goodwill includes an allocation from Kennametal for the
excess of costs over the fair value of net assets acquired related to the
historical acquisition costs of the Company and includes the excess of cost over
net assets of acquired companies. Goodwill is being amortized on a straight-line
basis over periods ranging from 20 to 40 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. Other intangible assets
arising from acquisitions consist of employee retention and non-compete
agreements and are being amortized over the life of the agreements, which range
from three to five years.
COMMON STOCK. The holders of Class A Common Stock and Class B Common Stock
generally have identical rights except that holders of Class A Common Stock are
entitled to one vote per share, while holders of Class B Common Stock are
entitled to ten votes per share on all matters to be voted on by the Company's
shareholders.
EARNINGS PER SHARE. Basic earnings per share is computed using the weighted
average number of shares outstanding during the period, while diluted earnings
per share is calculated to reflect the potential dilution that occurs related to
issuance of common stock under stock option grants. The difference between basic
and diluted earnings per share relates solely to the effect of common stock
options. For purposes of determining the number of dilutive shares outstanding,
weighted average shares outstanding for basic earnings per share calculations
were increased by 139,283 in 1998 due to the dilutive effect of unexercised
stock options.
For periods prior to 1998, pro forma basic and diluted earnings per share was
computed using the pro forma weighted and diluted average number of shares
outstanding during the period. Pro forma weighted average and diluted common
shares outstanding are presented on a basis that gives pro forma effect to the
issuance of the Class B Common Stock. Average and diluted weighted shares
outstanding are the same for these periods as the effect of unexercised stock
options for fiscal 1997 is not considered material, and there were no
unexercised stock options outstanding for fiscal 1996.
REVENUE RECOGNITION. The Company recognizes revenue from product sales upon
transfer of title to the customer.
PRE-OPENING COSTS related to showrooms, distribution centers and new integrated
supply contracts are expensed as incurred.
INCOME TAXES. The provision for federal and state income taxes has been
calculated as if the Company were a stand-alone corporation filing separate tax
returns. Deferred income taxes are recognized based on the future income tax
effects (using enacted tax laws and rates) of differences in the carrying
amounts of assets and liabilities for financial reporting and tax purposes. A
valuation allowance is recognized if it is "more likely than not" that some or
all of a deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
international operations are translated into U.S. dollars using year-end
exchange rates, while sales and expenses are translated at average exchange
rates throughout the year. The resulting net translation adjustments are
recorded as a separate component of shareholders' equity.
NEW ACCOUNTING STANDARDS. The Company adopted Statement of Financial Accounting
Statements (SFAS) No. 128, "Earnings per Share," issued in February 1997. This
statement requires the disclosure of basic and diluted earnings per share and
revises the method required to calculate these amounts. The adoption of this
standard did not have a material impact on previously reported earnings per
share amounts. The Company
19
<PAGE> 22
also adopted SFAS No. 129, "Disclosure of Information about Capital Structure,"
issued in February 1997. This statement requires specific disclosure
requirements related to a company's capital structure. The adoption of this
standard did not have a material impact on the Company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," were
issued by the Financial Accounting Standards Board requiring implementation for
periods beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company will adopt SFAS No. 130 in fiscal 1999 and does not anticipate that
the statement will have a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company is in the process of evaluating
the effect of applying this statement.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 will
revise certain footnote disclosure requirements related to pension and other
retiree benefits, but will not have a financial impact on the Company.
Implementation is required for fiscal 1999.
RECLASSIFICATIONS. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the current year presentation.
NOTE 3: ACQUISITIONS
During fiscal 1998 and 1997, the Company acquired the following distributors of
metalcutting tools and industrial supplies:
Acquisition
Date Acquired Acquisition Headquarters
- ---------------------------------------------------------------------------
FISCAL 1998
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 Salt Lake City, Utah
Supply Company
May 1998 Strong Tool Co. Cleveland, Ohio
- ---------------------------------------------------------------------------
FISCAL 1997
April 1997 Strelinger Company Troy, Mich.
May 1997 Mill & Abrasive Supply, Inc. Roseville, Mich.
- ---------------------------------------------------------------------------
All acquisitions were accounted for under the purchase method of accounting. The
excess of the purchase price over the fair values of the net assets acquired for
the acquisitions was approximately $39.9 million and $3.6 million for the fiscal
years ended June 30, 1998 and 1997, respectively, which has been recorded as
goodwill. The net purchase price of the acquisitions was allocated as follows:
1998 1997
(in thousands) Acquisitions Acquisitions
- -------------------------------------------------------------------
Current assets $38,360 $12,660
Property, plant & equipment 3,431 1,687
Other long-term assets 590 250
Goodwill 39,850 3,629
Current liabilities (24,890) (13,120)
- -------------------------------------------------------------------
Purchase price, net of cash $57,341 $ 5,106
===================================================================
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 $137.0 million and $36.0 million for
the companies acquired during fiscal 1998 and 1997, respectively. On a pro forma
basis, as if the acquisitions had taken place at the beginning of fiscal 1998
and 1997, consolidated net sales would have been $531.5 million and $479.2
million, respectively. The pro forma impact on net income and diluted earnings
per share would not be materially different from the amounts reported in fiscal
1998 and 1997.
In connection with the acquisitions, the Company also entered into employee
retention and non-compete agreements that amounted to approximately $6.6 million
and $4.1 million for the acquisitions consummated in 1998 and 1997,
respectively, which have been accounted for as noncash transactions. The
agreements will be amortized over their respective life which ranges between
three and five years. The liability for these agreements at June 30, 1998 and
1997 recorded in other current liabilities was $2.8 million and $1.0 million,
respectively, and in other liabilities was $6.5 million and $3.0 million,
respectively.
NOTE 4: INTANGIBLE ASSETS
Intangible assets consisted of the following:
(in thousands) 1998 1997
- -------------------------------------------------------------
Goodwill $68,766 $28,800
Other intangible assets 10,555 4,075
- -------------------------------------------------------------
79,321 32,875
Accumulated amortization (8,231) (4,948)
- -------------------------------------------------------------
Intangible assets-net $71,090 $27,927
=============================================================
20
<PAGE> 23
NOTE 5: NOTES PAYABLE TO BANKS
Notes payable to banks represent short-term borrowings under credit lines
obtained with United States and international commercial banks. These credit
lines totaled approximately $30.0 million at June 30, 1998, of which $18.1
million was unused. The weighted average interest rate for borrowings was 8.25
percent and 6.30 percent at June 30, 1998 and 1997, respectively.
On April 3, 1998, the Company entered into an agreement whereby the Company,
through J&L, is a co-guarantor with Kennametal on a $22.0 million line of credit
with a bank. This line of credit supports Kennametal's and JLK's operations in
the United Kingdom. Interest payable under the line of credit is based on one of
the following rates, depending upon the manner in which the credit facility is
used: the Bank's base rate, as defined in the credit facility, plus 1%, for
overdrafts; or LIBOR plus 0.9%, for short-term borrowings. The effective rate
was 8.50 percent at June 30, 1998. The line of credit is due in full on February
17, 1999. At June 30, 1998, total outstanding borrowings under this facility
were $11.9 million, of which $1.8 million was borrowed directly by JLK, and is
included in Notes Payable to Banks.
On January 8, 1998, the Company, through J&L, obtained a $5.6 million line of
credit with a bank to support its German operations. This line of credit is
guaranteed by Kennametal, is due 30 days subsequent to any termination of this
guarantee by Kennametal, and bears interest at 6.25 percent. At June 30, 1998,
no amounts were outstanding under this credit facility.
The Company, through J&L, has available a credit facility with a bank
aggregating $2.0 million, with interest payable at the prevailing prime interest
rate. The credit facility may be terminated at the option of the bank or the
Company. At June 30, 1998, no amounts were outstanding under the credit
facility.
On April 25, 1997, the Company, through J&L, obtained a $25.0 million line of
credit with a bank and borrowed $20.0 million under the line of credit to fund a
dividend to Kennametal. Interest payable under the line of credit was based on
LIBOR plus 0.25% and was required to be repaid in full within six months.
Kennametal had guaranteed repayment of the line of credit in the event of
default by the Company. The line of credit was repaid and canceled in full
during July 1997.
NOTE 6: LEASES
The majority of the operations of the Company are conducted on leased premises,
some of which are leased from related parties. The leases (most of which provide
for the payment of real estate taxes, insurance and other operating costs) are
for varying periods, the longest extending to the year 2013. At June 30, 1998,
approximate minimum annual rentals on such leases are as follows:
Total (including
Related Party Related Party
(in thousands) Commitments) Commitments
- --------------------------------------------------------------------
1999 $6,012 $1,287
2000 4,919 1,191
2001 3,232 610
2002 2,180 106
2003 1,748 106
2004 and thereafter 7,263 424
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for the fiscal years ended 1998, 1997
and 1996 was approximately $5.6 million, $2.8 million and $2.3 million,
respectively, including approximately $1.8 million, $1.2 million and $1.1
million, respectively, paid to related parties. In the opinion of the Company's
management, these leases with related parties are on terms that approximate fair
market value.
NOTE 7: INCOME TAXES
Income (loss) before income taxes and the provision for income taxes consisted
of the following:
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------
Income (loss) before
income taxes:
United States $45,786 $32,716 $25,423
International (1,410) (891) (541)
- ------------------------------------------------------------------------
Total income before
income taxes $44,376 $31,825 $24,882
========================================================================
Current income taxes:
Federal $17,600 $11,410 $ 9,454
State 2,100 1,709 1,421
- ------------------------------------------------------------------------
Total 19,700 13,119 10,875
Deferred income taxes (2,400) (601) (1,056)
- ------------------------------------------------------------------------
Provision for income taxes $17,300 $12,518 $ 9,819
========================================================================
Effective tax rate 39.0% 39.3% 39.5%
========================================================================
21
<PAGE> 24
The reconciliation of income taxes computed using the statutory U.S. income tax
rate and the provision for income taxes was as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Income taxes at
U.S. statutory rate $15,532 $11,139 $8,709
State income taxes, net of
federal tax benefits 1,445 1,064 835
Nondeductible goodwill 409 237 223
Foreign earnings rate differential (240) -- --
Other 154 78 52
- --------------------------------------------------------------------------------
Provision for income taxes $17,300 $12,518 $9,819
================================================================================
Deferred tax assets and liabilities consisted of the following:
(in thousands) 1998 1997
- ------------------------------------------------------------------
Deferred tax assets (liabilities):
Inventory valuation and reserves $4,384 $2,891
Accrued vacation and
workers compensation 985 275
Postretirement benefits 255 160
Pension benefits 453 362
Bad debts 299 73
Deductible goodwill 340 --
Net operating loss carryforwards 862 --
Other assets 147 21
Property, plant and equipment (358) (264)
- ------------------------------------------------------------------
Net deferred tax asset $7,367 $3,518
==================================================================
Included in deferred tax assets at June 30, 1998 are unrealized tax benefits
totaling $0.9 million related to net operating loss carryforwards in Germany,
which can be carried forward indefinitely.
NOTE 8: PENSION BENEFITS
The Company participates in Kennametal's Retirement Income Plan (the "Plan")
which covers substantially all of the Company's employees. The benefits provided
by the Plan are measured by length of service, compensation and other factors
and are funded by a trust established under the Plan. The Kennametal Plan
currently is overfunded and complies with the funding requirements of ERISA.
Plan assets consist principally of common stocks, corporate bonds and U.S.
government securities.
The following table provides the details of the components of pension expense
for the Company. It is not practicable to determine the funded status of the
portion of the Plan that relates to the Company. On an overall basis, the funded
assets of the Plan were in excess of the projected benefit obligation as of June
30, 1998 and 1997.
The components of net pension cost for the Company's portion of the Plan were as
follows:
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $623 $ 601 $515
Interest cost 240 332 275
Return on plan assets (901) (1,110) (422)
Net amortization and deferral 252 471 (57)
- ----------------------------------------------------------------------------
Net pension cost $214 $ 294 $311
============================================================================
The Company also participates in Kennametal's 401(k) Thrift Plan for employees.
The charge to operations incurred by the Company for contributions totaled $0.7
million, $0.5 million and $0.4 million in fiscal 1998, 1997 and 1996,
respectively.
NOTE 9: POSTRETIREMENT BENEFITS
The Company participates in Kennametal's sponsored plan whereby certain health
care and life insurance benefits are provided for retired employees.
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Company. These benefits currently
are unfunded.
The components of other postretirement benefit costs for the Company's plan were
as follows:
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $55 $74 $66
Interest cost 26 28 19
Net amortization and deferral (3) 1 --
- ----------------------------------------------------------------------------
Net postretirement cost $78 $103 $85
============================================================================
NOTE 10: FINANCIAL INSTRUMENTS
FAIR VALUE. The Company had $4.7 million and $13.1 million in cash and
equivalents at June 30, 1998 and June 30, 1997, respectively, which approximates
fair value because of the short maturity of these investments.
The estimated fair value of notes payable to banks approximated $1.9 million at
June 30, 1998. Fair value was determined using discounted cash flow analysis and
the Company's incremental borrowing rates for similar types of arrangements.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. With respect to trade receivables,
concentrations of credit risk are somewhat reduced because the Company serves
numerous customers in many industries and geographic areas. As of June 30, 1998
and 1997, receivables with the Company's five largest accounts represented 20
percent and 22 percent, respectively, of total accounts receivable (see Note
11).
22
<PAGE> 25
NOTE 11: SIGNIFICANT CUSTOMERS
The Company operates predominantly in one industry segment, that being
distribution of metalworking consumables and related products to the
metalworking industry utilizing mail-order catalogs, showrooms, a direct field
sales force and integrated industrial supply programs. During fiscal 1998, 1997
and 1996, sales to one customer amounted to 5 percent, 17 percent and 21 percent
of total sales, respectively. No other customer accounted for more than 5
percent of the Company's sales in fiscal 1998. Sales outside the United States
were approximately $15.1 million, $9.4 million and $5.1 million during fiscal
1998, 1997 and 1996, respectively. These sales principally were to customers in
the United Kingdom and Germany.
For the fiscal year ended June 30, 1997, the Company had $316.2 million in net
sales, of which $54.7 million of net sales were related to a Full Service Supply
program contract with General Electric Corporation ("GE") for services provided
at certain metalworking manufacturing facilities within GE's Aircraft Engine
Group (the "GE Contract"). The operating margin related to the GE Contract was
lower than the Company's other Full Service Supply program contracts. Many of
the products provided by the Company to GE under the GE Contract fell outside of
the Company's core focus on metalworking consumables and related products.
In April 1997, the Company conducted extensive negotiations with GE relating to
the continuation of the GE Contract. After careful evaluation, the Company
concluded that it was not in its best interest to accede to certain price
concessions requested by GE. As a result, GE served notice to the Company that
the GE Contract would not be renewed for a significant portion of the
manufacturing facilities served by the Company.
During fiscal 1998, the Company completed its disengagement from the GE
manufacturing sites that were discontinued. Sales to these GE sites totaled
$22.9 million in fiscal 1998, or 42 percent of the fiscal 1997 level. After
fiscal 1998, estimated sales to GE for those manufacturing sites that will
continue to be served by the Full Service Supply programs are expected to amount
to approximately 15 percent to 20 percent of the total amount received in fiscal
1998 under the GE Contract.
The Company has redeployed its resources related to the GE Contract to take
advantage of requests by certain current Full Service Supply program customers
to ramp-up their existing programs at an increased rate as well as to offer Full
Service Supply programs to new customers. Sales to all Full Service Supply
customers, including sales to the disengaged GE sites, decreased 7.4 percent in
fiscal 1998, as compared to sales to all Full Service Supply customers in fiscal
1997. As a result of these redeployment efforts, sales to Full Service Supply
customers in fiscal 1998, excluding the effect of the disengaged GE sites,
increased by 30.3 percent over the comparable sales in fiscal 1997.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its subsidiaries
and sales to these entities were as follows:
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Purchases from Kennametal
and subsidiaries $40,700 $30,918 $18,705
Sales to Kennametal
and subsidiaries 10,583 12,361 11,443
- ---------------------------------------------------------------------------
The Company and Kennametal have entered into a number of agreements, which
became effective upon completion of the IPO, for the purpose of defining certain
relationships between the two companies. As a result of Kennametal's ownership
interest in the Company, the terms of such agreements were not, and the terms of
any future amendments to those agreements may not be, the result of arm's-length
negotiations. Management believes that the fees charged by Kennametal are
reasonable and such fees are representative of the expenses the Company would
have incurred on a stand-alone basis. The agreements primarily have initial
terms of ten years. Descriptions of these agreements, and the material terms of
which, are set forth below.
ADMINISTRATIVE SERVICES AGREEMENT. The Company and Kennametal entered into an
intercompany administrative services agreement with respect to services to be
provided by Kennametal to the Company. The administrative services agreement
provides that such services will be provided in exchange for fees which,
generally, (i) in the case of services purchased by Kennametal from third
parties for the Company, are based upon the incremental cost charged by such
third parties to Kennametal for such services provided to the Company and (ii)
in the case of services directly provided by Kennametal, are based on the
estimated costs, including a reasonable allocation of direct and indirect
overhead costs, incurred by Kennametal for the services it provides directly to
the Company. The services initially provided by Kennametal to the Company
include, among other things, certain treasury, general accounting and
administrative services including, tax, risk management, human resources, legal,
internal audit, marketing, executive time and space, and information system
services. The administrative services agreement also provides that Kennametal
will arrange and administer all existing insurance arrangements and may continue
coverage of the Company under Kennametal's insurance policies and will allow
eligible employees of the Company to participate in all of Kennametal's benefit
plans. Under this agreement, fees charged to the Company by Kennametal for
services provided during fiscal 1998 were $6.3 million.
23
<PAGE> 26
LEASE AGREEMENT. The Company and Kennametal entered into a lease agreement
pursuant to which Kennametal subleases to the Company space within buildings
located on Kennametal's premises. The Company paid $0.1 million in lease
payments to Kennametal during fiscal 1998 under this agreement.
SHARED FACILITIES AGREEMENT. The Company and Kennametal entered into shared
facilities agreements pursuant to which each company subleases to the other
company the facilities that are leased by either of the companies and shared
with the other company. The shared facilities agreements provide that the
relevant sublessor leases space to the sublessee at a rental rate equal to a pro
rata share (based on square feet occupied) of all costs and expenses
(principally fixed rent) under the relevant lease. The Company's management
believes that the rental rates payable by the Company are commensurate with
market rates. Under this agreement, fees of $0.5 million were charged to the
Company by Kennametal during fiscal 1998 for the portion of the costs and
expenses attributable to the Company under the relevant leases. Also under this
agreement, fees of $0.2 million were charged by the Company to Kennametal during
fiscal 1998 for the portion of the costs and expenses attributable to Kennametal
under the relevant leases.
PRODUCT SUPPLY AGREEMENT. The Company and Kennametal entered into a product
supply agreement pursuant to which Kennametal supplies and the Company purchases
from Kennametal all of the Company's requirements for metalworking consumables
and related products direct-marketed by the Company, and Kennametal further
agreed to supply all metalworking consumables and related products requested
pursuant to Full Service Supply programs, except as otherwise agreed from time
to time between the Company and Kennametal. The Company is entitled to purchase
products for its direct-marketing business at prices discounted from
Kennametal's published price for each such product depending upon the volume of
each such product purchased by the Company. Under this agreement, products
purchased for resale from Kennametal by the Company during fiscal 1998 were
$40.7 million.
TAX-SHARING AGREEMENT. Pursuant to the tax-sharing agreement, the Company makes
payments to Kennametal determined as though the Company were to file separate
federal, state and local income tax returns.
TRADEMARK LICENSE AGREEMENT. The Company and Kennametal entered into a trademark
license agreement which provides, among other things, for the grant to the
Company by Kennametal of a non-exclusive license to use the trademarks service
marks, trade names and other intellectual property of Kennametal in connection
with the Company's business. The Company also has granted to Kennametal a
non-exclusive license to use the Company's trademarks service marks and trade
names on terms similar to those granted by Kennametal to the Company.
INDEMNIFICATION AGREEMENT. Under the indemnification agreement, subject to
limited exceptions, the Company is required to indemnify Kennametal and its
directors, officers, employees, agents and representatives for liabilities under
federal or state securities laws as a result of the Offering, including
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the Registration Statement. The indemnification agreement also
provides that each party thereto (the "Indemnifying Party") will indemnify the
other party thereto and its directors, officers, employees, agents and
representatives (the "Indemnified Party") for liabilities that may be incurred
by the Indemnified Party relating to, resulting from or arising out of: (i) the
businesses and operations conducted or formerly conducted, or assets owned or
formerly owned, by the Indemnifying Party and its subsidiaries (except, in the
case where Kennametal is the Indemnifying Party, such businesses, operations and
assets of the Company and its subsidiaries); or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering, except to the extent caused by the Indemnified Party. The
indemnification agreement also provides that the Company will indemnify
Kennametal for any liabilities incurred under guarantees of leases.
NON-COMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT. Pursuant to a
non-competition and corporate opportunities allocation agreement (the "Corporate
Opportunities Agreement") entered into between Kennametal and the Company: (i)
Kennametal agrees for as long as the other intercompany agreements remain in
effect (whose current term is 10 years) (A) not to compete with the Company in
the business of direct marketing of a broad range of metalworking consumables
and related products through catalogs, monthly promotional flyers, additional
mailings and advertisements, telemarketing efforts, direct-sales efforts and
showrooms targeted at small- and medium-sized metalworking shops, as well as the
supply of consumable tooling and related metalworking products at designated
manufacturing plants of large industrial customers through integrated supply
programs, (the "Base Business") except where the Company has been offered by
Kennametal or its affiliates or a third party, the right to acquire a business
that falls under the Base Business at fair market value, and the Company's Board
of
24
<PAGE> 27
Directors has determined, for whatever reason, that the Company shall not
acquire such business, and (B) not to sell, offer to sell, distribute or
otherwise make available Kennametal manufactured and branded products to anyone
who intends to direct market such products and therefore competes with the
Company's direct-marketing program except, with respect to those contracts,
arrangements or relationships in existence on the date of the Corporate
Opportunities Agreement or with the prior written consent of the Company; and
(ii) the Company has agreed for as long as the other intercompany agreements
remain in effect not to sell, offer to sell, distribute or otherwise make
available any products that compete directly or indirectly with Kennametal
without the prior written consent of Kennametal, except in connection with the
provision of integrated industrial supply programs as may be required
specifically by customers thereof.
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT. The Company and
Kennametal entered into an Intercompany Debt/Investment and Cash Management
Agreement (the "Cash Management Agreement") under which the Company will
continue to participate in Kennametal's centralized cash management system. The
Cash Management Agreement provides for a daily transfer from the Company's cash
accounts to Kennametal's centralized cash accounts and daily funding of the
disbursements of the Company from such Kennametal cash account. The Company
receives interest on net cash flows to Kennametal's centralized cash accounts
and is charged interest on net borrowings from the Kennametal centralized cash
accounts at a rate equal to the interest rate available to Kennametal from
outside sources for short-term borrowings or investments, depending upon the
overall position of the centralized cash accounts. The Company pays for this
service pursuant to the Administrative Services Agreement and reimburses
Kennametal for an allocable portion of Kennametal's facility and/or commitment
fees under its credit lines. Total net interest income earned by the Company
under the Agreement amounted to $2.9 million in fiscal 1998.
WAREHOUSING AGREEMENTS. The Company and Kennametal entered into separate
warehousing agreements with respect to (i) Kennametal distribution centers and
warehouses that store products for the Company and (ii) Company distribution
centers and warehouses that store products for Kennametal. The terms of each
warehousing agreement provide for the warehouser to store the warehousee's
products in the warehouses segregated and separate from the warehouser's
products and upon request by the warehousee to ship its products from these
warehouses to the warehousee's customers. The warehousee pays to the warehouser
a charge for each of the products picked, packed and shipped based upon an
allocation of costs (including overhead) incurred by the warehouser at these
warehouses. Under this agreement, fees charged to the Company by Kennametal for
its allocation of costs during fiscal 1998 were $5.4 million.
CORPORATE AGREEMENT. The Company and Kennametal entered into a corporate
agreement under which the Company grants to Kennametal a continuing option,
transferable, in whole or in part, to any of its affiliates, to purchase, under
certain circumstances, additional shares of Class B Common Stock or Class A
Common Stock (the "Stock Option"). The Stock Option may be exercised by
Kennametal simultaneously with the issuance of any equity security of the
Company or immediately prior to a Tax-Free Spin-Off to the extent necessary to
maintain its then existing percentage of the total voting power and economic
value of the Company at 80 percent of all outstanding Common Stock or, in
connection with a Tax-Free Spin-Off, in order to acquire stock ownership
necessary to effect a Tax-Free Spin-Off. The purchase price of the shares of
Common Stock purchased upon any exercise of the Stock Option, subject to certain
exceptions, will be based on the market price of the Class A Common Stock.
Kennametal will continue to provide services to the Company in the future in
accordance with the terms of the intercompany agreements. The amounts charged
pursuant to these intercompany agreements reflect the actual costs of providing
these services. The Company periodically remits cash to Kennametal in payment of
such operating expense allocations.
For the fiscal years ending June 30, 1997 and 1996, the Company received from
Kennametal certain warehouse, management information systems, financial and
administrative services. All amounts incurred by Kennametal on behalf of the
Company are reflected in operating expenses in the accompanying statements of
income totaling $9.3 million in fiscal 1997 and $7.3 million in fiscal 1996.
25
<PAGE> 28
NOTE 13: STOCK OPTION AND INCENTIVE PLAN
Effective June 27, 1997, the Company adopted a stock option and incentive plan
(the "Plan") under which directors, officers and employees of the Company or
Kennametal may be granted options to purchase shares of Class A Common Stock.
The Plan authorizes the issuance of up to 2,000,000 shares of Class A Common
Stock. Options are granted at fair market value at the date of grant and are
exercisable under specified conditions for up to 10 years from the date of
grant. Under provisions of the Plan, participants may deliver to the Company
stock in payment of the option price and receive credit for the fair market
value of the shares of Class A Common Stock delivered on the date of delivery.
Under the Plan, shares also may be awarded to eligible employees without
payment. The Plan specifies that such shares are to be awarded in the name of
the employee, who will then have all the rights of a shareholder, subject to
certain restrictions or forfeitures.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," effective with the 1997 consolidated financial
statements but elected to continue to measure compensation expense in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense for stock options has been
recognized in the accompanying consolidated financial statements.
If compensation cost had been determined based on the value of options granted,
consistent with the methodology in SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts) 1998 1997
- -------------------------------------------------------------------------------
Net income:
As reported $27,076 $19,307
Pro forma 26,890 17,271
Basic earnings per share:
As reported $ 1.08 --
Pro forma 1.07 --
Diluted earnings per share:
As reported $ 1.07 --
Pro forma 1.06 --
Pro forma basic and diluted net income per share:
As reported -- $ 0.92
Pro forma -- 0.82
- -------------------------------------------------------------------------------
The fair values of the options granted were estimated on the date of their grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
1998 1997
- -------------------------------------------------------------------------------
Risk-free interest rate 5.85% 6.49%
Expected life (years) 5 5
Expected volatility 35.00% 30.00%
Expected dividend yield -- --
- -------------------------------------------------------------------------------
26
<PAGE> 29
A summary of stock option activity for 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 513,500 $20.00 -- --
Granted 40,000 32.42 513,500 $20.00
Exercised -- -- -- --
Lapsed and forfeited -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 553,500 $20.90 513,500 $20.00
- ----------------------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 513,500 $20.00 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $13.19 $ 6.50
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- -----------------------------------
Range of Weighted Average Weighted Weighted
Exercise Remaining Contractual Average Average
Prices Options Life (years) Exercise Price Options Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.00 513,500 8.99 $20.00 513,500 $20.00
26.94 20,000 9.07 26.94 -- --
37.91 20,000 9.67 37.91 -- --
- ----------------------------------------------------------------------------------------------------------------------------
553,500 9.02 $20.90 513,500 $20.00
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information set forth under the captions
"Election of Directors" and "Other Matters" in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after June 30, 1998 ("1998 Proxy Statement").
The following sets forth information with respect to the executive officers of
the Company.
<TABLE>
<CAPTION>
<S> <C>
Name, Age and Position Experience During Past Five Years
- ---------------------- ---------------------------------
Richard J. Orwig, 57 Named President and Chief Executive Officer
President and Chief Executive Officer of JLK Direct Distribution Inc. in September
1998. Elected a Vice President of Kennametal
Inc. in 1987 and was Chief Financial and
Administrative Officer of Kennametal Inc.
from 1994 to 1998. Director of Administration
of Kennametal Inc. from 1991 to 1994.
Roland E. Lazzaro, 39 Served as Vice President-Operations since
Vice President-Operations 1997. Director, Branch Development of J&L
America, Inc. from 1994 to 1997.
Michael J. Mussog, 34 Served as Vice President and Chief Financial
Vice President and Chief Financial and Accounting Officer since 1997. Manager,
and Accounting Officer Strategic Sales and Marketing Planning of
Kennametal Inc. from 1996 to 1997. Chief Financial
Officer of J&L America, Inc. from 1995 to 1996.
Manager, External Reporting of Kennametal Inc.
from 1993 to 1995.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information set forth under the caption
"Compensation of Executive Officers" and certain information regarding
directors' fees under the caption "Board of Directors and Board Committees" in
the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information set forth under the caption
"Ownership of Capital Stock by Directors, Nominees and Executive Officers" with
respect to the directors' and officers' shareholdings and under the caption
"Principal Holders of Voting Securities" with respect to other beneficial owners
in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is certain information set forth in the notes
to the table under the caption "Election of Directors" and the information set
forth in the section entitled "Certain Relationships and Related Transactions"
in the 1998 Proxy Statement.
28
<PAGE> 31
PART IV
ITEM 14. EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements
Financial statements filed as a part of this report are
listed on the "Index to Consolidated Financial Statements"
herein.
2. Financial Statement Schedules
The financial statement schedule shown below should be read
in conjunction with the financial statements contained in
this Form 10-K. Other schedules are omitted because they
are not applicable or the required information is shown in
the financial statements or notes thereto.
Report of Independent Public Accountants
Schedule II -- Valuation and Qualifying Accounts for the
Three Years Ended June 30, 1998
3. Exhibits
(3) ARTICLES OF INCORPORATION AND BY-LAWS
(3.1) Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.a of Amendment No. 1 to
the Company's Registration Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997).
(3.2) By-laws (incorporated by reference to Exhibit 3.b of
Amendment No. 1 to the Company's Registration Statement on Form S-1
(No. 333-25989) filed with the Commission on June 4, 1997).
(10) MATERIAL CONTRACTS
(10.1) Administrative Services Agreement (incorporated by
reference to Exhibit 10.a of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.2) Corporate Agreement (incorporated by reference to
Exhibit 10.b of Amendment No. 1 to the Company's Registration Statement
on Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.3) Indemnification Agreement (incorporated by reference
to Exhibit 10.c of Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed with the Commission on June
4, 1997).
(10.4) Intercompany Debt/Investment and Cash Management
Agreement (incorporated by reference to Exhibit 10.d of Amendment No. 1
to the Company's Registration Statement on Form S-1 (No. 333-25989)
filed with the Commission on June 4, 1997).
(10.5) Noncompetition and Corporate Opportunities
Allocation Agreement (incorporated by reference to Exhibit 10.e of
Amendment No. 1 to the Company's Registration Statement on Form S-1
(No. 333-25989) filed with the Commission on June 4, 1997).
(10.6) Shared Facilities Agreement (incorporated by
reference to Exhibit 10.f of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.7) Tax Sharing Agreement (incorporated by reference to
Exhibit 10.g of Amendment No. 1 to the Company's Registration Statement
on Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.8) Trademark License Agreement (incorporated by
reference to Exhibit 10.h of Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-25989) filed with the
Commission on June 4, 1997).
(10.9) Warehousing Agreements (incorporated by reference to
Exhibit 10.i of Amendment No. 1 to the Company's Registration Statement
on Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.10) Lease Agreement (incorporated by reference to
Exhibit 10.j of Amendment No. 1 to the Company's Registration Statement
on Form S-1 (No. 333-25989) filed with the Commission on June 4, 1997).
(10.11) Product Supply Agreement (incorporated by reference
to Exhibit 10.k of Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-25989) filed with the Commission on June
4, 1997).
(10.12) 1997 JLK Direct Distribution Inc. Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1 of the
Company's December 31, 1997 Form 10-Q).
29
<PAGE> 32
(10.13) Kennametal Inc. Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.m of Amendment No. 1 to
the Company's Registration Statement on Form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997).
(10.14) Kennametal Inc. Employment Agreement with Michael
W. Ruprich (incorporated by reference to Exhibit 10.n of Amendment No.
1 to the Company's Registration Statement on Form S-1 (No. 333-25989)
filed with the Commission on June 4, 1997).
(10.15) JLK Direct Distribution Inc. Management Bonus Plan
(incorporated by reference to Exhibit 10.s of Amendment No. 2 to the
Company's Registration Statement on Form S-1 (No. 333-25989) filed with
the Commission on June 24, 1997).
(10.16) JLK Direct Distribution Inc. Employment Agreement
with Michael W. Ruprich filed herewith.
(10.17) JLK Direct Distribution Inc. Employment Agreement
with Kenneth M. McHenry filed herewith.
(10.18) JLK Direct Distribution Inc. Employment Agreement
with Roland E. Lazzaro filed herewith.
(10.19) JLK Direct Distribution Inc. Employment Agreement
with Michael J. Mussog filed herewith.
(21) SUBSIDIARIES OF THE REGISTRANT FILED HEREWITH.
(27) FINANCIAL DATA SCHEDULE FILED HEREWITH.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
(SIGNATURES)
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
By /s/ MICHAEL J. MUSSOG
---------------------
Michael J. Mussog
Vice President and Chief Financial
and Accounting Officer
Date: September 23, 1998
30
<PAGE> 33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ WILLIAM R. NEWLIN
- ---------------------
William R. Newlin Chairman of the Board September 23, 1998
/s/ RICHARD J. ORWIG
- ---------------------
Richard J. Orwig President, Chief Executive Officer September 23, 1998
and Director
/s/ MICHAEL J. MUSSOG
- ---------------------
Michael J. Mussog Vice President, Chief Financial September 23, 1998
and Accounting Officer
/s/ RICHARD C. ALBERDING
- ------------------------
Richard C. Alberding Director September 23, 1998
/s/ JEFFERY M. BOETTICHER
- -------------------------
Jeffery M. Boetticher Director September 23, 1998
/s/ IRWIN L. ELSON
- ---------------------
Irwin L. Elson Director September 23, 1998
/s/ H. PATRICK MAHANES
- ----------------------
H. Patrick Mahanes Director September 23, 1998
/s/ ROBERT L. MCGEEHAN
- ----------------------
Robert L. McGeehan Director September 23, 1998
/s/ ALOYSIUS T. MCLAUGHLIN, JR.
- -------------------------------
Aloysius T. McLaughlin, Jr. Director September 23, 1998
</TABLE>
31
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of JLK Direct Distribution Inc. and
subsidiaries included in this registration statement, and have issued our report
thereon dated July 21, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in Item 14-(a)2 of this Form 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1998
<TABLE>
<CAPTION>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS
ENDED JUNE 30, 1998
Balance at Charged to Deductions Balance at
Beginning Costs and Other from End of
Description of Year Expenses Recoveries Adjustments (a) Reserves (b) Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $285,950 $515,002 $26,176 $499,538 $(499,250) $827,416
1997
Allowance for doubtful accounts $218,487 $407,091 -- -- $(339,628) $285,950
1996
Allowance for doubtful accounts $151,842 $ 66,645 -- -- -- $218,487
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents reserves acquired through business combinations.
(b) Represents uncollected accounts charged against the allowance.
32
<PAGE> 35
EXHIBIT INDEX
Exhibit
No. Reference
- ------- -----------------------------------
3.1 Amended and Restated Articles of Incorporated herein by reference to
Incorporation Exhibit 3.a. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
3.2 By-laws Incorporated herein by reference to
Exhibit 3.b. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.1 Administrative Services Agreement Incorporated herein by reference to
Exhibit 10.a. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.2 Corporate Agreement Incorporated herein by reference to
Exhibit 10.b. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.3 Indemnification Agreement Incorporated herein by reference to
Exhibit 10.c. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.4 Intercompany Debt/Investment and Incorporated herein by reference to
Cash Management Agreement Exhibit 10.d. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.5 Noncompetition and Corporate Incorporated herein by reference to
Opportunities Allocation Agreement Exhibit 10.e. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
<PAGE> 36
Exhibit
No. Reference
- ------- ------------------------------------
10.6 Shared Facilities Agreement Incorporated herein by reference to
Exhibit 10.f. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.7 Tax Sharing Agreement Incorporated herein by reference to
Exhibit 10.g. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.8 Trademark License Agreement Incorporated herein by reference to
Exhibit 10.h. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.9 Warehousing Agreements Incorporated herein by reference to
Exhibit 10.i. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.10 Lease Agreement Incorporated herein by reference to
Exhibit 10.j. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.11 Product Supply Agreement Incorporated herein by reference to
Exhibit 10.k. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.12 1997 JLK Direct Distribution Inc. Incorporated herein by reference to
Stock Option and Incentive Plan Exhibit 10.1 of the Company's
December 31, 1997 Form 10-Q.
10.13 Kennametal Inc. Supplemental Incorporated herein by reference to
Executive Retirement Plan Exhibit 10.m. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
<PAGE> 37
Exhibit
No. Reference
- ------- ------------------------------------
10.14 Kennametal Inc. Employment Incorporated herein by reference to
Agreement with Michael Ruprich Exhibit 10.n. of Amendment No. 1 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 4, 1997.
10.15 JLK Direct Distribution Inc. Incorporated herein by reference to
Management Bonus Plan Exhibit 10.s. of Amendment No. 2 to
the Company's Registration Statement
of form S-1 (No. 333-25989) filed
with the Commission on June 24,
1997.
10.16 JLK Direct Distribution Inc. Filed herewith.
Employment Agreement with
Michael W. Ruprich
10.17 JLK Direct Distribution Inc. Filed herewith.
Employment Agreement with
Kenneth M. McHenry
10.18 JLK Direct Distribution Inc. Filed herewith.
Employment Agreement with
Roland E. Lazzaro
10.19 JLK Direct Distribution Inc. Filed herewith.
Employment Agreement with
Michael J. Mussog
21 Subsidiaries of the Registrant Filed herewith.
27 Financial Data Schedule Filed herewith.
<PAGE> 1
Exhibit 10.16
OFFICER'S EMPLOYMENT AGREEMENT
Amended and Restated
THIS AGREEMENT, is made and entered into this 1st day of July, 1997, by
and between JLK DIRECT DISTRIBUTION INC., a corporation organized under the laws
of the Commonwealth of Pennsylvania, for and on behalf of itself and on behalf
of its subsidiary companies (hereinafter referred to as "JLK"), and MICHAEL W.
RUPRICH, an individual (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee acknowledges that by reason of employment by JLK, it
is anticipated that Employee will work with, add to, create, have access to and
be entrusted with trade secrets and confidential information belonging to JLK
which are of a technical nature or business nature or pertain to future
developments, the disclosure of which trade secrets or confidential information
would be highly detrimental to the interests of JLK; and
WHEREAS, in order to have the benefit of Employee's assistance, JLK is
desirous of employing or continuing the employment of Employee; and
WHEREAS, JLK and Employee have heretofore entered into and executed an
Officer Employment Agreement, as amended (the "Employment Agreement"); and
WHEREAS, JLK and Employee desire to amend and restate the Employment
Agreement on the terms and conditions hereinafter expressed.
NOW, THEREFORE, JLK and Employee, each intending to be legally bound
hereby, do mutually covenant and agree as follows:
1. (a) Subject to the terms and conditions set forth herein, JLK
hereby agrees to employ Employee as of the date hereof, and Employee
hereby accepts such employment and agrees to devote his full time and
attention to the business and affairs of JLK, in such capacity or
capacities and to perform to the best of his ability such services
as shall be determined from time to time by the Chief Executive Officer
and the Board of Directors of JLK until the termination of his
employment hereunder.
(b) Employee's base salary, the size of bonus awards, if any, granted
to him and other emoluments for his services, if any, shall be
determined by the Board of Directors or its Committee on Executive
Compensation, as appropriate, from time to time in their sole
discretion.
2. In addition to the compensation set forth or contemplated elsewhere
herein, Employee, subject to the terms and conditions of this
agreement, shall be entitled to participate in all group insurance
programs, retirement income (pension) plans, thrift plans and vacation
and holiday programs normally provided for other executives of
JLK. Nothing herein contained shall be deemed to limit or
prevent Employee, during his employment hereunder, from being
reimbursed by JLK for out-of-pocket expenditures incurred for travel,
lodging, meals, entertainment expenses or any other expenses in
accordance with the policies of JLK applicable to the executives of
JLK.
<PAGE> 2
3. Employee's employment may be terminated with or without any reason for
termination by either party hereto at any time by giving the other
party prior written notice thereof; provided, however, that any
termination on the part of JLK shall occur only if specifically
authorized by its Board of Directors; provided, further, that
termination by JLK for Cause (as hereinafter defined) shall be made by
written notice which states that it is a termination for Cause; and
provided, further, that termination by Employee, other than
termination for Good Reason (as hereafter defined) following a Change-
in-Control (as hereafter defined), shall be on not less than 30 days
prior written notice to JLK.
4. (a) In the event that Employee's employment is terminated by JLK prior
to a Change-in-Control (as hereinafter defined) and other than for
Cause, Employee will receive as severance pay, in addition to all
amounts due him at the Date of Termination (as hereinafter defined), an
amount, payable promptly after the Date of Termination, equal to three
months' base salary at the annual rate in effect on the Date of
Termination.
(b) In the event that Employee's employment is terminated by Employee
following a Change-in-Control (as hereafter defined) without good
reason (as such term in defined in paragraph 4(h)) or prior to a
Change-in-Control (as hereinafter defined), Employee will not be
entitled to receive any severance pay in addition to the amounts, if
any, due him at the Date of Termination (as hereinafter defined).
(c) In the event at or after a Change-in-Control and prior to the third
anniversary of the date of the Change-in-Control that Employee's
employment is terminated by Employee for Good Reason or by JLK other
than for Cause or Disability pursuant to paragraph 5, Employee will
receive as severance pay (in addition to all other amounts due him at
the Date of Termination) an amount equal to the product of
(i) the lesser of
(x) two and eight tenths (2.8),
(y) a number equal to the number of calendar months remaining from
the Date of Termination to the Employee's Retirement Date (as such
term is hereafter defined) divided by twelve (12), or
(z) a number equal to the product obtained by multiplying
thirty-six (36) less the number of completed months after the date
of the Change-in-Control during which the Employee was employed
and did not have Good Reason for termination times one-twelfth
(1/12);
times
(ii) the sum of
(x) Employee's base salary at the annual rate in effect on the
Date of Termination (or, at Employee's election, at the annual
rate in effect on the first day of the calendar month immediately
prior to the Change-in-Control), plus
(y) the average of any bonuses which Employee was entitled to or
paid during the three most recent fiscal years ending prior to the
Date of Termination.
<PAGE> 3
Such severance pay shall be paid by delivery of a cashier's or
certified check to the Employee at JLK's executive offices on a date
which is no later than five business days following the Date of
Termination.
In addition to the severance payments provided for in this paragraph
4(c), Employee also will receive the same or equivalent medical,
dental, disability and group insurance benefits as were provided to the
Employee at the Date of Termination, which benefits shall be provided
to Employee for a three year period commencing on the Date of
Termination. The Employee shall also be deemed and shall be credited
for computing benefits, for vesting and for all other purposes under
any pension or retirement income plan of JLK and under the Supplemental
Executive Retirement Plan to have continuously remained in the
employment of JLK for the three year period (or, if clause (i)(y) or
clause (i)(z) above of this paragraph 4(c) is applicable to determine
the severance payments to be made, the lesser period measured in years
equal to clause (i)(y) or clause (i)(z) above, whichever is applicable)
following the Date of Termination at an annual compensation equal to
the sum of the base salary and bonus which were used to compute the
payment due the Employee under the first paragraph of this Paragraph
4(c).
(d) If for any reason, whether by law or provisions of JLK's employee
medical, dental or group insurance, pension or retirement plan or other
benefit plans, any benefits which the Employee would be entitled to
under the foregoing subparagraph (c) of this Paragraph 4 cannot be paid
pursuant to such employee benefit plans, then JLK hereby contractually
agrees to pay to the Employee the difference between the benefits which
the Employee would have received in accordance with the foregoing
subparagraphs of this paragraph 4 if the relevant employee medical,
dental or group insurance or pension or retirement plan or other
benefit plan could have paid such benefit and the amount of benefits,
if any, actually paid by such employee medical, dental or group
insurance or pension or retirement plan or other benefit plan. JLK
shall be required to fund its obligation to pay the foregoing
difference.
(e) In the event of a termination of employment under the circumstances
above described in Paragraph 4(c), Employee shall have no duty to seek
any other employment after termination of Employee's employment with
JLK and JLK hereby waives and agrees not to raise or use any defense
based on the position that Employee had a duty to mitigate or reduce
the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should Employee obtain other employment,
then the only effect of such on the obligations of JLK hereunder shall
be that JLK shall be entitled to credit against any payments which
would otherwise be made for medical, dental or group insurance or
similar benefits (excluding, however, any credit against JLK payments
relating to pension or retirement benefits or the Supplemental
Executive Retirement Plan) pursuant to the benefit provisions set forth
in the second paragraph of Paragraph 4(c) hereof, any comparable
payments to which Employee is entitled under the employee benefit plans
maintained by Employee's other employer or employers in connection with
services to such employer or employers after termination of his
employment with JLK.
(f) The term "Change-in-Control" shall mean a change in control of a
nature that would be required to be reported in response to Item 6(e)
of Schedule 14A promulgated under the Securities Exchange Act of 1934
<PAGE> 4
as in effect on the date hereof ("1934 Act"), or if Item 6(e) is no
longer in effect, any regulations issued by the Securities and Exchange
Commission pursuant to the 1934 Act which serve similar purposes;
provided that, without limitation, such a change in control shall be
deemed to have occurred if (A) JLK shall be merged or consolidated with
any corporation or other entity other than a merger or consolidation
with a corporation or other entity all of whose equity interests are
owned by JLK immediately prior to the merger or consolidation, or (B)
JLK shall sell all or substantially all of its operating properties and
assets to another person, group of associated persons or corporation,
or (C) any "person" (as such term is used in Sections 13(d) and 14(d)
of the 1934 Act), is or becomes a beneficial owner, directly or
indirectly, of securities of JLK representing 25% or more of the
combined voting power of JLK's then outstanding securities coupled with
or followed by the existence of a majority of the board of directors of
JLK consisting of persons other than persons who either were directors
of JLK immediately prior to or were nominated by those persons who were
directors of JLK immediately prior to such person becoming a beneficial
owner, directly or indirectly, of securities of JLK representing 25% or
more of the combined voting power of JLK's then outstanding securities.
(g) For purposes of this agreement "Date of Termination" shall mean:
(i) if Employee's employment is terminated due to his death or
retirement, the date of death or retirement, respectively; or
(ii) if Employee's employment is terminated for any other reason,
the date on which the termination becomes effective as stated in
the written notice of termination given to or by the Employee.
(h) The term "Good Reason" for termination by the Employee shall mean
the occurrence of any of the following at or after a Change-in-Control:
(i) without the Employee's express written consent, the assignment
to the Employee of any duties materially and substantially
inconsistent with his positions, duties, responsibilities and
status with JLK immediately prior to a Change-in-Control, or a
material change in his reporting responsibilities, titles or
offices as in effect immediately prior to a Change-in-Control, or
any removal of the Employee from or any failure to re-elect the
Employee to any of such positions, except in connection with the
termination of the Employee`s employment due to Cause (as
hereinafter defined) or as a result of the Employee's death;
(ii) a reduction by JLK in the Employee's base salary as in effect
immediately prior to any Change-in-Control;
(iii) a failure by JLK to continue to provide incentive
compensation, under the rules by which incentives are provided,
comparable to that provided by JLK immediately prior to any
Change-in-Control;
(iv) the failure by JLK to continue in effect any benefit or
compensation plan, stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan in which Employee
is participating immediately prior to a Change-in-Control
(provided, however, that there shall not be deemed to be any such
failure if JLK substitutes for the
<PAGE> 5
discontinued plan, a plan providing Employee with substantially
similar benefits) or the taking of any action by JLK which would
adversely affect Employee's participation in or materially reduce
Employee's benefits under any of such plans or deprive Employee of
any material fringe benefit enjoyed by Employee immediately prior
to a Change-in-Control;
(v) the failure of JLK to obtain the assumption of this Agreement
by any successor as contemplated in paragraph 11 hereof;
(viii) the relocation of the Executive to a facility or a location
more than 50 miles from the Executive's then present location,
without the Executive's prior written consent; or
(ix) any purported termination of the employment of Employee by JLK
which is not for Cause as provided in paragraph 5.
5. In the event that Employee (a) shall be guilty of malfeasance, willful
misconduct or gross negligence in the performance of the services
contemplated by this Agreement, or (b) shall not make his services
available to JLK on a full time basis in accordance with paragraph 1
hereof for any reason (including Disability) other than arising from
Employee's incapacity due to physical or mental illness or injury
which does not constitute Disability and other than by reason of the
fact Employee's employment has been terminated under the circumstances
described in paragraph 4(a), or (c) shall breach the provisions of
paragraph 8 hereof (the matters described in subparagraphs (a), (b)
and (c) are collectively referred to as "Cause"), JLK shall have the
right, exercised by resolution adopted by a majority of its Board of
Directors, to terminate Employee's employment for Cause by giving
prior written notice to Employee of its election so to do. In that
event, Employee's employment shall be deemed terminated for Cause,
Employee shall not be entitled to the benefits set forth in paragraph
4 which shall not be paid or payable and JLK only shall have the
obligation to pay Employee the unpaid portion of Employee's base
salary for the period from the last period from which Employee was
paid to the Date of Termination; provided, however, that if Employee's
employment is terminated as a result of the Disability of Employee,
the benefits set forth in paragraph 4 shall not be paid or payable but
Employee shall be entitled to receive the annual supplement under the
Supplemental Executive Retirement Plan and Employee's employment by JLK
shall not be deemed terminated for purposes of the Long-Term
Disability Plan, Retirement Income Plan for U.S. Salaried Employees
or any other benefit plan which so provides. For purposes of this
agreement "Disability" shall mean such incapacity due to physical or
mental illness or injury which results in the Employee's being absent
from his principal office at JLK's offices for the entire portion of
180 consecutive business days. Prior to a Change-in-Control, a
decision by the Board of Directors of JLK that "Cause" exists shall be
in the discretion of the Board of Directors and shall be final and
binding upon the Employee and his rights hereunder. After a Change-in-
Control, "Cause" shall not be deemed to include opposition by Employee
to such a Change-in-Control or any matter incidental thereto and any
determination by the Board of Directors that "Cause" existed shall not
be final or binding upon the Employee or his rights hereunder or
entitled to any deference in any court or other tribunal.
6. Employee understands and agrees that, except to the extent Employee is
entitled to the benefits provided in paragraph 4(c) hereof, in the
event Employee resigns or his employment is terminated for any reason
<PAGE> 6
other than death or Disability prior to his "Retirement Date" (as
hereinafter defined), he will forfeit any interest he may have in any
JLK retirement income plan (except to the extent vested
by actual service to date of separation as per the plan provisions),
and all other benefits dependent upon continuing service. The term
"Retirement Date" shall mean the first day of the month following the
day on which Employee attains his sixty-fifth birthday, or at
Employee's request, any other day that JLK's Board of Directors may
approve in writing.
7. Nothing herein contained shall affect the right of Employee to
participate in and receive benefits under and in accordance with the
then current provisions of any retirement income, profit-sharing,
additional year-end or periodic remuneration or bonus, incentive
compensation, insurance or any other employee welfare plan or program
of JLK and all payments hereunder shall be in addition to any benefits
received thereunder (including long term disability payments).
8. During the period of employment of Employee by JLK and for three years
thereafter, (provided, however, that this paragraph 8 shall not apply
to the Employee following a termination of Employee's employment (x)
if a Change-in-Control, shall have occurred prior to the Date of
Termination or (y) if Employee's employment is terminated by JLK other
than for Cause), he will not, in any geographic area in which JLK is
offering its services and products, without the prior written consent
of JLK:
(a) directly or indirectly engage in, or
(b) assist or have an active interest in (whether as proprietor,
partner, investor, shareholder, officer, director or any type of
principal whatsoever), or
(c) enter the employ of, or act as agent for, or advisor or
consultant to, any person, firm, partnership, association,
corporation or business organization, entity or enterprise which is
or is about to become directly or indirectly engage in, any business
which is competitive with any business of JLK or any subsidiary or
affiliate thereof in which Employee is or was engaged; provided,
however, that the foregoing provisions of this paragraph 8 are not
intended to prohibit and shall not prohibit Employee from
purchasing, for investment, not in excess of 1% of any class of
stock or other corporate security of any company which is registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
Employee acknowledges that the breach by him of the provisions of this
paragraph 8 would cause irreparable injury to JLK, acknowledges and
agrees that remedies at law for any such breach will be inadequate and
consents and agrees that JLK shall be entitled, without the necessity
of proof of actual damage, to injunctive relief in any proceedings
which may be brought to enforce the provisions of this paragraph 8.
Employee acknowledges and warrants that he will be fully able to earn
an adequate livelihood for himself and his dependents if this paragraph
8 should be specifically enforced against him and that such enforcement
will not impair his ability to obtain employment commensurate with his
abilities and fully acceptable to him.
<PAGE> 7
If the scope of any restriction contained in this paragraph 8 is too
broad to permit enforcement of such restriction to its full extent,
then such restriction shall be enforced to the maximum extent permitted
by law and Employee and JLK hereby consent and agree that such scope
may be judicially modified in any proceeding brought to enforce such
restriction.
9. (a) Employee acknowledges and agrees that in the course of his
employment by JLK, Employee may work with, add to, create or acquire
trade secrets and confidential information ("Confidential Information")
which could include, in whole or in part, information:
(i) of a technical nature such as, but not limited to,
JLK's manuals, methods, know-how, formulae, shapes,
designs, compositions, processes, applications, ideas,
improvements, discoveries, inventions, research and
development projects, equipment, apparatus, appliances,
computer programs, software, systems documentation,
special hardware, software development and similar
items; or
(ii) of a business nature such as, but not limited to,
information about business plans, sources of supply,
cost, purchasing, profits, markets, sales, sales
volume, sales methods, sales proposals, identity of
customers and prospective customers, identity of
customers' key purchasing personnel, amount or kind of
customers' purchases and other information about
customers; or
(iii) pertaining to future developments such as, but
not limited to, research and development or future
marketing or merchandising.
Employee further acknowledges and agrees that (i) all Confidential
Information is the property of JLK; (ii) the unauthorized use,
misappropriation or disclosure of any Confidential Information would
constitute a breach of trust and could cause irreparable injury to JLK;
and (iii) it is essential to the protection of JLK's goodwill and to
the maintenance of its competitive position that all Confidential
Information be kept secret and that Employee not disclose any
Confidential Information to others or use any Confidential Information
to the detriment of JLK.
Employee agrees to hold and safeguard all Confidential Information in
trust for JLK, its successors and assigns and Employee shall not
(except as required in the performance of Employee's duties), use or
disclose or make available to anyone for use outside JLK's organization
at any time, either during employment with JLK or subsequent thereto,
any of the Confidential Information, whether or not developed by
Employee, without the prior written consent of JLK.
(b) Employee agrees that:
(i) he will promptly and fully disclose to JLK or such officer
or other agent as may be designated by JLK any and all
inventions made or conceived by Employee (whether made solely
by Employee or jointly with others) during employment with JLK
(1) which are along the line of the business, work or
investigations of JLK, or (2) which result from or are
suggested by any work which Employee may do for or on behalf
of JLK; and
<PAGE> 8
(ii) he will assist JLK and its nominees during and subsequent
to such employment in every proper way (entirely at its or
their expense) to obtain for its or their own benefit patents
for such inventions in any and all countries; the said
inventions, without further consideration other than such
salary as from time to time may be paid to him by JLK as
compensation for his services in any capacity, shall be and
remain the sole and exclusive property of JLK or its nominee
whether patented or not; and
(iii) he will keep and maintain adequate and current written
records of all such inventions, in the form of but not
necessarily limited to notes, sketches, drawings, or reports
relating thereto, which records shall be and remain the
property of and available to JLK at all times.
(c) Employee agrees that, promptly upon termination of his employment,
he will disclose to JLK, or to such officer or other agent as may be
designated by JLK, all inventions which have been partly or wholly
conceived, invented or developed by him for which applications for
patents have not been made and will thereafter execute all such
instruments of the character hereinbefore referred to, and will take
such steps as may be necessary to secure and assign to JLK the
exclusive rights in and to such inventions and any patents that may be
issued thereon any expense therefor to be borne by JLK.
(d) Employee agrees that he will not at any time aid in attacking the
patentability, scope, or validity of any invention to which the
provisions of subparagraphs (b) and (c), above, apply.
10. In the event that (a) Employee institutes any legal action to enforce
his rights under, or to recover damages for breach of this agreement,
or (b) JLK institutes any action to avoid making any payments due to
Employee under this agreement, Employee, if he is the prevailing party,
shall be entitled to recover from JLK any actual expenses for
attorney's fees and other disbursements incurred by him in relation
thereto.
11. The terms and provisions of this agreement shall be binding upon, and
shall inure to the benefit of, Employee and JLK, its subsidiaries and
affiliates and their respective successors and assigns.
12. This agreement constitutes the entire agreement between the parties
hereto and supersedes all prior agreements and understandings, whether
oral or written, among the parties with respect to the subject matter
hereof. This agreement may not be amended orally, but only by an
instrument in writing signed by each of the parties to this agreement.
13. The invalidity or enforceability of any provision of this agreement
shall not affect the other provisions hereof, and this agreement shall
be construed in all respects as if such invalid or unenforceable
provision were omitted.
14. Any pronoun and any variation thereof used in this agreement shall be
deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the parties hereto may require.
15. JLK shall be entitled as a condition to paying any severance pay or
providing any benefits hereunder upon a termination
<PAGE> 9
of the Employee's employment to require the Employee to deliver on or
before the making of any severance payment or providing of any benefit
a release in the form of Exhibit A attached hereto.
16. Notwithstanding any other provision of this Agreement, in the event
that any payment or benefit received or to be received by Employee in
connection with a change in control of the Corporation, or the
termination of the Employee's employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or agreement with the
Corporation, any person whose actions result in a change in control or
any person affiliated with the Corporation or such person)
(collectively, the "Total Payments") would not be deductible, in whole
or part, as a result of section 280G of the Internal Revenue Code of
1986 (the "Code") by the Corporation, an affiliate or other person
making such payment or providing such benefit, the payments due under
this Agreement (the "Contract Payments") shall be reduced until no
portion of the Total Payments is not deductible, or the Contract
Payments are reduced to zero. In the event that the Corporation
determines that the Total Payments would not be deductible, in whole or
part, as a result of section 280G of the Code, the Corporation shall
immediately notify Employee of this determination and the amount which
would not be so deductible as well as a computation of Total Payments.
Employee shall have five (5) business days after receipt of the
foregoing notice and computation to waive in writing all or any portion
of any of the Total Payments and any portion of the Total Payments the
receipt or enjoyment of which Employee shall have effectively waived in
writing shall not be taken into account. If the Corporation had already
withheld any Contract Payments prior to receipt of such waiver, the
Corporation upon receipt of such waiver shall immediately pay to
Employee any withheld Contract Payments which would have been paid had
the Corporation had the Employee's written waiver prior to the date the
Corporation withheld any such payments.
For purposes of this limitation
(a) no portion of the Total Payments shall be taken into account which
in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Employee does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code,
(b) the Contract Payments shall be reduced only to the extent necessary
so that the Total Payments (other than those Contract Payments which
are waived in writing by the Employee or referred to in clause (a)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of
the tax counsel referred to in clause (a); and
(c) the value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles of
section 280G(d)(3) and (4) of the Code.
17. This agreement shall be governed by the laws of the Commonwealth of
Pennsylvania.
WITNESS the due execution hereto the day and year first above written.
<PAGE> 10
ATTEST: JLK DIRECT DISTRIBUTION INC.
/s/ KEVIN G. NOWE, Assistant Secretary By:/s/ MICHAEL J. MUSSOG
- -------------------------------------- --------------------------------
WITNESS: Employee:
/s/ PAUL J. WARD /s/ MICHAEL W. RUPRICH (SEAL)
- -------------------------------------- -----------------------------------
<PAGE> 11
Exhibit A
RELEASE
KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and
valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound, hereby releases, remises, quitclaims and
discharges completely and forever JLK Inc. and its directors, officers,
employees, subsidiaries and affiliates from any and all claims, causes of action
or rights which the undersigned has or may have, whether arising by virtue of
contract or of applicable state laws or federal laws, and whether such claims,
causes of action or rights are known or unknown; provided, however, that this
Release shall not release, remise, quitclaim or discharge any claims, causes of
action or rights which the undersigned may have (i) under that certain Amended
and Restated Employment Agreement dated __________ between the undersigned and
JLK Inc., (ii) to any unreimbursed expense account or similar out-of-pocket
reimbursement amounts owing the undersigned, or (iii) under the bylaws of JLK
Inc. or the applicable state corporate statutes to indemnification for having
served as an officer and/or employee of JLK Inc. and/or its subsidiaries.
DATE: __________________ _____________________________
<PAGE> 1
Exhibit 10.17
OFFICER'S EMPLOYMENT AGREEMENT
Amended and Restated
THIS AGREEMENT, is made and entered into this 1st day of July, 1997, by
and between JLK DIRECT DISTRIBUTION INC., a corporation organized under the laws
of the Commonwealth of Pennsylvania, for and on behalf of itself and on behalf
of its subsidiary companies (hereinafter referred to as "JLK"), and KENNETH T.
MCHENRY, an individual (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee acknowledges that by reason of employment by JLK, it
is anticipated that Employee will work with, add to, create, have access to and
be entrusted with trade secrets and confidential information belonging to JLK
which are of a technical nature or business nature or pertain to future
developments, the disclosure of which trade secrets or confidential information
would be highly detrimental to the interests of JLK; and
WHEREAS, in order to have the benefit of Employee's assistance, JLK is
desirous of employing or continuing the employment of Employee; and
WHEREAS, JLK and Employee have heretofore entered into and executed an
Officer Employment Agreement, as amended (the "Employment Agreement"); and
WHEREAS, JLK and Employee desire to amend and restate the Employment
Agreement on the terms and conditions hereinafter expressed.
NOW, THEREFORE, JLK and Employee, each intending to be legally bound
hereby, do mutually covenant and agree as follows:
1. (a) Subject to the terms and conditions set forth herein, JLK
hereby agrees to employ Employee as of the date hereof, and Employee
hereby accepts such employment and agrees to devote his full time and
attention to the business and affairs of JLK, in such capacity or
capacities and to perform to the best of his ability such services
as shall be determined from time to time by the Chief Executive Officer
and the Board of Directors of JLK until the termination of his
employment hereunder.
(b) Employee's base salary, the size of bonus awards, if any, granted
to him and other emoluments for his services, if any, shall be
determined by the Board of Directors or its Committee on Executive
Compensation, as appropriate, from time to time in their sole
discretion.
2. In addition to the compensation set forth or contemplated elsewhere
herein, Employee, subject to the terms and conditions of this
agreement, shall be entitled to participate in all group insurance
programs, retirement income (pension) plans, thrift plans and vacation
and holiday programs normally provided for other executives of
JLK. Nothing herein contained shall be deemed to limit or
prevent Employee, during his employment hereunder, from being
reimbursed by JLK for out-of-pocket expenditures incurred for travel,
lodging, meals, entertainment expenses or any other expenses in
accordance with the policies of JLK applicable to the executives of
JLK.
<PAGE> 2
3. Employee's employment may be terminated with or without any reason for
termination by either party hereto at any time by giving the other
party prior written notice thereof; provided, however, that any
termination on the part of JLK shall occur only if specifically
authorized by its Board of Directors; provided, further, that
termination by JLK for Cause (as hereinafter defined) shall be made by
written notice which states that it is a termination for Cause; and
provided, further, that termination by Employee, other than
termination for Good Reason (as hereafter defined) following a Change-
in-Control (as hereafter defined), shall be on not less than 30 days
prior written notice to JLK.
4. (a) In the event that Employee's employment is terminated by JLK prior
to a Change-in-Control (as hereinafter defined) and other than for
Cause, Employee will receive as severance pay, in addition to all
amounts due him at the Date of Termination (as hereinafter defined), an
amount, payable promptly after the Date of Termination, equal to three
months' base salary at the annual rate in effect on the Date of
Termination.
(b) In the event that Employee's employment is terminated by Employee
following a Change-in-Control (as hereafter defined) without good
reason (as such term in defined in paragraph 4(h)) or prior to a
Change-in-Control (as hereinafter defined), Employee will not be
entitled to receive any severance pay in addition to the amounts, if
any, due him at the Date of Termination (as hereinafter defined).
(c) In the event at or after a Change-in-Control and prior to the third
anniversary of the date of the Change-in-Control that Employee's
employment is terminated by Employee for Good Reason or by JLK other
than for Cause or Disability pursuant to paragraph 5, Employee will
receive as severance pay (in addition to all other amounts due him at
the Date of Termination) an amount equal to the product of
(i) the lesser of
(x) two and eight tenths (2.8),
(y) a number equal to the number of calendar months remaining
from the Date of Termination to the Employee's Retirement Date
(as such term is hereafter defined) divided by twelve (12), or
(z) a number equal to the product obtained by multiplying
thirty-six (36) less the number of completed months after the
date of the Change-in-Control during which the Employee was
employed and did not have Good Reason for termination times
one-twelfth (1/12);
times
(ii) the sum of
(x) Employee's base salary at the annual rate in effect on the
Date of Termination (or, at Employee's election, at the annual
rate in effect on the first day of the calendar month
immediately prior to the Change-in-Control), plus (y) the
average of any bonuses which Employee was entitled to or paid
during the three most recent fiscal years ending prior to the
Date of Termination.
<PAGE> 3
Such severance pay shall be paid by delivery of a cashier's or
certified check to the Employee at JLK's executive offices on a date
which is no later than five business days following the Date of
Termination.
In addition to the severance payments provided for in this paragraph
4(c), Employee also will receive the same or equivalent medical,
dental, disability and group insurance benefits as were provided to the
Employee at the Date of Termination, which benefits shall be provided
to Employee for a three year period commencing on the Date of
Termination. The Employee shall also be deemed and shall be credited
for computing benefits, for vesting and for all other purposes under
any pension or retirement income plan of JLK and under the Supplemental
Executive Retirement Plan to have continuously remained in the
employment of JLK for the three year period (or, if clause (i)(y) or
clause (i)(z) above of this paragraph 4(c) is applicable to determine
the severance payments to be made, the lesser period measured in years
equal to clause (i)(y) or clause (i)(z) above, whichever is applicable)
following the Date of Termination at an annual compensation equal to
the sum of the base salary and bonus which were used to compute the
payment due the Employee under the first paragraph of this Paragraph
4(c).
(d) If for any reason, whether by law or provisions of JLK's employee
medical, dental or group insurance, pension or retirement plan or other
benefit plans, any benefits which the Employee would be entitled to
under the foregoing subparagraph (c) of this Paragraph 4 cannot be paid
pursuant to such employee benefit plans, then JLK hereby contractually
agrees to pay to the Employee the difference between the benefits which
the Employee would have received in accordance with the foregoing
subparagraphs of this paragraph 4 if the relevant employee medical,
dental or group insurance or pension or retirement plan or other
benefit plan could have paid such benefit and the amount of benefits,
if any, actually paid by such employee medical, dental or group
insurance or pension or retirement plan or other benefit plan. JLK
shall be required to fund its obligation to pay the foregoing
difference.
(e) In the event of a termination of employment under the circumstances
above described in Paragraph 4(c), Employee shall have no duty to seek
any other employment after termination of Employee's employment with
JLK and JLK hereby waives and agrees not to raise or use any defense
based on the position that Employee had a duty to mitigate or reduce
the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should Employee obtain other employment,
then the only effect of such on the obligations of JLK hereunder shall
be that JLK shall be entitled to credit against any payments which
would otherwise be made for medical, dental or group insurance or
similar benefits (excluding, however, any credit against JLK payments
relating to pension or retirement benefits or the Supplemental
Executive Retirement Plan) pursuant to the benefit provisions set forth
in the second paragraph of Paragraph 4(c) hereof, any comparable
payments to which Employee is entitled under the employee benefit plans
maintained by Employee's other employer or employers in connection with
services to such employer or employers after termination of his
employment with JLK.
(f) The term "Change-in-Control" shall mean a change in control of a
nature that would be required to be reported in response to Item 6(e)
of Schedule 14A promulgated under the Securities Exchange Act of 1934
<PAGE> 4
as in effect on the date hereof ("1934 Act"), or if Item 6(e) is no
longer in effect, any regulations issued by the Securities and Exchange
Commission pursuant to the 1934 Act which serve similar purposes;
provided that, without limitation, such a change in control shall be
deemed to have occurred if (A) JLK shall be merged or consolidated with
any corporation or other entity other than a merger or consolidation
with a corporation or other entity all of whose equity interests are
owned by JLK immediately prior to the merger or consolidation, or (B)
JLK shall sell all or substantially all of its operating properties and
assets to another person, group of associated persons or corporation,
or (C) any "person" (as such term is used in Sections 13(d) and 14(d)
of the 1934 Act), is or becomes a beneficial owner, directly or
indirectly, of securities of JLK representing 25% or more of the
combined voting power of JLK's then outstanding securities coupled with
or followed by the existence of a majority of the board of directors of
JLK consisting of persons other than persons who either were directors
of JLK immediately prior to or were nominated by those persons who were
directors of JLK immediately prior to such person becoming a beneficial
owner, directly or indirectly, of securities of JLK representing 25% or
more of the combined voting power of JLK's then outstanding securities.
(g) For purposes of this agreement "Date of Termination" shall mean:
(i) if Employee's employment is terminated due to his death or
retirement, the date of death or retirement, respectively; or
(ii) if Employee's employment is terminated for any other reason,
the date on which the termination becomes effective as stated in
the written notice of termination given to or by the Employee.
(h) The term "Good Reason" for termination by the Employee shall mean
the occurrence of any of the following at or after a Change-in-Control:
(i) without the Employee's express written consent, the assignment
to the Employee of any duties materially and substantially
inconsistent with his positions, duties, responsibilities and
status with JLK immediately prior to a Change-in-Control, or a
material change in his reporting responsibilities, titles or
offices as in effect immediately prior to a Change-in-Control, or
any removal of the Employee from or any failure to re-elect the
Employee to any of such positions, except in connection with the
termination of the Employee`s employment due to Cause (as
hereinafter defined) or as a result of the Employee's death;
(ii) a reduction by JLK in the Employee's base salary as in effect
immediately prior to any Change-in-Control;
(iii) a failure by JLK to continue to provide incentive
compensation, under the rules by which incentives are provided,
comparable to that provided by JLK immediately prior to any
Change-in-Control;
(iv) the failure by JLK to continue in effect any benefit or
compensation plan, stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan in which Employee
is participating immediately prior to a Change-in-Control
(provided, however, that there shall not be deemed to be any such
failure if JLK substitutes for the
<PAGE> 5
discontinued plan, a plan providing Employee with substantially
similar benefits) or the taking of any action by JLK which would
adversely affect Employee's participation in or materially reduce
Employee's benefits under any of such plans or deprive Employee of
any material fringe benefit enjoyed by Employee immediately prior
to a Change-in-Control;
(v) the failure of JLK to obtain the assumption of this Agreement
by any successor as contemplated in paragraph 11 hereof;
(viii) the relocation of the Executive to a facility or a location
more than 50 miles from the Executive's then present location,
without the Executive's prior written consent; or
(ix) any purported termination of the employment of Employee by JLK
which is not for Cause as provided in paragraph 5.
5. In the event that Employee (a) shall be guilty of malfeasance, willful
misconduct or gross negligence in the performance of the services
contemplated by this Agreement, or (b) shall not make his services
available to JLK on a full time basis in accordance with paragraph 1
hereof for any reason (including Disability) other than arising from
Employee's incapacity due to physical or mental illness or injury
which does not constitute Disability and other than by reason of the
fact Employee's employment has been terminated under the circumstances
described in paragraph 4(a), or (c) shall breach the provisions of
paragraph 8 hereof (the matters described in subparagraphs (a), (b)
and (c) are collectively referred to as "Cause"), JLK shall have the
right, exercised by resolution adopted by a majority of its Board of
Directors, to terminate Employee's employment for Cause by giving
prior written notice to Employee of its election so to do. In that
event, Employee's employment shall be deemed terminated for Cause,
Employee shall not be entitled to the benefits set forth in paragraph
4 which shall not be paid or payable and JLK only shall have the
obligation to pay Employee the unpaid portion of Employee's base
salary for the period from the last period from which Employee was
paid to the Date of Termination; provided, however, that if Employee's
employment is terminated as a result of the Disability of Employee,
the benefits set forth in paragraph 4 shall not be paid or payable but
Employee shall be entitled to receive the annual supplement under the
Supplemental Executive Retirement Plan and Employee's employment by JLK
shall not be deemed terminated for purposes of the Long-Term
Disability Plan, Retirement Income Plan for U.S. Salaried Employees
or any other benefit plan which so provides. For purposes of this
agreement "Disability" shall mean such incapacity due to physical or
mental illness or injury which results in the Employee's being absent
from his principal office at JLK's offices for the entire portion of
180 consecutive business days. Prior to a Change-in-Control, a
decision by the Board of Directors of JLK that "Cause" exists shall be
in the discretion of the Board of Directors and shall be final and
binding upon the Employee and his rights hereunder. After a Change-in-
Control, "Cause" shall not be deemed to include opposition by Employee
to such a Change-in-Control or any matter incidental thereto and any
determination by the Board of Directors that "Cause" existed shall not
be final or binding upon the Employee or his rights hereunder or
entitled to any deference in any court or other tribunal.
6. Employee understands and agrees that, except to the extent Employee is
entitled to the benefits provided in paragraph 4(c) hereof, in the
event Employee resigns or his employment is terminated for any reason
<PAGE> 6
other than death or Disability prior to his "Retirement Date" (as
hereinafter defined), he will forfeit any interest he may have in any
JLK retirement income plan (except to the extent vested
by actual service to date of separation as per the plan provisions),
and all other benefits dependent upon continuing service. The term
"Retirement Date" shall mean the first day of the month following the
day on which Employee attains his sixty-fifth birthday, or at
Employee's request, any other day that JLK's Board of Directors may
approve in writing.
7. Nothing herein contained shall affect the right of Employee to
participate in and receive benefits under and in accordance with the
then current provisions of any retirement income, profit-sharing,
additional year-end or periodic remuneration or bonus, incentive
compensation, insurance or any other employee welfare plan or program
of JLK and all payments hereunder shall be in addition to any benefits
received thereunder (including long term disability payments).
8. During the period of employment of Employee by JLK and for three years
thereafter, (provided, however, that this paragraph 8 shall not apply
to the Employee following a termination of Employee's employment (x)
if a Change-in-Control, shall have occurred prior to the Date of
Termination or (y) if Employee's employment is terminated by JLK other
than for Cause), he will not, in any geographic area in which JLK is
offering its services and products, without the prior written consent
of JLK:
(a) directly or indirectly engage in, or
(b) assist or have an active interest in (whether as proprietor,
partner, investor, shareholder, officer, director or any type of
principal whatsoever), or
(c) enter the employ of, or act as agent for, or advisor or
consultant to, any person, firm, partnership, association,
corporation or business organization, entity or enterprise which is
or is about to become directly or indirectly engage in, any business
which is competitive with any business of JLK or any subsidiary or
affiliate thereof in which Employee is or was engaged; provided,
however, that the foregoing provisions of this paragraph 8 are not
intended to prohibit and shall not prohibit Employee from
purchasing, for investment, not in excess of 1% of any class of
stock or other corporate security of any company which is registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
Employee acknowledges that the breach by him of the provisions of this
paragraph 8 would cause irreparable injury to JLK, acknowledges and
agrees that remedies at law for any such breach will be inadequate and
consents and agrees that JLK shall be entitled, without the necessity
of proof of actual damage, to injunctive relief in any proceedings
which may be brought to enforce the provisions of this paragraph 8.
Employee acknowledges and warrants that he will be fully able to earn
an adequate livelihood for himself and his dependents if this paragraph
8 should be specifically enforced against him and that such enforcement
will not impair his ability to obtain employment commensurate with his
abilities and fully acceptable to him.
<PAGE> 7
If the scope of any restriction contained in this paragraph 8 is too
broad to permit enforcement of such restriction to its full extent,
then such restriction shall be enforced to the maximum extent permitted
by law and Employee and JLK hereby consent and agree that such scope
may be judicially modified in any proceeding brought to enforce such
restriction.
9. (a) Employee acknowledges and agrees that in the course of his
employment by JLK, Employee may work with, add to, create or acquire
trade secrets and confidential information ("Confidential Information")
which could include, in whole or in part, information:
(i) of a technical nature such as, but not limited to, JLK's
manuals, methods, know-how, formulae, shapes, designs,
compositions, processes, applications, ideas, improvements,
discoveries, inventions, research and development projects,
equipment, apparatus, appliances, computer programs, software,
systems documentation, special hardware, software development
and similar items; or
(ii) of a business nature such as, but not limited to,
information about business plans, sources of supply, cost,
purchasing, profits, markets, sales, sales volume, sales
methods, sales proposals, identity of customers and
prospective customers, identity of customers' key purchasing
personnel, amount or kind of customers' purchases and other
information about customers; or
(iii) pertaining to future developments such as, but not
limited to, research and development or future marketing or
merchandising.
Employee further acknowledges and agrees that (i) all Confidential
Information is the property of JLK; (ii) the unauthorized use,
misappropriation or disclosure of any Confidential Information would
constitute a breach of trust and could cause irreparable injury to JLK;
and (iii) it is essential to the protection of JLK's goodwill and to
the maintenance of its competitive position that all Confidential
Information be kept secret and that Employee not disclose any
Confidential Information to others or use any Confidential Information
to the detriment of JLK.
Employee agrees to hold and safeguard all Confidential Information in
trust for JLK, its successors and assigns and Employee shall not
(except as required in the performance of Employee's duties), use or
disclose or make available to anyone for use outside JLK's organization
at any time, either during employment with JLK or subsequent thereto,
any of the Confidential Information, whether or not developed by
Employee, without the prior written consent of JLK.
(b) Employee agrees that:
(i) he will promptly and fully disclose to JLK or such officer
or other agent as may be designated by JLK any and all
inventions made or conceived by Employee (whether made solely
by Employee or jointly with others) during employment with JLK
(1) which are along the line of the business, work or
investigations of JLK, or (2) which result from or are
suggested by any work which Employee may do for or on behalf
of JLK; and
<PAGE> 8
(ii) he will assist JLK and its nominees during and subsequent
to such employment in every proper way (entirely at its or
their expense) to obtain for its or their own benefit patents
for such inventions in any and all countries; the said
inventions, without further consideration other than such
salary as from time to time may be paid to him by JLK as
compensation for his services in any capacity, shall be and
remain the sole and exclusive property of JLK or its nominee
whether patented or not; and
(iii) he will keep and maintain adequate and current written
records of all such inventions, in the form of but not
necessarily limited to notes, sketches, drawings, or reports
relating thereto, which records shall be and remain the
property of and available to JLK at all times.
(c) Employee agrees that, promptly upon termination of his employment,
he will disclose to JLK, or to such officer or other agent as may be
designated by JLK, all inventions which have been partly or wholly
conceived, invented or developed by him for which applications for
patents have not been made and will thereafter execute all such
instruments of the character hereinbefore referred to, and will take
such steps as may be necessary to secure and assign to JLK the
exclusive rights in and to such inventions and any patents that may be
issued thereon any expense therefor to be borne by JLK.
(d) Employee agrees that he will not at any time aid in attacking the
patentability, scope, or validity of any invention to which the
provisions of subparagraphs (b) and (c), above, apply.
10. In the event that (a) Employee institutes any legal action to enforce
his rights under, or to recover damages for breach of this agreement,
or (b) JLK institutes any action to avoid making any payments due to
Employee under this agreement, Employee, if he is the prevailing party,
shall be entitled to recover from JLK any actual expenses for
attorney's fees and other disbursements incurred by him in relation
thereto.
11. The terms and provisions of this agreement shall be binding upon, and
shall inure to the benefit of, Employee and JLK, its subsidiaries and
affiliates and their respective successors and assigns.
12. This agreement constitutes the entire agreement between the parties
hereto and supersedes all prior agreements and understandings, whether
oral or written, among the parties with respect to the subject matter
hereof. This agreement may not be amended orally, but only by an
instrument in writing signed by each of the parties to this agreement.
13. The invalidity or enforceability of any provision of this agreement
shall not affect the other provisions hereof, and this agreement shall
be construed in all respects as if such invalid or unenforceable
provision were omitted.
14. Any pronoun and any variation thereof used in this agreement shall be
deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the parties hereto may require.
15. JLK shall be entitled as a condition to paying any severance pay or
providing any benefits hereunder upon a termination
<PAGE> 9
of the Employee's employment to require the Employee to deliver on or
before the making of any severance payment or providing of any benefit
a release in the form of Exhibit A attached hereto.
16. Notwithstanding any other provision of this Agreement, in the event
that any payment or benefit received or to be received by Employee in
connection with a change in control of the Corporation, or the
termination of the Employee's employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or agreement with the
Corporation, any person whose actions result in a change in control or
any person affiliated with the Corporation or such person)
(collectively, the "Total Payments") would not be deductible, in whole
or part, as a result of section 280G of the Internal Revenue Code of
1986 (the "Code") by the Corporation, an affiliate or other person
making such payment or providing such benefit, the payments due under
this Agreement (the "Contract Payments") shall be reduced until no
portion of the Total Payments is not deductible, or the Contract
Payments are reduced to zero. In the event that the Corporation
determines that the Total Payments would not be deductible, in whole or
part, as a result of section 280G of the Code, the Corporation shall
immediately notify Employee of this determination and the amount which
would not be so deductible as well as a computation of Total Payments.
Employee shall have five (5) business days after receipt of the
foregoing notice and computation to waive in writing all or any portion
of any of the Total Payments and any portion of the Total Payments the
receipt or enjoyment of which Employee shall have effectively waived in
writing shall not be taken into account. If the Corporation had already
withheld any Contract Payments prior to receipt of such waiver, the
Corporation upon receipt of such waiver shall immediately pay to
Employee any withheld Contract Payments which would have been paid had
the Corporation had the Employee's written waiver prior to the date the
Corporation withheld any such payments.
For purposes of this limitation
(a) no portion of the Total Payments shall be taken into account which
in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Employee does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code,
(b) the Contract Payments shall be reduced only to the extent necessary
so that the Total Payments (other than those Contract Payments which
are waived in writing by the Employee or referred to in clause (a)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of
the tax counsel referred to in clause (a); and
(c) the value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles of
section 280G(d)(3) and (4) of the Code.
17. This agreement shall be governed by the laws of the Commonwealth of
Pennsylvania.
WITNESS the due execution hereto the day and year first above written.
<PAGE> 10
ATTEST: JLK DIRECT DISTRIBUTION INC.
/s/ KEVIN G. NOWE, Assistant Secretary By:/s/ MICHAEL W. RUPRICH
- -------------------------------------- --------------------------------
WITNESS: Employee:
/s/ MARGARET P. WOODHOUSE /s/ KENNETH T. MCHENRY (SEAL)
- -------------------------------------- -----------------------------------
<PAGE> 11
Exhibit A
RELEASE
KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and
valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound, hereby releases, remises, quitclaims and
discharges completely and forever JLK Inc. and its directors, officers,
employees, subsidiaries and affiliates from any and all claims, causes of action
or rights which the undersigned has or may have, whether arising by virtue of
contract or of applicable state laws or federal laws, and whether such claims,
causes of action or rights are known or unknown; provided, however, that this
Release shall not release, remise, quitclaim or discharge any claims, causes of
action or rights which the undersigned may have (i) under that certain Amended
and Restated Employment Agreement dated __________ between the undersigned and
JLK Inc., (ii) to any unreimbursed expense account or similar out-of-pocket
reimbursement amounts owing the undersigned, or (iii) under the bylaws of JLK
Inc. or the applicable state corporate statutes to indemnification for having
served as an officer and/or employee of JLK Inc. and/or its subsidiaries.
DATE: __________________ _____________________________
<PAGE> 1
Exhibit 10.18
OFFICER'S EMPLOYMENT AGREEMENT
Amended and Restated
THIS AGREEMENT, is made and entered into this 1st day of July, 1997, by
and between JLK DIRECT DISTRIBUTION INC., a corporation organized under the laws
of the Commonwealth of Pennsylvania, for and on behalf of itself and on behalf
of its subsidiary companies (hereinafter referred to as "JLK"), and ROLAND E.
LAZZARO, an individual (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee acknowledges that by reason of employment by JLK, it
is anticipated that Employee will work with, add to, create, have access to and
be entrusted with trade secrets and confidential information belonging to JLK
which are of a technical nature or business nature or pertain to future
developments, the disclosure of which trade secrets or confidential information
would be highly detrimental to the interests of JLK; and
WHEREAS, in order to have the benefit of Employee's assistance, JLK is
desirous of employing or continuing the employment of Employee; and
WHEREAS, JLK and Employee have heretofore entered into and executed an
Officer Employment Agreement, as amended (the "Employment Agreement"); and
WHEREAS, JLK and Employee desire to amend and restate the Employment
Agreement on the terms and conditions hereinafter expressed.
NOW, THEREFORE, JLK and Employee, each intending to be legally bound
hereby, do mutually covenant and agree as follows:
1. (a) Subject to the terms and conditions set forth herein, JLK
hereby agrees to employ Employee as of the date hereof, and Employee
hereby accepts such employment and agrees to devote his full time and
attention to the business and affairs of JLK, in such capacity or
capacities and to perform to the best of his ability such services
as shall be determined from time to time by the Chief Executive Officer
and the Board of Directors of JLK until the termination of his
employment hereunder.
(b) Employee's base salary, the size of bonus awards, if any, granted
to him and other emoluments for his services, if any, shall be
determined by the Board of Directors or its Committee on Executive
Compensation, as appropriate, from time to time in their sole
discretion.
2. In addition to the compensation set forth or contemplated elsewhere
herein, Employee, subject to the terms and conditions of this
agreement, shall be entitled to participate in all group insurance
programs, retirement income (pension) plans, thrift plans and vacation
and holiday programs normally provided for other executives of
JLK. Nothing herein contained shall be deemed to limit or
prevent Employee, during his employment hereunder, from being
reimbursed by JLK for out-of-pocket expenditures incurred for travel,
lodging, meals, entertainment expenses or any other expenses in
accordance with the policies of JLK applicable to the executives of
JLK.
<PAGE> 2
3. Employee's employment may be terminated with or without any reason for
termination by either party hereto at any time by giving the other
party prior written notice thereof; provided, however, that any
termination on the part of JLK shall occur only if specifically
authorized by its Board of Directors; provided, further, that
termination by JLK for Cause (as hereinafter defined) shall be made by
written notice which states that it is a termination for Cause; and
provided, further, that termination by Employee, other than
termination for Good Reason (as hereafter defined) following a Change-
in-Control (as hereafter defined), shall be on not less than 30 days
prior written notice to JLK.
4. (a) In the event that Employee's employment is terminated by JLK prior
to a Change-in-Control (as hereinafter defined) and other than for
Cause, Employee will receive as severance pay, in addition to all
amounts due him at the Date of Termination (as hereinafter defined), an
amount, payable promptly after the Date of Termination, equal to three
months' base salary at the annual rate in effect on the Date of
Termination.
(b) In the event that Employee's employment is terminated by Employee
following a Change-in-Control (as hereafter defined) without good
reason (as such term in defined in paragraph 4(h)) or prior to a
Change-in-Control (as hereinafter defined), Employee will not be
entitled to receive any severance pay in addition to the amounts, if
any, due him at the Date of Termination (as hereinafter defined).
(c) In the event at or after a Change-in-Control and prior to the third
anniversary of the date of the Change-in-Control that Employee's
employment is terminated by Employee for Good Reason or by JLK other
than for Cause or Disability pursuant to paragraph 5, Employee will
receive as severance pay (in addition to all other amounts due him at
the Date of Termination) an amount equal to the product of
(i) the lesser of
(x) two and eight tenths (2.8),
(y) a number equal to the number of calendar months remaining
from the Date of Termination to the Employee's Retirement Date
(as such term is hereafter defined) divided by twelve (12), or
(z) a number equal to the product obtained by multiplying
thirty-six (36) less the number of completed months after the
date of the Change-in-Control during which the Employee was
employed and did not have Good Reason for termination times
one-twelfth (1/12);
times
(ii) the sum of
(x) Employee's base salary at the annual rate in effect on the
Date of Termination (or, at Employee's election, at the annual
rate in effect on the first day of the calendar month
immediately prior to the Change-in-Control), plus (y) the
average of any bonuses which Employee was entitled to or paid
during the three most recent fiscal years ending prior to the
Date of Termination.
<PAGE> 3
Such severance pay shall be paid by delivery of a cashier's or
certified check to the Employee at JLK's executive offices on a date
which is no later than five business days following the Date of
Termination.
In addition to the severance payments provided for in this paragraph
4(c), Employee also will receive the same or equivalent medical,
dental, disability and group insurance benefits as were provided to the
Employee at the Date of Termination, which benefits shall be provided
to Employee for a three year period commencing on the Date of
Termination. The Employee shall also be deemed and shall be credited
for computing benefits, for vesting and for all other purposes under
any pension or retirement income plan of JLK and under the Supplemental
Executive Retirement Plan to have continuously remained in the
employment of JLK for the three year period (or, if clause (i)(y) or
clause (i)(z) above of this paragraph 4(c) is applicable to determine
the severance payments to be made, the lesser period measured in years
equal to clause (i)(y) or clause (i)(z) above, whichever is applicable)
following the Date of Termination at an annual compensation equal to
the sum of the base salary and bonus which were used to compute the
payment due the Employee under the first paragraph of this Paragraph
4(c).
(d) If for any reason, whether by law or provisions of JLK's employee
medical, dental or group insurance, pension or retirement plan or other
benefit plans, any benefits which the Employee would be entitled to
under the foregoing subparagraph (c) of this Paragraph 4 cannot be paid
pursuant to such employee benefit plans, then JLK hereby contractually
agrees to pay to the Employee the difference between the benefits which
the Employee would have received in accordance with the foregoing
subparagraphs of this paragraph 4 if the relevant employee medical,
dental or group insurance or pension or retirement plan or other
benefit plan could have paid such benefit and the amount of benefits,
if any, actually paid by such employee medical, dental or group
insurance or pension or retirement plan or other benefit plan. JLK
shall be required to fund its obligation to pay the foregoing
difference.
(e) In the event of a termination of employment under the circumstances
above described in Paragraph 4(c), Employee shall have no duty to seek
any other employment after termination of Employee's employment with
JLK and JLK hereby waives and agrees not to raise or use any defense
based on the position that Employee had a duty to mitigate or reduce
the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should Employee obtain other employment,
then the only effect of such on the obligations of JLK hereunder shall
be that JLK shall be entitled to credit against any payments which
would otherwise be made for medical, dental or group insurance or
similar benefits (excluding, however, any credit against JLK payments
relating to pension or retirement benefits or the Supplemental
Executive Retirement Plan) pursuant to the benefit provisions set forth
in the second paragraph of Paragraph 4(c) hereof, any comparable
payments to which Employee is entitled under the employee benefit plans
maintained by Employee's other employer or employers in connection with
services to such employer or employers after termination of his
employment with JLK.
(f) The term "Change-in-Control" shall mean a change in control of a
nature that would be required to be reported in response to Item 6(e)
of Schedule 14A promulgated under the Securities Exchange Act of 1934
<PAGE> 4
as in effect on the date hereof ("1934 Act"), or if Item 6(e) is no
longer in effect, any regulations issued by the Securities and Exchange
Commission pursuant to the 1934 Act which serve similar purposes;
provided that, without limitation, such a change in control shall be
deemed to have occurred if (A) JLK shall be merged or consolidated with
any corporation or other entity other than a merger or consolidation
with a corporation or other entity all of whose equity interests are
owned by JLK immediately prior to the merger or consolidation, or (B)
JLK shall sell all or substantially all of its operating properties and
assets to another person, group of associated persons or corporation,
or (C) any "person" (as such term is used in Sections 13(d) and 14(d)
of the 1934 Act), is or becomes a beneficial owner, directly or
indirectly, of securities of JLK representing 25% or more of the
combined voting power of JLK's then outstanding securities coupled with
or followed by the existence of a majority of the board of directors of
JLK consisting of persons other than persons who either were directors
of JLK immediately prior to or were nominated by those persons who were
directors of JLK immediately prior to such person becoming a beneficial
owner, directly or indirectly, of securities of JLK representing 25% or
more of the combined voting power of JLK's then outstanding securities.
(g) For purposes of this agreement "Date of Termination" shall mean:
(i) if Employee's employment is terminated due to his death or
retirement, the date of death or retirement, respectively; or
(ii) if Employee's employment is terminated for any other reason,
the date on which the termination becomes effective as stated in
the written notice of termination given to or by the Employee.
(h) The term "Good Reason" for termination by the Employee shall mean
the occurrence of any of the following at or after a Change-in-Control:
(i) without the Employee's express written consent, the assignment
to the Employee of any duties materially and substantially
inconsistent with his positions, duties, responsibilities and
status with JLK immediately prior to a Change-in-Control, or a
material change in his reporting responsibilities, titles or
offices as in effect immediately prior to a Change-in-Control, or
any removal of the Employee from or any failure to re-elect the
Employee to any of such positions, except in connection with the
termination of the Employee's employment due to Cause (as
hereinafter defined) or as a result of the Employee's death;
(ii) a reduction by JLK in the Employee's base salary as in effect
immediately prior to any Change-in-Control;
(iii) a failure by JLK to continue to provide incentive
compensation, under the rules by which incentives are provided,
comparable to that provided by JLK immediately prior to any
Change-in-Control;
(iv) the failure by JLK to continue in effect any benefit or
compensation plan, stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan in which Employee
is participating immediately prior to a Change-in-Control
(provided, however, that there shall not be deemed to be any such
failure if JLK substitutes for the
<PAGE> 5
discontinued plan, a plan providing Employee with substantially
similar benefits) or the taking of any action by JLK which would
adversely affect Employee's participation in or materially reduce
Employee's benefits under any of such plans or deprive Employee of
any material fringe benefit enjoyed by Employee immediately prior
to a Change-in-Control;
(v) the failure of JLK to obtain the assumption of this Agreement
by any successor as contemplated in paragraph 11 hereof;
(viii) the relocation of the Executive to a facility or a location
more than 50 miles from the Executive's then present location,
without the Executive's prior written consent; or
(ix) any purported termination of the employment of Employee by JLK
which is not for Cause as provided in paragraph 5.
5. In the event that Employee (a) shall be guilty of malfeasance, willful
misconduct or gross negligence in the performance of the services
contemplated by this Agreement, or (b) shall not make his services
available to JLK on a full time basis in accordance with paragraph 1
hereof for any reason (including Disability) other than arising from
Employee's incapacity due to physical or mental illness or injury which
does not constitute Disability and other than by reason of the fact
Employee's employment has been terminated under the circumstances
described in paragraph 4(a), or (c) shall breach the provisions of
paragraph 8 hereof (the matters described in subparagraphs (a), (b) and
(c) are collectively referred to as "Cause"), JLK shall have the right,
exercised by resolution adopted by a majority of its Board of
Directors, to terminate Employee's employment for Cause by giving prior
written notice to Employee of its election so to do. In that event,
Employee's employment shall be deemed terminated for Cause, Employee
shall not be entitled to the benefits set forth in paragraph 4 which
shall not be paid or payable and JLK only shall have the obligation to
pay Employee the unpaid portion of Employee's base salary for the
period from the last period from which Employee was paid to the Date of
Termination; provided, however, that if Employee's employment is
terminated as a result of the Disability of Employee, the benefits set
forth in paragraph 4 shall not be paid or payable but Employee shall be
entitled to receive the annual supplement under the Supplemental
Executive Retirement Plan and Employee's employment by JLK shall not be
deemed terminated for purposes of the Long-Term Disability Plan,
Retirement Income Plan for U.S. Salaried Employees or any other benefit
plan which so provides. For purposes of this agreement "Disability"
shall mean such incapacity due to physical or mental illness or injury
which results in the Employee's being absent from his principal office
at JLK's offices for the entire portion of 180 consecutive business
days. Prior to a Change-in-Control, a decision by the Board of
Directors of JLK that "Cause" exists shall be in the discretion of the
Board of Directors and shall be final and binding upon the Employee and
his rights hereunder. After a Change-in-Control, "Cause" shall not be
deemed to include opposition by Employee to such a Change-in-Control or
any matter incidental thereto and any determination by the Board of
Directors that "Cause" existed shall not be final or binding upon the
Employee or his rights hereunder or entitled to any deference in any
court or other tribunal.
6. Employee understands and agrees that, except to the extent Employee is
entitled to the benefits provided in paragraph 4(c) hereof, in the
event Employee resigns or his employment is terminated for any reason
<PAGE> 6
other than death or Disability prior to his "Retirement Date" (as
hereinafter defined), he will forfeit any interest he may have in any
JLK retirement income plan (except to the extent vested
by actual service to date of separation as per the plan provisions),
and all other benefits dependent upon continuing service. The term
"Retirement Date" shall mean the first day of the month following the
day on which Employee attains his sixty-fifth birthday, or at
Employee's request, any other day that JLK's Board of Directors may
approve in writing.
7. Nothing herein contained shall affect the right of Employee to
participate in and receive benefits under and in accordance with the
then current provisions of any retirement income, profit-sharing,
additional year-end or periodic remuneration or bonus, incentive
compensation, insurance or any other employee welfare plan or program
of JLK and all payments hereunder shall be in addition
to any benefits received thereunder (including long term disability
payments).
8. During the period of employment of Employee by JLK and for three years
thereafter, (provided, however, that this paragraph 8 shall not apply
to the Employee following a termination of Employee's employment (x)
if a Change-in-Control, shall have occurred prior to the Date of
Termination or (y) if Employee's employment is terminated by JLK other
than for Cause), he will not, in any geographic area in which JLK is
offering its services and products, without the prior written consent
of JLK:
(a) directly or indirectly engage in, or
(b) assist or have an active interest in (whether as proprietor,
partner, investor, shareholder, officer, director or any type of
principal whatsoever), or
(c) enter the employ of, or act as agent for, or advisor or
consultant to, any person, firm, partnership, association,
corporation or business organization, entity or enterprise which is
or is about to become directly or indirectly engage in, any business
which is competitive with any business of JLK or any subsidiary or
affiliate thereof in which Employee is or was engaged; provided,
however, that the foregoing provisions of this paragraph 8 are not
intended to prohibit and shall not prohibit Employee from
purchasing, for investment, not in excess of 1% of any class of
stock or other corporate security of any company which is registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
Employee acknowledges that the breach by him of the provisions of this
paragraph 8 would cause irreparable injury to JLK, acknowledges and
agrees that remedies at law for any such breach will be inadequate and
consents and agrees that JLK shall be entitled, without the necessity
of proof of actual damage, to injunctive relief in any proceedings
which may be brought to enforce the provisions of this paragraph 8.
Employee acknowledges and warrants that he will be fully able to earn
an adequate livelihood for himself and his dependents if this paragraph
8 should be specifically enforced against him and that such enforcement
will not impair his ability to obtain employment commensurate with his
abilities and fully acceptable to him.
<PAGE> 7
If the scope of any restriction contained in this paragraph 8 is too
broad to permit enforcement of such restriction to its full extent,
then such restriction shall be enforced to the maximum extent permitted
by law and Employee and JLK hereby consent and agree that such scope
may be judicially modified in any proceeding brought to enforce such
restriction.
9. (a) Employee acknowledges and agrees that in the course of his
employment by JLK, Employee may work with, add to, create or acquire
trade secrets and confidential information ("Confidential Information")
which could include, in whole or in part, information:
(i) of a technical nature such as, but not limited to, JLK's
manuals, methods, know-how, formulae, shapes, designs,
compositions, processes, applications, ideas, improvements,
discoveries, inventions, research and development projects,
equipment, apparatus, appliances, computer programs,
software, systems documentation, special hardware, software
development and similar items; or
(ii) of a business nature such as, but not limited to,
information about business plans, sources of supply, cost,
purchasing, profits, markets, sales, sales volume, sales
methods, sales proposals, identity of customers and
prospective customers, identity of customers' key purchasing
personnel, amount or kind of customers' purchases and other
information about customers; or
(iii) pertaining to future developments such as, but not
limited to, research and development or future marketing or
merchandising.
Employee further acknowledges and agrees that (i) all Confidential
Information is the property of JLK; (ii) the unauthorized use,
misappropriation or disclosure of any Confidential Information would
constitute a breach of trust and could cause irreparable injury to JLK;
and (iii) it is essential to the protection of JLK's goodwill and to
the maintenance of its competitive position that all Confidential
Information be kept secret and that Employee not disclose any
Confidential Information to others or use any Confidential Information
to the detriment of JLK.
Employee agrees to hold and safeguard all Confidential Information in
trust for JLK, its successors and assigns and Employee shall not
(except as required in the performance of Employee's duties), use or
disclose or make available to anyone for use outside JLK's organization
at any time, either during employment with JLK or subsequent thereto,
any of the Confidential Information, whether or not developed by
Employee, without the prior written consent of JLK.
(b) Employee agrees that:
(i) he will promptly and fully disclose to JLK or such
officer or other agent as may be designated by JLK any and
all inventions made or conceived by Employee (whether made
solely by Employee or jointly with others) during employment
with JLK (1) which are along the line of the business, work
or investigations of JLK, or (2) which result from or are
suggested by any work which Employee may do for or on behalf
of JLK; and
<PAGE> 8
(ii) he will assist JLK and its nominees during and subsequent
to such employment in every proper way (entirely at its or
their expense) to obtain for its or their own benefit patents
for such inventions in any and all countries; the said
inventions, without further consideration other than such
salary as from time to time may be paid to him by JLK as
compensation for his services in any capacity, shall be and
remain the sole and exclusive property of JLK or its nominee
whether patented or not; and
(iii) he will keep and maintain adequate and current written
records of all such inventions, in the form of but not
necessarily limited to notes, sketches, drawings, or reports
relating thereto, which records shall be and remain the
property of and available to JLK at all times.
(c) Employee agrees that, promptly upon termination of his employment,
he will disclose to JLK, or to such officer or other agent as may be
designated by JLK, all inventions which have been partly or wholly
conceived, invented or developed by him for which applications for
patents have not been made and will thereafter execute all such
instruments of the character hereinbefore referred to, and will take
such steps as may be necessary to secure and assign to JLK the
exclusive rights in and to such inventions and any patents that may be
issued thereon any expense therefor to be borne by JLK.
(d) Employee agrees that he will not at any time aid in attacking the
patentability, scope, or validity of any invention to which the
provisions of subparagraphs (b) and (c), above, apply.
10. In the event that (a) Employee institutes any legal action to enforce
his rights under, or to recover damages for breach of this agreement,
or (b) JLK institutes any action to avoid making any payments due to
Employee under this agreement, Employee, if he is the prevailing party,
shall be entitled to recover from JLK any actual expenses for
attorney's fees and other disbursements incurred by him in relation
thereto.
11. The terms and provisions of this agreement shall be binding upon, and
shall inure to the benefit of, Employee and JLK, its subsidiaries and
affiliates and their respective successors and assigns.
12. This agreement constitutes the entire agreement between the parties
hereto and supersedes all prior agreements and understandings, whether
oral or written, among the parties with respect to the subject matter
hereof. This agreement may not be amended orally, but only by an
instrument in writing signed by each of the parties to this agreement.
13. The invalidity or enforceability of any provision of this agreement
shall not affect the other provisions hereof, and this agreement shall
be construed in all respects as if such invalid or unenforceable
provision were omitted.
14. Any pronoun and any variation thereof used in this agreement shall be
deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the parties hereto may require.
15. JLK shall be entitled as a condition to paying any severance pay or
providing any benefits hereunder upon a termination
<PAGE> 9
of the Employee's employment to require the Employee to deliver on or
before the making of any severance payment or providing of any benefit
a release in the form of Exhibit A attached hereto.
16. Notwithstanding any other provision of this Agreement, in the event
that any payment or benefit received or to be received by Employee in
connection with a change in control of the Corporation, or the
termination of the Employee's employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or agreement with the
Corporation, any person whose actions result in a change in control or
any person affiliated with the Corporation or such person)
(collectively, the "Total Payments") would not be deductible, in whole
or part, as a result of section 280G of the Internal Revenue Code of
1986 (the "Code") by the Corporation, an affiliate or other person
making such payment or providing such benefit, the payments due under
this Agreement (the "Contract Payments") shall be reduced until no
portion of the Total Payments is not deductible, or the Contract
Payments are reduced to zero. In the event that the Corporation
determines that the Total Payments would not be deductible, in whole or
part, as a result of section 280G of the Code, the Corporation shall
immediately notify Employee of this determination and the amount which
would not be so deductible as well as a computation of Total Payments.
Employee shall have five (5) business days after receipt of the
foregoing notice and computation to waive in writing all or any portion
of any of the Total Payments and any portion of the Total Payments the
receipt or enjoyment of which Employee shall have effectively waived in
writing shall not be taken into account. If the Corporation had already
withheld any Contract Payments prior to receipt of such waiver, the
Corporation upon receipt of such waiver shall immediately pay to
Employee any withheld Contract Payments which would have been paid had
the Corporation had the Employee's written waiver prior to the date the
Corporation withheld any such payments.
For purposes of this limitation
(a) no portion of the Total Payments shall be taken into account which
in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Employee does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code,
(b) the Contract Payments shall be reduced only to the extent necessary
so that the Total Payments (other than those Contract Payments which
are waived in writing by the Employee or referred to in clause (a)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of
the tax counsel referred to in clause (a); and
(c) the value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles of
section 280G(d)(3) and (4) of the Code.
17. This agreement shall be governed by the laws of the Commonwealth of
Pennsylvania.
WITNESS the due execution hereto the day and year first above written.
<PAGE> 10
ATTEST: JLK DIRECT DISTRIBUTION INC.
/s/ KEVIN G. NOWE, Assistant Secretary By:/s/ MICHAEL W. RUPRICH
- -------------------------------------- --------------------------------
WITNESS: Employee:
/s/ DAVID T. COFER /s/ ROLAND E. LAZZARO (SEAL)
- -------------------------------------- -----------------------------------
<PAGE> 11
Exhibit A
RELEASE
KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and
valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound, hereby releases, remises, quitclaims and
discharges completely and forever JLK Inc. and its directors, officers,
employees, subsidiaries and affiliates from any and all claims, causes of action
or rights which the undersigned has or may have, whether arising by virtue of
contract or of applicable state laws or federal laws, and whether such claims,
causes of action or rights are known or unknown; provided, however, that this
Release shall not release, remise, quitclaim or discharge any claims, causes of
action or rights which the undersigned may have (i) under that certain Amended
and Restated Employment Agreement dated __________ between the undersigned and
JLK Inc., (ii) to any unreimbursed expense account or similar out-of-pocket
reimbursement amounts owing the undersigned, or (iii) under the bylaws of JLK
Inc. or the applicable state corporate statutes to indemnification for having
served as an officer and/or employee of JLK Inc. and/or its subsidiaries.
DATE: __________________ _____________________________
<PAGE> 1
Exhibit 10.19
OFFICER'S EMPLOYMENT AGREEMENT
Amended and Restated
THIS AGREEMENT, is made and entered into this 1st day of July, 1997, by
and between JLK DIRECT DISTRIBUTION INC., a corporation organized under the laws
of the Commonwealth of Pennsylvania, for and on behalf of itself and on behalf
of its subsidiary companies (hereinafter referred to as "JLK"), and MICHAEL J.
MUSSOG, an individual (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee acknowledges that by reason of employment by JLK, it
is anticipated that Employee will work with, add to, create, have access to and
be entrusted with trade secrets and confidential information belonging to JLK
which are of a technical nature or business nature or pertain to future
developments, the disclosure of which trade secrets or confidential information
would be highly detrimental to the interests of JLK; and
WHEREAS, in order to have the benefit of Employee's assistance, JLK is
desirous of employing or continuing the employment of Employee; and
WHEREAS, JLK and Employee have heretofore entered into and executed an
Officer Employment Agreement, as amended (the "Employment Agreement"); and
WHEREAS, JLK and Employee desire to amend and restate the Employment
Agreement on the terms and conditions hereinafter expressed.
NOW, THEREFORE, JLK and Employee, each intending to be legally bound
hereby, do mutually covenant and agree as follows:
1. (a) Subject to the terms and conditions set forth herein, JLK
hereby agrees to employ Employee as of the date hereof, and Employee
hereby accepts such employment and agrees to devote his full time and
attention to the business and affairs of JLK, in such capacity or
capacities and to perform to the best of his ability such services
as shall be determined from time to time by the Chief Executive Officer
and the Board of Directors of JLK until the termination of his
employment hereunder.
(b) Employee's base salary, the size of bonus awards, if any, granted
to him and other emoluments for his services, if any, shall be
determined by the Board of Directors or its Committee on Executive
Compensation, as appropriate, from time to time in their sole
discretion.
2. In addition to the compensation set forth or contemplated elsewhere
herein, Employee, subject to the terms and conditions of this
agreement, shall be entitled to participate in all group insurance
programs, retirement income (pension) plans, thrift plans and vacation
and holiday programs normally provided for other executives of
JLK. Nothing herein contained shall be deemed to limit or
prevent Employee, during his employment hereunder, from being
reimbursed by JLK for out-of-pocket expenditures incurred for travel,
lodging, meals, entertainment expenses or any other expenses in
accordance with the policies of JLK applicable to the executives of
JLK.
<PAGE> 2
3. Employee's employment may be terminated with or without any reason for
termination by either party hereto at any time by giving the other
party prior written notice thereof; provided, however, that any
termination on the part of JLK shall occur only if specifically
authorized by its Board of Directors; provided, further, that
termination by JLK for Cause (as hereinafter defined) shall be made by
written notice which states that it is a termination for Cause; and
provided, further, that termination by Employee, other than
termination for Good Reason (as hereafter defined) following a Change-
in-Control (as hereafter defined), shall be on not less than 30 days
prior written notice to JLK.
4. (a) In the event that Employee's employment is terminated by JLK prior
to a Change-in-Control (as hereinafter defined) and other than for
Cause, Employee will receive as severance pay, in addition to all
amounts due him at the Date of Termination (as hereinafter defined), an
amount, payable promptly after the Date of Termination, equal to three
months' base salary at the annual rate in effect on the Date of
Termination.
(b) In the event that Employee's employment is terminated by Employee
following a Change-in-Control (as hereafter defined) without good
reason (as such term in defined in paragraph 4(h)) or prior to a
Change-in-Control (as hereinafter defined), Employee will not be
entitled to receive any severance pay in addition to the amounts, if
any, due him at the Date of Termination (as hereinafter defined).
(c) In the event at or after a Change-in-Control and prior to the third
anniversary of the date of the Change-in-Control that Employee's
employment is terminated by Employee for Good Reason or by JLK other
than for Cause or Disability pursuant to paragraph 5, Employee will
receive as severance pay (in addition to all other amounts due him at
the Date of Termination) an amount equal to the product of
(i) the lesser of
(x) two and eight tenths (2.8),
(y) a number equal to the number of calendar months remaining
from the Date of Termination to the Employee's Retirement Date
(as such term is hereafter defined) divided by twelve (12), or
(z) a number equal to the product obtained by multiplying
thirty-six (36) less the number of completed months after the
date of the Change-in-Control during which the Employee was
employed and did not have Good Reason for termination times
one-twelfth (1/12);
times
(ii) the sum of
(x) Employee's base salary at the annual rate in effect on the
Date of Termination (or, at Employee's election, at the annual
rate in effect on the first day of the calendar month
immediately prior to the Change-in-Control), plus (y) the
average of any bonuses which Employee was entitled to or paid
during the three most recent fiscal years ending prior to the
Date of Termination.
<PAGE> 3
Such severance pay shall be paid by delivery of a cashier's or
certified check to the Employee at JLK's executive offices on a date
which is no later than five business days following the Date of
Termination.
In addition to the severance payments provided for in this paragraph
4(c), Employee also will receive the same or equivalent medical,
dental, disability and group insurance benefits as were provided to the
Employee at the Date of Termination, which benefits shall be provided
to Employee for a three year period commencing on the Date of
Termination. The Employee shall also be deemed and shall be credited
for computing benefits, for vesting and for all other purposes under
any pension or retirement income plan of JLK and under the Supplemental
Executive Retirement Plan to have continuously remained in the
employment of JLK for the three year period (or, if clause (i)(y) or
clause (i)(z) above of this paragraph 4(c) is applicable to determine
the severance payments to be made, the lesser period measured in years
equal to clause (i)(y) or clause (i)(z) above, whichever is applicable)
following the Date of Termination at an annual compensation equal to
the sum of the base salary and bonus which were used to compute the
payment due the Employee under the first paragraph of this Paragraph
4(c).
(d) If for any reason, whether by law or provisions of JLK's employee
medical, dental or group insurance, pension or retirement plan or other
benefit plans, any benefits which the Employee would be entitled to
under the foregoing subparagraph (c) of this Paragraph 4 cannot be paid
pursuant to such employee benefit plans, then JLK hereby contractually
agrees to pay to the Employee the difference between the benefits which
the Employee would have received in accordance with the foregoing
subparagraphs of this paragraph 4 if the relevant employee medical,
dental or group insurance or pension or retirement plan or other
benefit plan could have paid such benefit and the amount of benefits,
if any, actually paid by such employee medical, dental or group
insurance or pension or retirement plan or other benefit plan. JLK
shall be required to fund its obligation to pay the foregoing
difference.
(e) In the event of a termination of employment under the circumstances
above described in Paragraph 4(c), Employee shall have no duty to seek
any other employment after termination of Employee's employment with
JLK and JLK hereby waives and agrees not to raise or use any defense
based on the position that Employee had a duty to mitigate or reduce
the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should Employee obtain other employment,
then the only effect of such on the obligations of JLK hereunder shall
be that JLK shall be entitled to credit against any payments which
would otherwise be made for medical, dental or group insurance or
similar benefits (excluding, however, any credit against JLK payments
relating to pension or retirement benefits or the Supplemental
Executive Retirement Plan) pursuant to the benefit provisions set forth
in the second paragraph of Paragraph 4(c) hereof, any comparable
payments to which Employee is entitled under the employee benefit plans
maintained by Employee's other employer or employers in connection with
services to such employer or employers after termination of his
employment with JLK.
(f) The term "Change-in-Control" shall mean a change in control of a
<PAGE> 4
nature that would be required to be reported in response to Item 6(e)
of Schedule 14A promulgated under the Securities Exchange Act of 1934
as in effect on the date hereof ("1934 Act"), or if Item 6(e) is no
longer in effect, any regulations issued by the Securities and Exchange
Commission pursuant to the 1934 Act which serve similar purposes;
provided that, without limitation, such a change in control shall be
deemed to have occurred if (A) JLK shall be merged or consolidated with
any corporation or other entity other than a merger or consolidation
with a corporation or other entity all of whose equity interests are
owned by JLK immediately prior to the merger or consolidation, or (B)
JLK shall sell all or substantially all of its operating properties and
assets to another person, group of associated persons or corporation,
or (C) any "person" (as such term is used in Sections 13(d) and 14(d)
of the 1934 Act), is or becomes a beneficial owner, directly or
indirectly, of securities of JLK representing 25% or more of the
combined voting power of JLK's then outstanding securities coupled with
or followed by the existence of a majority of the board of directors of
JLK consisting of persons other than persons who either were directors
of JLK immediately prior to or were nominated by those persons who were
directors of JLK immediately prior to such person becoming a beneficial
owner, directly or indirectly, of securities of JLK representing 25% or
more of the combined voting power of JLK's then outstanding securities.
(g) For purposes of this agreement "Date of Termination" shall mean:
(i) if Employee's employment is terminated due to his death or
retirement, the date of death or retirement, respectively; or
(ii) if Employee's employment is terminated for any other reason,
the date on which the termination becomes effective as stated in
the written notice of termination given to or by the Employee.
(h) The term "Good Reason" for termination by the Employee shall mean
the occurrence of any of the following at or after a Change-in-Control:
(i) without the Employee's express written consent, the assignment
to the Employee of any duties materially and substantially
inconsistent with his positions, duties, responsibilities and
status with JLK immediately prior to a Change-in-Control, or a
material change in his reporting responsibilities, titles or
offices as in effect immediately prior to a Change-in-Control, or
any removal of the Employee from or any failure to re-elect the
Employee to any of such positions, except in connection with the
termination of the Employee`s employment due to Cause (as
hereinafter defined) or as a result of the Employee's death;
(ii) a reduction by JLK in the Employee's base salary as in effect
immediately prior to any Change-in-Control;
(iii) a failure by JLK to continue to provide incentive
compensation, under the rules by which incentives are provided,
comparable to that provided by JLK immediately prior to any
Change-in-Control;
(iv) the failure by JLK to continue in effect any benefit or
compensation plan, stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan in which Employee
is participating immediately prior to a
<PAGE> 5
Change-in-Control (provided, however, that there shall not be
deemed to be any such failure if JLK substitutes for the
discontinued plan, a plan providing Employee with substantially
similar benefits) or the taking of any action by JLK which would
adversely affect Employee's participation in or materially reduce
Employee's benefits under any of such plans or deprive Employee of
any material fringe benefit enjoyed by Employee immediately prior
to a Change-in-Control;
(v) the failure of JLK to obtain the assumption of this Agreement
by any successor as contemplated in paragraph 11 hereof;
(viii) the relocation of the Executive to a facility or a location
more than 50 miles from the Executive's then present location,
without the Executive's prior written consent; or
(ix) any purported termination of the employment of Employee by JLK
which is not for Cause as provided in paragraph 5.
5. In the event that Employee (a) shall be guilty of malfeasance, willful
misconduct or gross negligence in the performance of the services
contemplated by this Agreement, or (b) shall not make his services
available to JLK on a full time basis in accordance with paragraph 1
hereof for any reason (including Disability) other than arising from
Employee's incapacity due to physical or mental illness or injury
which does not constitute Disability and other than by reason of the
fact Employee's employment has been terminated under the circumstances
described in paragraph 4(a), or (c) shall breach the provisions of
paragraph 8 hereof (the matters described in subparagraphs (a), (b)
and (c) are collectively referred to as "Cause"), JLK shall have the
right, exercised by resolution adopted by a majority of its Board of
Directors, to terminate Employee's employment for Cause by giving
prior written notice to Employee of its election so to do. In that
event, Employee's employment shall be deemed terminated for Cause,
Employee shall not be entitled to the benefits set forth in paragraph
4 which shall not be paid or payable and JLK only shall have the
obligation to pay Employee the unpaid portion of Employee's base
salary for the period from the last period from which Employee was
paid to the Date of Termination; provided, however, that if Employee's
employment is terminated as a result of the Disability of Employee,
the benefits set forth in paragraph 4 shall not be paid or payable but
Employee shall be entitled to receive the annual supplement under the
Supplemental Executive Retirement Plan and Employee's employment by JLK
shall not be deemed terminated for purposes of the Long-Term
Disability Plan, Retirement Income Plan for U.S. Salaried Employees
or any other benefit plan which so provides. For purposes of this
agreement "Disability" shall mean such incapacity due to physical or
mental illness or injury which results in the Employee's being absent
from his principal office at JLK's offices for the entire portion of
180 consecutive business days. Prior to a Change-in-Control, a
decision by the Board of Directors of JLK that "Cause" exists shall be
in the discretion of the Board of Directors and shall be final and
binding upon the Employee and his rights hereunder. After a Change-in-
Control, "Cause" shall not be deemed to include opposition by Employee
to such a Change-in-Control or any matter incidental thereto and any
determination by the Board of Directors that "Cause" existed shall not
be final or binding upon the Employee or his rights hereunder or
entitled to any deference in any court or other tribunal.
6. Employee understands and agrees that, except to the extent Employee is
<PAGE> 6
entitled to the benefits provided in paragraph 4(c) hereof, in the
event Employee resigns or his employment is terminated for any reason
other than death or Disability prior to his "Retirement Date" (as
hereinafter defined), he will forfeit any interest he may have in any
JLK retirement income plan (except to the extent vested
by actual service to date of separation as per the plan provisions),
and all other benefits dependent upon continuing service. The term
"Retirement Date" shall mean the first day of the month following the
day on which Employee attains his sixty-fifth birthday, or at
Employee's request, any other day that JLK's Board of Directors may
approve in writing.
7. Nothing herein contained shall affect the right of Employee to
participate in and receive benefits under and in accordance with the
then current provisions of any retirement income, profit-sharing,
additional year-end or periodic remuneration or bonus, incentive
compensation, insurance or any other employee welfare plan or program
of JLK and all payments hereunder shall be in addition
to any benefits received thereunder (including long term disability
payments).
8. During the period of employment of Employee by JLK and for three years
thereafter, (provided, however, that this paragraph 8 shall not apply
to the Employee following a termination of Employee's employment (x)
if a Change-in-Control, shall have occurred prior to the Date of
Termination or (y) if Employee's employment is terminated by JLK other
than for Cause), he will not, in any geographic area in which JLK is
offering its services and products, without the prior written consent
of JLK:
(a) directly or indirectly engage in, or
(b) assist or have an active interest in (whether as proprietor,
partner, investor, shareholder, officer, director or any type of
principal whatsoever), or
(c) enter the employ of, or act as agent for, or advisor or
consultant to, any person, firm, partnership, association,
corporation or business organization, entity or enterprise which is
or is about to become directly or indirectly engage in, any business
which is competitive with any business of JLK or any subsidiary or
affiliate thereof in which Employee is or was engaged; provided,
however, that the foregoing provisions of this paragraph 8 are not
intended to prohibit and shall not prohibit Employee from
purchasing, for investment, not in excess of 1% of any class of
stock or other corporate security of any company which is registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
Employee acknowledges that the breach by him of the provisions of this
paragraph 8 would cause irreparable injury to JLK, acknowledges and
agrees that remedies at law for any such breach will be inadequate and
consents and agrees that JLK shall be entitled, without the necessity
of proof of actual damage, to injunctive relief in any proceedings
which may be brought to enforce the provisions of this paragraph 8.
Employee acknowledges and warrants that he will be fully able to earn
an adequate livelihood for himself and his dependents if this paragraph
8 should be specifically enforced against him and that such enforcement
will not impair his ability to obtain employment commensurate with his
abilities and fully acceptable to him.
<PAGE> 7
If the scope of any restriction contained in this paragraph 8 is too
broad to permit enforcement of such restriction to its full extent,
then such restriction shall be enforced to the maximum extent permitted
by law and Employee and JLK hereby consent and agree that such scope
may be judicially modified in any proceeding brought to enforce such
restriction.
9. (a) Employee acknowledges and agrees that in the course of his
employment by JLK, Employee may work with, add to, create or acquire
trade secrets and confidential information ("Confidential Information")
which could include, in whole or in part, information:
(i) of a technical nature such as, but not limited to, JLK's
manuals, methods, know-how, formulae, shapes, designs,
compositions, processes, applications, ideas, improvements,
discoveries, inventions, research and development projects,
equipment, apparatus, appliances, computer programs, software,
systems documentation, special hardware, software development
and similar items; or
(ii) of a business nature such as, but not limited to,
information about business plans, sources of supply, cost,
purchasing, profits, markets, sales, sales volume, sales
methods, sales proposals, identity of customers and
prospective customers, identity of customers' key purchasing
personnel, amount or kind of customers' purchases and other
information about customers; or
(iii) pertaining to future developments such as, but not
limited to, research and development or future marketing or
merchandising.
Employee further acknowledges and agrees that (i) all Confidential
Information is the property of JLK; (ii) the unauthorized use,
misappropriation or disclosure of any Confidential Information would
constitute a breach of trust and could cause irreparable injury to JLK;
and (iii) it is essential to the protection of JLK's goodwill and to
the maintenance of its competitive position that all Confidential
Information be kept secret and that Employee not disclose any
Confidential Information to others or use any Confidential Information
to the detriment of JLK.
Employee agrees to hold and safeguard all Confidential Information in
trust for JLK, its successors and assigns and Employee shall not
(except as required in the performance of Employee's duties), use or
disclose or make available to anyone for use outside JLK's organization
at any time, either during employment with JLK or subsequent thereto,
any of the Confidential Information, whether or not developed by
Employee, without the prior written consent of JLK.
(b) Employee agrees that:
(i) he will promptly and fully disclose to JLK or such officer
or other agent as may be designated by JLK any and all
inventions made or conceived by Employee (whether made solely
by Employee or jointly with others) during employment with JLK
(1) which are along the line of the business, work or
investigations of JLK, or (2) which result from or are
suggested by any work which Employee may do for or on behalf
of JLK; and
<PAGE> 8
(ii) he will assist JLK and its nominees during and subsequent
to such employment in every proper way (entirely at its or
their expense) to obtain for its or their own benefit patents
for such inventions in any and all countries; the said
inventions, without further consideration other than such
salary as from time to time may be paid to him by JLK as
compensation for his services in any capacity, shall be and
remain the sole and exclusive property of JLK or its nominee
whether patented or not; and
(iii) he will keep and maintain adequate and current written
records of all such inventions, in the form of but not
necessarily limited to notes, sketches, drawings, or reports
relating thereto, which records shall be and remain the
property of and available to JLK at all times.
(c) Employee agrees that, promptly upon termination of his employment,
he will disclose to JLK, or to such officer or other agent as may be
designated by JLK, all inventions which have been partly or wholly
conceived, invented or developed by him for which applications for
patents have not been made and will thereafter execute all such
instruments of the character hereinbefore referred to, and will take
such steps as may be necessary to secure and assign to JLK the
exclusive rights in and to such inventions and any patents that may be
issued thereon any expense therefor to be borne by JLK.
(d) Employee agrees that he will not at any time aid in attacking the
patentability, scope, or validity of any invention to which the
provisions of subparagraphs (b) and (c), above, apply.
10. In the event that (a) Employee institutes any legal action to enforce
his rights under, or to recover damages for breach of this agreement,
or (b) JLK institutes any action to avoid making any payments due to
Employee under this agreement, Employee, if he is the prevailing party,
shall be entitled to recover from JLK any actual expenses for
attorney's fees and other disbursements incurred by him in relation
thereto.
11. The terms and provisions of this agreement shall be binding upon, and
shall inure to the benefit of, Employee and JLK, its subsidiaries and
affiliates and their respective successors and assigns.
12. This agreement constitutes the entire agreement between the parties
hereto and supersedes all prior agreements and understandings, whether
oral or written, among the parties with respect to the subject matter
hereof. This agreement may not be amended orally, but only by an
instrument in writing signed by each of the parties to this agreement.
13. The invalidity or enforceability of any provision of this agreement
shall not affect the other provisions hereof, and this agreement shall
be construed in all respects as if such invalid or unenforceable
provision were omitted.
14. Any pronoun and any variation thereof used in this agreement shall be
deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the parties hereto may require.
15. JLK shall be entitled as a condition to paying any
<PAGE> 9
severance pay or providing any benefits hereunder upon a termination of
the Employee's employment to require the Employee to deliver on or
before the making of any severance payment or providing of any benefit
a release in the form of Exhibit A attached hereto.
16. Notwithstanding any other provision of this Agreement, in the event
that any payment or benefit received or to be received by Employee in
connection with a change in control of the Corporation, or the
termination of the Employee's employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or agreement with the
Corporation, any person whose actions result in a change in control or
any person affiliated with the Corporation or such person)
(collectively, the "Total Payments") would not be deductible, in whole
or part, as a result of section 280G of the Internal Revenue Code of
1986 (the "Code") by the Corporation, an affiliate or other person
making such payment or providing such benefit, the payments due under
this Agreement (the "Contract Payments") shall be reduced until no
portion of the Total Payments is not deductible, or the Contract
Payments are reduced to zero. In the event that the Corporation
determines that the Total Payments would not be deductible, in whole or
part, as a result of section 280G of the Code, the Corporation shall
immediately notify Employee of this determination and the amount which
would not be so deductible as well as a computation of Total Payments.
Employee shall have five (5) business days after receipt of the
foregoing notice and computation to waive in writing all or any portion
of any of the Total Payments and any portion of the Total Payments the
receipt or enjoyment of which Employee shall have effectively waived in
writing shall not be taken into account. If the Corporation had already
withheld any Contract Payments prior to receipt of such waiver, the
Corporation upon receipt of such waiver shall immediately pay to
Employee any withheld Contract Payments which would have been paid had
the Corporation had the Employee's written waiver prior to the date the
Corporation withheld any such payments.
For purposes of this limitation
(a) no portion of the Total Payments shall be taken into account which
in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Employee does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code,
(b) the Contract Payments shall be reduced only to the extent necessary
so that the Total Payments (other than those Contract Payments which
are waived in writing by the Employee or referred to in clause (a)) in
their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of
the tax counsel referred to in clause (a); and
(c) the value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles of
section 280G(d)(3) and (4) of the Code.
17. This agreement shall be governed by the laws of the Commonwealth of
Pennsylvania.
<PAGE> 10
WITNESS the due execution hereto the day and year first above written.
ATTEST: JLK DIRECT DISTRIBUTION INC.
/s/ KEVIN G. NOWE, Assistant Secretary By:/s/ MICHAEL W. RUPRICH
- -------------------------------------- ---------------------------------
WITNESS: Employee:
/s/ PAUL J. WARD /s/ MICHAEL J. MUSSOG (SEAL)
- -------------------------------------- ------------------------------------
<PAGE> 11
Exhibit A
RELEASE
KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and
valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound, hereby releases, remises, quitclaims and
discharges completely and forever JLK Inc. and its directors, officers,
employees, subsidiaries and affiliates from any and all claims, causes of action
or rights which the undersigned has or may have, whether arising by virtue of
contract or of applicable state laws or federal laws, and whether such claims,
causes of action or rights are known or unknown; provided, however, that this
Release shall not release, remise, quitclaim or discharge any claims, causes of
action or rights which the undersigned may have (i) under that certain Amended
and Restated Employment Agreement dated __________ between the undersigned and
JLK Inc., (ii) to any unreimbursed expense account or similar out-of-pocket
reimbursement amounts owing the undersigned, or (iii) under the bylaws of JLK
Inc. or the applicable state corporate statutes to indemnification for having
served as an officer and/or employee of JLK Inc. and/or its subsidiaries.
DATE: __________________ _____________________________
<PAGE> 1
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
Consolidated Subsidiaries of JLK Direct
Distribution Inc.
J&L America, Inc. Michigan, United States
Consolidated Subsidiaries of J&L America, Inc.
J & L Industrial Supply UK (branch) England
J & L Werkeuge Und Industriebedarf G.m.b.H. Germany
ATS Industrial Supply Company Arizona, United States
GRS Industrial Supply Company Michigan, United States
Strong Tool Co. Ohio, United States
Dalworth Tool & Supply, Inc. Texas, United States
Production Tools Sales, Inc. Texas, United States
Abrasive & Tool Specialties Company Utah, United States
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 CONSOLIDATED FINANCIAL STATEMENTS AND THE JUNE 30, 1997 CONSOLIDATED
FINANCIAL STATEMENTS, AS RESTATED, FOR THE ADOPTION OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS 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> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 4,715 13,088
<SECURITIES> 0 0
<RECEIVABLES> 72,253 42,875
<ALLOWANCES> 827 286
<INVENTORY> 97,299 70,332
<CURRENT-ASSETS> 180,462 129,269
<PP&E> 26,531 11,236
<DEPRECIATION> 6,014 4,202
<TOTAL-ASSETS> 275,586 165,488
<CURRENT-LIABILITIES> 71,148 67,797
<BONDS> 0 0
0 0
0 0
<COMMON> 251 0
<OTHER-SE> 195,684 92,731
<TOTAL-LIABILITY-AND-EQUITY> 275,586 165,488
<SALES> 425,348 316,189
<TOTAL-REVENUES> 425,348 316,189
<CGS> 277,417 213,020
<TOTAL-COSTS> 277,417 213,020
<OTHER-EXPENSES> 3,279 771
<LOSS-PROVISION> 515 407
<INTEREST-EXPENSE> (2,975) 368
<INCOME-PRETAX> 44,376 31,825
<INCOME-TAX> 17,300 12,518
<INCOME-CONTINUING> 27,076 19,307
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 27,076 19,307
<EPS-PRIMARY> 1.08 0.92
<EPS-DILUTED> 1.07 0.92
</TABLE>
