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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission file number 1-13059
JLK DIRECT DISTRIBUTION INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2896928
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title Of Each Class Outstanding at May 3, 1999
------------------- --------------------------
Class A Common Stock, par value $.01 4,273,310
Class B Common Stock, par value $.01 20,237,000
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JLK DIRECT DISTRIBUTION INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1999 and June 30, 1998................................................................. 1
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 1999 and 1998.............................................. 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 1999 and 1998........................................................ 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)...................................................................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 7
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K................................................................. 12
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 2,178 $ 4,715
Notes receivable from Kennametal 4,690 1,169
Accounts receivable, less allowance for doubtful
accounts of $1,182 and $827 80,212 71,426
Inventories 102,619 97,299
Deferred income taxes 5,853 5,853
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Total current assets 195,552 180,462
----------- -----------
Property, plant and equipment:
Land and buildings 6,639 5,152
Machinery and equipment 26,083 21,379
Less accumulated depreciation (8,097) (6,014)
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Net property, plant and equipment 24,625 20,517
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Other assets:
Intangible assets, less accumulated
amortization of $12,261 and $8,231 65,713 71,090
Other 4,399 3,517
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Total other assets 70,112 74,607
----------- -----------
Total assets $ 290,289 $ 275,586
=========== ===========
LIABILITIES
Current liabilities:
Notes payable to banks $ 7,906 $ 1,915
Accounts payable 25,888 36,393
Due to Kennametal and affiliates 11,752 15,144
Income taxes payable 17,719 8,252
Accrued payroll and vacation pay 3,379 3,567
Other 6,832 5,877
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Total current liabilities 73,476 71,148
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Other liabilities 5,886 8,503
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Total liabilities 79,362 79,651
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SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value; 75,000 shares authorized;
4,917 shares issued, 4,273 and 4,288 shares outstanding 49 49
Class B Common Stock, $.01 par value; 50,000 shares authorized;
20,237 shares issued and outstanding 202 202
Additional paid-in capital 182,822 182,822
Retained earnings 42,369 27,076
Treasury stock, at cost; 644 and 629 shares of Class A Common
Stock held (14,529) (14,197)
Accumulated other comprehensive income (loss) 14 (17)
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Total shareholders' equity 210,927 195,935
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Total liabilities and shareholders' equity $ 290,289 $ 275,586
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Net sales $ 138,306 $ 109,945 $ 403,803 $ 299,058
Cost of goods sold 94,240 70,799 273,950 193,126
----------- ----------- ----------- -----------
Gross profit 44,066 39,146 129,853 105,932
Operating expenses 33,382 27,608 103,818 73,918
----------- ----------- ----------- -----------
Operating income 10,684 11,538 26,035 32,014
Interest expense (income) and other 127 (700) 742 (2,870)
----------- ----------- ----------- -----------
Income before provision for income taxes 10,557 12,238 25,293 34,884
Provision for income taxes 4,200 4,900 10,000 13,800
----------- ----------- ----------- -----------
Net income $ 6,357 $ 7,338 $ 15,293 $ 21,084
=========== =========== =========== ===========
PER SHARE DATA
Basic earnings per share $ 0.26 $ 0.29 $ 0.62 $ 0.84
=========== =========== =========== ===========
Diluted earnings per share $ 0.26 $ 0.29 $ 0.62 $ 0.83
=========== =========== =========== ===========
Weighted average shares outstanding 24,510 25,154 24,510 25,154
=========== =========== =========== ===========
Diluted weighted average shares outstanding 24,510 25,312 24,515 25,301
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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JLK DIRECT DISTRIBUTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 15,293 $ 21,084
Adjustments for noncash items:
Depreciation and amortization 6,414 3,315
(Gain) loss on sale of assets (6) 66
Changes in certain assets and liabilities, net of
effects of acquisitions and divestiture:
Accounts receivable (8,896) (9,590)
Inventories (7,021) (5,965)
Accounts payable and accrued liabilities (3,609) (1,601)
Other (2,139) (587)
----------- -----------
Net cash flow from operating activities 36 6,722
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,913) (4,399)
Notes receivable from Kennametal (3,521) (17,601)
Acquisitions, net of cash -- (43,974)
Divestiture 1,617 --
Other 266 112
----------- -----------
Net cash flow used for investing activities (8,551) (65,862)
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FINANCING ACTIVITIES
Net proceeds from initial public offering of
Class A Common Stock -- 90,430
Borrowings under (repayments of) notes payable to banks 5,991 (19,586)
Notes payable to Kennametal -- (15,805)
Purchase of treasury stock (332) --
----------- -----------
Net cash flow from financing activities 5,659 55,039
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Effect of exchange rate changes on cash 319 4
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CASH AND EQUIVALENTS
Net decrease in cash and equivalents (2,537) (4,097)
Cash and equivalents, beginning 4,715 13,088
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Cash and equivalents, ending $ 2,178 $ 8,991
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 344 $ 4
Income taxes paid 1,089 13,852
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the company's 1998 Annual Report on Form 10-K. The condensed consolidated
balance sheet as of June 30, 1998 has been derived from the audited balance
sheet included in the company's 1998 Annual Report on Form 10-K. These
interim statements are unaudited; however, management believes that all
adjustments necessary for a fair presentation have been made and all
adjustments are normal, recurring adjustments. The results for the three
months and nine months ended March 31, 1999 are not necessarily indicative
of the results to be expected for the full fiscal year. Certain amounts in
the prior years' consolidated financial statements have been reclassified
to conform with the current year presentation.
2. The accompanying condensed consolidated financial statements of JLK Direct
Distribution Inc. include the operations of J&L America, Inc. (J&L), a
previously wholly-owned subsidiary of Kennametal Inc. (Kennametal), and
Full Service Supply, which previously had been operated as a program of
Kennametal. Prior to April 1, 1997, the company had no separate legal
status or existence. Kennametal incorporated the company as a Pennsylvania
corporation under the name "JLK Direct Distribution Inc." in April 1997. In
anticipation of an initial public offering (IPO) of the Class A Common
Stock of the company, Kennametal contributed to the company the stock of
J&L, including the J&L United Kingdom operation, and the assets and
liabilities of Full Service Supply. Immediately prior to the effective date
of the IPO, Kennametal exchanged its currently outstanding investment for
20,897,000 shares of Class B Common Stock.
On July 2, 1997, the company consummated an IPO of approximately 4.9
million shares of Class A Common Stock at a price of $20.00 per share. The
net proceeds from the IPO were approximately $90.4 million and represented
approximately 20 percent of the company's outstanding common stock. The net
proceeds were used by the company to repay $20.0 million of short-term debt
related to a dividend paid to Kennametal and $20.0 million to repay
Kennametal for acquisitions in fiscal 1997 and income taxes paid on behalf
of the company. The remaining net proceeds of $50.4 million were used to
pay for fiscal 1998 acquisitions.
In connection with the IPO, Kennametal surrendered to the company 640,000
shares of Class B Common Stock equal to the number of additional shares of
Class A Common Stock purchased by the underwriters upon exercise of the
underwriters' over-allotment option. In addition, Kennametal sold 20,000
shares of Class B Common Stock at $20.00 per share to one of the members of
its and the company's board of directors. The 20,000 shares of Class B
Common Stock were subsequently converted to Class A Common Stock.
Subsequent to the IPO, 4,917,000 shares of Class A Common Stock were
outstanding, and Kennametal held 20,237,000 shares of Class B Common Stock.
Kennametal currently owns 83 percent of the outstanding stock of the
company due to treasury stock purchases made by the company since the IPO.
3. For purposes of determining the average number of dilutive shares
outstanding for the nine months ended March 31, 1999, weighted average
shares outstanding for the basic earnings per share calculation were
increased due to the dilutive effect of unexercised stock options by 4,254.
There was no dilutive effect from unexercised stock options for the three
months ended March 31, 1999. The dilutive effect of unexercised stock
options for the three months and nine months ended March 31, 1998 were
158,305 and 146,712, respectively.
4
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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4. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which requires the presentation of comprehensive income in a
company's financial statement disclosures. Comprehensive income represents
all changes in the equity of a company during the reporting period,
including net income, as well as charges and credits directly to retained
earnings which are excluded from net income. The company's components of
comprehensive income consist of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 6,357 $ 7,338 $ 15,293 $ 21,084
Foreign currency translation adjustments 53 -- 31 4
---------- ---------- ---------- ----------
Comprehensive income $ 6,410 $ 7,338 $ 15,324 $ 21,088
========== ========== ========== ==========
</TABLE>
Accumulated other comprehensive income (loss) consists solely of
cumulative foreign currency translation adjustments.
5. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by the
beginning of the first quarter of fiscal year 2000. SFAS No. 133
establishes accounting and reporting standards requiring all derivative
instruments (including certain derivative instruments imbedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at their fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Accounting for qualifying hedges allow a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. The company believes the adoption of SFAS No. 133
will not have a material effect on the financial statements or results of
operations of the company.
6. During fiscal 1998, the company acquired the following distributors of
metalcutting tools and industrial supplies:
<TABLE>
<CAPTION>
Acquisition
Date Acquired Acquisition Headquarters
----------------------------------------------------------------------------------------
<S> <C> <C>
October 1997 Car-Max Tool & Cutter, Inc. Rockford, Ill.
December 1997 GRS Industrial Supply Co. Grand Rapids, Mich.
January 1998 Production Tools Sales, Inc. Dallas, Texas
March 1998 Dalworth Tool & Supply, Inc. Arlington, Texas
March 1998 ATS Industrial Supply Company Salt Lake City, Utah
May 1998 Strong Tool Co. Cleveland, Ohio
</TABLE>
All acquisitions were accounted for under the purchase method of
accounting. The excess of the purchase price over the fair values of the
net assets acquired for the acquisitions has been recorded as goodwill. The
net purchase price of the acquisitions was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Current assets $ 38,360
Property, plant and equipment 3,431
Other long-term assets 590
Goodwill 39,850
Current liabilities (24,890)
---------
Purchase price, net of cash $ 57,341
=========
</TABLE>
5
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JLK DIRECT DISTRIBUTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The results of operations of the acquired businesses have been included in
the consolidated financial statements from the date of acquisition.
Estimated annualized sales for these acquisitions are approximately $137.0
million. On a pro forma basis, as if the acquisitions had taken place at
the beginning of the three-month and nine-month periods ended March 31,
1998, consolidated net sales would have been $138.1 million and $397.7
million, respectively. The pro forma impact on net income and diluted
earnings per share would not be materially different from the amount
reported for the three-month and nine-month periods ended March 31, 1998.
In connection with these acquisitions, the company also entered into
employee retention and non-compete agreements that amounted to
approximately $6.6 million. The remaining liability for these agreements,
and other similar agreements from previous acquisitions, at March 31, 1999
and June 30, 1998 recorded in other current liabilities was $2.5 million
and $2.8 million, respectively, and in other liabilities was $3.8 million
and $6.5 million, respectively.
7. The company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its
subsidiaries and sales to these entities were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Purchases from Kennametal and subsidiaries $ 9,829 $ 10,643 $ 28,550 $ 30,041
Sales to Kennametal and subsidiaries 4,160 2,603 10,379 7,795
</TABLE>
The company receives from Kennametal certain warehouse, management
information systems, financial and administrative services pursuant to
certain agreements between the company and Kennametal. Other agreements
between the company and Kennametal include a non-competition and corporate
opportunities allocation agreement, tax-sharing agreement, trademark
license agreement, product supply agreement and others, as more fully
described in the company's 1998 Annual Report on Form 10-K. All amounts
incurred by Kennametal on behalf of the company are reflected in operating
expenses in the accompanying statements of income. Costs charged to the
company by Kennametal under these agreements were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Administrative services agreement $ 1,686 $ 1,556 $ 4,928 $ 5,125
Warehousing agreement 915 1,395 2,939 3,705
Shared facilities agreement 105 57 365 177
Lease agreement 26 -- 79 --
---------- ---------- --------- ----------
Total costs charged by Kennametal $ 2,732 $ 3,008 $ 8,311 $ 9,007
========== ========== ========= ==========
</TABLE>
Under the Intercompany Debt/Investment and Cash Management Agreement with
Kennametal, the company incurred interest expense of $0.1 million and $0.5
million for the three and nine months ended March 31, 1999, respectively,
and earned $0.6 million and $2.8 million in interest income for the three
and nine months ended March 31, 1998, respectively.
8. On March 31, 1999, the company sold the assets of the steel mill business
of its subsidiary, Strong Tool Co., for approximately $1.6 million. There
was no significant impact on earnings as a result of this sale. The steel
mill business had annual sales of approximately $18.0 million. As this
business was marginally profitable, the impact on net income and diluted
earnings per share as a result of this sale is not material.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
NET SALES
Net sales for the March 1999 quarter were $138.3 million, an increase of 26
percent from $109.9 million last year. The overall increase in sales was
predominately attributable to acquisitions, which had sales of approximately
$30.9 million, and to a lesser extent, growth in Full Service Supply, offset by
lower mail-order sales due to the company's reduction of lower-margin business
from acquired companies.
Sales at J&L Industrial Supply rose 28 percent during the quarter due to
acquisitions. Sales were affected by reduced industrial activity across North
America and continued weakness in the oil and gas industries. In addition, sales
were reduced by lower mail-order sales due to the company's reduction of
lower-margin business from acquired companies.
Full Service Supply sales increased 21 percent compared to a year ago. This
growth is attributable to additional focus on growing this business as well as
the company's reputation for providing significant cost savings to its
customers. The company recognized sales to approximately 140 corporate customers
in the March 1999 quarter, an increase of 27 percent compared to the same period
a year ago. The number of plant sites served increased to 220 from 190 a year
ago.
For the nine-month period ended March 31, 1999, consolidated sales were $403.8
million, an increase of 35 percent from $299.1 million last year due to the
factors mentioned above.
GROSS PROFIT
Gross profit for the March 1999 quarter was $44.1 million, an increase of 13
percent from $39.1 million in the prior year. The gross profit margin for was
31.9 percent, down from 35.6 percent in the prior year. The gross profit margin
declined primarily as a result of lower-margin sales from acquisitions and the
growth in the Full Service Supply business, offset in part by improved margins
in the core J&L business.
For the nine-month period ended March 31, 1999, gross profit was $129.9 million,
up 23 percent from $105.9 million last year. Gross profit margin for the
nine-month period ended March 31, 1999 was 32.2 percent compared to 35.4 percent
in the prior year due to the factors mentioned above.
OPERATING EXPENSES
Operating expenses for the March 1999 quarter were $33.4 million, an increase of
21 percent from $27.6 million in the prior year. Operating expenses as a
percentage of sales were 24.1 percent compared to 25.1 percent in the prior
year. Operating expenses rose primarily as a result of increased costs from
acquisitions, including higher levels of amortization of intangible assets, and
higher direct mail costs, partially offset by cost-reduction actions implemented
in November 1998. These cost-reduction actions involved selected workforce
reductions, facility consolidations and closings, and other measures.
Also included in operating expenses were charges from Kennametal Inc.
(Kennametal) for warehousing, administrative, financial and management
information systems services provided to the company. Charges from Kennametal
were $2.7 million in the March 1999 quarter, a decrease of 9 percent from $3.0
million in the prior year. The decline in total charges from Kennametal resulted
from the reduction in warehouse charges in fiscal 1999 due to J&L taking over
the operation of several warehouses previously operated by Kennametal and the
closure of another commonly-operated facility. This was partially offset by
increased costs to support higher sales volumes.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
During the nine-month period ended March 31, 1999, operating expenses were
$103.8 million, up 40 percent from $73.9 million last year due to the factors
mentioned above. Charges from Kennametal were $8.3 million for the nine-month
period ended March 31, 1999, compared to $9.0 million in the prior year.
INTEREST EXPENSE (INCOME) AND OTHER
The company incurred interest expense from Kennametal of approximately $0.1
million and $0.5 million during the three-month and nine-month periods ended
March 31, 1999, respectively, due to amounts borrowed under notes payable to
Kennametal.
The company earned interest income of approximately $0.6 million and $2.8
million during the three-month and nine-month periods ended March 31, 1998,
respectively. This was primarily from investments of excess cash and from the
residual proceeds the company received from its initial public offering (IPO).
INCOME TAXES AND NET INCOME
The effective tax rate was 39.8 percent for the March 1999 quarter compared to
40.0 percent in the prior year. Net income decreased 13 percent to $6.4 million
for the March 1999 quarter from $7.3 million in the same quarter a year ago.
This decline is attributed to lower-margin sales from acquired companies, an
unfavorable product mix and higher operating expenses.
For the nine-month period ended March 31, 1999, the effective tax rate was 39.5
percent, relatively unchanged from the prior year. Net income decreased 27
percent to $15.3 million from $21.1 million in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary capital needs have been to fund working capital
requirements necessitated by sales growth, the addition of new products and Full
Service Supply programs, direct marketing programs in the United Kingdom and
Germany, and a showroom expansion program in the United States, and in fiscal
1998, to fund acquisitions. The company's primary sources of financing have been
cash from operations and the Intercompany Debt/Investment and Cash Management
Agreement with Kennametal, and in fiscal 1998, the net proceeds from the IPO.
The company anticipates that cash flows from operations and the Intercompany
Debt/Investment and Cash Management Agreement with Kennametal will be adequate
to support its operations for the foreseeable future.
Compared to the prior year, the decrease in net cash from operations resulted
primarily from lower net income and higher working capital requirements.
Net cash used for investing activities was $8.6 million for the nine months
ended March 31, 1999. The change in net cash used for investing activities
resulted from the repayment of a note receivable from Kennametal, reduced
acquisition activity and increased capital expenditures related primarily to the
new information systems, and the new distribution centers. This was partially
offset by the proceeds from the sale of the Strong Tool Co. steel mill business
unit.
Net cash flow from financing activities was $5.7 million for the nine months
ended March 31, 1999 and reflected amounts borrowed under notes payable to banks
which was used to fund investing activities. Financing activities in the prior
year include the net proceeds received from the issuance of common stock in
connection with the company's IPO. These amounts were partially offset by
repayments to Kennametal for funds previously advanced to the company for two
acquisitions in the June 1997 quarter and by the repayment of short-term
borrowings made under the company's line of credit primarily to fund the $20.0
million dividend paid to Kennametal.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
On July 2, 1997, the company consummated its IPO of approximately 4.9 million
shares of Class A Common Stock at a price of $20.00 per share. The net proceeds
from the IPO were approximately $90.4 million and represented approximately 20
percent of the company's outstanding common stock. The net proceeds were used by
the company to repay $20.0 million of short-term debt related to the dividend
paid to Kennametal and $20.0 million to repay Kennametal for the 1997
acquisitions and income taxes paid on behalf of the company. The remaining net
proceeds of $50.4 million were used to make acquisitions in fiscal 1998.
In June 1998, the company initiated a stock repurchase program to repurchase,
from time-to-time, up to a total of 20 percent, or approximately 1.0 million
shares, of its outstanding Class A Common Stock. During the nine months ended
March 31, 1999, the company repurchased 15,000 Class A shares at a total cost of
approximately $0.3 million. The repurchases were made in the open market or in
negotiated or other permissible transactions. The repurchase of common stock was
financed principally by available funds and short-term borrowings.
FINANCIAL CONDITION
The company's financial condition continues to remain strong. Total assets were
$290 million at March 31, 1999, up 5 percent from $276 million at June 30, 1998.
Net working capital increased to $122 million at March 31, 1999, up 12 percent
from $109 million at June 30, 1998. The company increased its debt levels to $8
million at March 31, 1999 to fund investing activity.
TERMINATION OF LARGE CONTRACT
During the September 1997 quarter, the company finalized its plan of
disengagement from those sites that are not being continued under the General
Electric (GE) Full Service Supply contract. Accordingly, Full Service Supply
sales experienced a gradual reduction as a result of this event. Sales to these
discontinued sites totaled $22.9 million in fiscal 1998. In fiscal 1999, the
company has not had any sales to GE for those manufacturing sites that were
discontinued.
YEAR 2000
The company continues to address its exposure relative to year 2000 issues for
both information and non-information technology systems. A committee actively
monitors the status of the readiness program of the company and its
subsidiaries. Overall, the company believes that 50 percent of the tasks
identified to remediate the year 2000 exposure have been completed for both
information and non-information technology systems, with the majority of the
remaining tasks targeted for September 1999 completion.
The company completed an assessment regarding the impact of this issue on its
existing information systems and determined that while not all systems were year
2000 compliant, these non-compliant systems could be modified to become year
2000 compliant. Due to the fact that the company was operating on several
different information systems, the company decided to implement a new business
system, HK System's Enterprise Information System, in order to have all existing
operations on one integrated system. This information system also is year 2000
compliant. The company is implementing this new business system in two phases
and has completed more than 80 percent of the tasks identified to remediate the
year 2000 exposure in the initial phase. This phase is expected to be tested and
completed in June 1999.
The second phase is expected to be initiated in late 1999, and tested and
completed thereafter. Due to the timing of the completion of this phase, the
company is currently modifying the existing non-compliant business systems to
ensure these operations are supported by a year 2000 compliant information
system. Testing of these modifications will be performed by September 1999.
Management has determined that sufficient internal resources are available and
adequate time exists to implement these procedures.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The company also has substantially completed an assessment of the impact of this
issue on its non-information technology systems, including the company's
personal computers, embedded technology in equipment used in operations, and
other non-information technology items, and has determined that the majority of
these systems are year 2000 compliant. The company is currently taking action to
remedy the non-compliant systems identified through replacement of, or
modification to, the existing systems. Such remedies will be subsequently tested
for year 2000 compliance prior to September 30, 1999.
The company estimates the total year 2000 expenditures to be approximately $8.0
to $13.0 million, with the majority being spent on the implementation of the
company's new business system. Included in the total costs are expenditures to
rectify non-compliant personal computers, embedded technology in equipment used
in operations, and various non-information technology items, which are estimated
to be $0.2 million. These costs include both internal and external personnel
costs related to the assessment, remediation and implementation processes, as
well as the cost of purchasing certain hardware and software. There can be no
guarantee that these estimates will be achieved and actual results could differ
from those planned.
Cash flows from operating and financing activities have provided, and should
continue to provide, funding for these expenditures. Through March 1999, the
company has incurred approximately $5.9 million of the total costs, of which
approximately $5.0 million relate to software licenses and hardware. The balance
of the expenditures are expected to be incurred in the remainder of fiscal 1999
and fiscal 2000.
Management believes the most significant risk of the year 2000 issue could be an
interrupted supply of goods and services from the company's vendors. The company
has an ongoing effort to gain assurances and certifications of suppliers'
readiness programs. To date, the results of this effort indicate that the
company's suppliers should be able to provide the company with sufficient goods
and services in the year 2000. The company will continue to expand its efforts
to ensure that major third-party businesses and public and private providers of
infrastructure services, such as utilities, communications services and
transportation, will also be prepared for the year 2000, and address any
failures on their part to become year 2000 compliant. Contingency plans may
include purchasing inventory from alternate certified vendors and the increase
of safety stock of major product lines. The company does not anticipate
employing this contingency plan.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate a year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue all of the year 2000 remediation activities discussed
herein.
OUTLOOK
In looking to the fourth quarter ending June 30, 1999, management expects sales
and earnings to be similar to the March quarter, when adjusted for the sale of
the Strong Tool Co. steel mill business, which occurred on March 31, 1999. The
steel mill business had annual sales of approximately $18.0 million and was
marginally profitable. The company's results should continue to benefit from the
cost-reduction actions implemented in November 1998. Management does not expect
overall economic conditions to strengthen in North America, but will remain
focused on improving the operating performance of the company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
This Form 10-Q contains "forward-looking statements," as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States and, to a lesser
extent, Europe, are not sustained, risks associated with integrating businesses,
demands on management resources, competition and the effect of third party or
company failures to achieve timely remediation of year 2000 issues. The company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances occurring after the date hereof.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
(10) Material Contracts
(10.1) Severance Agreement with former Executive Officer dated
February 25, 1999. Filed herewith.
(10.2) Severance Agreement with former Executive Officer dated
February 15, 1999. Filed herewith.
(27) Financial Data Schedule for nine months ended March 31, 1999,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JLK DIRECT DISTRIBUTION INC.
Date: May 17, 1999 By: /s/ DIANA L. SCOTT
-------------------
Diana L. Scott
Vice President and
Chief Financial Officer
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EXHIBIT 10.1
Confidential treatment has been requested for a portion of this exhibit. The
copy filed herewith omits the information subject to the confidentiality request
filed with the Securities and Exchange Commission. The omissions are designated
as " ** ". A complete version of this exhibit has been filed with the Securities
and Exchange Commission.
AGREEMENT
THIS AGREEMENT is made and entered into by and among Michael W. Ruprich
("Ruprich"), JLK Direct Distribution Inc., and Kennametal, Inc.
WHEREAS, JLK Direct Distribution Inc. terminated Ruprich's employment
as President and Chief Executive Officer effective 12:01 a.m. on September 17,
1998;
WHEREAS, Ruprich, JLK Direct Distribution Inc. and Kennametal, Inc.
desire to enter into a full and complete agreement in an amicable manner;
NOW THEREFORE, in consideration of the mutual promises contained
herein, and intending to be legally bound hereby, the parties to this Agreement
agree as follows:
1. Definitions
(a) "JLK," as used herein, shall at all times mean JLK Direct Distribution Inc.,
its parent, subsidiaries, successors and assigns, its affiliated and predecessor
companies or corporations, its divisions, their successors and assigns, their
affiliated and predecessor companies or corporations and the present and/or
former directors, officers, shareholders, employees, attorneys and agents of any
of them, including but not limited to Kennametal, Inc., J&L Industrial Supply,
and Full Service Supply, whether in their individual or official capacities, and
the current and former trustees or administrators of any pension or other
benefit plan applicable to the employees or former employees of JLK in their
official and individual capacities.
(b) "Kennametal," as used herein, shall at all times mean
Kennametal, Inc., its parent, subsidiaries, successors and assigns, its
affiliated and predecessor companies or corporations, its divisions, their
successors and assigns, their affiliated and predecessor companies or
corporations and the present or former directors, officers, shareholders,
employees, attorneys and agents of any of them, including but not limited to JLK
Direct Distribution Inc., whether in their individual or official capacities,
and the
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<PAGE> 2
current and former trustees or administrators of any pension or other benefit
plan applicable to the employees or former employees of Kennametal in their
official and individual capacities.
2. Termination of Employment
(a) Ruprich represents and agrees that effective 12:01 a.m. on September 17,
1998, his employment with JLK Direct Distribution Inc., his position as
President and Chief Executive Officer of JLK Direct Distribution Inc., and any
and all positions he held with JLK or Kennametal or their affiliates or
subsidiary companies ended. Ruprich, JLK and Kennametal agree that Ruprich: (a)
has not been required to perform any services for JLK or Kennametal since 12:01
a.m. on September 17, 1998; and (b) shall not be required to provide any further
services to JLK or Kennametal except as provided in paragraph 13 of this
Agreement.
(b) Ruprich waives any and all rights or claim of right to be reinstated to his
former or any other position with JLK or Kennametal and agrees that he shall not
at any time seek or accept future employment with JLK or Kennametal. A breach of
this subparagraph 2(b) by Ruprich will constitute lawful and just cause to
refuse to employ Ruprich, and he shall have no cause of action against JLK or
Kennametal for such refusal.
3. Severance
(a) At the time of his separation, Ruprich's monthly salary as President and
Chief Executive Officer of JLK was $29,167.00 per month. JLK continued to pay
Ruprich this amount, less applicable withholdings, from the time of his
termination through January 31, 1999. On or before February 28, 1999, JLK will
pay Ruprich $29,167.00, less applicable withholdings (representing continuing
payments for February 1999). Beginning in March 1999, JLK will pay Ruprich
$29,167.00 per month, in semi-monthly installments of $14,583.50, less
applicable withholdings, through June 16, 2000.
(b) The period during which Ruprich can exercise Kennametal and JLK stock
options, outstanding as of September 17, 1998, will be extended through
September 16, 2000.
(c) JLK will continue to provide Ruprich with coverage under the group health,
dental, vision, life insurance, and accidental death and dismemberment insurance
programs according to Ruprich's 1998 Enrollment Elections under JLK's Flex
Benefits Program, as well as under the $500,000.00 executive officer's term life
insurance policy, or with substantially similar coverage, through June 16, 2000.
Ruprich's contribution to this coverage, subject to increases consistent with
changes in contributions
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<PAGE> 3
made by current JLK employees, will be deducted from the payments described in
subparagraph 3(a). For benefit continuation purposes only, Ruprich will be
deemed to be an inactive employee on an approved termination related leave of
absence. For any period during which Ruprich is entitled to, eligible for, or
receiving group health, dental, vision, life insurance, accidental death and
dismemberment insurance, and/or executive officer's term life insurance benefits
from or through an employer or former employer other than JLK or Kennametal, JLK
will not be required to provide the corresponding benefit continuation described
in this subparagraph 3(c).
(d) JLK will not pay Ruprich any bonus.
(e) In lieu of providing executive outplacement services to Ruprich, JLK will
pay Ruprich $10,000.00, less applicable withholdings, within thirty (30) days
after the expiration of the seven (7) day period referenced in paragraph 15 of
this Agreement.
(f) In the event of a Change in Control of JLK Direct Distribution Inc. (as
hereinafter defined) occurring prior to September 17, 2000, and at Ruprich's
option, Ruprich will exercise his then-outstanding JLK options. For each share
of JLK common stock which Ruprich acquires upon exercise of an employee stock
option following an official announcement of a Change in Control of JLK Direct
Distribution Inc., and which Ruprich sells in the stock market within thirty
(30) days of that announcement for less than $24.00, if the announced Change in
Control of JLK Direct Distribution Inc. actually occurs, JLK will pay Ruprich
the difference between $24.00 and the sales price, less applicable withholdings.
If the stock market value of JLK common stock does not equal or exceed $20.00
per share at any time during that thirty (30) day period, and at Ruprich's
option, Ruprich may forfeit his then-outstanding JLK options by giving written
notice to David T. Cofer, Esquire within five (5) calendar days thereafter, and
JLK will pay Ruprich $4.00 per option so forfeited, less applicable
withholdings. The total payment from JLK to Ruprich pursuant to this
subparagraph 3(f) shall not exceed $400,000.00, less applicable withholdings.
The term "Change in Control of JLK Direct Distribution Inc." 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 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 Direct
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<PAGE> 4
Distribution Inc. 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 Direct Distribution Inc. or
Kennametal, Inc. immediately prior to the merger or consolidation, or (B) JLK
Direct Distribution Inc. shall sell all or substantially all of its operating
properties and assets to another person, group of associated persons or
corporation other than Kennametal, Inc. or its subsidiaries, or (C) any "person"
(as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than
Kennametal, Inc. or its subsidiaries, is or becomes a beneficial owner, directly
or indirectly, of securities of JLK Direct Distribution Inc. representing 25% or
more of the combined voting power of JLK Direct Distribution Inc.'s then
outstanding securities coupled with or followed by the existence of a majority
of the board of directors of JLK Direct Distribution Inc. consisting of persons
other than persons who either were directors of JLK Direct Distribution Inc.
immediately prior to or were nominated by those persons who were directors of
JLK Direct Distribution Inc. immediately prior to such person becoming a
beneficial owner, directly or indirectly, of securities of JLK Direct
Distribution Inc. representing 25% or more of the combined voting power of JLK
Direct Distribution Inc.'s then outstanding shares. A change in control of
Kennametal, Inc. shall not be considered a "Change in Control of JLK Direct
Distribution, Inc."
(g) If Ruprich becomes employed by or provides consultation to a competitor
prior to June 17, 2000, the salary continuation and benefits coverage extension
as described in subparagraphs 3(a) and 3(c) above shall terminate and be
discontinued immediately. For the purposes of this subparagraph 3(g),
"competitor" shall mean MSC Industrial Direct Co., Industrial Distribution
Group, Inc., Sandvik AB and Sandvik Coromant, SECO Tools AB, Iscar Ltd. and
Iscar Metals Inc., Milacron Inc., Carboloy Inc. and Valenite Inc., Airgas, Inc.,
W.W. Grainger, Inc. and/or any of their parents, subsidiaries, successors,
assigns, affiliated and predecessor companies or corporations, and divisions.
Ruprich agrees to immediately notify David T. Cofer, Esquire orally and in
writing of any employment, consulting arrangement, or comparable business
opportunity he undertakes with any of those entities before June 17, 2000.
(h) JLK's entire obligation to provide salary, incentive compensation,
severance, bonus, stock options, pension, 401(k), medical, dental, life, or
disability insurance, vacation, compensation, emoluments or benefits of any kind
to Ruprich is set forth in this Agreement and any other obligation of
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<PAGE> 5
JLK or Kennametal to provide any of the foregoing to Ruprich is hereby canceled
except that Ruprich shall retain the vested benefits he is entitled to receive
pursuant to the Kennametal, Inc. Retirement Income Plans and Thrift Plan.
4. No Actions
(a) Ruprich affirms that there are no charges, complaints, grievances or actions
by or concerning Ruprich against JLK or Kennametal currently pending in or
before any court, administrative agency, arbitrator or other entity.
(b) Ruprich agrees not to file, pursue, participate in, induce, aid or abet any
claim or cause of action against JLK or Kennametal, and Ruprich confirms that he
has not done so at any time prior to signing this Agreement. This provision does
not prohibit Ruprich from testifying in any cause of action relating to JLK or
Kennametal when required to do so by process of law, or from communicating with
the EEOC. In the event that Ruprich is required by process of law to testify in
any cause of action relating in any way to JLK or Kennametal, Ruprich shall
immediately notify David T. Cofer, Esquire orally and in writing, and shall use
his best lawful efforts not to testify until JLK and/or Kennametal has a
reasonable opportunity to oppose such testimony, if JLK and/or Kennametal
desires to do so. Ruprich agrees not to accept the proceeds from any cause of
action or proceeding against JLK or Kennametal. Communications between and among
Ruprich, Eric H. Clark, Esquire, Robert B. Sommer, Esquire, Nicholas P. Vari,
Esquire, P. Jerome Richey, Esquire, Robert W. Pritchard, Esquire, and/or David
T. Cofer, Esquire, which occurred prior to the execution of this Agreement, do
not constitute a breach by Ruprich of the first sentence of this subparagraph
4(b).
(c) Ruprich agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in this paragraph 4. In the
event JLK or Kennametal pursues a claim against Ruprich pursuant to this
subparagraph 4(c), but Ruprich is deemed not to have breached any of his
promises in this paragraph 4, JLK or Kennametal will pay the reasonable fees and
costs incurred by Ruprich in defending against said claim.
5. Release and Waiver
(a) As a material inducement to JLK and Kennametal to enter into this Agreement
and for and in consideration of the terms expressed herein, Ruprich, for
himself, his successors and assigns, does hereby irrevocably and unconditionally
release and forever discharge JLK and Kennametal of and from
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<PAGE> 6
any and all claims, charges, demands, liabilities, obligations, promises,
controversies, damages, rights, actions and causes of action of whatever nature,
kind or character, in law or equity, whether known or unknown ("Claims"), which
Ruprich now has, may have or claims to have or which he at any time heretofore
may have, had or claimed to have against JLK and/or Kennametal. This release
includes, but is not limited to, those Claims arising from or during Ruprich's
employment, related to his employment, as a result of his termination of or
separation from employment with JLK or Kennametal, his receipt of stock options,
or his ownership in securities, and Ruprich agrees not to assert any such Claims
or causes of action. This release and waiver includes, but is not limited to,
Claims arising under federal, state or local statutes, ordinances or common
laws, specifically including, but not limited to, the Civil Rights Act of 1866,
the Civil Rights Act of 1871, Title VII of the Civil Rights Act of 1964, the
Civil Rights Act of 1991, the Rehabilitation Act of 1973, the Americans with
Disabilities Act, the Age Discrimination in Employment Act, the Older Workers
Benefit Protection Act, the Employee Retirement Income Security Act of 1974,
Executive Order 11246, the Veterans Reemployment Statutes, the Family and
Medical Leave Act, the Securities Exchange Act of 1934, Securities and Exchange
Commission Rule 10b-5, the Pennsylvania Wage Payment and Collection Law, the
Michigan Act Regulating Payment of Wages and Fringe Benefits, the Pennsylvania
Human Relations Act, the Michigan Elliott-Larsen Civil Rights Act, or the
Michigan Handicappers' Civil Rights Act, all as amended, and Claims pertaining
to unlawful discrimination or harassment, any common law or statutory Claims for
breach of contract, detrimental reliance, wrongful discharge, defamation,
interference with current or prospective contractual relations, fraud, consumer
fraud or otherwise, and/or Claims for attorneys' fees and/or costs.
(b) Ruprich agrees to release and discharge JLK and Kennametal not only from any
and all claims which he could make on his own behalf, but also those which may
or could be brought by any person or organization in his behalf, and he
specifically waives any right to become, and promises not to become, a member of
any class in any proceeding or case in which a claim against JLK or Kennametal
may arise, in whole or in part, from any event which occurred prior to or as of
the date of this Agreement.
(c) **
(d) (i) Ruprich agrees not to file any lawsuit or demand for arbitration against
JLK or Kennametal for or relating to any event that occurred prior to the date
of signing this Agreement, except that, pursuant to paragraph 12 of this
Agreement, Ruprich may file a demand for arbitration for a breach
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<PAGE> 7
of any promises contained in this Agreement. In the event Ruprich files such a
demand, but JLK and/or Kennametal are deemed not to have breached any of their
promises in this Agreement, Ruprich will pay the reasonable fees and costs
incurred by JLK and/or Kennametal in defending against the claim.
(ii) JLK Direct Distribution Inc. agrees not to file any lawsuit or
demand for arbitration against Ruprich or Ruprich's attorneys for or relating to
any event that occurred prior to the date of signing this Agreement, except
that, pursuant to paragraph 12 of this Agreement, JLK Direct Distribution Inc.
may file a demand for arbitration for a breach of any promises or
representations contained in this Agreement. In the event JLK Direct
Distribution Inc. files such a demand, but Ruprich is deemed not to have
breached any of his promises or representations in this Agreement, JLK Direct
Distribution Inc. will pay the reasonable fees and costs incurred by Ruprich in
defending against the claim.
(iii) Kennametal, Inc. agrees not to file any lawsuit or demand for
arbitration against Ruprich or Ruprich's attorneys for or relating to any event
that occurred prior to the date of signing this Agreement, except that, pursuant
to paragraph 12 of this Agreement, Kennametal, Inc. may file a demand for
arbitration for a breach of any promises or representations contained in this
Agreement. In the event Kennametal, Inc. files such a demand, but Ruprich is
deemed not to have breached any of his promises or representations in this
Agreement, Kennametal, Inc. will pay the reasonable fees and costs incurred by
Ruprich in defending against the claim.
(e) Ruprich agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in this paragraph 5.
6. Ruprich confirms that he is not presently aware of any facts which would
support a claim by anyone against JLK or Kennametal under any federal, state or
local statute, ordinance or common law, including but not limited to claims for
unlawful discrimination or harassment, defamation, breach of contract, common
law fraud, violation of state consumer fraud statutes, securities fraud
(including violation of the Securities Exchange Act of 1934, Securities and
Exchange Commission Rule 10b-5, or similar state laws), or intentional
interference with current or prospective contractual relations.
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7. Confidentiality
(a) Ruprich recognizes and acknowledges JLK's and Kennametal's interest in the
confidentiality of this Agreement, and agrees that he shall keep the fact and
the terms of this Agreement and the negotiations leading to this Agreement
completely confidential.
(b) Ruprich further recognizes and acknowledges that his positions at JLK and
Kennametal were positions of trust and confidence and that by virtue of his
employment in such positions, Ruprich possesses confidential information and
trade secrets regarding JLK and Kennametal, including, but not limited to
information concerning JLK's and Kennametal's sales, customers, clients,
business, personal data, sources of supply or distribution, business plans,
technical secrets, methodologies, know-how, or the compensation, skills,
abilities, training or qualifications of JLK and Kennametal employees, officers
and directors, or other information not generally known to the public, including
information identified in subparagraph 9(a) of Ruprich's July 1, 1997 Amended
and Restated Officers Employment Agreement, and any tangible embodiments of said
confidential information and trade secrets (collectively "Confidential
Information"). Ruprich recognizes and acknowledges JLK's and Kennametal's
interest in the confidentiality of such Confidential Information.
(c) Ruprich promises and agrees not to disclose, either directly or indirectly,
in any manner whatsoever, any Confidential Information of any kind whatsoever
acquired in the course of his employment at JLK or Kennametal, unless compelled
by subpoena to give sworn testimony or to produce documents or other things
regarding said Confidential Information. Ruprich further promises and agrees
that if he is compelled by subpoena to give sworn testimony or produce documents
or things regarding said Confidential Information or to give sworn testimony or
produce documents or things which may include said Confidential Information,
Ruprich shall notify David T. Cofer, Esquire orally and in writing immediately
upon being served the subpoena or immediately upon being informed of the
possibility that he may be compelled to testify or produce documents or things
regarding said Confidential Information, whichever occurs first. Ruprich shall
use his best lawful efforts not to testify or produce documents or things until
JLK and/or Kennametal has a reasonable opportunity to oppose such testimony or
production, if JLK and/or Kennametal desires to do so.
(d) JLK and Ruprich agree that the July 1, 1997 Amended and Restated Officer's
Employment Agreement signed by Ruprich was valid and enforceable. Ruprich
reaffirms his continuing obligations
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<PAGE> 9
regarding trade secrets and confidential information as set forth in paragraph 9
of that employment agreement, and acknowledges that he has received all to which
he is entitled under that employment agreement and that JLK is not obligated to
make any future payments to Ruprich under that employment agreement.
(e) This paragraph 7 shall not prohibit Ruprich from (i) disclosing the fact and
terms of this Agreement to immediate family members and/or such professional
legal and tax advisors as he may from time to time engage, and/or government
officials or judicial officers for income or tax-reporting purposes in the event
Ruprich is legally required or professionally advised to do so, or (ii) stating
in response to any other inquiry that the terms of his separation from JLK are
confidential. To the extent that Ruprich does disclose the terms of this
Agreement to persons identified in subparagraph 7(e)(i), Ruprich shall advise
said persons that they must not disclose the fact and terms of the Agreement.
(f) **
(g) Ruprich promises and agrees that within ten (10) days of signing this
Agreement, he shall surrender to JLK any and all Confidential Information and
any and all books, records, files, documents, disks and other items relating to
JLK or Kennametal obtained or generated by Ruprich in the course of his
employment by JLK or Kennametal.
(h) If Ruprich discloses any information in breach of subparagraphs 7(c) or 7(f)
of this Agreement, or if one or more of Ruprich's attorneys (with or without
Ruprich's permission) discloses any information relating to the representation
of Ruprich without being compelled to do so by Rule 1.6(b) of the Pennsylvania
Rules of Professional Conduct, law or court order, to persons not identified in
subparagraph 7(e)(i) of this Agreement, then: (i) Ruprich shall repay to JLK any
payment he received under subparagraphs 3(a), 3(e), and 3(f) of this Agreement;
(ii) JLK shall not be required to make any further payments under subparagraphs
3(a) and 3(e) of this Agreement; (iii) the extended period during which Ruprich
could exercise Kennametal and JLK stock options, as described in subparagraph
3(b) of this Agreement, shall terminate and be discontinued immediately; (iv)
subparagraph 3(f) of this Agreement, relating to Change in Control, will
immediately be rendered null and void; and (v) the extended period during which
JLK agreed to continue to provide benefits as described in subparagraph 3(c) of
this Agreement, shall terminate and be discontinued immediately.
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(i) Ruprich agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in this paragraph 7. In the
event JLK or Kennametal pursues a claim against Ruprich pursuant to this
subparagraph 7(i), but Ruprich is deemed not to have breached any of his
promises in this paragraph 7, JLK or Kennametal will pay the reasonable fees and
costs incurred by Ruprich in defending against said claim.
(j) In the event that JLK and/or Kennametal take steps to seek relief from an
alleged breach of the foregoing terms of paragraph 7, all of the remaining
provisions of this Agreement shall remain in full force and effect.
8. No Solicitation. Ruprich agrees that, for two (2) years following his
separation from JLK, Ruprich will not, directly or indirectly, solicit or induce
or participate in recruiting, or attempt to solicit, induce, or recruit any
employee, current or future, of JLK or Kennametal, to leave JLK or Kennametal
for any reason whatsoever, or to hire, cause to be hired or assist in the hiring
of any current or future employee of JLK or Kennametal, or to provide
information to any third party to suggest, encourage, aid or facilitate such
solicitation, inducement, recruitment or hiring. The foregoing terms of this
paragraph 8 do not apply to any individual who has not been employed by JLK or
Kennametal for at least six (6) months immediately prior to the solicitation,
inducement or recruitment, if Ruprich has not, directly or indirectly,
encouraged that individual to terminate employment with JLK or Kennametal and
has not, directly or indirectly, provided or promised any compensation or
benefits to that individual during, or as a result of, that six (6) month
period.
9. **
10. Ruprich represents that he has not heretofore assigned or transferred, or
purported to assign or transfer, to any person or entity any Claim or any
portion thereof or interest therein.
11. Ruprich represents and acknowledges that in executing this Agreement he does
not rely, and has not relied, upon any representation or statement made by JLK
or Kennametal, or any of their agents, representatives or attorneys with regard
to the subject matter, basis or effect of this Agreement or otherwise.
12. The parties agree that in the event of any future dispute between Ruprich
and JLK or Kennametal, including any claims, counterclaims, cross claims or
third-party claims, whether referring or relating to any term of this Agreement,
disputes about whether or not the dispute is arbitrable, or any
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other matter which the parties are unable to resolve between themselves, the
dispute must be submitted to arbitration and must not be filed in any court.
Within ten (10) days after submission of a dispute to arbitration, each party
shall choose an arbitrator and within ten (10) days thereafter the American
Arbitration Association shall be requested to supply a third arbitrator and this
request shall be made by either party. In the event any party does not choose an
arbitrator within ten (10) days, as set forth above, the American Arbitration
Association shall also supply that arbitrator in addition to the third
arbitrator. The arbitration shall be held in Pittsburgh, Pennsylvania, and shall
commence and be completed as soon as possible under the Commercial Arbitration
Rules of the American Arbitration Association then in effect. In the event of
any dispute of any procedural, evidentiary, or substantive matter, including the
arbitrability of the dispute presented, the decision of the majority of the
arbitrators shall be final and conclusive upon the parties on the matter of
dispute.
13. Ruprich promises and agrees that if JLK or Kennametal shall, in the future,
require Ruprich's assistance or cooperation in preparation for, or the conduct
of, litigation or any proceeding, or for periodic consultation generally,
involving matters or events which occurred during Ruprich's employment by JLK or
Kennametal, or as to which Ruprich's knowledge or testimony may be important to
JLK or Kennametal, Ruprich shall furnish such assistance, cooperation, and
consultation to JLK or Kennametal as they shall reasonably request, as does not
unreasonably interfere with Ruprich's efforts to obtain alternative employment,
and as is within Ruprich's capability, provided that JLK or Kennametal shall
reimburse Ruprich for any expense Ruprich incurs in furnishing such assistance
and shall provide reasonable compensation for time expended on the matter by
Ruprich, except that: (a) JLK and Kennametal will not provide compensation to
Ruprich for time spent by Ruprich providing the assistance, cooperation or
consultation discussed in this paragraph 13 during the period in which Ruprich
is receiving payments under subparagraph 3(a) of this Agreement; and (b) no
compensation shall be paid for testimony in any litigation or proceeding.
14. Should any provision of this Agreement be declared or determined by any
court or arbitration panel to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part of
this Agreement. If a court or arbitration panel determines paragraph 4 or
paragraph 5 of this Agreement (or any subpart thereof) to be illegal or invalid,
then: (i) Ruprich shall repay to JLK the payments he
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received under subparagraphs 3(a), 3(e), and 3(f) of this Agreement; (ii) JLK
shall not be required to make any further payments under subparagraphs 3(a) and
3(e) of this Agreement; (iii) the extended period during which Ruprich could
exercise Kennametal and JLK stock options, as described in subparagraph 3(b) of
this Agreement, shall terminate and be discontinued immediately; (iv)
subparagraph 3(f) of this Agreement, relating to Change in Control, will
immediately be rendered null and void; and (v) the extended period during which
JLK agreed to continue to provide benefits as described in subparagraph 3(c) of
this Agreement, shall terminate and be discontinued immediately.
15. Ruprich agrees that he has been advised by JLK and Kennametal to consult
with an attorney of his choice and that he has done that, consulting with his
attorneys, Eric H. Clark, Esquire, Robert B. Sommer, Esquire, and Nicholas P.
Vari, Esquire, concerning his lawful remedies and rights as well as the meaning
and significance of this Agreement. Further, Ruprich confirms that he has
carefully read and fully understands the provisions of this Agreement, including
the release and waiver of claims of any nature, and that he has been given
twenty-one (21) days to consider the terms of this Agreement before signing the
Agreement. Ruprich may revoke acceptance of the release and waiver of Claims
arising under the Age Discrimination in Employment Act and the Older Workers
Benefit Protection Act contained in subparagraph 5(a) of this Agreement by
delivering a written revocation to David T. Cofer, Esquire, of Kennametal, Inc.,
P.O. Box 231, Latrobe, Pennsylvania 15650, within seven (7) days after executing
the Agreement. JLK's obligation to render payments under subparagraphs 3(a),
3(e) and 3(f) shall not commence until the seven (7) day period set forth herein
has expired without Ruprich's revocation. Ruprich acknowledges that his
execution of this Agreement is knowing and voluntary.
16. As used in this Agreement, the singular or plural number shall be deemed to
include the other whenever the context so indicates or requires. Whenever a
provision is stated in the disjunctive, it shall also be taken in the
conjunctive and vice versa. The use of any tense of any verb shall be considered
to include within its meaning all other tenses of the verbs so used.
17. The parties agree that this Agreement is the entire agreement between them,
supersedes all previous agreements between them, and represents their full and
complete understanding. No prior or contemporaneous oral agreements may be
offered to alter the terms of this Agreement. This Agreement shall be binding
upon the parties hereto and the parties' heirs, successors and assigns. This
Agreement may not be modified except in writing signed by both parties.
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18. This Agreement may be executed in counterparts, and when each party has
signed and delivered at least one such counterpart, each counterpart shall be
deemed an original, and, when taken together with other signed counterparts,
shall constitute one Agreement, which shall be binding upon and effective as to
all parties. For the purposes of this paragraph 18, a counterpart may be
delivered by facsimile.
19. This Agreement shall be governed by and interpreted in accordance with the
laws of the Commonwealth of Pennsylvania.
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A
RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS
WITNESS: /s/ Dianne L. Ruprich /s/ Michael W. Ruprich
------------------------- ------------------------
Michael W. Ruprich
Date: February 25, 1999
---------------------
JLK DIRECT DISTRIBUTION INC.
Date: February 25, 1999 By: /s/ H. Patrick Mahanes
--------------------- ------------------------
Director
KENNAMETAL INC.
Date: February 25, 1999 By: /s/ H. Patrick Mahanes
--------------------- ------------------------
Vice President
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EXHIBIT 10.2
Confidential treatment has been requested for a portion of this exhibit. The
copy filed herewith omits the information subject to the confidentiality request
filed with the Securities and Exchange Commission. The omissions are designated
as " ** ". A complete version of this exhibit has been filed with the Securities
and Exchange Commission.
AGREEMENT
THIS AGREEMENT is made and entered into by and among Roland E. Lazzaro
("Lazzaro"), JLK Direct Distribution Inc., and Kennametal, Inc.
WHEREAS, JLK Direct Distribution Inc. terminated Lazzaro's employment
as Vice President effective 12:01 a.m. on October 6, 1998;
WHEREAS, Lazzaro, JLK Direct Distribution Inc. and Kennametal, Inc.
desire to enter into a full and complete agreement in an amicable manner;
NOW THEREFORE, in consideration of the mutual promises contained
herein, and intending to be legally bound hereby, the parties to this Agreement
agree as follows:
1. Definitions
(a) "JLK," as used herein, shall at all times mean JLK Direct Distribution Inc.,
its parent, subsidiaries, successors and assigns, its affiliated and predecessor
companies or corporations, its divisions, their successors and assigns, their
affiliated and predecessor companies or corporations and the present and/or
former directors, officers, shareholders, employees, attorneys and agents of any
of them, including but not limited to Kennametal, Inc., J&L Industrial Supply,
and Full Service Supply, whether in their individual or official capacities, and
the current and former trustees or administrators of any pension or other
benefit plan applicable to the employees or former employees of JLK in their
official and individual capacities.
(b) "Kennametal," as used herein, shall at all times mean Kennametal, Inc., its
parent, subsidiaries, successors and assigns, its affiliated and predecessor
companies or corporations, its divisions, their successors and assigns, their
affiliated and predecessor companies or corporations and the present or former
directors, officers, shareholders, employees, attorneys and agents of any of
them, including but not limited to JLK Direct Distribution Inc., whether in
their individual or official capacities, and the
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current and former trustees or administrators of any pension or other benefit
plan applicable to the employees or former employees of Kennametal in their
official and individual capacities.
2. Termination of Employment
(a) Lazzaro represents and agrees that effective 12:01 a.m. on October 6, 1998,
his employment with JLK Direct Distribution Inc., his position as Vice President
of JLK Direct Distribution Inc., and any and all positions he held with JLK or
Kennametal or their affiliates or subsidiary companies ended. Lazzaro, JLK and
Kennametal agree that Lazzaro: (a) has not been required to perform any services
for JLK or Kennametal since 12:01 a.m. on October 6, 1998; and (b) shall not be
required to provide any further services to JLK or Kennametal except as provided
in paragraph 13 of this Agreement.
(b) Lazzaro waives any and all rights or claim of right to be reinstated to his
former or any other position with JLK or Kennametal and agrees that he shall not
at any time seek or accept future employment with JLK or Kennametal. A breach of
this subparagraph 2(b) by Lazzaro will constitute lawful and just cause to
refuse to employ Lazzaro, and he shall have no cause of action against JLK or
Kennametal for such refusal.
3. Severance
(a) At the time of his separation, Lazzaro's monthly salary as Vice President of
JLK was $12,500.00 per month. JLK continued to pay Lazzaro this amount, less
applicable withholdings, from the time of his termination through January 5,
1999. On or before February 28, 1999, JLK will pay Lazzaro $22,115.38, less
applicable withholdings (representing continuing payments for January 1999 and
February 1999, minus $2,884.62 already paid). Beginning in March 1999, JLK will
pay Lazzaro $12,500.00 per month, in semi-monthly installments of $6,250.00,
less applicable withholdings, through July 5, 2000.
(b) The period during which Lazzaro can exercise Kennametal and JLK stock
options, outstanding as of October 6, 1998, will be extended through October 5,
2000.
(c) JLK will continue to provide Lazzaro with coverage under the group health,
dental, vision, life insurance, and accidental death and dismemberment insurance
programs according to Lazzaro's 1998 Enrollment Elections under JLK's Flex
Benefits Program, or with substantially similar coverage, through July 5, 2000.
Lazzaro's contribution to this coverage, subject to increases consistent with
changes in contributions made by current JLK employees, will be deducted from
the payments described
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in subparagraph 3(a). For benefit continuation purposes only, Lazzaro
will be deemed to be an inactive employee on an approved termination related
leave of absence. For any period during which Lazzaro is entitled to, eligible
for, or receiving group health, dental, vision, life insurance, and/or
accidental death and dismemberment insurance benefits from or through an
employer or former employer other than JLK or Kennametal, JLK will not be
required to provide the corresponding benefit continuation described in this
subparagraph 3(c).
(d) JLK will not pay Lazzaro any bonus.
(e) In lieu of providing executive outplacement services to Lazzaro, JLK will
pay Lazzaro $10,000.00, less applicable withholdings, within thirty (30) days
after the expiration of the seven (7) day period referenced in paragraph 15 of
this Agreement.
(f) In the event of a Change in Control of JLK Direct Distribution
Inc. (as hereinafter defined) occurring prior to October 6, 2000, and at
Lazzaro's option, Lazzaro will exercise his then-outstanding JLK options. For
each share of JLK common stock which Lazzaro acquires upon exercise of an
employee stock option following an official announcement of a Change in Control
of JLK Direct Distribution Inc., and which Lazzaro sells in the stock market
within thirty (30) days of that announcement for less than $24.00, if the
announced Change in Control of JLK Direct Distribution Inc. actually occurs, JLK
will pay Lazzaro the difference between $24.00 and the sales price, less
applicable withholdings. If the stock market value of JLK common stock does not
equal or exceed $20.00 per share at any time during that thirty (30) day period,
and at Lazzaro's option, Lazzaro may forfeit his then-outstanding JLK options by
giving written notice to David T. Cofer, Esquire within five (5) calendar days
thereafter, and JLK will pay Lazzaro $4.00 per option so forfeited, less
applicable withholdings. The total payment from JLK to Lazzaro pursuant to this
subparagraph 3(f) shall not exceed $200,000.00, less applicable withholdings.
The term "Change in Control of JLK Direct Distribution Inc." 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 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 Direct
Distribution Inc. shall be merged or consolidated with any corporation or other
entity other than a
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merger or consolidation with a corporation or other entity all of whose equity
interests are owned by JLK Direct Distribution Inc. or Kennametal, Inc.
immediately prior to the merger or consolidation, or (B) JLK Direct Distribution
Inc. shall sell all or substantially all of its operating properties and assets
to another person, group of associated persons or corporation, other than
Kennametal, Inc. or its subsidiaries, or (C) any "person" (as such term is used
in Sections 13(d) and 14(d) of the 1934 Act), other than Kennametal, Inc. or its
subsidiaries, is or becomes a beneficial owner, directly or indirectly, of
securities of JLK Direct Distribution Inc. representing 25% or more of the
combined voting power of JLK Direct Distribution Inc.'s then outstanding
securities coupled with or followed by the existence of a majority of the board
of directors of JLK Direct Distribution Inc. consisting of persons other than
persons who either were directors of JLK Direct Distribution Inc. immediately
prior to or were nominated by those persons who were directors of JLK Direct
Distribution Inc. immediately prior to such person becoming a beneficial owner,
directly or indirectly, of securities of JLK Direct Distribution Inc.
representing 25% or more of the combined voting power of JLK Direct Distribution
Inc.'s then outstanding shares. A change in control of Kennametal, Inc. shall
not be considered a "Change in Control of JLK Direct Distribution, Inc."
(g) If Lazzaro becomes employed by or provides consultation to a competitor
prior to July 6, 2000, the salary continuation and benefits coverage extension
as described in subparagraphs 3(a) and 3(c) above shall terminate and be
discontinued immediately. For the purposes of this subparagraph 3(g),
"competitor" shall mean MSC Industrial Direct Co., Industrial Distribution
Group, Inc., Sandvik AB and Sandvik Coromant, SECO Tools AB, Iscar Ltd. and
Iscar Metals Inc., Milacron Inc., Carboloy Inc. and Valenite Inc., Airgas, Inc.,
W.W. Grainger, Inc. and/or any of their parents, subsidiaries, successors,
assigns, affiliated and predecessor companies or corporations, and divisions.
Lazzaro agrees to immediately notify David T. Cofer, Esquire orally and in
writing of any employment, consulting arrangement, or comparable business
opportunity he undertakes with any of those entities before July 6, 2000.
(h) If each of the following conditions are satisfied, JLK will pay a realtor
designated by Lazzaro and/or Lazzaro's mover up to $25,000.00, on an after-tax
basis, for moving expenses and/or real estate commissions actually incurred by
Lazzaro: (A) Lazzaro moves his primary residence to Western Pennsylvania before
July 6, 2000; (B) the above move is Lazzaro's first move following the date of
this
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Agreement; (C) the above move is not for the purposes of accepting or furthering
employment or consulting opportunities with a competitor, as that term is
defined in subparagraph 3(g) of this Agreement; (D) Lazzaro is not moving for
the purposes of accepting or furthering employment or consulting opportunities
with an entity which ordinarily pays all or a portion of moving expenses
incurred by a person similarly situated to Lazzaro; (E) Lazzaro incurs moving
expenses and/or real estate commissions as a result of the above move; and (F)
Lazzaro submits written invoices to David T. Cofer, Esquire, indicating the
amount of expenses and/or commissions incurred as a result of the above move and
the specific purpose for which the expense was incurred. JLK's total payments to
the realtor and/or mover pursuant to this subparagraph 3(h) shall not exceed
$25,000.00 on an after-tax basis.
(i) JLK's entire obligation to provide salary, incentive compensation,
severance, bonus, stock options, pension, 401(k), medical, dental, life, or
disability insurance, vacation, compensation, emoluments or benefits of any kind
to Lazzaro is set forth in this Agreement and any other obligation of JLK or
Kennametal to provide any of the foregoing to Lazzaro is hereby canceled except
that Lazzaro shall retain the vested benefits he is entitled to receive pursuant
to the Kennametal, Inc. Retirement Income Plans and Thrift Plan.
(j) Lazzaro acknowledges his continuing obligations to repay his outstanding
loan under his 401(k) plan. This Agreement is not intended to, and does not,
interfere with Lazzaro's obligations regarding said loan.
4. No Actions
(a) Lazzaro affirms that there are no charges, complaints, grievances or actions
by or concerning Lazzaro against JLK or Kennametal currently pending in or
before any court, administrative agency, arbitrator or other entity.
(b) Lazzaro agrees not to file, pursue, participate in, induce, aid or abet any
claim or cause of action against JLK or Kennametal, and Lazzaro confirms that he
has not done so at any time prior to signing this Agreement. This provision does
not prohibit Lazzaro from testifying in any cause of action relating to JLK or
Kennametal when required to do so by process of law, or from communicating with
the EEOC. In the event that Lazzaro is required by process of law to testify in
any cause of action relating in any way to JLK or Kennametal, Lazzaro shall
immediately notify David T. Cofer, Esquire orally and in writing, and shall use
his best lawful efforts not to testify until JLK and/or Kennametal has a
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reasonable opportunity to oppose such testimony, if JLK and/or Kennametal
desires to do so. Lazzaro agrees not to accept the proceeds from any cause of
action or proceeding against JLK or Kennametal. Communications between and among
Lazzaro, Martin E. Lazzaro, Esquire, Louis B. Loughren, Esquire, Robert B.
Sommer, Esquire, Nicholas P. Vari, Esquire, P. Jerome Richey, Esquire, Robert W.
Pritchard, Esquire, and/or David T. Cofer, Esquire, which occurred prior to the
execution of this Agreement, do not constitute a breach by Lazzaro of the first
sentence of this subparagraph 4(b).
(c) Lazzaro agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in this paragraph 4. In the
event JLK or Kennametal pursues a claim against Lazzaro pursuant to this
subparagraph 4(c), but Lazzaro is deemed not to have breached any of his
promises in this paragraph 4, JLK or Kennametal will pay the reasonable fees and
costs incurred by Lazzaro in defending against said claim.
5. Release and Waiver
(a) As a material inducement to JLK and Kennametal to enter into this Agreement
and for and in consideration of the terms expressed herein, Lazzaro, for
himself, his successors and assigns, does hereby irrevocably and unconditionally
release and forever discharge JLK and Kennametal of and from any and all claims,
charges, demands, liabilities, obligations, promises, controversies, damages,
rights, actions and causes of action of whatever nature, kind or character, in
law or equity, whether known or unknown ("Claims"), which Lazzaro now has, may
have or claims to have or which he at any time heretofore may have, had or
claimed to have against JLK and/or Kennametal. This release includes, but is not
limited to, those Claims arising from or during Lazzaro's employment, related to
his employment, as a result of his termination of or separation from employment
with JLK or Kennametal, his receipt of stock options, or his ownership in
securities, and Lazzaro agrees not to assert any such Claims or causes of
action. This release and waiver includes, but is not limited to, Claims arising
under federal, state or local statutes, ordinances or common laws, specifically
including, but not limited to, the Securities Exchange Act of 1934, Securities
and Exchange Commission Rule 10b-5, the Civil Rights Act of 1866, the Civil
Rights Act of 1871, Title VII of the Civil Rights Act of 1964, the Civil Rights
Act of 1991, the Rehabilitation Act of 1973, the Americans with Disabilities
Act, the Age Discrimination in Employment Act, the Older Workers Benefit
Protection Act, the Employee Retirement Income Security Act of 1974, Executive
Order 11246, the Veterans Reemployment Statutes, the Family and Medical Leave
Act, the
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Pennsylvania Wage Payment and Collection Law, the Michigan Act Regulating
Payment of Wages and Fringe Benefits, the Pennsylvania Human Relations Act, the
Michigan Elliott-Larsen Civil Rights Act, or the Michigan Handicappers' Civil
Rights Act, all as amended, and Claims pertaining to unlawful discrimination or
harassment, any common law or statutory Claims for breach of contract,
detrimental reliance, wrongful discharge, defamation, interference with current
or prospective contractual relations, fraud, consumer fraud or otherwise, and/or
Claims for attorneys' fees and/or costs.
(b) Lazzaro agrees to release and discharge JLK and Kennametal not only from any
and all claims which he could make on his own behalf, but also those which may
or could be brought by any person or organization in his behalf, and he
specifically waives any right to become, and promises not to become, a member of
any class in any proceeding or case in which a claim against JLK or Kennametal
may arise, in whole or in part, from any event which occurred prior to or as of
the date of this Agreement.
(c) **
(d) (i) Lazzaro agrees not to file any lawsuit or demand for arbitration against
JLK or Kennametal for or relating to any event that occurred prior to the date
of signing this Agreement, except that, pursuant to paragraph 12 of this
Agreement, Lazzaro may file a demand for arbitration for a breach of any
promises contained in this Agreement. In the event Lazzaro files such a demand,
but JLK and/or Kennametal are deemed not to have breached any of their promises
in this Agreement, Lazzaro will pay the reasonable fees and costs incurred by
JLK and/or Kennametal in defending against the claim.
(ii) JLK Direct Distribution Inc. agrees not to file any lawsuit or
demand for arbitration against Lazzaro or Lazzaro's attorneys for or relating to
any event that occurred prior to the date of signing this Agreement, except
that, pursuant to paragraph 12 of this Agreement, JLK Direct Distribution Inc.
may file a demand for arbitration for a breach of any promises or
representations contained in this Agreement. In the event JLK Direct
Distribution Inc. files such a demand, but Lazzaro is deemed not to have
breached any of his promises or representations in this Agreement, JLK Direct
Distribution Inc. will pay the reasonable fees and costs incurred by Lazzaro in
defending against said claim.
(iii) Kennametal, Inc. agrees not to file any lawsuit or demand for
arbitration against Lazzaro or Lazzaro's attorneys for or relating to any event
that occurred prior to the date of signing this Agreement, except that, pursuant
to paragraph 12 of this Agreement, Kennametal, Inc. may file a
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demand for arbitration for a breach of any promises or representations contained
in this Agreement. In the event Kennametal, Inc. files such a demand, but
Lazzaro is deemed not to have breached any of his promises or representations in
this Agreement, Kennametal, Inc. will pay the reasonable fees and costs incurred
by Lazzaro in defending against said claim.
(e) Lazzaro agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in this paragraph 5.
6. Lazzaro confirms that he is not presently aware of any facts which would
support a claim by anyone against JLK or Kennametal under any federal, state or
local statute, ordinance or common law, including but not limited to claims for
unlawful discrimination or harassment, defamation, breach of contract, common
law fraud, violation of state consumer fraud statutes, securities fraud
(including violation of the Securities Exchange Act of 1934, Securities and
Exchange Commission Rule 10b-5, or similar state laws), or intentional
interference with current or prospective contractual relations.
7. Confidentiality
(a) Lazzaro recognizes and acknowledges JLK's and Kennametal's interest in the
confidentiality of this Agreement, and agrees that he shall keep the fact and
the terms of this Agreement and the negotiations leading to this Agreement
completely confidential.
(b) Lazzaro further recognizes and acknowledges that his positions at JLK and
his prior employer, Kennametal, were positions of trust and confidence and that
by virtue of his employment in such positions, Lazzaro possesses confidential
information and trade secrets regarding JLK and Kennametal, including, but not
limited to information concerning JLK's and Kennametal's sales, customers,
clients, business, personal data, sources of supply or distribution, business
plans, technical secrets, methodologies, know-how, or the compensation, skills,
abilities, training or qualifications of JLK and Kennametal employees, officers
and directors, or other information not generally known to the public, including
information identified in subparagraph 9(a) of Lazzaro's July 1, 1997 Amended
and Restated Officers Employment Agreement, and any tangible embodiments of said
confidential information and trade secrets (collectively "Confidential
Information"). Lazzaro recognizes and acknowledges JLK's and Kennametal's
interest in the confidentiality of such Confidential Information.
(c) Lazzaro promises and agrees not to disclose, either directly or indirectly,
in any manner whatsoever, any Confidential Information of any kind whatsoever
acquired in the course of his
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employment at JLK or Kennametal, unless compelled by subpoena to give sworn
testimony or to produce documents or other things regarding said Confidential
Information. Lazzaro further promises and agrees that if he is compelled by
subpoena to give sworn testimony or produce documents or things regarding said
Confidential Information or to give sworn testimony or produce documents or
things which may include said Confidential Information, Lazzaro shall notify
David T. Cofer, Esquire orally and in writing immediately upon being served the
subpoena or immediately upon being informed of the possibility that he may be
compelled to testify or produce documents or things regarding said Confidential
Information, whichever occurs first. Lazzaro shall use his best lawful efforts
not to testify or produce documents or things until JLK and/or Kennametal has a
reasonable opportunity to oppose such testimony or production, if JLK and/or
Kennametal desires to do so.
(d) JLK and Lazzaro agree that the July 1, 1997 Amended and Restated Officer's
Employment Agreement signed by Lazzaro was valid and enforceable. Lazzaro
reaffirms his continuing obligations regarding trade secrets and confidential
information as set forth in paragraph 9 of that employment agreement, and
acknowledges that he has received all to which he is entitled under that
employment agreement and that JLK is not obligated to make any future payments
to Lazzaro under that employment agreement.
(e) This paragraph 7 shall not prohibit Lazzaro from (i) disclosing the fact and
terms of this Agreement to immediate family members and/or such professional
legal and tax advisors as he may from time to time engage, and/or government
officials or judicial officers for income or tax-reporting purposes in the event
Lazzaro is legally required or professionally advised to do so, or (ii) stating
in response to any other inquiry that the terms of his separation from JLK are
confidential. To the extent that Lazzaro does disclose the terms of this
Agreement to persons identified in subparagraph 7(e)(i), Lazzaro shall advise
said persons that they must not disclose the fact and terms of the Agreement.
(f) **
(g) Lazzaro promises and agrees that within ten (10) days of signing this
Agreement, he shall surrender to JLK any and all Confidential Information and
any and all books, records, files, documents, disks and other items relating to
JLK or Kennametal obtained or generated by Lazzaro in the course of his
employment by JLK or Kennametal.
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(h) If Lazzaro discloses any information in breach of subparagraphs 7(c) or 7(f)
of this Agreement, or if one or more of Lazzaro's attorneys (with or without
Lazzaro's permission) discloses any information relating to the representation
of Lazzaro without being compelled to do so by Rule 1.6(b) of the Pennsylvania
Rules of Professional Conduct, law or court order, to persons not identified in
subparagraph 7(e)(i) of this Agreement, then: (i) Lazzaro shall repay to JLK any
payment made or received under subparagraphs 3(a), 3(e), 3(f), and 3(h) of this
Agreement; (ii) JLK shall not be required to make any further payments under
subparagraphs 3(a), 3(e) and 3(h) of this Agreement; (iii) the extended period
during which Lazzaro could exercise Kennametal and JLK stock options, as
described in subparagraph 3(b) of this Agreement, shall terminate and be
discontinued immediately; (iv) subparagraph 3(f) of this Agreement, relating to
Change in Control, will immediately be rendered null and void; and (v) the
extended period during which JLK agreed to continue to provide benefits as
described in subparagraph 3(c) of this Agreement, shall terminate and be
discontinued immediately.
(i) Lazzaro agrees to pay for any legal fees or costs incurred by JLK or
Kennametal as a result of any breach of his promises in paragraph 7. In the
event JLK or Kennametal pursues a claim against Lazzaro pursuant to this
paragraph 7(i), but Lazzaro is deemed not to have breached any of his promises
in this paragraph 7, JLK or Kennametal will pay the reasonable fees and costs
incurred by Lazzaro in defending against said claim.
(j) In the event that JLK and/or Kennametal take steps to seek relief from an
alleged breach of the foregoing terms of paragraph 7, all of the remaining
provisions of this Agreement shall remain in full force and effect.
8. No Solicitation. Lazzaro agrees that, for two (2) years following his
separation from JLK, Lazzaro will not, directly or indirectly, solicit or induce
or participate in recruiting, or attempt to solicit, induce, or recruit any
employee, current or future, of JLK or Kennametal, to leave JLK or Kennametal
for any reason whatsoever, or to hire, cause to be hired or assist in the hiring
of any current or future employee of JLK or Kennametal, or to provide
information to any third party to suggest, encourage, aid or facilitate such
solicitation, inducement, recruitment or hiring.
9. **
10. Lazzaro represents that he has not heretofore assigned or transferred, or
purported to assign or transfer, to any person or entity any Claim or any
portion thereof or interest therein.
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11. Lazzaro represents and acknowledges that in executing this Agreement he does
not rely, and has not relied, upon any representation or statement made by JLK
or Kennametal, or any of their agents, representatives or attorneys with regard
to the subject matter, basis or effect of this Agreement or otherwise.
12. The parties agree that in the event of any future dispute between Lazzaro
and JLK or Kennametal, including any claims, counterclaims, cross claims or
third-party claims, whether referring or relating to any term of this Agreement,
disputes about whether or not the dispute is arbitrable, or any other matter
which the parties are unable to resolve between themselves, the dispute must be
submitted to arbitration and must not be filed in any court. Within ten (10)
days after submission of a dispute to arbitration, each party shall choose an
arbitrator and within ten (10) days thereafter the American Arbitration
Association shall be requested to supply a third arbitrator and this request
shall be made by either party. In the event any party does not choose an
arbitrator within ten (10) days, as set forth above, the American Arbitration
Association shall also supply that arbitrator in addition to the third
arbitrator. The arbitration shall be held in Pittsburgh, Pennsylvania, and shall
commence and be completed as soon as possible under the Commercial Arbitration
Rules of the American Arbitration Association then in effect. In the event of
any dispute of any procedural, evidentiary, or substantive matter, including the
arbitrability of the dispute presented, the decision of the majority of the
arbitrators shall be final and conclusive upon the parties on the matter of
dispute.
13. Lazzaro promises and agrees that if JLK or Kennametal shall, in the future,
require Lazzaro's assistance or cooperation in preparation for, or the conduct
of, litigation or any proceeding, or for periodic consultation generally,
involving matters or events which occurred during Lazzaro's employment by JLK or
Kennametal, or as to which Lazzaro's knowledge or testimony may be important to
JLK or Kennametal, Lazzaro shall furnish such assistance, cooperation, and
consultation to JLK or Kennametal as they shall reasonably request, as does not
unreasonably interfere with Lazzaro's efforts to obtain alternative employment,
and as is within Lazzaro's capability, provided that JLK or Kennametal shall
reimburse Lazzaro for any expense Lazzaro incurs in furnishing such assistance
and shall provide reasonable compensation for time expended on the matter by
Lazzaro, except that: (a) JLK and Kennametal will not provide compensation to
Lazzaro for time spent by Lazzaro providing the assistance, cooperation or
consultation discussed in this paragraph 13 during the period in which
11
<PAGE> 12
Lazzaro is receiving payments under subparagraph 3(a) of this Agreement; and (b)
no compensation shall be paid for testimony in any litigation or proceeding.
14. Should any provision of this Agreement be declared or determined by any
court or arbitration panel to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part of
this Agreement. If a court or arbitration panel determines paragraph 4 or
paragraph 5 of this Agreement (or any subpart thereof) to be illegal or invalid,
then: (i) Lazzaro shall repay to JLK the payments made or received under
subparagraphs 3(a), 3(e), 3(f), and 3(h) of this Agreement; (ii) JLK shall not
be required to make any further payments under subparagraphs 3(a), 3(e) and 3(h)
of this Agreement; (iii) the extended period during which Lazzaro could exercise
Kennametal and JLK stock options, as described in paragraph 3(b) of this
Agreement, shall terminate and be discontinued immediately; (iv) subparagraph
3(f) of this Agreement, relating to Change in Control, will immediately be
rendered null and void; and (v) the extended period during which JLK agreed to
continue to provide benefits as described in subparagraph 3(c) of this
Agreement, shall terminate and be discontinued immediately.
15. Lazzaro agrees that he has been advised by JLK and Kennametal to consult
with an attorney of his choice and that he has done that, consulting with his
attorneys, Martin E. Lazzaro, Esquire, Louis B. Loughren, Esquire, Robert B.
Sommer, Esquire, and Nicholas P. Vari, Esquire concerning his lawful remedies
and rights as well as the meaning and significance of this Agreement. Further,
Lazzaro confirms that he has carefully read and fully understands the provisions
of this Agreement, including the release and waiver of claims of any nature, and
that he has been given twenty-one (21) days to consider the terms of this
Agreement before signing the Agreement. Lazzaro may revoke acceptance of the
release and waiver of Claims arising under the Age Discrimination in Employment
Act and the Older Workers Benefit Protection Act contained in subparagraph 5(a)
of this Agreement by delivering a written revocation to David T. Cofer, Esquire
of Kennametal, Inc., P.O. Box 231, Latrobe, Pennsylvania 15650, within seven (7)
days after executing the Agreement. JLK's obligation to render payments under
subparagraphs 3(a), 3(e), 3(f), and 3(h) shall not commence until the seven (7)
day period set forth herein has expired without Lazzaro's revocation. Lazzaro
acknowledges that his execution of this Agreement is knowing and voluntary.
12
<PAGE> 13
16. As used in this Agreement, the singular or plural number shall be deemed to
include the other whenever the context so indicates or requires. Whenever a
provision is stated in the disjunctive, it shall also be taken in the
conjunctive and vice versa. The use of any tense of any verb shall be considered
to include within its meaning all other tenses of the verbs so used.
17. The parties agree that this Agreement is the entire agreement between them,
supersedes all previous agreements between them, and represents their full and
complete understanding. No prior or contemporaneous oral agreements may be
offered to alter the terms of this Agreement. This Agreement shall be binding
upon the parties hereto and the parties' heirs, successors and assigns. This
Agreement may not be modified except in writing signed by both parties.
18. This Agreement may be executed in counterparts, and when each party has
signed and delivered at least one such counterpart, each counterpart shall be
deemed an original, and, when taken together with other signed counterparts,
shall constitute one Agreement, which shall be binding upon and effective as to
all parties. For the purposes of this paragraph 18, a counterpart may be
delivered by facsimile.
19. This Agreement shall be governed by and interpreted in accordance with the
laws of the Commonwealth of Pennsylvania.
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A
RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS
WITNESS: /s/ Martin E. Lazzaro /s/ Roland E. Lazzaro
--------------------------- ---------------------------
Roland E. Lazzaro
Date: February 15, 1999
JLK DIRECT DISTRIBUTION INC.
Date: February 15, 1999 By: /s/ H. Patrick Mahanes
--------------------------- -----------------------
Director
KENNAMETAL, INC.
Date: February 15, 1999 By: /s/ H. Patrick Mahanes
--------------------------- -----------------------
Vice President
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1999 Condensed Consolidated Financial Statements (unaudited), and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,178
<SECURITIES> 0
<RECEIVABLES> 81,394
<ALLOWANCES> 1,182
<INVENTORY> 102,619
<CURRENT-ASSETS> 195,552
<PP&E> 32,722
<DEPRECIATION> 8,097
<TOTAL-ASSETS> 290,289
<CURRENT-LIABILITIES> 73,476
<BONDS> 0
0
0
<COMMON> 251
<OTHER-SE> 210,676
<TOTAL-LIABILITY-AND-EQUITY> 290,289
<SALES> 403,803
<TOTAL-REVENUES> 403,803
<CGS> 273,950
<TOTAL-COSTS> 273,950
<OTHER-EXPENSES> 4,053
<LOSS-PROVISION> 705
<INTEREST-EXPENSE> 723
<INCOME-PRETAX> 25,293
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 15,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,293
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
