Document:

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                                                                   Exhibit 10.5

                                    AGREEMENT

         THIS AGREEMENT, is made and entered into this 21st day of January,
2000, by and between JLK DIRECT DISTRIBUTION INC., a corporation organized under
the laws of the Commonwealth of Pennsylvania (hereinafter referred to as "JLK"
or the "Corporation"), and DIANA L. SCOTT, an individual (hereinafter referred
to as "Employee").

                                   WITNESSETH:

         WHEREAS, Employee acknowledges that by reason of employment by JLK, it
is anticipated that Employee will work with, add to, create, have access to and
be entrusted with trade secrets and confidential information belonging to JLK
and Kennametal Inc. ("Kennametal") which are of a technical nature or business
nature or pertain to future developments, the disclosure of which trade secrets
or confidential information would be highly detrimental to the interests of JLK
and Kennametal; and

         WHEREAS, in order to have the benefit of Employee's assistance, JLK is
desirous of continuing to employ Employee.

         NOW, THEREFORE, JLK and Employee, each intending to be legally bound
hereby, do mutually covenant and agree as follows:

1.       (a) Subject to the terms and conditions set forth herein, JLK hereby
         agrees to continue to employ Employee and Employee hereby accepts such
         continued employment and agrees to devote his full time and attention
         to the business and affairs of JLK, in such capacity or capacities and
         to perform to the best of his ability such services as shall be
         determined from time to time by the President and the Board of
         Directors of JLK until the termination of his employment hereunder.

         (b) Employee's base salary, the size of bonus awards, if any, granted
         to him and other emoluments for his services, if any, shall be
         determined by the Board of Directors of JLK or its Executive
         Compensation Committee, as appropriate, from time to time in their sole
         discretion.

2. In addition to the compensation set forth or contemplated elsewhere herein,
Employee, subject to the terms and conditions of this Agreement, shall be
entitled to continue to participate in all group insurance programs, retirement
income (pension) plans, thrift plans and vacation and holiday programs normally
provided for other executives of Kennametal and its subsidiaries for so long as
JLK remains a subsidiary of Kennametal. Nothing herein contained shall be deemed
to limit or prevent Employee, during his employment hereunder, from being
reimbursed by JLK for out-of-pocket expenditures incurred for travel, lodging,
meals, entertainment

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expenses or any other expenses in accordance with the policies of JLK
applicable to the executives of JLK.

3. Employee's employment may be terminated with or without any reason for
termination by JLK or Employee at any time by giving the other party prior
written notice thereof; provided, however, that any termination on the part of
JLK shall occur only if specifically authorized by its Board of Directors;
provided, further, that termination by JLK for Cause (as hereinafter defined)
shall be made by written notice which states that it is a termination for Cause;
and provided, further, that termination by Employee, other than termination for
Good Reason (as hereafter defined) following a Change-in-Control (as hereafter
defined), shall be on not less than 30 days prior written notice to JLK.

4.       (a) In the event that Employee's employment is terminated by JLK prior
         to a Change-in-Control and other than for Cause, Employee will receive
         as severance pay from JLK, in addition to all amounts due him at the
         Date of Termination (as hereinafter defined), an amount, payable
         promptly after the Date of Termination, equal to three months' base
         salary at the annual rate in effect on the Date of Termination.

         (b) In the event that Employee's employment is terminated (i) due to
         the death of the Employee or (ii) by Employee following a
         Change-in-Control without Good Reason or (iii) by Employee prior to a
         Change-in-Control, Employee will not be entitled to receive any
         severance pay in addition to the amounts, if any, due him at the Date
         of Termination.

         (c) In the event that at or after a Change-in-Control and prior to the
         third anniversary of the date of the Change-in-Control Employee's
         employment is terminated by Employee for Good Reason or by JLK other
         than for Cause or Disability pursuant to paragraph 5, Employee will
         receive as severance pay (in addition to all other amounts due him at
         the Date of Termination) from JLK an amount equal to the product of

                  (i) the lesser of

                           (x) two and eight tenths (2.8),

                           (y) a number equal to the number of calendar months
                           remaining from the Date of Termination to the
                           Employee's Retirement Date (as such term is hereafter
                           defined) divided by twelve (12), or

                           (z) a number equal to the product, if positive,
                           obtained by multiplying (AA) thirty-six (36) less the
                           number of completed months after the date of the
                           Change-in-Control during which the Employee was
                           employed and did not have Good Reason for termination
                           times (BB) one-twelfth (1/12);

                      times

                  (ii) the sum of

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                           (x) Employee's base salary at the annual rate in
                           effect on the Date of Termination (or, at Employee's
                           election, at the annual rate in effect on the first
                           day of the calendar month immediately prior to the
                           Change-in-Control), plus

                           (y) the average of any bonuses which Employee was
                           entitled to or paid during the three most recent
                           fiscal years ending prior to the Date of Termination
                           (or, at Employee's election, the average of any
                           bonuses which Employee was entitled to or paid for
                           the three fiscal years preceding the fiscal year in
                           which the Change-in-Control occurred).

                  Such severance pay shall be paid by delivery of a cashier's or
         certified check to the Employee at JLK's executive offices on a date
         which is no later than five business days following the Date of
         Termination.

         (d) If Employee is entitled to receive the severance payment set forth
         in paragraph 4(c), Employee also will receive from JLK the same or
         equivalent medical, dental, disability and group insurance benefits as
         were provided to the Employee by JLK at the Date of Termination, which
         benefits shall be provided by JLK to Employee for a three year period
         commencing on the Date of Termination. Pursuant to the terms of
         Kennametal's various benefit plans, Employee will not following a
         Change-in-Control have any rights to receive from Kennametal or from
         any medical, dental, disability, group insurance, retirement or pension
         plan or other benefit plan maintained or sponsored by Kennametal any
         benefits or other sums other than (i) to receive from the Kennametal
         Inc. Retirement Income Plan any vested benefits to the extent and at
         the times payable under the terms of the Kennametal Inc. Retirement
         Income Plan, (ii) to receive from the Kennametal Inc. Thrift Plan any
         vested benefits to the extent and at the times payable under the terms
         of the Kennametal Inc. Thrift Plan and (iii) to exercise any stock
         options held under Kennametal's stock option plans to the extent, if
         any, exerciseable and in accordance with the terms of Kennametal's
         stock option plans.

                  If for any reason, whether by law or provisions of any
         employee medical, dental or group insurance, or other benefit plan of
         JLK in which the Employee is eligible to participate, any benefits
         which the Employee would be entitled to under the foregoing paragraph
         of this subparagraph (d) cannot be paid pursuant to such employee
         benefit plans, then JLK hereby contractually agrees to pay to the
         Employee the difference between the benefits which the Employee would
         have received in accordance with the foregoing paragraph of this
         subparagraph (d) if the relevant employee medical, dental or group
         insurance or pension or retirement plan or other benefit plan could
         have paid such benefit and the amount of benefits, if any, actually
         paid by such employee medical, dental or group insurance or pension or
         retirement plan or other benefit plan. JLK shall not be required to
         fund its obligation to pay the foregoing difference.

                  If Employee is entitled to receive the severance payment set
         forth in paragraph 4(c), JLK shall also make supplemental pension
         payments to Employee equal in amount to the difference between the
         pension payable to Employee pursuant to the terms of the

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         Kennametal Inc. Retirement Income Plan (as in existence on the date of
         the Change-in-Control) and any increased pension which would have been
         payable to Employee under the terms of the Kennametal Inc. Retirement
         Income Plan (as in existence on the date of the Change-in-Control)
         assuming (i) JLK had remained a subsidiary of Kennametal and (ii)
         Employee had remained continuously in the employment of JLK for the
         three year period (or, if clause (i)(y) or clause (i)(z) of paragraph
         4(c) is applicable to determine the severance payment to be made, the
         lesser period measured in years and fractions thereof rounded to the
         nearest one-twelfth which equals the number determined by clause (i)(y)
         or clause (i)(z) above, whichever is applicable) following the Date of
         Termination at an annual compensation equal to the sum of the base
         salary and bonus which were used to compute the severance payment due
         the Employee under the first paragraph of paragraph 4(c). Such
         supplemental pension payments shall be paid by JLK to Employee ratably
         at the times when pension payments are made under the Kennametal Inc.
         Retirement Income Plan. JLK shall not be required to fund its
         obligation to pay the foregoing difference.

         (e) In the event of a termination of employment under the circumstances
         above described in paragraph 4(c), Employee shall have no duty to seek
         any other employment after termination of Employee's employment with
         JLK and JLK hereby waives and agrees not to raise or use any defense
         based on the position that Employee had a duty to mitigate or reduce
         the amounts due him hereunder by seeking other employment whether
         suitable or unsuitable and should Employee obtain other employment,
         then the only effect of such on the obligations of shall be that JLK
         shall be entitled to credit against any payments which would otherwise
         be made for medical, dental or group insurance or similar benefits
         (excluding, however, any credit against payments relating to pension or
         retirement benefits) pursuant to the benefit provisions set forth in
         paragraph 4(e) hereof, any comparable payments to which Employee is
         entitled under the employee benefit plans maintained by Employee's
         other employer or employers in connection with services to such
         employer or employers after termination of his employment with JLK.

         (f) The term "Change-in-Control" shall mean that all of the following
         conditions shall have occurred: (i) JLK is no longer a direct or
         indirect subsidiary of Kennametal, (ii) Kennametal and its affiliates
         no longer own any shares of Class B Common Stock of JLK and (iii) one
         or more persons (other than Kennametal or its subsidiaries) have
         acquired control of a nature that would be required to be reported by
         JLK in response to Item 6(e) of Schedule 14A promulgated under the
         Securities Exchange Act of 1934 as in effect on the date hereof (the
         "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,
         the third condition set forth in subclause (iii) of this sentence shall
         be deemed to have occurred if (A) JLK shall be merged or consolidated
         with any corporation or other entity other than a merger or
         consolidation with a corporation or other entity all of whose equity
         interests are owned (1) by JLK immediately prior to the merger or
         consolidation or (2) by Kennametal and/or its subsidiaries if JLK is at
         the time of such merger or consolidation a direct or

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         indirect subsidiary of Kennametal or if Kennametal and its affiliates
         at the time of such merger or consolidation own shares of Class B
         Common Stock of JLK, or (B) JLK shall sell all or substantially all of
         its operating properties and assets to another person, group of
         associated persons or corporation other than Kennametal or its
         subsidiaries.

         (g) For purposes of this Agreement "Date of Termination" shall mean:

                  (i) if Employee's employment is terminated due to his death or
                  retirement, the date of death or retirement, respectively; or

                  (ii) if Employee's employment is terminated for any other
                  reason, the date on which the termination becomes effective as
                  stated in the written notice of termination given to or by the
                  Employee.

         (h) The term "Good Reason" for termination by the Employee shall mean
         the occurrence of any of the following at or after a Change-in-Control:

                  (i) without the Employee's express written consent, the
                  assignment to the Employee of any duties materially and
                  substantially inconsistent with his positions, duties,
                  responsibilities and status with JLK immediately prior to a
                  Change-in-Control, or a material change in his reporting
                  responsibilities, titles or offices as in effect immediately
                  prior to a Change-in-Control, or any removal of the Employee
                  from or any failure to re-elect the Employee to any of such
                  positions, except in connection with the termination of the
                  Employee`s employment due to Cause or as a result of the
                  Employee's death;

                  (ii) a reduction by JLK in the Employee's base salary as in
                  effect immediately prior to any Change-in-Control;

                  (iii) a failure by JLK to continue to provide incentive
                  compensation comparable to that provided by JLK immediately
                  prior to any Change-in-Control;

                  (iv) in the event of a Change-in-Control, the failure to
                  continue in effect any benefit or compensation plan, stock
                  option plan, pension plan, life insurance plan, health and
                  accident plan or disability plan of JLK in which Employee is
                  participating immediately prior to a Change-in-Control
                  (provided, however, that there shall not be deemed to be any
                  such failure (x) due to Employee's no longer participating in
                  any plan of Kennametal or (y) if JLK substitutes for the
                  discontinued plan, a plan providing Employee with
                  substantially similar benefits) or the taking of any action by
                  JLK which would adversely affect Employee's participation in
                  or materially reduce Employee's benefits under any of such
                  plans or deprive Employee of any material fringe benefit
                  enjoyed by Employee immediately prior to a Change-in-Control;

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                  (v) the failure of JLK to obtain the assumption of this
                  Agreement by any successor as contemplated in paragraph 11
                  hereof;

                  (vi) the relocation of the Employee to a facility or a
                  location more than 50 miles from the Employee's then present
                  location, without the Employee's prior written consent; or

                  (vii) any purported termination of the employment of Employee
                  by JLK which is not for Cause as provided in paragraph 5.

         (i) Employee shall not be entitled to receive any severance payment
         from Kennametal and Kennametal shall have no obligation to pay any
         severance to Employee upon a termination of Employee's employment.

5. In the event that Employee (a) shall be guilty of malfeasance, willful
misconduct or gross negligence in the performance of the services contemplated
by this Agreement; or (b) shall not make his services available to JLK on a full
time basis in accordance with paragraph 1 hereof for any reason (including
Disability) other than arising from Employee's incapacity due to physical or
mental illness or injury which does not constitute Disability and other than by
reason of the fact Employee's employment has been terminated under the
circumstances described in paragraph 4(a); or (c) shall breach the provisions of
paragraph 8 hereof (each of the matters described in subparagraphs (a), (b) and
(c) shall be "Cause"), JLK shall have the right, exercised by resolution adopted
by a majority of its Board of Directors, to terminate Employee's employment for
Cause by giving written notice to Employee of its election so to do. In that
event, Employee's employment shall be deemed terminated for Cause, Employee
shall not be entitled to the benefits set forth in paragraph 4 which shall not
be paid or payable and JLK only shall have the obligation to pay Employee the
unpaid portion of Employee's base salary for the period from the last period
from which Employee was paid to the Date of Termination; provided, however, that
if Employee's employment is terminated as a result of the Disability of
Employee, the benefits set forth in paragraph 4 shall not be paid or payable but
Employee's employment by JLK shall not be deemed terminated for purposes of any
benefit plan of JLK. For purposes of this Agreement "Disability" shall mean such
incapacity due to physical or mental illness or injury which results in the
Employee's being absent from his principal office at JLK's offices for the
entire portion of 180 consecutive business days. Prior to a Change-in-Control, a
decision by the Board of Directors of JLK that "Cause" exists shall be in the
discretion of the Board of Directors and shall be final and binding upon the
Employee and his rights hereunder. After a Change-in-Control, "Cause" shall not
be deemed to include opposition by Employee to such a Change-in-Control or any
matter incidental thereto and any determination by the Board of Directors that
"Cause" existed shall not be final or binding upon the Employee or his rights
hereunder or entitled to any deference in any court or other tribunal.

6. Employee understands and agrees that, except to the extent Employee is
entitled to the benefits provided in paragraph 4(d) hereof, in the event
Employee resigns or his employment is terminated for any reason other than death
or Disability prior to his "Retirement Date" (as hereinafter defined), he will
forfeit any interest he may have in any retirement income plan

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(except to the extent vested by actual service to date of separation as per the
plan provisions), and all other benefits dependent upon continuing service. The
term "Retirement Date" shall mean the first day of the month following the day
on which Employee attains his sixty-fifth birthday, or at Employee's request,
any other day that JLK's Board of Directors may approve in writing.

7. Nothing herein contained shall affect the right of Employee to participate in
and receive benefits under and in accordance with and to the extent provided for
in the then current terms and provisions of any retirement income,
profit-sharing, additional year-end or periodic remuneration or bonus, incentive
compensation, insurance or any other employee welfare plan or program of JLK
applicable to Employee and all payments hereunder shall be in addition to any
benefits received thereunder (including long term disability payments).

8. During the period of employment of Employee by JLK and for three years
thereafter, (provided, however, that this paragraph 8 shall not apply to the
Employee following a termination of Employee's employment (x) after a
Change-in-Control shall have occurred or (y) if Employee's employment is
terminated by JLK other than for Cause), he will not, in any geographic area in
which JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of
Kennametal) is offering its services and products, without the prior written
consent of JLK:

         (a) directly or indirectly engage in, or

         (b) assist or have an active interest in (whether as proprietor,
         partner, investor, shareholder, officer, director or any type of
         principal whatsoever), or

         (c) enter the employ of, or act as agent for, or advisor or consultant
         to, any person, firm, partnership, association, corporation or business
         organization, entity or enterprise which is or is about to become
         directly or indirectly engaged in, any business which is competitive
         with any business of JLK (or Kennametal, if JLK on the Date of
         Termination is a subsidiary of Kennametal) or any subsidiary or
         affiliate thereof in which Employee is or was engaged; provided,
         however, that the foregoing provisions of this paragraph 8 are not
         intended to prohibit and shall not prohibit Employee from purchasing,
         for investment, not in excess of 1% of any class of stock or other
         corporate security of any company which is registered pursuant to
         Section 12 of the 1934 Act.

         Employee acknowledges that the breach by him of the provisions of this
paragraph 8 would cause irreparable injury to JLK (or Kennametal, if JLK on the
Date of Termination is a subsidiary of Kennametal), acknowledges and agrees that
remedies at law for any such breach will be inadequate and consents and agrees
that JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of
Kennametal) shall be entitled, without the necessity of proof of actual damage,
to injunctive relief in any proceedings which may be brought to enforce the
provisions of this paragraph 8. Employee acknowledges and warrants that he will
be fully able to earn an adequate livelihood for himself and his dependents if
this paragraph 8 should be

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specifically enforced against him and that such enforcement will not impair his
ability to obtain employment commensurate with his abilities and fully
acceptable to him.

         If the scope of any restriction contained in this paragraph 8 is too
broad to permit enforcement of such restriction to its full extent, then such
restriction shall be enforced to the maximum extent permitted by law and
Employee and JLK (and Kennametal, if JLK on the Date of Termination is a
subsidiary of Kennametal) hereby consent and agree that such scope may be
judicially modified in any proceeding brought to enforce such restriction.

9. (a) Employee acknowledges and agrees that in the course of his employment by
JLK, Employee may work with, add to, create or acquire trade secrets and
confidential information of JLK or Kennametal ("Confidential Information") which
could include, in whole or in part, information:

                  (i) of a technical nature such as, but not limited to, JLK's
                  or Kennametal's manuals, methods, know-how, formulae, shapes,
                  designs, compositions, processes, applications, ideas,
                  improvements, discoveries, inventions, research and
                  development projects, equipment, apparatus, appliances,
                  computer programs, software, systems documentation, special
                  hardware, software development and similar items; or

                  (ii) of a business nature such as, but not limited to,
                  information about JLK's or Kennametal's business plans,
                  sources of supply, cost, purchasing, profits, markets, sales,
                  sales volume, sales methods, sales proposals, identity of
                  customers and prospective customers, identity of customers'
                  key purchasing personnel, amount or kind of customers'
                  purchases and other information about customers; or

                  (iii) pertaining to future developments of JLK or Kennametal
                  such as, but not limited to, research and development or
                  future marketing or merchandising.

         Employee further acknowledges and agrees that (i) all Confidential
Information is the property of JLK and/or Kennametal; (ii) the unauthorized use,
misappropriation or disclosure of any Confidential Information would constitute
a breach of trust and could cause irreparable injury to JLK and/or Kennametal;
and (iii) it is essential to the protection of JLK's and/or Kennametal's good
will and to the maintenance of its competitive position that all Confidential
Information be kept secret and that Employee not disclose any Confidential
Information to others or use any Confidential Information to the detriment of
JLK or Kennametal.

         Employee agrees to hold and safeguard all Confidential Information in
trust for JLK and Kennametal, each of their successors and assigns and Employee
shall not (except as required in the performance of Employee's duties), use or
disclose or make available to anyone for use outside JLK's or Kennametal's
organization at any time, either during employment with JLK or subsequent
thereto, any of the Confidential Information, whether or not developed by
Employee, without the prior written consent of JLK and Kennametal.

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         (b) Employee agrees that:

                  (i) he will promptly and fully disclose to JLK or such officer
                  or other agent as may be designated by JLK any and all
                  inventions made or conceived by Employee (whether made solely
                  by Employee or jointly with others) during employment with JLK
                  (1) which are along the line of the business, work or
                  investigations of JLK or Kennametal, or (2) which result from
                  or are suggested by any work which Employee may do for or on
                  behalf of JLK or Kennametal; and

                  (ii) he will assist JLK (and Kennametal, if JLK on the Date of
                  Termination is a subsidiary of Kennametal) and its nominees
                  during and subsequent to such employment in every proper way
                  (entirely at its or their expense) to obtain for its or their
                  own benefit patents for such inventions in any and all
                  countries; the said inventions, without further consideration
                  other than such salary as from time to time may be paid to him
                  by JLK as compensation for his services in any capacity, shall
                  be and remain the sole and exclusive property of JLK (and
                  Kennametal, if JLK on the Date of Termination is a subsidiary
                  of Kennametal) or its nominee whether patented or not; and

                  (iii) he will keep and maintain adequate and current written
                  records of all such inventions, in the form of but not
                  necessarily limited to notes, sketches, drawings, or reports
                  relating thereto, which records shall be and remain the
                  property of and available to JLK (and Kennametal, if JLK on
                  the Date of Termination is a subsidiary of Kennametal) at all
                  times.

         (c) Employee agrees that, promptly upon termination of his employment,
         he will disclose to JLK (or Kennametal, if JLK on the Date of
         Termination is a subsidiary of Kennametal), or to such officer or other
         agent as may be designated by JLK (or Kennametal, if JLK on the Date of
         Termination is a subsidiary of Kennametal), all inventions which have
         been partly or wholly conceived, invented or developed by him for which
         applications for patents have not been made and will thereafter execute
         all such instruments of the character hereinbefore referred to, and
         will take such steps as may be necessary to secure and assign to JLK
         (or Kennametal, if JLK on the Date of Termination is a subsidiary of
         Kennametal) the exclusive rights in and to such inventions and any
         patents that may be issued thereon any expense therefor to be borne by
         JLK.

         (d) Employee agrees that he will not at any time aid in attacking the
         patentability, scope, or validity of any invention to which the
         provisions of subparagraphs (b) and (c), above, apply.

10. In the event that (a) Employee institutes any legal action to enforce his
rights under, or to recover damages for breach of this Agreement, or (b) JLK
institutes any action to avoid making any payments due to Employee under this
Agreement, Employee, if he is the prevailing

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party, shall be entitled to recover from JLK any actual expenses for attorney's
fees and other disbursements incurred by him in relation thereto.

11. The terms and provisions of this Agreement shall be binding upon Employee
and JLK, and shall inure to the benefit of, Employee, JLK and Kennametal (which
shall be deemed an express third party beneficiary of this Agreement) and their
subsidiaries and affiliates, and the parties respective successors and assigns.
The Employee's employment shall not be deemed terminated for purposes of this
Agreement if the Employee is employed by a successor to JLK, which successor
shall be deemed to be JLK for purposes of this Agreement.

12. This Agreement constitutes the entire agreement between the parties hereto
and supersedes all prior agreements and understandings, whether oral or written,
among the parties with respect to the subject matter hereof. Any prior
employment agreement between the Employee and Kennametal is hereby terminated
and Employee shall not be entitled to any severance or other benefits under any
prior employment agreement with Kennametal. This Agreement may not be amended
orally, but only by an instrument in writing signed by each of the parties to
this Agreement and consented to in writing by Kennametal. This Agreement does
not create any right to continued employment by JLK and the Employee shall
remain an "at will" employee of JLK.

13. The invalidity or enforceability of any provision of this Agreement shall
not affect the other provisions hereof, and this Agreement shall be construed in
all respects as if such invalid or unenforceable provision were omitted.

14. Any pronoun and any variation thereof used in this Agreement shall be deemed
to refer to the masculine, feminine, neuter, singular or plural, as the identity
of the parties hereto may require.

15. A condition to Employee's right to receive or receipt of any severance pay
or any benefits hereunder upon a termination of the Employee's employment shall
be for the Employee to execute and to deliver to JLK and Kennametal on or before
the making of any severance payment or providing of any benefit a release in the
form of Exhibit A attached hereto.

16. Not withstanding any other provision of this Agreement, in the event that
any payment or benefit received or to be received by Employee in connection with
a change in control of the Corporation or the termination of the Employee's
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Corporation, or any person whose actions
result in a change in control or any person affiliated with the Corporation or
such person) (collectively, the "Total Payments") would not be deductible, in
whole or part, as a result of section 280G of the Internal Revenue Code of 1986
(the "Code") by the Corporation, an affiliate or other person making such
payment or providing such benefit, the payments due under this Agreement (the
"Contract Payments") shall be reduced until no portion of the Total Payments is
not deductible, or the Contract Payments are reduced to zero. In the

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event that the Corporation or the affiliate or other person making such payment
or providing such benefit determines that the Total Payments would not be
deductible, in whole or part, as a result of section 280G of the Code, the
Corporation or the affiliate or other person making such payment or providing
such benefit shall immediately notify Employee of this determination and the
amount which would not be so deductible as well as a computation of Total
Payments. Employee shall have five (5) business days after receipt of the
foregoing notice and computation to waive in writing all or any portion of any
of the Total Payments and any portion of the Total Payments the receipt or
enjoyment of which Employee shall have effectively waived in writing shall not
be taken into account (and, if the Corporation had already withheld any Contract
Payments prior to receipt of such waiver, the Corporation upon receipt of such
waiver shall immediately pay to Employee any withheld Contract Payments which
would have been paid had the Corporation had the Employee's written waiver prior
to the date the Corporation withheld any such payments). For purposes of this
limitation (i) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Employee does not constitute a "parachute payment"
within the meaning of section 280G(b)(2) of the Code, (ii) the Contract Payments
shall be reduced only to the extent necessary so that the Total Payments (other
than those Contract Payments which are waived in writing by the Employee or
referred to in clause (i)) in their entirety constitute reasonable compensation
for services actually rendered within the meaning of section 280G(b)(4) of the
Code or are otherwise not subject to disallowance as deductions, in the opinion
of the tax counsel referred to in clause (i); and (iii) the value of any
non-cash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Corporation's independent auditors in
accordance with the principles of section 280G(d)(3) and (4) of the Code.

17. This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania without regard to its conflicts or choice of law provisions.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -11-
<PAGE>   12

         WITNESS the due execution hereto the day and year first above written.

ATTEST:                                 JLK DIRECT DISTRIBUTION INC.

/s/ Kevin G. Nowe                       By: /s/ Richard J. Orwig
--------------------                        --------------------
                                        Name: Richard J. Orwig
                                        Title: President and Chief
                                               Executive Officer

WITNESS:                                DIANA L. SCOTT, EMPLOYEE:

/s/ John Beaudoin                       /s/ Diana L. Scott               (SEAL)
--------------------                    ---------------------------------------

                                      -12-
<PAGE>   13

                                                                      Exhibit A

                                     RELEASE

         KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and
valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound, hereby releases, remises, quitclaims and
discharges completely and forever JLK Direct Distribution Inc. and Kennametal
Inc. and each of their respective directors, officers, employees, subsidiaries
and affiliates from any and all claims, causes of action or rights which the
undersigned has or may have, whether arising by virtue of contract or of
applicable state laws or federal laws, and whether such claims, causes of action
or rights are known or unknown; provided, however, that this Release shall not
release, remise, quitclaim or discharge any claims, causes of action or rights
which the undersigned may have (i) under that certain Employment Agreement dated
January 21, 2000 between the undersigned and JLK Direct Distribution Inc., (ii)
to any unreimbursed expense account or similar out-of-pocket reimbursement
amounts owing the undersigned, or (iii) under the bylaws of JLK Direct
Distribution Inc. or Kennametal Inc. or the applicable state corporate statutes
to indemnification for having served as an officer and/or employee of Kennametal
Inc. and/or its subsidiaries or JLK Direct Distribution Inc., and/or its
subsidiaries.

DATE:  January 21, 2000                      /s/ Diana L. Scott
       ---------------------                 ------------------<PAGE>   1

                                                                   Exhibit 10.6

                          JLK DIRECT DISTRIBUTION INC.

                     DEFERRED FEE PLAN FOR OUTSIDE DIRECTORS

         WHEREAS Directors of JLK Direct Distribution Inc. (herein referred to
as the "Company"), who are not otherwise employed by the Company (herein
referred to as "Outside Directors"), are paid an annual fee by the Company for
services as an Outside Director, and an additional amount for services on
certain committees of the Board of Directors; and,

         WHEREAS it is appropriate to permit an Outside Director to request that
the Company defer payment to the Director of all or a portion of the aforesaid
Director fee and committee service fees,

         NOW, THEREFORE, this Plan is adopted.

1.       Name and Effective Date

         This plan shall be known as the JLK Direct Distribution Inc. Deferred
Fee Plan for Outside Directors and shall be effective in accordance with a
resolution of the full Board of Directors. It shall continue in force thereafter
until terminated by resolution of the full Board of Directors.

2.       Eligibility

         Only those members of the Board of Directors of the Company who are not
otherwise employed by the Company or any corporation subsidiary to, or
affiliated with, the Company, in an executive or any other capacity, shall be
eligible to participate in this Plan. These eligible persons are generally
referred to by the Company as "Outside Directors."

3.       Administration of the Plan

         This Plan shall be administered by an officer of the Company' Director
of Human Resources or other individual designated by the Board of Directors
(hereinafter referred to as the "Administrator"), and the Administrator's
interpretation of this Plan shall be final and conclusive on all persons,
subject to any further interpretation by the Board of Directors.

4.       Election to Defer Fees

         Any outside Director eligible to participate in the Plan may elect to
defer all or a portion of the fees such person is entitled to receive from the
Company for services as a Director (including service on any committee of the
Board of Directors for which committee fees are

<PAGE>   2

specifically authorized) performed during any full calendar year in which the
Plan is in effect. An election to defer receipt of fees with respect to any
calendar year shall be irrevocable and shall be made in writing, on a form
prescribed by the Administrator, on or before the 30th day of June prior to the
beginning of such calendar year. An election to defer fees by a nominee to the
Board of Directors may be made prior to the nominee's election and be effective
for the balance of the calendar year in which the nominee is elected as
Director. A Director electing to defer receipt of fees shall, as part of the
election, select the time and manner of payment of deferred fees, within the
limits described herein, below. Special provisions for retirement accounts are
described herein, below.

5.       Continuation and Termination of Deferral

         An election to defer fees shall continue in force with respect to all
succeeding calendar years and terms of the Director's service, unless the
Director advises the Company in writing that he or she has elected to terminate
such deferment. Termination of deferments shall be effective with respect to all
fees payable for and after the calendar year next following the year in which
such election to terminate deferments occurs. Amounts earned will continue to be
deferred in accordance with the prior election until the beginning of the
calendar year in which the termination of deferral becomes effective, i.e., the
calendar year immediately following notification.

6.       Plan Account

         Deferred fees shall be maintained by the Company, at the specific and
irrevocable direction of the Director, in an "Interest Account" or in such other
account(s) as may then be available for the retention of deferred fees ("Other
Account(s)"). The Plan shall be unfunded and payments of deferred fees shall be
made out of the general corporate funds of the Company. The designation of a
deferred fee account to an account is for bookkeeping purposes of the Plan only,
and shall not be interpreted as establishing an independent, separately
identified account of the Company.

7.       Interest Account

         Deferred fees retained monthly in the Interest Account shall earn
interest monthly at an annual rate of interest equal to a rate of two interest
percentage points below average prime interest per annum for the previous month.
Interest rate shall be calculated and interest amount credited to the Interest
Account on the first business day of each month, for the previous month.
Interest shall accrue on deferred fees in the Interest Account from the date
such fees would have been paid without deferral, until the date of payment.
Deferred fees retained in Other Account(s) shall be valued in accordance with
the terms and conditions applicable to such Other Account(s).

                                      -2-
<PAGE>   3

8.       Payment of Deferred Fees

         At the time of election to participate in the Plan, a Director shall
select one of the following methods of payment of the deferred fees and interest
or accumulations thereon:

         a.       In full on a specified date.

         b.       In full or in installments beginning on the Director's
                  retirement date from the Board. Rules governing installment
                  payments shall be determined by the Administrator. Any
                  termination from the Board for any reason, voluntary or
                  involuntary, will be treated the same as "retirement" from the
                  Board, for purposes of administering this Plan.

         c.       Notwithstanding the payment instructions of the Director, at
                  the death of a Director, deferred fees remaining unpaid at
                  death will be paid to the Director's selected beneficiary (if
                  any), or to the Director's estate, in full.

9.       Special Retirement Options

         Directors selecting payment commencing upon retirement may change the
method of payment, i.e., in full or in installments, by submitting a revised
election form no fewer than twelve (12) months prior to retirement from the
Board. Under no circumstances, however, may the beginning payment be changed
from retirement to any other date. As indicated in Paragraph 8(b), above, any
termination of service from the Board for any reason, voluntary or involuntary,
will be treated the same as "retirement" from the Board, for purposes of
administering the plan.

10.      Amendment or Termination

         This Plan may be amended from time to time or may be terminated at any
time by resolution of the Board of Directors of the Company, provided that no
amendment or termination shall affect the rights of any person, for amounts
which had been deferred under the Plan prior to amendment or termination.

11.      Nonassignability

         No Director, beneficiary, or any other person or entity shall have any
power to commute, encumber, sell, or otherwise dispose of the rights provided
herein, and such rights shall be nonassignable and nontransferable.

12.      Noncompetition

         During the period of a Director's tenure on the Board of Directors and
the deferral any payment of any fees hereunder, the Director will not, without
the prior written consent of the Company, (a) directly or indirectly engage in,
(b) assist or have an active interest in (whether as proprietary, partner,
investor, shareholder, officer, director, or any type of principle whatever), or

                                      -3-
<PAGE>   4

(c) enter into the employ of, or act as an agent for, or advisor or consultant
to: any person, firm, partnership, association, corporation, or other business
organization, entity, or enterprise which is, or is about to become, directly or
indirectly engaged in the provision of any service with competes with any
service provided by or under development by the Company, or any subsidiary or
affiliate thereof, or in the provision of any product which competes with any
product which is made, manufactured, is under development, or is sold by the
Company or any subsidiary or affiliate thereof (provided, however, that this
provision is not intended to prohibit a Director's purchasing, for investment,
not in excess of five percent of any class of stock or other corporate security
of any company which is registered pursuant to Section 12 of the Securities and
Exchange Act of 1934).

Notwithstanding any other provision of this Plan, the Director acknowledges that
a breach of this Paragraph 12 shall entitle the Company to immediately terminate
deferral of fees and pay out to the Director all fees previously deferred,
without any interest or accumulations thereon.

July 1, 1997

                                      -4-

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