-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXo0BBVOXuwCBTXnmIJspYl2pcpukIrqG+tnLIMIGVgNSSNriKKBuN/lfVci7N2z CqiptF+7beK7dSAroGgV8Q== 0000719733-95-000046.txt : 19951003 0000719733-95-000046.hdr.sgml : 19951003 ACCESSION NUMBER: 0000719733-95-000046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950701 FILED AS OF DATE: 19950929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEY TRONIC CORP CENTRAL INDEX KEY: 0000719733 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 910849125 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11559 FILM NUMBER: 95577442 BUSINESS ADDRESS: STREET 1: N 4424 SULLIVAN RD CITY: SPOKANE STATE: WA ZIP: 99216 BUSINESS PHONE: 5099288000 MAIL ADDRESS: STREET 1: P O BOX 14687 CITY: SPOKANE STATE: WA ZIP: 99214 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ---------------------- For the Fiscal Year Ended Commission File Number July 1, 1995 0-11559 KEY TRONIC CORPORATION Washington 91-0849125 (State of Incorporation) (I.R.S. Employer ------------------ Identification No.) N. 4424 Sullivan Road Spokane, Washington 99216 (509) 928-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements during the past 90 days. Indicate by checkmark if delinquent filers pursuant to Item 405 of Regulation S- K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by nonaffiliates of the Registrant was $89,835,874 as of September 1, 1995. The number of shares of Common Stock of the Registrant outstanding as of September 1, 1995 was 8,513,205 shares. The Exhibit Index is located at Page 15. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report to Shareholders , pages 1 and 10 - - 32, are incorporated by reference into Parts I, II, and IV; a portion of the Registrant's Proxy Statement, pages 1 - 23, pursuant to Regulation 14A, covering the Annual Meeting of Shareholders to be held October 26, 1995 is incorporated by reference into Part III. KEY TRONIC CORPORATION 1995 FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business 3-9 Item 2. Properties 8 Item 3. Legal Proceedings 8-9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Disagreements on Accounting and Financial Disclosure 10 PART III Item 10. Directors and Executive Officers of the Registrant 11-13 Item 11. Management Remuneration 13 Item 12. Securities Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 PART IV Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K and Signatures 14-23 PART I ITEM 1. BUSINESS The following discussion relates to fiscal years of the Company. Key Tronic Corporation, a Washington corporation organized in 1969, and its subsidiaries (hereinafter collectively called the "Company" or "Key Tronic" unless the context otherwise requires) are principally engaged in the design, development, and manufacture of input devices, primarily keyboards, for personal computers, terminals, and workstations. BACKGROUND Keyboards are the primary means by which people input data and commands to computers. Keyboards consist of an array of switches, with each switch activated by an operator depressing a keycap to input a particular letter, number or special function to the computer. Full travel keyboards, with typewriter-like strokes, are preferred in high use applications where speed, accuracy, and ease of data input are required. Keyboards are distinguishable from keypads, which are short travel data entry devices more likely to be used where only numerical data entry is required, such as in push button telephones and pocket calculators. Keyboard configurations differ substantially, depending upon application and other factors with variables such as switch technology, the amount of key motion required to activate a switch, the feel or tactile response to the operator when depressing a key, and the shape, color and positioning of the individual keys. The majority of keyboards are sold with a plastic enclosure and cable, although keyboards for portable computers (notebooks and laptops) are generally sold unenclosed, housed within the system enclosure. Many keyboards contain a microprocessor. This microprocessor encodes the data being entered and sends it to the computer. The more powerful microprocessors available today allow intelligence to be included in the keyboard. With this intelligence, a keyboard can perform a number of functions which enhances the value of the keyboard in the overall hardware configuration. The majority of the Company's keyboards are custom designed for a particular computer product, although an increasing percentage consist of standard configurations or those that have been tailored to meet industry standards. Key Tronic has the capability to produce a variety of keyboards and keycap configurations to provide to computer manufacturers for the intended applications. The pace of computer product development requires that keyboard suppliers be able to rapidly design and manufacture new products for specific customer requirements, as well as develop new switch technology platforms that anticipate future market needs. Because of this, the Company provides custom design support which depends on its ability to closely control its tooling and manufacturing processes. The Company has recognized the need in the marketplace to provide more answers to data entry needs. In response to this need, the Company has developed other input devices that can be used separately or in conjunction with the keyboard. Some of these products include a touch pad, a mouse and an integrated trackball. The Company uses an internal sales force to reach a customer base that consists of Original Equipment Manufacturers (OEMs), corporations, and individual end users. Standard keyboard products that are plug-compatible with IBM, Apple and compatible personal computers are available through this network in addition to custom designed keyboards. The Company sells to principal customers primarily on a purchase order basis, as opposed to long-term contracts. ACQUISITION OF ASSETS On July 30, 1993, the Company acquired substantially all of the assets and liabilities of Honeywell, Inc.'s Keyboard Division in a purchase accounting transaction for approximately $22.0 million in cash, $5.8 million in liabilities assumed, $5.0 million in acquisition costs, a note payable to Honeywell, Inc. of $3.6 million plus 400,000 shares of the Company's common stock valued at $3.2 million and a warrant to purchase an additional 300,000 shares of the Company's common stock. Details of this transaction are more fully discussed in Note 15 to the Company's 1995 Annual Report and in Form 8-K filed on August 12, 1993. KEYSWITCH TECHNOLOGIES There are five prevalent keyswitch technologies for fully encoded keyboard applications presently available to computer manufacturer purchasers of keyboards: membrane, Hall effect, mechanical contact, conductive rubber, capacitance, and dome. Key Tronic currently manufactures keyboards employing capacitance and membrane technologies. CAPACITANCE SWITCH TECHNOLOGY In 1975, the Company developed a capacitance keyboard in response to demand for lower cost keyboards. Key Tronic was the first major independent keyboard supplier to successfully manufacture and market capacitance keyboards. The capacitance switch is based on two charged plates separated by an insulator brought into proximity by depressing the keycap. An electronic signal is transmitted at the point of closest proximity. Capacitance, mechanical, and membrane contact are currently the dominant technologies for applications which require detachable keyboards with serial output. During 1992, the conversion of significant OEM customers to membrane keyswitch technologies from capacitance resulted in a change in the predominant technology used by the Company. It is anticipated that capacitance will continue to decline as a preferred technology platform as membrane and other technologies in development offer relative price advantages. MEMBRANE TECHNOLOGY In 1987, the Company developed a full travel membrane switch technology. The membrane switch offers significant reduction in material and labor costs. Specifically, a membrane keyboard utilizes a smaller printed circuit board and approximately 40 percent fewer electronic components than capacitance keyboards. In 1990, the Company completed development on an improved generation of membrane technology. KEYBOARD PRODUCTS During 1995, 1994 and 1993, the Company realized revenues of approximately $185.3 million, $146.8 million and $110.7 million from the sale of keyboards representing approximately 89 percent, 92 percent and 90 percent of total sales. LOW PROFILE KEYBOARDS In 1979, Europe led a move toward adopting ergonomic standards for computer products designed to maximize operator comfort. The resulting DIN (Deutsche Industry Norm) standards were based on human factors engineering studies. The standards as applied to keyboards require a lower profile, designed to permit faster and more efficient data entry with less operator fatigue. This new design has become the worldwide standard. During 1981, Key Tronic committed to the extensive retooling required to manufacture the new lower profile design, and was the first domestic manufacturer in volume production of the low profile keyboards satisfying the DIN standards. The Company's low profile keyboards incorporate both the capacitance and membrane switch technologies. The Company believes it has a major position in the low profile noncaptive market. OEM STANDARD KEYBOARDS The keyboard market has continued to trend toward standard keyboard layouts. In order to accommodate the strong demand for standard products, the Company maintains a purchase-from-stock program. The most popular standard layouts are built and stocked for immediate availability. RETAIL KEYBOARDS In 1983, Key Tronic began supplying to the retail market fully enclosed plug-compatible keyboards. These products serve as enhancements to or replacements for the original system-supplied keyboard. The Company is presently selling its plug-compatible keyboards through a worldwide network of distributors. COMPLEX KEYBOARD PRODUCTS The Company developed a custom terminal for Reuters Limited in response to specifications developed by Reuters. The construction utilizes a custom injection molded enclosure which provides integral mounting for the keyboard, liquid crystal display and associated logic cards. The product utilizes a structural, high level language and module design to ensure ease of software maintenance. Features of the system include host-programmable key codes and selectable legends for the liquid crystal display, built-in 18 digit calculator function, multiple host environment and option mounts. ALTERNATIVE INPUT DEVICES The Company realized revenue from non-keyboard products, which in the aggregate, accounted for $22.2 million, $12.6 million and $12.6 million in 1995, 1994 and 1993 representing approximately 11 percent, 8 percent and 10 percent of total sales. The significant dollar increase in 1995 is due to the manufacture and sale of plastic components for use on computer peripherals. CUSTOM MANUFACTURING The Company utilizes its extensive fabrication and assembly capabilities to offer certain contract manufacturing services. Such services have included manufacture of tooling, custom molding, as well as complete fabrication and assembly of unique custom assemblies. Requirements for custom manufacturing may diminish as a result of the migration to standard products. MOUSE In 1988, the Company developed a two button mechanical mouse, a pointing device that essentially replaces the cursor keys on a computer keyboard and allows rapid selection of options from a menu on the display. As part of the acquisition of Honeywell, Inc.'s keyboard division the company acquired the rights to manufacture and sell the Hawley mouse. This mouse is a new design whereby it is virtually maintenance free. Unlike other mouse products this product does not have a trackball to pickup dust and dirt thereby avoiding contaminants reaching the internal mechanism. ERGONOMIC PRODUCTS The Company is currently in various stages of designing, developing, and marketing a number of input related devices for a growing market for improved ergonomic products. MANUFACTURING Since inception, the Company has made substantial investments in developing and expanding the extensive capital equipment base to achieve vertical integra tion in its manufacturing processes. The Company designs and develops tooling for injection molding machines and manufactures virtually all plastic parts used in its products. Additionally, the company has invested in equipment to produce switch membranes as a means to reduce cost and improve quality. The OEM market has increasingly demanded rapid response time and design adaptability from keyboard manufacturers. New computer products are continually being introduced by computer manufacturers, with the timing of product introduction often perceived as having distinct marketing advantages. Developing a keyboard for a new application is a custom process, which requires frequent contact with the customer while working through changes during design stages. Computer manufacturers place a premium on the ability of the keyboard manufacturer to design and produce keyboards which meet their technical specifications, aesthetic considerations, and which are delivered in accordance with production schedules. The Company's automated manufacturing processes enable it to work closely with its customers during design and prototype stages of production for new custom products and to increase productivity and response time. Key Tronic uses computer-aided design techniques to assist preparation of the tool design layout and tool fabrication to reduce tooling costs and significantly enhance turnaround time during product development. The Company uses numerous injection molding machines in producing more than 50,000 different keycaps, enclosures and various plastic parts for switching devices. The two shot injection molding process allows production of high quality, wear-resistant keycaps. Designs by Key Tronic engineers in both tooling and molding have improved standard processing time and thereby increased productivity. The molding machines used by the Company employ the latest technology, including the ability to mix plastics and determine the color of finished components as part of the molding process. This automated, pneumatically-fed process, not only allows precise control of color determination, but also results in lower product costs. The Company also produces blank keytops for certain models with print legends using a print process to apply the colored inks and laser technology to produce entire key configuration layouts. Key Tronic uses a variety of manual to highly-automated assembly processes in its facilities, depending upon product complexity and degree of customization. Automated processes include component insertion, flexible robotic assembly, computerized vision system quality inspection, automated switch and keytop installation, and automated functional testing. The Company purchases materials for keyboard production from a number of different suppliers. Key Tronic believes that it has excellent relationships with its vendors, most of whom have been suppliers for the Company for many years. CUSTOMERS AND MARKETING OEM MARKETS The Company manufactures and supplies custom keyboards to many of the leading OEMs in the noncaptive keyboard market. The Company currently sells keyboards to more than 170 active OEM customers. Based on industry data, the Company believes it acquired a leading domestic market position as an independent supplier of keyboards in the late 1970's. Hewlett Packard accounted for approximately 23 percent, 10 percent and 0 percent of net sales in 1995, 1994 and 1993. Microsoft accounted for approximately 19 percent, 1 percent and 0 percent of net sales in 1995, 1994 and 1993. Compaq Computer accounted for approximately 12 percent, 21 percent and 32 percent of net sales in 1995, 1994 and 1993. Digital Equipment Corporation accounted for approximately 6 percent, 11 percent and 3 percent of net sales in 1995, 1994 and 1993. No other customer accounted for more than 10 percent of net sales during any of the last three years. In 1995, 1994 and 1993, the five largest customers accounted for 65 percent, 50 percent and 47 percent of total sales, respectively. The Company markets its products primarily through its direct sales organization aided by distribution sales in the U.S., Canada and Europe. All OEM keyboards are accompanied by a manufacturer's one-year warranty which provides for repair or replacement of defective products. Retail products carry a three-year to a limited lifetime warranty. FOREIGN MARKETS In 1995, $83.2 million, or 40.1 percent of the Company's revenues were from foreign sales, primarily sales in Europe, the Far East and Canada. Foreign sales in 1994 and 1993 were $68.2 million and $53.0 million, respectively. Foreign sales are made through foreign sales representatives. For additional financial information about foreign operations, see Note 10 to the Consolidated Financial Statements contained in the Company's 1995 Annual Report to Shareholders. BACKLOG At September 1, 1995, the Company had an order backlog of approximately $48 million. This compares with a backlog of approximately $39 million at September 2, 1994. The increase in backlog is a result of increased demand for standard products and orders placed on new products. Order backlog is not necessarily indicative of future sales. Order backlog consists of purchase orders received for products with a specified shipment date, although shipment dates are subject to change due to design modifications or other customer requirements. All orders in backlog are expected to be filled within the current fiscal year. RESEARCH, DEVELOPMENT, AND ENGINEERING The Company's research, development, and engineering expenses were $6.1, $5.8 and $6.7 million in 1995, 1994 and 1993. Research, development and engineering expenses as a percentage of sales were 3.0 percent, 3.7 percent and 5.4 percent in 1995, 1994 and 1993. As a key strategy the Company plans continued emphasis on research, development, and engineering in the future. COMPETITION The Company believes that its principal competitors in the full travel keyboard market are Alps Electric, BTC, Cherry Electrical Products Corporation, Fujitsu, Chicony, Maxiswitch (a subsidiary of Siletek/Litcon), Mitsumi, NMB (formerly Hi Tek) and Se-Jin. TRADEMARKS AND PATENTS The company owns several patents on emerging keyboard technologies which management believes will have a significant impact on the market place once they become available. It is management's belief this will, in turn, strengthen the company's market position and ability to continue to respond to the needs of its customers. The Key Tronic name and logo are federally registered trademarks and the company believes they are valuable assets in its business. EMPLOYEES As of September 1, 1995, the Company had approximately 3,056 employees. Management considers its employee relations to be excellent. None of the Company's employees are represented by a union. The Company has never experienced any material interruption of production due to labor disputes. The Company's employee benefit program includes a bonus program involving periodic payments to all employees based on quarterly after-tax income. The Company maintains a tax-qualified profit sharing plan, a 401(k) plan which provides a matching company contribution on a portion of the employees contribution and also provides group health, life, and disability insurance plans. The Company also offers an Incentive Stock Option Plan, Executive Stock Appreciation Rights Plan, Executive Stock Option Plan, and an Employee Stock Ownership Plan to certain individuals. ITEM 2. PROPERTIES The Company owns its' principal research and administration facility, which is located in Spokane, Washington. The Company also owns an assembly facility in Juarez, Mexico in addition to manufacturing and assembly facilities Las Cruces, New Mexico and in Ireland. The Company leases manufacturing facilities in the Spokane Industrial Park, and warehouses in Singapore and El Paso Texas. In 1994 the Company closed its assembly facility in Cheney, Washington and currently holds it for sale. In 1992 the Company began the process of closing an assembly facility it leased in Taiwan. This action was completed in 1993. The Company considers its properties in good condition, well maintained and generally suitable for operations. The Company considers the productive capacity of the rest of its operations sufficient to carry on the Company's business. The facilities in Juarez, Mexico; Las Cruces, New Mexico; and El Paso, Texas are a result of the acquisition of assets of Honeywell Inc.'s Keyboard Division. The Company owns real estate, for sale, in Cheney, Washington. The net book value of this property is $2,243,000. ITEM 3. LEGAL PROCEEDINGS The company currently has one hundred nineteen suits by computer keyboard users which are in State or Federal Courts in California, Florida, Illinois, Kansas, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas. These suits allege that specific keyboard products manufactured by the company were sold with manufacturing, design and warning defects which caused or contributed to their injuries. The alleged injuries are not specifically identified but are referred to as repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These suits seek compensatory damages and some seek punitive damages. It is more likely than not that compensatory damages, if awarded, will be covered by insurance, however the likelihood that punitive damages, if awarded, will be covered by insurance is remote. A total of eighteen suits have been dismissed in California, Kentucky, New York and Texas. Seven of the eighteen dismissed suits are on appeal, all in New York. The company believes it has valid defenses and will vigorously defend these claims. These claims are in the early stages of discovery. Given the early stage of litigation, the complexity of the litigation, the inherent uncertainty of litigation and the ultimate resolution of insurance coverage issues, the range of reasonably possible losses in connection with these suits is not estimable at this time. Therefore, no provision has been made to cover any future costs. Management's position will change if warranted by facts and circumstances. (Also see Note 9 to the Consolidated Financial Statements contained in the Company's 1995 Annual Report to Shareholders.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE PART II The information required in Items 5, 6, 7 and 8 in Part II is incorporated by reference to Key Tronic Corporation's 1995 Annual Report to Shareholders. Except for such information, which is attached as exhibit 13, the 1995 Annual Report to Shareholders is not to be deemed filed as part of this report. Key Tronic Annual Report Page No. ITEM 5: MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS 27 & 32 ITEM 6: SELECTED FINANCIAL DATA 1 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-12 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14-31 ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT STANLEY HILLER, JR - Chairman of the Board Mr. Hiller, age 70, has been Chairman of the Board since September 1, 1995 and was Chief Executive Officer and a Director from February 1992 through August 1995. Mr. Hiller is also the Managing Partner of The Hiller Group (since 1972) and the Senior Partner of Hiller Investment Company (private investment) (since 1965). From 1986 through 1988 he was Chairman of the Board and Chief Executive Officer of York International Corporation, and from August 1988 through July 1990 he was Chairman of the Board of Levolor Corporation. Mr. Hiller also serves on the Board of Directors of The Boeing Company. He previously served as Chairman and Chief Executive Officer for a number of companies including G.W. Murphy, Reed Tool Company, Bekins, and Chairman of Baker International (Baker- Hughes). WENDELL J. SATRE - Chairman of the Board Emeritus Mr. Satre, age 77, was Chairman of the Board from August 1991 through August 1995 and was President from August 1991 through March 1992. He has been a Director since July 1988. Mr. Satre is a retired Chairman of Washington Water Power Company and was also a Director of Key Tronic from 1983 through 1986. Mr. Satre also serves on the Board of Directors of Alascom and Coeur d'Alenes Company. FRED WENNINGER - Chief Executive Officer and President Mr. Wenninger, age 56, was named President, Chief Executive Officer and Director effective September 1, 1995. Mr. Wenninger has been President and Chief Executive Officer of Iomega Corporation from 1989 to 1994. He also served as President of the Bendix/King Division of Allied Signal Corporation from 1986 to 1989. From 1963 to 1986 he served Hewlett-Packard in various positions, the last eight years in General Manager positions. Mr. Wenninger also serves on the Board of Directors of Hach and Norand. LEWIS G. ZIRKLE - Director Mr. Zirkle, age 80, is founder of the Company and served as Chairman and Chief Executive Officer from 1969 to August 1990, and as President from 1972 through 1987 and June 1988 through November 1989. Mr. Zirkle was employed for over 20 years with General Electric Corporation in a variety of engineering and manufacturing positions. He previously also served as Executive Vice President of the Poly Scientific Division of Litton Industries. YACOV A. SHAMASH - Director Dr. Shamash, age 45, has been a Director since December 1989. Since August 1992, Dr. Shamash has been the Dean of the College of Engineering and Applied Sciences, State University of New York (SUNY) at Stoneybrook. Prior to joining SUNY, he was a professor and school director at Washington State University from 1985 through August 1992. KENNETH F. HOLTBY - Director Mr. Holtby, age 73, has been a Director since March 1992. He is a retired Senior Vice President of Corporate Engineering for The Boeing Company. He joined Boeing in July of 1947. Mr. Holtby has continued to work as a consultant to Boeing since May 1987. He was also a consultant to Chrysler Corporation from March 1985 through December 1990. DALE F. PILZ - Director Mr. Pilz, age 69, has been a Director since March 1992. Since 1990 he has been working as a management consultant. In 1990 he retired from the position of Chief Executive Officer of Flowind Corporation, a position he held since 1986. Prior to that he served as Chief Executive Officer and President of GTE SPRINT Communications Corporation; Chief Executive Officer and President of GTE Spacenet Corporation; and President of Kaiser Steel. MICHAEL R. HALLMAN - Director Mr. Hallman, age 50, has been a Director since October 1992. Since March 1992, he has been a consultant with The Hallman Group. Prior to that he was President and Chief Operating Officer of Microsoft Corporation from March 1990 through February 1992; from March 1987 through February 1990 he was Vice President and later President of Boeing Computer Services. Mr. Hallman also serves on the Board of Directors of Intuit Inc. CLARENCE W. SPANGLE - Director Mr. Spangle, age 70, has been a Director since July 1992. In January 1985 he retired from the position of Chairman of Memorex Corporation and is a former President of Honeywell Information Systems. Since then he has been working as a management consultant. Mr. Spangle also serves on the Board of Directors of Apertus Technologies, Inc. and Pyramid Technologies, Inc. WILLIAM E. TERRY - Director Mr. Terry, age 62, has been a Director since July 1992. Mr. Terry retired from Hewlett-Packard in November 1993 where he served in a number of executive positions during the past 35 years. Mr. Terry also serves on the Board of Directors of Applied Magnetics, Inc. ROBERT H. CANNON, JR. - Director Mr. Cannon, age 71, has been a Director since September 1992. Professor Cannon has been Charles Lee Powell, Professor at the Department of Aeronautics and Astronautics, Stanford Univeristy since 1979. From 1979 to 1990 he was also Chairman of the Department. Previously, Professor Cannon served as Assistant Secretary of Transportation and as Chief Scientist of the United States Air Force. Professor Cannon has served on the General Motors Science Advisory Committee since 1975, serving as Chairman from 1980 to 1984. He also serves on the Board of Directors of Parker Hannifin Corporation. ROYCE G. PEARSON - Director Mr. Pearson, age 60, served as President and Chief Operating Officer of the Company from February 1992 to February 1994. Mr. Pearson has been a director of the Company since February 1992. He served as Vice President and Chief Manufacturing Officer for Levolor Corporation, a window blind manufacturer, from October 1988 to March 1992, prior to which he served as Vice President of Manufacturing for Reed Tool Company. THOMAS W. CASON - Director Mr. Cason, age 52, served as President and Chief Operating Officer of the company from 1994 to September 1995. Mr. Cason has been a Director of the company since February 1994. Mr. Cason has been President of Progressive Tractor & Implement Co., Inc., an agricultural equipment dealership, since 1991. He was Sr. Vice President and CFO of Baker Hughes Incorporated from July 1989 to December 1990. Mr. Cason was President and Chief Executive Officer of Milpark Drilling Fluids, a subsidiary of Baker Hughes Incorporated prior thereto. Mr. Cason also serves on the Board of Purolator Products Co. RICHARD T. TINSLEY - Vice President of Quality Assurance Mr. Tinsley, age 47, has been Vice President of the Company since November 29, 1993. He was the owner of Tinsley Associates from May 1993 to September 1993. Mr. Tinsley served as Director of Manufacturing Operations, Director of Quality and Quality Assurance Manager at Compaq Computer Corporation from 1983 to 1993. From 1972 to 1982 Mr. Tinsley worked for Texas Instruments Inc. as Printer Manufacturing Manager and New Products Program Manager. RONALD F. KLAWITTER - Vice President of Finance and Treasurer and Acting Secretary Mr. Klawitter, age 43, joined the Company in November 1992 as Vice President, Finance and Treasurer and has been Acting Secretary since November 1994. From 1987 to 1992, Mr. Klawitter was Vice President, Finance at Baker Hughes Tubular Service, a subsidiary of Baker Hughes Inc. JACK W. OEHLKE - Senior Vice President of Operations Mr. Oehlke, age 49, has been an officer of the Company since December 27, 1993. Mr. Oehlke served as Director of Operations, Director of Quality and various management positions within manufacturing, engineering and quality functions of the Micro Switch Division of Honeywell, Inc. from 1968 to 1993. CRAIG D. GATES - Vice President of Engineering Mr. Gates, age 36, has been Vice President of Engineering of the company since October 1994. Mr. Gates served as Director of Operations, Electronics and in several management positions within the engineering and operation functions at the Micro Switch Division of Honeywell from 1983 to 1994. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: Incorporated by reference to Key Tronic Corporation's 1994 Proxy Statement to Shareholders. ITEMS 11, 12 AND 13: EXECUTIVE COMPENSATION; SECURITIES OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Additional information required by these Items is incorporated by reference to Key Tronic Corporation's 1995 Proxy Statement to Shareholders which is attached as exhibit 20. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES Key Tronic Annual Report Page in Page No. Form 10K -------- -------- FINANCIAL STATEMENTS Independent Auditors' Report 13 N/A Consolidated Balance Sheets, July 1, 1995 and July 2, 1994 14 N/A Consolidated Statements of Operations for the years ending July 1, 1995, July 2, 1994 and July 3, 1993 15 N/A Consolidated Statements of Shareholders' Equity for the years ending July 1, 1995, July 2, 1994 and July 3, 1993 16 N/A Consolidated Statements of Cash Flows for the years ending July 1, 1995, July 2, 1994 and July 3, 1993 17 N/A Notes to Consolidated Financial Statements 18-31 N/A SCHEDULES Independent Auditors Report on Financial Statement Schedules N/A 18 Independent Auditors' Consent N/A 19 II. Consolidated Valuation and Qualifying Accounts N/A 20-21 Other schedules are omitted because of the absence of conditions under which they are required, or because required information is given in the financial statements or notes thereto. (B) REPORTS ON FORM 8-K Form 8-K dated October 31, 1994, reporting the secured financing agreement with the CIT Group/Business Credit, Inc. (CIT). File No. 2-83898 (i) Exhibit No. (C) EXHIBITS The Company will, upon request and upon payment of a reasonable fee not to exceed the rate at which such copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to its security holders. (3) (a) Articles of Incorporation 3.1 (b) By-Laws, as amended (iii) (4) Certain long-term debt is described in Notes 5 and 15 to the Consolidated Financial Statements of the Company. The Company agrees to furnish to the Commission, upon request, copies of any instruments defining rights of holders of long-term debt described in Notes 5 and 15. N/A (10) Material Contracts (a) 1983 Incentive Stock Option Plan for Employees of Key Tronic Corporation, as amended. (iii) (b) The Key Tronic Corporation Variable Investment Plan. (iii) (c) Key Employee Stock Option Plan, as amended. 10.3 (d) Executive Stock Option Plan. (iii) (e) Stock Bonus Plan (PAYSOP). (iii) (f) Directors and Officers Liability and Company Reimbursement Policies. 10.5 (g) Leases with Spokane Industrial Park, Inc. 10.7 (h) Amended and Restated Employment Agreement with Lewis G. Zirkle. (iii) (i) Agreement Regarding Split Dollar Life Insurance Policies, as amended. (iv) (j) Executive SAR Stock Option Plan of Key Tronic Corporation (v) (k) Key Tronic Corporation 1990 Stock Option Plan for Non-Employee Directors (v) (l) Employee Stock Ownership Plan (vi) (m) ELLCO Leasing Corporation Master Equipment Leasing Agreement (vi) (n) Registration Rights Agreement with Hiller Key Tronic Partners (vii) (o) Stock Option Agreement with Hiller Key Tronic Partners (vii) (p) Officer Severance Agreements (vii) (q) Purchase agreement with Honeywell, Inc. (viii) (r) Officer Employment Agreement (11) Computation of Earnings Per Share - page 24 of this report (13) 1995 Annual Report to Shareholders (to the extent set forth in Parts I, II, and IV (a) of this report). (i) Previous filing on Form S-1 is incorporated by reference, exhibit number indicated (ii) Incorporated by reference to report on Form 10-K for the year ended 06/30/87 (iii) Incorporated by reference to report on Form 10-K for the year ended 06/30/86 (iv) Incorporated by reference to report on Form 10-K for the year ended 06/30/85 (v) Incorporated by reference, Key Tronic Corporation 1990 Proxy Statement, pages C-1 - D3 (vi) Incorporated by reference to report on Form 10-K for the year ended 06/30/91 (vii) Incorporated by reference to report on Form 10-K for the year ended 07/04/92 (viii)Incorporated by reference to report on Form 8-K filed August 12, 1993 (21) Subsidiaries of Registrant 1. KT Services, Inc. 2. KT FSC 100% Owned Subsidiary 100% Owned Subsidiary, Incorporated in the State of a Foreign Sales Washington Corporation Incorporated in Guam 3. Key Tronic Taiwan Corporation 4. Key Tronic Europe, LTD 100% Owned Subsidiary 100% Owned Subsidiary Incorporated in Taiwan Incorporated in the Cayman Islands 5. KTI Limited 6. U.S. Keyboard Company 100% Owned by Key Tronic Europe, LTD 100% Owned Subsidiary Incorporated in Ireland Incorporated in the State of Washington 7. Key Tronic Juarez, SA de CV 100% Owned Subsidiary Incorporated in Mexico (23) Consents of Experts and Counsel (99) Pro Forma Statements of Operations for the years ended July 1, 1995 and July 2, 1994 are incorporated by reference to the 1995 Annual Report to Shareholders, pages 30-31, which is included as exhibit 13. Notes to Pro Forma Financial Statements are incorporated by reference to the 1995 Annual Report to Shareholders, page 29, which is included as exhibit 13. INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES Key Tronic Corporation We have audited the consolidated financial statements of Key Tronic Corporation as of July 1, 1995 and July 2, 1994, and for the years ended July 1, 1995, July 2, 1994 and July 3, 1993, and have issued our report thereon dated August 11, 1995; such consolidated financial statements and reports are included in the 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Key Tronic Corporation listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP August 11, 1995 INDEPENDENT AUDITORS' CONSENT - ----------------------------- We consent to the incorporation by reference in Registration Statements No. 33-85800 and No. 33-61680 of Key Tronic Corporation on Form S-8 of our report dated August 11, 1995, appearing in and incorporated by reference in the Annual Report on Form 10-K of Key Tronic Corporation for the year ended July 1, 1995. DELOITTE & TOUCHE LLP Seattle, Washington September 29, 1995 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND SIGNATURES SCHEDULE II KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS ENDED JULY 1, 1995 JULY 2, 1994 AND JULY 3, 1993 1995 1994 1993 -------- -------- -------- Allowance for Obsolete Inventory Balance at beginning of year $3,581,447 $ 726,838 $3,053,786 Assets acquired in acquisition 0 2,071,558 0 Provision charged to income 2,907,487 1,757,713 534,200 Dispositions (2,976,849) (974,662) (2,861,148) ---------- ---------- ---------- Balance at end of year $3,512,085 $3,581,447 $ 726,838 =========== ========== ========== Allowance for Doubtful Accounts Balance at beginning of year $1,538,517 $1,110,582 $ 791,505 Assets acquired in acquisition 0 637,156 0 Provision charged to income 361,283 542,179 713,390 Write-offs and reinstatements (714,427) (751,400) (394,313) ---------- ---------- --------- Balance at end of year $1,195,373 $1,538,517 $1,110,582 ========== ========== ========== Reserve for Litigation Balance at beginning of year $2,426,375 $1,500,091 $2,755,879 Assets acquired in acquisition 0 1,000,000 0 Provision charged (credited) to income 0 0 0 Cost incurred-net of recoveries (818,879) (73,716) (1,255,788) ---------- ---------- ---------- Balance at end of year 1,607,496 2,426,375 1,500,091 Less long-term portion 900,000 0 0 ---------- ---------- ---------- Current portion $ 607,496 $2,426,375 $1,500,091 ========== ========== ========== Accrued Warranty Costs Balance at beginning of year $ 762,284 $ 332,093 $ 570,532 Assets acquired in acquisition 0 627,341 0 Provision charged to income 1,001,276 646,759 765,535 Costs incurred (1,134,833) (843,909) (1,003,974) ---------- ---------- ---------- Balance at end of year $ 628,727 $ 762,284 $ 332,093 ========== ========== ========== Long-term Investment Allowance Balance at beginning of year $ 290,490 $ 290,490 $ 290,490 Provision charged to income 0 0 0 ---------- ---------- ---------- Balance at end of year $ 290,490 $ 290,490 $ 290,490 ========== ========== ========== Allowance for Advances to Affiliate Balance at beginning of year $ 55,434 $ 254,737 $ 254,737 Recovery (55,434) (199,303) 0 Provision charged to income 0 0 0 Write-offs 0 0 0 ---------- ---------- ---------- Balance at end of year $ 0 $ 55,434 $ 254,737 ========== ========== ==========
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: September 29, 1995 KEY TRONIC CORPORATION By: /s/ Fred Wenninger --------------------------------------- Fred Wenninger, Chief Executive Officer /s/ Fred Wenninger September 29, 1995 - --------------------------------- ------------------ Fred Wenninger Date (Chief Executive Officer and President) /s/ Ronald F. Klawitter September 29, 1995 - --------------------------------- ------------------ Ronald F. Klawitter Date (Principal Financial and Accounting Officer) /s/ Stanley Hiller, Jr. September 29, 1995 - --------------------------------- ------------------ Stanley Hiller, Jr. Date (Chairman of the Board) /s/ Wendell J. Satre September 29, 1995 - --------------------------------- ------------------ Wendell J. Satre Date (Chairman of the Board Emeritus) /s/ Thomas W. Cason September 29, 1995 - --------------------------------- ------------------ Thomas W. Cason Date (Director) /s/ Yacov A. Shamash September 29, 1995 - --------------------------------- ------------------ Yacov A. Shamash Date (Director) /s/ Dale F. Pilz September 29, 1995 - --------------------------------- ------------------ Dale F. Pilz Date (Director) /s/ William E. Terry September 29, 1995 - --------------------------------- ------------------ William E. Terry Date (Director) EX-10 2 July 27, 1995 PERSONAL AND CONFIDENTIAL Mr. Fred Wenninger 6037 South Spring Canyon Road Ogden, Utah 84403 Dear Fred: On behalf of the Board of Directors of Key Tronic Corporation, I am pleased to offer you the position of President and Chief Executive Officer of Key Tronic serving at the pleasure of the Board. The specific components of your offer are as follows: BASE SALARY: $300,000 per annum with annual reviews. ANNUAL PERFORMANCE BONUS: Targeted at 50% of base salary, based upon meeting specific objectives for each fiscal year agreed to in advance by the Board. Higher annual bonuses can be achieved based upon exceeding these objectives with a cap at 75% of base salary. For Key Tronics' current fiscal year, recognizing that you did not have the opportunity to participate in the determination of the objectives which drive this year's bonus plan, you will be guaranteed a minimum cash bonus of $150,000. Future CEO incentive bonus plans will be determined by you, with agreement from the Key Tronic Board. NON-QUALIFIED STOCK OPTIONS: You will be granted upon hire 225,000 shares of non-qualified stock options pursuant to Key Tronic's current stock option plan which vest over two years. These options are priced at market as of your first day of employment. Based upon performance, you should expect to receive, subject to Board approval, additional annual grants of non-qualified options, in the range of 50,000 shares annually, priced at market usually on the day when the Board meets each July. RESTRICTED STOCK GRANTS/PHANTOM OPTIONS: You will receive upon your date of hire 50,000 shares of restricted stock or phantom options which have no cost basis to you, and the value of which at any time equals the market price of Key Tronic stock, multiplied times the number of shares above (at today's market price of $17/share, approximately $850,000). This restricted stock will have a 5-year "cliff" vesting, where upon the fifth year anniversary of your employment with Key Tronic, these shares become 100% vested which triggers a taxable event whereby the market value of these shares at that time will be treated as ordinary income. Should your employment at Key Tronic terminate prior to your fifth year anniversary date, due to death or permanent disability, you or your designated beneficiary will receive that amount of restricted stock (or cash equivalent based upon the market price of Key Tronic stock on that date (the choice is cash or stock), at the option of the Board) which equates to what portion of the five-year "cliff" vesting period will have passed as of the date of your employment termination (e.g., if your employment terminates on the third anniversary of your date of hire, you or your designated beneficiary would receive 60% of the restricted stock (i.e., 30,000 shares) or its cash equivalent at market). CHANGE OF OWNERSHIP CONDITION: Should Key Tronic have a major change of ownership (defined as 50% or more of its outstanding and issued common stock being purchased by an individual, group of individuals, or corporate entity) during your employment, the vesting of both your non-qualified options and restricted stock will be accelerated immediately so that both are 100% vested. At your option, should you elect to leave Key Tronic after such a change of control, you will be paid one year's worth of your then annual base salary in a lump sum payment. DISMISSAL FOR "OTHER THAN CAUSE": Should your employment at Key Tronic be terminated by the Board for any reason (s) other than for cause (to be defined as a very serious offense, and approved by both you and the Board), you will be paid one year's worth of your then annual base salary in a lump sum payment. No bonus or portion thereof will be paid, except for bonus earned for a prior year but not yet paid. The vesting of your restricted stock will also be accelerated such that as of the date of your termination of employment for other than cause, you will receive that amount of restricted stock (or cash equivalent based upon the market price of Key Tronic stock on that date (the choice is cash or stock), at the option of the Board) which equates to what portion of the five-year "cliff" vesting period will have passed as of your date of termination (e.g., if your date of termination occurs on the third anniversary of your date of hire, you would receive 60% of the restricted stock (i.e., 30,000 shares) or its cash equivalent at market). No severance payments or acceleration of vesting will occur if termination is voluntary or for "cause." FRINGE BENEFITS: The following fringe benefits will be included in your offer: Participation in Key Tronic's standard employee benefits programs which include, both medical and dental insurance coverage for you and your wife, as well as disability and supplemental life insurance for you. Coverage of costs associated with your annual visit to the Mayo Clinic in Rochester, Minnesota for the purpose of completing your annual physical, not to exceed $3,000 per year. Business class travel on international flights. Club dues, if becoming a member of a local golf or lunch club has reasonable business justification (no current company policy, but negotiable). RELOCATION COVERAGE: The following components of your relocation coverage will be: Cost of moving your household goods and belongings from Ogden to Spokane. Real estate commissions and other closing costs associated with the sale of your Ogden home, grossed up for taxes. Legal and other closing costs associated with the purchase of your new home in Spokane (does not include points on a new mortgage or any mortgage rate or monthly mortgage payment differential reimbursements), grossed up for taxes. Living expenses in Spokane (based upon receipts) for up to 90 days, or until the Ogden home is sold, whichever is sooner. If required, this 90-day period of time may be extended if the situation so warrants it. Carrying costs of two homes, should the situation occur where your Spokane home is purchased prior to the sale of your Ogden home. The specific costs to be covered will be the carrying costs associated with the LEAST expensive of the two homes for a period of time not to exceed six months. Key Tronic does not want to be involved in the purchase of your Ogden home through a third-party. Payment of one month's base salary to cover the cost of "incidentals" associated with your move from Ogden to Spokane. Cost of a house hunting trip for you and your wife to Spokane, and up to an additional two round-trips for you to fly to Ogden to ensure the timely sale of your home there. AIRCRAFT EXPENSES: It is my belief, also shared generally by the rest of the Key Tronic Board, that it will turn out to make good business sense for Key Tronic to utilize your airplane for business purposes. Therefore, the proposed guidelines by which Key Tronic will reimburse you for the use of your personal aircraft (either your current Aerostar, or an MU-2 turboprop should you choose to replace your Aerostar) are as follows, to be incorporated into a formal policy developed by you once on board, to cover other employees who may wish to utilize their personally owned aircraft for Key Tronic business purposes: Coverage of all aircraft hanger costs, estimated by you at approximately $350 per month which is your current hanger rent cost for your Aerostar. Coverage of operating costs for your aircraft, when used on company business. These costs estimated to be two times (2x) fuel cost which, for example, is estimated to average $300/hour (given today's fuel costs in Spokane) for an MU-2 turboprop aircraft. You estimate, based upon your prior experience at Iomega, that you will utilize your aircraft for Key Tronic business purposes for approximately 100 hours of flight time in any given year. Coverage of all costs associated with your annual Flight Safety training which you estimate at around $4,500. Key Tronic will also pay for your required time off to complete this annual training. Coverage of the additional insurance costs to both name Key Tronic as an additional insured, as well as to have a higher amount of coverage than you would normally have as an individual (to be determined by the Key Tronic Board). It is the expectation of the Key Tronic Board that you will neither gain nor lose economically from this arrangement whereby the company reimburses you for the use of your aircraft for Key Tronic business purposes. You will be expected to provide Key Tronic an annual estimate of what you believe will be the reimbursement costs for Key Tronic to cover your aircraft utilization for business purposes (including estimated flight hours, operating cost per hour, flight training costs, hanger costs, and any other ancillary costs) so that this figure can be incorporated into the company's fiscal year budget. You will be expected to submit for payment at least once per calendar quarter a statement of reimbursable costs associated with the use of your aircraft for Key Tronic business purposes. CONFIDENTIALITY AGREEMENT: You will be expected to sign Key Tronic's Standard Confidentiality Agreement on or soon after your date of hire. Both I, the other members of the Key Tronic Board, and the management team at Key Tronic, are very pleased to have you join our company as its Chief Executive at such an exciting time in the company's history. We look forward to having you formally start on September 1. Best regards, Stanley Hiller Chief Executive Officer Agreed and Accepted: _________________________ Date: _________________ Fred Wenninger EX-11 3 Exhibit 11 KEY TRONIC CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (Unaudited) YEAR ENDED July 1, July 2, July 3, 1995 1994 1993 ------------ ----------- ----------- Primary Earnings Net Income $ 4,421 NOT $ 3,849 Add after tax interest expense APPLICABLE applicable to term debt * 0 0 Add after tax interest income applicable to short term paper * 0 0 ----------- ----------- Income applicable to common stock $ 4,421 $ 3,849 =========== =========== Shares ** Weighted average shares outstanding 8,334 7,787 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options * 1,519 1,315 ----------- ----------- Adjusted common stock outstanding 9,853 9,102 =========== =========== Primary earnings per common share $0.45 $0.42 =========== =========== Assuming full dilution Earnings Net Income $ 4,421 NOT $ 3,849 Add after tax interest expense APPLICABLE applicable to term debt *** 0 0 Add after tax interest income applicable to short term paper *** 0 0 ----------- ----------- Income applicable to common stock $ 4,421 $ 3,849 =========== =========== Shares ** Weighted average shares outstanding 8,334 7,787 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exericse of such options *** 2,005 1,417 ----------- ----------- Adjusted common stock outstanding 10,339 9,204 =========== =========== Fully diluted earnings per common share $0.43 $0.42 =========== =========== FISCAL 1994 COMPUTATION: Net Loss ($1,060) Weighted average shares outstanding 8,231 Net loss per common share ($0.13) * Proceeds calculated using average market price for the year. ** Application of modified treasury stock method of calculating common stock equivalents due to potential dilution exceeding 20% (APB Opinion No. 15). *** Proceeds calculated using higher of average or ending market price for the year.
EX-13 4 KEY TRONIC TEN-YEAR FINANCIAL HIGHLIGHTS 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 (Dollars in millions, except share amounts) Net Sales $207.5 $159.4 $123.3 $124.0 $141.0 $140.2 $145.9 $136.0 $107.6 $111.7 Operating Income (loss) 9.8 (8.3) 3.7 (7.7) (7.5) 0.5 2.9 (14.1) 0.7 0.9 Net Income (Loss) 4.4 (1.1) 3.8 (7.5) (7.7) 1.5 3.1 (11.0) 0.5 0.6 Earnings (Loss) per share .43 (0.13) 0.42 (0.96) (1.00) 0.18 0.37 (1.28) 0.06 0.06 Depreciation/amortization 8.9 8.6 6.3 6.9 5.4 6.5 8.6 8.4 8.9 10.1 Total Assets 115.1 101.9 61.8 62.2 68.6 75.4 80.8 78.2 86.8 87.7 Net working capital 37.7 28.5 20.0 17.2 19.7 33.9 38.0 31.4 40.5 36.7 Long-term Debt(net of current)28.5 26.6 0.8 0.8 0.1 0.0 1.1 2.6 2.3 3.6 Shareholders' equity 51.3 44.5 43.4 40.5 46.4 54.9 56.7 53.4 66.3 65.6 Book value/share 6.06 5.38 5.54 5.21 6.00 7.09 6.79 6.33 7.53 7.37 Cash dividends per share 0 0 0 0 0 0 0 0 0 0 Number of shares outstanding at year-end (thousands) 8,456 8,271 7,837 7,757 7,736 7,736 8,356 8,429 8,809 8,898 Number of employees 2,925 2,163 1,204 1,618 2,241 2,127 2,351 2,021 1,986 2,078 (year-end)
RESULTS OF OPERATIONS 1995: The results of operations improved each quarter due to an increase in sales from new products and programs to Original Equipment Manufacturing customers. The increased sales volume and the benefit of operating a full year in the company's Juarez, Mexico plant resulted in a lower cost of goods sold which allowed the company to improve its gross margins. Also, the company's operating expenses decreased, primarily due to lower selling expenses and the restructuring provision recorded in 1994 not recurring in the current year. The large declines in average selling price (ASP) experienced in 1993 and 1994 slowed significantly in 1995. This resulted from the addition of new value-added products at higher ASP's. To accommodate the increase in sales, the company increased its manufacturing capacity through additional investment in molding, membrane production, and assembly facilities. For the year, total unit volume increased by 31.4% while ASP declined by 3.9%. Gross profit percentage increased by 4.6% from the prior year to 15.3% in 1995. 1994: In the first quarter of 1994 the company acquired substantially all of the assets and liabilities of the Honeywell Keyboard Division (HKD) (See Note 15 to the financial statements). As a result of this acquisition the company broadened both its revenue base and its product base. The company also took advantage of many cost saving opportunities. The acquisition had an insignificant impact on Research, Development and Engineering costs as most functions of the combined companies were similar and duplicate functions were eliminated. Similarly, most Sales and Marketing costs were duplicate and only an outside sales force was retained. Certain General and Administrative functions remained as they were necessary to support facilities in New Mexico and Mexico. Manufacturing labor was reduced in the fourth quarter as labor intensive products were relocated to the facility in Juarez, Mexico. Despite declining average selling prices (ASP), revenue for 1994 increased by 29.3% due to strong unit volume growth and the addition of HKD products. Cost reduction efforts continued into 1994 but were outpaced by the decline in ASP resulting in decreased gross profit margins. To compensate for this, decisions were made in the third quarter to restructure manufacturing operations. The company's assembly plant in Cheney, Washington was closed and production of that plant was redeployed to other company plants where lower costs could be attained. The resulting provisions for this restructuring generated a charge of $1.0 million in the third quarter (see Note 14 to the financial statements). $144,000 of this was paid in the fourth quarter. The balance of this charge was paid in fiscal 1995. Unit sales increased by 75.5% over the year while ASP declined 25.6%. Gross profit percentage decreased by 12.2% to 10.7% in 1994 compared to 1993. NET SALES Net sales in 1995 were $207.5 million compared to $159.4 million and $123.3 million in 1994 and 1993, respectively. These were increases of 30.1% and 29.3% in 1995 and 1994, respectively. The average unit selling prices of the company's keyboard products declined by 3.9% in 1995 and by 25.6% in 1994. Offsetting these price declines were increases in unit volumes of 31.4% and 75.5% in 1995 and 1994, respectively. HKD products accounted for 76.5% of the increase in 1994. COST OF SALES In 1995, cost of sales was 84.7% of sales compared to 89.3% in 1994 and 77.1% in 1993. In 1995 the cost of sales percentage decreased due to the redeployment of production from the company's Cheney, Washington plant to other lower cost facilities, and lower costs as a result of the increased volume. In 1994, the increase in cost of sales as a percent of revenue resulted from the need to sell older, base line products at significantly reduced prices in order to remain in the market. After the acquisition of HKD the company operated two assembly facilities at significantly less than full capacity, which negatively affected gross margins. The company provides for warranty costs based on historical analysis and anticipated product returns. The amounts charged to expense were $1,001,000, $647,000, and $766,000, in 1995, 1994, and 1993, respectively. Warranty costs increased in 1995 due to the increase in sales and changes in product mix. The company provides for obsolete and nonsaleable inventories based on specific identification of inventory against current demand and recent usage. The amounts charged to expense were $2,907,000, $1,758,000, and $534,000, in 1995, 1994, and 1993, respectively. The increases in 1995 and 1994 were due to the discontinuance of certain products and the reduction of the related inventory to net realizable value. RESEARCH, DEVELOPMENT AND ENGINEERING The company's research, development and engineering (RD&E) expenses were $6.1 million, $5.8 million, and $6.7 million, in 1995, 1994, and 1993, respectively. As a percentage of sales, these expenses were 3.0%, 3.7%, and 5.4%, respectively. In 1995 and 1994 the company focused most of its RD&E efforts on products for large Original Equipment Manufacturers, thereby reducing the quantity of projects on which the company was working compared to 1993. Consequently, spending decreased both in dollars and as a percentage of revenue in 1994 when compared to 1993, and dollar spending was only slightly higher in 1995 from 1994. SELLING EXPENSES Selling expenses were $5.0 million, $7.4 million, and $7.6 million, in 1995, 1994, and 1993, respectively. Selling expenses as a percent of sales were 2.4%, 4.6%, and 6.2%, respectively. The significant decrease in 1995 is due to reduced spending in advertising, travel and commissions. The reduction in advertising is due to less general advertising in industry publications. The reduction in travel is due to a reduction in the company's sales force. The company ceased using outside sales representatives in 1995 and commission payments were reduced accordingly. In 1994 the acquisition of HKD did not have a material impact on selling costs since duplicate costs were eliminated. Consequently, 1994 selling expenses remained relatively unchanged in real terms from 1993 but declined as a percent of revenue. GENERAL AND ADMINISTRATIVE General and administrative expenses were $10.8 million, $11.0 million, and $10.3 million, in 1995, 1994, and 1993, respectively. G&A expenses in 1995 includes recoveries of previously written off accounts receivable totaling $310,000 and the reversal of certain litigation reserves in the amount of $517,000. The increase in 1994 was primarily due to severance costs related to management personnel changes and costs related to administrative functions added as a result of the HKD acquisition. The company provides for doubtful accounts primarily based on specific identification. The amounts charged to expense were $361,000, $542,000, and $713,000, in 1995, 1994, and 1993, respectively. General and administrative costs as a percentage of sales were 5.2%, 6.9%, and 8.3%, in 1995, 1994, and 1993, respectively. INTEREST EXPENSE AND OTHER The company had interest expense of $3,486,000, $1,849,000, and $123,000 in 1995, 1994, and 1993, respectively. The increase in 1994 is related to the debt incurred in the first quarter of 1994 due to the acquisition of HKD. The increase in 1995 is due to this debt being outstanding the entire year, an increase in the company's revolving line to support the growth in working capital, and higher interest rates than in 1994. The company earned $110,000, $146,000, and $374,000 in 1995, 1994, and 1993, respectively, from investing in short term securities and commercial paper. Interest income is included in Other (Income) Expense. A gain of $470,000 recognized upon the sale of the company's printed circuit board and sheet metal operations is also included in Other (Income) Expense in 1993. INCOME TAXES The company had income tax expense of $2,203,000, $8,000, and $522,000, in 1995, 1994 and 1993, respectively. $201,000 of the 1995 income tax expense and all of the income tax expense in 1994 and 1993 was a result of income tax on foreign operations. The company has tax loss carryforwards of approximately $33.7 million which expire in varying amounts in the years 2003 through 2009. In 1995 and 1993 the company's effective tax rates were 33.3% and 11.9%, respectively, differing both years from the statutory rate principally because of lower tax rates on foreign earnings. There was no effective tax rate for 1994 as the company had a net loss. In 1994 the company adopted "Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes" (See Note 7). The effect on the company's operations was to increase net income by $8,750,000. Additionally, a deferred tax asset of $8,750,000 was recorded, which was net of a valuation allowance of $5,416,000. The balance of the deferred tax asset on July 1, 1995 was $6,800,000, which was net of a valuation allowance of $6,651,000. The increase in the valuation allowance is based on management's estimate of the future realizable value of the net deferred tax asset. In recording this deferred tax asset, the company considered both negative and positive evidence. Negative evidence includes the fact that the company had sustained taxable losses in three of the four years prior to adoption. The company operates in a volatile industry which has seen average selling prices decline significantly due to foreign competition. Also, the company incurred a significant amount of debt as a result of the acquisition of the keyboard division of Honeywell in 1994. This is offset by positive evidence including greatly reduced product costs as a result of moving production to Juarez, Mexico, where a lower wage base can be attained and lower operating expenses by reducing commissions for sales representatives. The company was awarded significant new programs by new large OEM customers, which have and are expected to improve revenues and profits. As a result, backlogs grew to $35.5 million at the end of fiscal year 1994 from $15.1 million at the previous year end. Backlogs continued to grow in fiscal 1995 to a balance of $42.8 million by year end. In order to fully utilize this deferred tax asset, the company must generate approximately $20,000,000 in taxable income before the net operating loss carryovers expire. These loss carryovers expire in varying amounts in the years 2003 through 2009. Management believes that the positive evidence outweighs the negative evidence, and it is more likely than not that the company will generate sufficient taxable income to allow the realization of the deferred tax asset within the next three or four fiscal years. INTERNATIONAL (ASIA, EUROPE, MEXICO) As part of the acquisition of HKD, the company acquired an assembly facility in Juarez, Mexico. This subsidiary, Key Tronic Juarez, SA de CV, is primarily used to support the company's domestic operations. At the end of 1992, the company decided to discontinue the activities of one of its subsidiaries, Key Tronic Taiwan Corporation. This subsidiary, which was primarily an assembly facility, began operations in January 1984 and was initially set up to serve the Asian market. In July 1985, the company opened Key Tronic Europe, Ltd. (KTEL), a keyboard manufacturing facility in Dundalk, Ireland. KTEL serves the European market. Foreign sales from worldwide operations, including domestic exports, were $83.2 million in 1995 compared to $68.2 and $53.0 million in 1994 and 1993, respectively. Foreign sales were 40.1% of net sales in 1995 compared to 42.8% and 43.0% in 1994 and 1993, respectively. Sales from KTEL represented 18.3% of consolidated sales to unaffiliated customers in 1995, compared to 19.5% in 1994 and 27.5% in 1993 (Note 10), respectively. CAPITAL RESOURCES AND LIQUIDITY The company generated (used) cash flow from operating activities of $3.2 million, $(.7) million, and $3.6 million in 1995, 1994, and 1993, respectively. Capital expenditures were $7.7 million, $5.2 million, and $7.8 million in 1995, 1994, and 1993, respectively. The company's cash position decreased by $.5 million in 1995 compared to decreases of $1.9 million and $3.9 million in 1994 and 1993, respectively. The company had working capital of $37.7 million and $28.5 million at July 1, 1995 and July 2, 1994. The increase in working capital was due primarily to higher trade receivables resulting from increased sales. Trade receivables were $34.0 million at July 1, 1995, an increase of $8.5 million from 1994. Trade receivables increased primarily because of higher sales. Inventories were $26.9 million and $21.8 million at July 1, 1995 and July 2, 1994. The increase in inventory is to support the increase in sales. On October 24, 1994, the company entered into a secured financing agreement with The CIT Group/Business Credit, Inc. (CIT). The agreement contains covenants that relate to minimum net worth, minimum working capital, income statement and balance sheet ratios and restricts investments, disposition of assets, and payment of dividends. The agreement contains a $12,000,000 term note and a revolving loan for up to $28,000,000. The agreement is secured by the assets of the corporation (Note 5). At July 1, 1995 there was $10.6 million available for use under the revolving loan. In 1994 the company maintained a $5.0 million secured revolving credit agreement. This credit line had $.7 million available for use at July 2, 1994. At July 1, 1995 and July 2, 1994, the company was in compliance with all debt covenants and restrictions. The company anticipates that capital expenditures of approximately $9.7 million will be required during the next fiscal year. Capital expenditures are expected to be financed through cash balances, cash flow from operating activities and capital leases. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets July 1, 1995 July 2, 1994 ------------ ------------ (in thousands) ASSETS Current Assets: Cash and cash equivalents $ 4,455 $ 4,996 Trade receivables, less allowance for doubtful accounts of $1,185 and $1,539 33,964 25,435 Inventories (Note 2) 26,883 21,787 Real estate held for sale 2,243 2,339 Deferred income tax asset, net (Note 7) 1,531 2,940 Other 3,932 1,838 -------- -------- Total current assets 73,008 59,335 -------- -------- Property, Plant, and Equipment - at cost (Notes 3,6, and 14) 89,255 82,348 Less accumulated depreciation 55,387 47,579 -------- -------- Total property, plant, and equipment 33,868 34,769 -------- -------- Other Assets: Other, (net of accumulated amortization of $286 and $0) 1,283 254 Deferred income tax asset, net (Note 7) 5,269 5,810 Goodwill (net of accumulated amortization 1,658 1,760 of $128 and $14) -------- -------- $115,086 $101,928 ======== ======== See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets July 1, 1995 July 2, 1994 ------------ ------------ (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 21,650 $ 17,159 Current portion of long-term obligations (Note 5) 5,433 4,721 Interest payable 329 687 Accrued compensation and vacation (Note 14) 4,152 2,929 Accrued taxes other than income taxes 1,468 1,496 Other (Notes 9 and 14) 2,289 3,828 -------- -------- Total current liabilities 35,321 30,820 -------- -------- Long-term Liabilities: Long-term obligations, less current portion (Note 5) 28,499 26,596 -------- -------- Total long-term liabilities 28,499 26,596 -------- -------- Commitments and Contingencies (Notes 5,6, and 9) Shareholders' Equity (Note 8): Common stock, no par value, authorized 25,000 shares; issued and outstanding 8,456 and 8,271 shares 37,484 36,251 Retained earnings 12,741 8,320 Foreign currency translation adjustment 1,041 (59) -------- -------- Total shareholders' equity 51,266 44,512 -------- -------- $115,086 $101,928 ======== ======== See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years Ended July 1, 1995 July 2, 1994 July 3, 1993 ------------ ------------ ------------ (in thousands except per share amounts) Net Sales $207,456 $159,447 $123,318 Cost of sales (Notes 1 and 2) 175,709 142,397 95,073 -------- -------- -------- Gross Profit on Sales 31,747 17,050 28,245 Operating Expenses: Research, development and engineering (Note 1) 6,131 5,836 6,701 Selling 5,042 7,409 7,616 General and administrative (including provision for doubtful receivables of $361, $542, and $713) (Note 1) 10,772 11,045 10,278 Provision for restructuring (Note 14) 0 1,021 0 -------- -------- -------- Operating Income (Loss) 9,802 (8,261) 3,650 Interest Expense (Note 5) 3,486 1,849 123 Other (Income) Expense (Note 5) (308) (308) (844) -------- -------- -------- Income (Loss) Before Income Taxes 6,624 (9,802) 4,371 Income Tax Provision (Note 7) 2,203 8 522 -------- -------- -------- Income (Loss) before cumulative effect of change in accounting principle 4,421 (9,810) 3,849 Cumulative effect to July 4, 1993, of change in accounting principle for income taxes (Notes 1 and 7) 0 8,750 0 -------- -------- -------- Net Income (Loss) $ 4,421 $(1,060) $ 3,849 ======== ======== ======== Earnings (Loss) Per Share: Before cumulative effect of change in accounting principle $ N.A. $ (1.19) $ N.A. ======== ======== ======== Primary Earnings (Loss) Per Common Share $ .45 $ (.13) $ .42 ======== ======== ======== Fully Diluted Earnings Per Common Share $ .43 $ N.A. $ .42 ======== ======== ======== Primary Shares Outstanding 9,853 8,231 9,102 ======== ======== ======== Fully Diluted Shares Outstanding 10,339 N.A. 9,204 ======== ======== ======== See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended July 1, 1995 July 2, 1994 July 3, 1993 ------------ ------------ ------------ (in thousands) Increase (Decrease) in Cash and Cash Equivalents: Cash Flows from Operating Activities: Net Income (Loss) $4,421 $(1,060) $3,849 Adjustments to Reconcile Net Income (Loss) to Cash Provided (used) by Operating Activities: Depreciation and amortization 8,877 8,596 6,276 Provision for restructuring of business line 0 1,021 0 Provision for obsolete inventory 2,907 1,758 534 Provision for doubtful receivables 361 542 713 Provision for litigation (517) 0 0 Provision for warranty 1,001 647 766 (Gain) or loss on disposal of assets (43) (43) 19 Cumulative effect of change in accounting for income taxes (Notes 1 and 7) 0 (8,750) 0 Deferred income tax asset 1,950 0 0 Changes in Operating Assets and Liabilities: Trade receivables (8,890) (1,182) (1,713) Inventories (8,003) (1,290) (1,301) Other assets (2,164) 1,769 (1,545) Accounts payable 4,491 3,723 1,119 Employee compensation and accrued vacation 1,223 383 (1,183) Other liabilities (2,409) (6,839) (3,984) -------- -------- -------- Cash provided by (used in) operating activities 3,205 (725) 3,550 -------- -------- -------- Cash Flows from Investing Activities: Cash Paid for assets acquired and liabilities assumed, net (Note 15) 0 (21,961) 0 Purchase of property and equipment (7,652) (5,231) (7,786) Proceeds from sale of property and equipment 203 448 1,452 Change in other assets 0 1,047 (175) -------- -------- -------- Cash used in investing activities (7,449) (25,697) (6,509) -------- -------- -------- See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended July 1, 1995 July 2, 1994 July 3, 1993 ------------ ------------ ------------ (in thousands) Cash Flows from Financing Activities: Payment of financing costs (1,245) 0 0 Proceeds from issuance of common stock 1,233 164 369 Proceeds from long-term obligations 28,595 31,711 0 Payments on long-term obligations (25,980) (6,205) (31) -------- -------- -------- Cash provided by financing activities 2,603 25,670 338 -------- -------- -------- Effect of exchange rate changes on cash 1,100 (1,182) (1,282) -------- -------- -------- Decrease in Cash and Cash Equivalents (541) (1,934) (3,903) Cash and Cash Equivalents, Beginning of Year 4,996 6,930 10,833 -------- -------- -------- Cash and Cash Equivalents, End of Year $4,455 $4,996 $6,930 ======== ======== ======== See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Foreign Currency Common Stock Retained Translation Shares Amount Earnings Adjustment Total ------ ------ -------- ----------- ------ (in thousands) Balances, July 4, 1992 7,757 $32,518 $ 5,531 $2,405 $40,454 Net Income - 1993 3,849 3,849 Issuance of stock under stock options 80 369 369 Foreign currency translation adjustment (1,282) (1,282) -------- -------- -------- -------- -------- Balances, July 3, 1993 7,837 32,887 9,380 1,123 43,390 Net Loss - 1994 (1,060) (1,060) Issuance of stock under stock options 34 164 164 Stock issued (Note 15) 400 3,200 3,200 Foreign currency translation adjustment (1,182) (1,182) -------- -------- -------- -------- -------- Balances, July 2, 1994 8,271 36,251 8,320 (59) 44,512 Net Income - 1995 4,421 4,421 Issuance of stock under stock options 185 1,233 1,233 Foreign currency translation adjustment 1,100 1,100 -------- -------- -------- -------- -------- Balances, July 1, 1995 8,456 $37,484 $12,741 $1,041 $51,266 ======== ======== ======== ======== ======== See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES BUSINESS Key Tronic Corporation and subsidiaries (the "company") principally manufactures input devices, primarily keyboards, for computers, terminals, and work stations. The company also is in various stages of developing, marketing, and manufacturing a variety of computer related products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include Key Tronic Corporation and its wholly owned subsidiaries in Ireland, Mexico, Taiwan, and the United States. Significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS The company considers investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out (FIFO) method. The reserve to adjust inventory to market value for obsolete and nonsalable inventories were approximately $3,512,000 and $3,581,000 at July 1, 1995 and July 2, 1994, respectively. The company provides for obsolete and nonsalable inventories based on specific identification of inventory against current demand and recent usage. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and depreciated using accelerated and straight-line methods over the expected useful lives. Constructed molds and dies are expensed as incurred if there is no future utility beyond one year. Capitalized molds and dies are depreciated over the expected useful lives of one to three years. GOODWILL Goodwill resulted from the acquisition of substantially all of the assets and liabilities of Honeywell, Inc.'s Keyboard Division (see Note 15). Goodwill is amortized on a straight-line basis over a period of fifteen years. ACCRUED WARRANTY An accrual is made within other current liabilities for expected warranty costs, with the related expense recognized in cost of goods sold. Management reviews the adequacy of this accrual quarterly based on historical analysis and anticipated product returns. Accrued warranty costs at July 1, 1995 and July 2, 1994 were $629,000 and $762,000, respectively. NET SALES Sales are recognized when products are shipped. Provisions for estimated sales returns are not significant. The company provides for doubtful accounts primarily based on specific identification. RESEARCH, DEVELOPMENT AND ENGINEERING Research, development and engineering expenses include costs of developing new products and production processes as well as design and engineering costs associated with the production of custom keyboards. Generally product customizations are targeted at perceived market needs and precede the obtaining of customer orders and/or contracts. Such costs are charged to expense as incurred. Product customization costs incurred pursuant to customer orders and/or contracts are included in cost of sales. INCOME TAXES The company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" as of July 4, 1993. Under the asset and liability method prescribed by SFAS No. 109, deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. Tax credits are accounted for as a reduction of income taxes in the year the credit originates. PER SHARE DATA Net income per share is computed on the basis of the weighted average number of common and common equivalent shares outstanding and is adjusted for shares issuable upon exercise of stock options. The computation assumes the proceeds from the exercise of stock options were used to repurchase common shares at the average market price (for primary earnings per share) or greater of average or ending market price (for fully diluted earnings per share) of the company's common stock during each period. In 1994 common stock equivalents have an antidilutive effect on loss per share and, accordingly, are omitted from the calculation of primary earnings per share. SIGNIFICANT CUSTOMERS One customer accounted for approximately 23%, 10%, and 0% of net sales for the years ended July 1, 1995, July 2, 1994, and July 3, 1993, respectively. This customer accounted for approximately 20% and 14% of trade receivables at July 1, 1995 and July 2, 1994 respectively. Another customer accounted for approximately 19%, 1% and 0% of net sales in 1995, 1994, and 1993, respectively. This customer accounted for approximately 18% and 3% of trade receivables at July 1, 1995 and July 2, 1994, respectively. A third customer accounted for approximately 12%, 21%, and 32% of net sales in 1995, 1994, and 1993, respectively. This customer accounted for approximately 8% and 25% of trade receivables at July 1, 1995 and July 2, 1994, respectively. FOREIGN CURRENCY TRANSLATION ADJUSTMENT Assets and liabilities of the company's subsidiaries in Ireland, Mexico and Taiwan are translated to U.S. dollars at year-end exchange rates (April 1, 1995 exchange rate for the company's Irish subsidiary in 1995). Revenues and expenses are translated at average exchange rates. Translation gains and losses are included in a separate component of shareholders' equity. Realized foreign currency transaction gains and losses are included in general and administrative expenses. During the fourth quarter of fiscal 1995 the company determined that significant changes in the business of the company's subsidiary in Ireland had occurred throughout the year such that the functional currency of the subsidiary had changed from the Irish punt to the U.S. dollar. Effective April 1, 1995 the company changed the functional currency of this subsidiary to the U.S. dollar. Factors influencing this change include a) the origination point of major sales contracts switching to the U.S., b) a large increase in the percentage of materials received from the U.S. and c) a switch in the denomination of sales contracts from Irish punts to U.S. dollars. The impact of this change in accounting policy is such that subsequent to April 1, 1995, the company will not incur translation adjustments relating to this subsidiary. RECLASSIFICATION Certain amounts have been reclassified for 1994 and 1993 to be consistent with the presentation of 1995 amounts. FISCAL YEAR The company operates on a 52/53 week fiscal year. Fiscal years end on the Saturday nearest June 30. As such, fiscal years 1995, 1994, and 1993 ended on July 1, 1995, July 2, 1994, and July 3, 1993, respectively. Fiscal year 1996 will end on June 29, 1996. 2. INVENTORIES Components of inventories were as follows: July 1, July 2, 1995 1994 ------- ------- (in thousands) Finished goods $ 6,978 $ 2,888 Work-in-process 3,303 2,589 Raw materials 16,602 16,310 ------- ------- $26,883 $21,787 ======= ======= Cost of goods sold includes charges of $2.9 million, $1.8 million, and $.5 million resulting from reduction of inventories to estimated realizable value in 1995, 1994, and 1993, respectively. 3. PROPERTY, PLANT AND EQUIPMENT Equipment includes property leased under capital leases (See Note 6) of $1,329,000 and $1,148,000 at July 1, 1995 and at July 2, 1994. Related accumulated amortization is $844,000 and $606,000, respectively. Classification Life (in years) July 1, July 2, ------------------------------------------------------------------------------------------ 1995 1994 (in thousands) Land $ 2,486 $ 2,486 Buildings and improvements 3 to 30 13,701 12,969 Equipment 1 to 10 60,933 55,182 Furniture and fixtures 3 to 5 12,135 11,711 ------- ------- $89,255 $82,348 ======= =======
In 1993, the company sold substantially all of the assets of its printed circuit board and sheet metal operations for $1.1 million, resulting in a gain of $470,000. This gain was included in Other (Income) Expense. 4. RELATED PARTY TRANSACTIONS (a) The company has life insurance policies on the life of its founder/director with net death benefits totaling approximately $3,000,000. Of these, policies with death benefits totaling $750,000 have been designated to fund obligations of the company to the founder/director's spouse in the event of his death and, accordingly, such obligations are not recorded in the financial statements. Net cash values of such policies are recorded in the amount of $194,000 and $81,000 in 1995 and 1994, respectively, and are included in other assets. (b) Hiller Investment company (HIC), beneficially owned by Stanley Hiller, the company's Chief Executive Officer and a Director, incurs various overhead expenses, consulting services and travel expenses on behalf of the company. The manner in which costs incurred by HIC are charged to the company is through specific identification. The cost of these services, which was charged against General and Administrative Expense, amounted to approximately $330,000, $411,000, and $362,000 in 1995, 1994, and 1993, respectively. The amounts owed to HIC as of July 1, 1995 and July 2, 1994 were approximately $0 and $98,000, respectively. (c) Stanley Hiller, Thomas W. Cason, and Royce G. Pearson (a Director) respectively have 66.29%, 10.30%, and 6.50% equity interests in Hiller Key Tronic Partners (HKT Partners), a Washington limited partnership. Other directors and officers collectively have a 6.85% equity interest in HKT Partners. HKT Partners has a significant stock option agreement with the company (see note 8). 5. LONG-TERM OBLIGATIONS On October 24, 1994, the company entered into a secured financing agreement with The CIT Group/Business Credit, Inc. (CIT). The agreement contains a $12,000,000 term note and a revolving loan for up to $28,000,000. The agreement is secured by the assets of the corporation. The agreement contains covenants that relate to minimum net worth, minimum working capital, income statement and balance sheet ratios and restricts investments, disposition of assets, and payment of dividends. At July 1, 1995 and July 2, 1994, the company was in compliance with all debt covenants and restrictions. The term note is payable in quarterly installments of principal, each in the amount of $500,000, commencing in November 1995 and maturing in November 2001. This note bears interest at one and three-quarters percent (1.75%) in excess of the Chemical Bank Rate, which approximates prime (9.0% at July 1, 1995). The revolving loan is renewable and covers an initial period of approximately three years expiring on the first business day of November 1997. This loan bears interest at one and one-half percent (1.50%) in excess of the Chemical Bank Rate, which approximates prime. Borrowings outstanding, under this agreement at July 1, 1995 amounted to $16,428,000. This agreement replaced a $5.0 million secured revolving credit agreement and a $20.9 million note payable to a financial institution. Also, in connection with this agreement, the company issued to CIT a warrant to purchase 45,000 shares of common stock at $12.60 per share. Long-term obligations consist of: July 1, July 2, -------- -------- 1995 1994 (in thousands) Revolving Line $16,428 $ 3,715 Note Payable - CIT 11,990 0 Note Payable - Honeywell, Inc. 3,649 3,649 Litigation reserve 900 900 Deferred compensation obligation 657 698 Capital lease obligations (See Note 6) 308 321 Note Payable - financial institution 0 22,000 Installment contracts 0 34 -------- -------- 33,932 31,317 Less current portion (5,433) (4,721) -------- -------- $28,499 $26,596 ======== ========
The note payable to Honeywell, Inc. is payable in four installments of principal and interest on the last business day of July and October of 1995 and January and April of 1996. This unsecured note bears interest at the prime rate. The litigation reserve relates to an amount accrued for the company's estimate of probable legal costs associated with the Mica Sanitary landfill (see Note 9). The installment contracts and capital lease obligations have monthly repayment terms through December 1997, with fixed interest rates from 8.96% to 10.86% and are collateralized by equipment with a net book value approximately equal to amounts borrowed. At July 1, 1995, the company was contingently liable for $555,000 in standby letters of credit, which reduces the amount of availability under the revolving line. The company adopted the provisions of Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS 106), as of July 5, 1992. Under SFAS 106 the company has recorded a liability for certain compensation related agreements for two former employees. The liability was estimated based upon the present value of future cash payments as specified in the agreements. This cost of $111,000 in 1995, $81,000 in 1994 and $500,000 in 1993 was charged against General and Administrative Expenses. Principal maturities of long-term obligations, excluding litigation reserve, at July 1, 1995 are: Fiscal Years Ending (in thousands) 1996 $ 5,433 1997 2,216 1998 18,562 1999 2,102 2000 2,102 2001 and later 2,617 -------- Total $33,032 ======== Other (Income) Expense consists of: Years Ended July 1, July 2, July 3, ------- ------- ------- 1995 1994 1993 (in thousands) Interest income (110) (146) (374) Gain on sale (Note 3) 0 0 (470) Miscellaneous (198) (162) 0 ------ ------ ------ $(308) $(308) $(844) ====== ====== ====== In November 1992, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits" (SFAS 112). The provisions of SFAS 112 were adopted by the company in the first quarter of fiscal 1995. The implementation of SFAS 112 did not have a material impact on the company's financial position or results of operations. 6. LEASES The company has capital and operating leases for certain equipment and production facilities which expire over periods from one to five years. Future minimum payments under capital leases and noncancelable operating leases with initial or remaining terms of one year or more at July 1, 1995, are summarized as follows: Capital Operating Fiscal Years Ending Leases Leases ----------------------------------------------------------------------------- (in thousands) 1996 $178 $1,484 1997 121 1,333 1998 32 777 1999 0 450 2000 0 377 2001 and later 0 196 -------- -------- Total minimum lease payments 331 $4,617 ======== Amount representing interest 23 -------- Present value of net minimum lease payments (including $155 classified as current) $308 ========
Rental expenses under operating leases were $1,156,000, $751,000, and $520,000 in 1995, 1994, and 1993, respectively. 7. INCOME TAXES The company adopted the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," as of July 4, 1993. The standard changes the method of accounting for income taxes to the asset and liability method. The result of this accounting change, recorded cumulatively in the first quarter of 1994, was to increase net earnings for the year ended July 2, 1994, by $8,750,000 or $1.16 per primary common share. This change did not have a material effect on the income tax provision recorded in 1995 or 1994. In recording this deferred tax asset, the company considered both negative and positive evidence. Negative evidence includes the fact that the company had sustained taxable losses in three of the four years prior to adoption. The company operates in a volatile industry which has seen average selling prices decline significantly due to foreign competition. Also, the company incurred a significant amount of debt as a result of the acquisition of the keyboard division of Honeywell in 1994. This is offset by positive evidence including greatly reduced product costs as a result of moving production to Juarez, Mexico, where a lower wage base can be attained and lower operating expenses by reducing commissions for sales representatives. The company was awarded significant new programs by new large OEM customers, which have and are expected to improve revenues and profits. As a result, backlogs grew to $35.5 million at the end of fiscal year 1994 from $15.1 million at the previous year end. Backlogs continued to grow in fiscal 1995 to a balance of $42.8 million by year end. In order to fully utilize this deferred tax asset, the company must generate approximately $20,000,000 in taxable income before the net operating loss carryforwards expire. These loss carryforwards expire in varying amounts in the years 2003 through 2009. Management believes that the positive evidence outweighs the negative evidence, and it is more likely than not that the company will generate sufficient taxable income to allow the realization of the deferred tax asset within the next three or four fiscal years. The company's effective tax rate differs from the federal tax rate as follows: Year Ended Year Ended Year Ended July 1, July 2, July 3, -------- -------- -------- (in thousands) 1995 1994 1993 Federal income tax provision (benefit) at statutory rates $2,252 $(3,333) $1,486 Effect of foreign loss (income) not subject to federal income tax (181) 340 (2,028) Valuation allowance upon adoption of SFAS 109 0 2,965 0 Unrecognized benefit of tax loss 0 0 642 Permanent differences: Life insurance premiums 26 31 31 Other (95) (3) (131) Foreign tax provision (benefit) at foreign statutory rate 491 (412) 2,186 Adjustment for effect of beneficial tax rate on foreign manufacturing income (loss) (290) 420 (1,664) -------- -------- -------- Income tax provision $2,203 $ 8 $ 522 ======== ======== ========
The low statutory income tax rate granted manufacturers in Ireland is subject to an expiration date of December 31, 2010. In 1994 foreign losses increase the company's effective income tax rate since such losses are not deductible for U.S. income tax purposes. The domestic and foreign components of income (loss) before income taxes were (in thousands): December 31, 1995 1994 1993 - ----------- -------- -------- -------- Domestic $6,090 ($7,817) ($1,742) Foreign 534 (1,985) 6,113 -------- -------- -------- Income (loss) before income taxes $6,624 ($9,802) $4,371 -------- -------- -------- Deferred income tax provision (benefit) consists of the following for the year ended July 1, 1995: 1995 1994 -------- -------- Allowance for doubtful accounts $ 120 $ (145) Inventory 997 (1,752) Accrued liabilities 418 (478) Deferred compensation 14 27 Depreciation and amortization 1,338 312 Net operating loss carryforward (2,041) (1,127) Tax credit carryovers (49) 0 Other (83) 108 Change in valuation allowance 1,236 3,055 -------- -------- Deferred income tax provision (benefit) $1,950 $ 0 ======== Deferred income tax assets and liabilities consist of the following at: July 1, July 2, -------- -------- 1995 1994 (in thousands) Allowance for doubtful accounts $ 403 $ 523 Inventory 1,702 2,699 Vacation accrual 340 387 Self Insurance accrual 132 198 Litigation accrual 241 502 Warranty accrual 214 259 Restructuring accrual 0 298 Other (4) (107) ------------------------------------------------------------------------------------- Current deferred income tax assets 3,028 4,759 Current portion of valuation allowance (1,497) (1,819) ------------------------------------------------------------------------------------- Current deferred income tax assets net of valuation allowance 1,531 2,940 ------------------------------------------------------------------------------------- Litigation accrual 306 0 Deferred compensation 223 237 Depreciation and amortization (2,142) (804) Net operating loss carryforward 11,454 9,413 Tax credit carryovers 446 397 Other 136 164 ------------------------------------------------------------------------------------- Noncurrent deferred income tax assets 10,423 9,407 Valuation allowance net of current portion (5,154) (3,597) ------------------------------------------------------------------------------------- Noncurrent deferred income tax assets net of valuation allowance 5,269 5,810 -------------------------------------------------------------------------------------
At July 1, 1995 the company had tax loss carryforwards of approximately $33.7 million, which expire in varying amounts in the years 2003 through 2009. Additionally, for federal income tax purposes, the company has approximately $446,000 of general business credit carryforwards which expire in varying amounts in the years 2004 through 2007. Approximately $169,000 of the general business credit carryforwards have an indefinite carryforward period. Foreign income tax expense is calculated at the statutory rate of the foreign taxing jurisdiction. 8. SHAREHOLDERS' EQUITY The company has an Incentive Stock Option Plan, an Executive Stock Option Plan, and an Executive Stock Appreciation Rights Plan for certain key employees. Options under these plans vest over two to ten years and become exercisable as they vest. Options under the plans become exercisable in full immediately prior to the occurrence of a "Change in Control" as defined in the plan documents. As of July 1, 1995, 1,480,000 shares have been reserved for issuance and 370,458 options were outstanding of which 120,621 shares were exercisable under these plans. Compensation expense for options will be recorded if the exercise price of the option is less than the closing market price of the stock on the date of grant. There was no compensation expense incurred in conjunction with options in 1995, 1994 or 1993 as all options were granted at fair market value. The company also has a Stock Option Plan for "Nonemployee Directors." Options under this plan vest over a three year period and are exercisable as they vest. As of July 1, 1995, 300,000 shares have been reserved for issuance and 150,000 options were outstanding of which 60,000 shares were exercisable. In fiscal year 1992 the shareholders ratified and approved an option agreement dated February 29, 1992 (Hiller Option Agreement) between the company and Hiller Partners (see Note 4), pursuant to which Hiller Partners received an option to purchase 2,396,923 shares of common stock at an exercise price of $4.50 per share, subject to adjustment under certain circumstances. Options under this agreement are generally exercisable as follows: half of the shares after March 1, 1993 and the remainder of the shares after March 1, 1994. These options expire on March 1, 1997. Following is a summary of all plan activity: Number Price Range Of Options - ----------------------------------------------------------------- Outstanding, July 4, 1992 $3.56 to $ 6.75 274,400 Granted during 1993 $8.25 to $11.88 206,330 Stock appreciation rights exercised $4.50 (5,500) Options exercised $3.56 to $ 5.06 (80,350) Expired or canceled $3.56 to $10.75 (42,673) ------------------------- Outstanding, July 3, 1993 $3.56 to $11.88 352,207 ------------------------- Granted during 1994 $6.25 to $10.12 412,858 Options exercised $3.56 to $ 8.25 (33,930) Expired or canceled $3.56 to $11.13 (155,332) ------------------------- Outstanding, July 2, 1994 $3.56 to $11.88 575,803 ------------------------- Granted during 1995 $7.25 to $14.625 269,377 Stock appreciation rights exercised $4.50 (9,380) Options exercised $3.56 to $11.38 (184,956) Expired or canceled $4.50 to $11.13 (130,386) ------------------------- Outstanding, July 1, 1995 $3.56 to $14.625 520,458 ========================= The company has three issues of stock warrants outstanding at July 1, 1995. One stock warrant is dated August 17, 1990 and entitles a consultant to purchase 15,000 shares of common stock at $4.69 per share. A second stock warrant, dated July 30, 1993, entitles Honeywell, Inc. to purchase 300,000 shares of common stock at $14.00 per share (see Note 15). A third stock warrant, dated October 24, 1994, entitles CIT to purchase 45,000 shares of common stock at $12.60 per share (see Note 5). These warrants expire on August 17, 1995, July 30, 2000, and October 24, 1997, respectively. The company's Variable Investment Plan is available to employees who have attained age 21. The plan has an Employer's Discretionary Contribution Trust, invested in the company's stock, and an Employee Contribution Trust consisting of several investment alternatives. The company contributes an amount equal to 100% of the employee's contribution on the first 2% of the employee's compensation and an additional 25% of the employee's contribution on the following 2% of the employee's compensation. Company contributions to the Trust were $461,037, $485,287 and $388,001 in 1995, 1994 and 1993, respectively. The company has an Employee Stock Ownership Plan. No contributions were made to the plan in 1995, 1994, or 1993. The investment in the company's stock at July 1, 1995 by all employee trusts amounted to 308,193 shares. 9. COMMITMENTS & CONTINGENCIES LITIGATION The company used Mica Sanitary landfill, a public dump site operated by the County of Spokane, until early 1975. Mica landfill is a state lead National Priority List site ("NPL"). Mica landfill was placed on the NPL in 1985. In l988 the Washington Department of Ecology and Spokane County entered into a Consent Decree requiring the County to conduct a Remedial Investigation (RI) followed by appropriate Remedial Action (RA). The County's RI was completed by the County in September 1992. An interim remedial action plan was completed in late 1993 and instituted in mid 1994 to be followed by a 5-year performance monitoring program to be conducted by the County to determine if additional remedial measures are needed. The 5-year performance monitoring program commenced in the Spring of 1995. The company has not been named as a Potentially Liable Party ("PLP") under the State Toxic Control Act ("STCA") or as a Potentially Responsible Party ("PRP") under CERCLA, as amended ("CERCLA"). To date, test results have not shown the waste disposed of by the company at Mica to be a source of pollution or contamination. Prior to 1989 certain third parties were designated PRP's and PLP's . The company made a provision prior to the beginning of fiscal year 1992 based on information then currently available to it and the company's prior experience in connection with another NPL landfill site where the company disposed of a similar type of waste which it disposed of at Mica, for its estimate of probable legal costs to be associated with this matter. No provision has been made for probable liability for remedial action, because management does not believe a range of probable or reasonably possible costs is estimable at this time based upon the fact that the company to date has not been named a PRP or PLP and the uncertainty as to what additional pollution or contamination will be disclosed over the course of the County's 5-year monitoring and testing program. At fiscal year end 1995, 1994 and 1993, respectively, the accrued balance for probable legal costs was $900,000, $900,000, and $1.250 million. The reduction in the accrued balance reflects charges for expenditures of $4,000 during fiscal year 1994 and a reduction in the accrued balance for legal costs of $346,000 in 1994 based on management's revised estimate of the probable future legal costs associated with this matter. Management does not believe there to be any reasonably possible losses for legal costs beyond the existing accrual for probable losses which could be material to future financial position or results of operations. No provision has been made to cover any future costs to the company of any remedial action or clean-up activities because those costs, if any, can not be determined at this time. Given the inherent uncertainty in environmental matters, limited information available with respect to any future remedial measures, uncertainty of the results of future monitoring tests, limited information as to the number of PRP's and PLP's , the uncertainty as to whether the company will be designated a PRP or PLP with respect to the site and the complexity of the circumstances surrounding this matter, management's estimate is subject to and will change as facts and circumstances warrant. Based upon publicly available cost estimates of remediation and clean-up at the site and the contributions to date of designated PRP's and PLP's, management believes that insurance coverage is probable for any reasonably possible future remedial or clean-up costs to the company. Pursuant to the Amended and Restated Purchase and Sale Agreement between Honeywell, Inc. and Key Tronic Corporation, dated as of July 30, 1993 (the "Agreement"), the company assumed known and unknown product liabilities and unknown but potentially incurred environmental liabilities for a portion of any pre-existing claims against Honeywell, Inc. ("Honeywell") which are asserted after the closing date relating to environmental matters and to product liability matters associated with products manufactured by Honeywell prior to its ceasing manufacture of those products on the closing date of the Agreement. Honeywell retained responsibility for unasserted claims not assumed by the company as follows: Honeywell retained responsibility for environmental and product liability claims, incurred but not reported as of the closing date, in excess of $1,000,000 in the aggregate which 1) in the case of environmental claims are asserted within two years following the closing date or which 2) in the case of product liability claims are asserted within five years following the closing date. Management estimated on the closing date of the acquisition that it was probable that $1.0 million of incurred but not reported product liability claims would be recorded during the 5-year period following the closing of the Agreement and the company recorded this liability as part of the acquisition costs. At fiscal year end 1995 and 1994, respectively, the accrued balance for these product liability claims was $610,000 and $949,000. The reduction in the accrued balance reflects charges for expenses in fiscal years 1995 and 1994. Management does not believe there to be any reasonably possible product liability losses beyond the existing accrual for probable losses which could be material to future financial position or results of operations. The company has not made a provision for Honeywell environmental claims which may be discovered and asserted after the closing date or product liability claims which may be asserted five or more years after the closing date, because management does not believe such potential liabilities are reasonably possible at this time. No environmental claims have been asserted as of fiscal year end 1995. Given the inherent uncertainty of litigation, in environmental matters and in contract interpretation, the inherently limited information available with respect to unasserted claims and the complexity of the circumstances surrounding these matters, management's estimates are subject to and will change or be established as facts and circumstances warrant. The company has assumed certain obligations under the Agreement related to a patent infringement claim associated with Honeywell products. The company made a provision in 1994 in the amount of $455,000, based upon information which became available to it after the closing date, for its estimate of probable costs to be associated with this patent infringement claim. During fiscal 1995, management completed its investigation of this matter and reduced the accrued balance for future costs based on managements revised estimate of the probable future costs to be associated with this claim. This resulted in reduction of the litigation reserve and corresponding decrease in general and administrative expense during the year of $517,000. Management does not believe there to be any reasonably possible losses beyond the existing accrual for probable losses which could be material to future financial position or results of operations. The company currently has one hundred nineteen suits by computer keyboard users which are in State or Federal Courts in California, Florida, Illinois, Kansas, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas. These suits allege that specific keyboard products manufactured by the company were sold with manufacturing, design and warning defects which caused or contributed to their injuries. The alleged injuries are not specifically identified but are referred to as repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These suits seek compensatory damages and some seek punitive damages. It is more likely than not that compensatory damages, if awarded, will be covered by insurance, however the likelihood that punitive damages, if awarded, will be covered by insurance is remote. A total of eighteen suits have been dismissed in California, Kentucky, New York and Texas. Seven of the eighteen dismissed suits are on appeal, all in New York. The company believes it has valid defenses and will vigorously defend these claims. These claims are in the early stages of discovery. Given the early stage of litigation, the complexity of the litigation, the inherent uncertainty of litigation and the ultimate resolution of insurance coverage issues, the range of reasonably possible losses in connection with these suits is not estimable at this time. Therefore no provision has been made to cover any future costs. Management's position will change if warranted by facts and circumstances. The company's total accrual for litigation related matters, including compensatory damages, and legal costs, was $1.6 million and $2.4 million as of July 1, 1995 and July 2, 1994, respectively. The company has filed suit against its insurers for reimbursement of costs which were incurred and paid in previous years associated with the Colbert landfill (a Superfund site). No settlement has been reached with the insurers, and therefore the amount of the contingent gain is not determinable. Certain negotiations have commenced, and any recoveries will be recorded upon settlement. CAPITAL EXPENDITURES AND OTHER The amount of firm commitments to contractors and suppliers for capital expenditures was approximately $439,000 at July 1, 1995. The subsidiary in Ireland has received reimbursement grants from the Irish government for capital expenditures which may become repayable under certain circumstances through 2003, which are not deemed to be probable. Capital expenditures are recorded net of reimbursement grants received. The amount of the grants which may become repayable were approximately $2,416,000 at July 1, 1995. Certain significant events such as closure of the Irish plant would cause such repayment. The company has guaranteed $405,000 in future lease payments entered into between the company's Irish subsidiary and a third party. The company has also entered into several contracts, extending one to two years, which require the company to purchase minimum quantities of certain raw materials and components. As of July 1, 1995, minimum purchase contracts amounted to $2.2 million for fiscal 1996. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK The company distributes products primarily to Original Equipment Manufacturers (OEM's) and as a result maintains individually significant accounts receivable balances from various major OEM's. The company evaluates the credit worthiness of its customers on an ongoing basis and may tighten credit terms on particular customers from time to time. 10. FOREIGN OPERATIONS The company currently operates in one business segment, the manufacture of computer peripheral equipment, primarily keyboards and other input devices. Information concerning geographic areas for the years ended July 1, 1995, July 2, 1994 and July 3, 1993 is summarized in the following table. Domestic U.S. Mexico Ireland Taiwan Exports Operations Operations Operations Operations Eliminations Consolidated ------------------------------------------------------------------------------------ 1995 (in thousands) Net Sales: Unaffiliated customers $45,122 $124,278 $ 0 $38,056 $ 0 $ 0 $207,456 Affiliates 0 7,390 8,718 1,069 0 (17,177) 0 ------- -------- ------ ------- ------- -------- -------- Total $45,122 $131,668 $8,718 $39,125 $ 0 $(17,177) $207,456 ======= ======== ====== ======= ======= ======== ======== Income before income taxes $ 6,090 $ (12) $ 485 $ 0 $ 61 $ 6,624 ======= ====== ======= ======= ======== ======== Identifiable assets $98,270 $ 851 $18,230 $ 2,860 $ (5,125) $115,086 ======= ====== ======= ======= ======== ======== 1994 Net Sales: Unaffiliated customers $37,133 $ 91,220 $ 0 $31,094 $ 0 $ 0 $159,447 Affiliates 0 7,311 7,175 1,386 0 (15,872) 0 ------- -------- ------ ------- ------- -------- -------- Total $37,133 $ 98,531 $7,175 $32,480 $ 0 $(15,872) $159,447 ======= ======== ====== ======= ======= ======== ======== Income before income taxes $(7,817) $ 119 $(1,096) $ 0 $ (1,008) $ (9,802) ======= ====== ======= ======= ======== ======== Identifiable assets $86,892 $ 761 $16,323 $ 2,016 $ (4,064) $101,928 ======= ====== ======= ======= ======== ======== 1993 Net Sales: Unaffiliated customers $19,060 $ 70,339 $33,919 $ 0 $ 0 $123,318 Affiliates 0 6,785 1,709 0 (8,494) 0 ------- -------- ------- ------- -------- -------- Total $19,060 $ 77,124 $35,628 $ 0 $ (8,494) $123,318 ======= ======== ======= ======= ======== ======== Income (loss) before income taxes $(1,742) $ 5,966 $ 0 $ 147 $ 4,371 ======= ======= ======= ======== ======== Identifiable assets $43,765 $15,857 $ 3,129 $ (905) $ 61,846 ======= ======= ======= ======== ========
Historically, exports from domestic operations are sold primarily to European customers. Transfers to affiliates are made at prices which approximate market. There are no customer countries or regions which are individually significant to total export sales for any of the company's individual operations or for operations in the aggregate. Mexico had no operations in 1993 as the Mexican operation was acquired in the business combination with HKD in fiscal year 1994 (see Note 15). 11. SUPPLEMENTAL CASH FLOW INFORMATION Years Ended July 1, July 2, July 3, 1995 1994 1993 -------- -------- -------- (in thousands) Interest payments $4,803 $1,849 $123 Income tax payments 0 0 342 Stock exchange for net assets (Note 15) 0 $3,200 0
12. SUPPLEMENTAL INCOME STATEMENT INFORMATION Years Ended July 1, July 2, July 3, 1995 1994 1993 -------- -------- -------- (in thousands) Maintenance and repairs $3,295 $ 2,509 $ 2,363 13. QUARTERLY FINANCIAL DATA (Unaudited) Year Ended July 1, 1995 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) Net sales $45,436 $48,748 $53,187 $60,085 Gross profit 6,343 7,560 8,712 9,132 Income before income taxes 534 1,322 1,836 2,932 Net income 328 849 1,399 1,845 Primary earnings per common share 0.04 0.10 0.14 0.18 Fully diluted earnings per common share N.A. N.A. 0.14 0.18 Weighted average shares outstanding 8,273 8,314 8,349 8,400 Primary shares outstanding N.A. N.A. 9,937 10,262 Fully diluted shares outstanding N.A. N.A. 10,271 10,405 Common stock price range 1 High 11.500 11.000 14.375 16.125 Low 6.000 9.000 10.000 13.500 Year Ended July 2, 1994 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands,except per share amounts) Net sales $36,071 $41,262 $39,423 $42,692 Gross profit 4,535 4,554 3,481 4,480 Income (loss) before income taxes (1,569) (2,345) (4,762) (1,126) Net income (loss) 7,109 (2,303) (4,772) (1,094) Primary earnings per common share 0.77 ( 0.28) ( 0.58) ( 0.13) Fully diluted earnings per common share 0.77 N.A. N.A. N.A. Weighted average shares outstanding 8,130 8,255 8,266 8,271 Primary shares outstanding 9,418 N.A. N.A. N.A. Fully diluted shares outstanding 9,427 N.A. N.A. N.A. Common stock price range 1 High 10.750 9.250 9.000 8.000 Low 8.750 6.000 6.250 6.000
- ----------------------------------------- 1High and low stock prices are based on the daily closing price reported by the NASDAQ National Market System. These quotations represent prices between dealers without adjustment for markups, markdowns or commissions, and may not represent actual transactions. The company's common stock is quoted on the Nasdaq National Market System under the symbol "KTCC." The company has not paid any cash dividends on its Common Stock during the last two fiscal years. The company currently intends to retain its earnings for its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The company's ability to pay dividends is limited by certain financial covenants in the company's loan agreements. As of July 1, 1995, there were approximately 1,638 common shareholders of record. 14. RESTRUCTURING CHARGES For the year ended July 2, 1994 the company made $1,021,000 in provisions for the restructuring of certain business lines. This provision represented costs to redeploy production from the company's Cheney, Washington plant to other company plants where lower costs can be attained. The provision included $592,000 to reduce certain assets to estimated realizable value, $207,000 for severance and $222,000 for other costs directly associated with this plant closure. The restructuring activities were implemented during the company's third fiscal quarter of 1994 and were completed in the first fiscal quarter of 1995. The writedown of assets is comprised of $242,000 equipment writedown and $350,000 facility writedown. The equipment writedown was estimated as the difference between book value and the highest firm offer on the equipment. The building writedown was estimated as the difference between book value and average value determined from multiple independent market valuations. This writedown had no effect on cash or cash equivalents. The severance charge was calculated by applying the company's standard severance policy to the employees affected. The direct cost charge is primarily transportation costs associated with the relocation of equipment from the closing facility to other company facilities. The balance in the reserve for restructuring at July 1, 1995 is $372,000. This amount represents the amount provided for Taiwanese liquidation taxes, which have not yet been paid, related to the fiscal 1992 closure of the company's plant in Taiwan. The formal dissolution is pending governmental approval from Taiwan and is anticipated to occur in the second or third fiscal quarter of 1996. Reserve for Restructuring Obligations 1995 1994 ---------- ---------- Balance at beginning of year $1,385,000 $ 621,000 Provision charged to income 0 1,021,000 Amounts paid (1,013,000) (257,000) ---------- ---------- Balance at end of year $ 372,000 $1,385,000 ========== ==========
15. BUSINESS COMBINATION On July 30, 1993, the company acquired substantially all of the assets and liabilities of Honeywell, Inc.'s Keyboard Division (HKD). The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the underlying acquired assets and assumed liabilities at their estimated fair market values at July 30, 1993. Acquisition costs are summarized as follows (in thousands): Cash $22,000 Liabilities assumed 5,832 Acquisition costs 5,000 Note payable, Honeywell Inc. 3,648 Common stock issued 3,200 ------- Total $39,680 ------- These costs were allocated based on fair value as follows: Trade receivables $ 8,505 Inventories 10,964 Other current assets 489 Property, plant and equipment 17,922 Goodwill 1,800 ------- Total $39,680 ------- The stock was recorded at a twenty percent discount to the closing market price on July 30, 1993 due to the three year trading restrictions on the stock at the acquisition date. The costs incurred as part of the acquisition included $1,125,000 for severance for terminating employees of HKD, $175,000 for transition payroll for terminating employees of HKD, $1,100,000 for relocation of employees of HKD, $700,000 for the closure of an acquired facility, $1,000,000 for the assumption of certain potential liabilities (see note 9), and $900,000 for certain other direct purchase and integration costs. NOTES TO PRO FORMA FINANCIAL STATEMENTS NOTE 1 - General The objective of the Pro Forma Statement of Operations is to show what the significant effects on the historical financial information might have been had the company acquired the Keyboard Division of Honeywell, Inc. on July 5, 1992. The amounts are based upon certain assumptions and estimates which Key Tronic Corporation believes are reasonable. NOTE 2 - Pro Forma Statement of Operations As required by APB Opinion No. 16, pro forma information on results of operations is presented for the years ended July 2, 1994 and July 3, 1993. The results of operations is being reported as if the companies had combined at the beginning of each respective fiscal year. For the year July 3, 1993 the information reported is actual results of operations for both companies. Adjustments to the Pro Forma Statement of Operations primarily give effect to the elimination of corporate allocations from Honeywell, Inc., the recognition of interest expense on the acquisition debt, and the effect on per share earnings as a result of the additional shares issued in the acquisition. The corporate allocations were predominately charged as a percentage of division revenues for general corporate overhead and do not represent specific costs incurred on behalf of the division. For the year ended July 2, 1994 the information reported is one month of results of operations for the Honeywell Keyboard Division and the actual results of operations for Key Tronic Corporation, as Key Tronic Corporation's actual results include eleven months of operations of the former Honeywell Keyboard Division. NOTE 3 - Allocations Corporate allocations for services provided by Honeywell headquarters for the Keyboard Division were eliminated. These services were for payroll processing, employee benefit administration, treasury and banking services and in-house legal services. Key Tronic already performs these functions and does not anticipate increased costs in these areas. The following pro forma information represents the results of operations of the company and HKD for the years ended July 2, 1994 and July 3, 1993, on an individual as well as combined basis. The pro forma results do not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The unaudited pro forma results of operations were as follows: Year Ended July 2, 1994 Honeywell Keyboard Key Tronic Division Corporation Combined --------- ----------- -------- (dollars in thousands, except per share amounts) Net Sales $ 5,539 $159,447 $164,986 Cost of sales 5,296 142,397 147,693 -------- -------- -------- Gross Profit on Sales 243 17,050 17,293 Operating Expenses: Research, development and engineering 383 5,836 6,219 Selling 417 7,409 7,826 General and administrative 324 11,045 11,369 Restructuring of business line 0 1,021 1,021 -------- -------- -------- Operating Loss (881) (8,261) (9,142) Interest Expense 0 1,849 1,849 Other (Income) Expense (46) (308) (354) -------- -------- -------- Loss Before federal taxes on income and cumulative effect of change in accounting principle (835) (9,802) (10,637) Provision (Benefit) for Income Taxes 0 8 8 -------- -------- -------- Loss before cumulative effect of change in accounting principle (835) (9,810) (10,645) Cumulative effect to July 4, 1993, of change in accounting for income taxes 0 8,750 8,750 -------- -------- -------- Net Income (Loss) $ (835) $ (1,060) $ (1,895) ======== ======== ======== Earnings (Loss) Per Share: Before cumulative effect of change in accounting principle $ N.A. $ (1.19) $ (1.29) ======== ======== ======== Primary Earnings Per Common Share net of cumulative effect of change in accounting principle $ N.A. $ (0.13) $ (0.23) ======== ======== ======== Fully Diluted Earnings Per Common Share net of cumulative effect of change in accounting principle $ N.A. $ N.A. $ N.A. ======== ======== ======== Weighted Average Shares Outstanding N.A. 8,231 8,231 ======== ======== ======== Primary Shares Outstanding N.A. N.A. N.A. ======== ======== ======== Fully Diluted Shares Outstanding N.A. N.A. N.A. ======== ======== ========
Year Ended July 3, 1993 Honeywell Keyboard Key Tronic Division Corporation Adjustments Combined ---------- ----------- ----------- -------- (dollars in thousands, except per share amounts) Net Sales $83,109 $123,318 0 $206,427 Cost of sales 66,736 95,073 0 161,809 -------- -------- ------ -------- Gross Profit on Sales 16,373 28,245 0 44,618 Operating Expenses: Research, development and engineering 4,923 6,701 (118) 11,506 Selling 5,561 7,616 0 13,177 General and administrative 4,671 10,278 (1,126) 13,823 -------- -------- ------ -------- Operating Income 1,218 3,650 1,244 6,112 Interest Expense 0 123 0 123 Other (Income) Expense (306) (844) 1,759 609 -------- -------- ------ -------- Income before income taxes 1,524 4,371 (515) 5,380 Provision for Income Taxes 0 522 0 522 -------- -------- ------ -------- Net Income $ 1,524 $ 3,849 $ (515) $ 4,858 ======== ======== ====== ======== Earnings Per Share: Primary Earnings Per Common Share $ N.A. $ 0.42 $ .09 $ 0.51 ======== ======== ====== ======== Fully Diluted Earnings Per Common Share $ N.A. $ 0.42 $ .09 $ 0.51 ======== ======== ====== ======== Primary Shares Outstanding N.A. 9,102 400 9,502 ======== ======== ====== ======== Fully Diluted Shares Outstanding N.A. 9,204 400 9,604 ======== ======== ====== ========
CORPORATE DIRECTORY DIRECTORS OFFICERS AND MANAGEMENT Dr. Robert H. Cannon, Jr. Fred Wenninger Charles Lee Powell Professor, President and Chief Executive Officer Department of Aeronautics and Astronautics, Stanford University Jack W. Oehlke Senior Vice President of Operations Thomas W. Cason Former President and Chief Operating Craig D. Gates Officer of Key Tronic Corporation Vice President of Engineering Michael R. Hallman Ronald F. Klawitter Former President and Chief Operating Vice President of Finance and Officer of Microsoft Corporation Treasurer and Acting Secretary Stanley Hiller, Jr. Richard T. Tinsley Chairman of the Board Vice President of Quality Assurance Kenneth F. Holtby Kevin Carrie Retired Senior Vice President of Managing Director, Key Tronic Europe, Corporate Engineering for the Boeing Ltd. Company CORPORATE INFORMATION Royce G. Pearson Former President and Chief Operating Officer of Key Tronic Corporation CORPORATE OFFICES 4424 N. Sullivan Road Dale F. Pilz Spokane, WA 99216 Former Chief Executive Officer and President of GTE Sprint TRANSFER AGENT & REGISTRAR Communications Chemical Mellon Shareholder Services 50 California Street Wendell J. Satre 10th Floor Chairman of the Board Emeritus San Francisco, CA 94111 Retired Chairman of Washington Water Power SECURITIES Key Tronic Corporation's common stock Yacov A. Shamash is traded in the over-the-counter Dean of the College of Engineering market and is listed on the NASDAQ and Applied Sciences, State National Market System under the University of New York at Stoneybrook symbol KTCC. The closing price of the stock on June 30, 1995 was Clarence W. Spangle $16.00. As of July 30, 1995, the Former Chairman of Memorex and Former company had 1,641 shareholders of President of Honeywell Information record. The company's current line Systems of credit agreement contains a covenant which prohibits the William E. Terry declaration or payment of dividends. Executive Vice President and Director The company has never paid a cash of Hewlett-Packard Company dividend and does not anitcipate payment of dividends on its Common Fred Wenninger Stock in the foreseeable future. President and Chief Executive Officer 10-K REPORT Lewis G. Zirkle A copy of the company's report on SEC Retired Chairman of Key Tronic Form 10-K may be obtained by request Corporation from the Acting Secretary: Key Tronic Corporation P.O. Box 14687 Spokane, WA 99214-0687 509/928-8000 EX-20 5 KEY TRONIC CORPORATION September 22, 1995 Dear Shareholder: The attached Notice of Annual Meeting of Shareholders and Proxy Statement relate to the Annual Meeting of Shareholders of Key Tronic Corporation, a Washington corporation (the "Company"), to be held on Thursday, October 26, 1995, at 1:00 p.m. Pacific time at the principal executive offices of the Company, 4424 N. Sullivan Road, Spokane, Washington 99216. Whether or not you will attend the Annual Meeting in person and regardless of the number of shares you own, we request that you complete, sign, date and return the enclosed proxy card promptly in the accompanying postage-prepaid envelope. You may, of course, attend the Annual Meeting and vote in person, even if you have previously returned your proxy card. Sincerely, /s/ Stanley Hiller, Jr. Stanley Hiller, Jr. Chairman of the Board of Directors KEY TRONIC CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS OCTOBER 26, 1995 To the Shareholders of KEY TRONIC CORPORATION: The Annual Meeting of Shareholders of Key Tronic Corporation, a Washington corporation (the "Company"), will be held on Thursday, October 26, 1995, at 1:00 p.m. Pacific time at the principal executive offices of the Company, 4424 N. Sullivan Road, Spokane, Washington 99216 (the "Annual Meeting"), for the following purposes: 1. To elect eleven directors of the Company to hold office until the next Annual Meeting of Shareholders and until their successors are elected and have qualified; 2. To consider and vote upon adoption of an amendment to the Amended and Restated 1990 Stock Option Plan for Non-Employee Directors; 3. To consider and vote upon adoption of the 1995 Key Tronic Corporation Executive Stock Option Plan; 4. To ratify the appointment of Deloitte & Touche LLP as independent auditors for fiscal year 1996; and 5. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof. Record holders of the Company's Common Stock at the close of business on September 7, 1995 (the "Record Date") are entitled to notice of and to vote at the Annual Meeting and any adjournments or postponements thereof. Even if you will attend the Annual Meeting, please complete, sign, date and return the enclosed proxy to the Company in the enclosed postage-prepaid envelope in order to ensure that your shares will be voted at the Annual Meeting. You may vote your shares in person at the Annual Meeting even if you have previously returned your proxy card to the Company. By Order of the Board of Directors, /s/ Ronald F. Klawitter Spokane, Washington _______________________________ September 22, 1995 Ronald F. Klawitter, Acting Secretary YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING. First mailed to shareholders on or about September 22, 1995 KEY TRONIC CORPORATION PROXY STATEMENT INTRODUCTION GENERAL The preceding Notice of Annual Meeting of Shareholders, this Proxy Statement and the enclosed proxy card are being furnished by Key Tronic Corporation, a Washington corporation (the "Company"), to the holders of outstanding shares of Common Stock, no par value, of the Company ("Common Stock") in connection with the solicitation of proxies by the Board of Directors of the Company from holders of such shares. The proxies are to be used at the Annual Meeting of Shareholders of the Company to be held on Thursday, October 26, 1995, at 1:00 p.m. Pacific time at the principal executive offices of the Company, 4424 N. Sullivan Road, Spokane, Washington 99216, and any adjournments or postponements thereof (the "Annual Meeting"). The proxies appoint Stanley Hiller, Jr., Wendell J. Satre and Yacov A. Shamash, any of them and their substitutes, as proxy to vote all shares represented at the Annual Meeting pursuant to this proxy solicitation. RECORD DATE, PROXIES, REVOCATION Record holders of the Common Stock at the close of business on September 7, 1995 (the "Record Date") are entitled to notice of and to vote at the Annual Meeting. As of the Record Date, 8,513,205 shares of Common Stock were issued and outstanding. A proxy card for use at the Annual Meeting is enclosed with this Proxy Statement. All completed, signed and dated proxies returned to the Company will be voted at the Annual Meeting in accordance with the instructions thereon. If no instructions are given on an otherwise signed and dated proxy card, the proxy will be voted FOR the election of nominees for director named below, FOR adoption of the amendment to the Amended and Restated 1990 Stock Option Plan for Non-Employee Directors, FOR adoption of the 1995 Key Tronic Corporation Executive Stock Option Plan and FOR the ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for fiscal 1996. Any proxy may be revoked at any time before it has been voted by giving written notice of revocation to the Secretary of the Company at the address set forth above; by delivering a completed, signed proxy bearing a date later than any earlier proxy; or by voting shares in person at the Annual Meeting. The mere presence at the Annual Meeting of the shareholder who has given a proxy will not revoke such proxy. 1 VOTING Each share of Common Stock outstanding is entitled to one vote on each matter presented for a vote of the shareholders at the Annual Meeting. Under applicable law and the Company's Restated Articles of Incorporation and Amended and Restated By-Laws, if a quorum exists at a meeting: (i) the eleven nominees for election of directors who receive the greatest number of votes cast for the election of directors by the shares present in person or represented by proxy and entitled to vote shall be elected directors and (ii) matters 2, 3 and 4 listed in the accompanying Notice of Annual Meeting of Shareholders will be approved if the number of votes cast in favor of each proposal exceeds the number of votes cast against it. In the election of directors, any action other than a vote for a nominee will have the practical effect of voting against the nominee. An abstention from voting or a broker nonvote will have no effect on the approval of matters 2, 3 or 4 since neither represents a vote cast. With respect to matters 2 and 3, proxies marked "abstain" will be treated as a vote against the matter only for the purpose of determining whether the matter has been approved for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, for all other purposes proxies marked "abstain" will not be counted as voting with respect to the matter. PROPOSAL 1 ELECTION OF DIRECTORS Eleven directors are to be elected at the Annual Meeting to serve until the next Annual Meeting of Shareholders and until their respective successors have been elected and have qualified. The eleven nominees receiving the highest number of affirmative votes will be elected as directors. In the event any nominee is unable or unwilling to serve as a nominee or director, the proxies may be voted for the balance of those nominees named and for any substitute nominee designated by the present Board of Directors or the proxy holders to fill such vacancy, or for the balance of those nominees named without nomination of a substitute, or the size of the Board of Directors may be reduced in accordance with the By-laws of the Company. The Board of Directors has no reason to believe that any of the persons named will be unable or unwilling to serve as a nominee or as a director if elected. The following information has been provided to the Company with respect to the nominees to the Board of Directors: Robert H. Cannon, Jr., age 71, has been a director of the Company since September 1992. Professor Cannon has been Charles Lee Powell Professor at the Department of Aeronautics and Astronautics, Stanford University since 1979. From 1979 to 1990 he was also Chairman of the Department. Previously, Professor Cannon served as Assistant Secretary of Transportation and as Chief Scientist of the United States Air Force. Professor Cannon has served on the General Motors Science Advisory Committee since 1975, serving as Chairman from 1980 to 1984. He also serves on the Board of Directors of Parker Hannifin Corporation. Thomas W. Cason, age 52, has been a director of the Company since February 1994. He served as President and Chief Operating Officer of the Company from February 1994 through August 1995. Mr. Cason has been President of Progressive Tractor & Implement Co., Inc., an agricultural equipment dealership, since 1991. He was Senior Vice President and Chief Financial Officer of Baker Hughes Incorporated from July 1989 to December 1990. Mr. Cason was President and Chief Executive Officer of Milpark Drilling Fluids, a subsidiary of Baker Hughes Incorporated, prior thereto. Mr. Cason also serves on the Board of Global Marine, Inc. Michael R. Hallman, age 50, has been a director of the Company since July 1992. Mr. Hallman served as Vice President and later President of Boeing Computer Services from March 1987 to February 1990. He served as President and Chief Operating Officer of Microsoft Corporation from March 1990 through March 1992. Mr. Hallman has been with the Hallman Group, a consulting organization, since April 1992. Mr. Hallman also serves on the Board of Directors of Intuit, Inc., Infocus Systems, Amdahl Corporation and Timeline, Inc. Stanley Hiller, Jr., age 70, has been a director of the Company and Chairman of the Company's Executive Committee since February 1992. He served as Chief Executive Officer of the Company from February 1992 through August 1995 and has served as Chairman of the Board since September 1, 1995. Mr. Hiller is the Senior Partner of Hiller Investment Company and Managing Partner of the Hiller Group, a corporate management organization (the "Hiller Group"), and has served as Chairman of the Board, Chief Executive Officer or Senior Officer of numerous corporations over the last 50 years. Through the 2 Hiller Group, which he founded in the late 1960s, he has brought together groups of executives who become actively involved in the direct management of companies, usually at the request of its managers, directors or shareholders. During the past 20 years, Mr. Hiller has concentrated his efforts in the area of restructuring troubled companies, including G. W. Murphy Industries (diversified manufacturing and services), Reed Tool Company (tool manufacturing), Baker International (Baker-Hughes) (oil field service), The Bekins Company (moving and storage) and York International (air conditioning manufacturing). Mr. Hiller also serves on the Board of Directors of The Boeing Company ("Boeing"). Kenneth F. Holtby, age 73, has been a director of the Company since March 1992. He served in various positions in engineering, technology, product development and program management for Boeing since 1947. He most recently served as Senior Vice President of Engineering and as a member of the Corporate Executive Counsel for Boeing until his retirement in 1987. Mr. Holtby currently serves as a consultant to Boeing. Dale F. Pilz, age 69, has been a director of the Company since April 1992. Mr. Pilz was Chief Executive Officer of Flowind Corporation from 1986 to 1990. He served as President of Omninet Corporation from 1985 to 1986. Prior to that, Mr. Pilz was Chief Executive Officer and President of GTE Sprint Communications from 1983 to 1985 and also served as Chief Executive Officer and President of GTE Spacenet Corporation from 1983 to 1985. Wendell J. Satre, age 77, has been a director of the Company since 1988 and served as Chairman of the Board of Directors from July 1991 through August 1995. Mr. Satre also served as a director from 1983 through 1986 and served as Acting President of the Company from August 1991 through February 1992. Mr. Satre is the retired Chairman of the Board and Chief Executive Officer of the Washington Water Power Company, a public utility headquartered in Spokane, Washington. Mr. Satre also serves on the Boards of Directors of Alascom, a subsidiary of Pacific Telephone, Inc., which is a subsidiary of Pacificorp, and Coeur d' Alene Company. Yacov A. Shamash, age 45, has been a director of the Company since 1989. He has been the Dean of Engineering and Applied Sciences at the State University of New York campus at Stony Brook since 1992. Professor Shamash developed and directed the NSF Industry/University Cooperative Research Center for the Design of Analog/Digital Integrated Circuits from 1989 to 1992 and also served as Chairman of the Electrical and Computer Engineering Department at Washington State University from 1985 until 1992. Clarence W. Spangle, age 70, has been a director of the Company since July 1992. A former Chairman of Memorex and President of Honeywell Information Systems, Mr. Spangle has been an independent management consultant since 1985. Mr. Spangle also serves on the Board of Directors of Apertus Technologies, Inc. William E. Terry, age 62, has been a director of the Company since August 1992. Mr. Terry retired from Hewlett Packard in December 1993 where he served in a number of executive positions during the past 35 years. Mr. Terry also serves on the Board of Directors of Altera Corporation. Fred W. Wenninger, age 56, has been a director since September 1, 1995. He has served as President and Chief Executive Officer of the Company since September 1, 1995. Mr. Wenninger served as President and Chief Executive Officer and a director of Iomega Corporation, a computer mass storage company, from May 1989 until January 1994. From February 1986 until April 1989, he was President of Bendix/King, an avionics division of Allied Signal Corporation. From 1963 to 1986 he was employed by Hewlett Packard, the last eight years in General Manager positions at divisions which developed and produced computers and workstations. Mr. Wenninger has a Ph.D. in Engineering from Oklahoma State University. He is a director of Norand Corporation and Hach Corp. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES NAMED ABOVE. THE BOARD OF DIRECTORS AND COMMITTEES All directors hold office until the next Annual Meeting of Shareholders and until their successors have been elected and have qualified. There are no family relationships among any of the directors or executive officers of the Company. 3 The Company's Board of Directors met eight times during fiscal 1995. During fiscal 1995, each director attended 75% or more of the total number of Directors meetings and meetings of committees of the Board of Directors on which the director served during the time he served on the Board or Committee. The Audit Committee, which currently consists of Dr. Shamash (chairman) and Messrs. Holtby, Pilz and Zirkle, met two times during fiscal 1995. The Audit Committee selects the firm of certified public accountants to audit the financial statements of the Company for the fiscal year for which they are appointed, and monitors the effectiveness of the audit effort and the Company's financial and accounting organization, financial reporting and internal controls. The Compensation and Administration Committee (the "Compensation Committee"), which currently consists of Messrs. Pilz (chairman), Satre, Pearson and Spangle, met four times during fiscal 1995. The Compensation Committee establishes and reviews annually the Company's general compensation policies applicable to the Company's executive officers, reviews and approves the level of compensation awarded to the Company's Chief Executive Officer and other officers and key management employees, prepares and delivers annually to the Board a report disclosing compensation policies applicable to the Company's executive officers and the basis for the Chief Executive Officer's compensation during the last fiscal year, makes recommendations to the Board regarding changes to existing compensation plans and, through the Stock Option Sub-Committee of the Compensation Committee, administers the Company's stock option plans, including determining the individuals to receive options and the terms of such options. The Executive Committee, which currently consists of Messrs. Hiller (chairman), Cason, Pilz and Satre, held three meetings during fiscal 1995. The Executive Committee generally exercises the authority of the Board of Directors with respect to the management and operation of the Company. The Board of Directors does not have a Nominating Committee or a committee performing the function of a nominating committee. Although there are no formal procedures for shareholders to recommend nominations, the Board of Directors will consider recommendations from shareholders, which should be addressed to Ronald F. Klawitter, Vice President of Finance, Treasurer and Acting Secretary, at the Company's address listed above. See "Employment Contracts, Termination and Change in Control Arrangements--The Hiller Agreement." DIRECTOR COMPENSATION Each director who is not an employee of the Company receives a quarterly retainer of $1,500, a fee of $750 for each Board meeting attended in person and a fee of $250 for each Board meeting attended by telephone. Directors also receive a fee of $250 for each committee meeting attended, except that directors receive a fee of $1,000 for each Executive Committee meeting attended (which payment is in lieu of any payment for a Board meeting attended on the same day). Committee chairmen receive an additional fee of $100 for each committee meeting attended. Directors also receive payment of out-of-pocket expenses related to their service as such. Pursuant to an April 1989 employment agreement (the "Zirkle Agreement"), Mr. Zirkle is compensated for consulting services and for a covenant by him not to engage in activities competitive with the businesses of the Company. Under the Zirkle Agreement, Mr. Zirkle receives a base annual salary of $91,489 plus cost of living increases which have accrued since April 18, 1989, payable in 26 installments over the course of the year, as well as reimbursement of expenses, if any, incurred in connection with the provision of such services. No such expenses were incurred in fiscal 1995. The Company also pays for Mr. Zirkle's medical insurance, which for fiscal 1995 amounted to $3,723. Mr. Zirkle received $117,489 in salary pursuant to the Zirkle Agreement during fiscal 1995. Under the Zirkle Agreement, upon Mr. Zirkle's death the Company will pay to Mr. Zirkle's wife, if she survives him, beginning the first month after Mr. Zirkle's death and ending on the last day of the month in which Mr. Zirkle's wife dies, one-half of the compensation that would have been payable to Mr. Zirkle under the Zirkle Agreement had he lived during this period. This death benefit is not assignable by Mr. Zirkle or his wife. 4 EXECUTIVE OFFICERS In addition to Mr. Wenninger, the following persons are the executive officers of the Company: Craig D. Gates, age 36, joined the Company as Vice President of Engineering in October of 1994. Mr. Gates has a Bachelor of Science Degree in Mechanical Engineering and a Masters in Business Administration from the University of Illinois, Urbana. From 1983 he held various engineering and management positions within the Microswitch Division of Honeywell, Inc., in Freeport, Illinois and from 1991 to October 1994 he served as Director of Operations, Electronics for Microswitch. Ronald F. Klawitter, age 43, has been Vice President of Finance and Treasurer of the Company since November 1992 and Acting Secretary since November 1994. From 1987 to 1992, Mr. Klawitter was Vice President, Finance at Baker Hughes Tubular Service, a subsidiary of Baker Hughes, Inc. Jack W. Oehlke, age 49, has been Senior Vice President of Operations of the Company since January 1995. From December 1993 to January 1995, he served as Vice President of Manufacturing Operations of the Company. Mr. Oehlke served as Director of Operations, Director of Quality and in various management positions within manufacturing, engineering and quality functions of the Microswitch Division of Honeywell, Inc., from 1968 to 1993. Richard T. Tinsley, age 47, has been Vice President of Quality Assurance of the Company since November 1993. Mr. Tinsley was the owner of Tinsley Associates from May 1993 to September 1993 and served as Director of Manufacturing Operations, Director of Quality and Quality Assurance Manager at Compaq Computer Corporation from 1982 to 1993. From 1972 to 1982, Mr. Tinsley worked for Texas Instruments, Inc., as Printer Manufacturing Manager and New Products Program Manager. All executive officers hold office until their successors are elected and have qualified. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT The following table provides certain information which has been furnished to the Company regarding beneficial ownership of the Common Stock as of the Record Date, with respect to (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock; (ii) each director and nominee for director of the Company; (iii) the Chief Executive Officer and each of the executive officers of the Company other than the Chief Executive Officer named in the Summary Compensation table (collectively, the "Named Executive Officers"); and (iv) all directors and executive officers of the Company as a group. Number of Shares Percentage Name of Beneficial Owner* Beneficially Owned of Class BEA Associates 1,122,300 13.2% 153 East 53rd Street One Citicorp Center New York, NY 10022 FMR Corporation 585,300 6.9% 82 Devonshire Street Boston, MA 02109 Dimensional Fund Advisors, Inc. 495,800 5.9% 1299 Ocean Avenue, Suite 650 Santa Monica, CA 90401 5 Hiller Key Tronic Partners 2,587,002 23.7% 4424 N. Sullivan Road Spokane, WA 99216 LGZ, Inc. 142,378 1.7% 4424 N. Sullivan Road Spokane, WA 99216 Robert H. Cannon, Jr. 18,651 ** Thomas W. Cason 202,876 2.3% Michael R. Hallman 22,401 ** Stanley Hiller, Jr. 1,808,792 18.8% Kenneth F. Holtby 36,401 ** Royce G. Pearson 166,722 2.0% Dale F. Pilz 20,851 ** Wendell J. Satre 24,000 ** Yacov A. Shamash 4,500 ** Clarence W. Spangle 18,651 ** William E. Terry 22,401 ** Fred Wenninger -- ** Lewis G. Zirkle 165,038 1.9% Ronald F. Klawitter 56,376 ** Jack W. Oehlke 41,810 ** Richard T. Tinsley 39,695 ** All officers and directors as a group (17 persons) (5)-(18) 2,668,176 21.7% ___________________ * Unless otherwise noted, the address for each named shareholder is in care of the Company at its principal executive offices. ** Less than 1%. Percentage beneficially owned is based on 8,513,205 shares of Common Stock outstanding on the Record Date. A person or group of persons is deemed to beneficially own as of the record date any shares which such person or group of persons has the right to acquire within 60 days after the record date. In computing, the percentage of outstanding shares held 6 by each person or group of persons, any shares which such person or person's has the right to acquire within 60 days after the record date, are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. All such shares are held in portfolios of DFA Investment Dimensions Group, Inc., a registered open-end investment company ("DFA Investment"), or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans. Dimensional Fund Advisors, Inc. ("Dimensional") serves as investment manager for each of the foregoing entities. Dimensional disclaims beneficial ownership of all such shares. Dimensional has sole voting power with respect to 327,200 shares. Persons who are officers of Dimensional also serve as officers of DFA Investment. These persons, as officers of DFA Investment, hold voting power with respect to 495,800 shares owned by DFA Investment. Includes 2,396,923 shares subject to presently exercisable options pursuant to the Hiller Option Agreement (as defined below) between the Company and Hiller Key Tronic Partners, a Washington limited partnership ("HKT Partners") and 190,079 shares held by HKT Partners. Excludes 100 shares owned directly by Mr. Hiller, as to which HKT Partners disclaims beneficial ownership. See textual disclosure beginning on page 10 below. Represents shares owned by LGZ, Inc., a Washington corporation ("LGZ"). Mr. Zirkle owns a controlling interest in and is the Chairman of the Board of LGZ. Does not include 22,660 shares owned by Mr. Zirkle. Also does not include 2,000 shares owned by Mr. Zirkle's wife. Mr. Zirkle disclaims any beneficial interest in shares owned by LGZ or his wife. Represents 6,666 shares issuable upon exercise of a director stock option and Mr. Cannon's pro rata interest (11,985 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Represents Mr. Cason's pro rata interest in shares issuable upon the exercise of options held by HKT Partners. Represents 6,666 shares issuable upon exercise of a director stock option and Mr. Hallman's pro rata interest (15,735 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Includes 1,808,692 shares held and shares issuable upon the exercise of presently exercisable stock options, which shares represent the pro rata interest of Mr. Hiller in the interest of entities controlled by Mr. Hiller in shares held by HKT Partners and shares issuable upon the exercise of options owned by HKT Partners. Also includes 100 shares owned directly by Mr. Hiller, as to which HKT Partners disclaims beneficial ownership. See textual disclosure beginning on page 10 below. Includes 6,666 shares issuable upon exercise of a director stock option and Mr. Holtby's pro rata interest (15,735 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Represents Mr. Pearson's pro rata interest in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Includes 6,666 shares issuable upon exercise of a director stock option and Mr. Pilz's pro rata interest (12,985 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Excludes 1,200 shares owned by Mr. Satre's grandchildren under the Uniform Gifts to Minors Act. Mr. Satre disclaims beneficial ownership of these shares. Represents 6,666 shares issuable upon exercise of a director stock option and Mr. Spangle's pro rata interest (11,985 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Includes 6,666 shares issuable upon exercise of a director stock option and Mr. Terry's pro rata interest (14,735 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. 7 Includes 142,378 shares owned by LGZ. Mr. Zirkle owns a controlling interest in and is the Chairman of the Board of LGZ. Does not include 2,000 shares owned by Mr. Zirkle's wife. Mr. Zirkle disclaims any beneficial interest in shares owned by LGZ or his wife. Represents 30,274 shares issuable upon exercise of employee stock options and Mr. Klawitter's pro rata interest (26,102 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Represents 14,500 shares issuable upon exercise of employee stock options and Mr. Oehlke's pro rata interest (26,822 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Also includes Common Stock allocated to Mr. Oehlke as a participant in the Company's Variable Investment Plan (488 shares) as of July 1, 1995. Represents 18,000 shares issuable upon exercise of employee stock options and Mr. Tinsley's pro rata interest (19,751 shares) in shares held by HKT Partners and shares issuable upon the exercise of options held by HKT Partners. Also includes Common Stock allocated to Mr. Tinsley as a participant in the Company's Variable Investment Plan (1944 shares) as of July 1, 1995. Includes 72,774 shares subject to issuance pursuant to employee stock options. Does not include Common Stock allocated to officers as participants in the Company's Variable Investment, Stock Bonus or Employee Stock Ownership Plans after July 1, 1995
EXECUTIVE COMPENSATION COMPENSATION TABLES Set forth below is information on the annual and long-term compensation for services in all capacities for the fiscal year ended July 1, 1995 of those persons who were, at July 1, 1995, (i) the Chief Executive Officer and (ii) the Named Executive Officers. For information regarding the Company's current executive officers, see "Executive Officers." SUMMARY COMPENSATION TABLE Long-Term Compensation ------------------- Annual Compensation Awards Payouts ----------------------------------------- Securities Other Annual Underlying All Other Name and Fiscal Salary BonusCompensation Options Compensation Principal Position Year ($) ($) ($) (#) ($) - ----------------- ------ ------- ------- ------------- --------- ------- ------------ Stanley Hiller, Jr.1995 -- -- -- -- -- -- Chief Executive 1994 -- -- -- -- -- -- Officer 1993 -- -- -- -- -- -- Thomas W. Cason 1995 $200,425 $168,750 -- -- -- -- President and Chief 1994 66,904 -- $10,995 25,000 -- -- Operating Officer 1993 -- -- -- -- -- -- Jack W. Oehlke 1995 139,621 105,250 39,531 9,000 -- $3,491 Senior Vice 1994 61,251 8,000 26,044 20,000 -- 777 President 1993 -- -- -- -- -- -- Richard T. Tinsley 1995 135,025 65,651 38,698 6,000 -- 3,376 Vice President, 1994 77,899 -- 46,819 30,000 -- 650 Quality 1993 -- -- -- -- -- -- Ronald F. Klawitter 1995 120,910 73,500 -- 8,815 -- 3,023 Vice President, 1994 90,938 -- -- 5,867 -- 2,273 Finance & Treasurer 1993 50,778 -- -- 20,000 -- 474 ____________________ 8 Includes amounts deferred under the 401(k) component of the Company's Variable Investment Plan. Represents dollar value of cash bonuses earned by the named executive officers during the fiscal year indicated. Includes cash signing bonus of $16,000 paid in 1995 and $8,000 paid in 1994 to Jack W. Oehlke. In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits has been omitted in those instances where such perquisites and other personal benefits constituted less than the lesser of $50,000 or ten percent of the total of annual salary and bonus for the named executive officer for such year. Dollar amounts shown consist of relocation expenses, except with respect to Mr. Cason, amounts shown represent housing and automobile allowance. Does not include stock options granted to HKT Partners, a partnership in which entities controlled by Mr. Hiller, and in which Messrs. Cason, Oehlke, Tinsley and Klawitter, individually, hold limited partnership interests. See notes (3), (6) and (16) through (20) to "Principal Shareholders and Security Ownership of Management." Represents Company matching payments in 1995, 1994 and 1993 under the Company's Variable Investment Plan. Mr. Hiller served as executive officer of the Company from February 1992 through August 1995. Pursuant to an agreement entered into in February 1992 between the Company and the Hiller Group, a corporate management organization, Mr. Hiller received no salary for his services as an executive officer and director of the Company. See the textual disclosure beginning on page 10 below.
OPTION GRANTS IN 1995 FISCAL YEAR The following table sets forth information concerning individual grants of stock options made during fiscal 1995 to each of the individuals identified 9 in the Summary Compensation Table. Number of % of Total Potential Realizable Value at Securities Options Assumed Annual Rates of Underlying Granted To Stock Price Appreciation for Options Granted Employees in Exercise Expiration Option Term NAME (#) Fiscal 1995 ($/Share) Date 5%($) 10%($) - ------------------ ------------ ------------ --------- ---------- -------- --------- Stanley Hiller, Jr. -- -- -- -- -- Thomas W. Cason -- -- -- -- -- -- Jack W. Oehlke 9,000 4.92% $7.25 8/05/04 $41,035 $103,992 Richard T. Tinsley 6,000 3.28% $7.25 8/05/04 27,357 69,328 Ronald F. Klawitter 8,815 4.82% $7.25 8/05/04 40,192 101,854 ___________________________ Options vest at the rate of 50% per year on the first anniversary of the date of grant and the second anniversary of the date of grant. The rates of appreciation shown in the table are for illustrative purposes only pursuant to applicable SEC requirements. Actual values realized on stock options are dependent on actual future performance of the Company, among other factors. Accordingly the amounts shown may not necessarily be realized.
The following table provides information on the exercise of options to purchase Common Stock by the Named Executive Officers in fiscal 1995 and such officers' unexercised options to purchase Common Stock at July 1, 1995. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995 AND FISCAL YEAR-END OPTION VALUES Shares Number of Shares Acquired Underlying Unexercised Value of Unexercised on Value Options at Fiscal In-The-Money Options Exercise Realized Year End (#) at Fiscal Year-End($) Name (#) ($) Exercisable Unexerciseable Exercisable Unexercisable - ------------------- -------- -------- ----------- -------------- ----------- -------------- Stanley Hiller, Jr. 486,729 $3,042,056 1,645,631 0 $18,924,756 0 Thomas W. Cason 0 N/A 12,500 12,500 112,500 $112,500 Jack W. Oehlke 0 N/A 10,000 19,000 80,000 158,750 Richard T. Tinsley 0 N/A 15,000 21,000 131,250 183,750 Ronald F. Klawitter 0 N/A 22,934 11,749 174,804 96,935 ______________ This amount represents the aggregate of the number of shares acquired on exercise multiplied by the difference between the closing price of the Common Stock on the Nasdaq National Market on the respective option exercise date minus the exercise price for the relevant option. This amount represents the aggregate of the number of in-the-money options multiplied by the difference between the closing price of the Common Stock on the Nasdaq National Market on June 30, 1995 and the exercise prices for the relevant options.
EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE IN CONTROL ARRANGEMENTS The Hiller Agreement. On February 1, 1992, the Company approved an agreement with the Hiller Group, a corporate management organization (the "Hiller Agreement"), under which Stanley Hiller and other members of the Hiller Group would become involved in the management of the Company. Under the Hiller Agreement, Mr. Hiller was appointed a director, Chief Executive Officer and Chairman of the Company's Executive Committee in February 1992 and acquired the right to designate three additional persons to be appointed to the Company's Board of Directors. Under these arrangements, Mr. Hiller currently receives no salary for his services as an executive officer and director of the Company, and no such salary is currently anticipated to be paid in the foreseeable future. The Hiller Option Agreement. In connection with the Hiller Agreement, the Company entered into an agreement (the "Hiller Option Agreement"), which was approved by the Company's shareholders in May 1992. The Hiller Option Agreement provides that HKT Partners may purchase from the Company up to 2,396,923 shares of Common Stock (which shares would represent approximately 16% of the outstanding Common Stock on the Record Date on a fully diluted basis, including all outstanding and unexercised options and warrants), at an exercise price of $4.50 per share, subject to proportional adjustment in the number of shares and the exercise price in the event of any recapitalization, stock split, stock dividend or similar transaction (the "Hiller Option"). The last reported sale price of the Common Stock on the last trading day prior to the Board's approval of the Hiller Option was $3.125 per share. Pursuant to the Hiller Agreement, the Company also approved the authorization of an additional 300,000 shares of Common Stock issuable upon exercise of options to be granted under the Company's Employee Stock Ownership Plan to senior officers of the Company, which increase also was approved by the Company's shareholders in May 1992. The Hiller Option became fully exercisable on March 1, 1994 and expires on March 1, 1997. 10 Hiller Key Tronic Partners. HKT Partners is a Washington limited partnership created by the Hiller Group in connection with the Hiller Option Agreement and related matters. Mr. Hiller, as the sole shareholder of HKT, Inc., a Washington corporation and the General Partner of HKT Partners, and as a General Partner of Hiller Investment Partners, a California limited partnership and a limited partner of HKT Partners, currently has a 66.29% interest in HKT Partners; Mr. Pearson, former President and a director of the Company, currently has a 6.5% ownership interest in HKT Partners as a limited partner. Each partner of HKT Partners will share in the economic benefit of the Hiller Option (including any appreciation in the value of shares subject to the Hiller Option above the exercise price of such options) to the extent of their respective partnership interest. The following directors have received a .5% ownership interest in HKT Partners: Robert H. Cannon, Jr.; Michael R. Hallman; Kenneth F. Holtby; Dale F. Pilz; Clarence W. Spangle; and William E. Terry. Messrs. Cason, Gates, Klawitter, Oehlke and Tinsley, respectively have received 10.3%, .42%, 1.23%, 1.27% and .93% ownership interests in HKT Partners. From the beginning of fiscal year 1995 through August 1995, Messrs. Cason, Oehlke, Klawitter, Tinsley and Gates, respectively received cash distributions of a portion of their limited partnership interests in HKT Partners in the amounts of $548,843, $123,500, $119,700, $89,300, and $44,156. Pearson Agreement. In connection with the Hiller Agreement, the Company entered into a termination agreement with Mr. Pearson. Pursuant to this agreement, Mr. Pearson is entitled to receive one year's salary, payable during a two-year period after Mr. Pearson's termination. Employment Contracts. Pursuant to an employment contract, effective February 8, 1994, Mr. Cason agreed to serve as the Company's President and Chief Operating Officer for a projected period of approximately two years. He received an initial base salary of $180,000 and eligibility to participate in the Company's bonus incentive plan as offered to its key employees. In addition the Company granted to Mr. Cason, options to purchase 25,000 shares of Common Stock at an exercise price of $7.00 per share (the market price on the date of grant). Mr. Cason also received a $1,790 per month living and car allowance in lieu of payment of relocation related expenses. On September 1, 1995, Mr. Cason resigned as President and Chief Operating Officer of the Company. His option, which was not yet exercisable, to purchase 12,500 shares of Common Stock expired upon his resignation. Pursuant to an employment contract, dated December 27, 1993, amended on January 11, 1995, Mr. Oehlke received an initial salary of $122,500 per year, a cash signing bonus of $24,000 and eligibility to participate in the Company's bonus incentive plan as offered to its key employees from time to time. In addition the Company granted to Mr. Oehlke, options to purchase 20,000 shares of Common Stock at an exercise price of $8.00 per share (the market price on the date of grant) and agreed to pay Mr. Oehlke's relocation related expenses. Pursuant to an employment contract, dated November 11, 1993, Mr. Tinsley received an initial base salary of $135,000 per year and eligibility to participate in the Company's bonus incentive plan as offered to its key employees from time to time. In addition the Company granted to Mr. Tinsley options to purchase 30,000 shares of Common Stock at an exercise price of $7.25 per share (the market price on the date of grant) and agreed to pay Mr. Tinsley's relocation related expenses. Pursuant to an employment contract, executed December 9, 1992, Mr. Klawitter received an initial base salary of $88,000 per year and eligibility to participate in the Company's bonus incentive plan as offered to its key employees from time to time. In addition the Company granted to Mr. Klawitter options to purchase 20,000 shares of Common Stock at an exercise price of $8.25 per share (the market price on the date of grant) and agreed to pay Mr. Klawitter's relocation related expenses. Each of the employment contracts entered into described above imposes upon the employee standard non-disclosure, confidentiality and covenant not to compete provisions. The above employment contracts provide that the Company may terminate employment at any time. The Employment Contracts provide that upon termination of employment by the Company, other than for cause, or upon termination by the employee in the event the Company changes the substantive responsibilities and duties of the employee in such a way as to constitute a demotion; the Company shall continue to pay employee's base salary in effect prior to termination for a period of one year after termination. Stock Option Plans. The Company's executive stock option plans and non- employee directors stock option plan provide that upon a change of control of the Company the vesting of outstanding options will be accelerated. 11 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Board of Directors has a Compensation Committee, presently consisting of Messrs. Pilz, Pearson, Satre and Spangle. Mr. Pearson, a director of the Company, was an executive officer of the Company from February 1992 to February 1994. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION OVERVIEW Key Tronic's compensation philosophy established by the Compensation Committee is that annual total cash compensation should vary with the performance of the Company and long-term incentives should be aligned with the interests of the Company's shareholders. The Company's compensation plan is designed to allow the Company to attract, motivate and retain highly qualified individuals and is consistent with the short-term and long-term goals of the Company. Compensation of the Company's executive officers, except as otherwise noted in this report, and excluding the Chief Executive Officer (individually, a "Key Employee" and, collectively, the "Key Employees"), has three primary elements: base salary, annual performance bonus and an annual stock option grant. Base salaries are established following a review of competitive information related to comparable companies, in similar industries, located in the Northwest. Annual bonuses are tied to the profitability of the Company and the Key Employee's contribution to the Company's performance. Annual stock option incentive grants are based upon base salary and a stock performance goal established by the Compensation Committee. Annual stock option grants to executive officers are made under the Company's employee stock option plan. The Company's compensation policy with respect to Mr. Hiller is unique. Mr. Hiller received no salary, annual bonus or annual stock option for his services as Chief Executive Officer during fiscal years 1995, 1994 or 1993. Mr. Hiller will be compensated by the exercise of the Hiller Option, a substantial option to purchase shares of the Company's Common Stock. BASE SALARIES The Company's philosophy emphasizes performance-based pay. The goal is to have base salary represent a target percentage of an officer's total annual compensation. Prior to setting compensation levels for officers, the Compensation Committee reviews competitive information related to comparable companies, in similar industries, located in the Northwest. These companies include some but not all of the companies appearing in the Nasdaq Computer Manufacturer Index in the performance graph on page 14. The Compensation Committee indexes base salary ranges to be slightly below average competitive levels in the Northwest. During fiscal 1995, officer pay ranges were adjusted upward to be consistent with the Compensation Committee's established index. Management recommendations other than those of the subject officer are considered by the Compensation Committee in establishing an individual officer's recommended salary. The Compensation Committee also considers factors related to individual performance, individual responsibility, Company performance based on net earnings and external competitive factors. The Board as a whole establishes each officer's annual salary. Officers who also serve as directors abstain from voting when their own annual salary is determined. ANNUAL BONUS The Compensation Committee established a Key Employee incentive bonus plan for fiscal 1995. The plan was based upon a combination of individual goals and Company profit goals. A minimum Company profit goal had to be achieved before any payment was to be made under the plan. Bonus payments under the plan were to be based on three performance levels: threshold achievement, expected achievement, and over-achievement of a combination of individual goals and Company net earnings goals. Over-achievement payments under the plan were intended to be higher than comparable industry averages for annual incentive bonus plans by an amount approximately equal to the amount by which base salary was below comparable industry averages. Payments were to be based upon a percentage of base salary. The payment percentage 12 ranges were established in descending order for the President, all other officers and all other Key Employees. Mr. Hiller, the Company's Chief Executive Officer during 1995, did not participate in the plan. For fiscal year 1995 the over-achievement performance level was met and all named executive officers, except the Chief Executive Officer, and certain other Key Employees were paid bonuses in accordance with the incentive bonus plan for fiscal 1995. ANNUAL STOCK OPTION The Compensation Committee's policies make long-term incentive compensation an important part of motivating and retaining Key Employees. Such long-term incentive compensation is consistent with the interests of the Company's shareholders in that it ties executive compensation to the performance of the Company's stock. The Compensation Committee believes that long-term incentive compensation can best be implemented through the granting of annual stock options. The Compensation Committee makes the determination to grant an option based upon each Key Employee's position in the Company and base salary. The number of shares issuable upon exercise of each option is calculated by dividing each Key Employee's base salary by a stock performance index number which is uniformly applied when calculating the number of shares issuable upon exercise of options granted annually to Key Employees. The index number is established by the Compensation Committee and reflects the Company's goals for improving the performance of the Company's stock. The stock performance index number may be changed by the Compensation Committee. The Chief Executive Officer and the President and Chief Operating Officer may recommend to the Compensation Committee that the aggregate number of shares issuable upon exercise of such options be reallocated among the Key Employees, based on individual performance. The Compensation Committee may consider such reallocation in its sole discretion. The exercise price of the options is equal to the closing price of the Common Stock on the date of grant as quoted by the Nasdaq National Market, as reported in The Wall Street Journal. The options vest 50% per year commencing one year from the date of grant. As members of the Hiller Group with rights to some portion of the value of the stock issuable upon exercise of the stock option granted to HKT Partners pursuant to the Hiller Agreement, Mr. Hiller and Mr. Cason did not participate in this plan during the 1995 fiscal year. Stock options were granted to all other named executive officers and certain other Key Employees during fiscal 1995 in accordance with the Compensation Committee's policies. CHIEF EXECUTIVE OFFICER Pursuant to the Hiller Agreement, Mr. Hiller received as compensation in lieu of salary, bonus or other remuneration an interest in the value of the 2,396,923 shares of the Common Stock issuable upon exercise of the Hiller Option granted to HKT Partners. As the sole shareholder of HKT, Inc., a Washington corporation and the General Partner of HKT Partners, and as a General Partner of Hiller Investment Partners, a California limited partnership and a limited partner of HKT Partners, Mr. Hiller has a 66.29% interest in HKT Partners. The Board of Directors approved the Hiller Option in February 1992 subject to the approval of the Company's shareholders. The Company's shareholders approved the Hiller Option at a Special Meeting held for such purpose on May 13, 1992 (the "Special Meeting"). As a result, Mr. Hiller's compensation as Chief Executive Officer was determined by the entire Board of Directors and the shareholders present and voting in person or via proxy at the Special Meeting. Mr. Hiller's compensation is based upon the premise that he be compensated only to the extent that the value of the Company's stock increases. Compensation payments in excess of $1 million to the Chief Executive Officer or four other most highly compensated executive officers are subject to a limitation on deductibility for the Company under Section 162(m) of the Internal Revenue Code of 1986, as amended. Certain performance-based compensation is not subject to the limitation on deductibility. To the extent that there is no adverse effect on the Company's performance-related compensation philosophy or on the Company's ability to provide competitive compensation, it is the policy of the Compensation Committee and the Board of Directors to minimize executive compensation that is not deductible by the Company for tax purposes. COMPENSATION COMMITTEE Mr. Satre served as Acting President of the Company from August 1991 through February 1992. Mr. Pearson served as President and Chief Operating Officer of the Company from March 1992 until his resignation in February 1994. No other member of the Compensation Committee is a former or current 13 officer or employee of the Company or any of its subsidiaries. The Stock Option Sub-Committee consisting of Messrs. Pilz, Satre and Spangle administered the Company's stock option plans during fiscal 1995. COMPENSATION COMMITTEE ---------------------- Dale F. Pilz - Chairman Royce G. Pearson Wendell J. Satre Clarence W. Spangle STOCK OPTION SUB-COMMITTEE -------------------------- Dale F. Pilz, Chairman Wendell J. Satre Clarence W. Spangle SHAREHOLDER RETURN PERFORMANCE PRESENTATION STOCK PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the Common Stock of the Company for the last five fiscal years with the cumulative total return of (i) the CRSP Total Return Index for The Nasdaq Stock Market (U.S. and Foreign) (the "CRSP Nasdaq (US & Fgn) Index") and (ii) the CRSP Index for Nasdaq Computer Manufacturer Stocks (the "CRSP Computer Index"). This graph assumes the investment of $100 on June 30, 1990 in the Company's Common Stock, the CRSP Nasdaq Index and the CRSP Computer Index and assumes dividends are reinvested. Measurement points are at the last trading day of the fiscal years ended June 30, 1991, July 4, 1992, July 3, 1993, July 2, 1994 and July 1, 1995. The Nasdaq, (U.S. and foreign) Market Index is composed of companies included within all Standard Industrial Classification (SIC) codes. The SIC code of all companies included in the Nasdaq Computer Manufacturer Index is 357. The Company will provide a list of companies included in the indexes to any shareholder upon written request to the Company's Acting Secretary. Measurement Period Key Tronic CRSP Nasdaq (US CRSP Com- (Fiscal Year Covered) Corporation & Fgn) Index puter Index 06/30/90 $100.0 $100.0 $100.0 06/30/91 80.0 105.8 96.5 07/04/92 137.1 126.8 112.1 07/03/92 228.6 161.3 144.5 07/02/94 142.9 159.0 112.3 07/01/95 365.7 210.2 199.8 14 CERTAIN TRANSACTIONS Pursuant to an agreement approved by the Board of Directors in January 1993, Hiller Investment Company ("Hiller Investment") is entitled to receive $24,000 per month in reimbursement for expenses incurred by Hiller Investment in connection with the provision of clerical and other services to the Company. Hiller Investment received $329,580 pursuant to this agreement in fiscal 1995. Mr. Hiller is Senior Partner of Hiller Investment. Mr. Hiller does not receive any salary from the Company's reimbursement paid to Hiller Investment. Effective September 1, 1995, Fred Wenninger became President and Chief Executive Officer of the Company and a member of the Board of Directors. Pursuant to an employment agreement, effective September 1, 1995, Mr. Wenninger receives an initial base salary of $300,000 per year. Pursuant to the agreement Mr. Wenninger is also eligible to participate in the Company's annual bonus incentive plan with his annual bonus targeted at 50% of base salary, based upon meeting specific objectives for each fiscal year as agreed to in advance with the Board. Higher annual bonuses can be achieved based upon his exceeding these objectives with a maximum annual bonus of 75% of his base salary. For fiscal year 1996, the Board recognizing that Mr. Wenninger did not have the opportunity to participate in the determination of the objectives which drive the fiscal 1996 bonus plan, agreed to guarantee him a minimum cash bonus of $150,000. Mr. Wenninger was granted upon hire 225,000 shares of non-qualified stock options pursuant to Key Tronic's current stock option plan which vest in two consecutive annual installments of 50% each. These options are priced at market as of September 1, 1995. Mr. Wenninger was also granted on September 1, 1995, 50,000 phantom stock option units, the unit value of which equals the market price of Key Tronic stock on September 1, 1995. The phantom stock option units vest and become exercisable in five equal annual installments. Should the Company have a major change of ownership (defined as 50% or more of its outstanding and issued Common Stock being purchased by an individual, group of individuals, or corporate entity) during Mr. Wenninger's employment, the vesting of his non-qualified options and phantom stock option units will be accelerated immediately so that both are 100% vested. If Mr. Wenninger elects to leave the Company after such a change of control, he will be paid one year's annual base salary in a lump sum payment. Should Mr. Wenninger's employment with the Company be terminated by the Board for any reason(s) other than for cause he will be paid one year's annual base salary in a lump sum payment. No bonus or portion thereof will be paid, except for bonus earned for a prior year but not yet paid. As of the date of his termination of employment for other than cause, he will receive that amount of phantom stock units which equates to that portion of the five year vesting period that will have passed as of his date of termination. No severance payments or acceleration of vesting of stock options or phantom stock option units will occur if termination is voluntary or for "cause." Fred Wenninger, President and Chief Executive Officer and a director of the Company, is the sole stockholder of Star Hawk Aviation, Inc. The Company entered into an agreement on July 27, 1995 to obtain certain aviation services from Star Hawk Aviation, Inc. and will make payments to Star Hawk Aviation, Inc. for hanger fees for one aircraft and aircraft rental fees. The Company believes that the terms of its business relationship with Star Hawk Aviation, Inc. are no less favorable to the Company than could be obtained from an unrelated party. PROPOSAL 2 ADOPTION OF AMENDMENT TO THE AMENDED AND RESTATED 1990 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS The Board of Directors has adopted, and submits for shareholder approval, amendments to the Key Tronic Corporation Amended and Restated 1990 Stock Option Plan for Non-Employee Directors, which was adopted in 1990 and previously amended and restated in 1993 (the "Directors Plan"). The Company has adopted the Directors Plan to attract and retain the services of experienced, knowledgeable non-employee directors and to provide an incentive for such directors to increase their proprietary interest in the Company's long-term success and progress. In July 1995, the Board of Directors amended and restated the Directors Plan, subject to shareholder approval, to: (i) change the grant provisions; (ii) add a change of control provision which provides for accelerated vesting and termination of options; (iii) make various technical changes to conform the Directors Plan to Rule 16b-3 and the requirements of that Rule for a plan to qualify as a non- discretionary, formula plan; and (iv) make certain other technical changes. The amendments do not increase the number of shares available for option grants under the Directors Plan. The amendments will be effective as of July 27, 1995 (the date such amendments were approved by the Board of Directors), provided shareholder approval of such amendments is obtained at 15 the Annual Meeting. The Board of Directors believes that the Directors Plan, as amended, is essential to help attract and retain experienced, knowledgeable outside directors. Set forth below is a description of the principal features of the Directors Plan and the amendments to it, and the benefits that the Company would have granted under the Directors Plan, as amended, if it had been in effect over the prior fiscal year. This description does not purport to be complete and is qualified in its entirety by reference to the Directors Plan. Copies of the Directors Plan will be available at the Annual Meeting and may also be obtained by sending a written request to the Company's Acting Secretary. GENERAL PROVISIONS OF THE DIRECTORS PLAN The Directors Plan provides for the granting of non-qualified stock options to non-employee directors of the Company. The total number of shares of Common Stock for which options may be granted under the Directors Plan is 300,000 shares. On September 7, 1995, the closing price of the Company's Common Stock was $14.875. The Directors Plan currently provides that each director of the Company who is not an employee of the Company and is an independent and outside director of the Company shall, upon election or appointment to the Board of Directors, receive an option to acquire 10,000 shares on the date of the first meeting of the Board of Directors following the director's election or appointment to the Board of Directors which is attended by such director, unless on such date the stock of the Company is not publicly traded, in which event the grant shall be made effective as of the next following day on which the Company's stock is publicly traded. The Directors Plan also currently provides that such non-employee directors shall be eligible to receive additional options under the Directors Plan. As of July 27, 1995, options for a total of 150,000 shares had been granted and remained outstanding, options for a total of 26,600 shares had been exercised, and a total of 123,400 shares remained available for future option grants under the Directors Plan. The grant provisions of the Directors Plan are being amended such that, as amended, each director whose first election to the Board of Directors occurs after July 27, 1995 shall automatically, and without any further authorization or approval by the plan administrator or the Board of Directors, be granted (i) an option to purchase 10,000 shares on the third business day following such director's first election to the Board of Directors provided such director is a Non-Employee Director (as defined below) on the date of such first election; and (ii) an option to purchase 10,000 shares on the third business day following the first anniversary date of such director's first election to the Board of Directors provided such director is a Non-Employee Director on the date of such anniversary. A director shall be a "Non-Employee Director" on the date of any such election if, on such date and for one year prior to such date, such director has not been an employee of the Corporation or any of its subsidiaries. No other options shall be granted under the Directors Plan, as amended, except as specifically provided above. The Directors Plan currently provides that it shall be administered by an outside professional administrator and/or non-director employees of the Company as appointed by the Chief Executive Officer of the Company, and that the members shall not be directors of the Company. The Directors Plan also currently provides that, subject to the terms of the Directors Plan, the plan administrator shall have the power to construe the provisions of the Directors Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Directors Plan as it may deem desirable. The administration provisions of the Directors Plan are being amended such that, as amended, the Directors Plan will be administered by a committee appointed by the Board of Directors, which committee shall consist of two or more members of the Board of Directors who are not eligible to participate in the Directors Plan. The new plan administrator will have the same power to construe provisions, determine questions and adopt and amend rules and regulations relating to the Directors Plan, except that the selection of directors to whom options are to be granted, the timing of grants, the number of shares subject to any option, the exercise price of any option, the periods during which any option may vest and be exercised, and the term of any option shall be as provided in the Directors Plan, as amended, and the plan administrator shall have no discretion as to any such matters. The Directors Plan currently provides that each option shall have the following terms. The exercise price shall be the fair market value of the optioned shares (defined as the closing price as reported in the Wall Street Journal) on the grant date. The option shall vest and is exercisable to the extent of one-third per year of the optioned shares, beginning one year from the grant date. Payment of the exercise price may be in whole or in part shares of the Company already owned and fully paid for, valued at fair market value on the exercise date, and any withholding tax required by the Company. The option shall expire not more than ten years from the grant date but shall 16 be subject to earlier termination as follows: (i) in the event of the optionee's death, the option may be exercised within one year after the date of death or prior to the date on which the option expires by its terms, whichever is earlier and (ii) in the event the optionee ceases to be a director of the Company, the portion of the option which is vested at the date of such cessation may be exercised within one year after the date of such cessation or prior to the date on which the option expires by its terms, whichever is earlier. An option shall not be assigned or transferred by the optionee otherwise than by will or the laws of descent and distribution, and an option shall be exercisable during the lifetime of the optionee only by the optionee. Any agreement evidencing an option may contain such other terms, provisions and conditions not inconsistent with the Directors Plan as may be determined by the plan administrator. These provisions of the Directors Plan relating to terms of the options are being amended in certain technical respects to conform them to other amendments being made to the Directors Plan, to conform them to the non-discretionary plan or other requirements of Rule 16b-3, or to clarify such provisions. The amendments include that the term of an option shall be five years (rather than not more than five years). If an option expires or terminates without being exercised in full, the shares representing the unexercised portion shall again be available for grant under the Directors Plan. The amendments to the Directors Plan will add a change of control provision to the Directors Plan as follows. Notwithstanding any provision of the Directors Plan or any option agreement to the contrary, any option (or unexercised portion thereof) shall, unless previously lapsed and terminated become vested and exercisable in full immediately prior to the occurrence of a change in control, (as such term is defined below); provided, that such acceleration will not occur if it would render unavailable "pooling of interests" accounting treatment for any merger, consolidation, statutory share exchange or other reorganization of the Company. If the vesting and exercisability of any options (or portion thereof) hereunder are accelerated such options (or portion thereof) shall otherwise remain outstanding and subject to the other terms and conditions of the Directors Plan and the option agreement. A Change in Control shall be deemed to occur if any of the following shall occur: (A) any "person" other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the "beneficial owner" directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then-outstanding securities (other than as a result of an acquisition by any such person of securities directly from the Company); (B) the first purchase of Common Stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company or any Subsidiary); (C) the approval by the Company's stockholders of a merger or consolidation, a statutory share exchange, a sale or disposition of all or substantially all the Company's assets or a plan of liquidation or dissolution of the Company; or (D) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period. The Directors Plan currently provides that the Board of Directors may amend, terminate or suspend the Directors Plan at any time in its sole discretion, provided that shareholder approval is required for any amendment which would (i) increase the number of shares subject to the Directors Plan, (ii) reduce the option price below 100% of the fair market value of the shares subject to the option at the time the option was granted, (iii) increase beyond 10,000 the number of shares for which options may be granted to each director, (iv) change the timing with respect to which options are granted or exercisable and (v) make any other change which would require shareholder approval under applicable law, including Section 16(b), and provided further that, if required to qualify as a non-discretionary plan under Rule 16b-3, the Directors Plan may be amended no more frequently than every six months. The amendment provisions of the Directors Plan are being amended such that, as amended, the Board of Directors will have the same power to amend, terminate or suspend the Directors Plan, provided that shareholder approval will be required for any amendment which would (i) increase the aggregate number of shares subject to the Directors Plan, (ii) reduce the option price of the shares subject to any option, (iii) increase the number of options, or the number of shares for which any options, may be granted to each director, (iv) change the timing with respect to which options are granted or exercisable, or (v) make any other change which would require shareholder approval under applicable law, including Rule 16b-3 generally and the non-discretionary plan provisions of Rule 16b-3 specifically, and provided further that if required to qualify as a non-discretionary plan under Rule 16b-3, the Directors Plan (including without limitation the provisions either stating the amount and price of securities to be awarded and specifying the timing of awards, or setting forth a formula that determines the amount, price and timing) may be amended no more frequently than once every six months. 17 Notwithstanding the foregoing, the Directors Plan shall in any event, if not sooner terminated, be terminated on July 27, 2005. The Directors Plan currently provides that the aggregate number of shares for which options may be granted under the Directors Plan, the number of shares subject to each outstanding option, the aggregate number of shares with respect to which an option may be granted annually to a director, and the price per share specified in each option may all be adjusted, as the Plan Administrator shall determine in its sole discretion or as may be required, for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares, other similar capital adjustment, payment of a stock dividend, or other increase in such shares effected without receipt of consideration by, or merger or consolidation of, or sale of all or substantially all of the assets of, or liquidation of, the Company. The adjustment provisions of the Directors Plan are being amended such that under the Directors Plan, as amended, the kind (as well the number of shares) will be subject to adjustment and the number and kind of shares will be appropriately adjusted (rather than being adjusted by the plan administrator in its sole discretion or as may be required). The adjustment provisions are also being amended in certain technical respects to conform them to other amendments being made to the Directors Plan, to conform them to the non-discretionary plan or other requirements of Rule 16b-3, or to clarify such provisions. The amendments to the Directors Plan will also add a provision to the Directors Plan regarding the intended status of the Directors Plan under Rule 16b-3 as follows. The Directors Plan and transactions thereunder are intended to comply with all applicable provisions of Rule 16b-3 generally and with all applicable non-discretionary plan provisions of Rule 16b-3 specifically. To the extent any provision of the Directors Plan or action by the plan administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law. To the extent any provision of Rule 16b-3 required to be included in the Directors Plan to accomplish the intent thereof is omitted, the same is incorporated therein by reference. The Directors Plan is also being amended in certain other technical respects to conform it to other amendments being made to the Directors Plan, to conform it to the non-discretionary plan or other requirements of Rule 16b-3, or to clarify provisions of the Directors Plan. Amended Directors Plan Benefits Under the Directors Plan, as amended, each director whose first election to the Board of Directors occurs after July 27, 1995 and who qualifies as a Non-Employee Director on the applicable dates of election will be eligible to, and will automatically, participate in the Directors Plan, as amended. Because the participation of directors in the Directors Plan, as amended, is dependent on several factors, it is not possible to state the number of directors who will participate in the Directors Plan, as amended, the names or positions of any such directors, or the number of options that will be granted to any such directors except that any such director will receive a maximum of two options for 10,000 shares each under the automatic grant provisions of the Directors Plan, as amended. All directors nominated for election at the Annual Meeting, excluding those who are also executive officers, will receive no option grants under the Directors Plan, as amended, when it becomes effective. In addition all current directors, excluding those directors who are also executive officers, would have received no option grants if the Directors Plan, as amended, had been in effect over the prior fiscal year (assuming for such purpose that it provided for grants to directors whose first such election occurred after July 27, 1994). This is not necessarily indicative of options that may be granted under the Directors Plan, as amended, in the future. All options previously granted under the Directors Plan were granted at fair market value on the date of grant. Federal Income Tax Consequences The following is a summary of certain federal income tax consequences of the Directors Plan. All options granted under the Directors Plan will be non-qualified stock options. Non-qualified stock options do not qualify as "incentive stock options" under Section 422 of the Code and do not qualify for any special tax benefits to the optionee. 18 An optionee will not recognize any taxable income at the time he or she is granted an option. However, upon exercise of an option, the optionee will recognize ordinary income for federal tax purposes measured by the excess of the then fair market value of the shares over the option price. Upon a sale of any shares acquired pursuant to the exercise of an option, the difference between the sale price and the optionee's basis in the shares will be treated as a capital gain or loss and will be characterized as long term capital gain or loss if the shares have been held for more than one year at the date of sale by the optionee. The optionee's basis for determination of gain or loss upon the subsequent sale of shares acquired upon the exercise of an option will be the amount paid for such shares plus any ordinary income recognized as a result of the exercise of the option. In general, there will be no federal tax consequences to the Company upon the grant or termination of an option or a sale by the optionee of the shares acquired through exercise of an option. However, upon the exercise of an option, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that the optionee is required to recognize as a result of the exercise. If there is an acceleration of the vesting or payment of options and/or an acceleration of the exercisability of options upon a change of control, all or a portion of the accelerated benefits may constitute "excess parachute payments" under Section 280G of the Code. An excess parachute payment is not deductible by the Company. Moreover, the optionee receiving an excess parachute payment incurs an excise tax of 20% of the excess parachute payment. The foregoing summary of the federal income tax consequences of the Directors Plan is based on the Company's understanding of present federal tax law and regulations. The summary does not purport to be complete or applicable to every specific situation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE AMENDMENTS TO THE DIRECTORS PLAN. PROPOSAL 3 ADOPTION OF THE 1995 KEY TRONIC CORPORATION EXECUTIVE STOCK OPTION PLAN The Board of Directors has adopted, and submits for shareholder approval, the 1995 Key Tronic Corporation Executive Stock Option Plan (the "Plan"). The Company has adopted the Plan to enhance the profitability and value of the Company for the benefit of its shareholders by providing equity ownership opportunities and performance-based incentives to better align the interests of officers and key employees with those of shareholders. The Plan is also designed to enhance the profitability and value of the Company for the benefit of its shareholders by providing a means to attract, retain and motivate officers and other key employees who make important contributions to the success of the Company. The Plan is intended to replace the Company's Executive Stock Option Plan which has terminated. Set forth below is a description of the principal features of the Plan and the benefits that the Company has granted under the Plan, subject to shareholder approval. This description does not purport to be complete and is qualified in its entirety by reference to the Plan. Copies of the Plan will be available at the Annual Meeting and may also be obtained by sending a written request to the Company's Acting Secretary. General Plan Provisions The Plan provides for the granting of non-qualified stock Options ("Options") to employees of the Company. The number of shares of the Company's stock which may be issued in connection with Options will not exceed 1,500,000 shares. No more than 300,000 of such shares may be granted to any one individual during any fiscal year. On September 7, 1995, the closing price of the Company's Common Stock was $14.875. The Plan is administered by a committee (the "Committee") which consists of two or more members of the Board of Directors who are "disinterested 19 persons" as defined in Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934 ("Exchange Act") and "outside directors" as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code"). The Committee may amend the Plan at any time. However, the Committee may not amend the Plan without shareholder approval if such amendment would (i) cause the Plan to fail to meet the requirements of Rule 16b-3 or (ii) violate applicable law. No Option may be granted under the Plan on or after the 10th anniversary date of the date the Plan is approved by the Company's shareholders, but Options granted prior to such 10th anniversary may extend beyond that date. Under the Plan, the Committee may grant Options at such times, in such amounts, and to such recipients as the Committee may determine. Options may be granted, however, only to employees of the Company and its affiliates. Any amendment or termination of the Plan will not adversely affect any Option granted prior to such amendment or termination. However, any Option may be modified or canceled by the Committee, in its sole discretion, if and to the extent permitted by the Plan or applicable agreement or with the consent of the participant to whom such Option was granted. For all Options, the Option price will be as determined by the Committee, but will be no less than the fair market value of the Company's stock at the time the Option is granted. The other terms of an Option, including its term, vesting and exercisability, and termination, will be determined by the Committee. The applicable agreement for any Option may include a Change of Control provision, and the Committee, in its sole discretion, may specify in the agreement the definition of a Change of Control and the effect a Change of Control will have on the agreement and the related Options. The effect of a Change of Control provision may include accelerating vesting (or otherwise affecting the terms) of the Option upon a Change in Control. The occurrence of a Change of Control shall not limit the Committee's authority, described above to modify or cancel any Option. If an Option expires or is terminated, surrendered, or canceled without having been fully exercised, the unused shares of the Company's stock covered by any such Option shall again be available for grant under the Plan to any participant who is not subject to Section 16. If there is any change in the Company's stock by reason of any stock split, stock dividend, spin-off, split- up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, or any other similar transaction, the number and kind of shares of the Company's stock for which Options may be granted under the Plan, the number of shares of the Company's stock subject to outstanding Options and the price thereof, as applicable, will be appropriately adjusted by the Committee. Except as may be provided in an applicable agreement, any Option may be converted, modified, forfeited, or canceled, or the restrictions or conditions applicable to such Option waived or accelerated, prospectively or retroactively, in whole or in part, by the Committee, but (unless the participant is not in compliance with all applicable provisions of the Plan or with any applicable agreement or the participant has acted in a manner contrary to the best interests of the Company or an affiliate of the Company) no such action may adversely affect the rights of a participant under any Option granted prior to such action without his or her consent. The Committee will not permit the re-pricing of Options by any method, including by cancellation and reissuance. Upon the exercise of an Option, payment may be made either (i) in cash, or (ii) with the consent of the Committee, (A) by the surrender of all or part of the Company's stock issuable upon exercise of the Option, (B) by the tender to the Company of its stock owned by the participant having a fair market value equal to the amount due to the Company, (C) in other property, or (D) by any combination of the foregoing. At any time any Option granted under the Plan is exercised, the Company may withhold, in cash or in shares of the Company's stock, any amount necessary to satisfy withholding requirements applicable to such distribution or exercise of an Option. Unless otherwise determined by the Committee and specified in an applicable agreement, an Option granted under the Plan may not be transferred or assigned (either during life or death) by the participant to whom it is granted. Options Granted Under The Plan Under the Plan, all employees of the Company are eligible to participate. Because the officers and employees who may participate and the amount of their Options are determined by the Committee, in its sole discretion, it is not possible to state the names or positions of, or the number of Options that may be granted to, the Company's officers and employees. The maximum number of shares for which Options may be granted to any one individual during any fiscal year is 300,000. 20 In July and September, 1995, the Committee granted Options, subject to shareholder approval of the Plan. The Options have been granted as long-term incentive compensation to approximately 27 key employees who have had, and are expected to continue to have, a significant role in improving the profitability and value of the Company for the benefit of its shareholders. The following table shows Options which have been granted to date, subject to shareholder approval of the Plan and which may not be exercised until shareholder approval is obtained. This table is not necessarily indicative of Options that may be granted under the Plan in the future. Options Granted As of 9/7/95 Number of Shares Name and Position of Company's Stock Stanley Hiller, Jr. --- Thomas W. Cason --- Jack W. Oehlke 15,000 Richard T. Tinsley 7,500 Ronald F. Klawitter 15,000 All current (as of 9/1/95) 275,000 executive officers as a group (5 persons) All current directors who --- are not executive officers as a group Each nominee for election as 225,000 a director Fred W. Wenninger Each associate of any of --- such directors (none) Each other person who --- received or is to receive 5% of such options (none) All employees, including all 94,000 current officers who are not executive officers, as a group (23 persons) All options granted at an exercise price of $16.25 per share (the closing price of the Company's Common Stock on date of grant, July 27, 1995) except for options granted to Mr. Wenninger at $15.25 per share (the closing price of the Company's Common Stock on date of grant, September 1, 1995).
Federal Income Tax Consequences The following is a summary of certain federal income tax consequences of the Plan. The 1993 Omnibus Budget Reconciliation Act ("OBRA") became law in August 1993. Under the new law, publicly-held companies may be limited as to income tax deductions to the extent that total remuneration (including stock option exercises) for certain executive officers exceeds $1 million in any one year. OBRA, however, provides an exception for "performance-based" remuneration, 21 including stock options. OBRA requires that certain actions must be taken by a compensation committee of two or more outside directors and that the material terms of such remuneration must be approved by a majority vote of the shareholders in order for stock options to qualify as "performance-based" remuneration. No regulations have been issued that interpret this provision of OBRA, and the conference report that was issued by the Joint Committee on Taxation is unclear as to what action must be taken and at what time to ensure that stock options are treated as "performance-based" remuneration. The Company has been advised that, based on the proposed regulations and the conference report, the Plan complies with all requirements of OBRA for stock options to be treated as "performance-based" remuneration. All Options granted under the Plan will be non-qualified stock options. Non-qualified stock options do not qualify as "incentive stock options" under Section 422 of the Code and do not qualify for any special tax benefits to the optionee. An optionee will not recognize any taxable income at the time he or she is granted an Option. However, upon exercise of an Option, the optionee will recognize ordinary income for federal tax purposes measured by the excess of the then fair market value of the shares over the option price. Upon a sale of any shares acquired pursuant to the exercise of an Option, the difference between the sale price and the optionee's basis in the shares will be treated as a capital gain or loss and will be characterized as long term capital gain or loss if the shares have been held for more than one year at the date of sale by the optionee. The optionee's basis for determination of gain or loss upon the subsequent sale of shares acquired upon the exercise of an Option will be the amount paid for such shares plus any ordinary income recognized as a result of the exercise of the Option. In general, there will be no federal tax consequences to the Company upon the grant or termination of an Option or a sale by the optionee of the shares acquired through exercise of an Option. However, upon the exercise of an Option, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that the optionee is required to recognize as a result of the exercise. If there is an acceleration of the vesting or payment of Options and/or an acceleration of the exercisability of Options upon a change of control, all or a portion of the accelerated benefits may constitute "excess parachute payments" under Section 280G of the Code. An excess parachute payment is not deductible by the Company. Moreover, the optionee receiving an excess parachute payment incurs an excise tax of 20% of the excess parachute payment. The foregoing summary of the federal income tax consequences of the Plan is based on the Company's understanding of present federal tax law and regulations. The summary does not purport to be complete or applicable to every specific situation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE PLAN. PROPOSAL 4 RATIFICATION OF APPOINTMENT OF AUDITORS Deloitte & Touche LLP served as the Company's independent auditors since 1983 and has been appointed by the Board of Directors as the Company's independent auditors for the fiscal year ending June 29, 1996. In the event that ratification of this appointment of auditors is not approved by a majority of the shares of Common Stock voting at the Annual Meeting in person or by proxy, management will review its future selection of auditors. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting with the opportunity to make a statement, if they desire to do so, and they are expected to be available to respond to appropriate questions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE AS THE COMPANY'S INDEPENDENT AUDITORS. SHAREHOLDER PROPOSALS To be considered for presentation to the Annual Meeting of Shareholders to be held in 1996, a shareholder proposal must be received by Ronald F. Klawitter, Vice President of Finance, Treasurer and Acting Secretary, Key Tronic Corporation, 4424 N. Sullivan Road, Spokane, Washington 99216, no later than May 24, 1996. 22 OTHER MATTERS Compliance With Section 16(a) of the Exchange Act. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors and persons who own more than 10% of the Company's Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and Nasdaq. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received or written representations from certain Reporting Persons that no Forms 5 were required, the Company believes that during fiscal 1995 all the Reporting Persons complied with all applicable filing requirements. Solicitation Expenses. The expense of printing and mailing proxy material will be borne by the Company. In addition to the solicitation of proxies by mail, solicitation may be made by certain directors, executive officers and other employees of the Company by personal interview, telephone or facsimile. No additional compensation will be paid for such solicitation. The Company will request brokers and nominees who hold stock in their names to furnish proxy material to beneficial owners of the shares and will reimburse such brokers and nominees for their reasonable expenses incurred in forwarding solicitation material to such beneficial owners. Other Matters. The Board of Directors knows of no other business that will be presented to the Annual Meeting. If any other business is properly brought before the Annual Meeting, it is intended that proxies in the enclosed form will be voted in respect thereof in accordance with the judgment of the persons voting the proxies. It is important that the proxies be returned promptly and that your shares be represented. Shareholders are urged to fill in, sign and promptly return the accompanying form in the enclosed envelope. By Order of the Board of Directors, /s/ Ronald F. Klawitter Ronald F. Klawitter Acting Secretary Spokane, Washington September 22, 1995 23 KEY TRONIC CORPORATION 4424 N. Sullivan Road, Spokane, Washington 99216 PROXY SOLICITED BY BOARD OF DIRECTORS FOR ANNUAL MEETING OCTOBER 26, 1995 STANLEY HILLER, JR., WENDELL J. SATRE, AND YACOV A. SHAMASH, or any of them, each with the power of substitution, are hereby authorized to represent and vote all shares of the undersigned, with all the powers which the undersigned would possess if personally present, at the Annual Meeting of Shareholders of Key Tronic Corporation to be held on Thursday, October 26, 1995, and any adjournment or postponement thereof. UNLESS OTHERWISE SPECIFIED THIS PROXY WILL BE VOTED IN FAVOR OF PROPOSAL 1, PROPOSAL 2, PROPOSAL 3 AND PROPOSAL 4. 1. Election of Directors: WITHHOLD AUTHORITY to vote FOR all nominees listed below / / for all nominees listed below / / FOR, except vote withheld from the following nominee(s): ______________________________________________________________ Election of eleven directors (or if any nominee is not available for election, such substitute as the Board of Directors or the proxyholders may designate). Nominees: Robert H. Cannon, Jr., Thomas W. Cason, Michael R. Hallman, Stanley Hiller, Jr., Kenneth F. Holtby, Dale F. Pilz, Wendell J. Satre, Yacov A. Shamash, Clarence W. Spangle, William E. Terry and Fred W. Wenninger ______________________________________________________________ 2. Adoption of Amendment to the Amended and Restated 1990 Stock Option Plan for Non-Employee Directors. / / FOR / / AGAINST / / ABSTAIN ______________________________________________________________ 3. Adoption of the 1995 Key Tronic Corporation Executive Stock Option Plan. / / FOR / / AGAINST / / ABSTAIN ______________________________________________________________ 4. Ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for fiscal year 1996. / / FOR / / AGAINST / / ABSTAIN _______________________________________________________________ (Continued and to be signed and dated on other side.) The undersigned hereby acknowledges receipt of the Notice of Annual Meeting and accompanying proxy statement, ratifies all that said Proxies or their substitutes may lawfully do by virtue hereof, and revokes all prior proxies. Shares represented by this proxy will be voted as directed by the shareholder. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. If you wish to vote in accordance with the Board of Directors' recommendations, just sign and date below. You need not mark any boxes. PLEASE SIGN, DATE AND RETURN PROMPTLY. Mark / / for address change: Please sign exactly as your name appears herein. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. _______________________________________________ Signature Date _______________________________________________ Signature Date No postage is required if this proxy is returned in the enclosed envelope and mailed in the United States EX-27 6
5 This schedule contains summary financial information extracted from the Key Tronic Corporation year end Form 10K for 1995 and is qualified in its entirety by reference to such Form 10K. 1,000 12-MOS JUL-01-1995 JUL-01-1995 4,455 0 35,149 (1,185) 26,883 73,008 89,255 55,387 115,086 35,321 0 37,484 0 0 13,782 115,086 207,456 207,456 175,709 175,709 21,276 361 3,486 6,624 2,203 4,421 0 0 0 4,421 .45 .43
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