SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934.
FILED BY THE REGISTRANT /X/
FILED BY A PARTY OTHER THAN THE REGISTRANT / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for the Use of the Commission Only (as permitted by
rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or
sec. 240.14a-12
KEY TRONIC CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Persons(s) Filing Proxy Statement if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount
on which the filing fee is calculated and state how it was
determined):
4) Proposed maximum aggregate value of transaction:
5) Total Fee Paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number or the Form or Schedule and the date of its filing:
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party
4) Date Filed:
- -----------------------------------------------------------------------------
January __, 1996
Dear Shareholder:
The attached Notice of Special Meting of Shareholders and Proxy Statement
relates to the Special Meeting of Shareholders of key Tronic Corporation, a
Washington corporation (the "Company"), to be held on Wednesday, February 26,
1997 at 1:00 p.m. Pacific time at the principal executive offices of the
Company, 4424 N. Sullivan Road, Spokane, Washington 99216.
The principal purpose of the Special Meeting is to consider the ratification and
approval of an agreement (the "Restricted Stock Agreement") between the Company
and Hiller Key Tronic Partners, L.P. (HKT Partners). This agreement gives the
Company the opportunity to exchange and cancel HKT Partner's existing, vested
option to purchase 2,396,923 shares of common stock of the Company ("Common
Stock") for a grant of approximately 1,161,675 shares of restricted Common
Stock.
This allows the Company to reduce potential outstanding shares of Common Stock
by over one million shares, a decrease of approximately 10%. This makes
especially good sense given the current depressed stock price and the bright
future we see ahead. Additionally, restricted shares offered to HKT Partners in
exchange for the option will be subject to restrictions on resale of the shares
which restrictions will extend over a three year period. These restrictions
will provide a strong, longer term incentive to key members of management and
the Hiller Group to continue to improve results and increase shareholder value.
This transaction was unanimously approved by the Board of Directors. Board
approval followed a unanimous recommendation by an independent Special Committee
of the board (including myself) after careful consideration and analysis of all
of the alternatives. As set forth in the accompanying materials, approval of
this proposal requires the affirmative vote of at least 66.67% of the
outstanding shares of the common stock voting at the Special Meeting in person
or by proxy. The Company's Board of Directors recommends approval and
ratification by the Company's shareholders.
Whether or not you will attend the Special 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 Special Meeting and vote in person,
even if you have previously returned your proxy card.
Sincerely,
/s/ FRED W. WENNINGER
Fred W. Wenninger
Chief Executive Officer and President
Member of the Board of Directors
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
February 26, 1997
To the Shareholders of KEY TRONIC CORPORATION:
The Special Meeting of Shareholders of Key Tronic Corporation, a
Washington corporation (the "Company") will be held on Wednesday, February 26,
1997, at 1:00 p.m. Pacific time at the principal executive offices of the
Company, 4424 N. Sullivan Road, Spokane, Washington 99216 (the "Special
Meeting"), for the following purposes:
1. To consider the approval and ratification of a Restricted Stock
Agreement between the Company and Hiller Key Tronic Partners, L.P. ("HKT
Partners") in exchange for, and in cancellation of, an option owned by HKT
Partners (the "Hiller Option"), and
2. 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 January 17, 1997 (the "Record Date") are entitled to notice of and to vote
at the Special Meeting and any adjournments or postponements thereof.
Even if you will attend the Special 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
Special Meeting. You may vote your shares in person at the Special Meeting even
if you have previously returned your proxy card to the Company.
By Order of the Board of Directors,
/S/ RONALD F. KLAWITTER
Ronald F. Klawitter, Secretary
Spokane, Washington
January __, 1997
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED CARD PROMPTLY,
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING.
FIRST MAILED TO SHAREHOLDERS ON OR ABOUT JANUARY __, 1997
PROXY STATEMENT
--------------------
INTRODUCTION
GENERAL
The preceding Notice of Special 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
Special Meeting of Shareholders of the Company to be held on Wednesday, February
26 1997, 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 "Special Meeting"). The proxies appoint Fred W.
Wenninger, Wendell J. Satre and Yacov A. Shamash, any of them and their
substitutes, as proxy to vote all shares represented at the Special Meeting
pursuant to this proxy solicitation.
The principal purpose of the Special Meeting is to consider the
ratification and approval of an agreement (the "Restricted Stock Agreement")
between the Company and Hiller Key Tronic Partners, L.P., a Washington limited
partnership ("HKT Partners"), pursuant to which the Company shall issue
approximately 1,161,675 shares of the Company's Common Stock to HKT Partners in
exchange for, and in cancellation of, an option to purchase 2,396,923 shares of
Common Stock of the Company currently held by HKT Partners (the "Hiller
Option"). See "Approval and Ratification of Restricted Stock Agreement in
Exchange for Hiller Option -- Background and Recommendation of the Board of
Directors." The issuance of shares under the Restricted Stock Agreement in
exchange for the Hiller Option will result, on a fully-diluted basis
(including all outstanding and unexercised options and warrants), in an
approximately 10% decrease in shareholder dilution with the shares of Common
Stock to be issued under the Restricted Stock Agreement representing
approximately 11% of the outstanding Common Stock on the Record Date on a
fully-diluted basis (excluding the Option shares). The Company's Board of
Directors has unanimously approved the Restricted Stock Agreement which
provides the terms and conditions governing the issuance of shares of the
Company's Common Stock to HKT Partners in exchange for, and in cancellation
of, the Hiller Option. Pursuant to the Restricted Stock Agreement, certain
resale restrictions on the shares of Common Stock to be issued to HKT Partners
will lapse over a three-year period or upon the happening of certain events.
See "Approval and Ratification of Restricted Stock Agreement in Exchange for
Hiller Option -- Terms of the Restricted Stock Agreement."
RECORD DATE, PROXIES, REVOCATION
Record holders of the Common Stock at the close of business on
January 17, 1997 (the "Record Date") are entitled to notice of and to vote at
the Special Meeting. As of the Record Date, 8,540,434 shares of Common Stock
were issued and outstanding. A proxy card for use at the Special Meeting is
enclosed with this Proxy Statement. All completed, signed and dated proxies
returned to the Company will be voted at the Special 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 approval and ratification
of the Restricted Stock Agreement between the Company and HKT Partners in
exchange for the cancellation of the Hiller Option. 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 Special Meeting. The mere presence at the
Special Meeting of the shareholder who has given a proxy will not revoke such
proxy.
VOTING
Each share of Common Stock outstanding is entitled to one vote on each
matter presented for a vote of the shareholders at the Special 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) proposal 1 listed in
the accompanying Notice of Special Meeting of Shareholders will be approved if
the number of votes cast in favor of the proposal equals not less than 66.67% of
the total outstanding shares of Common Stock of the Company. An abstention
from voting or a broker nonvote will have the practical effect of voting
against proposal 1.
PROPOSAL 1
APPROVAL AND RATIFICATION OF
THE RESTRICTED STOCK AGREEMENT IN EXCHANGE FOR HILLER OPTION
BACKGROUND AND RECOMMENDATION OF THE BOARD OF DIRECTORS
Based upon the recommendations by a Special Committee of the Company's
Board of Directors, the Board has determined that it is in the best interests
of the Company and its shareholders for the shareholders to ratify and approve
the Restricted Stock Agreement between the Company and HKT Partners. See
"Role of the special Committee" below. Under the Restricted Stock Agreement,
HKT Partners will receive approximately 1,161,675 shares of Common Stock of the
Company in exchange for, and in cancellation of, an option to purchase 2,396,923
shares of Common Stock (the "Hiller Option") currently owned by HKT Partners.
This grant of shares to HKT Partners in exchange for the cancellation of the
Hiller Option will result, on a fully-diluted basis, in a 10% decrease in
shareholder dilution, and the shares will be subject to the resale restrictions
described below. The Board of Directors believes that the grant of restricted
shares of Common Stock to HKT Partners upon the terms contained in the
Restricted Stock Agreement in exchange for the Hiller Option, provides an
appropriate incentive to the Company's management and the Hiller Group to
improve the financial performance of the Company and to enhance shareholder
value. HKT Partners is an affiliate of the Hiller Group, a corporate
management organization of which Mr. Stanley Hiller, Jr., Chairman of the
Board of Directors, is a principal. Certain other members of the Company's
Board of Directors also have ownership interests in HKT Partners and its
affiliated entities.
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 Mr. 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 and acquired the right to
designate three additional persons to be appointed to the Company's Board of
Directors. Under these arrangements, Mr. Hiller has received 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 20% 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 a recapitalization, stock split, stock
dividend or similar transaction. 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.
REGISTRATION RIGHTS AGREEMENT. Pursuant to a Registration Rights
Agreement entered into concurrently with the Hiller Option Agreement (the
"Registration Rights Agreement"), the Company has agreed, subject to certain
conditions, to register shares of Common Stock held by HKT Partners, including
(but not limited to) shares subject to the Hiller Option (the "Registrable
Shares"), under the Securities Act of 1933, as amended (the "Securities Act").
Subject to certain exceptions, at any time after March 31, 1993, the holders of
at least 25% of the shares subject to the Hiller Option may on up to two
occasions require the Company at its own expense to use its diligent best
efforts to register all or part of the Registrable Shares under the Securities
Act, so long as the aggregate offering price to the public would be at least
$5,000,000. In addition, in the event that the Company registers shares under
the Securities Act on its own behalf, the Company is required at its own expense
to include in such registration all or part of the Registrable Shares upon
request of the holders thereof, subject to certain limitations. Finally,
subject to certain exceptions and limitations, the holders of Registrable Shares
may upon request require the Company, at the expense of such holders, to
register all or part of such shares on Form S-3 under the Securities Act if such
Form is available, and so long as the aggregate price to the public of such
shares would be equal to at least $500,000. The registration rights granted
under the Registration Rights Agreement expire on March 1, 2002. Pursuant to
the terms of the Restricted Stock Agreement, all shares of the Company's Common
Stock issued to HKT Partners under the Restricted Stock Agreement in exchange
for the cancellation of the Hiller Option shall be entitled to the benefits of
the Registration Rights Agreement upon the same terms and conditions as the
shares subject to the Hiller Option.
HKT 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 of which HKT Partners is the General Partner, and as a General
Partner of Hiller Investment Partners, a California general partnership and a
limited partner of HKT Partners, currently has a 66.73% interest in HKT
Partners. Each partner of HKT Partners will share in the economic benefit of
the cancellation of the Hiller Option in exchange for the issuance of shares
under the Restricted Stock Agreement to the extent of their respective
partnership interests. The following directors have each 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.
Mr. Cason, a director of the Company, has received a 8.46% ownership interest
in HKT Partners. Messrs. Gates, Klawitter and Oehlke, officers of the Company,
have received, respectively, .77%, 1.72% and 1.74% ownership interests in HKT
Partners. During fiscal year 1996, Messrs. Cason, Oehlke, Klawitter 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, and $44,156.
The Special Committee's Role. A Special Committee of the Board of
Directors, consisting of Messrs. Wenninger, Satre, and Shamash, was appointed
in July 1996 to consider the Hiller Option. In particular, the Special
Committee considered whether the terms of the Hiller Option currently provide
HKT Partners with appropriate incentives to continue actively participating in
the management of the Company in order to increase long-term shareholder value.
The Special Committee considered the possible outcomes of the Hiller Option,
including expiration of the option and HKT Partners' exercise of the option and
sale of the shares of Common Stock acquired upon exercise. In addition, the
Special Committee considered possible restructurings of the Hiller Option, such
as extending the term of the option or cancellation of the option in exchange
for a grant of a certain number of restricted shares of the Company's Common
Stock. In considering the Hiller Option, and possible restructurings of
the Hiller Option, the Special Committee sought to recommend to the Board
of Directors a transaction which would be fair to the Company and its
shareholders, including HKT Partners, and which would provide incentives
to HKT Partners to continue participating in the Company's long-term
growth as both a management consultant and shareholder of the Company.
The Special Committee determined that the cancellation of the Hiller
Option in exchange for the grant of restricted shares of the Company's Common
Stock, upon the terms set forth in the proposed Restricted Stock Agreement,
best satisfied these criteria. In making its determination the Special
Committee concluded that the resale restrictions to be imposed on the shares to
be issued to HKT Partners should reduce the fair market value of such shares by
17.5%, which conclusion was presented to the Board of Directors along with the
Special Committee's recommendation.
TERMS OF THE RESTRICTED STOCK AGREEMENT
The Restricted Stock Agreement provides that the Company shall issue
shares of Common Stock in exchange for, and in cancellation of, the Hiller
Option. The Board expects that approximately 1,161,675 shares of Common
Stock will be issued to HKT Partners. The exact number of shares to be issued
shall be determined pursuant to the formula described below and such shares
shall be subject to certain resale restrictions set forth in the Restricted
Stock Agreement which shall lapse over a three-year period or upon the
happening of certain events described below. A copy of the form of the
Restricted Stock Agreement is attached to this Proxy Statement as Exhibit A.
Number of Shares to Be Issued to HKT Partners. The number of shares
to be issued to HKT Partners under the Restricted Stock Agreement will be
determined by dividing the net aggregate dollar value of the Hiller Option by
the per share fair market value of the Common Stock to be issued to HKT
Partners on the date that shareholder approval for the transaction is obtained;
the per share fair market value of the HKT Partners' shares shall reflect the
resale restrictions imposed on the shares. The net aggregate dollar value of
the Hiller Option equals the current market price of the Company's Common Stock
based on the last reported sale price on NASDAQ on the date of shareholder
approval minus the exercise price ($4.50) of the Hiller Option multiplied by
the 2,396,923 shares subject to the Hiller Option. The Board believes that the
resale restrictions imposed on the shares to be issued to HKT Partners reduces
by 17.5% the fair market value of such shares.
Assuming, for example, that the last reported sale price of the
Company's Common Stock is $7.50 on the date of shareholder approval, the
aggregate value of shares to be issued would equal $7,190,769 (($7.50 - $4.50)
x 2,396,923 shares)), the net aggregate dollar value of the Hiller Option. The
aggregate value of $7,190,769 divided by $6.19 (the per share market value of
the Company's Common Stock ($7.50) reduced by 17.5% to reflect the resale
restrictions), yields a total of 1,161,675.5 shares of Common Stock to be issued
to HKT Partners in exchange for cancellation of the 2,396,923 Option Shares.
Resale Restrictions on the Shares. The shares to be issued under
the Restricted Stock Agreement will be subject to restrictions prohibiting
resale of the shares by HKT Partners until the restrictions lapse or upon the
happening of certain events described below. Subject to the events described
below, the resale restrictions shall lapse and the shares become unrestricted
according to the following schedule: (i) 33-1/3% of the total shares shall
become unrestricted on the first anniversary of the issuance date, (ii) an
additional 33-1/3% of the total shares shall become unrestricted on the second
anniversary of the issuance date, and (iii) the remaining 33-1/3% of the total
shares shall become unrestricted on the third anniversary of the issuance date.
The resale restrictions shall lapse according to the above schedule
provided that Mr. Hiller continues to serve the Company as a director, officer
or adviser during such anniversary periods, subject to the following exceptions:
(i) if the shareholders or Board of Directors fail to elect or appoint
Mr. Hiller to serve as a director, officer or adviser of the Company despite his
willingness to do so, all the shares shall immediately become unrestricted; (ii)
if Mr. Hiller becomes unable to serve as a director, officer or adviser of the
Company due to health problems, the resale restrictions shall continue to lapse
according to the three-year schedule above; and (iii) if there is a "Change of
Control" of the Company (as defined in the Restricted Stock Agreement), all
shares issued to HKT Partners shall immediately become unrestricted.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND RATIFICATION OF
THE RESTRICTED STOCK AGREEMENT IN EXCHANGE FOR THE HILLER OPTION.
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.
The Company's Board of Directors met five times during fiscal 1996.
During fiscal 1996, each director attended 75% or more of the total number of
Board 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, except Prof. Cannon who attended 40% of such meetings.
The Audit Committee, which currently consists of Dr. Shamash
(chairman) and Messrs. Cason, Holtby and Pilz met two times during fiscal 1996.
The Audit Committee recommends to the Board of Directors the independent
auditors to be selected to audit the financial statements of the Company for the
fiscal year for which they are appointed, reviews the fees of the independent
auditors and other terms of their engagement and monitors the adequacy 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), Cason, Satre and Spangle, met two times during fiscal 1996. The
Compensation Committee establishes and reviews annually the Company's general
compensation policies applicable to the Company's executive officers and other
key employees, 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 and makes recommendations to the Board regarding changes to existing
compensation plans. 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 Stock
Option Sub-Committee members are Messrs. Pilz and Spangle.
The Executive Committee, which currently consists of Messrs. Hiller
(Chairman), Pilz, Satre and Wenninger held one meeting during fiscal 1996. The
Executive Committee generally exercises the authority of the Board of Directors
with respect to the management and operation of the Company between meetings of
the Board of Directors. 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 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 directors.
Each director who is not, upon election to the Board of Directors, an
employee of the Company participates in the Company's Stock Option Plan for Non-
Employee Directors. Each non-employee director is granted, upon initial
election, an option to purchase 10,000 shares of the Company's Common Stock and
an additional option to purchase 10,000 shares upon the directors first re-
election to the Board of Directors. All options granted pursuant to the plan
have a three year vesting period.
EXECUTIVE OFFICERS
The following persons are the executive officers of the Company:
Fred W. Wenninger, age 57, 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.
Craig D. Gates, age 37, has been Vice President and General Manager
of New Business Development since October 1995. He 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 1982 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 44, has been Vice President of Finance and
Treasurer of the Company since November 1992 and Secretary since October 1995.
He was Acting Secretary from November 1994 to October 1995. 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 51, has been Chief Operating Officer of the
Company since October, 1995. Previously, he served as Senior Vice President of
Operations from January 1995 to October 1995 and Vice President of Manufacturing
Operations of the Company from December 1993 to January 1995. 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.
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.
<TABLE>
<S><C>
Number of Shares Percentage
Name of Beneficial Owner* Beneficially Owned (1) of Class(1)
Zesiger Capital Group LLC 1,065,800(2) 12.5%
320 Park Avenue
New York, NY 10022
BZW Barclays Global Investors, N.A. 584,376(3) 6.8%
420 Montgomery Street, Floor 3
San Francisco, CA 94162
Dimensional Fund Advisors, Inc. 538,300(4) 6.3%
1299 Ocean Avenue, Suite 650
Santa Monica, CA 90401
Hiller Key Tronic Partners 2,413,446(5) 23.6%
Robert H. Cannon, Jr. - Director 25,318(6) **
Thomas W. Cason - Director 202,865(7) 2.4%
Michael R. Hallman - Director 29,068(8) **
Stanley Hiller, Jr. - Chairman 1,768,352(9) 17.4%
Kenneth F. Holtby - Director 43,068(10) **
Dale F. Pilz - Director 26,518(11) **
Wendell J. Satre - Director 27,333(12) **
Yacov A. Shamash - Director 7,833(13) **
Clarence W. Spangle - Director 25,318(14) **
William E. Terry - Director 29,068(15) **
Fred Wenninger - Chief Executive 187,500(16) 2.2%
Officer and President
Craig D. Gates - Vice President, 45,276(17) **
General Manager of New Business
Development
Ronald F. Klawitter - Vice President 83,288(18) **
of Finance, Treasurer and Secretary
Jack W. Oehlke - Chief Operating 79,586(19) **
Officer
Richard T. Tinsley - Vice President, 64,018(20) **
Quality***
All officers and directors as a
group (15 persons) (6)-(20),(21) 2,630,982(21) 24.3%
___________________
* Unless otherwise noted, the address for each named shareholder is in care
of the Company at its principal executive offices.
** Less than 1%.
*** Mr. Tinsley who had served as Vice President, Quality of the Company
since November, 1993, resigned as Vice President, Quality effective January
1, 1997.
(1) Percentage beneficially owned is based on 8,540,434 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 by each
person or group of persons, any shares which such person or persons have
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.
(2) Based on Form 13F filed with the Securities and Exchange Commission, dated
August 6, 1996.
(3) Based on Form 13F filed with the Securities and Exchange Commission, dated
April 14, 1996.
(4) Dimensional Fund Advisors Inc. ("DFA"), a registered investor advisor, is
deemed to have beneficial ownership of these shares all of which are held
in portfolios of DFA Investment Dimensions Group Inc., a registered open-
end investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, for all of
which DFA serves as investment manager. DFA disclaims beneficial ownership
of all shares.
(5) Represents 2,396,923 shares subject to presently exercisable options
pursuant to the Hiller Option Agreement (described on page 10) between the
Company and HKT Partners, 12,986 shares held by HKT Partners and 3,537
shares held by HKT, Inc., its general partner. Excludes 100 shares owned
directly by Mr. Hiller and 146,538 shares held by Hiller Investment
Partners, as to which HKT Partners disclaims beneficial ownership. See
textual disclosure on page 10.
(6) Represents 13,333 shares issuable upon exercise of director stock options
and Mr. Cannon's pro rata interest (11,985 shares) in shares issuable upon
the exercise of options held by HKT Partners.
(7) Represents Mr. Cason's pro rata interest in shares issuable upon the
exercise of options held by HKT Partners.
(8) Includes 13,333 shares issuable upon exercise of director stock options
and Mr. Hallman's pro rata interest (11,985 shares) in shares issuable
upon the exercise of options held by HKT Partners.
(9) Includes 1,605,191 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
issuable upon the exercise of options owned by HKT Partners. Also
includes 100 shares owned directly by Mr. Hiller, 146,538 shares held by
Hiller Investment Partners, 12,986 shares held by HKT Partners and 3,537
shares held by HKT, Inc., its general partner, as to which HKT Partners
disclaims beneficial ownership. See textual disclosure on page 10.
(10) Includes 13,333 shares issuable upon exercise of director stock options and
Mr. Holtby's pro rata interest (15,735 shares) in shares held and shares
issuable upon the exercise of options held by HKT Partners.
(11) Includes 13,333 shares issuable upon exercise of director stock options and
Mr. Pilz's pro rata interest (11,985 shares) in shares issuable upon the
exercise of options held by HKT Partners.
(12) Includes 3,333 shares issuable upon exercise of a director stock option.
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.
(13) Includes 3,333 shares issuable upon exercise of a director stock option.
(14) Represents 13,333 shares issuable upon exercise of director stock options
and Mr. Spangle's pro rata interest (11,985 shares) in shares issuable upon
the exercise of options held by HKT Partners.
(15) Includes 13,333 shares issuable upon exercise of director stock options and
Mr. Terry's pro rata interest (11,985 shares) in shares issuable upon the
exercise of options held by HKT Partners.
(16) Includes 112,500 shares issuable upon exercise of employee stock options.
Excludes 6,500 shares owned by Mr. Wenninger's wife, as to which Mr.
Wenninger disclaims beneficial ownership.
(17) Includes 26,250 shares issuable upon exercise of employee stock options and
Mr. Gates' pro rata interest (18,467 shares) in shares issuable upon the
exercise of options held by HKT Partners.
(18) Represents 42,182 shares issuable upon exercise of employee stock options
and Mr. Klawitter's pro rata interest (41,106 shares) in shares issuable
upon the exercise of options held by HKT Partners.
(19) Includes 36,500 shares issuable upon exercise of employee stock options and
Mr. Oehlke's pro rata interest (41,812 shares) in 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 (774 shares) as of June 29, 1996.
(20) Includes 39,750 shares issuable upon exercise of employee stock options and
Mr. Tinsley's pro rata interest (19,751 shares) in 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 (2,534 shares) as of June 29, 1996.
(21) Includes 257,182 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 June 29, 1996.
EXECUTIVE COMPENSATION
COMPENSATION TABLES
Set forth below is information on the annual and long-term
compensation for services rendered during fiscal years 1994, 1995 and 1996, by
the Named Executive Officers which include (i) Mr. Wenninger, the Company's
Chief Executive Officer, (ii) Mr. Hiller who served as the Company's Chief
Executive Officer from February 1992 through August 1995, and (iii) the four
other most highly paid executive officers of the Company. For information
regarding the Company's current executive officers, see EXECUTIVE OFFICERS, page
5.
</TABLE>
<TABLE>
<S><C>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
----------------------------------------- Restricted Securities
Other Annual Stock Underlying All Other
Name and Fiscal Salary Bonus Compensation Award(s) Options Compensation
Principal Position Year ($)(1) ($)(2) ($)(3) ($)(4) (#)(5) Payouts ($)(6)
- ----------------- ------ ------- ------- ------------- --------- ---------- ------- ------------
Stanley Hiller, Jr.(7) 1995 -- -- -- -- -- -- --
Chairman 1994 -- -- -- -- -- -- --
1993 -- -- -- -- -- -- --
Fred W. Wenninger 1996 $243,462 $150,000 $131,782 $762,500 $225,000 -- $4,615
Chief Executive Officer 1995 -- -- -- -- -- -- --
and President 1994 -- -- -- -- -- -- --
Jack W. Oehlke 1996 179,808 -- -- -- 33,000 -- 4,495
Chief Operating 1995 139,621 105,250 39,531 -- 9,000 -- 3,491
Officer 1994 61,251 8,000 26,044 -- 20,000 -- 777
Craig D. Gates 1996 149,808 -- -- -- 43,000 -- 3,745
Vice President, 1995 93,159 88,500 20,448 -- 20,000 -- 1,664
General Manager of 1994 -- -- -- -- -- -- --
New Business
Development
Ronald F. Klawitter 1996 142,692 -- -- -- 33,000 -- 3,567
Vice President of 1995 120,910 73,500 -- -- 8,815 -- 3,023
Finance, Treasurer and 1994 90,938 -- -- -- 5,867 -- 2,273
Secretary
Richard T. Tinsley 1996 135,001 -- -- -- 12,500 -- 3,128
Vice President, 1995 135,025 65,651 38,698 -- 6,000 -- 3,376
Quality 1994 77,899 -- 46,819 -- 30,000 -- 650
- ------------
(1) Includes amounts deferred under the 401(k) component of the Company's
Variable Investment Plan.
(2) Represents dollar value of cash bonuses earned by the Named Executive
Officers during the fiscal year indicated. Includes cash signing bonus of
$24,000 ($16,000 paid in 1995 and $8,000 paid in 1994) to Jack W. Oehlke.
Also includes cash signing bonus of $15,000 paid in 1995 to Craig D. Gates.
(3) 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.
(4) On September 1, 1995 Mr. Wenninger was granted 50,000 phantom stock option
units, with no cost basis to Mr. Wenninger, and the value of which at any
time equals the market price of the Company's Common Stock multiplied by
the number of units. The units vest over a period of five years at 20% per
year. The market price of the Common Stock on September 1, 1995 was $15.25
per share.
(5) Does not include stock options granted to HKT Partners, a partnership in
which entities controlled by Mr. Hiller, and in which Messrs. Oehlke,
Tinsley, Klawitter and Gates, individually, hold limited partnership
interests. See notes (5) and (17) through (20) to "Principal Shareholders
and Security Ownership of Management."
(6) Represents Company matching payments in 1996, 1995 and 1994 under the
Company's Variable Investment Plan.
(7) Mr. Hiller served as chief executive officer of the Company from February
1992 through August 1995. Pursuant to an agreement entered into in
February 1992 between the Company and the Hiller Group, a corporate
management organization, Mr. Hiller has received no salary for his services
as an executive officer and director of the Company. See the textual
disclosure on page 10.
OPTION GRANTS IN 1996 FISCAL YEAR
The following table sets forth information concerning individual
grants of stock options made during fiscal 1996 to each of the individuals
identified in the Summary Compensation Table.
</TABLE>
<TABLE>
Number of % of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of
Underlying Granted To Stock Price Appreciation for
Options Granted Employees in Exercise Expiration Option Term(2)
NAME (#)(1) Fiscal 1995 ($/Share) Date 5%($) 10%($)
- ------------------ ------------ ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stanley Hiller, Jr. -- -- -- -- -- --
Fred W. Wenninger 225,000 42.1% $15.25 9/01/05 $5,589,128 $8,899,707
Jack W. Oehlke 15,000 2.8% 16.25 7/27/05 397,042 632,224
18,000 3.4% 8.34 6/18/06 244,529 389,372
Craig D. Gates 12,500 2.3% 16.25 7/27/05 169,812 270,397
30,500 5.7% 8.34 6/18/06 414,341 659,770
Ronald F. Klawitter 15,000 2.8% 16.25 7/27/05 397,042 632,224
18,000 3.4% 8.34 6/18/06 244,529 389,372
Richard T. Tinsley 7,500 1.4% 16.25 7/27/05 198,521 316,112
5,000 .9% 8.34 6/18/06 67.925 108,159
___________________________
</TABLE>
(1) Options vest at the rate of 50% per year on the first and second
anniversaries of the grant date.
(2) The rates of appreciation shown in the table are for illustrative purposes
only pursuant to applicable Securities and Exchange Commission
requirements. Actual values realized on stock options are dependent on
actual future performance of the Company, among other factors. Accordingly
the amounts shown may not necessarily be realized.
The following table provides information on the exercise of options to
purchase Common Stock by the Named Executive Officers in fiscal 1996 and such
officers' unexercised options to purchase Common Stock at June 29, 1996.
<TABLE>
<S><C>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END OPTION VALUES
Shares Number of Shares
Acquired Underlying Unexercised Value of Unexercised
on Value Options at Fiscal In-The-Money Options
Exercise Realized Year End (#) at Fiscal Year-End($)(1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- -------- -------- ----------- -------------- ----------- --------------
Stanley Hiller, Jr. 0 N/A 1,604,291 0 $3,208,582 N/A
Fred W. Wenninger 0 N/A 0 225,000 N/A N/A
Jack W. Oehlke 0 N/A 24,500 37,500 N/A N/A
Craig D. Gates 0 N/A 10,000 53,000 N/A N/A
Ronald F. Klawitter 0 N/A 30,274 37,405 N/A N/A
Richard T. Tinsley 0 N/A 33,000 15,500 N/A N/A
______________
(1) 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 29, 1996 and the
exercise prices for the relevant options.
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE IN CONTROL ARRANGEMENTS
Employment Contracts. Pursuant to an employment contract, effective
September 1, 1995, Mr. Wenninger agreed to serve as the Company's President and
Chief Executive Officer. He received an initial base salary of $300,000 and
eligibility to participate in the Company's bonus incentive plan as offered to
its key employees from time to time, with a guaranteed minimum cash bonus of
$150,000 for 1996. The Company also granted to Mr. Wenninger, options to
purchase 225,000 shares of Common Stock at an exercise price of $15.25 per share
(the market price on the grant date) and 50,000 units of phantom stock at $15.25
per unit, with no cost basis to Mr. Wenninger. The Company also agreed to pay
Mr. Wenninger's relocation related expenses.
Pursuant to an employment contract, dated December 27, 1993, 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.
Pursuant to an employment contract, executed October 27, 1994, Mr.
Gates received an initial base salary of $125,000 per year and eligibility to
participate in the Company's bonus incentive plan as offered to its key
employees from time to time. The Company also granted to Mr. Gates options to
purchase 20,000 shares of Common Stock at an exercise price of $10.75 per share
(the market price on the grant date) and agreed to pay Mr. Gates' 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 in the case of
Messrs. Wenninger, Oehlke, Klawitter and Tinsley and nine months in the case of
Mr. Gates.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Board of Directors has a Compensation Committee, presently
consisting of Messrs. Cason, Pilz, Satre and Spangle. Mr. Satre served as Acting
President of the Company from August 1991 through February 1992. Mr. Cason
served as President and Chief Operating Officer of the Company from February
1994 through August 1995. During the portion of fiscal 1996 during which Mr.
Cason served as President and Chief Operating Officer he received salary
payments totaling $62,500, payment of his incentive bonus earned during fiscal
1995 in the amount of $168,750 and other compensation and expense
reimbursements, pursuant to his employment arrangement totaling $28,326.
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 has three primary elements: base salary, annual incentive
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 incentive 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.
BASE SALARIES
The Company's compensation philosophy emphasizes performance-based
pay. The goal is to have base salary represent a target percentage of an
executive officer's total annual compensation. Prior to setting compensation
levels for executive 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 15. The Compensation Committee indexes base salary ranges to be slightly
below average competitive levels in the Northwest. During fiscal 1996,
executive officer pay ranges were adjusted upward to be consistent with the
Compensation Committee's established index. Management recommendations (other
than those of the subject executive officer) are considered by the Compensation
Committee in establishing an individual executive 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 executive officer's annual salary. Executive 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 1996. The plan was based upon Company profit goals. A minimum
Company profit goal had to be achieved before any payment was to be made under
the plan to executive officers. Bonus payments under the plan were to be based
on three performance levels: threshold achievement, expected achievement, and
over-achievement of Company profit goals or a combination of Company profit
goals and other financial 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 the key employees fiscal 1996 base earnings. The payment
percentage ranges were established in descending order for the Chief Operating
Officer, all other officers and all other key employees. Mr. Wenninger, the
Company's Chief Executive Officer and President did not participate in the plan
for fiscal 1996. Mr. Wenninger was awarded a bonus for fiscal 1996, pursuant to
his employment agreement. The threshold achievement profit performance level
was not met and therefore no executive officer was awarded a bonus pursuant to
the incentive bonus plan for fiscal 1996. Certain non-officer key employees
were paid bonuses in accordance with the incentive bonus plan for fiscal 1996.
ANNUAL STOCK OPTION AWARDS
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 Stock Option Sub-Committee of the Compensation Committee
makes the determination to grant options to key employees based upon each key
employee's position in the Company, base salary and the recommendations of the
President and Chief Executive Officer and the Chief Operating Officer based on
individual performance. 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
1996 fiscal year. The Stock Option Sub-Committee granted options to all other
executive officers (other than Mr. Wenninger who was granted stock options
during fiscal 1996 in accordance with his employment agreement) and certain
other key employees during fiscal 1996 in accordance with the Company's
compensation policies.
CHIEF EXECUTIVE OFFICER
Effective September 1, 1995, Fred W. Wenninger became Chief Executive
Officer and President of the Company and a member of the Board of Directors.
Pursuant to an employment agreement, effective September 1, 1995, Mr. Wenninger
received an initial base salary of $300,000 per year. Pursuant to the agreement
Mr. Wenninger is also eligible to participate, beginning in fiscal year 1997, in
the Company's annual incentive bonus 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 incentive bonus plan, agreed to guarantee
him a minimum cash bonus of $150,000.
Mr. Wenninger was granted upon his employment 225,000 shares of non-
qualified stock options pursuant to the Company's 1995 Executive Stock Option
Plan which vest in two consecutive annual installments of 50% each. These
options are priced at market price as of September 1, 1995. Mr. Wenninger was
also granted on September 1, 1995, 50,000 phantom stock option units, with no
cost basis to Mr. Wenninger, the unit value of which at any time equals the
market price of the Company's Common Stock. 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 receive a
severance payment equal to one year's annual base salary in a lump sum payment.
Upon Mr. Wenninger's termination, 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
Mr. Wenninger's termination of employment for other than "cause", he will
receive that amount of phantom stock option units which equates to that portion
of the five year vesting period that will have passed as of his date of
termination. No severance payment will occur if Mr. Wenninger's termination is
voluntary (unless it follows a change of control) or is for "cause."
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 STOCK OPTION SUB-COMMITTEE
Dale F. Pilz - Chairman Dale F. Pilz, Chairman
Thomas W. Cason Clarence W. Spangle
Wendell J. Satre
Clarence W. Spangle
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
STOCK PERFORMANCE GRAPH
<TABLE>
<CAPTION>
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
SET FORTH BELOW IS A LINE GRAPH COMPARING THE CUMULATIVE TOTAL
SHAREHOLDER RETURN ON THE COMPANY'S COMMON STOCK WITH THE CUMULATIVE
TOTAL RETURN OF THE NASDAQ MARKET INDEX AND THE NASDAQ COMPUTER
MANUFACTURER INDEX IN FISCAL 1996.
COMPARISON OF TOTAL RETURN(1)
AMONG NASDAQ (U.S. AND FOREIGN) MARKET INDEX,
NASDAQ COMPUTER MANUFACTURER INDEX AND KEY TRONIC CORPORATION
<C> <C> <C> <C>
Measurement Period Key Tronic CRSP NASDAQ (US CRSP Com-
(Fiscal Year Covered) Corporation & Frgn) Index puter
06/30/91 $100.000 $100.000 $100.000
07/04/92 137.143 126.804 112.145
07/03/93 228.571 161.340 144.460
07/02/94 142.857 159.046 112.266
07/01/95 365.714 210.155 199.800
06/29/96 185.714 260.794 297.376
</TABLE>
(1) Assumes that the value of the investment in the Common Stock and each index
was $100 invested on June 30, 1991 and that all dividends, if any, were
reinvested. 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 Secretary.
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.
Effective October 1, 1995 the agreement was amended to decrease the per month
reimbursement to $15,000. Hiller Investment received $221,000 pursuant to this
agreement in fiscal 1996. Mr. Hiller is Senior Partner of Hiller Investment.
Mr. Hiller does not receive any salary from the Company's reimbursement paid to
Hiller Investment.
During fiscal 1996, the Company made aggregate payments totaling
$37,881 to Bighawk Corp., Jayhawk Aviation, Inc. and Starhawk, Inc. for hanger
fees and aircraft rental fees. Mr. Wenninger is the sole stockholder of these
corporations. The Company believes that the terms of its business relationships
with these corporations are no less favorable to the Company than those which
could be obtained from an unrelated party.
See COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS, page 11, for additional relationships and transactions.
SHAREHOLDER PROPOSALS
To be considered for presentation to the Annual Meeting of
Shareholders to be held in 1997, a shareholder proposal must be received by
Ronald F. Klawitter, Vice President of Finance, Treasurer and Secretary, Key
Tronic Corporation, 4424 N. Sullivan Road, Spokane, Washington 99216, no later
than May 23, 1997.
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance. 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 with respect to the fiscal year ended June 29, 1996
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 Business. The Board of Directors knows of no other business
that will be presented to the Special Meeting. If any other business is
properly brought before the Special 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, Secretary
Spokane, Washington
January __, 1997
KEY TRONIC CORPORATION
4424 N. Sullivan Road, Spokane, Washington 99216
PROXY SOLICITED BY BOARD OF DIRECTORS FOR SPECIAL SHAREHOLDERS MEETING
FEBRUARY 26, 1997
FRED W. WENNINGER, 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 Special Meeting of Shareholders of Key
Tronic Corporation to be held on Wednesday, February 26, 1997, and any
adjournment or postponement thereof.
UNLESS OTHERWISE SPECIFIED THIS PROXY WILL BE VOTED IN FAVOR OF PROPOSAL 1.
1. To consider the approval and ratification of a Restricted Stock
Agreement between the Company and Hiller Key Tronic Partners, L.P. ("HKT
Partners") in exchange for, and in cancellation of, an option owned by HKT
Partners (the "Hiller Option"), and
2. To transact such other business as may properly come before the
meeting and any adjournments or postponements thereof.
/ / FOR / / AGAINST / / ABSTAIN
(Continued and to be signed and dated on other side.)
The undersigned hereby acknowledges receipt of the Notice of Special 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 Special 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
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Signature Date
No postage is required if this proxy is returned in the enclosed envelope and
mailed in the United States.
EXHIBIT A
KEY TRONIC CORPORATION
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is entered into as of the day of , 1997, between Key
Tronic Corporation (the "Company") and Hiller Key Tronic Partners L.P.
("Recipient").
WITNESSETH:
WHEREAS, the Company has previously granted Recipient an option to acquire
shares of Company common stock; and
WHEREAS, the Company has determined that it would be in the interest of the
Company and its shareholders to grant the Stock provided for in this Agreement
to the Recipient in exchange for, and in cancellation of, the option;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties to this Agreement hereby agree as follows:
1. RESTRICTED STOCK. Contemporaneously with the execution of this
Agreement, the Company will issue to Recipient shares of Common Stock
of the Company (the "Stock"). Stock certificates evidencing the Stock will be
retained by the Company, accompanied by blank stock powers executed by
Recipient, for the period during which the Stock constitutes "Restricted Stock"
pursuant to the terms of Sections 2 and 3, hereof. All shares of Stock issued
hereunder shall be deemed issued to Recipient as fully paid and nonassessable
shares, and Recipient shall have all rights of a stockholder with respect
thereto, including the right to vote, receive dividends (including stock
dividends), participate in stock splits or other recapitalizations, and
exchange such shares in a merger, consolidation or other reorganization.
Company shall pay any applicable stock transfer taxes. The term "Stock"
refers not only to the Stock granted hereunder, but also to any and all
"Additional Securities" as defined in Section 5 hereof.
2. RESTRICTIONS. No Stock issued to the Recipient hereunder shall be
sold, transferred by gift, pledged, hypothecated, or otherwise transferred or
disposed of by the Recipient prior to the date when the Recipient shall become
vested in such Stock pursuant to Section 3, hereof, and such Stock shall
constitute "Restricted Stock" for purposes of this Agreement until such date.
Any attempt to transfer Restricted Stock in violation of the terms of this
Agreement shall be null and void and, upon such attempt such shares of
Restricted Stock shall be deemed reconveyed to the Company without payment of
any consideration by the Company, and the Company shall thereafter be the legal
and beneficial owner of the Restricted Stock and shall have all rights and
interest in or related thereto without further action by Recipient.
3. VESTING.
(a) For purposes of this Agreement, the term "vest" shall mean with
respect to any share of the Stock that such share is no longer subject to the
restrictions on transfer set forth in Section 2 and that such share is released
from the reconveyance provision of that Section. If Recipient would become
vested in any fraction of a share of Stock on any date, such fractional share
shall not vest and shall remain Restricted Stock until the Recipient becomes
vested in the entire share. The transfer restrictions shall lapse and the
Restricted Stock shall become vested according to the following schedule:
(i) 33-1/3% of the total shares shall become vested on the first anniversary
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of the issuance date, (ii) an additional 33-1/3% of the total shares shall
become vested on the second anniversary of the issuance date, and (iii) the
remaining 33-1/3% of the total shares shall become vested on the third
anniversary of the issuance date.
The transfer restrictions shall lapse according to the above schedule
provided that Mr. Stanley Hiller continues to serve the Company as a director,
officer or adviser during such anniversary periods and up until such anniversary
dates subject to the following exceptions: (i) if the shareholders or Board of
Directors fail to elect or appoint Mr. Hiller to serve as a director, officer or
adviser of the Company despite his willingness to serve as such, all the shares
shall immediately become vested; (ii) if Mr. Hiller becomes unable to serve as a
director, officer or adviser of the Company due to health problems, the shares
shall continue to vest according to the three-year schedule above; and (iii) if
there is a "Change of Control" of the Company (as defined in paragraph 3(b)
hereof), all shares issued to Recipient shall immediately become vested.
(b) Notwithstanding the foregoing, all Restricted Stock issued under
this Agreement shall be fully vested, nonforfeitable and not subject to
reconveyance in the event of a Change in Control. For purposes of this
Agreement, a Change in Control shall be deemed to occur if (i) any acquisition
by shareholders acting as a group (other than an acquisition from the Company or
by the Company; by Recipient; by Recipients general and/or limited partners; by
the management of the Company or by a Company sponsored employee benefit plan)
of 30% or more of the outstanding common stock of the Company, (ii) during any
calendar year individuals who at the beginning of the year constitute the Board
(together with any new director whose election by the Board or whose nomination
for election by the Company's shareholders was approved by a vote of the
majority of the directors then still in office who either were directors at the
beginning of the calendar year or whose election or nomination was approved by
the Board) cease for any reason to constitute at least a majority thereof;
(iii) approval by the Company's stockholders of a reorganization, merger (in
which the shareholders of the Company before such merger do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the surviving company); consolidation, sale or disposition of
all or substantially all of the assets of the Company (other than a sale or
disposition to one or more corporation(s) where the shareholders of the
Company before such sale or disposition retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of the
corporation(s) to which the assets are transferred), or (iv) approval by the
Company's stockholders of a complete liquidation or dissolution of the Company.
4. WITHHOLDING OF TAXES. Recipient shall provide the Company with a copy
of any timely election made pursuant to Section 83(b) of the Internal Revenue
Code or similar provision of state law (collectively, an "83(b) Election"). If
Recipient makes a timely 83(b) Election, Recipient shall immediately pay the
Company the amount necessary to satisfy any applicable federal, state, and
local income and employment tax withholding requirements. If Recipient does not
make a timely 83(b) Election, Recipient shall, either at the time that the
restrictions lapse under this Agreement or at the time withholding is otherwise
required by any applicable law, pay the Company the amount necessary to satisfy
any applicable federal, state, and local income and employment tax withholding
requirements.
5. ADDITIONAL SECURITIES. Any securities received as the result of
ownership of Restricted Stock (hereinafter called "Additional Securities"),
including, but not by way of limitation, warrants, options and securities
received as a stock dividend or stock split, or as a result of a
recapitalization or reorganization, shall be retained by the Company in the same
manner and subject to the same conditions as the Restricted Stock with respect
to which they were issued. Recipient shall be entitled to direct the Company to
exercise any warrant or option received as Additional Securities upon supplying
the funds necessary to do so, in which event the securities so purchased shall
constitute Additional Securities, but the Recipient may not direct the Company
to sell any such warrant or option. If Additional Securities consist of a
convertible security, Recipient may exercise any conversion right, and any
securities so acquired shall constitute Additional Securities. Additional
Securities shall be subject to the provisions of Sections 2 and 3, above, in
the same manner as the Restricted Stock.
6. LEGENDS
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(a) All certificates for shares of the Stock shall bear the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE
TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BETWEEN THE
COMPANY AND THE HOLDER HEREOF, DATED , 1997. THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF THE COMPANY.
(b) The certificates for shares of the Stock shall also bear any
legend required by any applicable federal or state securities laws.
7. TERMINATION OF STOCK OPTION AGREEMENT. Upon the effective date
hereof, the Stock Option Agreement between the Company and Recipient dated
February 29, 1992, shall terminate and be superseded by this Agreement.
8. NO EFFECT ON TERMS OF EMPLOYMENT. THIS AGREEMENT SHALL NOT CONFER
UPON ANY OF RECIPIENT'S PARTNERS (A "RECIPIENT PARTNER") ANY RIGHT WITH RESPECT
TO CONTINUATION OF HIS EMPLOYMENT WITH THE COMPANY OR ITS AFFILIATES, NOR SHALL
IT INTERFERE IN ANY WAY WITH THE RIGHT OF RECIPIENT PARTNER OR THE COMPANY, OR
ANY OF ITS AFFILIATES TO TERMINATE SUCH RECIPIENT PARTNER'S EMPLOYMENT WITH THE
COMPANY OR ANY SUCH AFFILIATE AT ANY TIME FOR ANY REASON WITH OR WITHOUT CAUSE
OR TO CHANGE THE TERMS OF EMPLOYMENT OF A RECIPIENT PARTNER.
9. SECTION 83(B) ELECTION. Recipient hereby represents that it
understands (a) the contents and requirements of the 83(b) Election, (b) the
application of Section 83(b) to the receipt of the Stock by Recipient pursuant
to this Agreement, (c) the nature of the election to be made by Recipient's
partners under Section 83(b), and (d) the effect and requirements of the 83(b)
Election under relevant state and local tax laws. Recipient further represents
that its partners [intend/do not intend] to file an election pursuant to Section
83(b) with the Internal Revenue Service within thirty (30) days following
receipt of the Stock hereunder, and submit a copy of such election with their
respective federal tax returns for the calendar year in which the date of this
Agreement falls.
10. DISTRIBUTIONS. The Company shall disburse to Recipient all dividends,
interest and other distributions paid or made in cash or property (other than
Additional Securities) with respect to Restricted Stock and Additional
Securities, less any applicable federal or state withholding obligations.
11. SUCCESSORS. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, successor and assigns.
12. NOTICE. Any notice or other document required to be given or sent
pursuant to the terms of this Agreement shall be sufficiently given or served
hereunder to any party when transmitted by registered or certified mail, postage
prepaid, addressed to the party to be served as follows:
Company:
At Company's Address as it appears under
Company's signature to this Agreement,
or to such other address as Company may
specify in writing to the Recipient.
Recipient: At Recipient's address as it appears under
Recipient's signature to this Agreement, or
to such other address as Recipient may
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specify in writing to the Company.
Any party may designate another address for receipt of notices so long as notice
is given in accordance with this Section.
13. REGISTRATION RIGHTS. With respect to the Stock (including any
Additional Securities), Recipient is entitled to the benefit of the Registration
Rights Agreement, dated February 29, 1992, between the Company and Recipient
("Rights Agreement"). Paragraph 1(b) of the Rights Agreement is hereby amended
to read in full as follows: "The term "Registrable Securities" means: (i) the
Option; (ii) any Common Stock issued or to be issued by the Company to Hiller
pursuant to the exercise of the Option or in connection with the exchange or
cancellation of the Option; and (iii) any other Common Stock issued as a
dividend or other distribution with respect to, or in exchange for or in
replacement of, such Common Stock issued pursuant to the exercise of the Option
or in connection with the exchange or cancellation of the Option: (A) if and
so long as they have not been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction pursuant
to an effective registration statement or pursuant to SEC Rule 144, or (B) if in
the opinion of counsel to the Company they may be sold in a transaction exempt
from the prospectus delivery requirements of the Act so that all transfer
restrictions and legends with respect thereto are removed upon the consummation
of such sale; and (iv) any other shares of the Company's Common Stock owned by
Hiller or which Hiller has a right to acquire."
14. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Washington.
IN WITNESS WHEREOF, the parties hereto have duly executed this Restricted
Stock Agreement as of the date first above written.
COMPANY RECIPIENT
KEY TRONIC CORPORATION HILLER KEY TRONIC PARTNERS L.P.
By: By:
Fred W. Wenninger, President Stanley Hiller, Jr.
4424 N. Sullivan Road 3000 Sand Hill Road, Bldg. 2, Ste. 260
Spokane, WA 99216 Menlo Park, CA 94025
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