Table of Contents

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarter Ended December 28, 2002

 

Commission File Number

Number 0-11559

 


 

KEY TRONIC CORPORATION

 

Washington

 

91-0849125

(State of Incorporation)

 

(I.R.S. Employer

Identification No.)

 

North 4424 Sullivan

Spokane, Washington 99216

(509) 928-8000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ .

 

At February 8, 2003 9,672,580 shares of Common Stock, no par value (the only class of common stock), were outstanding.

 



Table of Contents

 

KEY TRONIC CORPORATION

 

Index

 

         

Page No.


PART I.

  

FINANCIAL INFORMATION:

    

Item 1.

  

Financial Statements:

    
    

Consolidated Statements of Operations (Unaudited) Second Quarters Ended December 28, 2002 and December 29, 2001

  

3

    

Consolidated Statements of Operations (Unaudited) Six Months Ended December 28, 2002 and December 29, 2001

  

4

    

Consolidated Balance Sheets – December 28, 2002 (Unaudited) and June 29, 2002

  

5

    

Consolidated Statements of Cash Flows (Unaudited) Six Months Ended December 28, 2002 and December 29, 2001

  

6

    

Notes to Consolidated Financial Statements

  

7-10

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

11-16

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

16

Item 4.

  

Controls and Procedures

  

16

PART II.

  

OTHER INFORMATION:

    

Item 1.

  

Legal Proceedings

  

17

Item 2.

  

Changes in Securities and Use of Proceeds*

    

Item 3.

  

Defaults upon Senior Securities*

    

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

17

Item 5.

  

Other Information

  

17

Item 6.

  

Exhibits and Reports on Form 8-K

  

17

Signatures

       

18

Officer’s Certifications

  

19-20


*Items   are not applicable

 

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PART I: FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

      

Second Quarters Ended


 
      

December 28, 2002


      

December 29, 2001


 
      

(in thousands, except per share amounts)

 

Net sales

    

$

30,552

 

    

$

50,516

 

Cost of sales

    

 

27,068

 

    

 

45,639

 

      


    


Gross profit on sales

    

 

3,484

 

    

 

4,877

 

Operating expenses:

                     

Research, development and engineering

    

 

774

 

    

 

689

 

Selling

    

 

456

 

    

 

747

 

General and administrative

    

 

1,832

 

    

 

2,449

 

      


    


Total operating expenses

    

 

3,062

 

    

 

3,885

 

Operating income

    

 

422

 

    

 

992

 

Interest expense

    

 

260

 

    

 

361

 

Litigation settlement

    

 

—  

 

    

 

17,000

 

Other income

    

 

(28

)

    

 

(229

)

      


    


Income (loss) before income tax provision

    

 

190

 

    

 

(16,140

)

Income tax provision

    

 

116

 

    

 

5,455

 

      


    


Net income (loss)

    

$

74

 

    

$

(21,595

)

      


    


Earnings (loss) per share:

                     

Earnings (loss) per common share—basic and diluted

    

$

0.01

 

    

$

(2.23

)

Weighted average shares outstanding—basic and diluted

    

 

9,673

 

    

 

9,673

 

 

 

See accompanying notes to consolidated financial statements.

 

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

      

Six Months Ended


 
      

December 28, 2002


      

December 29, 2001


 
      

(in thousands, except per share amounts)

 

Net sales

    

$

64,586

 

    

$

85,142

 

Cost of sales

    

 

57,596

 

    

 

78,134

 

      


    


Gross profit on sales

    

 

6,990

 

    

 

7,008

 

Operating expenses:

                     

Research, development and engineering

    

 

1,484

 

    

 

1,247

 

Selling

    

 

923

 

    

 

1,468

 

General and administrative

    

 

3,626

 

    

 

4,194

 

      


    


Total operating expenses

    

 

6,033

 

    

 

6,909

 

Operating income

    

 

957

 

    

 

99

 

Interest expense

    

 

497

 

    

 

703

 

Litigation settlement

    

 

(12,186

)

    

 

17,000

 

Other income

    

 

(262

)

    

 

(259

)

      


    


Income (loss) before income tax provision

    

 

12,908

 

    

 

(17,345

)

Income tax provision

    

 

355

 

    

 

5,232

 

      


    


Net income (loss)

    

$

12,553

 

    

$

(22,577

)

      


    


Earnings (loss) per share:

                     

Earnings (loss) per common share—basic and diluted

    

$

1.30

 

    

$

(2.33

)

Weighted average shares outstanding—basic and diluted

    

 

9,673

 

    

 

9,673

 

 

 

See accompanying notes to consolidated financial statements.

 

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

      

December 28, 2002


    

June 29, 2002


 
      

(in thousands)

 

Assets

                   

Current assets:

                   

Cash and cash equivalents

    

$

1,233

 

  

$

1,205

 

Restricted cash

    

 

701

 

  

 

280

 

Trade receivables, less allowance for doubtful accounts of $107 and $444

    

 

15,896

 

  

 

20,978

 

Inventories

    

 

19,501

 

  

 

18,395

 

Other

    

 

2,240

 

  

 

2,588

 

      


  


Total current assets

    

 

39,571

 

  

 

43,446

 

      


  


Property, plant and equipment—at cost

    

 

85,675

 

  

 

85,286

 

Less: Accumulated depreciation

    

 

73,479

 

  

 

73,054

 

      


  


Total property, plant and equipment

    

 

12,196

 

  

 

12,232

 

      


  


Other assets:

                   

Other (net of accumulated amortization of $416 and $240)

    

 

1,017

 

  

 

996

 

Goodwill

    

 

765

 

  

 

765

 

      


  


Total assets

    

$

53,549

 

  

$

57,439

 

      


  


Liabilities and shareholders’ equity

                   

Current liabilities:

                   

Current portion of long—term obligations

    

$

403

 

  

$

228

 

Accounts payable

    

 

12,639

 

  

 

14,409

 

Accrued compensation and vacation

    

 

2,947

 

  

 

2,803

 

Litigation settlement—short-term

    

 

1,051

 

  

 

293

 

Other

    

 

2,770

 

  

 

3,172

 

      


  


Total current liabilities

    

 

19,810

 

  

 

20,905

 

Long-term liabilities:

                   

Revolving loan—long-term

    

 

6,864

 

  

 

6,475

 

Litigation settlement—long–term

    

 

3,421

 

  

 

19,186

 

Other

    

 

1,190

 

  

 

1,162

 

      


  


Total long–term liabilities

    

 

11,475

 

  

 

26,823

 

Commitments and contingencies (Note 7)

                   

Shareholders’ equity:

                   

Common stock, no par value—shares authorized

                   

25,000; issued and outstanding 9,673 and 9,673

    

 

38,393

 

  

 

38,393

 

Accumulated deficit

    

 

(16,129

)

  

 

(28,682

)

      


  


Total shareholders’ equity

    

 

22,264

 

  

 

9,711

 

      


  


Total liabilities and stockholders’ equity

    

$

53,549

 

  

$

57,439

 

      


  


 

See accompanying notes to consolidated financial statements.

 

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

      

Six Months Ended


 
      

December 28, 2002


      

December 29, 2001


 
      

(in thousands)

 

Increase (decrease) in cash and cash equivalents:

                     

Cash flows from operating activities:

                     

Net income (loss)

    

$

12,553

 

    

$

(22,577

)

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

                     

Depreciation and amortization

    

 

1,497

 

    

 

2,500

 

Provision for obsolete inventory

    

 

93

 

    

 

300

 

Provision for (recoveries of) doubtful receivables

    

 

(56

)

    

 

95

 

Provision for warranty

    

 

—  

 

    

 

75

 

Litigation settlement (revision)

    

 

(12,186

)

    

 

17,000

 

Gain on disposal of assets

    

 

(16

)

    

 

(480

)

Deferred income taxes

    

 

—  

 

    

 

4,516

 

Deferred sales proceeds

    

 

(39

)

    

 

(311

)

Changes in operating assets and liabilities:

                     

Trade receivables

    

 

5,138

 

    

 

(8,511

)

Inventories

    

 

(1,199

)

    

 

(2,098

)

Other assets

    

 

99

 

    

 

285

 

Accounts payable

    

 

(1,770

)

    

 

755

 

Accrued compensation and vacation

    

 

144

 

    

 

295

 

Litigation settlement

    

 

(2,821

)

    

 

—  

 

Other liabilities

    

 

(335

)

    

 

784

 

      


    


Cash provided by (used in) operating activities

    

 

1,102

 

    

 

(7,373

)

Cash flows from investing activities:

                     

Proceeds from sale of property and equipment

    

 

26

 

    

 

2

 

Purchase of property and equipment

    

 

(1,093

)

    

 

(590

)

Increase in restricted cash

    

 

(421

)

    

 

—  

 

      


    


Cash used in investing activities

    

 

(1,488

)

    

 

(588

)

Cash flows from financing activities:

                     

Payment of financing costs

    

 

(150

)

    

 

(426

)

Borrowings under revolving credit agreement

    

 

70,566

 

    

 

83,463

 

Repayment of revolving credit agreement

    

 

(70,002

)

    

 

(75,232

)

      


    


Cash provided by financing activities

    

 

414

 

    

 

7,805

 

Effect of foreign currency translation on cash balances

    

 

—  

 

    

 

(245

)

      


    


Net increase (decrease) in cash and cash equivalents

    

 

28

 

    

 

(401

)

      


    


Cash and cash equivalents, beginning of period

    

 

1,205

 

    

 

2,137

 

      


    


Cash and cash equivalents, end of period

    

$

1,233

 

    

$

1,736

 

      


    


 

 

See accompanying notes to consolidated financial statements.

 

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KEY TRONIC CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation, in all material respects, of the financial position, results of operations, and cash flows for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s 10-K report for the fiscal year ended June 29, 2002. Certain reclassifications have been made for consistent presentation.

 

On October 24, 2002, the Company announced the settlement of the litigation with F&G Scrolling Mouse LLC as explained in greater detail in Note 7 to these financial statements. Readers should be aware that the reported earnings for the six months ended December 28, 2002, include a one-time benefit for reversal of previously recorded litigation expense.

 

1. INVENTORIES

 

      

December 28, 2002


    

June 29, 2002


 
      

(in thousands)

 

Finished goods

    

$

8,115

 

  

$

8,323

 

Work-in-process

    

 

1,409

 

  

 

2,002

 

Raw materials and supplies

    

 

13,983

 

  

 

12,835

 

Reserve for obsolescence

    

 

(4,006

)

  

 

(4,765

)

      


  


      

$

19,501

 

  

$

18,395

 

      


  


 

2. NEW ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (FASB) issued No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under the statement, the Company will initially record intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. Goodwill in each reporting unit shall be tested for impairment annually. An entity has six months from the date it initially applies Statement 142 to complete the first step of that transitional goodwill impairment test. The Company adopted SFAS No. 142 on June 30, 2002, and completed its impairment test using the income approach during the second quarter ended December 28, 2002. The test did not indicate the necessity to write-down the Company’s stated goodwill of $765,000. Therefore, the goodwill transitional impairment test did not have a material impact on the Company’s financial statement.

 

The net effect of adopting this accounting standard was to increase net income by $32,000 or $0.00 per basic and diluted share for the quarter ended December 28, 2002 and $64,000 or $0.00 per basic and diluted share for the six months ended December 28, 2002. In accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively. Comparative disclosure as if the change had been retroactively applied to the prior year is as follows (in thousands, except per share data):

 

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Quarter Ended

December


    

Six Months Ended

December


 
    

2002


  

2001


    

2002


  

2001


 

Reported net income (loss)

  

$

74

  

$

(21,595

)

  

$

12,553

  

$

(22,577

)

Add back: goodwill amortization, net of tax

  

 

0

  

 

32

 

  

 

0

  

 

64

 

    

  


  

  


Total

  

$

74

  

$

(21,563

)

  

$

12,553

  

$

(22,513

)

    

  


  

  


Basic and diluted earnings (loss) per share:

                               

Reported net income (loss)

  

$

0.01

  

$

(2.23

)

  

$

1.30

  

$

(2.33

)

Goodwill amortization

  

 

0

  

 

0

 

  

 

0

  

 

0

 

    

  


  

  


Adjusted basic and diluted earnings (loss) per share

  

$

0.01

  

$

(2.23

)

  

$

1.30

  

$

(2.33

)

    

  


  

  


 

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under SFAS No. 143, the Company will report all legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development, and the normal operation of long-lived assets. The Company adopted SFAS No. 143 on June 30, 2002. The impact of adoption did not have a material impact on the Company’s financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses accounts and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB No. 121 and Opinion No. 30. SFAS No. 144 retains the fundamental provisions of SFAS No. 121. It sets new criteria for asset classifications and establishes a broader scope of qualifying discontinued operations. The Company adopted SFAS No. 144 on June 30, 2002. The impact of adoption did not have a material impact on the Company’s financial statements.

 

In April, 2002, the Financial Accounting Standards Board issued SFAS No. 145. The purpose of this statement is to rescind previously issued SFAS Nos. 4, 44, and 64, and to amend SFAS No. 13. Statement Nos. 4 and 64 relate to reporting gains and losses from extinguishment of debt. Statement No. 44 concerned accounting of intangible assets of motor carriers, and Statement No. 13, “Accounting for Leases” was amended to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions related to Statement 13 are effective fortransactions occurring after May 15, 2002, and the remaining provisions of the statement are effective for fiscal years beginning after May 15, 2002. The Company adopted this new statement after issuance in April 2002; however, there were no lease transactions during the period between May 15, 2002 and June 29, 2002 that would be covered under the provisions of the statement. This new statement, in its entirety, is in effect for the Company’s fiscal year beginning June 30, 2002. Adoption of this statement did not have a material impact on the Company’s financial results.

 

Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated With Exit or Disposal Activities”, was issued in June 2002. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 on June 30, 2002 for exit or disposal activities initiated after December 31, 2002. Adoption of this statement did not have a material impact on the Company’s financial results.

 

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In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123.” SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Early application is encouraged. Management currently believes that the adoption of SFAS No. 148 will not have a material impact on the Company’s financial statements.

 

3. LONG-TERM OBLIGATIONS

 

On August 22, 2001, the Company obtained a new revolving credit facility with CIT Group/Business Credit, Inc. for up to $25 million. The new revolving loan is secured by certain assets of the Company. The agreement specifies four different levels of margin to be added to the prime rate between 0.25% and 1.00% depending on certain financial covenants calculated by the Company. For the first year of the financing agreement with CIT, a margin of 0.75% was applicable as an adder to the prime rate. The prime rate is based on the JP Morgan Chase prime rate. The margin applicable at December 28, 2002 was 0.50%. The full rate of interest as of December 28, 2002 was 4.75%. On November 19, 2002 a third amendment to the financing agreement was signed. The amendment contains financial covenants that relate to total equity, earnings before interest, taxes, depreciation and amortization, and a minimum fixed charge ratio. The amendment also extended the term of the agreement by one year. The agreement was effective on August 24, 2001, (the closing date of the agreement) and will now terminate on August 23, 2005. As of December 28, 2002, the Company was in compliance with all loan covenants. At December 28, 2002, the outstanding revolving credit balance was $6,864,000 compared to $6,475,000 at fiscal year end June 29, 2002.

 

4. SUPPLEMENTAL CASH FLOW INFORMATION

 

      

Six Months Ended


      

December 28, 2002


    

December 29, 2001


      

(in thousands)

Interest payments

    

$

262

    

$

614

Income tax payments, net of refunds

    

 

191

    

 

542

 

As of December 28, 2002, and June 29, 2002, the Company’s cash balances included restricted cash of $701,045 and $279,827, respectively. The $701,045 includes two amounts; $460,055 is a deposit required by the state of Washington for self-insurers that would cover the Company’s maximum calculated workers’ compensation liability in the event of default by the Company. This calculated liability was previously covered by a bond, which was secured through an insurance company; however, when the bond matured during the second quarter of fiscal 2003, insurance companies were no longer willing to write workers’ compensation bonds. The remaining $240,990 is the amount of uncollected funds in the Company’s depository account as of December 28, 2002. Such funds are considered restricted, because they cannot be used for any other purpose than to decrease the Company’s revolving debt.

 

5. INCOME TAXES

 

The income tax provision for the second quarter of fiscal year 2003 was $116,000 versus an income tax provision of $5,455,000 for the second fiscal quarter of the prior year. The provision for the six months of fiscal years 2003 and 2002 were $355,000 and $5,232,000, respectively. The provisions for the second quarter and six months of fiscal year 2003 are the result of provisions on the earnings of foreign subsidiaries. The provisions for the 2002 periods were the result of provisions on the earnings of foreign subsidiaries and the elimination of the Company’s net deferred tax assets in the amount of $4,951,000. A valuation allowance was recorded equal to the deferred tax assets as a result of the large financial loss during 2002, which increased the Company’s net operating loss carry-forwards. Financial Accounting Standard No. 109 requires that management assess the sources of future taxable income, which may be available to recognize the deductible differences that comprise deferred tax assets. A valuation allowance against deferred tax assets is required if it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance was increased to the full value of the deferred tax assets. The Company’s tax loss carry-forwards begin expiring in 2006.

 

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6. EARNINGS PER SHARE

 

Basic EPS is computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by dividing net income (loss) by the weighted-average number of common shares and common share equivalents outstanding during the period. Total weighted average shares outstanding for the quarters and six months ended December 28, 2002 and December 29, 2001 were 9,672,580 in all periods. Due to the net loss incurred for the quarter and six months ended December 29, 2001 common share equivalents are anti-dilutive in the fiscal 2002 periods. Common share equivalents during fiscal year 2003 are anti-dilutive due to the exercise price of the Company’s stock options. The number of stock options outstanding which were anti-dilutive for the fiscal 2003 and 2002 periods were 2,172,000 and 2,083,000 respectively.

 

7. COMMITMENTS AND CONTINGENCIES

 

The amount of firm commitments to contractors and suppliers for capital expenditures was approximately $103,000 at December 28, 2002.

 

Litigation Settlement : On December 20, 2001, a jury in Seattle federal court rendered a verdict in the case of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan v. Microsoft Corporation, Honeywell, Inc., and Key Tronic Corporation, United States District Court for the Western District of Washington, Case No. C99-995C (the “litigation”) finding that Key Tronic misappropriated trade secrets and breached a confidentiality agreement with Plaintiffs. The jury awarded damages to the Plaintiffs in the amount of $16.5 million. The judgment against the Company was subsequently increased to approximately $19.2 million through an award of pre-judgment interest. On October 24, 2002, the Company reached a settlement of the litigation with the Plaintiffs (hereafter called “F&G”). Under the terms of the settlement, the Company has agreed to pay F&G a total of $7.0 million. The Company was required to make an initial payment to F&G of $2.5 million, as well as make quarterly payments to F&G of $200,000 or 50% of Key Tronic’s operating income, whichever is greater, until the total payment of $7.0 million has been made, provided the total payment is completed by December 15, 2005. During the second quarter of fiscal year 2003, the Company made payments to F&G totaling approximately $2.8 million.

 

If the total of $7.0 million is not paid by 12/15/2005, the total settlement amount increases on 12/15/2005 to $7.6 million. If payment of $7.6 million is not completed by 12/15/2006 the total settlement amount increases to $8.2 million. If payment of $8.2 million is not completed by 12/15/2007 the total settlement amount increases to $8.8 million. If payment of $8.8 million is not completed by 12/15/2008 the total settlement amount increases to $9.7 million. If payment of $9.7 million is not completed by 12/15/2009 the total settlement amount increases to $10.6 million. If payment of $10.6 million is not made by 12/15/2010 the total settlement amount increases to $11.5 million. Any unpaid balance remaining at 12/15/2011 will accrue interest thereafter at prime plus 1½% per annum until paid. If the Company fails to make any minimum quarterly payment when due, Plaintiffs have the right to accelerate all remaining payments in the amount of $11.5 million less any amounts previously paid.

 

Reported earnings for the six months ended December 28, 2002, include a one-time benefit of $12.2 ($1.26 per share) million for reversal of previously recorded litigation expense.

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements in addition to historical information. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to those outlined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risks and Uncertainties That May Affect Future Results.” Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CRITICAL ACCOUNTING POLICIES

 

Revenue Recognition : The Company recognizes revenue primarily when products are shipped. Staff Accounting Bulletin 101 states that revenue generally is realized or realizable and earned when all of the following criteria are met:

 

    Persuasive evidence of an arrangement exists
    Delivery has occurred or services have been rendered
    The seller’s price to the buyer is fixed or determinable
    Collectibility is reasonably assured

 

The Company believes that it meets the above criteria for the following reasons:

 

    Customer purchase orders confirming the price and shipping terms are required prior to shipment.
    The terms of the Company’s sales are generally FOB shipping point, meaning that the customer takes ownership of the goods and assumes the risk of loss when the goods leave the Company’s premises.
    The seller’s price to the buyer is fixed or determinable – as noted, we require a customer purchase order, which confirms the price and shipping terms.
    Collectibility is reasonably assured – the credit terms for customers are pre-established so that collection of the account can be reasonably assured.

 

Inactive, Obsolete and Surplus Inventory Reserve: The Company reserves for inventories that it deems inactive, obsolete or surplus. This reserve is calculated based upon the demand for the products that the Company produces. Demand is determined by expected sales or customer forecasts. If expected sales do not materialize, the Company would have inventory in excess of their reserves and it would be necessary to charge the excess against future earnings. When the Company has purchased material based upon a customer’s forecast, it is usually covered by lead-time assurance agreements. These contracts state that the financial liability for material purchased within lead-time and based upon the customer’s forecasts, lies with the customer. If the Company purchases material outside the lead-time assurance agreement and the customer’s forecasts do not materialize, the Company would have the financial liability and would have to charge the excess against future earnings.

 

Bad Debt Provision: The Company values its accounts receivable net of an allowance for doubtful accounts. This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future, and the amount of this allowance is disclosed in the Company’s Consolidated Balance Sheet. The estimates used are based primarily on specific identification of potentially uncollectible accounts. Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity. However, if any of the Company’s customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, the Company could incur additional and possibly material expenses that would negatively impact earnings.

 

Accrued Warranty: An accrual is made for expected warranty costs, with the related expense recognized in cost of good sold. Management reviews the adequacy of this accrual quarterly based on historical analysis and anticipated product returns. Over the course of the past three years, the Company’s warranty expense has decreased. As the Company has made the transition from primarily manufacturing keyboards to electronic manufacturing services (“EMS”), its exposure to potential warranty claims has declined significantly. The Company’s warranty period for keyboards is generally three times longer than that for EMS products. Also the Company does not warrant design defects for EMS customers.

 

 

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CAPITAL RESOURCES AND LIQUIDITY

 

Operating activities provided $1.1 million of cash during the first six months of fiscal year 2003 versus $7.4 million used in operating activities during the same period of the prior year. The change in cash from operating activities is primarily due to the improvement in the Company’s net income (excluding the litigation expense in 2002 and the revision of the settlement amount in 2003), as well as a decrease in accounts receivable offset partially by a payment to F&G Scrolling Mouse for $2.8 million. This decrease was caused by a reduction in customer orders from a few of the Company’s primary customers.

 

During the first six months of fiscal year 2003, the Company spent $1.1 million versus $0.6 million in capital additions in the same period in the previous fiscal year. The increase was due to the purchase of new production equipment in the Las Cruces, New Mexico facility. The Company anticipates capital expenditures of approximately $1.2 million through the remainder of the current fiscal year ending June 28, 2003. Actual capital expenditures may vary from anticipated expenditures depending upon future results of operations. See RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 14-15. Capital expenditures are expected to be financed with internally generated funds.

 

On August 22, 2001, the Company obtained a new revolving credit facility with CIT Group/Business Credit, Inc. for up to $25 million. The new revolving loan is secured by certain assets of the Company. The agreement specifies four different levels of margin to be added to the prime rate between 0.25% and 1.00% depending on certain financial covenants calculated by the Company. For the first year of the financing agreement with CIT, a margin of 0.75% was applicable as an adder to the prime rate. The prime rate is based on the JP Morgan Chase prime rate. The margin applicable at December 28, 2002 was 0.50%. The full rate of interest as of December 28, 2002 was 4.75%. On November 19, 2002 a third amendment to the financing agreement was signed. The amendment contains financial covenants that relate to total equity, earnings before interest, taxes, depreciation and amortization, and a minimum fixed charge ratio. The amendment also extended the term of the agreement by one year. The agreement was effective on August 24, 2001, (the closing date of the agreement) and will now terminate on August 23, 2005. As of December 28, 2002, the Company was in compliance with all loan covenants. At December 28, 2002, the outstanding revolving credit balance was $6,864,000 compared to $6,475,000 at fiscal year end June 29, 2002.

 

Other than its revolving credit facility and normal operating accounts payable, at December 28, 2002, the Company has a $4.5 million litigation settlement obligation (of which $1 million is due during the next twelve months) and operating lease commitments of approximately $360,000 per month for the remainder of the 2003 fiscal year. The Company believes that funds available under the revolving credit facility and internally generated funds can satisfy cash requirements for a period in excess of 12 months.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s major market risk relates to its secured debt. A portion of the Company’s accounts receivable and inventories are used as collateral for its term and revolving debt. The interest rates applicable to the Company’s revolving loan fluctuate with the JP Morgan Chase Bank prime rate.

 

The Company does not enter into derivative transactions or leveraged swap agreements.

 

Although the Company has international operations, the functional currency for all active subsidiaries is the U.S. dollar. The Company imports for its own use raw materials that are used in its manufacturing operations. Substantially all of the Company’s purchases are denominated in U.S. dollars and are paid under normal trade terms.

 

RESULTS OF OPERATIONS

 

Net income for the second quarter ended December 28, 2002 was $0.07 million or $0.01 per share compared with a net loss of $21.6 million or $2.23 per share for the second quarter of the previous year. For the six months ended December 28, 2002, net income was $12.6 million or $1.30 per share compared with a net loss of $22.6 million or $2.33 per share for the same period of the prior year. Both of the six month periods were significantly affected by litigation (see Note 7). During the six months ended December 29, 2001, the Company recorded a $17.0 million loss on this litigation judgment. During the six months ended December 28, 2002, the Company recorded a $12.2 million reversal of this loss as the case was settled. Excluding the litigation expense in fiscal 2002 and the litigation gain in fiscal 2003, the Company recorded $0.7 million of pre-tax income in fiscal 2003 compared with a pre-tax loss of $0.3 million in fiscal 2002.

 

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NET SALES

 

Net sales for the second quarter ended December 28, 2002 were $30.6 million compared to $50.5 million for the second quarter of the previous year. For the six months ended December 28, 2002, sales were $64.6 million compared to $85.1 million for the same period of the previous year. The decrease in revenue for the second quarter and six months ended December 28, 2002 was due to decreased shipments to some of the Company’s larger customers for a variety of reasons. In the previous fiscal year, the Company’s largest customer began marketing a new product that required a ramp-up to fill sales channels. In the current fiscal year, this customer changed to a sell-through sales program. This change had a direct impact on the Company’s fiscal 2003 sales. Other contributing factors during the second quarter of fiscal year 2003 were some end-of-life customer programs and poor economic conditions in general. The F&G lawsuit, which was settled during the second quarter of fiscal 2003, also affected the Company’s sales during the second quarter and first six months of the year, because the Company was unable to secure new business while the judgment was pending.

 

EMS revenue accounted for 88.0% of total revenue in the second quarter of fiscal year 2003 versus 90.5% of total revenue in the second quarter of fiscal year 2002. For the six months ended December 28, 2002, EMS revenue accounted for 87.0% of total revenue versus 88.5% of total revenue for the same time period of the prior fiscal year.

 

As a percentage of sales, keyboard revenue was 11.7% for the second quarter of fiscal year 2003 compared to 9.4% in the second quarter of fiscal year 2002. For six months ended December 28, 2002, keyboard revenue was 12.7% and 11.4% for the same period of the prior year.

 

COST OF SALES

 

Cost of sales was 88.6% of revenue in the second quarter of fiscal year 2003, compared to 90.3% for the second quarter of fiscal year 2002. Cost of sales was 89.2% of revenue for the six months ended December 28, 2002 compared to 91.8% for the same period of the prior year. As a percentage of sales, cost of sales for the second quarter and six months ended December 28, 2002 declined slightly because of improvements in operating efficiencies and lower material costs. These declines were partially offset by an increase in underutilized capacity in the Company’s manufacturing facilities due to lower volumes of customer orders.

 

RESEARCH, DEVELOPMENT AND ENGINEERING

 

Research, development and engineering (RD&E) expenses were $0.8 million in the second quarter of fiscal year 2003 and $0.7 million for the same period of fiscal year 2002. As a percentage of sales, RD&E expenditures were 2.5% in the second quarter of fiscal year 2003, compared to 1.4% for the same period of the prior year. RD&E expenses were $1.5 million for the six months ended December 28, 2002, compared to $1.2 million for the same period of the prior year. As a percentage of sales, RD&E expenditures were 2.3% of the current six month period versus 1.5% for the same period of the prior fiscal year. The overall increases in the percentages of RD&E expenses were due to lower sales in both the second quarter and six months ended December 28, 2002.

 

SELLING EXPENSES

 

Selling expenses were $0.5 million in the second quarter of fiscal year 2003 compared to $0.7 million in the second quarter of fiscal year 2002. Selling expenses as a percentage of revenue remained constant at 1.5% for the second quarters of both 2003 and 2002. For the six months ended December 28, 2002, selling expenses were $0.9 million compared to $1.5 million for the same period of the prior year. As a percentage of revenue for the current six month period, selling expenses were 1.4% compared to 1.7% for the same period of the prior year. The overall decrease in selling expenses was due to a reduction in promotional programs and marketing expenses related to keyboard sales.

 

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Table of Contents

 

GENERAL AND ADMINISTRATIVE

 

General and administrative (G&A) expenses for the second quarter of fiscal year 2003 were $1.8 million and $2.4 million in the second quarter of fiscal 2002. As a percentage of revenue, G&A expenses were 6.0% in the second quarter of fiscal year 2003 and 4.9% in the second quarter of fiscal year 2002. For the six months ended December 28, 2002, G&A expenses were $3.6 million compared to $4.2 million for the same period of the prior year. As a percentage of revenue G&A expenses for the first six months of fiscal 2003 were 5.6% versus 4.9% for the same period of the prior year. The lower G&A expenses were due to a year over year decline in legal costs and the adoption of FASB No. 142 which prevents further amortization of goodwill. The elimination of goodwill reduced G&A expenses by $32,000 and $64,000 for the quarter and six months ended December 28, 2002, respectively.

 

INTEREST

 

Interest expense was $260,000 in the second quarter of fiscal 2003 compared to $361,000 for the second quarter of fiscal year 2002 and $500,000 in the first six months of fiscal 2003 compared to $700,000 in fiscal 2002. This decrease resulted from lower debt outstanding and reduced interest rates during the 2003 periods.

 

INCOME TAXES

 

The income tax provision for the second quarter of fiscal year 2003 was $116,000 versus an income tax provision of $5,455,000 for the second fiscal quarter of the prior year. The provision for the six months of fiscal years 2003 and 2002 was $355,000 and $5,232,000, respectively. The provision for the second quarter and six months of fiscal year 2003 is the result of provisions on the earnings of foreign subsidiaries. The provision for the 2002 periods was the result of provisions on the earnings of foreign subsidiaries and the elimination of the Company’s net deferred tax assets in the amount of $4,951,000. A valuation allowance was recorded equal to the deferred tax assets as a result of the large financial loss during 2002, which increased the Company’s net operating loss carry-forwards. Financial Accounting Standard No. 109 requires that management assess the sources of future taxable income, which may be available to recognize the deductible differences that comprise deferred tax assets. A valuation allowance against deferred tax assets is required if it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance was increased to the full value of the deferred tax assets. The Company’s tax loss carry-forwards begin expiring in 2006.

 

BACKLOG

 

The Company’s backlog at the end of second quarter of fiscal year 2003 was $26.5 million compared to $24.6 million at August 3, 2002 and $44.8 million at the end of the second quarter of fiscal year 2002. The decrease of backlog in the second quarter of fiscal year 2003 versus the backlog from the same period of the previous year is attributable to a ramp-up of one major EMS customer to fill sales channels during the second quarter of fiscal year 2002. Order backlog consists of purchase orders received for products expected to be shipped within the next fiscal year although shipment dates are subject to change due to design modifications or other customer requirements. Order backlog should not be considered an accurate measure of future sales.

 

RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

 

The following risks and uncertainties could affect the Company’s actual results and could cause results to differ materially from past results or those contemplated by the Company’s forward-looking statements. When used herein, the words “expects”, “believes”, “anticipates” and similar expressions are intended to identify forward-looking statements.

 

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Potential Fluctuations in Quarterly Results The Company’s quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including changes in overall demand for customers’ products, success of customers’ programs, timing of new programs, new product introductions or technological advances by the Company, its customers and its competitors and changes in pricing policies by the Company, its customers, its suppliers and its competitors. For example, the Company relies on customers’ forecasts to plan its business. If those forecasts are overly optimistic, the Company’s revenues and profits may fall short of expectations. Conversely, if those forecasts are too conservative, the Company could have an unexpected increase in revenues and profits. The products which the Company manufactures for its customers have relatively short product lifecycles, therefore the Company’s business, operating results and financial condition are dependent in significant part on the Company’s ability to obtain orders from new customers and new product programs from existing customers.

 

Competition The EMS industry is intensely competitive. Competitors may offer customers lower prices on certain high volume programs. This could result in price reductions, reduced margins and loss of market share, all of which would materially and adversely affect the Company’s business, operating results and financial condition. The Company’s inability to provide comparable or better manufacturing services at a lower cost than its competitors could cause sales to decline. In addition, competitors can copy the Company’s non-proprietary designs after the Company has invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.

 

Concentration of Major Customers At present, the Company’s customer base is highly concentrated, and there can be no assurance that its customer base will not become more concentrated. Four of the Company’s EMS customers accounted for 39%, 10%, 13%, and 10% of net sales, respectively during fiscal 2002. In 2001, these same customers accounted for 0%, 39%, 27% and 5%, of the Company’s net sales, respectively. There can be no assurance that the Company’s principal customers will continue to purchase products from the Company at current levels. Moreover, the Company typically does not enter into long-term volume purchase contracts with its customers, and the Company’s customers have certain rights to extend or delay the shipment of their orders. The loss of one or more of the Company’s major customers or the reduction, delay or cancellation of orders from such customers could materially and adversely affect the Company’s business, operating results and financial condition.

 

Dependence on Suppliers The Company is dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. Delays in deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials could cause delays or reductions in shipment of products to our customers which could adversely affect the Company’s operating results and damage customer relationships.

 

Dependence on Key Personnel The Company’s future success depends in large part on the continued service of its key technical, marketing and management personnel and on its ability to continue to attract and retain qualified employees. The competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of key employees could have a material adverse effect on the Company’s business, operating results and financial condition.

 

Foreign Manufacturing Operations Virtually all products manufactured by the Company are produced at the Company’s facilities located in Mexico and China. Accordingly the Company’s operations are subject to a variety of risks unique to international operations including import and export duties and value added taxes, import and export regulation changes, the burden and cost of compliance with foreign laws and foreign economic and political risk.

 

Technological Change and New Product Risk The markets for the Company’s customers’ products is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. The Company’s success will depend upon its customers’ ability to enhance existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure of the Company’s customers to do so could substantially harm the Company’s customers’ competitive positions. There can be no assurance that the Company’s customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.

 

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Table of Contents

 

Dilution and Stock Price Volatility As of December 28, 2002, there were outstanding options for the purchase of approximately 2,172,000 shares of common stock of the Company (Common Stock), of which options for approximately 1,801,000 shares were vested and exercisable. Holders of the Common Stock will suffer immediate and substantial dilution to the extent outstanding options to purchase the Common Stock are exercised. The stock price of the Company may be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be due to factors specific to the Company such as variations in quarterly operating results or changes in analysts’ earnings estimates, or to factors relating to the computer industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s major market risk relates to its secured debt. Substantially all of the Company’s assets are used as collateral for its revolving debt. The interest rates applicable to the Company’s revolving loan fluctuate with the JP Morgan Chase Bank prime rate. As of February 11, 2003, the JP Morgan Chase Bank prime rate was 4.25%.

 

The Company does not enter into derivative transactions or leveraged swap agreements.

 

Although the Company has international operations, the functional currency for all active subsidiaries is the U.S. dollar. The Company imports for its own use raw materials that are used in its manufacturing operations. Substantially all of the Company’s purchases are denominated in U.S. dollars and are paid under normal trade terms.

 

Item 4. Controls and Procedures

 

  a)   Within the 90-day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC reports.

 

  b)   There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out the evaluation.

 

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Table of Contents

 

PART II. OTHER INFORMATION:

 

Item 1. Legal Proceedings

None

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The Annual Meeting of Shareholders was held on October 24, 2002 at which shareholders voted on proposals as follows:

 

    

Votes For


  

Votes Against

or Withheld


  

Votes Abstained


    

Broker

Non-Votes


Proposal 1. Election of Directors:

                     

Jack W. Oehlke

  

8,717,079

  

168,457

           

Dale F. Pilz

  

8,772,187

  

113,349

           

Wendell J. Satre

  

8,761,277

  

124,259

           

Yacov A. Shamash

  

8,769,687

  

115,849

           

Patrick Sweeney

  

8,773,937

  

111,599

           

William E. Terry

  

8,769,737

  

115,799

           

Proposal 2. Ratification of Appointment of Deloitte & Touche LLP as independent auditors for fiscal year 2003.

  

8,738,338

  

125,263

  

21,935

      

 

Item 5. Other Information

 

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(1

)

  

10.1 retention bonus plan

(2

)

  

10.2 employee contracts

(3

)

  

10.3 third amendment to financing agreement

(4

)

  

99.1 certifications

 

(b) Reports on Form 8-K

(1

)

  

Dated December 3, 2002 announcing change in registrant’s certifying accountant

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

KEY TRONIC CORPORATION

 

/s/ Jack W. Oehlke


         

February 11, 2003


Jack W. Oehlke

         

Date:

(Director, President and Chief Executive Officer)

           

/s/ Ronald F. Klawitter


         

February 11, 2003


Ronald F. Klawitter

         

Date:

(Principal Financial Officer Principal Accounting Officer)

           

 

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CERTIFICATION

 

I, Jack W. Oehlke, President and Chief Executive Officer of Key Tronic Corporation, certify that:

 

  1.   I have reviewed this quarterly report on form 10-Q of Key Tronic Corporation;

 

  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons fulfilling the equivalent functions);

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated: February 11, 2003

 

/s/ Jack W. Oehlke


Jack W. Oehlke

President and Chief Executive Officer

 

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CERTIFICATION

 

I, Ronald F. Klawitter, Chief Financial Officer of Key Tronic Corporation, certify that:

 

  1.   I have reviewed this quarterly report on form 10-Q of Key Tronic Corporation;

 

  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons fulfilling the equivalent functions);

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated: February 11, 2003

 

/s/ Ronald F. Klawitter


Ronald F. Klawitter

Executive Vice President of Administration,

Chief Financial Officer and Treasurer

 

20

 

EXHIBIT 10.1

 

RETENTION BONUS PLAN

 

Participants


  

Payment Date


  

Bonus Payment


Jack W. Oehlke

  

08/01/03

  

$    211,250

President & CEO

  

08/02/04

  

      243,750

    

08/01/05

  

      276,250

Craig D. Gates

  

08/01/03

  

      119,000

Executive Vice President & General Manager

  

08/02/04

  

      142,800

    

08/01/05

  

      166,600

Ronald F. Klawitter

  

08/01/03

  

      119,000

Executive Vice President & CFO

  

08/02/04

  

      142,800

    

08/01/05

  

      166,600

         

Total Plan Bonus Payments

       

$1,588,050

 

Terms

 

    In order to earn and receive the bonus payment on the payment date, the participant must be employed by the Company on the payment date or have been terminated by the Company without cause.

 

    Bonus payments shall be reduced by the amount of any incentive payments earned by a participant pursuant to any other Company incentive plan during the fiscal year immediately preceding the payment date.

 

Approved by Board of Directors – October 24, 2002.

 

 

EXHIBIT 10.2

 

ADDENDUM TO EMPLOYMENT CONTRACT

R E C I T A L S

 

WHEREAS, KEY TRONIC CORPORATION (the “Employer”) and Jack W. Oehlke (the “Employee”) desire to amend, effective October 24, 2002, Employee’s December 27, 1993 Employment Contract, as amended (the “Agreement”);

 

WHEREAS, said amendment is based upon the mutual desires of the Employer and the Employee;

 

NOW, THEREFORE, in consideration of the mutual covenants contained therein, the following amendment to the Agreement is executed. Except as provided in this amendment, the other terms and conditions set out in the Agreement remain in full force and effect.

 

1.   Section 10a of the Agreement is hereby amended to read in full as follows:

 

  “10.   TERMINATION
  a.   Employer’s Board of Directors and/or its President and its CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, all rights, duties and obligations of both parties shall cease except that Employer shall pay Employee for Employee’s accumulated unused vacation and subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of two years after termination if termination occurs prior to July 30, 2003 and for a period of one year after termination if termination occurs on or after July 30, 2003. The foregoing notwithstanding, if such termination occurs after a Change of Control, Employer shall continue to pay employee’s base salary only in effect prior to termination for a period of two years after termination. Also, for the period during which any such payments are being made, Employer will continue Employee’s group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense.”

 

2.   A new Section 10f is added to the Agreement to read in full as follows:

 

  “f.   As used herein, a Change in Control shall be deemed to occur if any of the following shall occur: (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), 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 shareholders 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 shareholders 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.”

 

1


 

EMPLOYER: Key Tronic Corporation

     

EMPLOYEE: Jack W. Oehlke

By:

 

/s/    Ronald F. Klawitter


     

By:

 

/s/    Jack W. Oehlke


Name:

 

Ronald F. Klawitter

     

Name:

 

Jack W. Oehlke

Title:

 

Executive Vice President

           

Date:

 

November 4, 2002

     

Date:

 

November 4, 2002

 

ADDENDUM TO EMPLOYMENT CONTRACT

R E C I T A L S

 

WHEREAS, KEY TRONIC CORPORATION (the “Employer”) and Craig D. Gates (the “Employee”) desire to amend, effective October 24, 2002, Employee’s October 27, 1994 Employment Contract, as amended (the “Agreement”);

 

WHEREAS, said amendment is based upon the mutual desires of the Employer and the Employee;

 

NOW, THEREFORE, in consideration of the mutual covenants contained therein, the following amendment to the Agreement is executed. Except as provided in this amendment, the other terms and conditions set out in the Agreement remain in full force and effect.

 

1.   Section 10a of the Agreement is hereby amended to read in full as follows:

 

  “10.   TERMINATION
  a.   Employer’s Board of Directors and/or its President and its CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, all rights, duties and obligations of both parties shall cease except that Employer shall pay Employee for Employee’s accumulated unused vacation and subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of two years after termination if termination occurs prior to July 30, 2003 and for a period of one year after termination if termination occurs on or after July 30, 2003. The foregoing notwithstanding, if such termination occurs after a Change of Control, Employer shall continue to pay employee’s base salary only in effect prior to termination for a period of two years after termination. Also, for the period during which any such payments are being made, Employer will continue Employee’s group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense.”

 

2.   A new Section 10f is added to the Agreement to read in full as follows:

 

  “f.   As used herein, a Change in Control shall be deemed to occur if any of the following shall occur: (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), 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 shareholders 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 shareholders 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.”

 

2


 

EMPLOYER: Key Tronic Corporation

     

EMPLOYEE: Ronald F. Klawitter

By:

 

/s/ Jack W. Oehlke


     

By:

 

/s/     Ronald F. Klawitter


Name:

 

Jack W. Oehlke

     

Name:

 

Ronald F. Klawitter

Title:

 

President and CEO

           

Date:

 

November 4, 2002

     

Date:

 

November 4, 2002

 

ADDENDUM TO EMPLOYMENT CONTRACT

R E C I T A L S

 

WHEREAS, KEY TRONIC CORPORATION (the “Employer”) and Michael D. Chard (the “Employee”) desire to amend, effective October 24, 2002, Employee’s July 28, 2000 Employment Contract, as amended (the “Agreement”);

 

WHEREAS, said amendment is based upon the mutual desires of the Employer and the Employee;

 

NOW, THEREFORE, in consideration of the mutual covenants contained therein, the following amendment to the Agreement is executed. Except as provided in this amendment, the other terms and conditions set out in the Agreement remain in full force and effect.

 

1.   Section 9a of the Agreement is hereby amended to read in full as follows:

 

  “9.   TERMINATION
  a.   Employer’s Board of Directors and/or its President and its CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, all rights, duties and obligations of both parties shall cease except that Employer shall pay Employee for Employee’s accumulated unused vacation and subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of two years after termination if termination occurs prior to July 30, 2003 and for a period of one year after termination if termination occurs on or after July 30, 2003. The foregoing notwithstanding, if such termination occurs after a Change of Control, Employer shall continue to pay employee’s base salary only in effect prior to termination for a period of two years after termination. Also, for the period during which any such payments are being made, Employer will continue Employee’s group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense.”

 

2.   A new Section 9f is added to the Agreement to read in full as follows:

 

3


  “f.   As used herein, a Change in Control shall be deemed to occur if any of the following shall occur: (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), 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 shareholders 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 shareholders 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.”

 

EMPLOYER: Key Tronic Corporation

     

EMPLOYEE: Craig D. Gates

By:

 

/S/ Jack W. Oehlke        


     

By:

 

/S/ Craig D. Gates


Name:

 

Jack W. Oehlke

     

Name:

 

Craig D. Gates

Title:

 

President and CEO

           

Date:

 

November 4, 2002

     

Date:

 

November 4, 2002

 

ADDENDUM TO EMPLOYMENT CONTRACT

R E C I T A L S

 

WHEREAS, KEY TRONIC CORPORATION (the “Employer”) and Michael D. Chard (the “Employee”) desire to amend, effective October 24, 2002, Employee’s July 28, 2000 Employment Contract, as amended (the “Agreement”);

 

WHEREAS, said amendment is based upon the mutual desires of the Employer and the Employee;

 

NOW, THEREFORE, in consideration of the mutual covenants contained therein, the following amendment to the Agreement is executed. Except as provided in this amendment, the other terms and conditions set out in the Agreement remain in full force and effect.

 

1.   Section 9a of the Agreement is hereby amended to read in full as follows:

 

  “9.   TERMINATION
  a.   Employer’s Board of Directors and/or its President and its CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, all rights, duties and obligations of both parties shall cease except that Employer shall pay Employee for Employee’s accumulated unused vacation and subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of two years after termination if termination occurs prior to July 30, 2003 and for a period of one year after termination if termination occurs on or after July 30, 2003. The foregoing notwithstanding, if such termination occurs after a Change of Control, Employer shall continue to pay employee’s base salary only in effect prior to termination for a period of two years after termination. Also, for the period during which any such payments are being made, Employer will continue Employee’s group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense.”

 

4


2.   A new Section 9f is added to the Agreement to read in full as follows:

 

  “f.   As used herein, a Change in Control shall be deemed to occur if any of the following shall occur: (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), 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 shareholders 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 shareholders 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.”

 

EMPLOYER: Key Tronic Corporation

     

EMPLOYEE: Michael D. Chard

By:

 

/S/ Jack W. Oehlke


     

By:

 

/S/ Michael D. Chard


Name:

 

Jack W. Oehlke

     

Name:

 

Michael D. Chard

Title:

 

President and CEO

           

Date:

 

November 4, 2002

     

Date:

 

November 4, 2002

 

ADDENDUM TO EMPLOYMENT CONTRACT

R E C I T A L S

 

WHEREAS, KEY TRONIC CORPORATION (the “Employer”) and Efren R. Perez (the “Employee”) desire to amend, effective October 24, 2002, Employee’s July 10, 1997 Employment Contract, as amended (the “Agreement”);

 

WHEREAS, said amendment is based upon the mutual desires of the Employer and the Employee;

 

NOW, THEREFORE, in consideration of the mutual covenants contained therein, the following amendment to the Agreement is executed. Except as provided in this amendment, the other terms and conditions set out in the Agreement remain in full force and effect.

 

1.   Section 9a of the Agreement is hereby amended to read in full as follows:

 

  “9.   TERMINATION
  a.   Employer’s Board of Directors and/or its President and its CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, all rights, duties and obligations of both parties shall cease except that Employer shall pay Employee for Employee’s accumulated unused vacation and subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of two years after termination if termination occurs prior to July 30, 2003 and for a period of one year after termination if termination occurs on or after July 30, 2003. The foregoing notwithstanding, if such termination occurs after a Change of Control, Employer shall continue to pay employee’s base salary only in effect prior to termination for a period of two years after termination. Also, for the period during which any such payments are being made, Employer will continue Employee’s group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense.”

 

5


2.   A new Section 9f is added to the Agreement to read in full as follows:

 

  “f.   As used herein, a Change in Control shall be deemed to occur if any of the following shall occur: (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), 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 shareholders 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 shareholders 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.”

 

EMPLOYER: Key Tronic Corporation

     

EMPLOYEE: Efren R. Perez

By:

 

/S/ Jack W. Oehlke      


     

By:

 

/S/ Efren R. Perez


Name:

 

Jack W. Oehlke

     

Name:

 

Efren R. Perez

Title:

 

President and CEO

           

Date:

 

November 4, 2002

     

Date:

 

November 7, 2002

 

6

 

Exhibit 10.3

 

THIRD AMENDMENT TO FINANCING AGREEMENT

 

This Third Amendment to Financing Agreement (“Amendment”) is made and entered into as of this 19 th day of November, 2002 between Key Tronic Corporation (“Company”) and The CIT Group/Business Credit, Inc. (“CIT”) in reference to that certain Financing Agreement between Company and CIT dated August 22, 2001, (as amended, modified or otherwise supplemented from time to time, the “Financing Agreement”). Capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Financing Agreement.

 

A. One or more Events of Default resulted from the entry of a judgment in the amount of $16,500,000 (“Judgment Lien”) in favor of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan (collectively, “F&G”) as more fully described in that certain letter agreement between CIT and Company dated January 3, 2002 (“January Letter”).

 

B. Company and F&G intend to enter into a settlement agreement (the “Settlement Agreement” whereby: (i) Company shall pay to F&G $2,500,000 on the date three days after the date of such agreement and further pay an amount equal to the greater of: (x) 50% of Company’s reported operating income for such quarter or (y) $200,000 not to exceed $7,000,000 in the aggregate so long as all payments are received by December 15, 2005 or such greater amounts as are set forth in the Settlement Agreement if all payments are not received by December 15, 2005 (such payments to be payable quarterly on the first day of the third month following such fiscal quarter end (the first payment being for the fiscal quarter ending September 30, 2002 due on December 2, 2002)) and (ii) each party thereto shall release all claims it may have against the other party arising prior to the date of the Settlement Agreement (subparagraphs (i) and (ii) collectively, the “Settlement”).

 

C. Company has requested CIT permit Company’s payments to F&G under the Settlement in accordance with the terms and subject to the conditions set forth below.

 

NOW, THEREFORE, the parties hereto do hereby agree as follows:

 

1. Incorporation by Reference . Recitals A through C above are incorporated herein as though set forth in full.

 

2. Limited Consent . On the terms and subject to the conditions set forth in Section 3 hereof and notwithstanding anything in the Financing Agreement to the contrary, CIT hereby consents to the Settlement and the payments to F&G expressly set forth in the Settlement Agreement, a copy of which is attached hereto as Schedule 1 and by this reference incorporated herein.

 

The foregoing consent is a one-time consent and not a continuing consent and shall apply only to the matter and time periods specifically set forth in this Amendment. Without limiting the generality of the foregoing, this consent shall not apply to any future failure by Company to comply with those provisions referenced in the January Letter nor to any failure by Company to comply with any other provision of the Financing Agreement at any time.

 

3. Limitations. CIT’s consent to the Settlement is conditioned upon each of the following:

 

(a) Each of the representations and warranties set forth in the Financing Agreement being true and correct as of the date hereof.

 

1


 

(b) Other than the Specified Defaults (as defined in the January Letter), no new Default or Event of Default has occurred or is continuing.

 

(c) Termination of that certain letter of credit in the face amount of $1,930,000 issued for the benefit of F&G by Company and delivery of the original thereof to CIT concurrent with the payment of $2,500,000 as set forth in Recital B hereof.

 

4. Definitions . Each of the following definitions set forth in Section 1 of the Financing Agreement are hereby amended as follows:

 

(a) The definition of Anniversary Date is hereby amended by replacing “three (3) years” with “four (4) years” therein.

 

(b) The definition of Availability is hereby amended by adding “and the Equipment Term Loan” at the end thereof.

 

(c) The definition of EBITDA is hereby amended and restated in its entirety as follows:

 

“EBITDA” shall mean, in any period, all Operating Income of the Company plus the sum of: (a) depreciation and amortization (each to the extent deducted in the calculation of Operating Income) and (b) without duplication, non-cash charges associated with the amortization of capitalized manufacturing variances booked prior to the Closing Date, all as determined in accordance with GAAP on a consistent basis with the latest audited financial statements of the Company.

 

(d) The following definition is hereby added in Section 1 of the Financing Agreement in alphabetical order:

 

“Equipment Term Loan” shall mean the term loan in the principal amounts of $500,000 made by CIT pursuant to, and repayable in accordance with, the provisions of Section 4 of this Financing Agreement

 

(e) The following definition is hereby added in Section 1 of the Financing Agreement in alphabetical order:

 

“Equipment Term Loan Promissory Note” shall mean the promissory note in the form of Exhibit B attached hereto and executed by the Company to evidence the Equipment Term Loan made by CIT under Section 4 hereof.

 

(f) The definition of Fixed Charge Coverage Ratio is hereby amended and restated in its entirety as follows:

 

Fixed Charge Coverage Ratio shall mean, for the relevant period, the ratio determined by dividing (A) EBITDA minus cash Capital Expenditures by (B) the sum of: (a) all scheduled interest obligations paid and (b) the amount of all scheduled principal repaid on Indebtedness and (c) the aggregate amount of all payments (other than the initial $2,500,000 payment) made to F&G pursuant to the Settlement Agreement” at the end thereof.”

 

2


 

(g) The definition of Line of Credit is hereby amended by replacing “and” with “,” prior to subparagraph “(c)” therein, and is further amended by adding “and (d) make the Equipment Term Loan pursuant to Section 4 of this Financing Agreement.” at the end thereof.

 

(h) The definition of Obligations is hereby amended by adding “, the Term Loan, the Equipment Term Loan” prior to “and Letter of Credit Guaranties” in the third line thereof.

 

(i) The following definition is hereby added in Section 1 of the Financing Agreement in alphabetical order:

 

“Operating Income” shall mean income from ongoing operations and shall be measured as: revenue minus cost of goods sold and operating expense as defined in accordance with GAAP.

 

(j) The definition of Tangible Net Worth is hereby deleted.

 

(k) The following definition is hereby added in Section 1 of the Financing Agreement in alphabetical order:

 

“Total Equity” shall mean the total equity of the Company and its subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), minus goodwill.

 

5. Equipment Term Loan. Section 4 of the Financing Agreement is hereby amended and restated in its entirety as follows:

 

“SECTION 4. Term Loans

 

4.1 The Company hereby agrees to execute and deliver to CIT Equipment Term Loan Promissory Note to evidence the Equipment Term Loan to be extended by CIT.

 

4.2 Upon receipt of such Equipment Term Loan Promissory Note and subject to Section 2.2 of this Financing Agreement, CIT hereby agrees to extend to the Company the Equipment Term Loan on February 1, 2003; provided , that the outstanding principal amount of Revolving Loans (including Letters of Credit), the outstanding principal amounts under the Term Loan and the outstanding principal amounts under the Equipment Term Loan shall not exceed the Line of Credit at any time. The Company may not reborrow the principal amount of the Equipment Term Loan after repayment or prepayment thereof.

 

4.3 The principal amount of the Equipment Term Loan shall be repaid to CIT by the Company by: twelve (12) equal installments of $42,000 each, whereof the first such installment shall be due and payable on March 1, 2003 and subsequent installments shall be due and payable on the first Business Day of each month thereafter until this Note is paid in full; provided , that the entire remaining principal amount then outstanding, together with any accrued and unpaid interest and any and all other amounts due hereunder, shall be due and payable on February 1, 2004.

 

3


 

4.4 In the event this Financing Agreement or the Line of Credit is terminated by either CIT or the Company for any reason whatsoever, the Equipment Term Loan shall become due and payable on the effective date of such termination notwithstanding any provision to the contrary in the Equipment Term Loan Promissory Note or this Financing Agreement.

 

4.5 The Company may prepay at any time, at its option, in whole or in part, the Term Loan or the Equipment Term Loan, provided that on each such prepayment, the Company shall pay accrued interest on the principal so prepaid to the date of such prepayment.

 

4.6 Each prepayment shall be applied to the then last maturing installments of principal of the Term Loan or Equipment Term Loan, as applicable.

 

4.7 The Company hereby authorizes CIT to charge its Revolving Loan Account with the amount of all obligations owing under this Section 4 as such amounts become due. The Company confirms that any charges which CIT may so make to its Revolving Loan Account as herein provided will be made as an accommodation to the Company and solely at CIT’s discretion.

 

4.8 Paragraphs 5 and 6 of that certain Second July, 2002 Amendment to Financing Agreement dated as of July 15, 2002 between Company and CIT are hereby incorporated by reference as though set forth in this Section 4.8 of the Financing Agreement.”

 

6. Insurance Proceeds . Section 7.5(b) of the Financing Agreement is hereby amended by adding “then the Equipment Term Loan,” prior to “then any other Obligations” in the second line thereof.

 

7 Financial Covenants . Each of Sections 7.11(a), (b) and (c) of the Financing Agreement are hereby amended as follows:

 

(a) Section 7.11(a) of the Financing Agreement is hereby amended and restated in its entirety as follows:

 

“(a) maintain at all times Total Equity of not less than $21,000,000, to be measured on a monthly basis in accordance with the methodology set forth in Exhibit A hereto.”

 

(b) Section 7.11(b) of the Financing Agreement is hereby amended and restated in its entirety as follows:

 

“‘(b) maintain at all times EBITDA of not less than $4,000,000, to be measured monthly on a rolling twelve month basis in accordance with the methodology set forth in Exhibit A hereto.”

 

(c) Section 7.11(c) of the Financing Agreement is hereby amended and restated in its entirety as follows: “(c) maintain a Fixed Charge Coverage Ratio of not less than 0.70:1 at all times to and including June 30, 2003 and 1.0:1 at all times thereafter, to be measured monthly on a rolling twelve month basis in accordance with the methodology set forth in Exhibit A hereto.”

 

4


 

8. Interest . Section 8.2 of the financing Agreement is hereby amended and restated in its entirety as set forth below:

 

“8.2(a) Interest on the Equipment Term Loan shall be payable monthly as of the end of each month on the unpaid balance or on payment in full prior to maturity, and shall bear interest at an amount equal to the JP Morgan Chase Bank Rate plus the Applicable Margin. The Applicable Margin shall be calculated quarterly after the date 12 months from the Closing Date, and shall be calculated based on the EBITDA for the prior four quarters. In the event of any change in said JP Morgan Chase Bank Rate the rate hereunder shall change, as of the date of such change, so as to maintain the Applicable Margin. The rate hereunder shall be calculated based on a 360 day year. CIT shall be entitled to charge the Revolving Loan Account at the rate provided for herein when due until all Obligations have been paid in full.”

 

9. Exhibit A Exhibit A to the Financing Agreement is hereby amended and restated in its entirety as set forth on Exhibit A hereto.

 

10. Exhibit B Exhibit B attached hereto is hereby incorporated by reference as Exhibit B to the Financing Agreement.

 

11. Accommodation Fee . In consideration for this Amendment, Borrower shall pay to CIT a fee in an amount equal to $5,000 (“Accommodation Fee”), which fee shall be due and fully payable to CIT on the date hereof and shall be in addition to all other fees payable by Borrower.

 

12. Conditions . The initial and continued effectiveness of this Amendment are further conditioned upon receipt by CIT of each of the following (except to the extent expressly waived by CIT in writing):

 

(a) the fully executed Settlement Agreement in the form of Schedule 1 hereto.

 

(b) this fully executed Amendment.

 

(c) within 45 days after the date of the Settlement Agreement, a copy of the amended judgment and filed dismissal of the appeal filed in connection with the F&G lawsuit.

 

(d) the Accommodation Fee.

 

13. Counterparts . This Amendment may be signed in counterparts with the same affect as if the signatures to each counterpart were upon a single instrument.

 

14. Reaffirmation . Except as modified by the terms herein, the Financing Agreement and the Loan Documents remain m full force and effect in accordance with their terms without offset, counterclaim or recoupment.

 

5


 

15 . Governing Law . This Amendment shall be governed by the laws of the State of California.

 

16. Fees and Expenses . Company agrees to pay, on demand, all reasonable attorneys’ fees and costs incurred in connection with the negotiation, documentation and execution of this Amendment. If any legal action or proceeding shall be commenced at any time by any party to this Amendment in connection with its interpretation or enforcement, the prevailing party or parties in such action or proceeding shall be entitled to reimbursement of its reasonable attorneys’ fees and costs in connection therewith.

 

17. Waiver of Jury Trial . COMPANY AND CIT HEREBY WAIVE ALL RIGHTS EITHER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE, DEFEND, INTERPRET OR OTHERWISE CONCERNING THIS AMENDMENT.

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

 

KEY TRONIC CORPORATION

     

By:

 

  /S/


Its:

 

  Exec. V.P. & CFO


 

 

THE CIT GROUP/BUSINESS

CREDIT, INC.

     

By:

 

  /S/


Its:

 

  Vice President


 

6


Exhibit A

 

  1.   Total Equity Calculation :

 

As of September 28, 2002, the Total Equity of Key Tronic Corporation was $21,425,000, calculated as follows:

 

    

Common Stock

       

$

48,121,000

 

Plus :

                  
    

Treasury Stock

       

$

(9,728,000

)

Plus :

                  
    

Retained Earnings

       

$

(16,203,000

)

    

Total Shareholders’ Equity

  

    =    

  

$

22,190,000

 

Minus

                  
    

Goodwill

       

$

765,000

 

    

Total Equity

  

    =    

  

$

21,425,000

 

 

7


 

Exhibit A

(continued)

 

  2.   EBITDA Calculation :

 

The rolling twelve month EBITDA as of September 28, 2002 for Key Tronic Corporation was $7,496,000, calculated as follows:

 

Operating Income

       

$

2,652,000

Plus:

           

Depreciation

       

$

3,064,000

Amortization

       

$

851,000

Amortization of Capitalized

           

Manufacturing Variances

           

(without duplication)

       

$

929,000

Total EBITDA

  

    =                

  

$

7,496,000

 

8


Exhibit A

(continued)

 

  3.   Fixed Charge Coverage Ratio Calculation :

 

The rolling twelve month Fixed Charge Coverage Ratio as of September 28, 2002 for Key Tronic Corporation was 6.0 : 1.0 calculated as follows:

 

EBITDA

       

$

7,496,000

Minus:

           

Cash Capital Expenditures

       

$

1,483,000

Total (A)

       

$

6,013,000

 

Divided by :

 

All Scheduled Interest Obligations

       

$

993,000

Plus :

           

Scheduled Principal Payments on Indebtedness

  

$

9,000

Plus :

           

Payments to F&G

       

$

0

Total (B)

       

$

1,002,000

Fixed Charge

           

Coverage Ratio (A ÷ B)

  

    =    

  

 

6.0 : 1.0

 

9


 

Exhibit B

 

FORM OF

EQUIPMENT LOAN PROMISSORY NOTE

 

February 1, 2003

 

$500,000

 

FOR VALUE RECEIVED, the undersigned, Key Tronic Corporation a Washington corporation (the “Company”), promises to pay to the order of THE CIT GROUP BUSINESS CREDIT, INC. (herein “CIT”) at its office located at 300 S. Grand Ave., 3rd Floor, Los Angeles, California 90071, in lawful money of the United States of America and in immediately available funds, the principal amount of Five Hundred Thousand Dollars ($500,000) as follows: twelve (12) equal installments of $42,000 each, whereof the first such installment shall be due and payable on March 1, 2003 and subsequent installments shall be due and payable on the first Business Day of each month thereafter until this Note is paid in full; provided , that the entire remaining principal amount then outstanding, together with any accrued and unpaid interest and any and all other amounts due hereunder, shall be due and payable on February 1, 2004.

 

Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Financing Agreement by Borrower or by CIT in accordance with the terms thereof.

 

The Company further agrees to pay interest at said office, in like money, on the unpaid principal amount owing hereunder from time to time from the date hereof on the date and at the rate specified in Section 8 of the Financing Agreement, dated August 22, 2001 between the Company and CIT (as amended, modified or otherwise supplemented from time to time, the “ Financing Agreement”) . Capitalized terms used herein and defined in the Financing Agreement shall have the same meanings as set forth therein unless otherwise specifically defined herein.

 

If any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension.

 

This “Note” is Equipment Term Loan Promissory Note referred to in the Financing Agreement, evidences the Equipment Term Loan thereunder, and is subject to, and entitled to, all provisions and benefits thereof and is subject to prepayment, in whole or in part, as provided therein.

 

 

Upon the occurrence of any Event of Default specified in the Financing Agreement or upon termination of the Financing Agreement, all amounts then remaining unpaid on this Note may become, or be declared to be, at the sole election of CIT, immediately due and payable as provided in the Financing Agreement.

 

KEY TRONIC CORPORATION

 

By:                                                                                     

Title:                                                                                 

 

 

10


 

Schedule 1

 

(See Attached)

 

11


 

SETTLEMENT AGREEMENT

 

This Settlement Agreement (“Agreement”), effective as of the 4th day of November 2002, is entered between F&G Scrolling Mouse, LLC and Fernando Falcon and Federico Gilligan on the one hand (collectively referred to as “F&G”) and Key Tronic Corporation (“‘Key Tronic ) on the other hand.

 

WHEREAS, this Agreement relates to a settlement and compromise of all claims that were or could have been brought by the parties in Civil Action No. C99-995C entitled F&G Scrolling Mouse L.L .C Fernando Falcon and Federico Gilligan V. Microsoft Corp. and Key Tronic Corporation now on appeal in the United States Court of Appeals for the Ninth Circuit, previously before the United States District Court for the District of Washington at Seattle (“the Lawsuit”).

 

WHEREAS, the parties seek an amicable and final business resolution and settlement of the Lawsuit, on the terms and conditions set forth below;

 

NOW, THEREFORE, in accordance with the foregoing recitals, and in consideration of the mutual covenants contained herein, F&G and Key Tronic agree as follows:

 

1. In full settlement of all claims that F&G brought or could have made against Key Tronic in the Lawsuit, and in consideration of the release contained in this Agreement, Key Tronic shall pay to F&G, within three (3) days of the effective date of this Agreement, Two Million Five Hundred Thousand Dollars ($2,500,000.00 U.S.) by wire transfer to F&G and its attorneys, Niro, Scavone, Haller & Niro, to the following client trust account:

 

CITIBANK FSB—Chicago, Illinois

ABA No. 271070801

Niro, Scavone, Haller & Niro Client Trust Account

Account No.0980023222

 

Upon receipt of this initial payment, the parties shall dismiss the pending appeal and the Lawsuit through entry of the Amended Judgment and Agreed Order attached as Exhibit A.

 

2. In addition to the above initial payment, Key Tronic shall pay F&G by wire transfer to the client trust account identified above, the following additional continuing & quarterly payments due on or before the first day of the third calendar month following the end of each fiscal quarter:

 

12


 

(a) For each quarter beginning for the quarter ending September 30, 2002 (making the first additional payment due December 2, 2002), fifty percent (50%) of Key Tronic’s reported operating income or Two Hundred Thousand Dollars ($200,000.00 U.S.), whichever is greater. The Two Hundred Thousand Dollars ($200,000 U.S.) quarterly payment, therefore, shall be a minimum payment due each quarter no matter what Key Tronic 1 s reported operating income is for any particular quarter,

 

(b) Such quarterly payments shall continue until Seven Million Dollars ($7,000,000.00 U.S.) total has been paid to F&G (Four Million Five Hundred Thousand Dollars ($4,500,000.00 U.S.) in addition to the Two Million Five Hundred Thousand Dollars ($2,500,000.00 U.S.) initial payment), provided such total payment of Seven Million Dollars $7,000,000.00 U.S.) is paid in full by December 15, 2005.

 

(c) If Seven Million Dollars ($7,000,000.00 U.S.) has not been paid to F&G by December 15, 2005, then the total payments due F&G shall increase each year as follows and the quarterly payments as set forth in paragraph 2(a) above shall continue until:

 

    Seven Million Six Hundred Thousand Dollars ($7,600,000.00 U.S.) is paid by December 15, 2006; or

 

    Eight Million Two Hundred Thousand Dollars ($8,200,000.00 U.S.) is paid by December 15, 2007; or

 

    Eight Million Eight Hundred Thousand Dollars ($8,800,000.00 U.S.) is paid by December 15, 2003; or

 

    Nine Million Seven Hundred Thousand Dollars ($9,700,000.00 U.S.) is paid by December 15, 2009; or

 

    Ten Million Six Hundred Thousand Dollars ($10,600,000.00 U.S.) is paid by December 15, 2010; or

 

    Eleven Million Five Hundred Thousand Dollars ($11,500,000.00 U.S.) is paid by December 15, 2011.

 

(d) If Key Tronic makes total payments in the agreed amounts by the dates due, then no additional payments need be made. In other words, if total payments of Seven Million Six Hundred Thousand Dollars ($7,600,000.00 U.S.) are made by December 15, 2006, no further payments need be made. The same is true, for example, if, total payments of Eight Million Eight Hundred Thousand Dollars ($8,800,000.00 U.S.) are made by December 15, 2008. If Eleven Million Five Hundred Thousand Dollars ($1 l,500,000.00 U.S.) has not been paid by December 15, 201 1, however, then Key Tronic shall continue to make quarterly payments as required m paragraph 2(a) above interest at prime plus and at one-half percent (1  1 / 2 %), for as long as it takes for Eleven Million Five Hundred Thousand Dollars ($11,500,000.00 U.S.), plus interest, to be paid to F&G. The prime rate shall the prime rate as published from time to time in the Wall Street Journal.

 

3 . In the event that Key Tronic fails to make any minimum quarterly payment of Two Hundred Thousand Dollars ($200,000.00 U.S.) when due, then Key Tronic will automatically be deemed in breach of this Agreement. F&G shall then have the right to accelerate all remaining payments in the amount of Eleven Million Five Hundred Thousand Dollars ($11,500,000.00 U.S.), less any amounts previously paid, and shall, be entitled to judgment for breach of this Agreement in that agreed amount plus prejudgment interest and reasonable attorneys’ fees.

 

 

13


 

4. In the event Key Tronic is the subject of proceedings under Chapter 11 or Chapter 7 of the federal bankruptcy laws or otherwise voluntarily or involuntarily makes an assignment for the benefit of creditors under RCW Chapter 7.08 or similar state statutes, then F&G shall have the right, in addition to any other remedies it might have, to pursue a claim in bankruptcy court or with the assignee for benefit of creditors in the amount of Eleven Million Five Hundred Thousand Dollars ($11,500,000.00 U.S.) less any payments previously made to F&G under this Agreement. If Key Tronic is the subject of proceedings under Chapter 11 or Chapter 7 of the federal bankruptcy laws within 90 days of making the initial payment of Two Million Five Hundred Thousand Dollars ($2,500,000 U.S.), then F&G shall have the right, in addition to any other remedies it might have, to pursue a claim in bankruptcy court in the amount of Nineteen Million Two Hundred Thousand Dollars ($l9,200,000.00 U.S.)

 

5. Effective upon the execution of this Agreement, F&G and Key Ironic each hereby release and forever discharge the other together with its past; present and future officers, directors, shareholders, employees, agents , representatives, customers, subsidiaries, patent companies and affiliates and their successors, heirs and assigns, from any and all claims, demands, damages, actions, causes of action, suits, debts, liabilities and obligations, liens, costs and expenses of any nature, character and description, known or unknown, accrued or not yet accrued, anticipated or unanticipated, arising out of anything occurring prior to the effective date of this Agreement, including without limitation all claims raised or which could have been raised in the Lawsuit that are not disposed of by this Agreement or the Amended Judgment and Agreed Order.

 

6. F&G and Key Tronic each hereby covenants that it will not file suit against the other, together with its past, present and future officers, directors, shareholders, employees, representatives, customers, subsidiaries, parent companies and affiliates and their successors, heirs and assigns, over any Claims released under this Agreement.

 

7. Each party hereto warrants and represents to the other that (a) its Execution hereof has been duly authorized by all necessary corporation action of such party; and (1,) it has all requisite legal rights necessary to grant the other party all releases and covenants not to sue as set forth above. F&G further warrants and represents that its rights include the right to sue for alleged past infringement and that it has not entered into and shall not enter into any agreement which would interfere with any of the releases and covenants not to sue granted by this Agreement.

 

14


 

8. Disclosure of this settlement to the public will be made only by Key Tronic. Neither F&G nor its representatives will make any public statement or disclosure regarding the settlement, other than to confirm that the matter has been settled.

 

9. This Agreement and the rights and obligations herein shall be binding upon and inure to the benefit of the parties (including their parents, subsidiaries) affiliates and divisions), their successors and assigns.

 

10. This Agreement will become binding and effective upon the exchange off facsimile copies of the requited signatures The parties will thereafter exchange formal signed originals of this Agreement for their permanent records.

 

11. Within 10 days of the effective date of this Agreement, the parties agree to file the Amended Judgment and Agreed Order attached as Exhibit A, which shall provide for dismissal with prejudice, of the Lawsuit The Amended Judgment and Agreed Order shall further state that the parties are to bear their own attorney’s fees and costs regarding the Lawsuit. The patties further agree to prepare and file the documents necessary to dismiss the appeal currently pending before the United States court of Appeals for the Ninth Circuit.

 

12. This Agreement, including tile exhibits and any agreements contained therein, constitutes the entire agreement of the parties with regard to the subject matter of the Lawsuit. Notwithstanding the foregoing, the provisions of the Stipulated Protective Order of record in the Lawsuit that relates to continued confidentiality of documents and things produced in the Lawsuit shall continue in force and shall be deemed to merge into this Agreement.

 

13. No modification or amendment of this Agreement or waiver of any right hereunder shall be valid or binding upon a party hereto unless made in writing and signed by the party against which enforcement of the modification, amendment or waiver is sought.

 

14. F&G and Key Tronic agree to take such further actions, and to execute, deliver and file such further documents and instruments, and to obtain such consents, may be reasonably required or requested in order to fully effectuate the purposes, terms and conditions of this Agreement.

 

15. The parties agree that the terms of this Agreement shall be governed in all respects by the law of the State of Washington, without giving effect to any conflicts or choice of law principles that otherwise might be applicable.

 

16. The parties agree that the United States District Court for the Western District of Washington shall have jurisdiction to resolve any disputes concerning this Agreement. If federal jurisdiction is not present, the parties agree that any litigation concerning this Agreement must be filed in the state courts of Washington. If litigation arises out of this Agreement, the prevailing party shall be awarded its reasonable attorney’s fees and costs.

 

17. Neither party may terminate this Agreement under my circumstances F&G and Key Tronic acknowledge that, in the event of a breach of this Agreement, this Agreement shall continue in full force and effect Neither party shall be entitled to terminate this Agreement as a result of such breach nor shall either party be entitled to seek such a termination in any proceeding, including without limitation, a proceeding, before any court or arbitrator.

 

15


 

18. Counsel for both F&G and Key Tronic have participated in the drafting of this Agreement, and it shall not be construed against either party as the drafter.

 

19. If any provision of this Agreement is found to be prohibited by law or unenforceable, in Whole or in part, such provision shall be ineffective to the extent it is prohibited or unenforceable without invalidating or having any oilier adverse effect upon any other provision of this Agreement.

 

WHEREFORE, the parties acknowledge their agreement and consent to the terms and conditions set further above through their respective signatures as contained below:

 

KEY TRONIC CORPORATION

     

F&G SCROLLING MOUSE, L.L.C.

By:

 

/S/            


     

By:

 

/S/    


Title:

 

Exec VP & CFO


     

Title:

 

Tax Matters Partner


Date:

 

November 4, 2002


     

Date:

 

October 16, 2002


       

FERNANDO FALCON

           

/S/    


           

Date:

 

October 16, 2002


           

FEDERICO GILLIGAN

           

/S/


           

Date:

 

October 16, 2002


 

 

16


 

EXHIBIT A

 

THE HONORABLE JOHN C. COUGHENOUR

 

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

 

 

F&G SCROLLING MOUSE, L.L.C.,

FERNANDO FALCON, and FEDERICO

GILL1GAN,

 

NO. C99-995C

 

 

                    v.

 

 

                        Plaintiffs,

 

 

 

AMENDED JUDGMENT AND

AGREED ORDER

MICROSOFT CORP., HONEYWELL, INC

and KEY TRONIC CORPORATION,

                          Defendants.


   

 

Plaintiffs F&G Scrolling Mouse, L.L.C., Fernando Falcon and Federico Gilligan (collectively, “F&G”) and defendant Key Tronic Corporation (Key Tronic”) (collectively, the Parties), having entered into a confidential Settlement Agreement dated October               2002, that resolves all matters relating to this case, IT IS STIPULATED AND ORDERED:

 

1. Under the Settlement Agreement, all claims that were made in this action, or could have been made, have been settled and compromised. Accordingly, all such claims and this action are hereby dismissed with prejudice and without costs to any party. F&G and Key Tronic shall each be responsible for its own attorney’s fees and costs incurred in connection with this case.

 

2. The Judgment entered in this case dated December 26, 2001, and the Amended Judgment dated May 13, 2002, are both hereby vacated. Key Tronic’s only obligations to F&G are those specified in the Settlement Agreement.

 

3. Under the Settlement Agreement, the parties have agreed to dismiss the appeal taken by Key Tronic in this case, which is Appeal No. 02-35514 currently pending before the United States Court of Appeals for the Ninth Circuit. Upon dismissal of the appeal, this Court will have jurisdiction to resolve any disputes concerning the Settlement Agreement.

 

17


 

DATED: October 14,2002

 

PERKINS COIE LLP

     

By:

 
   

Jerry A. Riedinger, WSBA #25828

Michael D. Broaddus, WSBA #19S33

Katrina R, Kelly, WSBA #28435

 

Attorneys for Defendant Key Tronic Corporation

 

DATED: October 14, 2002

 

NIRO, SCAVONE, HALLER & NIRO

     

By:

 
   

Raymond P. Niro (Pro Hac Vice )

Paul K. Vickrey (Pro Hac Vice)

Gregory P. Casimer (Pro Hac Vice)

 

 

Attorneys for Plaintiffs F&G Scrolling

Mouse, L.L.C., Fernando Falcon and

Federico Gilligan

 

IT IS SO ORDERED.

 

DATED this          of                      , 2002.

 

,                                                                       

HONORABLE JOHN C. COUGHENOUR

UNITED STATES DISTRICT JUDGE

 

18

EXHIBIT 99.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Key Tronic Corporation (the “Company”) on Form 10-Q for the period ended December 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I Ronald F. Klawitter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

  1.   The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

  2.   The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: February 11, 2003

 

/s/ Ronald F. Klawitter


Ronald F. Klawitter

Executive Vice President of Administration,

Chief Financial Officer and Treasurer

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Key Tronic Corporation (the “Company”) on Form 10-Q for the period ended December 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I Jack W. Oehlke, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

  1.   The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

  2.   The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: February 11, 2003

 

/s/ Jack W. Oehlke


Jack W. Oehlke

President and Chief Executive Officer