SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 1, 1995 Commission File Number
Number 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
Identification No.)
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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 .
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At shares of Common Stock, no par value (the only class of common stock),
were outstanding.
KEY TRONIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION: PAGE NO.
Item 1. Financial Statements
Notes to Consolidated Financial Statements 3-9
PART II. OTHER INFORMATION:
Item 5. Other Events 10
SIGNATURES 11
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
of operations for such periods. All adjustments are of a normal recurring
nature. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's annual report for the year ended July 2, 1994.
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1. BUSINESS COMBINATION
On July 30, 1993, the Company acquired substantially all of the assets and
liabilities of Honeywell, Inc.'s Keyboard Division (HKD). The acquisition was
accounted for under the purchase accounting method of accounting and,
accordingly, the purchase price was allocated to the underlying acquired assets
and assumed liabilities at their estimated fair market values at July 30, 1993.
Acquisition costs are summarized as follows: (in thousands)
Cash $ 22,000
Liabilities assumed 5,832
Acquisition costs 5,000
Note payable, Honeywell Inc. 3,648
Common stock issued 3,200
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Total $ 39,680
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These costs were allocated based on fair value as follows:
Trade receivables $ 8,505
Inventories 10,964
Other current assets 489
Property, plant and equipment 17,922
Goodwill 1,800
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Total $ 39,680
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The stock was recorded at a twenty percent discount to the closing market price
on July 30, 1993 due to the three year trading restrictions on the stock at the
acquisition date. The costs incurred as part of the acquisition included
$1,125,000 for severance for terminating employees of HKD, $175,000 for
transition payroll for terminating employees of HKD, $1,100,000 for relocation
of employees of HKD, $700,000 for the closure of an acquired facility,
$1,000,000 for the assumption of certain potential liabilities, and $900,000 for
certain other direct purchase and integration costs.
Details of this transaction are more fully reported on Form 8-K dated July
30, 1993.
2. INVENTORIES
April 1, July 2,
1995 1994
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(Unaudited) (Audited)
(in thousands)
Finished goods $ 5,908 $ 3,385
Work-in-process 3,967 3,048
Raw materials 20,903 18,935
Reserve for obsolescence (3,040) (3,581)
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$ 27,738 $21,787
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The increase in raw materials and work-in-process inventory is primarily to
support demand based on increases in customer forecasts. The increase in
finished goods inventory is to support anticipated demand in the retail
channels.
3. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $1,433,000 at April 1,
1995.
Litigation
The Company used Mica Sanitary landfill, a public dump site operated by the
County of Spokane, until early 1975. Mica landfill is a state lead National
Priority List site ("NPL") . Mica landfill was placed on the NPL in 1985. In
l988 the Washington Department of Ecology and Spokane County entered into a
Consent Decree requiring the County to conduct a Remedial Investigation (RI)
followed by appropriate Remedial Action (RA). The County's RI was completed by
the County in September 1992. An interim remedial action plan was completed in
late 1993 and instituted in mid 1994 to be followed by a 5 year performance
monitoring program to be conducted by the County to determine if additional
remedial measures are needed. The Company has not been named as a Potentially
Liable Party ("PLP") under the State Toxic Control Act ("STCA") or as a
Potentially Responsible Party ("PRP") under CERCLA, as amended ("CERCLA"). To
date, test results have not shown the waste disposed of by the Company at Mica
to be a source of pollution or contamination. Prior to 1989 certain third
parties were designated PRP's and PLP's . The Company made a provision prior to
the beginning of fiscal year 1992 based on information then currently available
to it and the Company's prior experience in connection with another NPL landfill
site where the Company disposed of a similar type of waste which it disposed of
at Mica, for its estimate of probable legal costs to be associated with this
matter. No provision has been made for probable liability for remedial action,
because management does not believe a range of probable or reasonably possible
costs is estimable at this time based upon the fact that the Company to date has
not been named a PRP or PLP and the uncertainty as to what additional pollution
or contamination will be disclosed over the course of the County's 5 year
monitoring and testing program. The accrued balance was $900,000 at the end of
the third fiscal quarter of 1995, the end of fiscal 1994 and the end of the
third quarter of fiscal year 1994. Management does not believe there to be any
reasonably possible losses for legal costs beyond the existing accrual for
probable losses which could be material to future financial position or results
of operations. No provision has been made to cover any future costs to the
Company of any remedial action or clean-up activities because those costs, if
any, can not be determined at this time. Given the inherent uncertainty in
environmental matters, limited information available with respect to any future
remedial measures, uncertainty of the results of future monitoring tests,
limited information as to the number of PRP's and PLP's , the uncertainty as to
whether the Company will be designated a PRP or PLP with respect to the site and
the complexity of the circumstances surrounding this matter, management's
estimate is subject to and will change as facts and circumstances warrant.
Based upon publicly available cost estimates of remediation and clean-up at the
site and the contributions to date of designated PRP's and PLP's, management
believes that insurance coverage is probable for any reasonably possible future
remedial or clean-up costs to the Company.
Pursuant to the Amended and Restated Purchase and Sale Agreement between
Honeywell, Inc. and Key Tronic Corporation, dated as of July 30, 1993 (the
"Agreement"), the Company assumed known and unknown product liabilities and
unknown but potentially incurred environmental liabilities for a portion of any
pre-existing claims against Honeywell, Inc. ("Honeywell") which are asserted
after the closing date relating to environmental matters and to product
liability matters associated with products manufactured by Honeywell prior to
its ceasing manufacture of those products on the closing date of the Agreement.
Honeywell retained responsibility for unasserted claims not assumed by the
Company as follows: Honeywell retained responsibility for environmental and
product liability claims, incurred but not reported as of the closing date, in
excess of $1,000,000 in the aggregate which 1) in the case of environmental
claims are asserted within two years following the closing date or which 2) in
the case of product liability claims are asserted within five years following
the closing date. Management estimated on the closing date of the acquisition
that it was probable that $1.0 million of incurred but not reported product
liability claims would be recorded during the 5 year period following the
closing of the Agreement and the Company recorded this liability as part of the
acquisition costs. The accrued balance for these product liability claims was
$735,000 at the end of the third fiscal quarter of 1995 versus $950,000 at the
end of both fiscal 1994 and the third quarter of fiscal year 1994. The
reduction in the accrued balance reflects charges for expenses. Management does
not believe there to be any reasonably possible product liability losses beyond
the existing accrual for probable losses which could be material to future
financial position or results of operations. The Company has not made a
provision for Honeywell environmental claims which may be discovered and
asserted after the closing date or product liability claims which may be
asserted five or more years after the closing date, because management does not
believe such potential liabilities are reasonably possible at this time. No
environmental claims have been asserted as of fiscal year end 1994. Given the
inherent uncertainty in litigation, in environmental matters and in contract
interpretation, the inherently limited information available with respect to
unasserted claims and the complexity of the circumstances surrounding these
matters, management's estimates are subject to and will change or be established
as facts and circumstances warrant.
The Company has assumed certain obligations under the Agreement related to
a patent infringement claim associated with Honeywell products. The Company
made a provision in 1994 in the amount of $455,000, based upon information which
became available to it after the closing date, for its estimate of probable
costs to be associated with this patent infringement claim. These matters are
in the early stages of investigation. Management does not believe there to be
any reasonably possible losses beyond the existing accrual for probable losses
which could be material to future financial position or results of operations.
The Company currently has one hundred eight suits by computer keyboard
users which are in State or Federal Courts in California, Florida, Kentucky,
Pennsylvania, New Jersey and New York. These suits allege that specific
keyboard products manufactured by the company were sold with manufacturing,
design and warning defects which caused or contributed to their injuries. The
alleged injuries are not specifically identified but are referred to as
repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These
suits seek compensatory damages and some seek punitive damages. It is more
likely than not that compensatory damages, if awarded, will be covered by
insurance, however the likelihood that punitive damages, if awarded, will be
covered by insurance is remote. The Florida, one New Jersey and the
Pennsylvania suits were removed from New York. A total of eight suits have been
dismissed from New York, California and Texas, the dismissal of one California
suit was recently reversed on appeal. The Company believes it has valid
defenses and will vigorously defend these claims. These claims are in the early
stages of discovery. Given the early stage of litigation, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, the range of reasonably possible losses in
connection with these suits is not estimable at this time. Therefore no
provision has been made to cover any future costs. Management's position will
change if warranted by facts and circumstances.
The Company's total accrual for litigation related matters, including
compensatory damages, and legal costs, was $2.2 million, $2.4 million and $2.5
million as of April 1, 1995, July 2, 1994 and April 2, 1994, respectively.
4. LONG TERM OBLIGATIONS
On October 24, 1994 the Company entered into a secured financing agreement
with the CIT Group/Business Credit, Inc. (CIT). The agreement contains a $12
million term note and a revolving loan for up to $28 million. The agreement is
secured by the assets of the Company. This agreement replaces a $5.0 million
secured revolving credit agreement and a $20.9 million note payable to a
financial institution. At April 1, 1995 and July 2, 1994, the Company was in
compliance with all debt covenants and restrictions.
Details of this transaction are more fully reported on Form 8-K dated
October 31, 1994.
Long-term obligations consist of:
April 1, July 2,
1995 1994
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(in thousands)
Note payable - CIT $ 11,990 $ 0
Revolving loan - CIT 15,265 0
Note payable - financial institution 0 22,000
Revolving line - financial institution 0 3,715
Note payable - Honeywell, Inc. 3,649 3,649
Deferred compensation obligation 666 698
Capital lease obligations 332 321
Installment contracts 0 34
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31,902 30,417
Less current portion (4,017) (4,721)
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$ 27,885 $ 25,696
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5. INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," as of July 4, 1993. The
standard changes the method of accounting for income taxes to the asset and
liability method. The result of this accounting change, recorded cumulatively
in the first quarter of 1994, was to increase net earnings for the year ended
July 2, 1994, by $8,750,000 or $1.16 per primary common share. This change did
not have a material effect on the income tax provision recorded in 1994.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Third Quarter Ended
April 1, April 2,
1995 1994
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(in thousands)
Interest payments $ 808 $ 459
Income tax payments 0 10
7. RESTRUCTURING CHARGES
During the third quarter of fiscal year 1994, the Company made $1,021,000
in restructuring provisions.
This provision represented costs to redeploy production from the Company's
Cheney WA plant to other Company plants where lower costs can be attained. The
provision included $592,000 to reduce certain assets to estimated realizable
value, $207,000 for severance and $222,000 for other costs directly associated
with this plant closure. The restructuring activities were implemented during
the Company's third fiscal quarter of 1994 and were scheduled for completion in
the fourth fiscal quarter of 1994 or the first fiscal quarter of 1995.
The writedown of assets is comprised of equipment writedown and facility
writedown. The equipment writedown was estimated as the difference between book
value and the highest firm offer on the equipment. The building writedown was
estimated as the difference between book value and average value determined from
multiple independent market valuations. This writedown had no effect on cash or
cash equivalents.
The severance charge was calculated by applying the Company's standard
severance policy to the employee's affected.
The direct cost charge is primarily transportation costs associated with
the relocation of equipment from the closing facility to other Company
facilities.
PART II. OTHER INFORMATION:
Item 5. Other Events
Filing of Registration Statement on Form S-3 on February 10, 1995
covering the sale of common stock held by certain shareholders.
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/ Thomas W. Cason
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Thomas W. Cason Date
President &
Chief Operating Officer
/s/
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Ronald F. Klawitter Date
Principal Financial &
Accounting Officer
