SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of
The Securities Exchange Act of 1934
----------------------
For the Fiscal Year Ended Commission File Number
June 29, 1996 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
------------------ Identification No.)
N. 4424 Sullivan Road
Spokane, Washington 99216
(509) 928-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities and Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements during the past 90 days.
Indicate by checkmark if delinquent filers pursuant to Item 405 of Regulation S-
K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $59,780,238 as of September 17, 1996.
The number of shares of Common Stock of the Registrant outstanding as of
September 17, 1996 was 8,540,034 shares.
The Exhibit Index is located at Page 15.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Registrant's Proxy Statement, pages 1 - 23, pursuant to
Regulation 14A, covering the Annual Meeting of Shareholders to be held October
24, 1996 is incorporated by reference into Part III and IV.
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KEY TRONIC CORPORATION
1995 FORM 10-K
TABLE OF CONTENTS
Page
Part I
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Item 1. Business.......................................................3-8
Item 2. Properties.....................................................8-9
Item 3. Legal Proceedings..............................................9-11
Item 4. Submission of Matters to a Vote of Security Holders..............11
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters..............................................12
Item 6. Selected Financial Data.......................................12-13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14-20
Item 8. Financial Statements and Supplementary Data...................20-39
Item 9. Disagreements on Accounting and Financial Disclosure............ 39
Part III
Item 10. Directors and Executive Officers of the Registrant............40-42
Item 11. Executive Compensation...........................................42
Item 12. Securities Ownership of Certain Beneficial Owners and
Management.......................................................42
Item 13. Certain Relationships and Related Transactions...................42
Part IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form
8-K and Signatures............................................43-52
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PART I
Item 1. BUSINESS
The following discussion relates to fiscal years of the Company.
Key Tronic Corporation, a Washington corporation organized in 1969, and its
subsidiaries (hereinafter collectively called the "Company" or "Key Tronic"
unless the context otherwise requires) are principally engaged in the design,
development, and manufacture of input devices, primarily keyboards, for personal
computers, terminals, and workstations.
BACKGROUND
Keyboards are the primary means by which people input data and commands to
computers. Keyboards consist of an array of switches, with each switch activated
by an operator depressing a keycap to input a particular letter, number or
special function to the computer. Full travel keyboards, with typewriter-like
strokes, are preferred in high use applications where speed, accuracy, and ease
of data input are required. Keyboards are distinguishable from keypads, which
are short travel data entry devices more likely to be used where only numerical
data entry is required, such as in push button telephones and pocket
calculators.
Keyboard configurations differ substantially, depending upon application and
other factors with variables such as switch technology, the amount of key motion
required to activate a switch, the feel or tactile response to the operator when
depressing a key, and the shape, color and positioning of the individual keys.
The majority of keyboards are sold with a plastic enclosure and cable, although
keyboards for portable computers (notebooks and laptops) are generally sold
unenclosed, housed within the system enclosure.
Many keyboards contain a microprocessor. This microprocessor encodes the data
being entered and sends it to the computer. The more powerful microprocessors
available today allow intelligence to be included in the keyboard. With this
intelligence, a keyboard can perform a number of functions which enhances the
value of the keyboard in the overall hardware configuration.
The majority of the Company's keyboards are custom designed for a particular
computer product, although an increasing percentage consist of standard
configurations or those that have been tailored to meet industry standards. Key
Tronic has the capability to produce a variety of keyboards and keycap
configurations to provide to computer manufacturers for the intended applica-
tions.
The pace of computer product development requires that keyboard suppliers be
able to rapidly design and manufacture new products for specific customer
requirements, as well as develop new switch technology platforms that anticipate
future market needs. Because of this, the Company provides custom design
support which depends on its ability to closely control its tooling and
manufacturing processes.
The Company has recognized the need in the marketplace to provide more answers
to data entry needs. In response to this need, the Company has developed other
input devices that can be used separately or in conjunction with the keyboard.
Some of these products include a touch pad, a mouse and an integrated trackball.
The Company uses an internal sales force in conjunction with retail
representatives and distributors to reach a customer base that consists of
Original Equipment Manufacturers (OEMs), corporations, and individual end users.
Standard keyboard products that are plug-compatible with IBM, Apple and
compatible personal computers are available through this network in addition to
custom designed keyboards. The Company sells to principal customers primarily
on a purchase order basis, as opposed to long-term contracts.
ACQUISITION OF ASSETS
On July 30, 1993, the Company acquired substantially all of the assets and
liabilities of Honeywell, Inc.'s Keyboard Division in a purchase accounting
transaction for approximately $22.0 million in cash, $5.8 million in liabilities
assumed, $5.0 million in acquisition costs, a note payable to Honeywell, Inc. of
$3.6 million plus 400,000 shares of the Company's common stock valued at $3.2
million and a warrant to purchase an additional 300,000 shares of the Company's
common stock. Details of this transaction are more fully discussed in Note 15
to the Company's 1995 Annual Report and in Form 8-K filed on August 12, 1993.
KEYSWITCH TECHNOLOGIES
There are five prevalent keyswitch technologies for fully encoded keyboard
applications presently available to computer manufacturer purchasers of
keyboards: membrane, Hall effect, mechanical contact, conductive rubber,
capacitance, and dome. Key Tronic currently manufactures keyboards employing
capacitance and membrane technologies.
Capacitance Switch Technology
In 1975, the Company developed a capacitance keyboard in response to demand for
lower cost keyboards. Key Tronic was the first major independent keyboard
supplier to successfully manufacture and market capacitance keyboards. The
capacitance switch is based on two charged plates separated by an insulator
brought into proximity by depressing the keycap. An electronic signal is
transmitted at the point of closest proximity. Capacitance, mechanical, and
membrane contact are currently the dominant technologies for applications which
require detachable keyboards with serial output.
During 1992, the conversion of significant OEM customers to membrane keyswitch
technologies from capacitance resulted in a change in the predominant technology
used by the Company. It is anticipated that capacitance will continue to
decline as a preferred technology platform as membrane and other technologies in
development offer relative price advantages.
Membrane Technology
In 1987, the Company developed a full travel membrane switch technology. The
membrane switch offers significant reduction in material and labor costs.
Specifically, a membrane keyboard utilizes a smaller printed circuit board and
approximately 40 percent fewer electronic components than capacitance keyboards.
In 1990, the Company completed development on an improved generation of membrane
technology.
KEYBOARD PRODUCTS
During 1996, 1995 and 1994, the Company realized revenues of approximately
$169.1 million, $185.3 million and $146.8 million from the sale of keyboards
representing approximately 84 percent, 89 percent and 92 percent of total sales.
Low Profile Keyboards
In 1979, Europe led a move toward adopting ergonomic standards for computer
products designed to maximize operator comfort. The resulting DIN (Deutsche
Industry Norm) standards were based on human factors engineering studies. The
standards as applied to keyboards require a lower profile, designed to permit
faster and more efficient data entry with less operator fatigue. This new
design has become the worldwide standard. During 1981, Key Tronic committed to
the extensive retooling required to manufacture the new lower profile design,
and was the first domestic manufacturer in volume production of the low profile
keyboards satisfying the DIN standards. The Company's low profile keyboards
incorporate both the capacitance and membrane switch technologies. The Company
believes it has a major position in the low profile noncaptive market.
OEM Standard Keyboards
The keyboard market has continued to trend toward standard keyboard layouts. In
order to accommodate the strong demand for standard products, the Company
maintains a purchase-from-stock program. The most popular standard layouts are
built and stocked for immediate availability.
Retail Keyboards
In 1983, Key Tronic began supplying to the retail market fully enclosed
plug-compatible keyboards. These products serve as enhancements to or
replacements for the original system-supplied keyboard. The Company is
presently selling its plug-compatible keyboards through a worldwide network of
distributors.
Complex Keyboard Products
The Company developed a custom terminal for Reuters Limited in response to
specifications developed by Reuters. The construction utilizes a custom
injection molded enclosure which provides integral mounting for the keyboard,
liquid crystal display and associated logic cards. The product utilizes a
structural, high level language and module design to ensure ease of software
maintenance. Features of the system include host-programmable key codes and
selectable legends for the liquid crystal display, built-in 18 digit calculator
function, multiple host environment and option mounts.
ALTERNATIVE INPUT DEVICES
The Company realized revenue from non-keyboard products, which in the aggregate,
accounted for $31.9 million, $22.6 million and $12.6 million in 1996, 1995 and
1994 representing approximately 16 percent, 11 percent and 8 percent of total
sales. The significant dollar increase in 1996 is due to the manufacture and
sale of plastic components for use on computer peripherals.
Custom Manufacturing
The Company utilizes its extensive fabrication and assembly capabilities to
offer certain contract manufacturing services. Such services have included
manufacture of tooling, custom molding, as well as complete fabrication and
assembly of unique custom assemblies. Requirements for custom manufacturing may
diminish as a result of the migration to standard products.
Mouse
In 1988, the Company developed a two button mechanical mouse, a pointing device
that essentially replaces the cursor keys on a computer keyboard and allows
rapid selection of options from a menu on the display.
As part of the acquisition of Honeywell, Inc.' s keyboard division the company
acquired the rights to manufacture and sell the Hawley mouse. This mouse is a
new design whereby it is virtually maintenance free. Unlike other mouse
products this product does not have a trackball to pickup dust and dirt thereby
avoiding contaminants reaching the internal mechanism.
Ergonomic Products
The Company is currently in various stages of designing, developing, and
marketing a number of input related devices for a growing market for improved
ergonomic products.
MANUFACTURING
Since inception, the Company has made substantial investments in developing and
expanding the extensive capital equipment base to achieve selective vertical
integration in its manufacturing processes. The Company designs and develops
tooling for injection molding machines and manufactures the majority of plastic
parts used in its products. Additionally, the company has invested in equipment
to produce switch membranes as a means to reduce cost and improve quality.
The OEM market has increasingly demanded rapid response time and design
adaptability from keyboard manufacturers. New computer products are continually
being introduced by computer manufacturers, with the timing of product
introduction often perceived as having distinct marketing advantages. Developing
a keyboard for a new application is a custom process, which requires frequent
contact with the customer while working through changes during design stages.
Computer manufacturers place a premium on the ability of the keyboard
manufacturer to design and produce keyboards which meet their technical
specifications, aesthetic considerations, and which are delivered in accordance
with production schedules.
The Company's automated manufacturing processes enable it to work closely with
its customers during design and prototype stages of production for new custom
products and to jointly increase productivity and reduce response time to the
market place. Key Tronic uses computer-aided design techniques and unique
software to assist preparation of the tool design layout and tool fabrication to
reduce tooling costs, significantly improve component and product quality and
significantly enhance turnaround time during product development.
The Company uses numerous injection molding machines in producing more than
50,000 different keycaps, enclosures and various plastic parts for the entire
keyboard. Designs by Key Tronic engineers in both tooling and molding have
improved standard processing time and thereby increased productivity. The
molding machines used by the Company employ the latest technology, including the
ability to mix plastics and determine the color of finished components as part
of the molding process. This automated, pneumatically-fed process, not only
allows precise control of color determination, but also results in lower product
costs and improved component quality. The Company also produces blank keytops
for certain models with print legends using a print process to apply the colored
inks and laser technology to produce entire key configuration layouts.
Key Tronic uses a variety of manual to highly-automated assembly processes in
its facilities, depending upon product complexity and degree of customization.
Automated processes include component insertion, surface mount technology,
flexible robotic assembly, computerized vision system quality inspection,
automated switch and keytop installation, and automated functional testing.
The Company purchases materials for keyboard production from a number of
different suppliers. Key Tronic believes that it has excellent relationships
with its vendors, most of whom have been suppliers for the Company for many
years.
CUSTOMERS AND MARKETING
OEM MARKETS
The Company manufactures and supplies custom keyboards to many of the leading
OEMs in the noncaptive keyboard market. The Company currently sells keyboards
to more than 170 active OEM customers.
Based on industry data, the Company believes it acquired a leading domestic
market position as an independent supplier of keyboards in the late 1970's.
Hewlett Packard accounted for approximately 34 percent, 23 percent and 10
percent of net sales in 1996, 1995 and 1994. Microsoft accounted for
approximately 17 percent, 19 percent and 1 percent of net sales in 1996, 1995
and 1994. Compaq Computer accounted for approximately 7 percent, 12 percent and
21 percent of net sales in 1996, 1995 and 1994. Digital Equipment Corporation
accounted for approximately 2 percent, 6 percent and 11 percent of net sales in
1996, 1995 and 1994. No other customer accounted for more than 10 percent of
net sales during any of the last three years. In 1996, 1995 and 1994, the five
largest customers accounted for 68 percent, 65 percent and 50 percent of total
sales, respectively.
The Company markets its products primarily through its direct sales organization
aided by distribution sales in the U.S., Canada and Europe. During the past
year, the Company also established relationships with several independent sales
organizations to assist in marketing the Company's retail product lines in the
U.S.
All OEM keyboards are accompanied by a manufacturer's one-year warranty which
provides for repair or replacement of defective products. Retail products carry
a one-year to a limited lifetime warranty. The limited lifetime warranty is
product specific.
FOREIGN MARKETS
In 1996, $87.0 million, or 43.0 percent of the Company's revenues were from
foreign sales, primarily sales in the Far East, Europe and Canada. Foreign
sales in 1995 and 1994 were $83.2 million and $68.2 million, respectively.
Foreign sales are made primarily through the Company's direct sales force in the
U.S. and Ireland.
For additional financial information about foreign operations, see Note 11 to
the Consolidated Financial Statements contained in the Company's 1996 Annual
Report to Shareholders.
BACKLOG
At September 17, 1996, the Company had an order backlog of approximately $29
million. This compares with a backlog of approximately $48 million at September
1, 1995. The decrease in backlog is a result of decreased customer demand for
products due to various market-driven factors and decreased manufacturing lead
time. Order backlog is not necessarily indicative of future sales. Order
backlog consists of purchase orders received for products with a specified
shipment date, although shipment dates are subject to change due to design
modifications or other customer requirements. All orders in backlog are
expected to be filled within the current fiscal year.
RESEARCH, DEVELOPMENT, AND ENGINEERING
The Company's research, development, and engineering expenses were $6.0, $6.1
and $5.8 million in 1996, 1995 and 1994. Research, development and engineering
expenses as a percentage of sales were 3.0 percent, 3.0 percent and 3.7 percent
in 1996, 1995 and 1994.
As a key strategy the Company plans continued emphasis on research, development,
and engineering in the future.
COMPETITION
The Company believes that its principal competitors in the full travel keyboard
market are Alps Electric, BTC, Fujitsu, Chicony, Maxiswitch (a subsidiary of
Siletek/Liteon), Mitsumi, NMB (formerly Hi Tek) and Se-Jin.
TRADEMARKS AND PATENTS
The company owns several patents on emerging keyboard technologies which
management believes will have a significant impact on the market place once they
become available. It is management's belief this will, in turn, strengthen the
company's market position and ability to continue to respond to the needs of its
customers. The Key Tronic name and logo are federally registered trademarks and
the company believes they are valuable assets in its business.
EMPLOYEES
As of September 17, 1996, the Company had approximately 2,585 employees.
Management considers its employee relations to be excellent. None of the
Company's U.S. employees are represented by a union; however a limited number of
the Company's employees in Dundalk, Ireland are represented by the ATGWU
(Amalgamated Transport and General Workers Union). The Company has never
experienced any material interruption of production due to labor disputes.
The Company's employee benefit program includes a bonus program involving
periodic payments to all employees based on quarterly after-tax income. The
Company maintains a tax-qualified profit sharing plan, a 401(k) plan which
provides a matching company contribution on a portion of the employees
contribution and also provides group health, life, and disability insurance
plans. The Company also offers an Incentive Stock Option Plan, Executive Stock
Appreciation Rights Plan, Executive Stock Option Plan, and an Employee Stock
Ownership Plan to certain individuals.
Item 2. PROPERTIES
The Company owns its' principal research and administration facility, which is
located in Spokane, Washington. The Company also owns an assembly facility in
Juarez, Mexico in addition to a manufacturing and assembly facility in Las
Cruces, New Mexico and a Sales, Marketing and Product distribution facility in
Ireland. The Company leases manufacturing facilities in the Spokane Industrial
Park, and warehouses in Singapore and El Paso, Texas. In the fourth fiscal
quarter of 1996, the Company began restructuring it's manufacturing and assembly
facility in Ireland into a Sales, Marketing, and product distribution facility.
This action was completed in the first fiscal quarter of 1997. In 1994 the
Company closed its assembly facility in Cheney, Washington and currently holds
it for sale. In 1992 the Company began the process of closing an assembly
facility it leased in Taiwan. This action was completed in 1993. The Company
considers its properties in good condition, well maintained and generally
suitable for operations. The Company considers the productive capacity of the
rest of its operations sufficient to carry on the Company's business. The
facilities in Juarez, Mexico; Las Cruces, New Mexico; and El Paso, Texas are a
result of the acquisition of assets of Honeywell Inc.'s Keyboard Division.
The Company owns real estate, for sale, in Cheney, Washington. The net book
value of this property is $2,243,000.
Item 3. LEGAL PROCEEDINGS
The company currently has one hundred ten suits by computer keyboard users which
are in State or Federal Courts in Connecticut, Illinois, Kansas, Maryland, New
Jersey, New York, Pennsylvania and Texas. These suits allege that specific
keyboard products manufactured by the company were sold with manufacturing,
design and warning defects which caused or contributed to their injuries. The
alleged injuries are not specifically identified but are referred to as
repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These
suits seek compensatory damages and some seek punitive damages. It is more
likely than not that compensatory damages, if awarded, will be covered by
insurance, however the likelihood that punitive damages, if awarded, will be
covered by insurance is remote. A total of thirty-four suits have been
dismissed in California, Florida, Illinois, Kentucky, Massachusetts, Michigan,
New Jersey, New York and Texas. Six of the thirty-four dismissed suits are on
appeal, all in New York. The Company believes it has valid defenses and will
vigorously defend these claims. These claims are in the early stages of
discovery. Given the early stage of litigation, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, the range of reasonably possible losses in
connection with these suits is not estimable at this time. Therefore, no
provision has been made to cover any future costs. Management's position will
change if warranted by facts and circumstances.
(Also see Note 9 to the Consolidated Financial Statements contained in the
Company's 1996 Annual Report to Shareholders.)
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.
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 computer 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 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.
Competition. The keyboard and other input device industry is intensely
competitive. Most of the Company's principal competitors are headquartered in
Asian countries that have a low cost labor force. Those competitors may be able
to 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. 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. Three of the Company's OEM customers accounted
for 34%, 17% and 7% individually, of net sales during fiscal 1996. In 1995, the
same customers accounted for 23%, 19% and 12% of the Company's net sales. 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 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.
Litigation. The Company currently is a party to approximately 110 lawsuits
brought by computer keyboard users in state and federal courts. These lawsuits
allege that specific keyboard products manufactured by the Company were sold
with manufacturing, design and warning defects which caused or contributed to
the claimants' alleged injuries, generally referred to as repetitive stress
injuries (RSI) or cumulative trauma disorders (CTD). The Company believes it
has valid defenses to these claims, and it will vigorously defend them. These
lawsuits are in the early stages of discovery. At this time, management
believes that it is not likely that the ultimate outcome of these lawsuits will
have a material adverse effect on the Company's financial position. However,
given the limited information currently available, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, management's position will change if warranted by
facts and circumstances.
Technological Change and New Product Risk. The market for the Company's 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 ability to enhance its 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 to do so could substantially harm the Company's competitive position.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing products that respond to technological
change, emerging industry standards or evolving customer requirements.
Dilution and Stock Price Volatility. As of June 29, 1996, there were outstanding
options and warrants for the purchase of approximately 3,670,000 shares of
common stock of the Company ("Common Stock"), of which options for approximately
2,671,000 shares were vested and exercisable. Holders of the Common Stock will
suffer immediate and substantial dilution to the extent outstanding options and
warrants 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.
Control by Hiller Key Tronic Partners, L.P. and The Hiller Group. Hiller Key
Tronic Partners, L.P. ("HKT Partners") is a limited partnership created by The
Hiller Group, a corporate management organization. Pursuant to an agreement,
which terminates March 1, 1997, between The Hiller Group and the Company,
Stanley Hiller, Jr., who currently has approximately 67% interest in HKT
Partners, was appointed as a Director and Chairman of the Company's Executive
Committee in February 1992 and acquired the right to designate three additional
persons to be appointed to the Company's Board of Directors. Mr. Hiller has
served as Chairman of the Board of Directors since September 1995. In
connection with the agreement, HKT Partners received options to purchase
2,396,923 shares of Common Stock at an exercise price of $4.50 per share. The
options terminate on March 1, 1997. HKT Partners beneficially owns
approximately 24% of the outstanding shares of Common Stock. This concentration
of ownership, in conjunction with the agreement between the Company and The
Hiller Group, enables The Hiller Group to exert significant control over
corporate actions and potentially over any change in control of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5: MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Corporate Information
Corporate Offices
4424 N. Sullivan Road
Spokane, WA 99216
Transfer Agent & Registrar
Chase Mellon Shareholder Services
50 California Street
10th Floor
San Francisco, CA 94111
Securities
Key Tronic Corporation's common stock is traded in the over-the-counter market
and is listed on the NASDAQ National Market System under the symbol KTCC. The
closing price of the stock on June 28, 1996 was $ 6.50. As of June 30, 1996,
the company had 1,591 shareholders of record. The company's current line of
credit agreement contains a covenant which prohibits the declaration or payment
of dividends. The company has never paid a cash dividend and does not
anticipate payment of dividends on its Common Stock in the foreseeable future.
10-K Report
A copy of the company's report on SEC Form 10-K may be obtained by request from
the Secretary:
Key Tronic Corporation
P.O. Box 14687
Spokane, WA 99214-0687
509/928-8000
Item 6: SELECTED FINANCIAL DATA
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KEY TRONIC TEN-YEAR FINANCIAL HIGHLIGHTS
(Dollars in millions, except share amounts)
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1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Net Sales $201.0 $207.5 $159.4 $123.3 $124.0 $141.0 $140.2 $145.9 $136.0 $107.6
Operating Income (loss) 0.2 9.8 (8.3) 3.7 (7.7) (7.5) 0.5 2.9 (14.1) 0.7
Net Income (Loss) (1.8) 4.4 (1.1) 3.8 (7.5) (7.7) 1.5 3.1 (11.0) 0.5
Earnings (Loss) per share (0.22) .43 (0.13) 0.42 (0.96) (1.00) 0.18 0.37 (1.28) 0.06
Depreciation/amortization 10.0 8.9 8.6 6.3 6.9 5.4 6.5 8.6 8.4 8.9
Total Assets 93.5 115.1 101.9 61.8 62.2 68.6 75.4 80.8 78.2 86.8
Net working capital 28.0 37.7 28.5 20.0 17.2 19.7 33.9 38.0 31.4 40.5
Long-term Debt (net of current) 17.3 28.5 26.6 0.8 0.8 0.1 0.0 1.1 2.6 2.3
Shareholders' equity 49.5 51.3 44.5 43.4 40.5 46.4 54.9 56.7 53.4 66.3
Book value/share 5.80 6.06 5.38 5.54 5.21 6.00 7.09 6.79 6.33 7.53
Cash dividends per share 0 0 0 0 0 0 0 0 0 0
Number of shares outstanding
at year-end (thousands) 8,534 8,456 8,271 7,837 7,757 7,736 7,736 8,356 8,429 8,809
Number of employees
(year-end) 2,824 2,925 2,163 1,204 1,618 2,241 2,127 2,351 2,021 1,986
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Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996: Fiscal year 1996 started out very strong with first quarter sales in
excess of $60 million and net income of $1.6 million. However, various market-
driven events began to negatively impact sales beginning in the second quarter.
Second quarter sales declined to $56 million and sales were down to $41 million
for the third quarter. Although there was some recovery in the fourth quarter
of the year, sales volume did not recover to the levels reached in the first and
second quarter.
During the fourth quarter, it became apparent that to remain competitive in the
European marketplace, the company would need to scale down its manufacturing
facility in Dundalk, Ireland and fill excess capacity in its Juarez
manufacturing facility. Restructuring activities were implemented during the
quarter and a charge of $2.7 million was recorded to reflect the estimated costs
associated with this restructuring (see Note 15 to the June 29, 1996
Consolidated Financial Statements).
Unit sales increased by 3.5% compared to fiscal 1995 while average selling price
(ASP) declined by 11.6%. Gross profit percentage decreased by 1.9% to 13.4% in
1996 compared to 1995.
1995: The results of operations improved each quarter due to an increase in
sales from new products and programs to Original Equipment Manufacturing
customers. The increased sales volume and the benefit of operating a full year
in the company's Juarez, Mexico plant resulted in a lower cost of goods sold
which allowed the company to improve its gross margins. Also, the company's
operating expenses decreased, primarily due to lower selling expenses and the
restructuring provision recorded in 1994 not recurring in the current year.
The large declines in ASP experienced in 1993 and 1994 slowed significantly in
1995. This resulted from the addition of new value-added products at higher
ASP's.
To accommodate the increase in sales, the company increased its manufacturing
capacity through additional investment in molding, membrane production, and
assembly facilities.
For the year, total unit sales increased by 31.4% compared to fiscal 1994 while
ASP declined by 3.9%. Gross profit percentage increased by 4.6% from the prior
year to 15.3% in 1995.
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.
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 computer 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 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.
Competition. The keyboard and other input device industry is intensely
competitive. Most of the Company's principal competitors are headquartered in
Asian countries that have a low cost labor force. Those competitors may be able
to 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. 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. Three of the Company's OEM customers accounted
for 34%, 17% and 7% individually, of net sales during fiscal 1996. In 1995, the
same customers accounted for 23%, 19% and 12% of the Company's net sales. 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 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.
Litigation. The Company currently is a party to approximately 110 lawsuits
brought by computer keyboard users in state and federal courts. These lawsuits
allege that specific keyboard products manufactured by the Company were sold
with manufacturing, design and warning defects which caused or contributed to
the claimants' alleged injuries, generally referred to as repetitive stress
injuries (RSI) or cumulative trauma disorders (CTD). The Company believes it
has valid defenses to these claims, and it will vigorously defend them. These
lawsuits are in the early stages of discovery. At this time, management
believes that it is not likely that the ultimate outcome of these lawsuits will
have a material adverse effect on the Company's financial position. However,
given the limited information currently available, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, management's position will change if warranted by
facts and circumstances.
Technological Change and New Product Risk. The market for the Company's 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 ability to enhance its 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 to do so could substantially harm the Company's competitive position.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing products that respond to technological
change, emerging industry standards or evolving customer requirements.
Dilution and Stock Price Volatility. As of June 29, 1996, there were outstanding
options and warrants for the purchase of approximately 3,670,000 shares of
common stock of the Company ("Common Stock"), of which options for approximately
2,671,000 shares were vested and exercisable. Holders of the Common Stock will
suffer immediate and substantial dilution to the extent outstanding options and
warrants 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.
Control by Hiller Key Tronic Partners, L.P. and The Hiller Group. Hiller Key
Tronic Partners, L.P. ("HKT Partners") is a limited partnership created by The
Hiller Group, a corporate management organization. Pursuant to an agreement,
which terminates March 1, 1997, between The Hiller Group and the Company,
Stanley Hiller, Jr., who currently has approximately 67% interest in HKT
Partners, was appointed as a Director and Chairman of the Company's Executive
Committee in February 1992 and acquired the right to designate three additional
persons to be appointed to the Company's Board of Directors. Mr. Hiller has
served as Chairman of the Board of Directors since September 1995. In
connection with the agreement, HKT Partners received options to purchase
2,396,923 shares of Common Stock at an exercise price of $4.50 per share. The
options terminate on March 1, 1997. HKT Partners beneficially owns
approximately 24% of the outstanding shares of Common Stock. This concentration
of ownership, in conjunction with the agreement between the Company and The
Hiller Group, enables The Hiller Group to exert significant control over
corporate actions and potentially over any change in control of the Company.
NET SALES
Net sales in 1996 were $201.0 million compared to $207.5 million and $159.4
million in 1995 and 1994, respectively. This represents a 3.1% decrease in 1996
compared to an increase of 30.1% in 1995. The average unit selling prices of
the company's keyboard products declined by 11.6% in 1996 compared to 3.9% in
1995. Offsetting these price declines were increases in unit volumes of 3.5% and
31.4% in 1996 and 1995, respectively.
COST OF SALES
In 1996, cost of sales was 86.6% of sales compared to 84.7% in 1995 and 89.3% in
1994. The increase in 1996 is mainly due the decrease in ASP outpacing cost
reductions and a shift in product mix such that a greater quantity of lower
margin products contributed a larger portion of sales. In 1995 the cost of
sales percentage decreased due to the redeployment of production from the
company's Cheney, Washington plant to other lower cost facilities as well as
increased sales volume. The company provides for warranty costs based on
historical experience and anticipated product returns. The amounts charged to
expense were $1,121,000, $1,001,000, and $647,000 in 1996, 1995, and 1994,
respectively. The large increase in 1995 is due to the increase in sales and
changes in product mix. The company provides for obsolete and nonsaleable
inventories based on specific identification of inventory against current demand
and recent usage. The amounts charged to expense were $2,906,000, $2,907,000,
and $1,758,000 in 1996, 1995, and 1994, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
The company's research, development and engineering (RD&E) expenses were $6.0
million, $6.1 million, and $5.8 million, in 1996, 1995, and 1994, respectively.
As a percent of sales, these expenses were 3.0%, 3.0%, and 3.7%, respectively.
In 1996, 1995, and 1994 the company focused most of its RD&E efforts on products
for large Original Equipment Manufacturers, resulting in a fairly constant
quantity of projects on which the company worked. Consequently, spending in
1996, 1995, and 1994 was relatively unchanged.
SELLING EXPENSES
Selling expenses were $5.6 million, $5.0 million, and $7.4 million, in 1996,
1995, and 1994, respectively. Selling expenses as a percent of revenue were
2.8%, 2.4%, and 4.6%, respectively. The increase in 1996 is primarily due to
costs associated with the introduction of new products into the retail market.
The significant decrease in 1995 is due to reduced spending in advertising,
travel and commissions. The reduction in advertising is due to less general
advertising in industry publications. The reduction in travel is due to a
reduction in the company's sales force. The company ceased using outside sales
representatives in 1995 and commission payments were reduced accordingly.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $12.5 million, $10.8 million and $11.0
million, in 1996, 1995, and 1994, respectively. The increase in 1996 is
partially due to $827,000 of recoveries and reversals (discussed below) recorded
in 1995 not recurring in 1996. The balance of the increase is primarily due to
an increase of $267,000 in foreign exchange transaction losses, $480,000 of
costs incurred to scale down European Operations, an increase of $149,000 in
hiring and moving costs, and $101,000 of increased insurance costs. G&A
expenses in 1995 include recoveries of previously written off accounts
receivable totaling $310,000 and the reversal of certain litigation reserves in
the amount of $517,000. The company provides for doubtful accounts primarily
based on specific identification. The amounts charged to expense were $87,000,
$361,000, and $542,000, in 1996, 1995 and 1994, respectively.
General and administrative costs as a percentage of sales were 6.2%, 5.2%, and
6.9%, in 1996, 1995, and 1994, respectively.
INTEREST EXPENSE AND OTHER
The company had interest expense of $3,047,000, $3,486,000, and $1,849,000, in
1996, 1995 and 1994, respectively. The decrease in 1996 is due to a significant
reduction in interest bearing debt, partially offset by increases in interest
rates over the year. The increase in 1995 is related to the debt incurred in
the acquisition of Honeywell, Inc.' s Keyboard Division (see Note 16 to the June
29, 1996 Consolidated Financial Statements) being outstanding the entire year,
an increase in the company's revolving line to support the growth in working
capital, and higher interest rates compared to 1994.
The company earned $125,000, $110,000, and $146,000 in 1996, 1995, and 1994,
respectively, from investing in short term securities and commercial paper.
Interest income is included in Other (Income) Expense.
On January 3, 1996 the company reached a settlement in the amount of $1,440,000
with one of its insurers for reimbursement of costs associated with the Colbert
landfill (a Superfund site), which were incurred and paid in previous years.
This amount was recorded in Other (Income) Expense in 1996. No settlement has
been reached with the final insurer, and therefore, the amount of any contingent
gain is not determinable. Negotiations have commenced, and any recoveries will
be recorded upon settlement.
As a result of the restructuring of the Ireland subsidiary a significant amount
of property, plant, and equipment was disposed of in the fourth fiscal quarter
of 1996. This generated the recognition of $549,000 gain on liquidation of the
currency translation account which was included in Other (Income) Expense in
1996.
INCOME TAXES
The company had income tax expense of $1,240,000, $2,203,000, and $8,000, in
1996, 1995, and 1994, respectively. Income tax expense (benefit) on foreign
operations represented $(251,000) and $201,000 of the income tax expense in 1996
and 1995, respectively, and all of the income tax expense in 1994. The company
has tax loss carryforwards of approximately $30.3 million which expire in
varying amounts in the years 2003 through 2010. In 1996 and 1994 foreign losses
increased the Company's effective income tax rate since such losses are not
deductible for U.S. income tax purposes. Accordingly, in 1996 the income tax
provision primarily resulted from net income from domestic operations and has
been reported net of any tax benefit from foreign operations. In 1995 the
company's effective tax rate was 33.3% differing from the statutory rate
principally because of lower tax rates on foreign earnings. In 1994 the company
adopted "Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes" (see Note 7 to the June 29, 1996 Consolidated Financial
Statements). The effect on the company's operations was to increase net income
by $8,750,000. Additionally, a deferred tax asset of $8,750,000 was recorded,
which was net of a valuation allowance of $5,416,000. The balance of the
deferred tax asset on June 29, 1996 was $5,506,000, which was net of a valuation
allowance of $8,609,000. The increase in the valuation allowance is based on
management's estimate of the future realizable value of the net deferred tax
asset. In recording this deferred tax asset, the company considered both
negative and positive evidence. Negative evidence includes the fact that the
company had sustained taxable losses in three of the four years prior to
adoption. The company operates in a volatile industry which has seen average
selling prices decline significantly due to foreign competition. Also, the
company incurred a significant amount of debt as a result of the acquisition of
the keyboard division of Honeywell in 1994. This is offset by positive evidence
including greatly reduced product costs as a result of moving production to
Juarez, Mexico, where a lower wage base can be attained and lower operating
expenses by reducing commissions for sales representatives. The company was
awarded significant new programs by new large OEM customers, which have and are
expected to improve revenues and profits. As a result, backlogs grew to $35.5
million an the end of fiscal year 1994 from $15.1 million at the previous year
end. Backlogs continued to grow in fiscal 1995 to a balance of $42.8 million by
year end. Fiscal year 1996 experienced a decrease in backlog to $24.6 million,
primarily due to reduced lead time requirements from the company's customers.
In order to fully utilize this deferred tax asset, the company must generate
approximately $16,000,000 in taxable income before the net operating loss
carryovers expire. Management believes that the positive evidence outweighs the
negative evidence, and it is more likely than not that the company will generate
sufficient taxable income to allow the realization of the deferred tax asset
within the next three or four fiscal years.
INTERNATIONAL (ASIA, EUROPE, MEXICO)
In the first quarter of 1994 the company acquired substantially all of the
assets and liabilities of the Honeywell Keyboard Division (see note 16 to the
June 29, 1996 Consolidated Financial Statements). As part of this acquisition
the company acquired an assembly facility in Juarez, Mexico. This subsidiary,
Key Tronic Juarez, SA de CV, is primarily used to support the company's domestic
and European operations. At the end of 1992, the company decided to discontinue
the activities of one of its subsidiaries, Key Tronic Taiwan Corporation. This
subsidiary, which was primarily an assembly facility, began operations in
January 1984 and was initially set up to serve the Asian market. In July 1985,
the company opened Key Tronic Europe, Ltd. (KTEL), a keyboard manufacturing
facility in Dundalk, Ireland. In the fourth quarter of 1996 the company
implemented a restructuring of the KTEL operation (see Note 15 to the June 29,
1996 Consolidated Financial Statements). KTEL will remain the company's European
base for sales, marketing, and product distribution.
Foreign sales from worldwide operations, including domestic exports, were $87.0
million in 1996 compared to $83.2 and $68.2 million in 1995 and 1994,
respectively. Foreign sales were 43.3% of net sales in 1996 compared to 40.1%
and 42.8% in 1995 and 1994, respectively. Sales from KTEL represented 20.4% of
consolidated sales to unaffiliated customers in 1996, compared to 18.3% in 1995
and 19.5% in 1994, respectively (see Note 11 to the June 29, 1996 Consolidated
Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The company generated (used) cash flow from operating activities of $19.1
million, $3.2 million, and $(.7) million in 1996, 1995, and 1994, respectively.
Capital expenditures were $7.1 million, $7.7 million, and $5.2 million in 1996,
1995, and 1994, respectively. The company's cash position decreased by $1.9
million in 1996 compared to decreases of $.5 million and $1.9 million in 1995
and 1994, respectively. Cash flow generated from operations allowed the long-
term debt to be reduced by $14.2. The company had working capital of $28.0
million and $37.7 million at June 29, 1996 and July 1, 1995. The decrease in
working capital was due primarily to lower trade receivables resulting from
decreased sales.
Trade receivables were $23.4 million at June 29, 1996, a decrease of $10.6
million from 1995. Trade receivables decreased primarily because of lower
sales. Inventories were $22.0 million and $26.9 million at June 29, 1996 and
July 1, 1995. The decrease in inventory is a result of less materials required
to support a lower sales volume.
On October 24, 1994, the company entered into a secured financing agreement with
the CIT Group/Business Credit, Inc. (CIT). The agreement contains covenants
that relate to minimum net worth, minimum working capital, income statement, and
balance sheet ratios, and it restricts investments, disposition of assets, and
payment of dividends. The agreement contains a $12,000,000 term note and a
revolving loan for up to $28,000,000. The agreement is secured by the assets of
the corporation (see Note 5 to the June 29, 1996 Consolidated Financial
Statements). At June 29, 1996 there was $11.4 million available for use under
the revolving loan. At June 29, 1996 and July 1, 1995, the company was in
compliance with all debt covenants and restrictions.
The company anticipates that capital expenditures of approximately $8.6 million
will be required during the next fiscal year. Capital expenditures are expected
to be financed through cash balances, cash flow from operating activities and
capital leases.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Key Tronic Corporation.
We have audited the consolidated balance sheets of Key Tronic Corporation and
Subsidiaries as of June 29, 1996 and July 1, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ending June 29, 1996, July 1, 1995 and July 2, 1994. These financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statemtns based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
resonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Key Tronic Corporation and
Subsidiaries at June 29, 1996 and July 2, 1994, and the results of their
poerations and cash flows for the years ending June 29, 1996, July 1, 1995 and
July 2, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
August 9, 1996
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands) June 29, July 1,
- - -------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,569 $ 4,455
Trade receivables, less allowance for doubtful
accounts of $932 and $1,185 23,358 33,964
Inventories (Note 2) 21,966 26,883
Real estate held for sale 2,243 2,243
Deferred income tax asset, net (Note 7) 1,295 1,531
Other 3,322 3,932
- - --------------------------------------------------------------------------------------
Total current assets 54,753 73,008
- - --------------------------------------------------------------------------------------
Property, Plant, and Equipment-at cost (Notes 3, 6, and 15) 94,609 89,255
Less accumulated depreciation 63,264 55,387
- - --------------------------------------------------------------------------------------
Total property, plant, and equipment 31,345 33,868
- - --------------------------------------------------------------------------------------
Other Assets:
Other, (net of accumulated amortization of $734 and $286) 1,692 1,283
Deferred income tax asset, net (Note 7) 4,211 5,269
Goodwill (net of accumulated amortization of $255 and $128) 1,531 1,658
- - --------------------------------------------------------------------------------------
$93,532 $115,086
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,577 $ 21,650
Current portion of long-term obligations (Note 5) 2,265 5,433
Interest payable 253 329
Accrued compensation and vacation (Note 15) 2,936 4,152
Accrued taxes other than income taxes 1,125 1,468
Other (Notes 9 and 15) 4,577 2,289
- - --------------------------------------------------------------------------------------
Total current liabilities 26,733 35,321
- - --------------------------------------------------------------------------------------
Long-term liabilities:
Long-term obligations, less current portion (Note 5) 17,323 28,499
- - --------------------------------------------------------------------------------------
Total long-term liabilities 17,323 28,499
- - --------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5,6, and 9)
Shareholders' equity (Note 8):
Common stock, no par value, authorized 25,000 shares; issued and
outstanding 8,534 and 8,456 shares 38,142 37,484
Retained earnings 10,906 12,741
Foreign currency translation adjustment 428 1,041
- - --------------------------------------------------------------------------------------
Total shareholders' equity 49,476 51,266
- - --------------------------------------------------------------------------------------
$93,532 $115,086
======================================================================================
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
(In thousands, except per share amounts) June 29, July 1, July 2,
- - -------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net sales $201,038 $207,456 $159,447
Cost of sales (Notes 1 and 2) 174,052 175,709 142,397
- - ------------------------------------------------------------------------------------
Gross profit on sales 26,986 31,747 17,050
Operating expenses:
Research, development and engineering (Note 1) 5,997 6,131 5,836
Selling 5,597 5,042 7,409
General and administrative (including provision for
doubtful receivables of $87, $361, and $542) (Note 1) 12,543 10,772 11,045
Provision for restructuring (Note 15) 2,669 - 1,021
- - ------------------------------------------------------------------------------------
Operating income (loss) 180 9,802 (8,261)
Interest expense (Note 5) 3,047 3,486 1,849
Other (income) expense (Note 10) (2,272) (308) (308)
- - -------------------------------------------------------------------------------------
Income (loss) before income taxes (595) 6,624 (9,802)
Income tax provision (Note 7) 1,240 2,203 8
- - ------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle (1,835) 4,421 (9,810)
Cumulative effect to July 4, 1993, of change in
accounting principle for income taxes (Notes 1 and 7) - - 8,750
- - ------------------------------------------------------------------------------------
Net income (loss) $ (1,835) $ 4,421 $ (1,060)
========= ======== =========
Earnings (loss) per share:
Before cumulative effect of change in
accounting principle $ N.A. $ N.A. $ (1.19)
========= ======== =========
Primary earnings (loss) per common share $ (.22) $ .45 $ (.13)
========= ======== =========
Fully diluted earnings per common share $ N.A. $ .43 $ N.A.
========= ======== =========
Primary shares outstanding 8,522 9,853 8,231
========= ======== =========
Fully diluted shares outstanding N.A. 10,339 N.A.
========= ======== =========
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Currency
Common Stock Retained Translation
(In thousands) Shares Amount Earnings Adjustment Total
<S> <C> <C> <C> <C> <C>
Balances, July 3, 1993 7,837 $32,887 $9,380 $1,123 $43,390
Net Loss - 1994 (1,060) (1,060)
Issuance of stock under stock options 34 164 164
Stock issued (Note 16) 400 3,200 3,200
Foreign currency translation adjustment (1,182) (1,182)
- - -----------------------------------------------------------------------------------------
Balances, July 2, 1994 8,271 $36,251 $8,320 $(59) $44,512
- - -----------------------------------------------------------------------------------------
Net Income - 1995 4,421 4,421
Issuance of stock under stock options 185 1,233 1,233
Foreign currency translation adjustment 1,100 1,100
- - -----------------------------------------------------------------------------------------
Balances, July 1, 1995 8,456 $37,484 $12,741 $1,041 $51,266
- - -----------------------------------------------------------------------------------------
Net Loss - 1996 (1,835) (1,835)
Issuance of stock under stock options 78 658 658
Foreign currency translation adjustment (613) (613)
- - -----------------------------------------------------------------------------------------
Balances, June 29, 1996 8,534 $38,142 $10,906 $ 428 $49,476
- - -----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
(In thousands) June 29, July 1, July 2,
- - ------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) $(1,835) $4,421 $(1,060)
Adjustments to reconcile net income (loss) to cash
provided (used) by operating activities:
Depreciation and amortization 9,974 8,877 8,596
Provision for restructuring of business line 2,669 - 1,021
Provision for obsolete inventory 2,906 2,907 1,758
Provision for doubtful receivables 87 361 542
Provision for litigation - (517) -
Provision for warranty 1,121 1,001 647
(Gain) or loss on disposal of assets (181) (43) (43)
Cumulative effect of change in accounting for
income taxes (Notes 1 and 7) - - (8,750)
Deferred income tax asset 1,294 1,950 -
Changes in operating assets and liabilities:
Trade receivables 10,519 (8,890) (1,182)
Inventories (39) (8,003) (1,290)
Other assets 1,809 (2,164) 1,769
Accounts payable (6,073) 4,491 3,723
Employee compensation and accrued vacation (1,216) 1,223 383
Other liabilities (1,921) (2,409) (6,839)
- - ------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 19,114 3,205 (725)
- - ------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash Paid for assets acquired and liabilities
assumed, net (Note 16) - - (21,961)
Purchase of property and equipment (7,060) (7,652) (5,231)
Proceeds from sale of property and equipment 358 203 448
Change in other assets - - 1,047
- - ------------------------------------------------------------------------------------
Cash used in investing activities (6,702) (7,449) (25,697)
- - ------------------------------------------------------------------------------------
Cash flows from financing activities:
Payment of financing costs (22) (1,245) -
Proceeds from issuance of common stock 681 1,233 164
Proceeds from long-term obligations - 28,595 31,711
Payments on long-term obligations (14,344) (25,980) (6,205)
- - ------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (13,685) 2,603 25,670
- - ------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (613) 1,100 (1,182)
- - ------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,886) (541) (1,934)
Cash and cash equivalents, beginning of year 4,455 4,996 6,930
- - ------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,569 $ 4,455 $4,996
======== ======= ======
</TABLE>
See notes to consolidated financial statements
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Key Tronic Corporation and subsidiaries (the "Company") principally manufactures
input devices, primarily keyboards, for computers, terminals, and work stations.
The Company also is in various stages of developing, marketing, and
manufacturing a variety of computer related products.
Principles of Consolidation
The consolidated financial statements include Key Tronic Corporation and its
wholly owned subsidiaries in Ireland, Mexico, Taiwan, and the United States.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include the provisions for bad debts, inventory, litigation, warranty
and barter credits. Actual results could differ from those estimates.
Cash Equivalents
The Company considers investments with an original maturity of three months or
less to be cash equivalents. Cash equivalents are carried at cost which
approximates fair value.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally using the first-in, first-out (FIFO) method. The reserve to adjust
inventory to market value for obsolete and nonsaleable inventories was
approximately $4,322,000 and $3,512,000 at June 29, 1996 and July 1, 1995,
respectively. The Company provides for obsolete and nonsaleable inventories
based on specific identification of inventory against current demand and recent
usage.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using
accelerated and straight-line methods over the expected useful lives.
Constructed molds and dies are expensed as incurred if there is no future
utility beyond one year. Capitalized molds and dies are depreciated over the
expected useful lives of one to three years.
Valuation of Long-Lived Assets
Effective March 31, 1996 the company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company,
using its best estimates based on reasonable and supportable assumptions and
projections, reviews assets for impairment whenever events or changes in
circumstances have indicated that the carrying amount of its assets might not be
recoverable. Impaired assets are reported at the lower of cost or fair value.
At June 29, 1996, no assets had been written down.
Goodwill
Goodwill resulted from the acquisition of substantially all of the assets and
liabilities of Honeywell, Inc.' s Keyboard Division (see Note 16). Goodwill is
amortized on a straight-line basis over a period of fifteen years.
Accrued Warranty
An accrual is made within other current liabilities for expected warranty costs,
with the related expense recognized in cost of goods sold. Management reviews
the adequacy of this accrual quarterly based on historical analysis and
anticipated product returns. Accrued warranty costs at June 29, 1996 and July
1, 1995 were $437,000 and $629,000, respectively.
Net Sales
Sales are recognized when products are shipped. Provisions for estimated sales
returns are not significant. The Company provides for doubtful accounts
primarily based on specific identification.
Research, Development and Engineering
Research, development and engineering expenses include costs of developing new
products and production processes as well as design and engineering costs
associated with the production of custom keyboards. Generally product
customizations are targeted at perceived market needs and precede the obtaining
of customer orders and/or contracts. Such costs are charged to expense as
incurred. Product customization costs incurred pursuant to customer orders
and/or contracts are included in cost of sales.
Income Taxes
The Company accounts for income taxes in accordance with provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under the asset and liability method prescribed by SFAS No. 109,
deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities. Deferred taxes are
measured using provisions of currently enacted tax laws. Tax credits are
accounted for as a reduction of income taxes in the year the credit originates.
Per Share Data
Net income (loss) per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding and is adjusted for
shares issuable upon exercise of stock options when such exercise has a dilutive
effect. The computation assumes the proceeds from the exercise of stock options
were used to repurchase common shares at the average market price (for primary
earnings per share) or greater of average or ending market price (for fully
diluted earnings per share) of the Company's common stock during each period.
Significant Customers
One customer accounted for approximately 34%, 23%, and 10% of net sales for the
years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively. This
customer accounted for approximately 28% and 20% of trade receivables at June
29, 1996 and July 1, 1995 respectively. Another customer accounted for
approximately 17%, 19%, and 1% of net sales in 1996, 1995, and 1994,
respectively. This customer accounted for approximately 7% and 18% of trade
receivables at June 29, 1996 and July 1, 1995, respectively. A third customer
reported as significant as of July 1, 1995 accounted for approximately 7% of net
sales for the year ended June 29, 1996. Sales to this customer accounted for
12% and 21% of net sales in 1995 and 1994, respectively. This customer
accounted for approximately 6% and 8% of trade receivables at June 29, 1996 and
July 1, 1995, respectively.
Foreign Currency Translation Adjustment
The functional currency of the company's subsidiaries in Ireland and Mexico is
the U.S. dollar. Realized foreign currency transaction gains and losses are
included in general and administrative expenses. Assets and liabilities of the
Company's subsidiary in Taiwan are translated to U.S. dollars at year-end
exchange rates. Revenues and expenses are translated at average exchange
rates. Translation gains and losses are included in a separate component of
shareholders' equity.
During the fourth quarter of fiscal 1995 the Company determined that significant
changes in the business of the company's subsidiary in Ireland had occurred
throughout the year such that the functional currency of the subsidiary had
changed from the Irish punt to the U.S. dollar. Effective April 1, 1995 the
Company changed the functional currency of this subsidiary to the U.S. dollar.
Factors influencing this change include a) the origination point of major sales
contracts switching to the U.S. b) a large increase in the percentage of
materials received from the U.S. and c) a switch in the denomination of sales
contracts from Irish punts to U.S. dollars. The impact of this change in
accounting policy is such that subsequent to April 1, 1995, the Company has not
incurred translation adjustments relating to this subsidiary.
Financial Instruments
Effective July 2, 1995 the company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 107 "Disclosures About the Fair Value
of Financial Instruments". The carrying values reflected in the balance sheet
at June 29, 1996, reasonably approximate the fair value of cash and cash
equivalents and other assets. Based on the borrowing rates currently available
to the company for loans with similar terms and average maturities, the fair
value of long-term debt is estimated to be $20.0 million.
Reclassification
Certain amounts have been reclassified for 1994 to be consistent with the
presentation of 1995 amounts.
Fiscal Year
The Company operates on a 52/53 week fiscal year. Fiscal years end on the
Saturday nearest June 30. As such, fiscal years 1996, 1995, and 1994 ended on
June 29, 1996, July 1, 1995, and July 2, 1994, respectively. Fiscal year 1997
will end on June 28, 1997.
2. INVENTORIES
<TABLE>
Components of inventories were as follows:
(in thousands) June 29, July 1,
1996 1995
<S> <C> <C>
Finished goods $ 4,740 $ 6,978
Work-in-process 3,073 3,303
Raw materials 14,153 16,602
------ ------
Total $21,966 $26,883
====== ======
</TABLE>
Cost of goods sold includes charges of $2.9 million, $2.9 million, and $1.8
million resulting from reduction of inventories to estimated realizable value in
1996, 1995, and 1994, respectively.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Equipment includes property leased under capital leases (See Note 6) of
$1,407,000 and $1,329,000 at June 29, 1996 and at July 1, 1995. Related
accumulated amortization is $1,044,000 and $844,000, respectively.
<TABLE>
<CAPTION>
Classification Life (in years) June 29, July 1,
- - --------------------------------------------------------------------
1996 1995
(in thousands)
<S> <C> <C>
Land $ 2,486 $ 2,486
Buildings and improvements 3 to 30 14,186 13,701
Equipment 1 to 10 65,670 60,933
Furniture and fixtures 3 to 5 12,267 12,135
- - --------------------------------------------------------------------
Total $94,609 $89,255
======= =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
(a) The Company has life insurance policies on the life of its founder/director
with net death benefits totaling approximately $3,000,000. Of these, policies
with death benefits totaling $750,000 have been designated to fund obligations
of the Company to the founder/director's spouse in the event of his death and,
accordingly, such obligations are not recorded in the financial statements. Net
cash values of such policies are recorded in the amount of $285,000 and $194,000
in 1996 and 1995, respectively, and are included in other assets.
(b) Hiller Investment Company (HIC), beneficially owned by Stanley Hiller,
the Company's Chairman of the Board of Directors, incurs various overhead
expenses, consulting services and travel expenses on behalf of the Company. The
manner in which costs incurred by HIC are charged to the Company is through
specific identification. The cost of these services, which was charged against
General and Administrative Expense, amounted to approximately $221,000,
$330,000, and $411,000 in 1996,1995, and 1994, respectively. No amounts were
owed to HIC as of June 29, 1996 and July 1, 1995.
(c) Stanley Hiller Jr. and Thomas W. Cason (a Director) respectively have
66.73% and 8.46% equity interests in Hiller Key Tronic Partners (HKT Partners),
a Washington limited partnership. Other directors and officers collectively
have a 8.05% equity interest in HKT Partners. HKT Partners has a significant
stock option agreement with the Company (see note 8).
5. LONG-TERM OBLIGATIONS
On October 24, 1994, the company entered into a secured financing agreement with
The CIT Group/Business Credit, Inc. (CIT). The agreement contains a $12,000,000
term note and a revolving loan for up to $28,000,000. The agreement is secured
by the assets of the corporation. The agreement contains covenants that relate
to minimum net worth, minimum working capital, income statement and balance
sheet ratios and restricts investments, disposition of assets, and payment of
dividends. At June 29, 1996 and July 1, 1995, the Company was in compliance with
all debt covenants and restrictions.
The term note is payable in quarterly installments of principal, each in the
amount of $500,000, commencing in November 1995 and maturing in November 2001.
This note bears interest at one and three-quarters percent (1.75%) in excess of
the Chase Manhattan Bank Rate, which approximates prime (8.25% at June 29,
1996).
The revolving loan is renewable and covers an initial period of approximately
three years expiring on the first business day of November 1997. This loan
bears interest at one and one-half percent (1.50%) in excess of the Chase
Manhattan Bank Rate, which approximates prime. Borrowings outstanding, under
this agreement at June 29, 1996 amounted to $8,508,000.
Also, in connection with this agreement, the company issued to CIT a warrant to
purchase 45,000 shares of common stock at $12.60 per share. These warrants
expire on October 24, 1997.
<TABLE>
<CAPTION>
Long-term obligations consist of:
(in thousands) June 29, July 1,
- - ------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Note Payable - CIT $9,375 $11,990
Revolving line 8,508 16,428
Litigation reserve 900 900
Deferred compensation obligation 618 657
Capital lease obligations(See Note 6) 187 308
Note payable - Honeywell, Inc. 0 3,649
- - ------------------------------------------------------------------------
Total long-term obligations 19,588 33,932
Less current portion (2,265) (5,433)
- - ------------------------------------------------------------------------
Long-term obligations,
net of current portion $17,323 $28,499
======= =======
</TABLE>
The note payable to Honeywell, Inc. was payable in four installments of
principal and interest on the last business day of July and October of 1995 and
January and April of 1996. This unsecured note bore interest at the prime rate.
The litigation reserve relates to an amount accrued for the company's estimate
of probable legal costs associated with the Mica Sanitary landfill (see Note 9).
The installment contracts and capital lease obligations have monthly repayment
terms through December 1997, with fixed interest rates from 8.96% to 16.76% and
are collateralized by equipment with a net book value approximately equal to
amounts borrowed.
At June 29, 1996, the company was contingently liable for $555,000 in standby
letters of credit, which reduces the amount of availability under the revolving
line.
The Company accounts for its postretirement benefits in accordance with the
provisions of Statement of Financial Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions" (SFAS 106). Under
SFAS 106 the Company has recorded a liability for certain compensation related
agreements for two former employees. The liability was estimated based upon the
present value of future cash payments as specified in the agreements. This cost
of $116,000 in 1996, $111,000 in 1995 and $81,000 in 1994 was charged against
General and Administrative Expenses.
Principal maturities of long-term obligations, excluding litigation reserve, at
June 29, 1996 are:
<TABLE>
<CAPTION>
Fiscal Years Ending (in thousands)
<S> <C>
------------------------------------------------
1997 $2,265
1998 10,637
1999 2,103
2000 2,103
2001 1,477
2001 and later 103
------------------------------------------------
Total $18,688
================================================
</TABLE>
In November 1992, the Financial Accounting Standards Board issued "Statement of
Financial Accounting Standards No. 112, Employers' Accounting for Postemployment
Benefits" (SFAS 112). The provisions of SFAS 112 were adopted by the Company in
the first quarter of fiscal 1995. The implementation of SFAS 112 did not have a
material impact on the Company's financial position or results of operations.
NOTE 6. LEASES
The Company has capital and operating leases for certain equipment and
production facilities which expire over periods from one to five years. Future
minimum payments under capital leases and noncancelable operating leases with
initial or remaining terms of one year or more at June 29, 1996, are summarized
as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Years Ending(in thousands) Leases Leases
<S> <C> <C>
------------------------------------------------------
1997 $170 $1,527
1998 26 1,147
1999 0 814
2000 0 800
2001 0 515
2002 and later 0 60
------------------------------------------------------
Total minimum lease payments 196 $4,863
======
Amount representing interest 9
-------------------------------------------
Present value of net minimum
lease payments (including $170
classified as current) $187
====
</TABLE>
Rental expenses under operating leases were $1,823,000, $1,156,000, and $751,000
in 1996, 1995, and 1994, respectively.
7. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes". The standard changes
the method of accounting for income taxes to the asset and liability method.
The result of this accounting change, recorded cumulatively in the first quarter
of 1994, was to increase net earnings for the year ended July 2, 1994, by
$8,750,000 or $1.16 per primary common share. This change did not have a
material effect on the income tax provision recorded in 1995. In recording this
deferred tax asset, the Company considered both negative and positive evidence.
Negative evidence includes the fact that the Company had sustained taxable
losses in three of the four years prior to adoption. The Company operates in a
volatile industry which has seen average selling prices decline significantly
due to foreign competition. Also, the Company incurred a significant amount of
debt as a result of the acquisition of the keyboard division of Honeywell in
1994. This is offset by positive evidence including greatly reduced product
costs as a result of moving production to Juarez, Mexico, where a lower wage
base can be attained and lower operating expenses by reducing commissions for
sales representatives. The Company was awarded significant new programs by new
large OEM customers, which have and are expected to improve revenues and
profits. As a result, backlogs grew to $35.5 million at the end of fiscal year
1994 from $15.1 million at the previous year end. Backlogs continued to grow in
fiscal 1995 to a balance of $42.8 million by year end. In fiscal 1996 backlog
decreased to $24.6 million, primarily due to reduced lead times on orders. In
order to fully utilize this deferred tax asset, the Company must generate
approximately $16,000,000 in taxable income before the net operating loss
carryforwards expire. These loss carryforwards expire in varying amounts in the
years 2003 through 2009. Management believes that the positive evidence
outweighs the negative evidence, and it is more likely than not that the Company
will generate sufficient taxable income to allow the realization of the deferred
tax asset within the next three or four fiscal years.
The Company's effective tax rate differs from the federal tax rate as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(in thousands) June 29, July 1, July 2,
- - --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Federal income tax provision
(benefit)at statutory rates $ (202) $2,252 $(3,333)
Effect of foreign loss (income) not
subject to federal income tax 2,130 (181) 340
Valuation allowance upon adoption
of SFAS 109 - - 2,965
Permanent differences:
Tax credits (147) - -
Life insurance premiums 39 26 31
Other (329) (95) (3)
Foreign tax provision (benefit) at
foreign statutory rate (2,169) 491 (412)
Adjustment for effect of
beneficial tax rate on foreign
manufacturing income (loss) 1,918 (290) 420
- - -------------------------------------------------------------------------------
Income tax provision $ 1,240 $ 2,203 $ 8
===============================================================================
</TABLE>
In 1996 and 1994 foreign losses increased the Company's effective income tax
rate since such losses are not deductible for U.S. income tax purposes. The
domestic and foreign components of income (loss) before income taxes were:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(in thousands) June 29, July 1, July 2,
- - -------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Domestic $3,356 $6,090 ($7,817)
Foreign (3,951) 534 (1,985)
- - -------------------------------------------------------------------------------
Income (loss) before income taxes ($595) $6,624 ($9,802)
===============================================================================
</TABLE>
Deferred income tax provision (benefit) consists of the following for the year
ended:
<TABLE>
<CAPTION>
(in thousands) June 29, July 1,
- - --------------------------------------------------------------------
1996 1995
<S> <C> <C>
Allowance for doubtful accounts $ 24 $ 120
Inventory (189) 997
Accrued liabilities 34 418
Deferred compensation 13 14
Depreciation and amortization (1,342) 1,338
Net operating loss carryforward 1,136 (2,041)
Tax credit carryovers (198) (49)
Other (142) (83)
Change in valuation allowance 1,958 1,236
- - --------------------------------------------------------------------
Deferred income tax provision (benefit) $ 1,294 $1,950
====================================================================
</TABLE>
Deferred income tax assets and liabilities consist of the following at:
<TABLE>
<CAPTION>
(in thousands) June 29, July 1,
- - --------------------------------------------------------------------
1996 1995
<S> <C> <C>
Allowance for doubtful accounts $379 $403
Inventory 1,891 1,702
Vacation accrual 341 340
Self Insurance accrual 65 132
Litigation accrual 24 241
Warranty accrual 149 214
State deferred asset 143 108
Other 327 (112)
- - --------------------------------------------------------------------
Current deferred income tax assets 3,319 3,028
Current portion of valuation allowance (2,024) (1,497)
- - --------------------------------------------------------------------
Current deferred income tax assets net of
valuation allowance 1,295 1,531
- - --------------------------------------------------------------------
Litigation accrual 306 306
Deferred compensation 210 223
Depreciation and amortization (800) (2,142)
Net operating loss carryforward 10,318 11,454
Tax credit carryovers 644 446
Other 118 136
- - --------------------------------------------------------------------
Noncurrent deferred income tax assets 10,796 10,423
Valuation allowance net of
current portion (6,585) (5,154)
- - --------------------------------------------------------------------
Noncurrent deferred income tax assets net
of valuation allowance $4,211 $5,269
- - --------------------------------------------------------------------
</TABLE>
At June 29, 1996 the Company had tax loss carryforwards of approximately $30.3
million, which expire in varying amounts in the years 2003 through 2010.
Additionally, for federal income tax purposes, the Company has approximately
$644,000 of general business credit carryforwards which expire in varying
amounts in the years 2004 through 2010. Approximately $220,000 of the general
business credit carryforwards have an indefinite carryforward period. Foreign
income tax expense is calculated at the statutory rate of the foreign taxing
jurisdiction.
8. SHAREHOLDERS' EQUITY
The Company has an Incentive Stock Option Plan, an Executive Stock Option Plan,
and an Executive Stock Appreciation Rights Plan for certain key employees.
Options under these plans vest over two to ten years and become exercisable as
they vest. Options under the plans become exercisable in full immediately prior
to the occurrence of a "Change in Control" as defined in the plan documents. As
of June 29, 1996, 2,630,000 shares have been reserved for issuance and 787,605
options were outstanding of which 187,649 shares were exercisable under these
plans. Compensation expense for options will be recorded if the exercise price
of the option is less than the closing market price of the stock on the date of
grant. There was no compensation expense incurred in conjunction with options in
1996, 1995 or 1994 as all options were granted at fair market value.
The Company also has a Stock Option Plan for "Nonemployee Directors." Options
under this plan vest over a three year period and are exercisable as they vest.
As of June 29, 1996, 300,000 shares have been reserved for issuance and 140,000
options were outstanding of which 86,664 shares were exercisable.
In fiscal year 1992 the shareholders ratified and approved an option agreement
dated February 29, 1992 (Hiller Option Agreement) between the Company and Hiller
Partners (see Note 4), pursuant to which Hiller Partners received an option to
purchase 2,396,923 shares of common stock at an exercise price of $4.50 per
share, subject to adjustment under certain circumstances. Options under this
agreement are generally exercisable as follows; half of the shares after March
1, 1993 and the remainder of the shares after March 1, 1994. These options
expire on March 1, 1997.
Following is a summary of all plan activity:
<TABLE>
<CAPTION> Number
Price Range Of Options
- - -------------------------------------------------------------------------
<S> <C> <C>
Outstanding, July 3, 1993 $3.56 to $11.88 2,764,130
Granted during 1994 $6.25 to $10.12 412,858
Options exercised $3.56 to $ 8.25 (33,930)
Expired or canceled $3.56 to $11.13 (155,332)
- - --------------------------------------------------------------------------
Outstanding, July 2, 1994 $3.56 to $11.88 2,987,726
- - --------------------------------------------------------------------------
Granted during 1995 $7.25 to $14.625 269,377
Stock appreciation rights exercised $4.50 (9,380)
Options exercised $3.56 to $11.38 (184,956)
Expired or canceled $4.50 to $11.13 (130,386)
- - --------------------------------------------------------------------------
Outstanding, July 1, 1995 $3.56 to $14.625 2,932,381
- - --------------------------------------------------------------------------
Granted during 1996 $8.34 to $16.25 538,000
Options exercised $3.56 to $10.12 (77,709)
Expired or canceled $3.56 to $16.25 (68,144)
- - --------------------------------------------------------------------------
Outstanding, June 29, 1996 $3.56 to $16.25 3,324,528
- - --------------------------------------------------------------------------
</TABLE>
The company has two issues of stock warrants outstanding at June 29, 1996. The
first outstanding stock warrant, dated July 30, 1993, entitles Honeywell, Inc.
to purchase 300,000 shares of common stock at $14.00 per share (see Note 16). A
second stock warrant, dated October 24, 1994, entitles CIT to purchase 45,000
shares of common stock at $12.60 per share (see Note 5). These warrants expire
on July 30, 2000, and October 24, 1997, respectively.
The Company's Variable Investment Plan is available to employees who have
attained age 21. The plan has an Employer's Discretionary Contribution Trust,
invested in the Company's stock, and an Employee Contribution Trust consisting
of several investment alternatives. The Company contributes an amount equal to
100% of the employee's contribution on the first 2% of the employee's
compensation and an additional 25% of the employee's contribution on the
following 2% of the employee's compensation. Company contributions to the Trust
were $474,614, $461,037 and $485,287 in 1996, 1995 and 1994, respectively. The
Company has an Employee Stock Ownership Plan. No contributions were made to the
plan in 1996, 1995, or 1994. The investment in the Company's stock at June 29,
1996 by all employee trusts amounted to 344,443 shares.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments, such as stock purchase plans. Under
this method, compensation cost is measured based on the fair value of the stock
award when granted and is recognized as an expense over the service period,
which is usually the vesting period. This standard will be effective for the
Company beginning on June 30, 1996.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the company had applied the new method of accounting.
The Company intends to implement these disclosure requirements for its employee
stock plans beginning on June 30, 1996. Based on the Company's current use of
equity instruments, adoption of the new standard will not impact reported net
income or net income per share, and will have no effect on the Company's cash
flows.
9. COMMITMENTS & CONTINGENCIES
Litigation
The Company used Mica Sanitary landfill, a public dump site operated by the
County of Spokane, until early 1975. Mica landfill is a state lead National
Priority List site ("NPL"). Mica landfill was placed on the NPL in 1985. In
l988 the Washington Department of Ecology and Spokane County entered into a
Consent Decree requiring the County to conduct a Remedial Investigation (RI)
followed by appropriate Remedial Action (RA). The County's RI was completed by
the County in September 1992. An interim remedial action plan was completed in
late 1993 and instituted in mid 1994 to be followed by a 5 year performance
monitoring program to be conducted by the County to determine if additional
remedial measures are needed. The 5 year performance monitoring program
commenced in the Spring of 1995. The Company has not been named as a
Potentially Liable Party ("PLP") under the State Toxic Control Act ("STCA") or
as a Potentially Responsible Party ("PRP") under CERCLA, as amended ("CERCLA").
To date, test results have not shown the waste disposed of by the Company at
Mica to be a source of pollution or contamination. Prior to 1989 certain third
parties were designated PRP's and PLP's. The Company made a provision prior to
the beginning of fiscal year 1992 based on information then currently available
to it and the Company's prior experience in connection with another NPL landfill
site where the Company disposed of a similar type of waste which it disposed of
at Mica, for its estimate of probable legal costs to be associated with this
matter. No provision has been made for probable liability for remedial action,
because management does not believe a range of probable or reasonably possible
costs is estimable at this time based upon the fact that the Company to date has
not been named a PRP or PLP and the uncertainty as to what additional pollution
or contamination will be disclosed over the course of the County's 5 year
monitoring and testing program. At fiscal year end 1996, 1995 and 1994,
respectively, the accrued balance for probable legal costs was $900,000.
Management does not believe there to be any reasonably possible losses for legal
costs beyond the existing accrual for probable losses which could be material to
future financial position or results of operations. No provision has been made
to cover any future costs to the Company of any remedial action or clean-up
activities because those costs, if any, can not be determined at this time.
Given the inherent uncertainty in environmental matters, limited information
available with respect to any future remedial measures, uncertainty of the
results of future monitoring tests, limited information as to the number of
PRP's and PLP's, the uncertainty as to whether the Company will be designated a
PRP or PLP with respect to the site and the complexity of the circumstances
surrounding this matter, management's estimate is subject to and will change as
facts and circumstances warrant. Based upon publicly available cost estimates
of remediation and clean-up at the site and the contributions to date of
designated PRP's and PLP's, management believes that insurance coverage is
probable for any reasonably possible future remedial or clean-up costs to the
Company.
Pursuant to the Amended and Restated Purchase and Sale Agreement between
Honeywell, Inc. and Key Tronic Corporation, dated as of July 30, 1993 (the
"Agreement"), the Company assumed known and unknown product liabilities and
unknown but potentially incurred environmental liabilities for a portion of any
pre-existing claims against Honeywell, Inc. ("Honeywell") which are asserted
after the closing date relating to environmental matters and to product
liability matters associated with products manufactured by Honeywell prior to
its ceasing manufacture of those products on the closing date of the Agreement.
Honeywell retained responsibility for unasserted claims not assumed by the
Company as follows: Honeywell retained responsibility for environmental and
product liability claims, incurred but not reported as of the closing date, in
excess of $1,000,000 in the aggregate which 1) in the case of environmental
claims are asserted within two years following the closing date or which 2) in
the case of product liability claims are asserted within five years following
the closing date. Management estimated on the closing date of the acquisition
that it was probable that $1.0 million of incurred but not reported product
liability claims would be recorded during the 5 year period following the
closing of the Agreement and the Company recorded this liability as part of the
acquisition costs. At fiscal year end 1996,1995, and 1994, respectively, the
accrued balance for these product liability claims was $29,000, $610,000 and
$949,000. The reduction in the accrued balance reflects charges for expenses in
fiscal years 1996, 1995 and 1994. Management does not believe there to be any
reasonably possible product liability losses beyond the existing accrual for
probable losses which could be material to future financial position or results
of operations. The Company has not made a provision for Honeywell environmental
claims which may be discovered and asserted after the closing date or product
liability claims which may be asserted five or more years after the closing
date, because management does not believe such potential liabilities are
reasonably possible at this time. No environmental claims have been asserted as
of fiscal year end 1996. 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 currently has one hundred ten suits by computer keyboard users which
are in State or Federal Courts in Connecticut, Illinois, Kansas, Maryland, New
Jersey, New York, Pennsylvania and Texas. These suits allege that specific
keyboard products manufactured by the company were sold with manufacturing,
design and warning defects which caused or contributed to their injuries. The
alleged injuries are not specifically identified but are referred to as
repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These
suits seek compensatory damages and some seek punitive damages. It is more
likely than not that compensatory damages, if awarded, will be covered by
insurance, however the likelihood that punitive damages, if awarded, will be
covered by insurance is remote. A total of thirty-four suits have been
dismissed in California, Florida, Illinois, Kentucky, Massachusetts, Michigan,
New Jersey, New York and Texas. Six of the thirty-four dismissed suits are on
appeal, all in New York. The Company believes it has valid defenses and will
vigorously defend these claims. These claims are in the early stages of
discovery. Given the early stage of litigation, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, the range of reasonably possible losses in
connection with these suits is not estimable at this time. Therefore no
provision has been made to cover any future costs. Management's position will
change if warranted by facts and circumstances.
The Company's total accrual for litigation related matters, including
compensatory damages, and legal costs, was $1.0 million, $1.6 million and $2.4
million as of June 29, 1996, July 1, 1995 and July 2, 1994, respectively.
The Company has filed suit against its insurers for reimbursement of costs
associated with the Colbert landfill (a Superfund site). Settlements have been
reached with all but one insurer. Certain negotiations have commenced, with the
remaining insurer, and any recovery will be recorded upon settlement.
Capital Expenditures and Other
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $700,000 at June 29, 1996.
The subsidiary in Ireland has received reimbursement grants from the Irish
government for capital expenditures. Capital expenditures are recorded net of
reimbursement grants received. With reorganization of the subsidiary in
Ireland, the grants reimbursement agreement with the Irish government was re-
negotiated. All contingent grant liabilities were replaced with a short term
loan of $790,000 and a contingent liability of $1,777,000 which will cease at
the end of 5 years from the date of signing. The date of signing will be in
conjunction with the sale of a building currently owned by the subsidiary in
Ireland, and proceeds from this sale will be used to repay the short term loan.
Certain significant events such as closure of the Irish plant would cause
repayment of the contingent liability. The company currently plans to maintain
the Irish plant as its sales, marketing, distribution, and engineering facility
to service the European community.
The company has re-negotiated several contracts which previously required the
company to purchase minimum quantities of certain raw materials and components.
As of June 29, 1996 and July 1, 1995 minimum purchase contracts amounted to $0
and $2.2 million, respectively.
Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
management estimates include the allowance for doubtful accounts receivable, the
reserve for obsolete and nonsaleable inventories, the recoverability of
intangible assets, and warranty reserves. Actual results could differ from
those estimates.
The Company participates in a very dynamic high-technology industry and believes
that a variety of factors could have a material adverse affect on the Company's
future financial position or results of operations. Among these factors are:
changes in overall demand for computer products; increased competition;
litigation; risks associated with international operations; success of
customers' programs; timing of new programs; new product introductions or
technological advances by the Company and its competitors; changes in pricing
policies by the Company and its competitors.
The Company distributes products primarily to Original Equipment Manufacturers
(OEM's) and as a result maintains individually significant accounts receivable
balances from various major OEM's. The Company evaluates the credit worthiness
of its customers on an ongoing basis and may tighten credit terms on particular
customers from time to time.
NOTE 10. OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
Other (Income) Expense consists of:
Years Ended
(in thousands) June 29, July 1, July 2,
- - -------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Insurance Recovery (1,417) 0 0
Gain on liquidation of currency
translation account (549) 0 0
Other (306) (308) (308)
- - ------------------------------------------------------------------------
Total $(2,272) $(308) $(308)
========================================================================
</TABLE>
FOREIGN OPERATIONS
The Company currently operates in one business segment, the manufacture of input
devices, primarily keyboards, for computers, terminals, and work stations.
Information concerning geographic areas for the years ended June 29, 1996, July
1, 1995 and July 2, 1994 is summarized in the following table.
<TABLE>
<CAPTION>
Domestic U.S. Mexico Ireland Taiwan
(in thousands) Exports Operations Operations Operations Operations Eliminations Consolidated
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Net Sales:
Unaffiliated customers $45,942 $114,028 $ $41,068 $ 0 $ $201,038
Affiliates 11,059 9,745 1,644 (22,448)
- - -----------------------------------------------------------------------------------------------------------------------
Total 45,942 125,087 9,745 42,712 0 (22,448) 201,038
=======================================================================================================================
Income (loss) before
income taxes 5,256 415 (6,048) 0 (218) (595)
=======================================================================================================================
Identifiable assets 84,606 1,395 17,305 2,812 (12,586) 93,532
=======================================================================================================================
1995
Net Sales:
Unaffiliated customers 45,122 124,278 0 38,056 0 0 207,456
Affiliates 7,390 8,718 1,069 0 (17,177) 0
- - -----------------------------------------------------------------------------------------------------------------------
Total 45,122 131,668 8,718 39,125 0 (17,177) 207,456
=======================================================================================================================
Income (loss) before
income taxes (6,090) 0 (12) 485 61 6,624
=======================================================================================================================
Identifiable assets $ 98,270 $ 851 $18,230 $2,860 $(5,125) $115,086
=======================================================================================================================
1994
Net Sales:
Unaffiliated customers 37,133 91,220 0 31,094 0 0 159,447
Affiliates 0 7,311 7,175 1,386 0 (15,872) 0
- - -----------------------------------------------------------------------------------------------------------------------
Total 37,133 98,531 7,175 32,480 0 (15,872) 159,447
Income (loss) before
income taxes (7,817) 119 (1,096) 0 (1,008) (9,802)
=======================================================================================================================
Identifiable assets $86,892 $ 761 $16,323 $2,016 $(4,064) $101,928
=======================================================================================================================
</TABLE>
Historically, exports from domestic operations are sold primarily to European
customers. However, 42% of domestic exports as of June 29, 1996 were sold to
customers in the Far East. Transfers to affiliates are made at prices which
approximate market.
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended
(in thousands) June 29, July 1, July 2,
- - -----------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Interest payments $ 3,117 $4,803 $1,849
Income tax payments 212 0 0
Stock exchange for net assets (Note 16) 0 0 3,200
Inventory exchanged for other assets 2,050 0 0
- - ------------------------------------------------------------------------------
</TABLE>
NOTE 13. SUPPLEMENTAL INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Years Ended
(in thousands) June 29, July 1, July 2,
- - --------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Maintenance and repairs $2,411 $ 3,295 $ 2,509
- - --------------------------------------------------------------------------
</TABLE>
NOTE 14. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Year Ended June 29, 1996
First Second Third Fourth
(in thousands, except per share amounts)Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $60,550 $56,624 $41,217 $42,646
Gross profit 8,925 8,043 4,390 5,628
Income (loss) before income taxes 2,532 1,064 (748) (3,443)
Net income (loss) 1,618 696 (966) (3,183)
Primary earnings (loss) per
common share 0.16 0.07 (0.11) (0.37)
Fully diluted earnings per
common share 0.16 0.07 N.A. N.A.
Weighted average shares outstanding 8,488 N.A. 8,533 8,534
Primary shares outstanding 10,417 9,996 N.A. N.A.
Fully diluted shares outstanding 10,417 9,996 N.A. N.A.
Common stock price range 1
High 17.922 13.875 9.000 9.125
Low 13.875 7.750 5.375 6.000
- - --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 1, 1995
First Second Third Fourth
(in thousands, except per share amounts)Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $45,436 $48,748 $53,187 $60,085
Gross profit 6,343 7,560 8,712 9,132
Income before income taxes 534 1,322 1,836 2,932
Net income 328 849 1,399 1,845
Primary earnings per common share 0.04 0.10 0.14 0.18
Fully diluted earnings per
common share N.A. N.A. 0.14 0.18
Weighted average shares outstanding 8,273 8,314 8,349 8,400
Primary shares outstanding N.A. N.A. 9,937 10,262
Fully diluted shares outstanding N.A. N.A. 10,271 10,405
Common stock price range
High 11.500 11.000 14.375 16.125
Low 6.000 9.000 10.000 13.500
- - ---------------------------------------------------------------------------------
</TABLE>
1 High and low stock prices are based on the daily closing price reported by the
NASDAQ National Market System. These quotations represent prices between
dealers without adjustment for markups, markdowns or commissions, and may not
represent actual transactions.
The Company's common stock is quoted on the Nasdaq National Market System under
the symbol "KTCC."
The Company has not paid any cash dividends on its Common Stock during the last
two fiscal years. The Company currently intends to retain its earnings for its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The Company's ability to pay dividends is limited by
certain financial covenants in the Company's loan agreements.
As of June 29, 1996, there were approximately 1,591 common shareholders of
record.
NOTE 15. RESTRUCTURING CHARGES
For the year ended June 29, 1996 the Company made $2,669,000 in provisions for
the restructuring of its European Operations.
This provision was made in connection with the redeployment of production from
the Company's Dundalk, Ireland plant to other Company plants where lower costs
can be attained. The provision included $1,879,000 for severance and $790,000
for repayment of grants to the Irish Development Authority (IDA). The
restructuring activities were implemented during the Company's fourth fiscal
quarter of 1996 and are anticipated to be completed in the first fiscal quarter
of 1997.
The severance charge was a negotiated settlement with the employees through the
Irish labor court.
The redeployment of production of the company's Ireland plant resulted in a
significant decrease in employment at the facility. This decrease in employment
was an event which triggered the repayment of a portion of reimbursement grants
received from the Irish government (see note 9).
For the year ended July 2, 1994 the Company made $1,021,000 in provisions for
the restructuring of certain business lines.
This provision was made in connection with the redeployment of 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 completed
in the first fiscal quarter of 1995.
The write-down of assets is comprised of $242,000 equipment write-down and
$350,000 facility write-down. The equipment write-down was estimated as the
difference between book value and the highest firm offer on the equipment. The
building write-down was estimated as the difference between book value and
average value determined from multiple independent market valuations. This
write-down 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.
The balance in the reserve for restructuring at June 29, 1996 is $3,069,000.
This amount includes $2,669,000 provided for the restructuring of the company's
European Operations and $401,000 provided for Taiwanese liquidation taxes, which
have not yet been paid, related to the fiscal 1992 closure of the company's
plant in Taiwan. The formal dissolution is pending governmental approval from
Taiwan and is anticipated to occur in the second or third fiscal quarter of
1997.
<TABLE>
<CAPTION>
Reserve for Restructuring Obligations
- - ----------------------------------------------------------------------
1996 1995
<S> <C> <C>
Balance at beginning of year $372,000 $1,385,000
Provision charged to income 2,669,000 -
Amounts paid - (1,013,000)
Currency translation adjustment 28,000 -
- - ----------------------------------------------------------------------
Balance at end of year $ 3,069,000 $ 372,000
======================================================================
</TABLE>
NOTE 16. BUSINESS COMBINATION
On July 30, 1993, the Company acquired substantially all of the assets and
liabilities of Honeywell, Inc.' s Keyboard Division (HKD). The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the underlying acquired assets and assumed
liabilities at their estimated fair market values at July 30, 1993.
<TABLE>
<CAPTION>
Acquisition costs are summarized as follows (in thousands):
<S> <C>
Cash $22,000
Liabilities assumed 5,832
Acquisition costs 5,000
Note payable, Honeywell Inc. 3,648
Common stock issued 3,200
Total $39,680
These costs were allocated based on fair value as follows:
Trade receivables $ 8,505
Inventories 10,964
Other current assets 489
Property, plant and equipment 17,922
Goodwill 1,800
Total $39,680
</TABLE>
The stock was recorded at a twenty percent discount to the closing market price
on July 30, 1993 due to the three year trading restrictions on the stock at the
acquisition date. The costs incurred as part of the acquisition included
$1,125,000 for severance for terminating employees of HKD, $175,000 for
transition payroll for terminating employees of HKD, $1,100,000 for relocation
of employees of HKD, $700,000 for the closure of an acquired facility,
$1,000,000 for the assumption of certain potential liabilities (see note 9), and
$900,000 for certain other direct purchase and integration costs.
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
STANLEY HILLER, JR - Director
Mr. Hiller, age 71, has been a director of the Company and Chairman of the
Company's Executive Committee since February 1992. He served as Chief Executive
Officer of the Company from February 1992 through August 1995 and has served as
Chairman of the Board since September 1, 1995. Mr. Hiller is the Senior Partner
of Hiller Investment Company and Managing Partner of the Hiller Group, a
corporate management organization (the "Hiller Group"), and has served as
Chairman of the Board, Chief Executive Officer or Senior Officer of numerous
corporations over the last 50 years. Through the Hiller Group, which he founded
in the late 1960s, he has brought together groups of executives who become
actively involved in the direct management of companies, usually at the request
of its managers, directors or shareholders. During the past 20 years, Mr.
Hiller has concentrated his efforts in the area of restructuring troubled
companies, including G. W. Murphy Industries (diversified manufacturing and
services), Reed Tool Company (tool manufacturing), Baker International (Baker-
Hughes) (oil field service), The Bekins Company (moving and storage) and York
International (air conditioning manufacturing), Mr. Hiller also serves on the
Board of Directors of The Boeing Company (Boeing).
WENDELL J. SATRE - Director
Mr. Satre, age 78, has been a director of the Company since 1988 and served as
Chairman of the Board of Directors from July 1991 through August 1995. Mr.
Satre also served as a director from 1983 through 1986 and served as Acting
President of the Company from August 1991 through February 1992. Mr. Satre is
the retired Chairman of the Board and Chief Executive Officer of the Washington
Water Power Company, a public utility headquartered in Spokane, Washington. Mr.
Satre also serves on the Board of Directors of Alascom, a subsidiary of Pacific
Telephone, Inc., which is a subsidiary of Pacificorp, and Coeur d'Alene Company.
Fred Wenninger - Director, President and Chief Executive Officer
Mr. Wenninger, age 56, was named President, Chief Executive Officer and Director
effective September 1, 1995. Mr. Wenninger has been President and Chief
Executive Officer of Iomega Corporation from 1989 to 1994. He also served as
President of the Bendix/King Division of Allied Signal Corporation from 1986 to
1989. From 1963 to 1986 he served Hewlett-Packard in various positions, the
last eight years in General Manager positions. Mr. Wenninger also serves on the
Board of Directors of Hach and Norand.
YACOV A. SHAMASH - Director
Dr. Shamash, age 46, has been a director of the Company since 1989. He has been
the Dean of Engineering and Applied Sciences at the State University of New York
campus at Stony Brook since 1992. Professor Shamash developed and directed the
NSF Industry/University Cooperative Research Center for the Design of
Analog/Digital Integrated Circuits from 1989 to 1992 and also served as Chairman
of the Electrical and Computer Engineering Department at Washington State
University from 1985 until 1992.
KENNETH F. HOLTBY - Director
Mr. Holtby, age 74, has been a director of the Company since March 1992. He
served in various positions in engineering, technology, product development and
program management for Boeing since 1947. He most recently served as Senior
Vice President of Engineering and as a member of the Corporate Executive Counsel
for Boeing until his retirement in 1987. Mr. Holtby currently serves as a
consultant to Boeing.
DALE F. PILZ - Director
Mr. Pilz, age 70, has been a director of the Company since April 1992. Mr. Pilz
was Chief Executive Officer of Flowind Corporation from 1986 to 1990. He served
as President of Omninet Corporation from 1985 to 1986. Prior to that, Mr. Pilz
was Chief Executive Officer and President of GTE Sprint Communications from 1983
to 1985 and also served as Chief Executive Officer and President of GTE Spacenet
Corporation from 1983 to 1985.
MICHAEL R. HALLMAN - Director
Mr. Hallman, age 51, has been a director since July 1992. Since April 1992, he
has been with The Hallman Group. a consulting organization. He was President
and Chief Operating Officer of Microsoft Corporation from March 1990 through
March 1992; from March 1987 to February 1990, he was Vice President and later
President of Boeing Computer Services. Mr. Hallman also serves on the Board of
Directors of Intuit Inc., Infocus Systems, Amdahl Corporation, Network Appliance
and Timeline, Inc.
CLARENCE W. SPANGLE - Director
Mr. Spangle, age 71, has been a director of the Company since July 1992. A
former Chairman of Memorex and President of Honeywell Information Systems, Mr.
Spangle has been an independent management consultant since 1985. Mr. Spangle
also serves on the Board of Directors of Apertus Technologies, Inc.
WILLIAM E. TERRY - Director
Mr. Terry, age 63, has been a director since July 1992. Mr. Terry retired from
Hewlett-Packard in November 1993 where he served in a number of executive
positions during the past 35 years. Mr. Terry also serves on the Board of
Directors of Altera Corporation.
ROBERT H. CANNON, JR. - Director
Mr. Cannon, age 72, has been a director since September 1992. Professor Cannon
has been Charles Lee Powell Professor at the Department of Aeronautics and
Astronautics, Stanford Univeristy since 1979. From 1979 to 1990 he was also
Chairman of the Department. Previously, Professor Cannon served as Assistant
Secretary of Transportation and as Chief Scientist of the United States Air
Force. Professor Cannon has served on the General Motors Science Advisory
Committee since 1975, serving as Chairman from 1980 to 1984. He also serves on
the Board of Directors of Parker Hannifin Corporation.
THOMAS W. CASON - Director
Mr. Cason, age 53, served as President and Chief Operating Officer of the
company from 1994 to September 1995. Mr. Cason has been a director of the
company since February 1994. Mr. Cason has been President of Progressive
Tractor & Implement Co., Inc., an agricultural equipment dealership, since 1991.
He was Sr. Vice President and CFO of Baker Hughes Incorporated from July 1989 to
December 1990. Mr. Cason was President and Chief Executive Officer of Milpark
Drilling Fluids, a subsidiary of Baker Hughes Incorporated prior thereto. Mr.
Cason also serves on the Board of Global Marine, Inc.
RICHARD T. TINSLEY - Vice President of Quality
Mr. Tinsley, age 48, has been Vice President of Quality Assurance of the Company
since November 1993. Mr. Tinsley was the owner of Tinsley Associates from May
1993 to September 1993 and served as Director of manufacturing Operations,
Director of Quality and Quality Assurance Manager at Compaq Computer Corporation
from 1982 to 1993. From 1972 to 1982, Mr. Tinsley worked for Texas Instruments,
Inc., as Printer Manufacturing Manager and New Products Program Manager.
RONALD F. KLAWITTER - Vice President of Finance, Treasurer and Secretary
Mr. Klawitter, age 44, has been Vice President of Finance and Treasurer of the
Company since November 1992 and Secretary since October 1995. He was Acting
Secretary from November 1994 to October 1995. From 1987 to 1992, Mr. Klawitter
was Vice President, Finance at Baker Hughes Tubular Service, a subsidiary of
Baker Highes, Inc.
JACK W. OEHLKE - Chief Operating Officer
Mr. Oehlke, age 50, has been Chief Operating Officer of the Company since
October, 1995. Previously, he served as Senior Vice President of Operations
from January 1995 to October 1995 and Vice President of Manufacturing Operations
of the Company from December 1993 to January 1995. Mr. Oehlke served as
Director of Operations. Director of Quality and in various management positions
within manufacturing, engineering and quality functions of the Microswitch
Division of Honeywell, Inc. from 1968 to 1993.
CRAIG D. GATES - Vice President, General Manager of Business Development
Mr. Gates, age 37, has been Vice President and General manager of New Business
Development since October 1995. He joined the Company as Vice President of
Engineering in October of 1994. Mr. Gates has a Bachelor of Science Degree in
Mechanical Engineering and a Masters in Business Administration from the
Univeristy of Illinois, Urbana. From 1982 he held various engineering and
management positions within the Microswitch Division of Honeywell, Inc., in
Freeport, Illinois and from 1991 to October 1994 he served as Director of
Operations, Electronics for Microswitch.
Compliance with Section 16(a) of the Exchange Act:
Incorporated by reference to Key Tronic Corporation's 1994 Proxy Statement to
Shareholders.
Items 11, 12 and 13: EXECUTIVE COMPENSATION; SECURITIES OWNERSHIP AND CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSAC-
TIONS.
Additional information required by these Items is incorporated by reference to
Key Tronic Corporation's 1995 Proxy Statement to Shareholders which is attached
as exhibit 20.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page in
Form 10K
--------
FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets, June 29, 1996
and July 1, 1995 21
Consolidated Statements of Operations for
the years ending June 29, 1996, July 1, 1995,
and July 2, 1994 22
Consolidated Statements of Shareholders' Equity
for the years ending June 29, 1996, July 1, 1995,
and July 2, 1994 23
Consolidated Statements of Cash Flows for the
years ending July 1, 1995, July 2, 1994 and
July 3, 1993 23-24
Notes to Consolidated Financial Statements 24-39
SCHEDULES
Independent Auditors Report on Financial
Statement Schedules 47
Independent Auditors' Consent 48
II. Consolidated Valuation and Qualifying Accounts 49-50
</TABLE>
Other schedules are omitted because of the absence of conditions under which
they are required, or because required information is given in the financial
statements or notes thereto.
(B) REPORTS ON FORM 8-K
Form 8-K dated October 31, 1994, reporting the secured financing agreement with
the CIT Group/Business Credit, Inc. (CIT).
<TABLE>
<CAPTION>
File No. 2-83898 (i)
Exhibit
No.
(C) EXHIBITS
<S> <C>
The Company will, upon request and upon payment of a
reasonable fee not to exceed the rate at which such
copies are available from the Securities and Exchange
Commission, furnish copies of any of the following
exhibits to its security holders.
(3) (a) Articles of Incorporation 3.1
(b) By-Laws, as amended (iii)
(4) Certain long-term debt is described in Notes 5 and 15 to
the Consolidated Financial Statements of the Company.
The Company agrees to furnish to the Commission, upon
request, copies of any instruments defining rights of
holders of long-term debt described in Notes 5 and 15. N/A
(10) Material Contracts
(a) 1983 Incentive Stock Option Plan for Employees
of Key Tronic Corporation, as amended. (iii)
(b) The Key Tronic Corporation Variable Investment
Plan. (iii)
(c) Key Employee Stock Option Plan, as amended. 10.3
(d) Executive Stock Option Plan. (iii)
(e) Stock Bonus Plan (PAYSOP). (iii)
(f) Directors and Officers Liability and Company
Reimbursement Policies. 10.5
(g) Leases with Spokane Industrial Park, Inc. 10.7
(h) Amended and Restated Employment Agreement with
Lewis G. Zirkle. (iii)
(i) Agreement Regarding Split Dollar Life Insurance
Policies, as amended. (iv)
(j) Executive SAR Stock Option Plan of Key Tronic
Corporation (v)
(k) Key Tronic Corporation 1990 Stock Option Plan
for Non-Employee Directors (v)
(l) Employee Stock Ownership Plan (vi)
(m) ELLCO Leasing Corporation Master Equipment
Leasing Agreement (vi)
(n) Registration Rights Agreement with Hiller
Key Tronic Partners (vii)
(o) Stock Option Agreement with Hiller Key Tronic
Partners (vii)
(p) Officer Severance Agreements (vii)
(q) Purchase agreement with Honeywell, Inc. (viii)
(r) Officer Employment Agreement (ix)
(s) Executive Stock Option Plan (x)
</TABLE>
(13) 1996 Annual Report to Shareholders (to the extent set forth in Parts I,
II, and IV (a) of this report).
(i) Previous filing on Form S-1 is incorporated by reference, exhibit
number indicated
(ii) Incorporated by reference to report on Form 10-K for the year
ended 06/30/87
(iii) Incorporated by reference to report on Form 10-K for the year ended
06/30/86
(iv) Incorporated by reference to report on Form 10-K for the year ended
06/30/85
(v) Incorporated by reference, Key Tronic Corporation 1990 Proxy
Statement, pages C-1 - D3
(vi) Incorporated by reference to report on Form 10-K for the year ended
06/30/91
(vii) Incorporated by reference to report on Form 10-K for the year ended
07/04/92
(viii) Incorporated by reference to report on Form 8-K filed August 12,
1993.
(ix) Incorporated by reference, Key Tronic Corporation 1996 Proxy
Statement, pages 10-11
(x) Incorporated by reference, Key Tronic Corporation 1995 Proxy
Statement, pages 19-22
(21) Subsidiaries of Registrant
<TABLE>
<CAPTION>
<C> <C>
1. KT Services, Inc. 2. KT FSC
100% Owned Subsidiary 100% Owned Subsidiary,
Incorporated in the State of a Foreign Sales
Washington Corporation
Incorporated in Guam
3. Key Tronic Taiwan Corporation 4. Key Tronic Europe, LTD
100% Owned Subsidiary 100% Owned Subsidiary
Incorporated in Taiwan Incorporated in the
Cayman Islands
5. KTI Limited 6. U.S. Keyboard Company
100% Owned by Key Tronic Europe, LTD 100% Owned Subsidiary
Incorporated in Ireland Incorporated in the
State of Washington
7. Key Tronic Juarez, SA de CV
100% Owned Subsidiary
Incorporated in Mexico
</TABLE>
(23) Consents of Experts and Counsel
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Key Tronic Corporation
We have audited the consolidated financial statements of Key Tronic Corporation
as of June 29, 1996 and July 1, 1995, and for the years ended June 29, 1996,
July 1, 1995 and July 2, 1994, and have issued our report thereon dated August
9, 1996; such consolidated financial statements and reports are included in the
1996 Annual Report to Shareholders and are incorporated herein by reference.
Our audits also included the financial statement schedule of Key Tronic
Corporation listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
August 9, 1996
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND
SIGNATURES SCHEDULE II
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 29, 1996
JULY 1, 1995 AND JULY 2, 1994
1996 1995 1994
--------- ---------- ----------
Allowance for Obsolete Inventory
- - --------------------------------
<S> <C> <C> <C>
Balance at beginning of year $3,512,085 $3,581,447 $ 726,838
Assets acquired in acquisition 0 0 2,071,558
Provision charged to income 2,952,911 2,907,487 1,757,713
Dispositions (2,142,925) (2,976,849) (974,662)
--------- ---------- ----------
Balance at end of year $4,322,071 $3,512,085 $3,581,447
========= ========== ===========
Allowance for Doubtful Accounts
- - -------------------------------
Balance at beginning of year $1,185,373 $1,538,517 $1,110,582
Assets acquired in acquisition 0 0 637,156
Provision charged to income 0 361,283 542,179
Write-offs and reinstatements (253,136) (714,427) (751,400)
--------- ---------- ----------
Balance at end of year $ 932,237 $1,185,373 $1,538,517
========= ========== ===========
Reserve for Litigation
- - ----------------------
Balance at beginning of year $1,607,496 $2,426,375 $1,500,091
Assets acquired in acquisition 0 0 1,000,000
Provision charged (credited) to income 0 0 0
Cost incurred-net of recoveries (638,353) (818,879) (73,716)
--------- ---------- ----------
Balance at end of year 969,143 1,607,496 2,426,375
Less long-term portion 900,000 900,000 0
--------- ---------- ----------
Current portion $ 69,143 $ 707,496 $2,426,375
========= ========== ===========
Accrued Warranty Costs
- - ----------------------
Balance at beginning of year $ 628,727 $ 762,284 $ 332,093
Assets acquired in acquisition 0 0 627,341
Provision charged to income 1,120,979 1,001,276 646,759
Costs incurred (1,312,499) (1,134,833) (843,909)
--------- ---------- -----------
Balance at end of year $ 437,207 $ 628,727 $ 762,284
========= ========== ===========
Long-term Investment Allowance
- - ------------------------------
Balance at beginning of year $ 290,490 $ 290,490 $ 290,490
Provision charged to income 0 0 0
--------- ---------- ----------
Balance at end of year $ 290,490 $ 290,490 $ 290,490
========= ========== ===========
</TABLE>
SCHEDULE II
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 29, 1996
JULY 1, 1995 AND JULY 2, 1994
(continued)
1996 1995 1994
------ ------ ------
Allowance for Advances to Affiliate
- - -----------------------------------
<S> <C> <C> <C>
Balance at beginning of year 0 $ 55,434 $254,737
Recovery 0 (55,434) (199,303)
Provision charged to income 0 0 0
Write-offs 0 0 0
------ ------ ------
Balance at end of year $ 0 $ 0 $ 55,434
====== ====== ======
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 29, 1995
KEY TRONIC CORPORATION
By: /s/ Fred Wenninger
Fred Wenninger, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
/s/ Fred Wenninger September 29, 1995
Fred Wenninger Date
(Director, Chief Executive Officer
and President)
/s/ Ronald F. Klawitter September 29, 1995
Ronald F. Klawitter Date
(Principal Financial Officer)
/s/ Keith D. Cripe September 29, 1995
Keith D. Cripe Date
(Principal Accounting Officer)
/s/ Stanley Hiller, Jr. September 29, 1995
Stanley Hiller, Jr. Date
(Director)
/s/ Wendell J. Satre September 29, 1995
Wendell J. Satre Date
(Director)
/s/ Thomas W. Cason September 29, 1995
Thomas W. Cason Date
(Director)
/s/ Yacov A. Shamash September 29, 1995
Yacov A. Shamash Date
(Director)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Dale F. Pilz September 29, 1995
Dale F. Pilz Date
(Director)
/s/ William E. Terry September 29, 1995
William E. Terry Date
(Director)
</TABLE>
