SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 28, 1996
Commission File Number
Number 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
Identification No.)
----------------------
North 4424 Sullivan
Spokane, Washington 99216
(509) 928-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /.
At October 14, 1996, 8,540,034 shares of Common Stock, no par value (the
only class of common stock), were outstanding.
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KEY TRONIC CORPORATION
Index
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Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets - September 28,
1996 and June 29, 1996 3-4
Consolidated Statements of Income - First
Quarter Ended September 28, 1996 and
September 30, 1995 5
Consolidated Statements of Cash Flows -
First Quarter Ended September 28, 1996 and
September 30, 1995 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 11-15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Events 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 28, June 29,
1996 1996
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(Unaudited) (Audited)
(in thousands)
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ASSETS
Current Assets:
Cash and cash equivalents $ 2,012 $ 2,569
Trade receivables, less allowance for
doubtful accounts of $957 and $932 28,234 23,358
Inventories (Note 1) 21,715 21,966
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,307 1,295
Other 3,583 3,322
----- -----
Total current assets 59,094 54,753
----- ------
Property, Plant and Equipment - at cost 96,464 94,609
Less accumulated depreciation 65,068 63,264
----- ------
Total property, plant and equipment 31,396 31,345
----- ------
Other Assets:
Deferred income tax asset - non-current 4,304 4,211
Goodwill(net of accumulated amortization
of $287 and $255) 1,499 1,531
Other 1,543 1,692
----- ------
Total other assets 7,346 7,434
----- ------
$ 97,836 $ 93,532
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See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 28, June 29,
1996 1996
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(Unaudited) (Audited)
(in thousands)
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 2,324 $ 2,265
Accounts payable 16,253 15,577
Accrued compensation and vacation 3,013 2,936
Accrued taxes other than income taxes 1,298 1,125
Interest payable 171 253
Other 2,759 4,577
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Total current liabilities 25,818 26,733
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Long-term Obligations, less current portion 22,299 17,323
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Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,540 and 8,534 shares 38,169 38,142
Retained earnings 11,114 10,906
Foreign currency translation adjustment 436 428
----- ------
Total shareholders' equity 49,719 49,476
----- ------
$ 97,836 $ 93,532
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See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter Ended
September 28, September 30,
1996 1995
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(in thousands, except per share amounts)
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Net Sales $45,337 $60,550
Cost of sales (including warranty
provision of $427 and $151) 38,558 51,625
----- ------
Gross Profit on Sales 6,779 8,925
Operating Expenses:
Research, development and engineering 1,575 1,558
Selling 1,750 979
General and administrative (including provision
for doubtful accounts receivable of $25
and $0) 2,530 3,038
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Operating Income 924 3,350
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Interest Expense 672 815
Other (income)expense (50) 3
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Earnings before federal taxes on income 302 2,532
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Income Tax Provision 95 914
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Net Income 207 1,618
======== ========
Earnings Per Share (See exhibit 11):
Primary Earnings Per Common Share $0.02 $ 0.16
Fully Diluted Earnings Per Common Share $0.02 $ 0.16
Primary Shares Outstanding 9,422 10,417
Fully Diluted Shares Outstanding 9,598 10,417
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See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter Ended
September 28, September 30,
1996 1995
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(in thousands)
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Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $ 207 $1,618
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 2,068 2,398
Provision for obsolete inventory 100 718
Provision for doubtful receivables 25 0
Provision for warranty 427 160
(Gain) or loss on disposal of property and (11) 3
equipment
Deferred income tax asset (105) 800
Changes in Operating Assets and Liabilities:
Trade receivables (4,901) 746
Inventories 151 (2,991)
Other assets (174) (893)
Accounts payable 676 2,003
Employee compensation and accrued vacation 77 (1,773)
Other liabilities (2,154) 145
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Cash provided (used) by operating activities (3,614) 2,934
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Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 20 15
Purchase of property and equipment (1,984) (1,614)
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Cash used in investing activities (1,964) (1,599)
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Cash Flows from Financing Activities:
Other financing fees (50) (23)
Issuance of common stock 27 619
Proceeds from long-term obligations 5,036 0
Payments on long-term obligations 0 (6,130)
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Cash provided by (used in) financing activities 5,013 (5,534)
----- ------
Effect of exchange rate changes on cash 8 (48)
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Net decrease in cash and cash equivalents (557) (4,247)
Cash and cash equivalents, beginning of year 2,569 4,455
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Cash and cash equivalents, end of quarter $2,012 $ 208
======== ========
Non-Cash Investing and Financing Activities:
See note 4 to these financial statements
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
of operations for such periods. The results of operations for any interim period
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the Company's annual report for the year ended June 29,
1996.
1. INVENTORIES
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September 28, June 29,
1996 1996
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(Unaudited) (Audited)
(in thousands)
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Finished goods $ 5,341 $ 5,381
Work-in-process 2,743 3,640
Raw materials and supplies 17,188 17,267
Reserve for obsolescence (3,557) (4,322)
----- ------
$21,715 $21,966
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2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $1,382,000 at September
28, 1996.
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
<PAGE> 7
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 the end of the first fiscal quarter of 1997
and 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 the end of the first fiscal quarter of 1997, the accrued
balance for these product liability claims was $0. At fiscal year ends
1996, 1995, and 1994, respectively, the accrued balance for these product
<PAGE> 8
liability claims was $29,000, $610,000 and $949,000. The reduction in the
accrued balances reflect charges for expenses in the first quarter of fiscal
year 1997, 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 probable at this time. No environmental claims have been asserted as
of the end of the first quarter of fiscal 1997. 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 $.9 million, $1.0 million and $1.4
million as of September 28, 1996, June 29, 1996, and September 30, 1995
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.
<PAGE> 9
3. LONG-TERM OBLIGATIONS
On October 24, 1994 the Company entered into a secured financing agreement with
The CIT Group/Business Credit, Inc. (CIT). The agreement contains a $12 million
term note and a revolving loan for up to $28 million. The agreement is secured
by the assets of the Company. This agreement replaced a $5.0 million secured
revolving credit agreement and a $20.9 million note payable to a financial
institution. At September 28, 1996 and June 29,1996, the company was in
compliance with all debt covenants and restrictions.
Details of the CIT agreement are more fully reported on Form 8-K dated October
31, 1994.
Long-term obligations consist of:
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September 28, June 29,
1996 1996
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(in thousands)
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Note Payable - CIT $ 8,875 $ 9,375
Revolving Line 14,102 8,508
Litigation Reserve 900 900
Deferred compensation obligation 618 618
Capital lease obligations 128 187
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24,623 19,588
Less current portion (2,324) (2,265)
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$22,299 $17,323
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4. SUPPLEMENTAL CASH FLOW INFORMATION
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First Quarter Ended
September 28, September 30,
1996 1995
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(in thousands)
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Interest payments $754 $801
Income tax payments 0 0
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY
The Company used cash flows of $3.6 million in operating activities for the
first quarter of fiscal 1997 versus $2.9 million of cash provided from operating
activities during the same period of the prior year.
During the first quarter of 1997, $2.0 million was expended in capital
additions. During the first quarter of the prior year, $1.6 million was expended
in capital additions. The Company anticipates capital expenditures of
approximately $9.3 million through the remainder of the current fiscal year
ending June 28, 1997. Actual capital expenditures may vary from anticipated
expenditures depending upon future results of operations. See RISKS AND
UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 13-15 Capital expenditures
are expected to be financed with the combination of internally generated funds,
capital leases, and limited amounts of secured indebtedness along with several
operating leases.
The Company has a secured financing agreement which 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 September 28, 1996 and June 29, 1996, the company was in
compliance with all debt covenants.
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
September 28, 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. At September 28, 1996,
there was $8.9 million available for use under the revolving loan. The loan
balance increased $5.6 million over the first quarter due mainly to increased
receivables as a result of slower customer payments. To achieve maximum
cash availability and to decrease interest expense, management is
currently engaged in lengthy negotiations with the Company's current
lenders and other potential lenders with the intention of refinancing its
debt prior to the November 1997 expiration date of its current agreement.
Real estate held for sale is carried at net realizable value based upon
appraisals and management's intentions for sale or investment. Management is
actively marketing the properties through real estate brokers and has obtained
independent appraisals. The property is recorded at the lower of cost or net
realizable value.
<PAGE> 11
During the first three months of fiscal year 1997 accounts receivable
increased by $4.9 million. This increase is due primarily to increased sales in
the last month of the first quarter and increased days sales outstanding.
The Company believes that cash, cash equivalents, funds available under the
line of credit, and internally generated funds can satisfy cash requirements for
a period in excess of 12 months.
NET SALES
Net sales for the fiscal 1997 first quarter, which ended September 28,
1996, were $45.3 million compared to $60.6 million for the first quarter of the
previous year. The decrease in revenue is a result of decreased sales to
existing customers. Decreased sales of the Microsoft Natural Keyboard and the
phase out of the IBM Shuffleboard program were the largest contributors.
Keyboard shipments decreased 16.3% from the first quarter of the prior year
while the average selling price decreased approximately 18.1%. The decrease in
units shipped is due primarily to decreased customer orders. The decrease in
average selling price is due primarily to the sale of new lower cost, lower
margin products. Non-keyboard revenue accounted for 20.4% of total revenue in
the first quarter versus 13.2% in the first quarter of the prior year.
COST OF SALES
Cost of sales were 85.0% of revenue in the first quarter of 1997 compared
to 85.3% for the first quarter of 1996. The cost of sales percentage decreased
due to increased cost reductions. The company continues to emphasize cost
reduction whenever feasible by utilizing excess capacity in its Juarez, Mexico
facility to manufacture an increasing number of products.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.58 million in the
first quarter of fiscal 1997 and $1.56 million for the same period of fiscal
1996. As a percentage of sales, R, D & E expenditures were 3.5% in the first
quarter of 1997 compared to 2.6% in the first quarter of 1996. As a percent of
revenue the increase is due primarily to static activity over a decreased
revenue base.
SELLING EXPENSES
Selling expenses were $1.7 million in the first quarter of 1997 compared to
$1.0 million in the first quarter of 1996. Selling expenses as a percentage of
revenue were 3.9% for the quarter compared to 1.6% in the same quarter of fiscal
1996. Selling expenses increased in dollars due primarily to the introduction
of new products into the retail market. As a percentage of revenue, selling
expenses increased due to a combination of the decrease in revenue and the
increase in expenses as previously stated.
<PAGE> 12
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.5 million in the first quarter
of 1997 compared to $3.0 million in the first quarter of fiscal 1996. As a
percent of revenue G&A expenses were 5.6% in the first quarter compared to 5.0%
during the first quarter of the prior year. As a percent of revenue the
increase is primarily due to the decreased revenue base. The decrease in dollar
spending is primarily due to decreases in both hiring costs and insurance rates.
INTEREST
Interest expense was $672,000 in the first quarter of 1997 compared to
$815,000 for the first quarter of 1996. This decrease is due to lower interest
rates as well as decreased debt due to payment in full of the Honeywell note
and additional paydown of the CIT note.
INCOME TAXES
Income taxes provision was $95,000 and $914,000 for the first quarter of
1997 and 1996, respectively. In the first quarter of 1997 $67,000 of this
provision and $58,000 of 1996's first quarter provision relate to taxes on
earnings of foreign subsidiaries. The remaining $28,000 of the first quarter
1997 provision relates to taxes on U.S. earnings. The Company has tax loss
carryforwards of approximately $30.3 million which expire in varying amounts in
the years 2003 through 2010.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the first quarter of fiscal years 1997 and 1996.
BACKLOG
The Company's backlog at the end of the first fiscal quarter of 1997 was
$27.7 million compared to $24.6 million at the end of the 1996 fiscal year and
$42.9 million at the end of the first quarter of fiscal 1996. The increase in
the backlog from fiscal year end is attributable primarily to increased orders
from a major OEM.
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
<PAGE> 13
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%, 10% and 8% 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.
<PAGE> 14
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, 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.
<PAGE> 15
<TABLE>
<S> <C>
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Share
(b) Reports on Form 8-K
None
</TABLE>
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION
<S> <C>
/s/ Fred Wenninger
Fred Wenninger Date: 11/12/96
President
/s/ Ronald F. Klawitter
Ronald F. Klawitter Date: 11/12/96
Principal Financial Officer
/s/ Keith D. Cripe
Keith D. Cripe Date: 11/12/96
Principal Accounting Officer
</TABLE>
<PAGE> 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> SEP-28-1996
<CASH> 2012
<SECURITIES> 0
<RECEIVABLES> 29166
<ALLOWANCES> 932
<INVENTORY> 21715
<CURRENT-ASSETS> 59094
<PP&E> 96464
<DEPRECIATION> 65068
<TOTAL-ASSETS> 97836
<CURRENT-LIABILITIES> 25818
<BONDS> 0
38169
0
<COMMON> 0
<OTHER-SE> 11550
<TOTAL-LIABILITY-AND-EQUITY> 97836
<SALES> 45337
<TOTAL-REVENUES> 45337
<CGS> 38558
<TOTAL-COSTS> 38558
<OTHER-EXPENSES> 5780
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 672
<INCOME-PRETAX> 302
<INCOME-TAX> 95
<INCOME-CONTINUING> 207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
