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 December 30, 1995 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 January 23, 1996, 8,533,307 shares of Common Stock, no par value (the
only class of common stock), were outstanding.
KEY TRONIC CORPORATION
Index
Page
No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets - December 30, 1995
and July 1, 1995 3-4
Consolidated Statements of Income - Second Quarter
Ended December 30, 1995 and December 31, 1994 5
Consolidated Statements of Income - Two Quarters
Ended December 30, 1995 and December 31, 1994 6
Consolidated Statements of Cash Flows - Two Quarters
Ended December 30, 1995 and December 31, 1994 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 12-19
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Events 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,392 $ 4,455
Trade receivables, less allowance for doubtful
accounts of $1,185 and $1,185 29,676 33,964
Inventories (Note 1) 25,269 26,883
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,235 1,531
Other 4,465 3,932
------ ------
Total current assets 64,280 73,008
------ ------
Property, Plant and Equipment - at cost 93,285 89,255
Less accumulated depreciation 59,816 55,387
------ ------
Total property, plant and equipment 33,469 33,868
------ ------
Other Assets:
Deferred income tax asset - non-current 4,490 5,269
Goodwill(net of accumulated amortization
of $191 and $128) 1,595 1,658
Other 2,108 1,283
------ ------
Total other assets 8,193 8,210
------ ------
$105,942 $115,086
======== =========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 4,109 $ 5,433
Accounts payable 16,209 21,650
Accrued compensation and vacation 2,378 4,152
Accrued taxes other than income taxes 1,227 1,468
Interest payable 233 329
Other 2,868 2,289
------ ------
Total current liabilities 27,024 35,321
------ ------
Long-term Obligations, less current portion 24,739 28,499
------ ------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,533 and 8,456 shares 38,162 37,484
Retained earnings 15,032 12,741
Foreign currency translation adjustment 985 1,041
------ ------
Total shareholders' equity 54,179 51,266
------ ------
$105,942 $115,086
======== ========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Second Quarter Ended
December 30, December 31,
1995 1994
(in thousands, except per share amounts)
Net Sales $56,624 $48,748
Cost of sales (including warranty
provision of $318 and $296) 48,581 41,188
------ ------
Gross Profit on Sales 8,043 7,560
Operating Expenses:
Research, development and engineering 1,412 1,454
Selling 1,283 1,381
General and administrative (including provision
for doubtful accounts receivable of $25
and $161) 3,464 2,623
------ ------
Operating Income 1,884 2,102
Interest Expense 854 764
Other (income)expense (34) 16
------ ------
Earnings before federal taxes on income 1,064 1,322
Income Tax Provision 368 473
------ ------
Net Income $ 696 $ 849
======== ========
Earnings Per Share (See exhibit 11):
Net Income per Weighted Average Share N.A. $ 0.10
Primary Earnings Per Common Share $ .07 N.A.
Fully Diluted Earnings Per Common Share $ .07 N.A.
Weighted Average Shares Outstanding N.A. 8,314
Primary Shares Outstanding 9,996 N.A.
Fully Diluted Shares Outstanding 9,996 N.A.
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Two Quarters Ended
December 30, December 31,
1995 1994
(in thousands, except per share amounts)
Net Sales $117,174 $94,184
Cost of sales (including warranty
provision of $469 and $489) 100,207 80,281
------ ------
Gross Profit on Sales 16,967 13,903
Operating Expenses:
Research, development and engineering 2,970 2,779
Selling 2,262 2,607
General and administrative (including provision
for doubtful accounts receivable of $25
and $345) 6,502 5,247
------ ------
Operating Income 5,233 3,270
Interest Expense 1,701 1,434
Other (income)expense (63) (20)
------ ------
Earnings before federal taxes on income 3,595 1,856
Income Tax Provision 1,282 679
------ ------
Net Income $ 2,313 $ 1,177
======== =========
Earnings Per Share (See exhibit 11):
Net Income per Weighted Average Share N.A. $ 0.14
Primary Earnings Per Common Share $ .23 N.A.
Fully Diluted Earnings Per Common Share $ .23 N.A.
Weighted Average Shares Outstanding N.A. 8,294
Primary Shares Outstanding 10,220 N.A.
Fully Diluted Shares Outstanding 10,220 N.A.
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Two Quarters Ended
December 30, December 31,
1995 1994
(in thousands)
Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $2,313 $ 1,177
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 4,934 4,287
Provision for obsolete inventory 868 1,063
Provision for doubtful receivables 0 (7)
Provision for warranty 469 489
(Gain) or loss on disposal of property
and equipment (6) (92)
Deferred income tax asset 1,075 604
Changes in Operating Assets and Liabilities:
Trade receivables 4,288 (1,624)
Inventories (1,304) (4,150)
Other assets 468 (1,700)
Accounts payable (5,441) (556)
Employee compensation and accrued vacation (1,774) 574
Other liabilities (228) (810)
- ------ ------
Cash provided (used) by operating activities 5,662 (745)
------ ------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 54 238
Purchase of property and equipment (4,296) (2,874)
------ ------
Cash used in investing activities (4,242) (2,636)
------ ------
Cash Flows from Financing Activities:
Refinancing Fees 0 (1,183)
Other financing fees (23) 0
Issuance of common stock 678 442
Proceeds from long-term obligations 2,506 26,900
Payments on long-term obligations (7,589) (25,882)
------ ------
Cash used in financing activities (4,428) 277
------ ------
Effect of exchange rate changes on cash (55) 525
------ ------
Net decrease in cash and cash equivalents (3,063) (2,579)
Cash and cash equivalents, beginning of year 4,455 4,996
------ ------
Cash and cash equivalents, end of quarter $ 1,392 $2,417
========= =========
Non-Cash Investing and Financing Activities:
See note 4 to these financial statements
See accompanying notes to consolidated financial statements.
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 July 1,
1995.
- ------------------------------------------------------------------------
1. INVENTORIES
December 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
Finished goods $4,439 $7,891
Work-in-process 3,357 3,734
Raw materials and supplies 20,186 18,770
Reserve for obsolescence (2,713) (3,512)
------ ------
$25,269 $26,883
========= =========
2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $364,000 at December 30,
1995.
Litigation
The Company used Mica Sanitary landfill 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 RI was
completed 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 determine if additional remedial measures are needed. The
Company has not been named as a Potentially Liable Party ("PLP") under the State
Toxic Control Act ("STCA") or as a Potentially Responsible Party ("PRP") under
CERCLA, as amended ("CERCLA"). 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, for its estimate of probable legal costs to be associated with this matter.
At the end of the second fiscal quarter of 1996, the end of the first fiscal
quarter of 1996, and at the end of fiscal 1995, the accrued balance was
$900,000. The accrued balance reflects management's estimate of the probable
future legal costs associated with this matter. Management does not believe
there to be any reasonably probable losses 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, 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 estimated total costs 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
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 liability for a portion of any unknown and
unasserted claims against Honeywell, Inc. ("Honeywell") 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 unasserted environmental and product liability claims in
excess of $1,000,000 in the aggregate which 1) in the case of environmental
claims are discovered and 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 estimates that unknown and
unasserted product liability claims in the amount of $1,000,000 during the 5
years following the closing of the Agreement are probable and recorded this
liability as part of the acquisition costs. The accrued balance was $170,000,
$610,000, and $830,000, respectively, at the end of the second fiscal quarter of
1996, at the end of fiscal 1995, and at the end of the second fiscal quarter of
1995. The reduction in the accrued balance reflects charges for expenses.
Management does not believe there to be any reasonably probable 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 estimable at this time. No environmental
claims have been asserted as of the second fiscal quarter of 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 twenty-three suits by computer
keyboard users which are in State or Federal Courts in California, Connecticut
Illinois, Kansas, Massachusetts, Michigan, Pennsylvania, New Jersey, New York
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 twenty suits have been dismissed from California, Florida, Kentucky, New York
and Texas. Of the dismissed suits, one is on appeal in California and seven 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 probable 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 liability for litigation related matters, including compensatory
damages, remediation and legal costs, was $1.2 million, $1.6 million and $2.3
million as of December 30, 1995, July 1, 1995 and December 31, 1994,
respectively.
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 December 30, 1995, and July 1, 1995, the company was in
compliance with all debt covenants and restrictions.
Details of this transaction are more fully reported on Form 8-K dated October
31, 1994.
Long-term obligations consist of:
December 30, July 1,
1995 1995
(in thousands)
Note Payable - financial institution $11,490 $11,990
Revolving Line 13,776 16,428
Note Payable - Honeywell, Inc. 1,824 3,649
Litigation Reserve 900 900
Deferred compensation obligation 640 657
Capital lease obligations 218 308
------ ------
28,848 33,932
Less current portion (4,109) (5,433)
------ ------
$24,739 $28,499
========= =========
4. SUPPLEMENTAL CASH FLOW INFORMATION
Second Quarter Ended
December 30, December 1,
1995 1994
(in thousands)
Interest payments $1,797 $521
Income tax payments 0 0
Inventory exchange 2,562 0
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company provided cash flows of $5.7 million from operating activities
for the first two quarters of fiscal 1996 versus $.7 million of cash used in
operating activities during the same period of the prior year.
During the first two quarters of 1996, $4.3 million was expended in capital
additions. During the first two quarters of the prior year, $2.9 million was
expended in capital additions. The Company anticipates capital expenditures of
approximately $3.9 million through the remainder of the current fiscal year
ending June 29, 1996. Capital expenditures are expected to be financed with the
combination of internally generated funds, capital leases, and limited amounts
of secured indebtedness. The Company is also considering entering into certain
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 December 30, 1995 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 Chemical Bank Rate, which approximates prime (8.50% at December
30, 1995).
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
Chemical Bank Rate, which approximates prime. At December 30, 1995, there was
$8.7 million available for use under the revolving loan.
As a result of the acquisition of substantially all of the assets and
liabilities of the Honeywell Keyboard Division (HKD) in fiscal year 1994, the
Company has a $1.8 million note to Honeywell, Inc. This note has two remaining
installments of principal and interest payable on the last business day of
January and April of 1996. This note bears interest at the prime rate.
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.
The increase of $1.4 million in other current assets and other long-term
assets is due to the exchange of excess inventory for future barter credits
which will be realized over the next twelve to thirty-six months.
On January 3, 1996, the Company reached a settlement in the amount of
$1,489,000 with one of its' insurers for reimbursement of costs which were
incurred and paid in previous years associated with the Colbert landfill (a
Superfund site.) This amount will be recorded and included in the financial
statements in the third quarter of fiscal 1996. No settlement has been
reached with the final insurer, and therefore, the amount of the contingent
gain is not determinable. Negotiations have commenced, and any recoveries
will be recorded upon settlement.
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 1996 second quarter, which ended December 30,
1995, were $56.6 million compared to $48.7 million for the second quarter of the
previous year. For the six months ended December 30, 1995, sales were $117.2
million compared to $94.2 million for the same period of the previous year. The
increase in revenue is a result of additional revenue from existing customers,
new customers, and the addition of new product lines.
Keyboard shipments increased 21.6% over the second quarter from the prior
year while the average selling price decreased approximately 10.3%. For the six
months ended December 30, 1995, unit shipments increased 30.9% over the same
period of the prior year while the average selling price decreased 10.0%. The
increase in units shipped is due primarily to the sale of new products.
Non-Keyboard revenue accounted for 14.6% of total revenue in the second quarter
of 1996 versus 9.1% in the second quarter of the prior year. For the six months
ended December 31, 1995, non-keyboard revenue accounted for 13.9% of total
revenue versus 9.1% for the same period of the prior year.
COST OF SALES
Cost of sales were 85.8% of revenue in the second quarter of 1996 compared
to 84.5% for the second quarter of 1995. Cost of sales were 85.5% of revenue
for the six months ended December 30, 1995, compared to 85.2% for the same
period of the prior year. The cost of sales percentage increased due to a
decrease in average selling price.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.4 million in the
second quarter of fiscal 1996 and $1.5 million for the same period of fiscal
1995. As a percentage of sales, R, D & E expenditures were 2.5% in the second
quarter of 1996 compared to 3.0% in the second quarter of 1995. As a percent of
revenue the decrease is due primarily to the increase in the revenue base.
Research, development, and engineering expenses were $3.0 million for the six
months ended December 30, 1995 and $2.8 million for the same period of the prior
year. As a percentage of sales, R, D & E expenditures were 2.5% during this
period compared to 3.0% for the same period of the prior year. As a percent of
revenue the decrease is due primarily to the increase in the revenue base.
SELLING EXPENSES
Selling expenses were $1.3 million in the second quarter of 1996 compared
to $1.4 million in the second quarter of 1995. Selling expenses as a percentage
of revenue were 2.3% for the quarter compared to 2.8% in the same quarter of
fiscal 1995. Selling expenses were $2.3 million for the six months ended
December 30, 1995 compared to $2.6 million for the same period of the prior
year. Selling expenses as a percentage of revenue were 1.9% during this period
compared to 2.8% for the same period of the prior year. Selling expenses
decreased in dollars due to decreased commissions. Commissions decreased due to
the company's decision to discontinue the use of outside sales representatives.
As a percentage of revenue, selling expenses decreased due to a combination of
the increase in revenue and the decrease in commissions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3.5 million in the second quarter
of 1996 compared to $2.6 million in the second quarter of fiscal 1995. As a
percent of revenue G&A expenses were 6.1% in the second quarter of 1996 compared
to 5.4% during the second quarter of the prior year. General and administrative
expenses were $6.5 million for the six months ended December 30, 1995 compared
to $5.2 million for the same period of the prior year. As a percent of revenue,
G&A expenses were 5.6% in the second quarter compared to 5.6% during the second
quarter of the prior year. The increase in G&A expenses is primarily due to
increases in compensation, insurance, hiring, and moving costs.
INTEREST
Interest expense was $854,000 in the second quarter of 1996 compared to
$764,000 for the second quarter of 1995. For the six months ended December 30,
1995, interest expense was $1,701,000 compared to $1,434,000 for the same period
of the prior year. These increases are due to higher interest rates and
refinancing cost amortization.
INCOME TAXES
Income taxes provision was $368,000 and $473,000 for the second quarter of
1996 and 1995, respectively. In the second quarter of 1996 $38,000 of this
provision and $48,000 of 1995's second quarter provision relate to taxes on
earnings of foreign subsidiaries. The remaining $330,000 of the second quarter
1996 provision relates to taxes on U.S. earnings. For the six months ended
December 30, 1995, the income tax provision was $1,282,000 compared to $679,000
for the same period of the prior year. Taxes on earnings of foreign
subsidiaries account for $97,000 and $75,000, respectively, for the six month
period ending December 30, 1995 and December 31, 1994. The balance of this
provision relates to taxes on U.S. earnings. The Company has tax loss
carryforwards of approximately $29.7 million which expire in varying amounts in
the years 2003 through 2009.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the first quarter of fiscal years 1996 and 1995.
BACKLOG
The Company's backlog at the end of the second fiscal quarter of 1996 was
$28.4 million compared to $43.2 million at the end of the 1995 fiscal year and
$32.1 million at the end of the second quarter of fiscal 1995. The drop in
backlog is due primarily to a significant reduction in a program for a major
customer and a program that reached the end of its life for another customer.
RISK FACTORS
The Company's future business, financial condition and results of
operations can be materially and adversely affected by the following risk
factors:
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 success of customers'
programs, timing of new programs, new product introductions or technological
advances by the Company and its competitors and changes in pricing policies by
the Company 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 Japan and other
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 31%, 23% and 6% individually,
of net sales during the first 6 months of fiscal 1996. In 1995 the same
customers accounted for 23%, 19% and 12% of the Company's net sales. In 1994,
the same customers accounted for 10%, 1% 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. In addition, the Company
does not have any employment contracts with its key 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 123 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
As of December 30, 1995 there were outstanding options for the purchase of
3,528,728 shares, of which options for approximately 2,956,380 shares were
vested and exercisable. Purchasers of the Common Stock offered hereby will
suffer immediate and substantial dilution to the extent outstanding options to
purchase the Company's Common Stock are exercised.
Possible Volatility of Stock Price
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' earning 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. Investors in the
Company's Common Stock should be willing to incur the risk of such fluctuations.
Market Price of and Dividends on the Registrant's Common Equity and Related
Shareholder Matters
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "KTCC". The following table sets forth, for the Company's fiscal
quarters indicated, the high and low closing sale price per share of the Common
Stock as reported by Nasdaq.
1996 High Low
1st Quarter $17.922 $ 13.875
2nd Quarter $13.875 $ 7.750
1995 High Low
1st Quarter $11.500 $ 6.000
2nd Quarter $11.000 $ 9.000
3rd Quarter $14.375 $ 10.000
4th Quarter $16.125 $ 13.500
1994 High Low
1st Quarter $10.750 $ 8.750
2nd Quarter $ 9.250 $ 6.000
3rd Quarter $ 9.000 $ 6.250
4th Quarter $ 8.000 $ 6.000
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 bank loan agreements.
As of December 30, 1995 there were approximately 1,579 common shareholders
of record.
Control by the 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 between The Hiller Group and the Company, Stanley Hiller, Jr., who
currently has approximately 66.73% 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 also served as Chief Executive Officer
from February 1992 to September, 1995 and has served as Chairman of the Board of
Directors since September 1995. HKT Partners beneficially owns approximately
24% of the outstanding shares of Common Stock of the Company. This
concentration of ownership, in conjunction with the agreement between the
Company and The Hiller Group, will enable The Hiller Group to continue to exert
significant control over corporate actions after the sale of the shares offered
hereby and may have the effect of delaying or preventing a change in control of
the Company.
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY TRONIC CORPORATION
/s/ Fred Wenninger
Fred Wenninger Date: February 13, 1996
President
/s/ Ronald F. Klawitter
Ronald F. Klawitter Date: February 13, 1996
Principal Financial &
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Key Tronic
Corporation's 2nd Quarter Form 10Q and is qualified in its entirety by reference
to such Form 10Q.
</LEGEND>
<CIK> 0000719733
<NAME> PAULA BENIQUEZ 509 927 5521
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> DEC-30-1995
<CASH> 1392
<SECURITIES> 0
<RECEIVABLES> 30861
<ALLOWANCES> (1185)
<INVENTORY> 25269
<CURRENT-ASSETS> 64061
<PP&E> 93285
<DEPRECIATION> 59816
<TOTAL-ASSETS> 105942
<CURRENT-LIABILITIES> 27024
<BONDS> 0
<COMMON> 38162
0
0
<OTHER-SE> 16017
<TOTAL-LIABILITY-AND-EQUITY> 105942
<SALES> 56624
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<CGS> 48581
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<OTHER-EXPENSES> 6100
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<INCOME-PRETAX> 1064
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</TABLE>
