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 28, 1997 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 $38,940,347 as of September 3, 1997.
The number of shares of Common Stock of the Registrant outstanding as of
September 3, 1997 was 9,610,830 shares.
The Exhibit Index is located at Page 39.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Registrant's Proxy Statement, pages 1 - 37, pursuant to
Regulation 14A, covering the Annual Meeting of Shareholders to be held November
13, 1997 is incorporated by reference into Part III.
KEY TRONIC CORPORATION
1997 FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................3-7
Item 2. Properties....................................................7-8
Item 3. Legal Proceedings...............................................8
Item 4. Submission of Matters to a Vote of Security Holders..........9-10
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................11
Item 6. Selected Financial Data.....................................11-12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................13-18
Item 8. Financial Statements and Supplementary Data.................18-35
Item 9. Disagreements on Accounting and Financial Disclosure...........35
PART III
Item 10. Directors and Executive Officers of the Registrant..........35-37
Item 11. Executive Compensation.........................................37
Item 12. Securities Ownership of Certain Beneficial Owners and
Management.....................................................37
Item 13. Certain Relationships and Related Transactions.................37
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form
8-K and Signatures..........................................37-43
PART I
ITEM 1. BUSINESS
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. The Company operates on a fiscal year
which ends on the Saturday closest to June 30. The following discussion relates
to these fiscal years of the Company.
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), distributors, retailers, 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.
KEYSWITCH TECHNOLOGIES
There are six 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 1997, 1996 and 1995, the Company realized revenues of approximately
$150.9 million, $169.1 million and $185.3 million from the sale of keyboards
representing approximately 82 percent, 84 percent and 89 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. During the last half of
fiscal 1996, the Company began developing a new line of keyboards specifically
targeted toward retail channels and this line of products was fully promoted
throughout fiscal 1997. The Company sells its plug-compatible keyboards through
a worldwide network of distributors and major retailers.
ALTERNATIVE INPUT DEVICES
The Company realized revenue from non-keyboard products, which in the aggregate,
accounted for $34.0 million, $31.9 million and $22.6 million in 1997, 1996 and
1995 representing approximately 18 percent, 16 percent and 11 percent of total
sales. The significant dollar increase in 1996 was due to the manufacture and
sale of plastic components for use on computer peripherals. In fiscal 1997,
sales of these plastic components were the largest contributing factor to
increasing revenues from alternative input devices.
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.
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 140 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, 34 percent and 23
percent of net sales in 1997, 1996 and 1995. Microsoft accounted for
approximately 7 percent, 17 percent and 19 percent of net sales in 1997, 1996
and 1995. Compaq Computer accounted for approximately .5 percent, 7 percent and
12 percent of net sales in 1997, 1996 and 1995. Toshiba Corporation, a new
customer in fiscal 1997, accounted for approximately 11 percent of net sales.
No other customer accounted for more than 10 percent of net sales during any of
the last three years. In 1997, 1996 and 1995, the five largest customers
accounted for 65 percent, 68 percent and 65 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 three-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 1997, $78.2 million, or 42.3 percent of the Company's revenues were from
foreign sales, primarily sales in Europe, the Far East, Canada and Mexico.
Foreign sales in 1996 and 1995 were $87.0 million and $83.2 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.
BACKLOG
At August 30, 1997, the Company had an order backlog of approximately $16
million. This compares with a backlog of approximately $29 million at September
17, 1996. 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 $5.2, $6.0
and $6.1 million in 1997, 1996 and 1995. Research, development and engineering
expenses as a percentage of sales were 2.8 percent, 3.0 percent and 3.0 percent
in 1997, 1996 and 1995.
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, Siletek, 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 August 30, 1997, the Company had approximately 2,434 employees. Management
considers its employee relations to be excellent. None of the Company's U.S.
employees are represented by a union; however about half 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 before-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 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 a 155,000 sq. ft.
assembly and molding facility in Juarez, Mexico in addition to a 60,000 sq. ft.
manufacturing and assembly facility in Las Cruces, New Mexico and a Sales,
Marketing and Product distribution facility in Ireland. The Company leases two
manufacturing facilities in the Spokane Industrial Park which total 216,000 sq.
ft. and an 80,000 sq. ft. warehouse in El Paso, Texas. The Spokane Industrial
Park leases expire on January 31, 2000 and November 30, 2002, and the El Paso
lease expires on July 31, 2002. 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. In September of 1997, the Company
signed a five year operating lease with a local company for this property. The
lease terms include an option to buy the property upon notice at any time during
the course of the lease. 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. In fiscal 1997, the Company began an expansion project of
its facility in Juarez, Mexico to provide more manufacturing lines and increase
molding capacity. At the end of fiscal 1997, this project is near completion.
ITEM 3. LEGAL PROCEEDINGS
The Company currently has ninety-three suits by computer keyboard users which
are in State or Federal Courts in Connecticut, Illinois, 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 fifty-three suits have been dismissed in California,
Florida, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New
Jersey, New York, Pennsylvania and Texas. Six of the fifty-three 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 for these cases. 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 1997 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%, 7% and 11% individually, of net sales during fiscal 1997. In 1996,
these same customers accounted for 34%, 17%, and 0% 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 93 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 28, 1997, there were
outstanding options and warrants for the purchase of approximately 1,600,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 940,000 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of Key Tronic Corporation (the "Company") was
held on April 15, 1997 (adjourned to May 28, 1997) to consider and act on a
proposal set forth in the Company's Proxy Statement dated March 5, 1997 (herein
incorporated by reference to proxy statement filed March 5, 1997). The proposal
was to approve and ratify a Restricted Stock Agreement between the Company and
Hiller Key Tronic Partners L.P., ("HKT Partners") and to issue restricted shares
of Company Stock in exchange for, and in cancellation of, an option owned by HKT
Partners (see Item 14(C)(10)(o) in the Company's 10-K Report for the year ended
July 4, 1992).
Approval and ratification of the Restricted Stock Agreement was achieved at the
reconvened Special Meeting on May 28, 1997 with 73.38% of the outstanding shares
voted. Voting results were as follows:
<TABLE>
<S> <C> <C>
Number of Shares Outstanding: 8,540,434
For: 5,764,225 67.49%
Against: 433,779 5.08%
Abstentions: 68,703 0.80%
Broker Non Votes: 0
Withheld: 2,273,727 26.62%
</TABLE>
PART II
ITEM 5: MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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. Quarterly high and low sales prices for Key Tronic common
stock for fiscal years 1997 and 1996 were as follows:
1997 1996
High Low High Low
- ------------------------------------------------------------------------
First Quarter $8.375 $6.375 $17.922 $13.875
Second Quarter 9.000 7.000 13.875 7.750
Third Quarter 7.750 3.750 9.000 5.375
Fourth Quarter 6.625 4.500 9.125 6.000
As of September 3, 1997 the Company had 1,527 shareholders of record.
The Company's current line of credit agreement contains a covenant which
prohibits the declaration or payment of dividends (see Note 5 to
Consolidated Financial Statements). The Company has never paid a cash
dividend and does not anticipate payment of dividends on its Common
Stock in the foreseeable future.
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
KEY TRONIC TEN-YEAR FINANCIAL HIGHLIGHTS
(Dollars in millions, except share amounts)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $184.9 $201.0 $207.5 $159.4 $123.3 $124.0 $141.0 $140.2 $145.9 $136.0
Operating Income (loss) 1.9 0.2 9.8 (8.3) 3.7 (7.7) (7.5) 0.5 2.9 (14.1)
Net Income (loss) 0.3 (1.8) 4.4 (1.1) 3.8 (7.5) (7.7) 1.5 3.1 (11.0)
Earnings (loss) per share 0.03 (0.22) .43 (0.13) 0.42 (0.96) (1.00) 0.18 0.37 (1.28)
Depreciation/amortization 8.9 10.0 8.9 8.6 6.3 6.9 5.4 6.5 8.6 8.4
Total Assets 100.2 93.5 115.1 101.9 61.8 62.2 68.6 75.4 80.8 78.2
Net working capital 38.5 28.0 37.7 28.5 20.0 17.2 19.7 33.9 38.0 31.4
Long-term Debt (net of current) 27.0 17.3 28.5 26.6 0.8 0.8 0.1 0.0 1.1 2.6
Shareholders' equity 49.8 49.5 51.3 44.5 43.4 40.5 46.4 54.9 56.7 53.4
Book value/share 5.18 5.80 6.06 5.38 5.54 5.21 6.00 7.09 6.79 6.33
Cash dividends per share 0 0 0 0 0 0 0 0 0 0
Number of shares outstanding
at year-end (thousands) 9,611 8,534 8,456 8,271 7,837 7,757 7,736 7,736 8,356 8,429
Number of employees
(year-end) 2,429 2,824 2,925 2,163 1,204 1,618 2,241 2,127 2,351 2,021
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997: Sales for fiscal 1997 gradually increased for the first three quarters of
the year. Fourth quarter sales dropped significantly from the third quarter due
to decreased customer requirements; however, the Company was able to maintain
profitability for all four quarters of the year. Although the Company won
several new programs in fiscal 1997, shipments in volume with associated
revenues are not expected to commence until the last half of fiscal 1998.
Annual unit sales increased by 9.1% compared to fiscal 1996, but the average
selling price (ASP) decreased by 18.3% from the prior year. These statistics
present very clearly the challenges facing the Company. Although unit sales
continue to increase each year, market pressures command lower and lower prices.
Since the Company's niche in the marketplace depends on its ability to satisfy
customer requirements, there is a continuing emphasis on cost control as new and
improved keyboard models are designed. The Company's facility in Juarez, Mexico
has proven to be a tremendous asset in this continuing struggle, and it was
expanded during the fiscal year to better enable it to meet increased production
demands. Further restructuring of the facility in Dundalk, Ireland became
necessary in fiscal 1997 and a charge of $1.1 million was recorded for
anticipated costs associated with this continued downsizing.
The Company's gross profit percentage increased .8% to 14.2% compared to fiscal
1996.
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.
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%, 7% and 11% individually, of net sales during fiscal 1997. In 1996,
these same customers accounted for 34%, 17%, and 0% 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 ninety-three 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 28, 1997, there were outstanding
options and warrants for the purchase of approximately 1,600,000 shares of
common stock of the Company ("Common Stock"), of which options and warrants for
approximately 940,000 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.
NET SALES
Net sales in 1997 were $184.9 million compared to $201.0 million and $207.5
million in 1996 and 1995, respectively. This represents decreases of 8.0% and
3.1% in 1997 and 1996, respectively. The average unit selling prices of the
Company's keyboard products declined by 18.3% in 1997 compared to 11.6% in 1996.
Offsetting these price declines were increases in unit volumes of 9.1 % and 3.5%
in 1997 and 1996, respectively.
COST OF SALES
In 1997, cost of sales was 85.8% of sales compared to 86.6% in 1996 and 84.7% in
1995. The decrease in 1997 is due to the redeployment of production from the
Company's Dundalk, Ireland plant to its lower cost facility in Juarez, Mexico as
well as increased unit sales volume. The increase in 1996 is primarily due the
decrease in average selling price outpacing cost reductions and a shift in
product mix such that a greater quantity of lower margin products contributed to
a larger portion of sales. The Company provides for warranty costs based on
historical experience and anticipated product returns. The amounts charged to
expense were $1,290,000, $1,121,000, and $1,001,000 in 1997, 1996, and 1995,
respectively. 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 $1,953,000, $2,906,000, and
$2,907,000 in 1997, 1996, and 1995, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering (RD&E) expenses were $5.2
million, $6.0 million, and $6.1 million, in 1997, 1996, and 1995, respectively.
As a percent of sales, these expenses were 2.8%, 3.0%, and 3.0%, respectively.
In 1997, 1996, and 1995 the Company focused most of its RD&E efforts on products
for large Original Equipment Manufacturers. The quantity of projects on which
the Company worked has remained fairly constant over the course of the three
years. The decrease in fiscal 1997 is primarily the result of better design
controls and increased cost recovery for services performed.
SELLING EXPENSES
Selling expenses were $8.2 million, $5.6 million, and $5.0 million, in 1997,
1996, and 1995, respectively. Selling expenses as a percent of revenue were
4.4%, 2.8%, and 2.4%, respectively. In fiscal 1997, the Company utilized the
services of outside market research firms and consultants to evaluate the market
viability of certain products currently in the planning stages and to advise the
Company regarding the feasibility of a partnership with another company to
increase sales in the Far East. Also, the transition of customer shipments from
Ireland to Juarez generated additional freight charges which were absorbed by
the selling departments. The remaining increase in selling costs was directly
related to the Company's first full year of participation in the retail market.
To promote greater sales activity, the Company increased its outside sales force
and introduced an inside sales incentive program. These steps increased
expenses for commissions, compensation, and travel. The retail marketplace
requires frequent demo units which increases freight costs. The Company made
its decision to actively participate in the retail market during fiscal 1996,
and the start-up costs associated with that decision were absorbed last year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $10.0 million, $12.5 million and $10.8
million, in 1997, 1996, and 1995, respectively. General and administrative
costs as a percentage of sales were 5.4%, 6.2%, and 5.2%, in 1997, 1996, and
1995, respectively. The decrease in 1997 is partially due to $1,273,000 in
eliminated costs resulting from the scaling down of European Operations at the
end of fiscal year 1996. The balance of the decrease is primarily due to cost
reductions in compensation of $404,000, business tax reductions of $203,000,
depreciation reductions of $295,000, and hiring and moving cost reductions of
$215,000. 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 $10,000, $87,000, and $361,000, in 1997, 1996 and 1995,
respectively.
INTEREST EXPENSE AND OTHER
The Company had interest expense of $2,328,000, $3,047,000, and $3,486,000, in
1997, 1996 and 1995, respectively. The decrease in 1997 is partially due to a
lower interest rate obtained when the Company refinanced its debt in December
1996 (see Note 5 to the June 28, 1997 Consolidated Financial Statements). The
balance of the 1997 decrease is due primarily to a lower amount of interest
bearing debt outstanding for a longer period of time in 1997 than in 1996. The
decrease in 1996 is due to a significant reduction in interest bearing debt when
compared to 1995, partially offset by increases in interest rates over the year.
The Company earned $139,000, $125,000, and $110,000 in 1997, 1996, and 1995,
respectively, from investing in short term securities and commercial paper.
Interest income is included in Other (Income) Expense.
On June 26, 1997 and January 3, 1996 the Company reached settlements with its
insurers for reimbursement of costs associated with the Colbert landfill (a
Superfund site) in the amounts of $1,600,000 and $1,440,000, respectively.
These costs were incurred and paid in previous years. The reimbursements were
recorded in Other (Income) Expense in 1997 and 1996, respectively. 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 $862,000, $1,240,000, and $2,203,000 in
1997, 1996, and 1995, respectively. Income tax expense (benefit) on foreign
operations represented $530,000, $(251,000), and $201,000 of the income tax
expense in 1997, 1996, and 1995, respectively. The Company has tax loss
carryforwards of approximately $27.2 million which expire in varying amounts in
the years 2003 through 2011. In 1997 and 1996 losses on European Operations
increased the Company's effective income tax rate since such losses are not
deductible for U.S. income tax purposes. In 1997 the Company's effective tax
rate differed from the statutory rate principally because of statutory taxes on
Mexican Operations and the recapture of prior tax benefits on European
Operations. 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 differed from the
statutory rate principally because of lower tax rates on foreign earnings.
The Company accounts for income taxes in accordance with "Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes" (SFAS 109) (see Note
7 to the June 28, 1997 Consolidated Financial Statements). Pursuant to SFAS 109
the Company has recorded a deferred tax asset. The balance of the deferred tax
asset on June 28, 1997 was $5,301,000, which was net of a valuation allowance of
$8,609,000.
INTERNATIONAL (MEXICO, EUROPE, ASIA)
The Company owns an assembly and molding facility in Juarez, Mexico. This
subsidiary, Key Tronic Juarez, SA de CV, is primarily used to support the
Company's domestic and European operations.
Key Tronic Europe, Ltd. (KTEL), the Company's facility in Dundalk, Ireland, has
undergone restructuring in the last two fiscal years. The keyboards previously
manufactured in Ireland to support the European market are now assembled at the
Juarez, Mexico facility. This decision was made as a cost-saving measure in
fiscal 1996. The Company plans to maintain Key Tronic Europe as an active
entity supporting the European community primarily as a sales and distribution
facility.
The Company's subsidiary in Taiwan, Key Tronic Taiwan Corporation, has been
inactive since the end of 1992.
Foreign sales from worldwide operations, including domestic exports, were $78.2
million in 1997 compared to $87.0 and $83.2 million in 1996 and 1995,
respectively. Foreign sales were 42.3% of net sales in 1997 compared to 43.3%
and 40.1% in 1996 and 1995, respectively. Sales from KTEL represented 13.1% of
consolidated sales to unaffiliated customers in 1997, compared to 20.4% in 1996
and 18.3% in 1995, respectively (see Note 11 to the June 28, 1997 Consolidated
Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The Company generated cash flow from operating activities of $.7 million, $19.1
million, and $3.2 million in 1997, 1996, and 1995, respectively. Capital
expenditures were $9.6 million, $7.1 million, and $7.7 million in 1997, 1996,
and 1995, respectively. The Company's cash position increased by $.2 million in
1997 compared to decreases of $1.9 million and $.5 million in 1996 and 1995,
respectively. Cash generated from financing activities allowed the payment of
$18.0 million in long-term debt to its previous financing company and the
purchase of $9.6 million in property and equipment. This purchase was partially
offset by proceeds from the sale of property and equipment of $1.1 million. The
Company had working capital of $38.5 million and $28.0 million at June 28, 1997
and June 29, 1996. The increase in working capital was due primarily to higher
trade and miscellaneous receivables. The increase in trade receivables is
explained below. Miscellaneous receivables, included in other current assets,
increased a substantial amount in fiscal 1997 as compared to fiscal 1996
primarily as a result of prepaid costs associated with customer tooling projects
that are rebillable and receivable from customers as the projects develop.
Trade receivables were $27.0 million at June 28, 1997, an increase of $3.6
million from 1996. Trade receivables increased primarily because of higher
sales in period 12 of fiscal 1997 compared to period 12 of fiscal 1996 and
increased days sales outstanding (DSO's) in the current year. Inventories were
$21.5 million and $22.0 million at June 28, 1997 and June 29, 1996. The
decrease in inventory is a result of the sales increase in the final period of
1997 as compared to 1996.
On December 31, 1996, the Company entered into a secured financing agreement
with General Electric Capital Corporation (GECC). The agreement contains
financial covenants that relate to maximum capital expenditures, minimum debt
service coverage, minimum earnings before interest expense, income tax,
depreciation, and amortization, and maximum leverage percentages. In addition
to these financial covenants, the financing agreement restricts investments,
disposition of assets, and payment of dividends. At June 28, 1997, the Company
was in compliance with all debt covenants.
This financing agreement replaced a secured financing agreement with the CIT
Group/Business Credit, Inc. (CIT), which was entered into on October 24, 1994.
The CIT agreement contained covenants that related to minimum net worth, minimum
working capital, income statement, and balance sheet ratios, and it also
restricted investments, disposition of assets, and payment of dividends. As of
June 29, 1996, the Company was in compliance with all debt covenants and
restrictions under this agreement.
The Company anticipates that capital expenditures of approximately $11.4 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
operating 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 (the
Company) and subsidiaries as of June 28, 1997 and June 29, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended June 28, 1997, June 29, 1996, and July 1, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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
reasonable 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 28, 1997 and June 29, 1996, and the results of their
operations and their cash flows for the years ended June 28, 1997, June 29,
1996, and July 1, 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
August 8, 1997
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands) JUNE 28, JUNE 29,
- --------------------------------------------------------------------------------------
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,812 $ 2,569
Trade receivables, less allowance for doubtful
accounts of $905 and $932 26,989 23,358
Inventories 21,481 21,966
Real estate held for sale 2,243 2,243
Deferred income tax asset, net 1,444 1,295
Other 6,876 3,322
- --------------------------------------------------------------------------------------
Total current assets 61,845 54,753
- -------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT-AT COST 97,155 94,609
Less accumulated depreciation 65,135 63,264
- --------------------------------------------------------------------------------------
Total property, plant, and equipment 32,020 31,345
- --------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred income tax asset, net 3,857 4,211
Other, (net of accumulated amortization of $81 and $734) 1,030 1,692
Goodwill (net of accumulated amortization of $383 and $255) 1,403 1,531
- --------------------------------------------------------------------------------------
$100,155 $ 93,532
======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 1,379 $ 2,265
Accounts payable 14,319 15,577
Accrued compensation and vacation 3,033 2,936
Accrued taxes other than income taxes 1,142 1,125
Interest payable 166 253
Other 3,289 4,577
- --------------------------------------------------------------------------------------
Total current liabilities 23,328 26,733
- --------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term obligations, less current portion 27,010 17,323
- --------------------------------------------------------------------------------------
Total long-term liabilities 27,010 17,323
- --------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5,6, and 9)
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 25,000 shares; issued
and outstanding 9,611 and 8,534 shares 38,165 38,142
Retained earnings 11,228 10,906
Foreign currency translation adjustment 424 428
- --------------------------------------------------------------------------------------
Total shareholders' equity 49,817 49,476
- --------------------------------------------------------------------------------------
$100,155 $93,532
======================================================================================
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
(In thousands, except per share amounts) JUNE 28, June 29, July 1,
- ---------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
NET SALES $184,927 $201,038 $207,456
Cost of sales 158,617 174,052 175,709
- ---------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 26,310 26,986 31,747
OPERATING EXPENSES:
Research, development and engineering 5,164 5,997 6,131
Selling 8,216 5,597 5,042
General and administrative 9,965 12,543 10,772
Provision for restructuring 1,108 2,669 -
- ---------------------------------------------------------------------------------------
OPERATING INCOME 1,857 180 9,802
INTEREST EXPENSE 2,328 3,047 3,486
OTHER INCOME (1,901) (2,272) (308)
- ---------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,430 (595) 6,624
INCOME TAX PROVISION 862 1,240 2,203
- ---------------------------------------------------------------------------------------
Income (loss) before extraordinary item 568 (1,835) 4,421
Extraordinary item: extinguishment of debt, net of
applicable income taxes of $127 246 - -
- ---------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 322 $ (1,835) $ 4,421
======= ======== ========
EARNINGS (LOSS) PER SHARE:
Before extraordinary item $ .06 $ (.22) $ .45
======= ======== ========
Extraordinary item: extinguishment of debt $ (.03) $ - $ -
======= ======== ========
Primary earnings (loss) per common share $ .03 $ (.22) $ .45
======= ======== ========
Fully diluted earnings per common share $ .03 $ - $ .43
======= ======== ========
Primary shares outstanding 9,525 8,522 9,853
======= ======== ========
Fully diluted shares outstanding 9,525 $ - 10,339
======= ======== ========
</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 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
Net Income - 1997 322 322
Issuance of restricted stock 1,070 - -
Issuance of stock under stock options 7 23 23
Foreign currency translation adjustment (4) (4)
BALANCES, JUNE 28, 1997 9,611 $38,165 $11,228 $ 424 $49,817
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
(In thousands) JUNE 28, June 29 July 1,
- -------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 322 $(1,835) $4,421
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 8,903 9,974 8,877
Provision for restructuring of business line 1,108 2,669 -
Provision for obsolete inventory 1,953 2,906 2,907
Provision for doubtful receivables 10 87 361
Provision for litigation - - (517)
Provision for warranty 1,290 1,121 1,001
(Gain) or loss on disposal of assets (267) (181) (43)
Deferred income tax asset 205 1,294 1,950
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade receivables (3,641) 10,519 (8,890)
Inventories (368) (39) (8,003)
Other assets (3,860) 1,809 (2,164)
Accounts payable (1,258) (6,073) 4,491
Employee compensation and accrued vacation 97 (1,216) 1,223
Other liabilities (3,756) (1,921) (2,409)
- -------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 738 19,114 3,205
- ------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,635) (7,060) (7,652)
Proceeds from sale of property and equipment 1,131 358 203
- ------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (8,504) (6,702) (7,449)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (811) (22) (1,245)
Proceeds from issuance of common stock 23 681 1,233
Proceeds from long-term obligations 26,845 - 28,595
Payments on long-term obligations (18,044) (14,344) (25,980)
- -------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,013 (13,685) 2,603
- ------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (613) 1,100
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 243 (1,886) (541)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,569 4,455 4,996
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,812 $ 2,569 $ 4,455
====================================================================================
</TABLE>
See notes to consolidated financial statements
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. Significant estimates include the provisions for bad debts,
inventory, valuation allowance on deferred tax assets, 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 $2,938,000 and $4,322,000 at June 28, 1997 and June 29, 1996,
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 28, 1997, 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 on July 30, 1993.
Goodwill is amortized on a straight-line basis over a period of fifteen years.
ACCRUED WARRANTY
An accrual is made 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 28, 1997 and June 29, 1996 were $576,000 and
$437,000, 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%, 34%, and 23% of net sales for
the years ended June 28, 1997, June 29, 1996, and July 1, 1995, respectively.
This customer accounted for approximately 33% and 28% of trade receivables at
June 28, 1997 and June 29, 1996, respectively. Another customer accounted for
approximately 7%, 17%, and 19% of net sales in 1997, 1996, and 1995,
respectively. This customer accounted for approximately 11% and 7% of trade
receivables at June 28, 1997 and June 29, 1996, respectively. A third customer,
new to the Company in fiscal 1997, accounted for approximately 11% of net sales
for the year ended June 28, 1997. This customer accounted for approximately 7%
of trade receivables at June 28, 1997.
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 will not
incur 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 28, 1997 and June 29, 1996, reasonably approximate the fair value of cash
and cash equivalents. 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 $28.0 million and $20.0 million, respectively,
which approximates the carrying value.
STOCK-BASED COMPENSATION
Effective June 30, 1996 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-based
Compensation," (SFAS 123). The Company has, however, elected to account for
stock-based awards to employees using the intrinsic value method in accordance
with APB No. 25, "Accounting for Stock Issued to Employees."
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of
fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 72 months; stock
volatility, 56.6% in 1997 and 56.8% in 1996; risk free interest rates, 6.34% in
1997 and 6.45% in 1996; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1997 and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net loss would have been $1,072,000 ($.12 per share) in
1997 and $2,799,000 ($.33 per share) in 1996. However, the impact of
outstanding non-vested stock options granted prior to 1996 has been excluded
from the pro forma calculation; accordingly, the 1997 and 1996 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options. The weighted average
fair values of options granted during fiscal years 1997 and 1996 is $3.39 and
$8.15 per share, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This
pronouncement specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) and will supersede APB Opinion 15.
The new standard modifies the calculation of earnings per share by replacing the
computation of "Primary EPS" with "Basic EPS" which excludes the dilutive effect
of common stock equivalents. Additionally, the standard replaces "Fully Diluted
EPS" with "Diluted EPS." The calculation of common stock equivalents using the
treasury stock method is modified under diluted EPS to always utilize an average
share price during the period as compared to the APB Opinion 15 method which
utilizes the higher of average or ending stock price. The standard becomes
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early application is not permitted; however, an entity
is permitted to disclose pro forma EPS computed using this standard in periods
prior to required adoption. Based on this new standard, earnings per share for
the years ending June 28, 1997, June 29, 1996, and July 1, 1995 would be as
follows:
Pro forma earnings per share under FAS 128:
June 28, June 29, July 1,
1997 1996 1995
Basic .04 (.22) .53
Diluted .03 - .45
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", were also
recently issued and are effective for the Company's year ending June 27, 1998.
The Company is currently evaluating the effects of these Standards; however,
management believes the impact of adoption will not be material to the financial
statements, taken as a whole.
RECLASSIFICATION
Certain amounts have been reclassified for 1996 and 1995 to be consistent
with the presentation of 1997 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 1997, 1996, and 1995 ended on
June 28, 1997, June 29, 1996, and July 1, 1995, respectively. Fiscal year 1998
will end on June 27, 1998.
2. INVENTORIES
Components of inventories were as follows: June 28, June 29,
1997 1996
-----------------------------------------------------------
(in thousands)
Finished goods $ 9,119 $ 5,381
Work-in-process 2,053 3,640
Raw materials 13,247 17,267
Reserve for obsolescence (2,938) (4,322)
----------------------------------------------------------
$21,481 $21,966
===========================================================
Cost of goods sold includes charges of $2.0 million, $2.9 million, and $2.9
million resulting from reduction of inventories to estimated realizable value in
1997, 1996, and 1995, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Equipment includes property leased under capital leases (see Note 6) of
$181,000 and $500,000 at June 28, 1997 and at June 29, 1996. Related
accumulated amortization is $90,000 and $209,000, respectively.
June 28, June 29,
Classification Life (in years) 1997 1996
---------------------------------------------------------
(in thousands)
Land $ 2,486 $ 2,486
Buildings and improvements 3 to 30 14,618 14,186
Equipment 1 to 10 66,968 65,670
Furniture and fixture 3 to 5 13,083 12,267
---------------------------------------------------------
$97,155 $94,609
=========================================================
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
$256,000 and $285,000 in 1997 and 1996, respectively, and are included in other
assets.
(b) Hiller Investment Company (HIC), beneficially owned by Stanley Hiller,
Jr., 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 $186,000,
$221,000, and $330,000 in 1997, 1996, and 1995, respectively. No amounts were
owed to HIC as of June 28, 1997 and June 29, 1996.
(c) Stanley Hiller Jr. and Thomas W. Cason (a Director) respectively have
66.73% and 8.46% equity interests in Hiller Key Tronic Partners, L.P. (HKT
Partners), a Washington limited partnership. Other directors and officers
collectively have a 8.05% equity interest in HKT Partners. HKT Partners hold
1,070,396 shares of restricted common stock of the Company (see Note 8).
5. LONG-TERM OBLIGATIONS
On December 31, 1996, the Company refinanced its debt with General
Electric Capital Corporation (GECC). This secured financing agreement contains
an $11 million term note and a revolving credit agreement for up to $30 million.
This agreement replaced an $8.4 million note payable and a secured revolving
credit agreement for up to $28 million to the CIT Group/Business Credit, Inc.
(CIT). The agreement is secured by the assets of the corporation. The
agreement contains financial covenants that relate to maximum capital
expenditures, minimum debt service coverage, minimum earnings before interest
expense, income tax, depreciation, and amortization, and maximum leverage
percentages. In addition to these financial covenants the financing agreement
restricts investments, disposition of assets, and payment of dividends. At June
28, 1997 and June 29, 1996, the Company was in compliance with all debt
covenants. The refinancing resulted in an extraordinary charge of $246,000 in
fiscal year 1997, net of applicable income taxes of $127,000.
The term note with GECC is payable in quarterly installments of principal,
each in the amount of $250,000, commencing in March 1997 and ending in December
1997. Thereafter, the quarterly installment payments of principal will be
$500,000 commencing in March 1998 and maturing in December 2002. If debt
service coverage is greater than 1.4, this note bears interest at one and three-
quarters percent (1.75%) in excess of the applicable London Interbank Offered
Rate (LIBOR). If debt service coverage is less than or equal to 1.4, this note
bears interest at two percent (2.00%) in excess of the applicable LIBOR rate.
At June 28, 1997, the applicable LIBOR rate was 5.6875%, and the applicable
interest rate was 7.6875%.
The revolving loan with GECC is renewable and covers an initial period of
five years expiring on December 31, 2001. If debt service coverage is greater
than 1.4, the applicable interest rate is one and one-half percent (1.50%) in
excess of the applicable LIBOR rate. If debt service coverage is less than or
equal to 1.4, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At June 28, 1997, the
applicable LIBOR rate was 5.6875%, and the applicable interest rate was 7.4375%.
At June 28, 1997, there was $16.1 million borrowed on the revolving loan and
approximately $2.5 million available for use under the revolving loan. The
Company is required to pay fees on the unused revolving loan balance.
Long-term obligations consist of:
June 28, June 29,
1997 1996
- -----------------------------------------------------------------------
(in thousands)
Note payable $10,750 $ 9,375
Revolving line 16,095 8,508
Litigation reserve (Note 9) 900 900
Deferred compensation obligation 618 618
Capital lease obligations (Note 6) 26 187
- ------------------------------------------------------------------------
Total long-term obligations 28,389 19,588
Less current portion (1,379) (2,265)
- ------------------------------------------------------------------------
Long-term obligations, net of current portion $27,010 $17,323
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 capital lease obligations have monthly repayment terms through January
1998, 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 28, 1997, the Company was contingently liable for $370,000 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 $155,000 in 1997, $116,000 in 1996 and $111,000 in 1995 was charged against
General and Administrative Expenses.
Principal maturities of long-term obligations, excluding litigation
reserve, at June 28, 1997 are:
Fiscal Years Ending (in thousands)
---------------------------------------------------------
1998 $ 1,379
1999 2,105
2000 2,105
2001 2,105
2002 18,200
2003 and later 1,595
---------------------------------------------------------
Total $27,489
6. LEASES
The Company has capital and operating leases for certain equipment and
production facilities which expire over periods from one to six years. Future
minimum payments under capital leases and noncancelable operating leases with
initial or remaining terms of one year or more at June 28, 1997, are summarized
as follows:
Capital Operating
Fiscal Years Ending (in thousands) Leases Leases
------------------------------------------------------------
1998 $27 $1,480
1999 - 1,393
2000 - 1,193
2001 - 695
2002 - 237
2003 and later - 15
------------------------------------------------------------
Total minimum lease payments 27 $5,013
Amount representing interest 1
------------------------------------------------------------
Present value of net minimum lease payments
(all classified as current) $26
===
Rental expenses under operating leases were $1,892,000, $1,823,000, and
$1,156,000 in 1997, 1996 and 1995, respectively.
7. INCOME TAXES
Income taxes consist of the following:
1997 1996 1995
----------------------------
Current income taxes:
Federal $ 68 $ (50) $ (162)
Foreign 531 (144) 308
State 58 140 107
------------------------------
$657 $ (54) $ 253
Deferred income taxes:
Federal $225 $1,435 $2,062
Foreign (1) (106) (108)
State (19) (35) (4)
------------------------------
$205 $1,294 $1,950
----------------------------
Total income taxes $862 $1,240 $2,203
============================
The Company's effective tax rate differs from the federal tax rate as
follows:
Year Ended Year Ended Year Ended
June 28, June 29, July 1,
1997 1996 1995
- ---------------------------------------------------------------------------
(in thousands)
Federal income tax provision (benefit)
at statutory rates $359 $(202) $2,252
Effect of foreign loss (income)
not subject to federal income tax 279 2,130 (181)
Permanent differences:
Tax credits - (147) -
Life insurance premiums 33 39 26
Other (339) (329) (95)
Foreign tax provision (benefit) at
foreign statutory rate 91 (2,169) 491
Adjustment for effect of beneficial tax rate on
foreign manufacturing income (loss) 439 1,918 (290)
- ---------------------------------------------------------------------------
Income tax provision $862 $1,240 $2,203
In 1997 and 1996 foreign losses increase 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:
Year Ended Year Ended Year Ended
June 28, June 29, July 1,
1997 1996 1995
- ---------------------------------------------------------------------------
(in thousands)
Domestic $ 674 $3,356 $6,090
Foreign 756 (3,951) 534
- ---------------------------------------------------------------------------
Income (loss) before income taxes $1,430 $ (595) $6,624
Deferred income tax provision consists of the following for the year ended:
June 28, June 29,
1997 1996
- -----------------------------------------------------------------------
(in thousands)
Allowance for doubtful accounts $ 9 $ 24
Inventory 268 (189)
Accrued liabilities (524) 34
Deferred compensation - 13
Depreciation and amortization (585) (1,342)
Net operating loss carryforward 1,086 1,136
Tax credit carryovers (22) (198)
Other (27) (142)
Change in valuation allowance - 1,958
- -----------------------------------------------------------------------
Deferred income tax provision $ 205 $1,294
Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expenses. Deferred income tax assets and
liabilities consist of the following at:
June 28, June 29,
1997 1996
- -----------------------------------------------------------------------
(in thousands)
Allowance for doubtful accounts $ 370 $ 379
Inventory 1,623 1,891
Vacation accrual 385 341
Self insurance accrual 145 65
Litigation accrual - 24
Warranty accrual 196 149
State deferred asset 162 143
Other 704 327
- -----------------------------------------------------------------------
Current deferred income tax assets 3,585 3,319
Current portion of valuation allowance (2,141) (2,024)
- -----------------------------------------------------------------------
Current deferred income tax assets net of
valuation allowance 1,444 1,295
- -----------------------------------------------------------------------
Litigation accrual 306 306
Deferred compensation 210 210
Depreciation and amortization (501) (800)
Net operating loss carryforward 9,525 10,318
Tax credit carryovers 666 644
Other 119 118
- -----------------------------------------------------------------------
Noncurrent deferred income tax assets 10,325 10,796
Valuation allowance net of current portion (6,468) (6,585)
- -----------------------------------------------------------------------
Noncurrent deferred income tax assets net
of valuation allowance $ 3,857 $ 4,211
At June 28, 1997 the Company had tax loss carryforwards of approximately
$27.2 million, which expire in varying amounts in the years 2003 through 2011.
Additionally, for federal income tax purposes, the Company has approximately
$666,000 of general business credit carryforwards which expire in varying
amounts in the years 2004 through 2010. Approximately $242,000 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.
Management has considered the relative impact of positive and negative evidence,
including previous and forecasted revenues and profits/losses, existing
contracts and sales backlogs, and other evidence, and believes that it is more
likely than not that the Company will generate sufficient taxable income to
allow the realization of the net deferred tax assets within the next three or
four fiscal years.
8. SHAREHOLDERS' EQUITY
The Company has Executive Stock Option Plans and an Executive Stock
Appreciation Rights Plan for certain key employees. Options under these plans
vest over two to five 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 28, 1997,
2,781,870 shares have been reserved for issuance and 1,113,559 options were
outstanding of which 482,356 shares were exercisable. There were no outstanding
stock appreciation rights as of June 28, 1997. 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 1997, 1996 or 1995 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 28, 1997, 300,000 shares have been reserved for issuance
and 140,000 options were outstanding of which 113,336 shares were exercisable.
In fiscal year 1992 the shareholders ratified and approved an option
agreement between the Company and HKT 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. These options were exchanged for 1,070,396 shares of restricted
common stock and the options were canceled on February 28, 1997 pursuant to a
Restricted Stock Agreement between the Company and HKT Partners.
Following is a summary of all plan activity:
Weighted
Number Average
Price Range Of Options Exercise Price
- -----------------------------------------------------------------------------
Outstanding, July 2, 1994 $3.56 to $11.88 2,987,726 $5.22
- -----------------------------------------------------------------------------
Granted during 1995 $7.25 to $14.625 269,377 $9.10
Stock appreciation rights exercised $4.50 (9,380) $4.50
Options exercised $3.56 to $11.38 (184,956) $7.04
Expired or canceled $4.50 to $11.13 (130,386) $8.55
- -----------------------------------------------------------------------------
Outstanding, July 1, 1995 $3.56 to $14.625 2,932,381 $5.32
- -----------------------------------------------------------------------------
Granted during 1996 $8.34 to $16.25 538,000 $13.49
Options exercised $3.56 to $10.12 (77,709) $7.86
Expired or canceled $3.56 to $16.25 (68,144) $7.92
- -----------------------------------------------------------------------------
Outstanding, June 29, 1996 $3.56 to $16.25 3,324,528 $6.53
- -----------------------------------------------------------------------------
Granted during 1997 $5.50 to $ 7.13 477,800 $5.64
Options exercised $4.50 to $ 4.69 (6,400) $4.51
Expired or canceled $4.50 to $16.25 (2,542,369) $4.69
- -----------------------------------------------------------------------------
Outstanding, June 28, 1997 $3.56 to $16.25 1,253,559 $9.93
- -----------------------------------------------------------------------------
Additional information regarding options outstanding as of June 28, 1997
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted Avg.
Remaining Weighted Weighted
Range of Number Contractual Avg. Exercise Number Avg. Exercise
Exercise Prices Outstanding Life (yrs.) Price Exercisable Price
- ----------------------------------------------------------------------------------------
$ 3.56-$ 5.34 3,640 3.3 $ 4.42 3,640 $ 4.42
$ 5.35-$ 8.01 506,919 9.3 6.08 129,219 7.37
$ 8.02-$12.02 378,000 7.6 9.80 280,333 10.03
$ 12.03-$16.25 365,000 8.3 15.47 512,500 14.44
- ----------------------------------------------------------------------------------------
$ 3.56-$16.25 1,253,559 8.4 $ 9.93 925,692 $12.08
</TABLE>
Of the 3,324,528 options outstanding as of June 29, 1996, 2,671,236 were
exercisable, and of the 2,932,381 options outstanding as of July 1, 1995,
2,577,544 were exercisable.
The Company has two issues of stock warrants outstanding at June 28, 1997.
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. A second
stock warrant, dated October 24, 1994, entitles CIT Group Credit, Inc. to
purchase 45,000 shares of common stock at $12.60 per share. This grant was part
of the loan agreement established between Key Tronic and CIT in October 1994.
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 $454,899, $474,614, and $461,037 in 1997, 1996, and 1995, respectively. The
Company has an Employee Stock Ownership Plan. No contributions were made to the
plan in 1997, 1996, or 1995. The investment in the Company's stock at June 28,
1997 by all employee trusts amounted to 344,443 shares.
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 PRPs and PLPs. 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 1997, 1996 and 1995,
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, cannot 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 PRPs
and PLPs , 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
PRPs and PLPs, 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 two
years after the closing date relating to environmental matters and five years
after the closing date with respect 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. 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
discovered and asserted in the future 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 June 28, 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 ninety-three suits by computer keyboard users
which are in State or Federal Courts in Connecticut, Illinois, 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 fifty-three have been dismissed in California, Florida,
Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New
York, Pennsylvania and Texas. Six of the fifty-three 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 $1.6
million as of June 28, 1997, June 29, 1996, and July 1, 1995, respectively.
Between 1975 and 1980, the Company deposited certain waste material at the
Colbert area landfill. The area landfill was put on the National Priority List
and the Company was named in suits brought upon by Colbert area landowners. The
Company settled all suits with the landowners and contributed to remediation at
the landfill. The Company subsequently filed suits against the insurance
companies to recover legal costs associated therewith and for reimbursement of
payments to landowners. Settlements have been reached with all of the insurers
(see Note 10).
CAPITAL EXPENDITURES AND OTHER
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $750,000 at June 28, 1997.
The subsidiary in Ireland received reimbursement grants from the Irish
government for capital expenditures. Capital expenditures prior to 1996 were
recorded net of reimbursement grants received or receivable. With
reorganization of the subsidiary in Ireland, the grant agreement with the Irish
government, under which a contingent liability for the reimbursement of the
grants arose, 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.
Certain significant events such as closure of the Irish plant or the reduction
of headcount levels could cause repayment of the contingent liability.
As of June 28, 1997, $185,000 of the short-term loan remains payable, and
the Company has made a provision for another $734,000 to be paid to the Irish
Development Authority (IDA) due to further reduction of headcount at the Irish
facility. This provision reduces the original $1,777,000 by the same amount
leaving a contingent liability of $1,043,000 as of June 28, 1997.
The Company currently plans to maintain the Irish plant as its sales,
marketing, distribution, and engineering facility to service the European
community.
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,
valuation allowance on deferred tax assets, 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 effect 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, and changes in
pricing policies by the Company and its competitors.
The Company distributes products primarily to Original Equipment
Manufacturers (OEMs) and as a result maintains individually significant accounts
receivable balances from various major OEMs. 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.
10. OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
Other (income) expense consists of:
Year Ended Year Ended Year Ended
June 28, June 29, July 1,
1997 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Insurance recovery, net of legal costs $(1,495) $(1,417) $ -
Gain on liquidation of currency
translation account - (549) -
Other (406) (306) (308)
- -------------------------------------------------------------------------------
Total $(1,901) $(2,272) $(308)
- -------------------------------------------------------------------------------
</TABLE>
11. 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 28, 1997, June
29, 1996 and July 1, 1995 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>
1997
Net Sales:
Unaffiliated customers $54,048 $106,696 $ - $24,183 $ - $ - $184,927
Affiliates 17,335 13,980 967 - (32,282) -
- -----------------------------------------------------------------------------------------------------
Total $54,048 $124,031 $13,980 $25,150 $ - $ (32,282) $184,927
=====================================================================================================
Income (loss) before
income taxes $ 1,666 $ 585 $ (898) $ - $ 77 $ 1,430
=====================================================================================================
Identifiable assets $ 99,023 $ 3,834 $13,631 $ 2,802 $ (19,135) $100,155
=====================================================================================================
1996
Net Sales:
Unaffiliated customers $45,942 $114,028 $ - $41,068 $ - $ - $201,038
Affiliates - 11,059 9,745 1,644 - (22,448) -
- -----------------------------------------------------------------------------------------------------
Total $45,942 $125,087 $ 9,745 $42,712 $ - $ (22,448) $201,038
=====================================================================================================
Income (loss) before
income taxes $ 5,256 $ 415 $(6,048) $ - $ (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 $ - $38,056 $ - $ - $207,456
Affiliates - 7,390 8,718 1,069 - (17,177) -
- -----------------------------------------------------------------------------------------------------
Total $45,122 $131,668 $8,718 $39,125 $ - $ (17,177) $207,456
=====================================================================================================
Income (loss) before
income taxes $ 6,090 $ (12) $ 485 $ - $ 61 $ 6,624
=====================================================================================================
Identifiable assets $ 98,270 $ 851 $18,230 $ 2,860 $ (5,125) $115,086
=====================================================================================================
</TABLE>
Forty-nine percent of the Company's domestic exports for the year ended
June 28, 1997 were sold to customers in Europe. Twenty-nine percent of domestic
exports were sold to customers in the Far East. The remaining 22% of domestic
exports were spread among customers in Mexico, South America, and Canada.
For the year ended June 29, 1996, 42% of domestic exports were sold to
customers in the Far East.
For the year ended July 1, 1995, there were no customer countries or
regions which were individually significant to total export sales for any of the
Company's individual operations or for operations in the aggregate.
Transfers to affiliates are made at prices which approximate market.
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 28, June 29, July 1,
1997 1996 1995
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest payments $2,414 $3,117 $4,803
Income tax payments 847 212 -
Inventory exchanged for other assets - 2,050 -
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended June 28, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $45,337 $47,102 $49,195 $43,292
Gross profit 6,779 6,862 6,518 5,782
Income before income taxes
and extraordinary item 302 59 442 627
Income before extraordinary item 302 59 266 39
Net income 207 56 19 39
Earnings per share before
extraordinary item 0.02 0.01 0.03 -
Extraordinary item per share - - (0.03) -
Primary earnings per common share 0.02 0.01 - -
Fully diluted earnings per
common share 0.02 0.01 - -
Primary shares outstanding 9,422 9,610 9,446 9,614
Fully diluted shares outstanding 9,598 9,610 9,446 9,614
Common stock price range1
High 8.375 9.000 7.750 6.625
Low 6.375 7.000 3.750 4.500
</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 28, 1997, there were approximately 1,545 common shareholders of
record.
<TABLE>
<CAPTION>
Year Ended June 29, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
(in thousands, except per share amounts)
<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 (.011) (0.37)
Fully diluted earnings per
common share 0.16 0.07 - -
Weighted average shares outstanding - - 8,533 8,534
Primary shares outstanding 10,417 9,996 - -
Fully diluted shares outstanding 10,417 9,996 - -
Common stock price range1
High 17.922 13.875 9.000 9.125
Low 13.875 7.750 5.375 6.000
</TABLE>
14. RESTRUCTURING CHARGES
For the year ended June 28, 1997, the Company made $1,108,000 in
provisions during the fourth quarter for further restructuring of the
Company's facility in Ireland, which serves as a distribution center for its
European sales. This provision includes $734,000 for repayment of grants to
the Irish Development Authority (IDA) and $374,000 for severance.
For the year ended June 29, 1996, the Company made $2,669,000 in
provisions for the restructuring of the facility in Ireland. 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 could be
attained. This provision included $1,879,000 for severance and $790,000 for
repayment of grants to the Irish Development Authority (IDA). The severance
amount 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).
The balance in the reserve for restructuring at June 28, 1997 is
$1,365,000. This amount includes $967,000 provided for the restructuring of
the Company's European Operations and $397,000 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.
Reserve for Restructuring Obligations
-----------------------------------------------------------------
1997 1996
Balance at beginning of year $3,069,000 $ 372,000
Provision charged to income 1,108,000 2,669,000
Amounts paid 2,812,000 -
Currency translation adjustment - 28,000
-----------------------------------------------------------------
Balance at end of year $1,365,000 $3,069,000
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 72, 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 Consolidated
Electronics, Inc., Output Technology Corporation, and The Coeur d'Alenes
Company.
YACOV A. SHAMASH - Director
Dr. Shamash, age 47, 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 75, 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.
DALE F. PILZ - Director
Mr. Pilz, age 71, 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 52, has been a director of the Company since July 1992. Mr.
Hallman served as Vice President, and later, President of Boeing Computer
Services from March 1987 to February 1990. He served as President and Chief
Operating Officer of Microsoft Corporation from March 1990 through March
1992. Mr. Hallman has been with The Hallman Group, a consulting
organization, since April 1992. 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 72, 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 64, has been a director of the Company since August 1992. Mr.
Terry retired from Hewlett-Packard in December 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 73, has been a director since September 1992. Professor
Cannon has been Charles Lee Powell Professor at the Department of Aeronautics
and Astronautics, Stanford University 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 54, 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.
JACK W. OEHLKE - DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mr. Oehlke, age 51, has been President and Chief Executive officer of the
Company since June 1997. From October 1995, he served as Chief Operating
Officer. 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.
RONALD F. KLAWITTER EXECUTIVE VICE PRESIDENT OF ADMINISTRATION AND CHIEF
FINANCIAL OFFICER
Mr. Klawitter, age 45, has been Executive Vice President of Administration,
CFO, Treasurer and Secretary since July 1997. Previously he was Vice
President of Finance, Secretary and Treasurer of the Company. 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 Hughes, Inc.
CRAIG D. GATES - EXECUTIVE VICE PRESIDENT OF MARKETING, ENGINEERING, AND
SALES
Mr. Gates, age 38, has been Executive Vice President of Marketing,
Engineering and Sales since July 1997. Previously he was Vice President and
General Manager of New Business Development. 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 University 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 1995 Proxy Statement to
Shareholders.
ITEMS 11, 12 AND 13: EXECUTIVE COMPENSATION; SECURITIES OWNERSHIP AND
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
Additional information required by these Items is incorporated by reference
to Key Tronic Corporation's 1997 Proxy Statement to Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
Page in
Form 10K
FINANCIAL STATEMENTS
Independent Auditors' Report 18-19
Consolidated Balance Sheets, June 28, 1997
and June 29, 1996 19-20
Consolidated Statements of Operations for
the years ending June 28, 1997, June 29, 1996,
and July 1, 1995 20
Consolidated Statements of Shareholders' Equity
for the years ending June 28, 1997, June 29, 1996,
and July 1, 1995 21
Consolidated Statements of Cash Flows for the
years ending June 28, 1997, June 29, 1996,
July 1, 1995 21-22
Notes to Consolidated Financial Statements 22-35
SCHEDULES
Independent Auditors Report on Financial
Statement Schedule 41
II. Consolidated Valuation and Qualifying Accounts 42
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 January 14, 1997 reporting the secured financing agreement
with General Electric Capital Corporation (GECC).
File
No. 2-83898(i)
Exhibit
No.
(C) EXHIBITS
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 Note 5 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 Note 5. N/A
(10) Material Contracts
(a) The Key Tronic Corporation Variable Investment
Plan. (iii)
(b) Key Employee Stock Option Plan, as amended. 10.3
(c) Executive Stock Option Plan. (iii)
(d) Stock Bonus Plan (PAYSOP). (iii)
(e) Directors and Officers Liability and Company
Reimbursement Policies. 10.5
(f) Leases with Spokane Industrial Park, Inc. 10.7
(g) Amended and Restated Employment Agreement with
Lewis G. Zirkle. (iii)
(h) Agreement Regarding Split Dollar Life Insurance
Policies, as amended. (iv)
(i) Executive SAR Stock Option Plan of Key Tronic
Corporation (v)
(j) Key Tronic Corporation 1990 Stock Option Plan
for Non-Employee Directors (v)
(k) Employee Stock Ownership Plan (vi)
(l) Registration Rights Agreement with Hiller
Key Tronic Partners (vii)
(m) Officer Severance Agreements (vii)
(n) Purchase agreement with Honeywell, Inc. (viii)
(o) Officer Employment Agreement (ix)
(p) Executive Stock Option Plan (x)
(q) Secured Financing Agreement With The CIT Business Group, Inc (xi)
(r) Secured Financing Agreement With General Electric Capital
Corporation (xii)
(13) 1997 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
(xi) Incorporated by reference to report on Form 8-K filed October 24,
1994.
(xii) Incorporated by reference to report on Form 8-K filed January 14,
1997.
(21) Subsidiaries of Registrant
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 8. Key Tronic Far East Pte LTD
100% Owned Subsidiary 100% Owned Subsidiary
Incorporated in Mexico Incorporated in Singapore
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Key Tronic Corporation
We have audited the consolidated financial statements of Key Tronic
Corporation as of June 28, 1997 and June 29, 1996, and for each of the three
years in the period ended June 28, 1997 and have issued our report thereon
dated August 8, 1997; such report is included elsewhere in this Form 10-K.
Our audits also included the consolidated financial statement schedule of Key
Tronic Corporation, listed in Item 14(A). 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, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Seattle, Washington
August 8, 1997
PART IV
SCHEDULE II
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 28, 1997
JUNE 29, 1996 AND JULY 1, 1995
1997 1996 1995
<S> <C> <C> <C>
Allowance for Obsolete Inventory
Balance at beginning of year
$4,322,071 $3,512,085 $3,581,447
Provision charged to income 1,953,331 2,952,911 2,907,487
Dispositions (3,337,793) (2,142,925) (2,976,849)
---------- ---------- ----------
Balance at end of year $2,937,609 $4,322,071 $3,512,085
========== ========== ==========
Allowance for Doubtful Accounts
Balance at beginning of year $ 932,237 $1,185,373 $1,538,517
Provision charged to income 10 0 361,283
Write-offs and reinstatements (27,108) (253,136) (714,427)
---------- ---------- ----------
Balance at end of year $ 905,139 $ 932,237 $1,195,373
========== ========== ==========
Reserve for Litigation
Balance at beginning of year $ 969,143 $1,607,496 $2,426,375
Provision charged (credited) to income 0 0 0
Cost incurred-net of recoveries (69,143) (638,353) (818,879)
---------- ---------- ----------
Balance at end of year 900,000 969,143 1,607,496
Less long-term portion 900,000 900,000 900,000
---------- ---------- ----------
Current portion $0 $ 69,143 $ 707,496
========== ========== ==========
Accrued Warranty Costs
Balance at beginning of year $ 437,207 $ 628,727 $ 762,284
Provision charged to income 1,290,236 1,120,979 1,001,276
Costs incurred (1,151,242) (1,312,499) (1,134,833)
---------- ---------- ----------
Balance at end of year $ 576,201 $ 437,207 $ 628,727
========== ========== ==========
</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 23, 1997
KEY TRONIC CORPORATION
By: /s/ Jack W. Oehlke
Jack W. Oehlke, Director,
President and 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:
/s/ Jack W. Oehlke September 23, 1997
Jack W. Oehlke Date
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter September 23, 1997
Ronald F. Klawitter Date
(Principal Financial Officer)
/s/ Keith D. Cripe September 23, 1997
Keith D. Cripe Date
(Principal Accounting Officer)
/s/ Stanley Hiller, Jr. September 23, 1997
Stanley Hiller, Jr. Date
(Director)
/s/ Wendell J. Satre September 23, 1997
Wendell J. Satre Date
(Director)
/s/ Yacov A. Shamash September 23, 1997
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 23, 1997
Dale F. Pilz Date
(Director)
/s/ William E. Terry September 23, 1997
William E. Terry Date
(Director)
<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> JUN-28-1997
<CASH> 2812
<SECURITIES> 0
<RECEIVABLES> 27894
<ALLOWANCES> 905
<INVENTORY> 21481
<CURRENT-ASSETS> 61845
<PP&E> 97155
<DEPRECIATION> 65135
<TOTAL-ASSETS> 100155
<CURRENT-LIABILITIES> 23328
<BONDS> 0
0
0
<COMMON> 38165
<OTHER-SE> 11652
<TOTAL-LIABILITY-AND-EQUITY> 100155
<SALES> 184927
<TOTAL-REVENUES> 184927
<CGS> 158617
<TOTAL-COSTS> 158617
<OTHER-EXPENSES> 22542
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 2328
<INCOME-PRETAX> 1430
<INCOME-TAX> 862
<INCOME-CONTINUING> 568
<DISCONTINUED> 0
<EXTRAORDINARY> 246
<CHANGES> 0
<NET-INCOME> 322
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
