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 27, 1998
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 $26,331,883 as of August 14, 1998.
The number of shares of Common Stock of the Registrant outstanding as of August
14, 1998 was 9,630,830 shares.
The Exhibit Index is located at Page 36.
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 October
22, 1998 is incorporated by reference into Part III.
KEY TRONIC CORPORATION
1998 FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................3-7
Item 2. Properties........................................................7
Item 3. Legal Proceedings...............................................7-8
Item 4. Submission of Matters to a Vote of Security Holders...............9
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters..............................................10
Item 6. Selected Financial Data..........................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................11-17
Item 8. Financial Statements and Supplementary Data...................18-34
Item 9. Disagreements on Accounting and Financial Disclosure.............34
PART III
Item 10. Directors and Executive Officers of the Registrant............34-36
Item 11. Executive Compensation...........................................36
Item 12. Securities Ownership of Certain Beneficial Owners and
Management.......................................................36
Item 13. Certain Relationships and Related Transactions...................36
PART IV
Item 14. Exhibits, Financial Statement Schedule, Reports on Form
8-K and Signatures............................................36-41
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements in addition to
historical information. Forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements.
Risks and uncertainties that might cause such differences include, but
are not limited to those outlined in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risks and
Uncertainties that May Affect Future Results." Readers are cautioned not
to place undue reliance on forward-looking statements, which reflect
management's opinions only as of the date hereof. The Company undertakes
no obligation to revise or publicly release the results of any revision
to forward-looking statements. Readers should carefully review the risk
factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including Quarterly Reports
on Form 10Q.
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 their 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 1998, 1997 and 1996, the Company realized revenues of approximately
$145.3 million, $150.9 million and $169.1 million, respectively, from the sale
of keyboards representing approximately 85 percent, 82 percent and 84 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 engineering studies of physical comfort
factors when using computer products. 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 $24.8 million, $34.0 million and $31.9 million in 1998, 1997 and
1996 representing approximately 15 percent, 18 percent and 16 percent of total
sales. The significant dollar decrease in 1998 was due primarily to decreased
customer orders for plastic components which are used 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. The Company plans to increase its
contract manufacturing services. Target markets will include customers in
computers, computer peripherals, telecommunications and medical devices.
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 and aesthetic considerations 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. During
fiscal 1998, Key Tronic introduced stack molding technology to the manufacturing
process. Stacked molds allow the Company to utilize two molds simultaneously
thereby producing twice as many parts in nearly the same cycle time used for one
part. 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 31 percent, 34 percent and 34
percent of net sales in 1998, 1997 and 1996. Microsoft accounted for
approximately 13 percent, 7 percent and 17 percent of net sales in 1998, 1997
and 1996. Toshiba Corporation accounted for approximately 11 percent of net
sales in fiscal 1997; however, in fiscal 1998, sales to Toshiba only represented
2 percent of net sales. No other customer accounted for more than 10 percent of
net sales during any of the last three years. In 1998, 1997 and 1996, the five
largest customers accounted for 61 percent, 65 percent and 68 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 1998, $70.9 million, or 41.7 percent of the Company's revenues were from
foreign sales, primarily sales in Europe, the Far East, Canada, Mexico, and
South America. Foreign sales in 1997 and 1996 were $78.2 million and $87.0
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 12 to
the Consolidated Financial Statements.
BACKLOG
At August 15, 1998, the Company had an order backlog of approximately $15
million. This compares with a backlog of approximately $16 million at August
30, 1997. 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 $4.6 million,
$5.2 million, and $6.0 million in 1998, 1997 and 1996, respectively. Research,
development and engineering expenses as a percentage of sales were 2.7 percent,
2.8 percent and 3.0 percent in 1998, 1997 and 1996, respectively.
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 15, 1998, the Company had approximately 2,685 employees. Management
considers its employee relations to be excellent. None of the Company's U.S.
employees are represented by a 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 September of 1997, the
Company signed a five-year operating lease with a local company for property
located in Cheney, Washington. The lease terms include an option to buy the
property upon notice at any time during the course of the lease. During the
fourth fiscal quarter of 1998, the Company leased space of approximately 1,098
square meters in a building in Shanghai, China. The Company plans to begin an
assembly operation in this facility within the next several months. 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. This
expansion was completed during the first quarter of fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company currently has fifty-three suits by computer keyboard users which are
in State or Federal Courts in Illinois, New York, and Pennsylvania. These suits
allege that specific keyboard products manufactured by the Company were sold
with manufacturing, design and warning defects which caused or contributed to
plaintiffs' 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 one hundred and
fifty-four suits have been dismissed in California, Connecticut, Florida,
Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New
York, Pennsylvania and Texas. One of the one hundred and fifty-four dismissed
suits is on appeal, in New York. The Company believes it has valid defenses and
will vigorously defend these claims. These claims are in the early stages of
discovery. Given the early stage of litigation, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate resolution
of insurance coverage issues, the range of reasonably possible losses in
connection with these suits is not estimable at this time. Therefore no
provision has been made to cover any future costs. Management's position will
change if warranted by facts and circumstances.
(Also see Note 10 to the Consolidated Financial Statements contained in the
Company's 1998 Annual Report to Shareholders.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5: MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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 1998 and 1997 were as follows:
1998 1997
High Low High Low
First Quarter $5.688 $4.375 $8.375 $6.375
Second Quarter 5.625 4.000 9.000 7.000
Third Quarter 4.750 3.125 7.750 3.750
Fourth Quarter 4.125 2.250 6.625 4.500
As of August 20, 1998 the Company had 1,496 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)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $170.1 $184.9 $201.0 $207.5 $159.4 $123.3 $124.0 $141.0 $140.2 $145.9
Operating Income (loss) 1.2 1.9 0.2 9.8 (8.3) 3.7 (7.7) (7.5) 0.5 2.9
Net Income (loss) (0.9) 0.3 (1.8) 4.4 (1.1) 3.8 (7.5) (7.7) 1.5 3.1
Earnings (loss) per share (0.09) 0.03 (0.22) .43 (0.13) 0.42 (0.96) (1.00) 0.18 0.37
Depreciation/amortization 9.6 8.9 10.0 8.9 8.6 6.3 6.9 5.4 6.5 8.6
Total Assets 97.0 100.2 93.5 115.1 101.9 61.8 62.2 68.6 75.4 80.8
Net working capital 34.4 38.5 28.0 37.7 28.5 20.0 17.2 19.7 33.9 38.0
Long-term Debt (net of current) 22.9 27.0 17.3 28.5 26.6 0.8 0.8 0.1 0.0 1.1
Shareholders' equity 48.8 49.8 49.5 51.3 44.5 43.4 40.5 46.4 54.9 56.7
Book value/share 5.06 5.18 5.80 6.06 5.38 5.54 5.21 6.00 7.09 6.79
Cash dividends per share 0 0 0 0 0 0 0 0 0 0
Number of shares outstanding
at year-end (thousands) 9,631 9,611 8,534 8,456 8,271 7,837 7,757 7,736 7,736 8,356
Number of employees
(year-end) 2,721 2,429 2,824 2,925 2,163 1,204 1,618 2,241 2,127 2,351
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1998: Fiscal year 1998 sales improved sequentially over the first three
quarters but declined during the fourth quarter. The Company maintained
profitability for the first three quarters of the fiscal year, but the decline
in sales during the fourth quarter resulted in a loss for the year. The decline
in the fourth quarter was due to decreasing customer orders because of market
conditions in the computer industry. The Company has been successful in
increasing its market share by expanding its customer base during the year, but
prices declined at a greater rate which resulted in lower sales and
profitability compared to the previous year.
Unit keyboard sales increased 15.0% in fiscal 1998 compared to fiscal 1997, but
the average selling price declined by 16.3%. The Company continues to increase
its manufacturing operations in its Juarez, Mexico facility to combat the
pressures of ever decreasing unit prices for its keyboards. The Company is also
currently working with a subcontractor in China for the assembly of keyboards
and other input devices.
If keyboard technology remains the same, pricing is expected to continue
declining in future years. The Company plans to focus its molding and
manufacturing capabilities on increasing production in contract manufacturing
and design in the new fiscal year. At the present time, return on investment in
this market tends to be more lucrative than for keyboards. Within the first
quarter of fiscal 1999, the Company should be in a position to open its own
assembly facility in China to support one of its major OEM customers in this
area.
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 were not expected to commence until the last half of fiscal 1998;
however, in the fourth quarter of fiscal 1998, the Company's customers decreased
their orders due to market conditions, and this expectation was not met.
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% in fiscal 1997
compared to fiscal 1996.
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. Two of the Company's OEM customers accounted for
31% and 13% individually, of net sales during fiscal 1998. In 1997, these same
customers accounted for 34%, and 7% of the Company's net sales. In fiscal 1997,
another customer accounted for 11% of net sales; however, in fiscal 1998, this
customer accounted for only 2% of 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 fifty-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 27, 1998, there were
outstanding options and warrants for the purchase of approximately 2,000,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 1,000,000 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.
Year 2000 Matters. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar formal business activities.
Many of the Company's systems include hardware and packaged software purchased
from vendors who have represented that these systems are already Year 2000
compliant. The Company has also initiated a conversion from existing software
to programs that are represented to be Year 2000 compliant.
The Company has communicated with all of its significant suppliers, and is in
the process of initiating formal communications with all of its large customers
and other external agencies to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company can give no guarantee that the systems of other companies
on which the Company's systems rely will be converted on time or that a failure
to convert by another company or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which will be
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
NET SALES
Net sales in 1998 were $170.1 million compared to $184.9 million and $201.0
million in 1997 and 1996, respectively. This represents approximate decreases
of 8.0% in both 1998 and 1997. The average unit selling prices of the Company's
keyboard products declined by 16.3% in 1998 compared to 18.3% in 1997.
Offsetting these price declines were increases in unit volumes of 15.0% and 9.1%
in 1998 and 1997, respectively.
COST OF SALES
In 1998, cost of sales was 86.8% of sales compared to 85.8% in 1997 and 86.6% in
1996. The increase in 1998 is due primarily to lower revenues. The decrease in
1997 was 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 Company provides for warranty costs based on historical
experience and anticipated product returns. The amounts charged to expense were
$1,480,000 $1,290,000, and $1,121,000 in 1998, 1997, and 1996, 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 $1,850,000, $1,953,000, and $2,906,000 in 1998,
1997, and 1996, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering (RD&E) expenses were $4.6
million, $5.2 million, and $6.0 million, in 1998, 1997, and 1996, respectively.
As a percent of sales, these expenses were 2.7%, 2.8%, and 3.0%, respectively.
In 1998, 1997, and 1996 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 decreases in fiscal 1998 and 1997 are primarily the result of better
design controls and increased cost recovery for services performed.
SELLING EXPENSES
Selling expenses were $8.3 million, $8.2 million, and $5.6 million, in 1998,
1997, and 1996, respectively. Selling expenses as a percent of revenue were
4.9%, 4.4%, and 2.8%, respectively. In fiscal 1998, the Company utilized the
services of independent sales representatives as well as its own outside sales
force to further promote both retail and OEM products. The slight increase in
selling expenses over the course of the current fiscal year is primarily the
result of additional expenses for commissions, compensation and retail sales
incentive programs. 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 in fiscal
years ended 1996 and 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $8.5 million, $10.0 million and $12.5
million, in 1998, 1997, and 1996, respectively. General and administrative
costs as a percentage of sales were 5.0%, 5.4%, and 6.2%, in 1998, 1997, and
1996, respectively. The decrease in 1998 is due primarily to decreased
expenditures for compensation, taxes, travel, and various other operating
expenses. The decrease in compensation expense relates primarily to the
departure of one of the Company's officers at the end of fiscal 1997. The
position was filled by another of the Company's officers which left a permanent
headcount reduction in the department. The decrease in fiscal 1997 was 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
was primarily due to cost reductions in compensation, business taxes,
depreciation, and hiring and moving costs.
INTEREST EXPENSE AND OTHER
The Company had interest expense of $2,108,000, $2,328,000, and $3,047,000, in
1998, 1997 and 1996, respectively. The decrease in 1998 is due to additional
paydown of the Company's term debt which bears a somewhat higher interest rate
than its revolving loan. The decrease in 1997 is partially due to a lower
interest rate obtained when the Company refinanced its debt in December 1996.
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.
INCOME TAXES
The Company had income tax expense of $156,000, $862,000, and $1,240,000 in
1998, 1997, and 1996, respectively. Income tax expense (benefit) on foreign
operations represented $433,000, $530,000 and ($251,000) of the income tax
expense in 1998, 1997, and 1996, respectively. The Company has U.S. tax loss
carryforwards of approximately $25.5 million which expire in varying amounts in
the years 2006 through 2012. In 1998 income from European operations decreased
the Company's effective income tax rate, because such income is taxed at a lower
rate than income from U.S. operations. 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.
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 27, 1998 Consolidated Financial Statements). Pursuant to SFAS 109
the Company has recorded a deferred tax asset. The balance of the deferred tax
asset on June 27, 1998 was $5,879,126, which was net of a valuation allowance of
$8,609,436.
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, was
restructured in fiscal years 1997 and 1996 to become a sales and distribution
facility. 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.
Foreign sales from worldwide operations, including domestic exports, were $70.9
million in 1998 compared to $78.2 and $87.0 million in 1997 and 1996,
respectively. Foreign sales were 41.0% of net sales in 1998 compared to 42.3%
and 43.3% in 1997 and 1996, respectively. Sales from KTEL represented 11.0% of
consolidated sales to unaffiliated customers in 1998, compared to 13.1% in 1997
and 20.4% in 1996, respectively (see Note 12 to the June 27, 1998 Consolidated
Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The Company generated cash flow from operating activities of $7.8 million, $.7
million, and $19.1 million in 1998, 1997, and 1996, respectively. Capital
expenditures were $7.1 million, $9.6 million, and $7.1 million in 1998, 1997,
and 1996, respectively. The Company's cash position decreased by $2.5 million
in 1998 compared to an increase of $.2 million and a decrease of $1.9 million in
1997 and 1996, respectively. Cash generated from operating and financing
activities allowed the payment of $6.4 million in long-term debt to its
financing company and the purchase of $7.1 million in property and equipment.
The Company had working capital of $34.4 million and $38.5 million at June 27,
1998 and June 28, 1997. The decrease in working capital was due primarily to
lower cash balances and trade receivables and an increase in account payable.
The decrease in trade receivables is explained below. The increase in accounts
payable is due primarily to tighter cash controls offset by payments made on
debt.
Trade receivables were $23.1 million at June 27, 1998, a decrease of $3.9
million from 1997. The decrease in trade receivables was caused in part by
lower sales in periods 11 and 12 of fiscal 1998 compared to the same periods of
fiscal 1997. Another contributing factor was the Company's improved collection
cycle. Days sales outstanding (DSO's) decreased from 56 at the end of fiscal
1997 to 52 in the current year. Inventories were $24.7 million and $21.5
million at June 27, 1998 and June 28, 1997. The increase in inventory is
primarily a result of finished goods held in warehouses throughout Europe in
support of the Company's customers.
On December 31, 1996, the Company entered into a secured financing agreement
with General Electric Capital Corporation (GECC). This agreement contains a
term note for up to $11,000,000 and a revolving loan for up to $25,800,000.
During the second quarter of fiscal 1998, the Company entered into an operating
lease agreement with GECC which reduced the borrowing limit on the revolving
loan by $4.2 million. The revolving loan 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 27, 1998 and June 28, 1997, the Company was in compliance
with all debt covenants. As of June 27, 1998, the revolving loan balance
decreased $.9 million when compared to the balance as of June 28, 1997. This
decrease can be attributed to additional cash from more aggressive collection
efforts.
The Company anticipates that capital expenditures of approximately $10.2 million
will be required during the next fiscal year. Capital expenditures are expected
to be financed through cash flow from operating activities and operating leases.
Real estate held for sale is carried at the lower of cost or net realizable
value. In September of 1997, the Company signed a five-year operating lease
with a local company for this property. Monthly lease payments are $21,000, and
the proceeds are used to pay down the Company's term debt per a special
agreement with General Electric Capital Corporation. The lease terms include an
option to buy the property upon notice at any time during the course of the
lease. The building is listed with a real estate broker as the Company continues
to actively sell the property.
The Company believes that funds available under the line of credit, and
internally generated funds can satisfy cash requirements for a period in excess
of 12 months.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
The Company has an internal committee made up of representatives from seven
strategic areas that are dedicated to the year 2000 issue, and the committee
meets on a regular basis to discuss any changes to applications that are
considered critical to the Company's operations. To date, each area has
identified those applications, functions, and software programs that are
considered critical to the Company's operations and has also identified those
that are not year 2000 compliant.
Progress has been made in the current fiscal year to upgrade software programs
that were not compliant. Costs associated with such upgrades have been
immaterial and have been expensed as incurred. The Company has contacted its
critical suppliers and the majority of all suppliers by survey regarding their
year 2000 readiness and, although it has received responses from all critical
suppliers, it has received target dates for compliance from less than one-fourth
of them to date. Production and test equipment as well as production facilities
are being evaluated for compliance, and steps are being taken to correct any
problem areas.
The Company's foreign subsidiaries are also involved in determining whether or
not their equipment, facilities, and utilities are year 2000 compliant, and they
are advising the committee accordingly.
Less progress has been made in evaluating embedded systems, because they are
more difficult to identify; however, the committee is aware of their importance
and is taking steps to both identify and correct any date-sensitive systems
found non-compliant.
Based on information currently available, management does not believe that there
will be any material impact on future financial statements for changes necessary
to bring the Company's systems into year 2000 compliance. It is believed that
the greatest risk to the Company will be from outside firms that the Company
relies on for its operations. Relationships with such firms could interfere
with the Company's ability to make shipments and therefore impact sales. As of
June 27, 1998, the Company does not have contingency plans in place to cover
these types of problems, but it plans to have all such risks to its operations
identified and fully covered by contingency plans no later than mid 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. The Company's major market risk relates to its secured debt
(see notes to financial statements). A portion of the Company's accounts
receivable and inventories are used as collateral for its term and revolving
debt. The interest rates applicable to the Company's debt fluctuate with the
London Interbank Offered Rate (LIBOR). Over the past fiscal year, the highest
LIBOR rate was 6.000% at the end of December, 1997. This rate continued through
the month of January, 1998 and has since remained less than 6.000%.
The table below presents principal (or notional) amounts and related weighted
average variable interest rates by fiscal year of maturity. The weighted average
variable interest rates for fiscal years 1999 and thereafter are estimated based
on implied forward rates in the yield curve as of June 27, 1998. These forward
rates have been increased by 2% for the term debt and 1.75% for the revolving
debt based on debt service coverage of less than .9 (see Note 5 to the June 27,
1998 Consolidated Financial Statements). All items described in the table are
non-trading and are stated in U.S. dollars.
<TABLE>
<CAPTION>
Fair Value
June 27,
In thousands 1998 1999 2000 2001 2002 Thereafter Total 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate risk:
Long-term debt-
floating rate:
Secured term debt 8,332 2,000 2,000 2,000 2,000 332 8,332 8,332
Average interest
rate 7.69% 7.84% 7.87% 7.91% 7.92% 7.94%
Secured revolving
debt 15,153 15,153 15,153 15,153
Average interest
rate 7.44% 7.67%
</TABLE>
The Company does not enter into derivative transactions or leveraged swap
agreements.
Although the Company does have international operations, the functional currency
for all active subsidiaries is the U.S. dollar, so it is not subject to dramatic
currency translation adjustments. The Company imports for its own use raw
materials that are used in its manufacturing operations. Such purchases are
denominated in U.S. dollars and are paid for under normal trade terms.
Management does not believe that the European conversion to Euro-currency
scheduled for January 1, 1999, will have a material effect on its financial
statements taken as a whole, primarily because its sales worldwide are
predominantly in U.S. dollars.
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 accompanying consolidated balance sheets of Key Tronic
Corporation (the Company) and subsidiaries as of June 27, 1998 and June 28,
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended June 27, 1998, June 28, 1997, and
June 29, 1996. 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 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for the years ended June 27, 1998, June 28,
1997, and June 29, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
August 10, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands) JUNE 27, JUNE 28,
1998 1997
- -------------------------------------------------------------------------------
ASSETS
<S>
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 288 $ 2,812
Trade receivables, less allowance for doubtful
accounts of $885 and $905 23,103 26,989
Inventories 24,723 21,481
Real estate held for sale 2,134 2,243
Deferred income tax asset, net 1,681 1,444
Customer tooling 4,855 3,016
Other 3,127 3,860
- -------------------------------------------------------------------------------
Total current assets 59,911 61,845
- -------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT-AT COST 103,551 97,155
Less accumulated depreciation 73,621 65,135
- -------------------------------------------------------------------------------
Total property, plant, and equipment 29,930 32,020
- -------------------------------------------------------------------------------
OTHER ASSETS:
Deferred income tax asset, net 4,198 3,857
Other (net of accumulated amortization of $170 and $81) 1,770 1,030
Goodwill (net of accumulated amortization of $511 and $383) 1,276 1,403
- -------------------------------------------------------------------------------
$ 97,085 $100,155
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 2,105 $ 1,379
Accounts payable 15,525 14,319
Accrued compensation and vacation 2,750 3,033
Accrued taxes other than income taxes 1,558 1,142
Interest payable 132 166
Other 3,257 3,289
- -------------------------------------------------------------------------------
Total current liabilities 25,327 23,328
- -------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term obligations, less current portion 22,898 27,010
- -------------------------------------------------------------------------------
Total long-term liabilities 22,898 27,010
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5,6, AND 10)
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 25,000 shares;
issued and outstanding 9,631 and 9,611 shares 38,273 38,165
Retained earnings 10,342 11,228
Foreign currency translation adjustment 245 424
- -------------------------------------------------------------------------------
Total shareholders' equity 48,860 49,817
- -------------------------------------------------------------------------------
$ 97,085 $100,155
===============================================================================
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
(In thousands, except per share amounts) JUNE 27, June 28, June 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $170,050 $184,927 $201,038
Cost of sales 147,541 158,617 174,052
- ------------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 22,509 26,310 26,986
OPERATING EXPENSES:
Research, development and engineering 4,579 5,164 5,997
Selling 8,291 8,216 5,597
General and administrative 8,465 9,965 12,543
Provision for restructuring - 1,108 2,669
- ------------------------------------------------------------------------------------------
OPERATING INCOME 1,174 1,857 180
INTEREST EXPENSE 2,108 2,328 3,047
OTHER INCOME (204) (1,901) (2,272)
- ------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (730) 1,430 (595)
INCOME TAX PROVISION 156 862 1,240
- ------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (886) 568 (1,835)
Extraordinary item: extinguishment of debt, net of
applicable income taxes of $127 - 246 -
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (886) $ 322 $ (1,835)
===============================
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per common share before extraordinary item:
Earnings per common share _ basic and diluted $ (.09) $ .06 $ (.22)
Earnings per share after extraordinary item:
Earnings per common share _ basic and diluted $ (.09) $ .03 $ (.22)
Weighted average shares outstanding 9,626 8,895 8,522
Diluted shares outstanding 9,626 9,525 8,522
- ------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<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 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
- ---------------------------------------------------------------------------------------------
Net loss - 1998 (886) (886)
Issuance of stock 20 108 108
Foreign currency translation adjustment (179) (179)
- ---------------------------------------------------------------------------------------------
BALANCES, JUNE 27, 1998 9,631 $38,273 $10,342 $ 245 $48,860
- ---------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
(In thousands) JUNE 27, June 28, June 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (886) $ 322 $(1,835)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 9,577 8,903 9,974
Provision for restructuring of business line - 1,108 2,669
Provision for obsolete inventory 1,850 1,953 2,906
Provision for doubtful receivables 75 10 87
Provision for warranty 1,477 1,290 1,121
Gain on disposal of assets (244) (267) (730)
Deferred income tax provision (578) 205 1,294
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade receivables 3,811 (3,641) 10,519
Inventories (4,142) (368) (39)
Other assets (2,922) (3,860) 1,809
Accounts payable 1,206 (1,258) (6,073)
Employee compensation and accrued vacation (283) 97 (1,216)
Other liabilities (1,127) (3,756) (1,921)
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 7,814 738 18,565
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,096) (9,635) (7,060)
Proceeds from sale of property and equipment 80 1,131 358
- ------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (7,016) (8,504) (6,702)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (44) (811) (22)
Proceeds from issuance of common stock 108 23 681
Proceeds from long-term obligations 3,047 26,845 -
Payments on long-term obligations (6,433) (18,044) (14,344)
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,322) 8,013 (13,685)
- ------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (4) (64)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,524) 243 (1,886)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,812 2,569 4,455
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 288 $ 2,812 $ 2,569
========================
See notes to consolidated financial statements
</TABLE>
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, 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 allowance for doubtful
receivables, the reserve for obsolete and non-saleable inventories, the
valuation allowances on deferred tax assets, and the reserve for warranty costs.
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 $2,739,000 and $2,938,000 at June 27, 1998 and June 28, 1997,
respectively. The Company provides for obsolete and nonsaleable inventories
based on specific identification of inventory against current demand and recent
usage.
CUSTOMER TOOLING
Customer tooling is the Company's prepaid tooling design and construction costs
for customer specified new production tools and molds. Each new project is
assigned a project number, and expected project costs are recorded and tracked
against actual costs. These actual costs are invoiced to the Company's customers
depending on the terms agreed upon during the quoting process prior to
initiation of each new project.
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 27, 1998, it was determined that the Company's assets were appropriately
valued and that further adjustments were not necessary.
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 27, 1998 and June 28, 1997 were $664,000 and
$576,000 respectively.
NET SALES
Sales are recognized when products are shipped. Provisions for estimated
sales returns are not significant. The Company provides for doubtful accounts
receivable 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
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common and
common equivalent shares outstanding during the period using the treasury stock
method. The computation assumes the proceeds from the exercise of stock options
were used to repurchase common shares at the average market price during the
period. The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of common equivalent shares that
would have an antidilutive effect on earnings per share. As of June 27, 1998,
due primarily to the Company's financial loss for the year, common equivalent
shares resulted in an antidilutive effect on earnings per share, and so, the
earnings per common share assuming dilution is not reflected in the financial
statements.
SIGNIFICANT CUSTOMERS
One customer accounted for approximately 31%, 34%, and 34% of net sales for
the years ended June 27, 1998, June 28, 1997, and June 29, 1996, respectively.
This customer accounted for approximately 24% and 33% of trade receivables at
June 27, 1998 and June 28, 1997, respectively. Another customer accounted for
approximately 13%, 7%, and 17% of net sales in 1998, 1997, and 1996,
respectively. This customer accounted for approximately 13% and 11% of trade
receivables at June 27, 1998 and June 28, 1997, 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. However, this same customer in fiscal year
1998 only accounted for 2% of net sales. No other customer accounted for more
than 10% of net sales for the years ended June 27, 1998 and 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. Until the end of fiscal 1998,
assets and liabilities of the Company's subsidiary in Taiwan had been translated
to U.S. dollars at year-end exchange rates. Revenues and expenses had been
translated at average exchange rates. Translation gains and losses had been
included in a separate component of shareholders' equity. The foreign currency
translation adjustment of $179,000 for the year ended June 27, 1998, which is
included in the Consolidated Statements of Shareholders' Equity is a result of
final liquidation entries for the Company's subsidiary in Taiwan and is included
in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reflected in the balance sheet at June 27, 1998 and June 28,
1997, 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 $23.0 million and $27.0 million, respectively, as of June 27, 1998 and June
28, 1997, which approximates the carrying values of $23,484,913 as of June 27,
1998 and $26,845,169 as of June 28, 1997.
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, 58.36% in 1998, 56.6% in 1997, and 56.8% in 1996, respectively; risk
free interest rates, 5.81% in 1998, 6.34% in 1997 and 6.45% in 1996,
respectively; 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 1998, 1997,
and 1996 awards had been amortized to expense over the vesting period of the
awards, pro forma net loss would have been $1,764,000 ($.19 per share) in 1998,
$1,072,000 ($.12 per share) in 1997, and $2,799,000 ($.33 per share) in 1996.
The weighted average fair values of options granted during fiscal years 1998,
1997, and 1996 are $2.34, $3.39, and $8.15 per share, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", were issued in late
1997 and are effective for companies whose fiscal years begin after December
27, 1997. Therefore, this standard will not be applicable to the Company until
the year ending July 3, 1999. However, management believes the impact of
adoption will not be material to the financial statements, taken as a whole.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" was issued in February 1998 and is effective for companies whose
fiscal years begin after December 15, 1997. Although this standard is not
yet applicable to the Company, management has chosen to disclose the
following information with regard to the new SFAS: The Company pays certain
postretirement benefits for two former employees in accordance with SFAS No.
106 (see Note 5). These payments are expensed monthly. The Company has
recorded a liability based upon the present value of future cash payments as
specified in the agreements. Since there are no other postretirement
agreements between the Company and its employees, management believes the
impact of adoption will not be material to the financial statements, taken as
a whole.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June, 1998 and is effective for companies whose fiscal years
begin after June 15, 1999. The Company does not presently participate in the
kinds of activities that the new SFAS applies to; therefore, management
believes the impact of adoption will not be material to the financial
statements.
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 1998, 1997, and 1996 ended on
June 27, 1998, June 28, 1997, and June 29, 1996, respectively. Fiscal year 1999
will end on July 3, 1999.
2. INVENTORIES
<TABLE>
<CAPTION>
Components of inventories were as follows: June 27, June 28,
1998 1997
- -----------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Finished goods $ 11,802 $ 9,119
Work-in-process 3,106 2,053
Raw materials 12,554 13,247
Reserve for obsolescence (2,739) (2,938)
- -----------------------------------------------------------------------
$ 24,723 $21,481
=======================================================================
</TABLE>
Cost of goods sold includes charges of $1.9 million, $2.0 million, and $2.9
million resulting from reduction of inventories to estimated realizable value in
1998, 1997, and 1996, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
June 27, June 28,
Classification Life 1998 1997
(in years) (in thousands)
- -----------------------------------------------------------------------
Land $ 2,486 $ 2,486
Buildings and improvements 3 to 30 16,740 14,618
Equipment 1 to 10 70,673 66,968
Furniture and fixtures 3 to 5 13,652 13,083
- -----------------------------------------------------------------------
$103,551 $97,155
=======================================================================
4. RELATED PARTY TRANSACTIONS
(a) The Company has life insurance policies on the life of its founder 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'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 $338,000 and $256,000 in 1998 and
1997, respectively, and are included in other noncurrent 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 $164,000,
$186,000, and $221,000 in 1998, 1997, and 1996, respectively. No amounts were
owed to HIC as of June 27, 1998 and June 28, 1997.
(c) Stanley Hiller Jr. has a 66.73% equity interest in Hiller Key Tronic
Partners, L.P. (HKT Partners), a Washington limited partnership. Other
directors and officers collectively have an 8.05% equity interest in HKT
Partners. HKT Partners hold 1,070,396 shares of restricted common stock of the
Company (see Note 9).
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 $25.8 million. 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 27, 1998 and June 28,
1997, 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 is payable in quarterly installments of principal, each in the
amount of $500,000 commencing in March 1998 and maturing in December 2001. In
addition to these scheduled payments, the Company is also paying $21,000 per
month against the term note which is a special agreement with GECC resulting
from the Company's lease of its Cheney facility. If debt service coverage is
greater than .9, 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 .9, this note bears interest at
two percent (2.00%) in excess of the applicable LIBOR rate. At June 27, 1998,
the applicable LIBOR rate was 5.65234%, and the applicable interest rate was
7.65234%.
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
.9, the applicable interest rate is one and one-half percent (1.5%) in excess of
the applicable LIBOR rate. If debt service coverage is less than or equal to
.9, the applicable interest rate is one and three-quarters percent (1.75%) in
excess of the applicable LIBOR rate. At June 27, 1998, the applicable LIBOR
rate was 5.65234%, and the applicable interest rate was 7.40234%. At June 27,
1998, there was $15.2 million borrowed on the revolving loan and approximately
$10.2 million available for use under the revolving loan. The Company is
required to pay fees of three and three-quarters of one percent (.375%) on the
unused revolving loan balance.
Long-term obligations consist of:
June 27, June 28,
1998 1997
- -----------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------
Note payable $8,332 $ 10,750
Revolving line 15,153 16,095
Litigation reserve (Note 9) 900 900
Deferred compensation obligation 618 618
Capital lease obligations (Note 6) 0 26
Total long-term obligations 25,003 28,389
Less current portion (2,105) (1,379)
- -----------------------------------------------------------------------
$22,898 $27,010
- -----------------------------------------------------------------------
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
10).
At June 27, 1998, the Company was contingently liable for $460,000 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 $165,000 in 1998, $155,000 in 1997 and $116,000 in 1996 was charged against
General and Administrative Expenses.
Principal maturities of long-term obligations, excluding litigation reserve,
at June 27, 1998 are:
Fiscal Years Ending (in thousands)
- -------------------------------------------------------
1999 $ 2,105
2000 2,105
2001 2,105
2002 17,258
2003 437
Future Years 93
- -------------------------------------------------------
Total $24,103
=======================================================
6. LEASES
The Company has operating leases for certain equipment and production facilities
which expire over periods from one to six years. Future minimum payments under
noncancelable operating leases with initial or remaining terms of one year or
more at June 27, 1998, are summarized as follows:
Operating
Fiscal Years Ending (in thousands) Leases
- -------------------------------------------------------
1999 $2,320
2000 1,977
2001 1,423
2002 542
2003 19
- -------------------------------------------------------
Total minimum lease payments $6,281
=====
Rental expenses under operating leases were $1,797,000, $1,892,000, and
$1,823,000 in 1998, 1997 and 1996, respectively.
7. INCOME TAXES
Income taxes consist of the following:
1998 1997 1996
------------------------
Current income taxes:
Federal $ 244 $ 68 $ (50)
Foreign 449 531 (144)
State 41 58 140
-------------------------
$734 $ 657 $ (54)
Deferred income taxes:
Federal $(517) $225 $1,435
Foreign (16) (1) (106)
State (45) (19) (35)
-------------------------
$(578) $ 205 $1,294
-------------------------
Total income taxes $ 156 $ 862 $1,240
=========================
The Company's effective tax rate differs from the federal tax rate as
follows:
Year Ended Year Ended Year Ended
June 27, June 28, June 29,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Federal income tax provision (benefit)
at statutory rates $(248) $359 $(202)
Effect of foreign income (loss)
not subject to federal income tax (65) 279 2,130
Permanent differences:
Tax credits - - (147)
Life insurance premiums 33 33 39
Other 3 (339) (329)
Foreign tax provision (benefit) at
foreign statutory rate 481 91 (2,169)
Adjustment for effect of beneficial tax rate
on foreign manufacturing (income) loss (48) 439 1,918
- -------------------------------------------------------------------------------
Income tax provision $156 $862 $1,240
===============================================================================
In 1998 foreign income decreased the Company's effective income tax rate, since
such income is taxed at a lower rate than U.S. income. In 1997 foreign losses
increased the Company's effective income tax rate, since such losses are not
deductible for U.S. income tax purposes. The domestic and foreign components of
income (loss) before income taxes were:
Year Ended Year Ended Year Ended
June 27, June 28, June 29,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Domestic $(3,136) $ 674 $3,356
Foreign 2,406 756 (3,951)
- -------------------------------------------------------------------------------
Income (loss) before income taxes $ (730) $1,430 $ (595)
===============================================================================
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 27, June 28,
1998 1997
(in thousands)
- ----------------------------------------------------------------------------
Allowance for doubtful accounts $ 328 $ 370
Inventory 1,540 1,623
Vacation accrual 429 385
Self insurance accrual 195 145
Warranty accrual 226 196
State deferred asset 207 162
Other 993 704
- ----------------------------------------------------------------------------
Current deferred income tax assets 3,918 3,585
Current portion of valuation allowance (2,237) (2,141)
- ----------------------------------------------------------------------------
Current deferred income tax assets net of
valuation allowance 1,681 1,444
- ----------------------------------------------------------------------------
Litigation accrual 306 306
Deferred compensation 210 210
Depreciation and amortization 518 (501)
Net operating loss carryforward 8,674 9,525
Tax credit carryovers 725 666
Other 137 119
- ----------------------------------------------------------------------------
Noncurrent deferred income tax assets 10,570 10,325
Valuation allowance net of current portion (6,372) (6,468)
- ----------------------------------------------------------------------------
Noncurrent deferred income tax assets net
of valuation allowance $ 4,198 $ 3,857
============================================================================
At June 27, 1998 the Company had tax loss carryforwards of approximately $25.5
million, which expire in varying amounts in the years 2006 through 2012.
Additionally, for federal income tax purposes, the Company has approximately
$725,000 of general business credit carryforwards which expire in varying
amounts in the years 2004 through 2010. Approximately $302,000 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 five to
seven fiscal years.
8. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The Company adopted Financial Accounting Standards No. 128 at the end of its
second quarter on December 27, 1997. The standard became effective for any
financial statements issued for periods ending after December 15, 1997. This
standard requires the presentation of "basic EPS" and "diluted EPS". The
objective of basic EPS is to measure the performance of an entity over the
reporting period. Basic EPS is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) during the period. Diluted EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common shares and common share equivalents outstanding during the period.
Key Tronic uses the Treasury Stock Method required by the new standard in
calculating the dilutive effect of common stock equivalents.
There are no adjustments to the income available to common shareholders before
or after extraordinary items for the years ended June 27, 1998, June 28, 1997,
and June 29, 1996. The following table presents the Company's calculations of
weighted average shares (number of shares):
<TABLE>
<CAPTION>
Adjustments For
Weighted Avg. Shares Potential Common Shares Total
For The Years Ended:
<S> <C> <C> <C>
June 27, 1998 9,625,775 Antidilutive 9,625,775
June 28, 1997 8,895,306 629,223 9,524,529
June 29, 1996 8,521,620 Antidilutive 8,521,620
</TABLE>
The antidilutive potential common shares were 129,230 and 1,425,397,
respectively, as of June 27, 1998 and June 29, 1996.
9. SHAREHOLDERS' EQUITY
The Company has Executive Stock Option Plans 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 27, 1998, 2,596,870 shares have been reserved for issuance and 1,490,193
options were outstanding of which 603,843 shares were exercisable. These
options expire in ten years from the date of grant. 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 1998, 1997 or 1996
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 27, 1998, 300,000 shares have been reserved for issuance and 122,500
options were outstanding of which 70,000 shares were exercisable. These options
expire in ten years from the date of grant.
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:
Number Weighted Average
Price Range Of Options Exercise Price
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
Granted during 1998 $2.75 to $ 5.00 763,500 $ 3.83
Expired or canceled $5.63 to $16.25 (404,366) $12.84
- ------------------------------------------------------------------------------
Outstanding, June 27, 1998 $2.75 to $16.25 1,612,693 $ 6.31
- ------------------------------------------------------------------------------
Additional information regarding options outstanding as of June 28, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------
Weighted Avg.
Remaining Weighted Weighted
Range of Number Contractual Avg. Exercise Number Avg. Exercise
Exercise Prices Outstanding Life (yrs.) Price Exercisable Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.75 -$ 4.13 374,880 10.0 $ 2.77 880 $ 3.56
$ 4.14 -$ 6.20 733,460 9.0 5.20 173,360 5.59
$ 6.21 -$ 9.32 267,389 6.8 8.04 262,639 8.06
$ 9.33 -$13.99 126,964 3.6 10.93 126,964 10.93
$14.00 _$16.25 110,000 7.1 16.25 110,000 16.25
- --------------------------------------------------------------------------------------------
$ 2.75 -$16.25 1,612,693 8.3 6.31 673,843 9.30
</TABLE>
Of the 1,253,559 options outstanding as of June 28, 1997, 925,692 were
exercisable, and of the 3,324,528 options outstanding as of June 29, 1996,
2,671,236 were exercisable.
The Company has one remaining stock warrant outstanding at June 27, 1998. This
outstanding stock warrant, dated July 30, 1993, entitles Honeywell, Inc. to
purchase 300,000 shares of common stock at $14.00 per share. This stock warrant
expires on July 30, 2000. A second stock warrant, dated October 24, 1994,
entitled CIT Group Credit, Inc. to purchase 45,000 shares of common stock at
$12.60 per share. This grant expired on October 24, 1997.
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 $416,683, $454,899, and $474,614 in 1998, 1997, and 1996, respectively. The
Company has an Employee Stock Ownership Plan. No contributions were made to the
plan in 1998, 1997, or 1996. The investment in the Company's stock at June 27,
1998 by all employee trusts amounted to 503,594 shares.
10. COMMITMENTS AND 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"). 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). An RA
plan was completed and instituted to be followed by a 5-year performance
monitoring program. 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. 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 for its estimate of
probable costs to be associated with this matter. At fiscal year end 1998, 1997
and 1996, respectively, the accrued balance for probable legal costs was
$900,000. However, given the inherent uncertainty in environmental matters,
limited information available with respect to any future remedial measures,
uncertainty of the results of the five-year monitoring program, limited
information as to the number of PRPs and PLPs, the uncertainty as to whether the
Company will be designated a PRP or PLP, and the complexity of circumstances
surrounding this matter, management's estimate is subject to and will change as
facts and circumstances warrant.
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 27, 1998. Given
the inherent uncertainty in litigation, in environmental matters, in contract
interpretation, in 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 fifty-three suits by computer keyboard users
which are in State or Federal Courts in Illinois, New York, and Pennsylvania.
These suits allege that specific keyboard products manufactured by the Company
were sold with manufacturing, design and warning defects which caused or
contributed to plaintiffs' 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 one
hundred and fifty-four suits have been dismissed in California, Connecticut,
Florida, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New
Jersey, New York, Pennsylvania and Texas. One of the one hundred and fifty-four
dismissed suits is on appeal, 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, $.9 million, and $1.0
million as of June 27, 1998, June 28, 1997, and June 29, 1996, respectively.
CAPITAL EXPENDITURES
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $418,000 at June 27, 1998.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
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.
11. OTHER INCOME
Other income consists of:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 27, June 28, June 29,
1998 1997 1996
- -------------------------------------------------------------------------------
(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 204 406 306
- -------------------------------------------------------------------------------
Total $204 $1,901 $2,272
- -------------------------------------------------------------------------------
</TABLE>
12. 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 27, 1998,
June 28, 1997 and June 29, 1996 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>
1998
Net Sales:
Unaffiliated customers $52,600 $ 99,123 $ - $18,327 $ - $ - $170,050
Affiliates 15,596 22,068 127 - (37,791) -
- -----------------------------------------------------------------------------------------------------
Total $52,600 $114,719 $22,068 $18,454 $ - $ (37,791) $170,050
=====================================================================================================
Income (loss) before
income taxes $ (2,225) $ 1,688 $ 200 $ - $ (393) $ (730)
=====================================================================================================
Identifiable assets $ 81,299 $15,661 $12,213 $ - $ (12,088) $ 97,085
=====================================================================================================
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
=====================================================================================================
</TABLE>
For the year ended June 27, 1998, sixty-eight percent of the Company's
domestic exports were sold to customers in Europe, nineteen percent were sold to
customers in the Far East, and the remaining thirteen percent were spread among
customers in Mexico, South America, and Canada.
For the year ended June 28, 1997, forty-nine percent of domestic exports
were sold to customers in Europe and twenty-nine percent of domestic exports
were sold to customers in the Far East.
For the year ended June 29, 1996, forty-two percent of domestic exports
were sold to customers in the Far East, and the remainder were spread among many
different countries, none of which was significant.
Transfers to affiliates are made at prices which approximate market.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended Year Ended Year Ended
June 27, June 28, June 29,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Interest payments $2,142 $2,414 $3,117
Income tax payments 104 847 212
Inventory exchanged for other assets - - 2,050
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended June 27, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $40,257 $44,129 $45,387 $40,277
Gross profit 5,703 6,500 5,994 4,311
Income before income taxes 238 259 150 (1,377)
Net income 143 248 147 (1,424)
Earnings (loss) per share:
Earnings per common share basic
and diluted 0.01 0.03 0.02 (0.15)
Weighted average shares
Outstanding 9,611 9,631 9,631 9,631
Diluted shares outstanding 9,611 9,631 9,632 9,631
Common stock price range 1
High 5.688 5.625 4.750 4.125
Low 4.375 4.000 3.125 2.250
Due to the financial loss in the fourth quarter of fiscal 1998, the diluted
shares outstanding caused an antidilutive effect on earnings per share;
therefore, they are not reported. Fourth quarter sales fell short of
expectations due to decreased customer orders. The decline in keyboard
unit prices accompanied by higher freight costs to support customer
requirements contributed to the large fourth quarter loss.
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 27, 1998, there were approximately 1,556 common shareholders of
record.
Year Ended June 27, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------
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
Basic earnings per share before
extraordinary item 0.02 0.01 0.03 -
Extraordinary item per share - - (0.03) -
Diluted earnings per common share 0.02 0.01 - -
Weighted average shares 8,537 8,540 8,893 9,611
outstanding
Diluted shares outstanding 9,598 9,610 9,446 9,614
Common stock price range 2
High 8.375 9.000 7.750 6.625
Low 6.375 7.000 3.750 4.500
2 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.
In the fourth quarter of fiscal 1997, the earnings per share were less than
.01; therefore, they are not reported in the table above.
15. RESTRUCTURING CHARGES
As of June 27, 1998, the Company had a remaining reserve of approximately
$457,000 for restructuring charges in Ireland. Of this amount, $200,000 is
currently owed to the Irish Development Authority (IDA) for reductions in
headcount over the past several months. The remaining $257,000 will be left
on reserve to cover the remaining restructuring and severance costs.
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. When the subsidiary
in Ireland was established, it received reimbursement grants from the Irish
government for capital expenditures. 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 27, 1998, the short-term note has been paid and the contingent liability
is reduced to $457,000.
The Company currently plans to maintain the Irish plant as its sales, marketing,
and distribution facility to service the European community.
During fiscal 1998, the liquidation of the Company's facility in Taiwan was
finalized, and the $397,000 in the restructuring reserve at the end of fiscal
1997 was used to pay liquidation taxes and other final closing costs.
Reserve for Restructuring Obligations
- ----------------------------------------------------------
1998 1997
Balance at beginning of year $1,365,000 $3,069,000
Provision charged to income 1,108,000
Amounts paid 908,000 2,812,000
- ----------------------------------------------------------
Balance at end of year $457,000 $1,365,000
==========================================================
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 73, 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).
WENDELL J. SATRE - Director
Mr. Satre, age 80, 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 48, 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 76, 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 72, 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 53, 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, and Network Appliance.
CLARENCE W. SPANGLE - Director
Mr. Spangle, age 73, 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 65, 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 and Phase Materials.
JACK W. OEHLKE - DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mr. Oehlke, age 52, 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 46, has been Executive Vice President of Administration,
CFO, Treasurer and Secretary since July 1997. He was Vice President of
Finance, Secretary and Treasurer of the Company from October 1995 to July
1997 and was Acting Secretary from November 1994 to October 1995 and Vice
President of Finance and Treasurer from 1992 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 39, 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 from October 1995 to July 1997.
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 1998 Proxy Statement to
Shareholders.
ITEMS 11, 12 AND 13: EXECUTIVE COMPENSATION; SECURITIES OWNERSHIP AND CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSAC-
TIONS.
Additional information required by these Items is incorporated by reference to
Key Tronic Corporation's 1998 Proxy Statement to Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULE
Page in
Form 10K
FINANCIAL STATEMENTS
Independent Auditors' Report 17
Consolidated Balance Sheets, June 27, 1998
and June 28, 1997 18
Consolidated Statements of Operations for
the years ending June 27, 1998, June 28, 1997,
and June 29, 1996 19
Consolidated Statements of Shareholders' Equity
for the years ending June 27, 1998, June 28, 1997,
and June 29, 1996 20
Consolidated Statements of Cash Flows for the
years ending June 27, 1998, June 28, 1997,
June 29, 1996 20-21
Notes to Consolidated Financial Statements 21-34
SCHEDULE
Independent Auditors Report on Financial
Statement Schedule 39
II. Consolidated Valuation and Qualifying Accounts 40
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.
REPORTS ON FORM 8-K
None
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. KTI Limited 4. Key Tronic Europe, LTD
100% owned by Key Tronic Europe, LTD 100% owned subsidiary
Incorporated in Ireland Incorporated in the
Cayman Islands
5. Key Tronic Juarez, SA de CV 6. Key Tronic China LTD
100% owned subsidiary 100% owned subsidiary
Incorporated in Mexico Incorporated in the
State of Washington
7. Key Tronic Far East Pte LTD
100% owned subsidiary
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 27, 1998 and June 28, 1997, and for each of the three years in the
period ended June 27, 1998 and have issued our report thereon dated August 10,
1998; 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 10, 1998
PART IV
SCHEDULE II
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 28, 1997
JUNE 29, 1996 AND JULY 1, 1995
1997 1997 1996
------------ ---------- -----------
Allowance for Obsolete Inventory
- --------------------------------
Balance at beginning of year $2,937,609 $4,322,071 $3,512,085
Provision charged to income 1,850,199 1,953,331 2,952,911
Dispositions (2,048,418) (3,337,793) (2,142,925)
- --------------------------------------------------------------------------
Balance at end of year $2,739,390 $2,937,609 $4,322,071
==========================================================================
Allowance for Doubtful Accounts
- -------------------------------
Balance at beginning of year $ 905,139 $ 932,237 $1,185,373
Provision charged to income 75 0 0
Write-offs and reinstatements (20,162) (27,108) (253,136)
- --------------------------------------------------------------------------
Balance at end of year $ 885,052 $ 905,139 $ 932,237
==========================================================================
Reserve for Litigation
- ----------------------
Balance at beginning of year $ 900,000 $ 969,143 $1,607,496
Cost incurred-net of recoveries 0 (69,143) (638,353)
Balance at end of year 900,000 900,000 969,143
Less long-term portion 900,000 900,000 900,000
- --------------------------------------------------------------------------
Current portion $ 0 $ 0 $ 69,143
==========================================================================
Accrued Warranty Costs
- ----------------------
Balance at beginning of year $ 576,201 $ 437,207 $ 762,284
Provision charged to income 1,476,796 1,290,236 1,001,276
Costs incurred (1,388,618) (1,151,242) (1,134,833)
- --------------------------------------------------------------------------
Balance at end of year $ 664,379 $ 576,201 $ 628,727
==========================================================================
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 21, 1998
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 21, 1998
Jack W. Oehlke Date
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter September 21, 1998
Ronald F. Klawitter Date
(Principal Financial Officer)
/s/ Keith D. Cripe September 21, 1998
Keith D. Cripe Date
(Principal Accounting Officer)
/s/ Stanley Hiller, Jr. September 21, 1998
Stanley Hiller, Jr. Date
(Director)
/s/ Wendell J. Satre September 21, 1998
Wendell J. Satre Date
(Director)
/s/ Yacov A. Shamash September 21, 1998
Yacov A. Shamash Date
(Director)
/s/ Dale F. Pilz September 21, 1998
Dale F. Pilz Date
(Director)
/s/ William E. Terry September 21, 1998
William E. Terry Date
(Director)
Exhibit 23
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Key Tronic Corporation
We have audited the consolidated financial statements of Key Tronic Corporation
as of June 27, 1998 and June 28, 1997, and for each of the three years in the
period ended June 27, 1998 and have issued our report thereon dated August 10,
1998; 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 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statments and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> JUN-27-1998
<CASH> 288
<SECURITIES> 0
<RECEIVABLES> 23988
<ALLOWANCES> 885
<INVENTORY> 24723
<CURRENT-ASSETS> 59911
<PP&E> 103551
<DEPRECIATION> 73621
<TOTAL-ASSETS> 97085
<CURRENT-LIABILITIES> 25327
<BONDS> 0
0
0
<COMMON> 38273
<OTHER-SE> 10587
<TOTAL-LIABILITY-AND-EQUITY> 97085
<SALES> 170050
<TOTAL-REVENUES> 170050
<CGS> 147541
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<OTHER-EXPENSES> 21131
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<INTEREST-EXPENSE> 2108
<INCOME-PRETAX> (730)
<INCOME-TAX> 156
<INCOME-CONTINUING> (886)
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<NET-INCOME> (886)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
