SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 28, 1998 Commission File Number
Number 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
Identification No.)
----------------------
North 4424 Sullivan
Spokane, Washington 99216
(509) 928-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /.
At April 15, 1998, 9,630,830 shares of Common Stock, no par value (the only
class of common stock), were outstanding.
KEY TRONIC CORPORATION
Index
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets - March 28, 1998
(Unaudited) and June 28, 1997 (Audited) 3-4
Consolidated Statements of Income (Unaudited)
Third Quarters Ended March 28, 1998
and March 29, 1997 5
Consolidated Statements of Income (Unaudited)
Three Quarters Ended March 28, 1998
and March 29, 1997 6
Consolidated Statements of Cash Flows (Unaudited)
Three Quarters Ended March 28, 1998
and March 29, 1997 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 10-16
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Events 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, June 28,
1998 1997
----------------------------------------------------------------------------
(Unaudited) (Audited)
(in thousands)
ASSETS
<C> <S> <S>
Current assets:
Cash and cash equivalents $951 $2,812
Trade receivables, less allowance for doubtful
accounts of $879 and $905 29,793 26,989
Inventories 24,846 21,481
Real estate held for sale 2,170 2,243
Deferred income tax asset - current 1,508 1,444
Customer tooling 5,803 3,016
Other 2,647 3,860
----- -----
Total current assets 67,718 61,845
------ ------
Property, plant and equipment - at cost 102,810 97,155
Less accumulated depreciation 71,492 65,135
------ ------
Total property, plant and equipment 31,318 32,020
------ ------
Other Assets:
Deferred income tax asset - non-current 4,319 3,857
Other (net of accumulated amortization
of $211 and $81) 1,150 1,030
Goodwill (net of accumulated amortization
of $479 and $383) 1,308 1,403
----- -----
$105,813 $100,155
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 28, June 28,
1998 1997
-----------------------------------------------------------------------
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<C> <S> <S>
Current liabilities:
Current portion of long-term obligations $2,105 $1,379
Accounts payable 20,819 14,319
Accrued compensation and vacation 2,753 3,033
Accrued taxes other than income taxes 1,677 1,142
Interest payable 142 166
Other 3,167 3,289
----- -----
Total current liabilities 30,663 23,328
------ ------
Long-term obligations, less current portion 24,947 27,010
------ ------
Commitments and Contingencies (Note 2)
Shareholders' equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,631 and 9,611 shares 38,165 38,165
Retained earnings 11,766 11,228
Foreign currency translation adjustment 272 424
--- ---
Total shareholders' equity 50,203 49,817
------ ------
$105,813 $100,155
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Third Quarter Ended
March 28, March 29,
1998 1997
----------------------------------------------------------------------
(in thousands, except per share amounts)
<C> <S> <S>
Net sales $45,387 $49,195
Cost of sales 39,393 42,677
------ ------
Gross profit on sales 5,994 6,518
Operating expenses:
Research, development and engineering 1,151 1,139
Selling 2,198 2,238
General and administrative 2,080 2,433
----- -----
Operating income 565 708
Interest expense 526 307
Other income (111) (41)
----- ----
Earnings before income tax provision 150 442
Income tax provision 3 176
- ---
Income before extraordinary item 147 266
Extraordinary item _ early extinguishment of
debt (less applicable income taxes of $127) 0 247
-- ---
Net income $147 $19
==== ===
Earnings per share:
Earnings per share before extraordinary item:
Earnings per common share $0.02 $0.03
Earnings per common share _ assuming dilution $0.02 $0.03
Earnings per share after extraordinary item:
Earnings per common share N.A. $0.00
Earnings per common share _ assuming dilution N.A. $0.00
Weighted average shares outstanding 9,631 8,893
Weighted average shares outstanding _ assuming dilution 9,632 9,446
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Quarters Ended
March 28, March 29,
1998 1997
----------------------------------------------------------------------
(in thousands, except per share amounts)
<C> <S> <S>
Net sales $129,773 $141,634
Cost of sales 111,576 121,474
------- -------
Gross profit on sales 18,197 20,160
Operating expenses:
Research, development and engineering 3,308 4,010
Selling 6,344 6,461
General and administrative 6,537 7,496
----- -----
Operating income 2,008 2,193
Interest expense 1,551 1,738
Other income (190) (348)
----- -----
Earnings before federal taxes on income 647 803
Income tax provision 108 274
--- ---
Income before extraordinary item 539 529
Extraordinary item _ early extinguishment of debt 0 247
- ---
(less applicable income taxes of $127)
Net income $539 $282
=== ===
Earnings per share:
Earnings per share before extraordinary item:
Earnings per common share $0.06 $0.06
Earnings per common share _ assuming dilution $0.06 $0.06
Earnings per share after extraordinary item:
Earnings per common share N.A. $0.03
Earnings per common share _ assuming dilution N.A. $0.03
Weighted average shares outstanding 9,624 8,657
Weighted average shares outstanding _ assuming dilution 9,626 9,487
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Quarters Ended
March 28, March 29,
1998 1997
----------------------------------------------------------------------
(in thousands)
<C> <S> <S>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $539 $282
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,294 6,669
Provision for obsolete inventory 1,170 543
Provision for doubtful receivables 50 45
Provision for warranty 1,145 967
Gain on disposal of property and equipment (65) (266)
Deferred income tax asset (526) (140)
Changes in operating assets and liabilities:
Trade receivables (2,854) (7,346)
Inventories (3,965) (1,882)
Other assets (2,348) (2,074)
Accounts payable 6,500 2,910
Accrued compensation and vacation (280) 257
Other liabilities (756) (3,375)
----- -------
Cash provided by (used in) operating activities 5,904 (3,410)
----- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 80 1,142
Purchase of property and equipment (6,311) (7,151)
------ -------
Cash used in investing activities (6,231) (6,009)
------ -------
Cash flows from financing activities:
Other financing fees (45) (793)
Issuance of common stock 0 22
Proceeds from long-term obligations 3,047 26,210
Payments on long-term obligations (4,384) (18,029)
------ -------
Cash provided by (used in) financing activities (1,382) 7,410
------ -----
Effect of exchange rate changes on cash (152) 6
----- -
Net decrease in cash and cash equivalents (1,861) (2,003)
Cash and cash equivalents, beginning of period 2,812 2,569
----- -----
Cash and cash equivalents, end of period $951 $566
==== ====
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
These interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
of operations for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's annual report for the year ended
June 28, 1997.
- -----------------------------------------------
1. INVENTORIES
March 28, June 28,
1998 1997
- ----------------------------------------------------------------------
(Unaudited) (Audited)
(in thousands)
Finished goods $9,990 $9,119
Work-in-process 2,868 2,053
Raw materials and supplies 16,238 13,247
Reserve for obsolescence (4,250) (2,938)
------ ------
$24,846 $21,481
======= =======
2. COMMITMENTS AND CONTINGENCIES
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $1,363,000 at March 28, 1998.
<PAGE>
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
March 28, June 28,
1998 1997
- -----------------------------------------------------------------------
(in thousands)
Note Payable - GECC $8,895 $10,750
Revolving Line 16,639 16,095
Litigation Reserve 900 900
Deferred compensation obligation 618 618
Capital lease obligations 0 26
----- ------
27,052 28,389
Less current portion (2,105) (1,379)
$24,947 $27,010
======= =======
4. SUPPLEMENTAL CASH FLOW INFORMATION
Three Quarters Ended
March 28, June 28,
1998 1997
(in thousands)
Interest payments $1,575 $1,927
Income tax payments 149 300
5. INCOME TAXES
The income taxes provision was $3,000 for the third quarter of fiscal 1998
and $176,000 for the third quarter of 1997. In the third quarter of 1998,
$172,000 of this provision and $0 of the 1997 provision relate to taxes on
earnings of foreign subsidiaries. The offsetting ($169,000) of the third
quarter 1998 provision relates to tax benefits on U.S. losses. The Company has
tax loss carryforwards of approximately $27.4 million which expire in varying
amounts in the years 2003 through 2010.
6. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The Company has adopted Financial Accounting Standards NO. 128 which became
effective for any financial statements issued for periods ending after December
15, 1997. This new 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 third quarter and the three quarters ended
March 28, 1998. The following table presents the Company's calculations of
weighted average shares (number of shares):
<TABLE>
<CAPTION>
Adjustments For
Weighted Avg. Shares Dilutive O/S Options Total
For the Quarter Ended
<C> <S> <S> <S>
March 28, 1998 9,630,830 802 9,631,632
March 29, 1997 8,893,312 553,057 9,446,369
Three Quarters Ended
March 28, 1998 9,624,090 2,324 9,626,414
March 29, 1997 8,656,798 830,243 9,487,041
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $5.9 million of cash during the first three
quarters of fiscal 1998 versus $3.4 million of cash used in operating activities
during the same period of the prior year. This change in available cash is due
primarily to increased earnings, increases in accounts payable and lower
increases in accounts receivable.
During the first three quarters of fiscal 1998, $6.2 million was expended
in capital additions versus $7.2 million spent during the same period in the
previous fiscal year. The Company anticipates capital expenditures of
approximately $.9 million through the remainder of the current fiscal year
ending June 27, 1998. Actual capital expenditures may vary from anticipated
expenditures depending upon future results of operations. See RISKS AND
UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 17-19. Capital expenditures
are expected to be financed with the combination of internally generated funds
and operating leases.
The Company has a secured financing agreement which 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 March 28, 1998 and June 28, 1997, the Company was in compliance
with all debt covenants.
The term note is payable in quarterly installments of principal, each in
the amount of $500,000, commencing in March 1998 and maturing in December 2002.
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 1.4, this note bears interest at one and three-quarters percent
(1.75%) in excess of the applicable London Interbank Offered Rate (LIBOR). If
debt service coverage is less than or equal to 1.4, this note bears interest at
two percent (2.00%) in excess of the applicable LIBOR rate. At March 28, 1998,
the applicable LIBOR rate was 5.67188%, and the applicable interest rate was
7.67188%.
The revolving loan with GECC is renewable and covers an initial period of
five years expiring on December 31, 2001. If debt service coverage is greater
than 1.4, the applicable interest rate is one and one-half percent (1.5%) in
excess of the applicable LIBOR rate. If debt service coverage is less than or
equal to 1.4, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At March 28, 1998, the
applicable LIBOR rate was 5.67188%, and the applicable interest rate was
7.42188%. At March 28, 1998, there was $16.6 million borrowed on the revolving
loan and approximately $8.8 million available for use under the revolving loan.
The Company is required to pay fees on the unused revolving loan balance.
The revolving loan balance has increased $.5 million since the Company's
fiscal year end at June 28, 1997. This increase can be attributed to increased
inventories and accounts receivable largely offset by an increase in accounts
payable.
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. The lease terms include an option to
buy the property upon notice at any time during the course of the lease.
The Company believes that cash, cash equivalents, funds available under the
line of credit, and internally generated funds can satisfy cash requirements for
a period in excess of 12 months.
NET SALES
Net sales for the fiscal 1998 third quarter, which ended March 28, 1998,
were $45.4 million compared to $49.2 million for the third quarter of the
previous year. This represents an overall decrease of 7.7% from quarter to
quarter. For the nine months ended March 28, 1998, sales were $129.8 million
compared to $141.6 million for the same period of the previous year. This
represents an overall decrease of 8.3% from year to year.
Keyboard unit shipments increased 25.7% from the third quarter of the prior
year while the average selling price decreased approximately 19.4%. For the
nine months ended March 28, 1998, unit shipments increased approximately 11.8%
over the same period of the prior year while the average selling price decreased
14.4%. The increase in units shipped from the third quarter of fiscal year 1997
to the third quarter of fiscal year 1998 is due primarily to increased customer
orders. The decrease in average selling price is due primarily to the sale of
new lower cost products as well as competition from Asian companies.
Non-keyboard revenue accounted for 8.1% of total revenue in the third
quarter of fiscal 1998 versus 16.3% in the third quarter of the prior year. For
the nine months ended March 28,1998, non-keyboard revenue accounted for 14.7% of
total revenue versus 18.4% for the same period of the prior year. The decrease
in this segment of the Company's revenue base is primarily due to the slowing
production of mature or discontinued product programs.
COST OF SALES
Cost of sales were 86.8% of revenue in the third quarters of fiscal 1998
and 1997. Cost of sales were 86.0% of revenue for the nine months ended March
28, 1998, compared to 85.8% for the same period of the prior year. The cost of
sales percentage has remained fairly constant despite lower unit pricing. The
company continues to emphasize cost reduction and continues to improve its
operating efficiencies.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.2 million in the
third quarter of fiscal 1998 and $1.1 million for the same period of fiscal
1997. As a percentage of sales, R D & E expenditures were 2.5% in the third
quarter of 1998 compared to 2.3% in the third quarter of 1997. Research,
development, and engineering expenses were $3.3 million for the nine months
ended March 28, 1998 compared to $4.0 million for the same period of the prior
year. As a percentage of sales, R D & E expenditures were 2.6% for the current
nine month period versus 2.8% for the same period of the prior fiscal year. As
a percent of revenue the increase for the quarter is due primarily to lower
revenues. The decrease over the first nine months is due primarily to increased
efficiency in recovery of engineering design costs which are reflected in gross
profit on sales. The following table provides a comparative analysis of gross
and net R D & E expenditures:
Gross Expenditures Net Expenditures
Q3 FY98 $1,406.0 $1,151.0
Q3 FY97 1,139.0 1,139.0
YTD FY98 $5,024.0 $3,308.0
YTD FY97 4,222.0 4,010.0
SELLING EXPENSES
Selling expenses were $2.2 million in the third quarters of 1998 and 1997.
Selling expenses as a percentage of revenue were 4.8% for the quarter compared
to 4.6% in the same quarter of fiscal 1997. For the nine months ended March 28,
1998, selling expenses were $6.3 million compared to $6.5 million for the same
period of the prior year. As a percentage of revenue for the current nine month
period, selling expenses were 4.9% compared to 4.6% for the same period of the
prior year. Selling expenses decreased in dollars due primarily to lower
promotional expenses required for new products. As a percentage of revenue,
selling expenses increased due to the decrease in revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.1 million in the third quarter
of 1998 compared to $2.4 million in the third quarter of fiscal 1997. As a
percentage of revenue, G&A expenses were 4.6% in the third quarter of fiscal
1998 compared with 5.0% for the third quarter of the prior year. For the nine
months ended March 28, 1998, G&A expenses were $6.5 million compared to $7.5
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first nine months of fiscal 1998 were 5.0% versus 5.3% for the
same period of the prior year. As a percentage of revenue the decrease is
primarily due to decreased spending. The decrease in dollar spending is
primarily due to decreased hiring costs and an insurance premium refund in the
first fiscal quarter of 1998.
INTEREST
Interest expense was $526,000 in the third quarter of 1998 compared to
$307,000 for the third quarter of 1997. For the nine months ended March 28,
1998, interest expense was $1.6 million compared to $1.7 million for the same
period of the prior year. The increase for the quarter is due primarily to the
Company receiving a discounted interest rate in fiscal 1997 as a result of
refinancing its term and revolving debt during the second quarter of that year.
The decrease over the first nine months of the year is due primarily to
additional payments of the Company's term note which carries a higher interest
rate than the revolving loan.
INCOME TAXES
The income taxes provision was $3,000 for the third quarter of fiscal 1998
and $176,000 for the third quarter of 1997. In the third quarter of 1998,
$172,000 of this provision and $0 of the 1997 provision relate to taxes on
earnings of foreign subsidiaries. The offsetting ($169,000) of the third
quarter 1998 provision relates to tax benefits on U.S. losses. The Company has
tax loss carryforwards of approximately $27.4 million which expire in varying
amounts in the years 2003 through 2010.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the third quarter of fiscal years 1998 and 1997.
BACKLOG
The Company's backlog at the end of the third fiscal quarter of 1998 was
$13.8 million compared to $18.4 million at the end of the 1997 fiscal year and
$24.5 million at the end of the third quarter of fiscal 1997. The decrease in
the backlog from fiscal year end is attributable to two major OEM customers
expanding their Just-In-Time (JIT) inventory systems, so that orders are not
placed in advance but are pulled from a stock location maintained by Key Tronic
Corporation.
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. Costs
associated with converting existing software are being expensed as incurred.
The Company is in the process of initiating formal communications with all
of its significant suppliers and large customers 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 Company is currently and will continue to utilize internal and external
resources to implement, reprogram, or replace and test software and related
assets affected by the Year 2000 issue. The Company expects to complete the
majority of its efforts in this area by mid 1999 leaving adequate time to assess
and correct any significant issues that may materialize.
The total cost to the Company of these Year 2000 compliance activities has
not been material to its financial position or results of operations as of the
quarter ended and three quarters ended March 28, 1998. The Company has an
internal committee dedicated to assessing the full impact of the Year 2000
issue. Although most of the Company's major computer systems have already been
evaluated, all of the necessary data to determine future costs related to
various support systems is not yet available. Anticipated costs and 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.
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The following risks and uncertainties could affect the Company's actual
results and could cause results to differ materially from past results or those
contemplated by the Company's forward-looking statements. When used herein, the
words "expects", "believes", "anticipates" and similar expressions are intended
to identify forward-looking statements.
Potential Fluctuations in Quarterly Results. The Company's quarterly operating
results have varied in the past and may vary in the future due to a variety of
factors, including changes in overall demand for computer products, success of
customers' programs, timing of new programs, new product introductions or
technological advances by the Company, its customers and its competitors and
changes in pricing policies by the Company, its customers and its competitors.
For example, the Company relies on customers' forecasts to plan its business.
If those forecasts are overly optimistic, the Company's revenues and profits may
fall short of expectations. Conversely, if those forecasts are too
conservative, the Company could have an unexpected increase in revenues and
profits.
Competition. The keyboard and other input device industry is intensely
competitive. Most of the Company's principal competitors are headquartered in
Asian countries that have a low cost labor force. Those competitors may be able
to offer customers lower prices on certain high volume programs. This could
result in price reductions, reduced margins and loss of market share, all of
which would materially and adversely affect the Company's business, operating
results and financial condition. In addition, competitors can copy the
Company's non-proprietary designs after the Company has invested in development
of products for customers, thereby enabling such competitors to offer lower
prices on such products due to savings in development costs.
Concentration of Major Customers. At present, the Company's customer base is
highly concentrated, and there can be no assurance that its customer base will
not become more concentrated. Three of the Company's OEM customers accounted
for 34%, 11% and 7% individually, of net sales during fiscal 1997. In 1996,
these same customers accounted for 34%, 0% and 17% of the Company's net sales.
There can be no assurance that the Company's principal customers will continue
to purchase products from the Company at current levels. Moreover, the Company
typically does not enter into long-term volume purchase contracts with its
customers, and the Company's customers have certain rights to extend or delay
the shipment of their orders. The loss of one or more of the Company's major
customers or the reduction, delay or cancellation of orders from such customers
could materially and adversely affect the Company's business, operating results
and financial condition.
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key technical, marketing and management
personnel and on its ability to continue to attract and retain qualified
employees. The competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of key employees could have a material adverse effect on
the Company's business, operating results and financial condition.
Litigation. The Company currently is a party to thirty-one 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 March 28, 1998, there were
outstanding options and warrants for the purchase of approximately 1,300,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 840,000 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. Costs
associated with converting existing software are being expensed as incurred.
The Company is in the process of initiating formal communications with all
of its significant suppliers and large customers 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 Company is currently and will continue to utilize internal and external
resources to implement, reprogram, or replace and test software and related
assets affected by the Year 2000 issue. The Company expects to complete the
majority of its efforts in this area by mid 1999 leaving adequate time to assess
and correct any significant issues that may materialize.
The total cost to the Company of these Year 2000 compliance activities has
not been material to its financial position or results of operations as of the
quarter ended and three quarters ended March 28, 1998. The Company has an
internal committee dedicated to assessing the full impact of the Year 2000
issue. Although most of the Company's major computer systems have already been
evaluated, all of the necessary data to determine future costs related to
various support systems is not yet available. Anticipated costs and 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,
transactions, send invoices, or engage in similar formal business activities.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY TRONIC CORPORATION
/S/ JACK W. OEHLKE
Jack W. Oehlke Date: May 12, 1998
(Director, President, and
Chief Executive Officer)
/S/ RONALD F. KLAWITTER
Ronald F. Klawitter Date: May 12, 1998
Principal Financial Officer
/S/ KEITH D. CRIPE
Keith D. Cripe Date: May 12, 1998
Principal Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> MAR-28-1998
<CASH> 951
<SECURITIES> 0
<RECEIVABLES> 30,672
<ALLOWANCES> 879
<INVENTORY> 24,846
<CURRENT-ASSETS> 67,718
<PP&E> 102,810
<DEPRECIATION> 71,492
<TOTAL-ASSETS> 105,813
<CURRENT-LIABILITIES> 30,663
<BONDS> 0
0
0
<COMMON> 38,165
<OTHER-SE> 12,038
<TOTAL-LIABILITY-AND-EQUITY> 105,813
<SALES> 45,387
<TOTAL-REVENUES> 45,387
<CGS> 39,393
<TOTAL-COSTS> 39,393
<OTHER-EXPENSES> 5,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 526
<INCOME-PRETAX> 150
<INCOME-TAX> 3
<INCOME-CONTINUING> 147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
