SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 26, 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 October 9, 1998, 9,630,830 shares of Common Stock, no par value (the
only class of common stock), were outstanding.
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KEY TRONIC CORPORATION
Index
Page No.
PART I. FINANCIAL INFORMATION:
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Item 1. Financial Statements:
Consolidated Balance Sheets - September 26, 1998
(Unaudited) and June 27, 1998 (Audited) 3-4
Consolidated Statements of Income (Unaudited)
First Quarters Ended September 26, 1998
and September 27, 1997 5
Consolidated Statements of Cash Flows (Unaudited)
First Quarters Ended September 26, 1998
and September 27, 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 9-15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 26, June 27,
1998 1998
(Unaudited)
ASSETS
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Current Assets:
Cash and cash equivalents $ 168 $ 288
Trade receivables, less allowance for doubtful
accounts of $963 and $885 26,263 23,103
Inventories 24,037 24,723
Real estate held for sale 2,098 2,134
Deferred income tax asset, net 1,352 1,681
Customer tooling 2,991 4,855
Other 4,601 3,127
------ ------
Total current assets 61,510 59,911
------ ------
Property, plant and equipment - at cost 103,925 103,551
Less accumulated depreciation 75,457 73,621
------ ------
Total property, plant and equipment 28,468 29,930
------ ------
Other Assets:
Deferred income tax asset, net 4,404 4,198
Other, (net of accumulated amortization
of $213 and $170) 1,314 1,770
Goodwill (net of accumulated amortization 1,244 1,276
of $543 and $511) ------ ------
$96,940 $97,085
======= =======
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued, in thousands)
September 26, June 27,
1998 1998
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
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Current portion of long-term obligations $ 2,105 $ 2,105
Accounts payable 16,148 15,525
Accrued compensation and vacation 2,286 2,750
Accrued taxes 1,612 1,558
Interest payable 128 132
Other 3,907 3,257
------ ------
Total current liabilities 26,186 25,327
------ ------
Long-term obligations, less current portion 21,401 22,898
------ ------
Commitments and contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,631 shares 38,273 38,273
Retained earnings 10,835 10,342
Foreign currency translation adjustment 245 245
------ ------
Total shareholders' equity 49,353 48,860
------ ------
$96,940 $97,085
======= =======
See accompanying notes to consolidated financial statements
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter Ended
September 26, September 27,
1998 1997
(in thousands, except
per share amounts)
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Net sales $42,304 $40,257
Cost of sales (including warranty
provision of $328 and $608) 35,308 34,554
------ ------
Gross profit on sales 6,996 5,703
Operating expenses:
Research and development 1,494 884
Selling 2,191 1,973
General and administrative 2,068 2,095
------ ------
Operating income 1,243 751
------ ------
Interest expense 528 531
Other income (56) (18)
------ ------
Earnings before taxes on income 771 238
------ ------
Income tax provision 278 95
------ ------
Net income $ 493 $ 143
=== ===
Earnings per share:
Earnings per common share - basic and diluted $ 0.05 $ 0.01
Weighted average shares outstanding 9,631 9,611
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Diluted shares outstanding 9,631 9,611
See accompanying notes to consolidated financial statements.
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<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter Ended
September 26, September 27,
1998 1997
(in thousands)
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Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 493 $ 143
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,947 2,405
Provision for obsolete inventory 575 470
Provision for doubtful receivables 78 0
Provision for warranty 328 608
Deferred income taxes 123 (100)
Changes in Operating Assets and Liabilities:
Trade receivables (3,238) 834
Inventories 111 25
Other assets 803 149
Accounts payable 623 1,669
Employee compensation and accrued vacation (464) (112)
Other liabilities 372 (388)
------ ------
Cash provided by operating activities 1,751 5,703
------ ------
Cash flows from investing activities:
Purchase of property and equipment (374) (2,328)
------ ------
Cash used in investing activities (374) (2,328)
------ ------
Cash flows from financing activities:
Other financing fees 0 (36)
Payments on long-term obligations (1,497) (4,260)
------ ------
Cash used in financing activities (1,497) (4,296)
------ ------
Effect of exchange rate changes on cash 0 (36)
------ ------
Net decrease in cash and cash equivalents (120) (957)
Cash and cash equivalents, beginning of quarter 288 2,812
------ ------
Cash and cash equivalents, end of quarter $ 168 $ 1,855
====== =======
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments of a normal and recurring nature 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 27, 1998.
- ------------------------------------------------------------------------
1. INVENTORIES
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<CAPTION>
September 26, June 27,
1998 1998
(in thousands)
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Finished goods $11,173 $11,802
Work-in-process 3,275 3,106
Raw materials and supplies 11,956 12,554
Reserve for obsolescence (2,367) (2,739)
------ ------
$24,037 $24,723
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2. COMMITMENTS
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $321,000 at September 26, 1998.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
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September 26, June 27,
1998 1998
(in thousands)
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Note payable - GECC $ 7,769 $ 8,332
Revolving line 14,219 15,153
Litigation reserve 900 900
Deferred compensation obligation 618 618
------ ------
23,506 25,003
Less current portion (2,105) (2,105)
------ ------
$21,401 $22,898
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4. SUPPLEMENTAL CASH FLOW INFORMATION
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<CAPTION>
First Quarter Ended
September 26, September 27,
1998 1997
(in thousands)
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Interest payments $532 $562
Income tax payments 175 0
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5. INCOME TAXES
The income taxes provision was $278,000 for the first quarter of fiscal
1999 and $95,000 for the first fiscal quarter of 1998. $132,000 of the fiscal
1999 provision and $146,000 of the fiscal 1998 provision relates to taxes on
earnings of foreign subsidiaries. The offsetting ($51,000) of the first quarter
1998 provision relates to tax benefits on U.S. losses. The Company has tax loss
carryforwards of approximately $25.4 million which expire in varying amounts in
the years 2006 through 2012.
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
for the first quarters ended September 26, 1998 and September 27, 1997. The
following table presents the Company's calculations of weighted average shares
(number of shares):
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<CAPTION>
Adjustments For
Weighted Avg. Shares Dilutive O/S Options Total
For the Quarter Ended
<S> <C> <C> <C>
September 26, 1998 9,630,830 0 9,630,830
September 27, 1997 9,610,830 465 9,611,295
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FORWARD-LOOKING STATEMENTS
This Quarterly 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $1.8 million of cash during the first
quarter of fiscal 1999 versus $5.7 million of cash provided by operating
activities during the same period of the prior year. This change in available
cash is due primarily to increased trade receivables resulting from greater
sales activity in the last week of the quarter as well as miscellaneous
receivables resulting from sales activity between the Company and its
subcontractor in China.
During the first quarter of fiscal 1999, $.4 million was spent in capital
additions versus $2.3 million during the same period in the previous fiscal
year. The Company anticipates capital expenditures of approximately $7.0
million through the remainder of the current fiscal year ending July 3, 1999.
Actual capital expenditures may vary from anticipated expenditures depending
upon future results of operations. See RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS, pages 13-15. Capital expenditures are expected to be financed
with internally generated funds.
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 September 26, 1998 and June 27, 1998, 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 1.0, 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 1.0, this note bears interest at
two percent (2.00%) in excess of the applicable LIBOR rate. At September 26,
1998, the applicable LIBOR rate was 5.65625%, and the applicable interest rate
was 7.65625%.
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 1.0, 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 1.0, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At September 26, 1998, the
applicable LIBOR rate was 5.65625%, and the applicable interest rate was
7.40625%. At September 26, 1998, there was $14.2 million borrowed on the
revolving loan and approximately $11.1 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 decreased $1.0 million since the Company's
fiscal year end at June 27, 1998. This decrease can be attributed primarily to
decreased inventories and increased 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.
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.
In the first fiscal quarter of 1999, the Company continued 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 all
suppliers by survey regarding their year 2000 readiness. All suppliers have
responded to the survey, but not in a manner sufficient to confirm their
readiness, so the committee is in the process of requesting test data to ensure
compliance. 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.
Progress has also been made in identifying and evaluating embedded systems. The
committee is aware of their importance and has taken steps to make sure that all
date-sensitive systems are 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
September 26, 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. 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 quarter, the highest LIBOR rate was 5.66797% at the end of
June, 1998. This rate continued through the month of July, 1998 and has since
remained at 5.65625%.
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 1.0 (see discussion above
related to the Company's debt). All items described in the table are non-
trading and are stated in U.S. dollars.
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<CAPTION> Fair Value
September 26, 1998
IN THOUSANDS 1999 2000 2001 2002 THEREAFTER TOTAL
Interest rate risk:
Long-term debt-floating rate:
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Secured term debt 1,500 2,000 2,000 2,000 269 7,769 7,769
Average interest rate 7.84% 7.87% 7.91% 7.92% 7.94%
Secured revolving
debt 14,219 14,219 14,219
Average interest rate 7.67%
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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.
NET SALES
Net sales for the fiscal 1999 first quarter, which ended September 26,
1998, were $42.3 million compared to $40.3 million for the first quarter of the
previous year. The increase in revenue is a result of increased sales of the
Company's ODM (original design manufacturing) product lines to existing as well
as new customers.
Keyboard shipments increased 38.6% from the first quarter of the prior
year while the average selling price decreased approximately 20.7%. The
increase in units shipped is due primarily to increased customer orders. The
decrease in average selling price is due primarily to the sale of new lower cost
products. Non-keyboard revenue accounted for 19.4% of total revenue in the
first quarter versus 22.8% in the first quarter of the prior year.
COST OF SALES
Cost of sales were 83.5% of revenue in the first quarter of 1999 compared
to 85.8% for the first quarter of 1998. The cost of sales percentage decreased
in part as a result of higher sales volume. The Company has also made
significant strides in controlling raw material costs. Whenever feasible, the
Company transfers production to its Juarez, Mexico facility to emphasize cost
reductions. During fiscal 1998, the Company began working with a subcontractor
in mainland China for the production of its keyboard products. This segment of
the Company's business will eventually be produced almost in entirety within
China. The Company plans to use its facility in Mexico to increase available
capacity for new and existing ODM products. This facility in conjunction with a
newly organized subsidiary in Shanghai, China, will enable the Company to
increase its presence in this growing market.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.5 million in the
first quarter of fiscal 1999 and $.9 million for the same period of fiscal 1998.
As a percentage of sales, R, D & E expenditures were 3.5% in the first quarter
of 1999 compared to 2.2% in the first quarter of 1998. The increase in spending
is primarily due to decreased customer funded projects during the first quarter
of fiscal 1999. The amount spent in the current quarter is considered closer to
the expected expenditure for R&D.
SELLING EXPENSES
Selling expenses were $2.2 million in the first quarter of 1999 compared
to $2.0 million in the first quarter of 1998. Selling expenses as a percentage
of revenue were 5.2% for the quarter compared to 4.9% in the same quarter of
fiscal 1998. Selling expenses increased in dollars due primarily to a retail
marketing plan that includes various customer incentive programs related to
sales volume. As a percentage of revenue, selling expenses increased due to the
increase in the proportion of revenue upon which the sales incentives are based.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.1 million in the first fiscal
quarters of 1999 and 1998. As a percent of revenue, G&A expenses were 4.9% in
the first quarter compared to 5.2% during the first quarter of the prior year.
As a percent of revenue, the decrease is primarily due to increased sales.
INTEREST
Interest expense was $528,000 in the first quarter of 1999 compared to
$531,000 for the first quarter of 1998. The level of long-term debt has
decreased due to scheduled term loan payments. This reduction has been matched
with increased short-term borrowings, resulting in a minor reduction in total
borrowings and interest expense.
INCOME TAXES
The income tax provisions were $278,000 for the first quarter of 1999 and
$95,000 for the first quarter of 1998. In the first quarter of 1999, $132,000
of this provision and $146,000 of 1998's first quarter provision relate to
taxes on earnings of foreign subsidiaries. The remaining $146,000 of the 1999
provision relates to tax on U.S. earnings. The remaining ($51,000) of the first
quarter 1998 provision relates to tax benefits on U.S. earnings. The Company
has tax loss carryforwards of approximately $25.4 million which expire in
varying amounts in the years 2006 through 2012.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the first quarter of fiscal years 1999 and 1998.
BACKLOG
The Company's backlog at the end of the first fiscal quarter of 1999 was
$14.5 million compared to $12.9 million at the end of the 1998 fiscal year and
$15.9 million at the end of the first quarter of fiscal 1998. The increase in
the backlog from fiscal year end is attributable in part to increased keyboard
orders from major OEM's and distributors in anticipation of holiday orders as
well as increased customer orders for ODM products.
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 forty-five 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 September 26, 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.
<TABLE>
PART II. OTHER INFORMATION:
<S> <C>
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
</TABLE>
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 November 6, 1998
Jack W. Oehlke Date:
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter November 6, 1998
Ronald F. Klawitter Date:
Principal Financial Officer
/s/ Keith D. Cripe November 6, 1998
Keith D. Cripe Date:
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> SEP-26-1998
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<CURRENT-ASSETS> 61510
<PP&E> 103925
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<TOTAL-ASSETS> 96940
<CURRENT-LIABILITIES> 26186
<BONDS> 0
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 96940
<SALES> 42304
<TOTAL-REVENUES> 42304
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<OTHER-EXPENSES> 5697
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<EPS-DILUTED> .05
</TABLE>
