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
July 3, 1999 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 $40,664,660 as of September 8, 1999
The number of shares of Common Stock of the Registrant outstanding as of
September 8, 1999 was 9,634,830 shares.
The Exhibit Index is located at Page 34.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the 1999 Registrant's Proxy Statement, pages 1 - 10, pursuant to
Regulation 14A, covering the Annual Meeting of Shareholders to be held November
19, 1999 is incorporated by reference into Part III.
KEY TRONIC CORPORATION
1999 FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................3-7
Item 2. Properties......................................................8
Item 3. Legal Proceedings...............................................8
Item 4. Submission of Matters to a Vote of Security Holders.............8
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters..........................................9
Item 6. Selected Financial Data.........................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................10-15
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk..............................................15-16
Item 8. Financial Statements and Supplementary Data.................16-31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........................31
PART III
Item 10. Directors and Executive Officers of the Registrant..........32-33
Item 11. Executive Compensation.........................................33
Item 12. Securities Ownership of Certain Beneficial Owners and
Management..................................................33
Item 13. Certain Relationships and Related Transactions.................33
PART IV
Item 14. Exhibits, Financial Statement Schedule, Reports on
Form 8-K and Signatures..................................34-38
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 10-
Q.
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
that 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 consists 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 that
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 of an improved membrane technology.
KEYBOARD PRODUCTS
During 1999, 1998 and 1997, the Company realized revenues of approximately
$134.7 million, $145.3 million and $151.0 million, respectively, from the sale
of keyboards representing approximately 76 percent, 85 percent and 82 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. In fiscal 1998, Key Tronic developed new enhanced
keyboards (with fingerprint recognition and smartcard reader technology) and
successfully marketed them throughout 1999. The Company sells its
plug-compatible keyboards through a worldwide network of distributors and major
retailers.
NON-KEYBOARD PRODUCTS
The Company realized revenue from non-keyboard products, which in the aggregate,
accounted for $43.6 million, $24.8 million and $33.9 million in 1999, 1998 and
1997 representing approximately 24 percent, 15 percent and 18 percent of total
sales. The significant dollar increase in 1999 was due primarily to the
Company's success in expanding its original design manufacturing (ODM) sales
from 11% of total revenue in 1998 to 21% in 1999. The success in 1999 was
primarily due to management direction along with the sales and marketing
approach to selling the Company's existing capabilities. The decrease in 1998
when compared to 1997 was due to reduced customer orders for plastic components
used on computer peripherals.
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 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 that meet their technical
specifications and aesthetic considerations and to deliver 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 170 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 24 percent, 31 percent and 34
percent of net sales in 1999, 1998 and 1997. Microsoft accounted for
approximately 11 percent, 13 percent and 7 percent of net sales in 1999, 1998
and 1997. Gateway accounted for approximately 13 percent and 7 percent of net
sales in fiscal years 1999 and 1998. Toshiba accounted for approximately 11
percent of net sales in fiscal year 1997. No other customer accounted for more
than10 percent of net sales during any of the last three years. In 1999, 1998
and 1997, the five largest customers accounted for 60 percent, 61 percent and 65
percent of total sales, respectively.
The Company markets its products primarily through its direct sales organization
aided by distribution sales in the U.S., Canada and Europe. During the past
year, the Company also established relationships with several independent sales
organizations to assist in marketing the Company's retail product lines in the
U.S.
All OEM keyboards are accompanied by a manufacturer's three-year warranty that
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
Information concerning geographic areas for the years ended July 3, 1999,
June 27, 1998 and June 28, 1997 is summarized in the following table.
<TABLE>
<CAPTION>
Domestic U.S. Mexico Ireland Far East
(in thousands) Exports Operations Operations Operations Operations Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales:
Unaffiliated customers $57,192 $102,872 $ - $17,650 $ 590 $ - $178,304
Affiliates - 9,581 20,297 190 3,493 (33,561) -
- ------------------------------------------------------------------------------------------------------------------
Total $57,192 $112,453 $ 20,297 $17,840 $ 4,083 $ (33,561) $178,304
==================================================================================================================
Income (loss) before
income taxes $ - $ 1,989 $ 1,631 $ 499 $ 26 $ 600 $ 4,745
==================================================================================================================
Identifiable assets $ - $ 91,552 $ 13,585 $15,655 $ 7,022 $ (26,867) $100,947
==================================================================================================================
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
==================================================================================================================
</TABLE>
Transfers to affiliates are made at prices which approximate market.
In 1999, $75.4 million, or 42.3 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 1998 and 1997 were $70.9 million and $78.2
million, respectively. Foreign sales are made primarily through the Company's
direct sales force in the U.S. and Ireland.
Key Tronic Shanghai (KTS), the Company's facility in Shanghai, China, began
operations in the third quarter of 1999 and is used to support customers in that
area as well as for export
For additional financial information about foreign operations, see Note 120 to
the Consolidated Financial Statements.
BACKLOG
At August 14, 1999, the Company had an order backlog of approximately $14
million. This compares with a backlog of approximately $15 million at August
15, 1998. The decrease in backlog is attributable in part to increased sales in
the last month of fiscal 1999. The Company also supports two major OEM
customers that have expanded 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. 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 $4.9 million,
$4.6 million, and $5.2 million in 1999, 1998 and 1997, respectively. Research,
development and engineering expenses as a percentage of sales were 2.7 percent,
2.7 percent and 2.8 percent in 1999, 1998 and 1997, 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.
Principle competitors in the ODM market are believed to be Venture
Manufacturing, Plexus Corp, Kimball Electronics Group, K*Tec Electronics, EFTC
Corp, Pemstar Inc. And K-Byte Manufacturing. The principal methods of
competition are price, quality and capability.
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 September 7, 1999, the Company had approximately 1,9816 employees compared
to 2,685 on August 17, 1998. The number of employees was reduced as a result of
restructuring, following the downsizing of domestic operations and the shifting
of production to more efficient facilities in Mexico and China. Management
considers its employee relations to be excellent. Only the Company employees in
Ireland 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 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. 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 June 1999, the Company sold its real
estate in Dundalk, Ireland. Under the terms of the agreement, the Company has
rent free possession of the premises until March 29, 2000 and is currently using
it for sales, marketing and product distribution. In September 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 began an assembly
operation in this facility in the third quarter of fiscal year 1999. 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 eighteen lawsuits by computer keyboard users that are
in state or federal courts in Illinois, New Jersey, 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 their injury. 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 120
suits have been dismissed in California, Connecticut, Florida, Illinois, Kansas,
Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania
and Texas. One of the 120 dismissed suits is on appeal in New York. 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 1999 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
MARKET INFORMATION
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 1999 and 1998 were as follows:
1999 1998
High Low High Low
First Quarter 2.813 1.75 5.688 4.375
Second Quarter 4.812 2.375 5.625 4.000
Third Quarter 5.938 3.188 4.750 3.125
Fourth Quarter 5.625 3.625 4.125 2.250
HOLDERS AND DIVIDENDS
As of September 8, 1999, the Company had 1,472 shareholders of record. The
Company's current line of credit agreement contains a covenant that 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)
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $178.3 $170.1 $184.9 $201.0 $207.5 $159.4 $123.3 $124.0 $141.0 $140.2
Operating income 5.2 1.2 1.9 0.2 9.8 (8.3) 3.7 (7.7) (7.5) 0.5
(loss)
Net income (loss) 3.0 (0.9) 0.3 (1.8) 4.4 (1.1) 3.8 (7.5) (7.7) 1.5
Net income (loss)
per share 0.32 (0.09) 0.03 (0.22) 0.53 (0.13) 0.49 (0.97) (1.00) 0.19
Depreciation/amorti 6.9 9.6 8.9 10.0 8.9 8.6 6.3 6.9 5.4 6.5
zation
Total assets 101.0 97.0 100.2 93.5 115.1 101.9 61.8 62.2 68.6 75.4
Net working capital 41.8 34.6 38.5 28.0 37.7 28.5 20.0 17.2 19.7 33.9
Long-term debt (net 20.6 22.9 27.0 17.3 28.5 26.6 0.8 0.8 0.1 0.0
of current)
Shareholders' 51.9 48.8 49.8 49.5 51.3 44.5 43.4 40.5 46.4 54.9
equity
Book value/share 5.39 5.06 5.18 5.80 6.06 5.38 5.54 5.21 6.00 7.09
Cash dividends per 0 0 0 0 0 0 0 0 0 0
share
Number of shares
outstanding
at year end 9631 9631 9611 8534 8456 8271 7837 7757 7736 7736
(thousands)
Number of employees
at year end 1961 2721 2429 2824 2925 2163 1204 1618 2241 2127
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal year 1999: Fiscal year 1999 sales increased 5% over the prior year and
the Company maintained profitability for all four quarters of the fiscal year.
The Company continued to increase its market share by expanding its customer
base during the year and was successful in expanding its original design
manufacturing (ODM) sales from 11% of total revenue in 1998 to 21% in 1999.
Unit keyboard sales increased 10% in fiscal year 1999 compared to fiscal year
1998, but the average selling price declined by 13%. The Company continues to
emphasize cost control 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 continues to focus its molding and
manufacturing capabilities on increasing production in contract manufacturing
and design. At the present time, return on investment in this market tends to
be more lucrative than for keyboards. In the third quarter of fiscal year 1999,
the Company opened its own assembly facility in China to support one of its
major customers in this area.
The Company's gross profit percentage increased 2.5% to 15.7% in fiscal year
1999 compared to fiscal year 1998. This increase is due to aggressive cost
reduction programs, tight cost control and revenue mix.
Fiscal year 1998: Fiscal year 1998 sales increased 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 year 1998 compared to fiscal year
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's gross profit percentage for fiscal year 1998 was 13.2%, a decrease
of 1.0% in comparison to fiscal year 1997.
RISKS AND UNCERTAINTIES THAT COULD 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 in this
discussion and analysis and elsewhere in this annual report, the words
"expects," "believes," "anticipates" and similar expressions are intended to
identify forward-looking statements. Actual future results may differ
materially due to uncertainties including risks identified in: Potential
Fluctuations In Quarterly Results, Competition, Concentration of Major
Customers, Dependence on Key Personnel, Litigation, Technological Change and
New Product Risk, Dilution and Stock Price Volatility, and Year 2000 Matters.
Forward-looking statements are based on estimates as of the date of this report.
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. 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 the
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 could become even more concentrated. Three of the
Company's OEM customers accounted for 24%, 13% and 11% of net sales during
fiscal year 1999. In 1998, these same customers accounted for 31%, 8% and 13% of
net sales. In fiscal year 1997, another customer accounted for 11% of net sales;
however, in fiscal year 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 has eighteen lawsuits by computer keyboard
users which are in state or federal court in Illinois, New Jersey, 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 injury. 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 120
lawsuits have been dismissed in California, Connecticut, Florida, Illinois,
Kansas, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York,
Pennsylvania and Texas. One of the 120 dismissed lawsuits is on appeal in New
York.
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, to develop and introduce, on a timely and cost-effective basis, new
products that keep pace with technological developments and emerging industry
standards, and to 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 July 3, 1999, 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 decreases 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 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 other
external agencies to determine the extent to which the Company is vulnerable to
those third parties' failure to remedy their 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 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 is 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 1999 were $178.3 million compared to $170.1 million and $184.9
million in 1998 and 1997, respectively. This represents an approximate increase
of 4.9% in 1999. The average unit selling prices of the Company's keyboard
products declined by 12.8% in 1999 compared to 16.3% in 1998. Offsetting these
price declines were increases in unit volumes of 10.0% and 15.0% in 1999 and
1998, respectively.
COST OF SALES
In 1999, cost of sales was 84.3% of sales compared to 86.8% in 1998 and 85.8% in
1997. The decrease in 1999 was due primarily to cost control efforts and the
mix of revenues, specifically the increase of ODM products. The increase in
1998 is due to lower revenues. The Company provides for warranty costs based on
historical experience and anticipated product returns. The amounts charged to
expense were $1,269,000 $1,477,000, and $1,290,000 in 1999, 1998, and 1997,
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 $1,674,000, $1,850,000, and
$1,953,000 in 1999, 1998, and 1997, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering (RD&E) expenses were $4.9
million, $4.6 million, and $5.2 million, in 1999, 1998, and 1997, respectively.
As a percent of sales, these expenses were 2.7%, 2.7%, and 2.8%, respectively.
In 1999, 1998, and 1997, the Company focused most of its RD&E efforts on
products for large OEM's. The number of RD&E projects has remained fairly
constant over the course of the three years. The decreases in fiscal year 1999
and 1998 are primarily the result of better design controls and increased cost
recovery for services performed.
SELLING
Selling expenses were $9.3 million, $8.3 million, and $8.2 million, in 1999,
1998, and 1997, respectively. Selling expenses as a percentage of revenues were
5.2%, 4.9%, and 4.4%, respectively. In fiscal year 1999, the increase in
selling expenses was primarily due to increased advertising and increased
promotional programs (volume incentive rebates and co-operative advertising
expenses). In fiscal year 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 was primarily additional expenses for commissions, compensation and
retail sales incentive programs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $8.6 million, $8.5 million and $10.0
million, in 1999, 1998, and 1997, respectively. General and administrative
costs as a percentage of sales were 4.9%, 5.0%, and 5.4%, in 1999, 1998, and
1997, respectively. General and administrative expenses for 1999 remained about
the same as 1998. The Company recorded $779,000 for its Incentive Compensation
Program based upon the company's fiscal year 1999 performance, and $900,000 for
the reversal of its MICA sanitary landfill litigation accrual. Management
considered the facts and circumstances surrounding the MICA sanitary landfill
and Company's waste disposal at the MICA landfill and determined that an
accrual was no longer needed, as of the quarter ended April 3, 1999.
Accordingly, management reversed its accrual of $900,000 in the third quarter
of fiscal 1999. The decrease in 1998 was 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 year 1997.
INTEREST EXPENSE
The Company had interest expense of $1,887,000, $2,108,000, and $2,328,000, in
1999, 1998 and 1997, respectively. The decreases in 1999 and 1998 were due to
additional paydown of the Company's term debt, which bears a somewhat higher
interest rate than its revolving loan.
OTHER INCOME
The Company had other income of $1,480,000 in 1999 compared to $204,000 in 1998.
The increase in 1999 was largely due to the sale of its real estate in Dundalk,
Ireland. (see Capital Resources and Liquidity).
INCOME TAXES
The Company had income tax expense of $1,701,000, $156,000, and $862,000 in
1999, 1998, and 1997, respectively. Income tax expense on foreign operations
represented $513,000, $433,000, and $530,000 of the income tax expense in 1999,
1998, and 1997, respectively. The Company has U.S. tax loss carryforwards of
approximately $26.7 million that expire in varying amounts in the years 2006
through 2019. 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, losses on European operations increased
the Company's effective income tax rate because such losses are not deductible
for U.S. income tax purposes. In 1997, the Company's effective tax rate
differed from the statutory rate primarily because of statutory taxes on Mexican
operations and the recapture of prior tax benefits on European operations.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" (see Note 7 to the July 3, 1999 Consolidated
Financial Statements). Pursuant to SFAS No. 109, the Company has recorded a
deferred tax asset. The balance of the deferred tax asset on July 3, 1999 was
$4,637,000, which was net of a valuation allowance of $9,015,000.
INTERNATIONAL (MEXICO, EUROPE, ASIA)
The Company owns an assembly and molding facility in Juarez, Mexico. This
subsidiary, Key Tronic Juarez, SA de CV, is primarily used to support the
Company's U.S. 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 Dundalk, Ireland to support
the European market are assembled at the Juarez, Mexico facility or
subcontracted to a manufacturer in China. This decision was made as a cost-
saving measure in fiscal year 1996.
Key Tronic Shanghai (KTS), the Company's facility in Shanghai, China, began
operations in the third quarter of 1999 and is used to support customers in that
area as well as for export.
Foreign sales from worldwide operations, including domestic exports, were $75.4
million in 1999 compared to $70.9 million and $78.2 million in 1998 and 1997,
respectively. Foreign sales were 42.3% of net sales in 1999 compared to 41.7%
and 42.3% in 1998 and 1997, respectively. Sales from KTEL represented 9.9% of
consolidated sales to external customers in 1999, compared to 11.0% in 1998 and
13.1% in 1997, respectively. Sales from KTS represented 0.3% of total sales in
1999 (Note 12 to the July 3, 1999 Consolidated Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The Company generated cash flows from operating activities of $4.2 million, $7.8
million, and $.7 million in 1999, 1998, and 1997, respectively. Capital
expenditures were $2.3 million, $7.1 million, and $9.6 million in 1999, 1998,
and 1997, respectively. The Company's cash position increased by $1.6 million
in 1999, compared to a decrease of $2.5 million and an increase of $.2 million
in 1998 and 1997, respectively. Cash generated from operating and financing
activities allowed the payment of $1.4 million in long-term debt to its
financing company and the purchase of $2.3 million in property and equipment.
The Company had working capital of $41.8 million and $34.6 million at July 3,
1999 and June 27, 1998. The increase in working capital was due primarily to
higher cash balances and trade receivables. Trade receivables were $31.3 million
at July 3, 1999, an increase of $8.2 million from 1998. The increase in trade
receivables was caused primarily by higher sales in the last four weeks of
fiscal year 1999 compared to the same period of fiscal year 1998.
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 million and a revolving loan for up to $30 million.
During the second quarter of fiscal year 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 and the term note
are secured by the assets of the Company. 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 July 3, 1999 and June 27, 1998, the
Company was in compliance with all debt covenants.
The Company anticipates that capital expenditures of approximately $4.5 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 an agreement with
GECC. 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 market the property.
In June of fiscal year 1999, the Company sold its real estate in Dundalk,
Ireland for approximately $2.3 million. Approximately one third of this amount
was received in cash at closing. The remaining amount is included in other
current assets. Under the terms of the agreement, the Company has rent free
possession of the premises until March 29, 2000. The receivable becomes due and
payable, upon the earlier of March 29, 2000 or the Company's decision to vacate
the premises. The Company realized a gain of $775,000 net of Irish taxes of
$251,000 on this transaction.
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 the Company's progress on any remaining
projects that are considered potential problem areas. During the fourth quarter
of fiscal year 1999, the Company upgraded software programs that were not
compliant. The Company has plans in place to complete the remaining software
upgrade within the next few months. Any remaining hardware issues are being
handled in a similar manner.
The Company started its Year 2000 readiness program in 1993 with the upgrade of
its business systems. Total budgeted cost associated with this upgrade was
$500,000, and this project was completed as scheduled in 1993. Other costs
associated with upgrades of PC's and other communication equipment, security
systems, software, facilities, and equipment was budgeted at less than $1.5
million. As of July 3, 1999, the budgeted amount remaining to be spent is
approximately $100,000. The costs have been expensed as incurred over fiscal
years 1999, 1998 and 1997. The committee, at this time, has determined that its
readiness programs are about 95% complete. September of 1999 has been targeted
as the completion date for any currently unresolved Year 2000 issues. The
Company believes that this is a reasonable date based on information currently
available.
The Company contacted all suppliers by survey regarding their year 2000
readiness several months ago. All suppliers responded to the survey, but not
all of the responses were sufficient to confirm their readiness, so the
committee requested test data from some of the Company's suppliers and has
reviewed some of the Company's more critical suppliers in order to confirm their
compliance. The Company has also communicated with its banks and other external
agencies that provide critical services to the company. Assurances and
documentation have been received to indicate full compliance. Production and
test equipment as well as production facilities have been evaluated for
compliance and, at this time, are considered to be 95% compliant. These
statistics include the Company's foreign subsidiaries. Any embedded systems
have been identified and remediated as a part of the production facilities
evaluation.
The Company believes that completed and planned modifications and conversions of
its internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner. 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 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.
There can also be no assurance that contingency plans will mitigate the effects
of any non-compliance. It is believed that the most reasonably likely worst
case scenario for Year 2000 non-compliance to the Company will be that the
supply of goods and services by third parties to the Company would be
interrupted or delayed resulting in interruption or delay in the Company's
manufacture of products. All interruptions or delays could interfere with the
Company's ability to make shipments and therefore impact sales and cash flows.
As of July 3, 1999, the Company's Year 2000 committee has discussed and
evaluated contingency plans in the event that outside firms fail to mitigate
their Year 2000 compliance issues and has determined that there are sufficient
plans in place to cover the Company's operations should this occur.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" was issued in late 1997 and was
adopted by the Company in fiscal year 1999. SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued in late 1997 and was adopted by the Company in fiscal
year 1999. SFAS No. 131 establishes reporting and disclosure standards for an
entity's operating segments. It also establishes standards for enterprise-wide
disclosures about products and services, geographic areas and major customers.
Management organizes its business around keyboards and original design
manufacturing (ODM). These segments have been aggregated as each segment has
similar economic characteristics and the nature of the segments, its production
processes, customers and distribution methods are similar.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-
retirement Benefits" was issued in February 1998 and was adopted by the
Company in fiscal year 1999. The Company pays certain post-retirement
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. There are no other post-retirement agreements between the
Company and its employees, and the amount of the benefits paid to these two
former employees is immaterial to the Company's operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998 and was to be effective for companies whose fiscal
years began after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. Under
this statement, certain derivatives are recognized at fair market value, and
changes in fair market value are recognized as gains or losses. However, in
June 1999, the Financial Accounting Standards Board delayed the adoption of
this new standard for an additional year, so it will not be applicable to the
Company's financial statements until the end of fiscal year 2001. At this
time, management believes the impact of adoption will not be material to the
Company's financial statements.
ITEM 7A: 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 year the highest LIBOR rate was 5.66797% at the end of June
1998. This rate continued through the month of July 1998 and it has since
fluctuated between 4.9025% and 5.65625%. At July 3, 1999, the effective LIBOR
rate was 5.0925% for the revolver debt and 5.21% for the term debt. The
difference between these two rates is due to LIBOR contract renewals on separate
days during the period. LIBOR rates fluctuate on a daily basis.
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. 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.
The table below presents principal (or notional) amounts and related weighted
average variable rates by fiscal year of maturity. The weighted average
variable interest rates for fiscal years 2000 through 2003 are estimated based
on implied forward rates in the yield curve as of July 3, 1999. These forward
rates have been increased by 1.75% for the term debt and 1.50% for the revolving
loan based on debt service coverage of greater than 1.4 (see Note 5 to the July
3, 1999 Consolidated Financial Statements). If the debt service coverage ratio
were to be less than or equal to 1.4, the weighted average interest rates would
increase by .25% for each year. All items described in the table are non-
trading and assume a debt coverage ratio of greater than 1.4.
<TABLE>
Fair
Fiscal Years Value
2000 2001 2002 2003 Total July 3,
1999
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest rate risk:
Long-term debt-
floating rate:
Secured term debt $2,000 $2,000 $1,559 $5,559 $5,559
Average interest rate 6.86% 7.36% 7.43% 7.47%
Secured revolving $16,523 $16,523 $16,523
debt
Average interest rate 6.61% 7.11% 7.18% 7.22%
</TABLE>
The weighted average variable interest rates for the secured revolving debt were
6.81% and 7.44% for fiscal years 1999 and 1998, respectively. The weighted
average variable interest rates for the secured term debt were 6.96% and 7.69%
for fiscal years 1999 and 1998, respectively.
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 and subsidiaries (the Company) as of July 3, 1999 and June 27, 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended July 3, 1999, June 27, 1998, and June 28, 1997.
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 July 3, 1999 and June 27, 1998, and the results of their
operations and their cash flows for the years ended July 3, 1999, June 27, 1998,
and June 28, 1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Seattle, Washington
August 27, 1999
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands) July 3, 1999 June 27, 1998
- ------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,866 $ 288
Trade receivables, less allowance
for doubtful
Accounts of $542 and $885 31,285 23,103
Inventories 24,896 24,723
Real estate held for sale 1,988 2,134
Deferred income tax asset, net 1,033 1,681
Customer tooling 2,449 4,855
Other 6,720 3,127
- ------------------------------------------------------------------------------------------
Total current assets 70,237 59,911
- ------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT-AT 102,681 103,551
COST
Less accumulated depreciation 78,159 73,621
- ------------------------------------------------------------------------------------------
Total property, plant and equipment 24,522 29,930
- ------------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred income tax asset, net 3,604 4,198
Other (net of accumulated amortization of 1,436 1,770
$433 and $170)
Goodwill (net of accumulated amortization 1,148 1,276
of $639 and $511)
- ------------------------------------------------------------------------------------------
$100,947 $97,085
- ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term $2,105 $2,105
obligations
Accounts payable 18,720 15,525
Accrued compensation and vacation 3,269 2,750
Accrued taxes other than income 1,099 1,558
taxes
Interest payable 27 132
Other 3,227 3,257
- ------------------------------------------------------------------------------------------
Total current liabilities 28,447 25,327
- ------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term obligations, less current 20,596 22,898
portion
- ------------------------------------------------------------------------------------------
Total long-term liabilities 20,596 22,898
- ------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5,6,
AND 10)
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized
25,000 shares;
issued and outstanding 9,631 38,273 38,273
shares
Retained earnings 13,386 10,342
Accumulated other comprehensive 245 245
income
- ------------------------------------------------------------------------------------------
Total shareholders' equity 51,904 48,860
- ------------------------------------------------------------------------------------------
$100,947 $97,085
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
(In thousands, except per share July 3, June 27, June 28,
amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $178,304 $170,050 $184,927
Cost of sales 150,284 147,541 158,617
- ----------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 28,020 22,509 26,310
OPERATING EXPENSES:
Research, development and 4,879 4,579 5,164
engineering
Selling 9,341 8,291 8,216
General and administrative 8,648 8,465 9,965
Provision for restructuring - - 1,108
- ----------------------------------------------------------------------------------------
OPERATING INCOME 5,152 1,174 1,857
INTEREST EXPENSE 1,887 2,108 2,328
OTHER INCOME (1,480) (204) (1,901)
- ----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY 4,745 (730) 1,430
ITEM
INCOME TAX PROVISION 1,701 156 862
- ----------------------------------------------------------------------------------------
Income (loss) before extraordinary 3,044 (886) 568
item
Extraordinary item: extinguishment
of debt, net of
Applicable income taxes of $127 0 0 246
NET INCOME (LOSS) $3,044 ($886) $322
- ----------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per common share before
extraordinary item:
Earnings per common share _ basic $0.32 ($0.09) $0.06
$0.31 ($0.09) $0.06
- - diluted
Earnings per share after
extraordinary item:
Earnings per common share _ basic $0.32 ($0.09) $0.03
$0.31 ($0.09) $0.03
- - diluted
Weighted average shares outstanding 9,631 9,626 8,895
Diluted shares outstanding 9,786 9,626 9,525
- ----------------------------------------------------------------------------------------
See notes to consolidated financial
statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Common Stock Retained Comprehensive
(In thousands) Share Amount Earnings Income Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 29, 1996 8,534 $38,142 $10,906 $428 $49,476
- ------------------------------------------------------------------------------------------
Comprehensive income:
Net income _ 1997 322 322
Other comprehensive income:
Foreign currency (4) (4)
translation
Total comprehensive income 318
Issuance of restricted stock 1,070 - -
Issuance of stock under stock 7 23 23
options
- ------------------------------------------------------------------------------------------
BALANCES, JUNE 28, 1997 9,611 $38,165 $11,228 $424 $49,817
- ------------------------------------------------------------------------------------------
Comprehensive income:
Net loss _ 1998 (886) (886)
Other comprehensive income:
Foreign currency (179) (179)
translation
Total comprehensive income (1,065)
Issuance of stock 20 108 108
- ------------------------------------------------------------------------------------------
BALANCES, JUNE 27, 1998 9,631 $38,273 $10,342 $245
$48,860
- ------------------------------------------------------------------------------------------
Comprehensive income:
Net income _ 1999 3,044 3,044
- ------------------------------------------------------------------------------------------
BALANCES, JULY 3, 1999 9,631 $38,273 $13,386 $245 $51,904
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial
statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
(In thousands) July 3, June 27, June 28,
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $3,044 ($886) $322
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO CASH
PROVIDED (USED) BY OPERATING
ACTIVITIES:
Depreciation and amortization 6,882 9,577 8,903
Provision for restructuring of - - 1,108
business line
Provision for obsolete inventory 1,674 1,850 1,953
Provision for doubtful receivables 334 75 10
Provision for warranty 1,269 1,477 1,290
Provision for litigation (900) - -
Gain on disposal of assets (1,263) (244) (267)
Deferred income tax provision 836 (578) 205
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Trade receivables (8,516) 3,811 (3,641)
Inventories (1,847) (4,142) (368)
Customer tooling 2,406 (1,839) (3,380)
Other assets (1,951) (1,083) (480)
Accounts payable 3,195 1,206 (1,258)
Employee compensation and accrued 519 (283) 97
vacation
Other liabilities (1,457) (1,127) (3,756)
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 4,225 7,814 738
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment (2,288) (7,096) (9,635)
Proceeds from sale of property and 1,043 80 1,131
equipment
- ------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,245) (7,016) (8,504)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of financing costs - (44) (811)
Proceeds from issuance of common - 108 23
stock
Proceeds from long-term obligations - 3,047 26,845
Payments on long-term obligations (1,402) (6,433) (18,044)
- ------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,402) (3,322) 8,013
- ------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (4)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH 1,578 (2,524) 243
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 288 2,812 2,569
CASH AND CASH EQUIVALENTS, END OF YEAR $1,866 $288 $2,812
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Key Tronic Corporation and subsidiaries (the Company) principally manufactures
input devices, primarily keyboards, for computers, terminals, and work
stations. The Company is also in various stages of developing, marketing, and
manufacturing a variety of computer related products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its wholly owned
subsidiaries in Ireland, Mexico, China 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, 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 non-saleable inventories was
approximately $3,066,000 and $2,739,000 at July 3, 1999 and June 27, 1998,
respectively. The Company provides for obsolete and non-saleable 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 actual project costs are recorded and tracked
against expected 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
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 July 3, 1999, it was determined that the Company's assets were
appropriately valued. No assets were written down during the fiscal year ended
July 3, 1999.
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 15 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 July 3, 1999 and June 27, 1998 were $724,000 and
$664,000, 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 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 bases 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 stock equivalent shares
that would have an antidilutive effect on earnings per share.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The functional currency of the Company's subsidiaries in Ireland, Mexico and
China is the U.S. dollar. Realized foreign currency transaction gains and
losses are included in general and administrative expenses. Until the end of
fiscal year 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 was included in the Consolidated Statements of Shareholders' Equity
was a result of final liquidation entries for the Company's subsidiary in Taiwan
and was included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reflected in the balance sheets at July 3, 1999 and June 27,
1998, 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 $22.0 million and $23.0 million, respectively, as of July 3, 1999 and June
27, 1998, which approximates the carrying values of $22,082,485 as of July 3,
1999 and $23,484,913 as of June 27, 1998.
STOCK-BASED COMPENSATION
Effective June 30, 1996, the Company adopted the provisions of SFAS No. 123
"Accounting for Stock-based Compensation." 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 No. 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 year 1996. Under SFAS No. 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, 57.2% in 1999, 58.36% in 1998, and 56.6% in 1997, respectively; risk
free interest rates, 6.03% in 1999, 5.81% in 1998, and 6.34% in 1997,
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 1999, 1998,
and 1997 awards had been amortized to expense over the vesting period of the
awards, pro forma net income (loss) would have been $2,122,000 ($.22 per share)
in 1999, ($1,764,000) ($.19 per share) in 1998, and ($1,072,000) ($.12 per
share) in 1997.
The weighted average fair values of options granted during fiscal years 1999,
1998, and 1997 are $2.87, $2.34, and $3.39 per share, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" was issued in late 1997 and was
adopted by the Company in fiscal year 1999. SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components. There
were no components of other comprehensive income for the year ended July 3,
1999.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-
retirement Benefits" was issued in February 1998 and was adopted by the
Company in fiscal year 1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998 and was to be effective for companies whose fiscal
years began after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. Under
this statement, certain derivatives are recognized at fair market value, and
changes in fair market value are recognized as gains or losses. However, in
June 1999, the Financial Accounting Standards Board delayed the adoption of
this new standard for an additional year, so it will not be applicable to the
Company's financial statements until the end of fiscal year 2001. At this
time, management believes the impact of adoption will not be material to the
Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications of prior year balances have been made for
consistent presentation with the current year.
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 1999, 1998, and 1997 ended on
July 3, 1999, June 27, 1998, and June 28, 1997, respectively. Fiscal year 2000
will end on July 1, 2000.
2. INVENTORIES
Components of inventories July 3, June 27,
were as follows: 1999 1998
- -----------------------------------------------------------------------------
(in thousands)
Finished goods $13,008 $11,802
Work-in-process 2,134 3,106
Raw materials 12,820 12,554
Reserve for obsolescence (3,066) (2,739)
- -----------------------------------------------------------------------------
$24,896 $24,723
=============================================================================
Cost of sales includes charges of $1.7 million, $1.9 million, and $2.0
million resulting from reduction of inventories to estimated realizable value
in 1999, 1998, and 1997, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
July 3, June 27,
1999 1998
Classification Life (in
years) (in thousands)
- -----------------------------------------------------------------------------
Land $2,486 $2,486
Buildings and 3 to 30 16,795 16,740
improvements
Equipment 1 to 10 69,821 70,673
Furniture and 3 to 5 13,579 13,652
fixtures
- -----------------------------------------------------------------------------
$102,681 $103,551
=============================================================================
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 $439,000 and $338,000 in 1999 and
1998, 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 and
$186,000 in 1998 and 1997, respectively. There were no services provided in
fiscal year 1999. No amounts were owed to HIC as of July 3, 1999 and June 27,
1998.
(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 a 6.73% equity interest in HKT
Partners. HKT Partners originally received 1,070,396 shares of restricted common
stock in 1998. The restrictions lapse at a rate of one third each year over the
course of three years beginning in March of 1998. During fiscal 1999, a
distribution in kind of one third of the outstanding shares was completed among
the partners. As of July 3, 1999, HKT Partners continue to hold 713,598 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 $30 million. During
the second quarter of fiscal year 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 agreement is secured by the assets of the Company.
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 July
3, 1999 and June 27, 1998, 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 2002. In
addition to these scheduled payments, the Company is also paying $21,000 per
month against the term note to GECC under a separate 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 July
3, 1999, the applicable LIBOR rate was 5.21%, and the applicable interest rate
was 6.96%.
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 July 3, 1999, the applicable LIBOR rate
was 5.0925%, and the applicable interest rate was 6.5925%. At July 3, 1999,
approximately $9.3 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:
July 3, June 27,
1999 1998
- -------------------------------------------------------------
(in thousands)
Note payable $5,559 $8,332
Revolving loan 16,524 15,153
Litigation reserve - 900
(Note 10)
Deferred compensation 618 618
obligation
- --------------------------------------------------------------
Total long-term 22,701 25,003
obligations
Less current portion (2,105) (2,105)
$20,596 $22,898
==============================================================
The Company accounts for its post-retirement benefits in accordance with the
provisions SFAS No. 106 "Employers' Accounting for Post-retirement Benefits
Other than Pensions." Under SFAS No. 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 $181,000 in 1999, $165,000 in 1998
and $155,000 in 1997 was charged against General and Administrative Expenses.
Principal maturities of long-term obligations at July 3, 1999 are:
Fiscal Years Ending (in thousands)
- --------------------------------------------------------------
2000 2,105
2001 2,105
2002 18,187
2003 105
2004 105
Future Years 94
- --------------------------------------------------------------
Total $22,701
==============================================================
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
non-cancelable operating leases with initial or remaining terms of one year or
more at July 3, 1999, are summarized as follows:
Fiscal Years Ending (in thousands)
- --------------------------------------------------------------
2000 2,781
2001 2,437
2002 946
2003 26
- --------------------------------------------------------------
Total minimum lease payments $6,190
==============================================================
Rental expenses under operating leases were $2,313,000, $1,797,000, and
$1,892,000 in 1999, 1998 and 1997, respectively.
7. INCOME TAXES
Income taxes consist of the following:
1999 1998 1997
- -----------------------------------------------------------------------
Current income taxes:
Federal $(94) $244 $68
Foreign 513 449 531
State 40 41 58
- -----------------------------------------------------------------------
459 734 657
Deferred income taxes:
Federal 879 (517) 225
Foreign - (16) (1)
State (43) (45) (19)
- -----------------------------------------------------------------------
836 (578) 205
Change in valuation
llowance 406
- -----------------------------------------------------------------------
Total income taxes $1,701 $156 $862
=======================================================================
The Company's effective tax rate differs from the federal tax rate as
follows:
Year Ended
July 3, June 27, June 28,
1999 1998 1997
- -----------------------------------------------------------------------
(in thousands)
Federal income tax provision
benefit) at statutory rates $1,613 $(248) 359
Effect of foreign income
loss) at statutory rates (815) (65) 279
Permanent differences:
Life insurance premiums 30 33 33
Other (46) 3 (339)
Foreign tax provision
benefit) at Foreign statutory rate 513 481 91
Change in valuation allowance 406 - -
Adjustment for effect of beneficial
tax rate On foreign manufacturing - (48) 439
(income) loss
- -----------------------------------------------------------------------
Income tax provision $1,701 $156 $862
=======================================================================
In 1998, foreign income decreased the Company's effective income tax rate,
because such income is taxed at a lower rate than U.S. income. In 1997, foreign
losses increased the Company's effective income tax rate, because 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
July 3, June 27, June 28,
1999 1998 1997
- -----------------------------------------------------------------------
(in thousands)
Domestic $3,551 $(3,136) $674
Foreign 1,194 2,406 756
- -----------------------------------------------------------------------
Income (loss) before income taxes $4,745 ($730) $1,430
=======================================================================
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:
July 3, June 27,
1999 1998
- -----------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------
Allowance for doubtful
accounts $ 132 $ 328
Inventory
1,450 1,540
Vacation accrual
401 429
Self insurance accrual
118 195
Warranty accrual
246 226
State deferred asset
250 207
Other
444 993
Current deferred income
tax assets 3,041 3,918
Current portion of valuation allowance (2,008) (2,237)
Current deferred income tax assets net of
valuation allowance 1,033 1,681
Litigation accrual - 306
Deferred compensation 210 210
Depreciation and
amortization 627 518
Net operating loss
carryforwards 9,094 8,674
Tax credit carryforwards 680 725
Other - 137
Noncurrent deferred income tax
assets 10,611 10,570
Valuation allowance net of (7,007) (6,372)
current portion
Noncurrent deferred income tax assets net of $3,604 $4,198
valuation allowance
- -----------------------------------------------------------------------
At July 3, 1999, the Company had tax loss carryforwards of approximately $26.7
million, which expire in varying amounts in the years 2006 through 2019.
Additionally, for federal income tax purposes, the Company has approximately
$680,000 of general business credit carryforwards which expire in varying
amounts in the years 2004 through 2010. Approximately $257,000 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
Financial Accounting Standards No. 128 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 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 July 3, 1999, June 27, 1998,
and June 28, 1997. The following table presents the Company's calculations of
weighted average shares (number of shares):
Adjustments For
For The Years Weighted Avg. Potential Common Total
Ended: Shares Shares
July 3, 1999 9,630,830 155,086 9,785,916
June 27, 1998 9,625,775 Antidilutive 9,625,775
June 28, 1997 8,895,306 629,223 9,524,529
The adjustment for potential common shares of 129,230 as of June 27, 1998 was
not included in the calculation of weighted average shares outstanding for such
date as the effect was considered to be antidilutive. The number of outstanding
options with an exercise price greater than average market price for fiscal
years ended July 3, 1999, June 27, 1998, and June 28, 1997 were 1,054,376,
1,537,813, and 1,221,719, respectively.
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 July 3, 1999, 2,596,870 shares have been reserved for issuance and 1,516,016
options were outstanding of which 994,516 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 1999, 1998 or 1997
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 July 3, 1999, 300,000 shares have been reserved for issuance and 175,000
options were outstanding of which 96,250 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, 1998, pursuant to a
Restricted Stock Agreement between the Company and HKT Partners (see Note 4).
FOLLOWING IS A SUMMARY OF ALL PLAN
ACTIVITY:
Weighted
Number Average
Price Range Of Options Exercise Price
- --------------------------------------------------------------------------------
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 199 $2.75 to $ 5.00 763,500 $3.83
Expired or canceled $5.63 to $16.25 (404,366) $12.84
- --------------------------------------------------------------------------------
Outstanding, June 27, 199 $2.75 to $16.25 1,612,693 $6.31
- --------------------------------------------------------------------------------
Granted during 1999 $2.75 to $ 5.56 212,500 $2.88
Expired or canceled $2.75 to $16.25 (134,177) $7.39
- --------------------------------------------------------------------------------
Outstanding, July 3, 1999 $2.75 to $16.25 1,691,016 $5.79
- --------------------------------------------------------------------------------
Additional information regarding options outstanding as of July 3, 1999, is as
follows:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
Weighted
Avg. Weighted Weighted
Remaining Avg. Avg.
Range of Number Contractual Exercise Number Exercise
Exercise Outstanding Life (yrs.) Price Exercisable Price
Prices
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.75 - $ 4.13 544,380 8.5 $2.79 198,880 $ 2.77
$ 4.14 - $ 6.20 713,360 7.7 5.18 458,610 5.37
$ 6.21 - $ 9.12 227,856 5.6 8.06 227,856 8.06
$ 9.33 - $13.99 114,420 1.3 11.06 114,420 11.06
$14.00 - $16.25 91,000 6.1 16.25 91,000 16.25
- ------------------------------------------------------------------------------------
$ 2.75 - $16.25 1,691,016 7.7 $5.79 1,090,766 $ 6.96
- ------------------------------------------------------------------------------------
</TABLE>
Of the 1,612,693 options outstanding as of June 27, 1998, 673,843 were
exercisable, and of the 1,253,559 options outstanding as of June 28, 1997,
925,692 were exercisable.
The Company has one remaining stock warrant outstanding at July 3, 1999. 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 $397,538, $416,683, and $454,899 in 1999, 1998, and 1997, respectively. The
Company has an Employee Stock Ownership Plan. No contributions were made to the
plan in 1999, 1998, or 1997. The investment in the Company's stock at July 3,
1999, by all employee trusts amounted to 440,191 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 and
1997, the accrued balance for probable legal costs was $900,000. However,
management considered the facts and circumstances surrounding the MICA sanitary
landfill and the Company' waste disposal at the Mica landfill and determined
that an accrual was no longer needed as of the quarter ended April 3, 1999, and
accordingly reversed its accrual of $900,000 in the third quarter of fiscal year
1999.
The Company currently has eighteen lawsuits by computer keyboard users which are
in state or federal courts in Illinois, New Jersey, 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 their injury. 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 120
suits have been dismissed in California, Connecticut, Florida, Illinois, Kansas,
Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania
and Texas. One of the 120 dismissed suits is on appeal in New York. No
provision has been made to cover any future costs. Management's position will
change if warranted by facts and circumstances. Given the inherent uncertainty
in litigation, the inherently limited information available with respect to
unasserted claims, and the complexity of the circumstances surrounding these
matters, management estimates are subject to and will change or be established
as facts and circumstances warrant. The Company is also subject to various
legal proceedings that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters is not expected to have
any material effect on the consolidated financial position or results of
operations of the Company.
CAPITAL EXPENDITURES
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $73,000 at July 3, 1999.
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:
Year Ended
July 3, June 27, June 28,
1999 1998 1997
- -------------------------------------------------------------------------
(in thousands)
Insurance recovery, net of legal costs $ - $ - $1,495
Gain on sale of real estate - Ireland 775
Other 706 204 406
- -------------------------------------------------------------------------
Total $1,481 $204 $1,901
- -------------------------------------------------------------------------
In June of fiscal year 1999, the Company sold its real estate in Dundalk,
Ireland for approximately $2.3 million. Approximately one third of this amount
was received in cash as a down payment at closing prior to the fiscal year ended
July 3, 1999. The remaining amount is included in other current receivables.
Under the terms of the agreement, the Company has rent free possession of the
premises until March 29, 2000. Upon the Company's delivery of possession to the
owners, the receivable becomes due and payable. The Company realized a gain of
$775,000 net of Irish taxes of $251,000 on this transaction.
12. ENTERPRISE-WIDE DISCLOSURES
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued in late 1997 and was adopted by the Company in fiscal
year 1999. SFAS No. 131 establishes reporting and disclosure standards for an
entity's operating segments. It also establishes standards for enterprise-wide
disclosures about products and services, geographic areas and major customers.
Management organizes its business around keyboards and original design
manufacturing (ODM). These segments have been aggregated as each segment has
similar economic characteristics and the nature of the segments, its production
processes, customers and distribution methods are similar.
Of the external revenues for the years ended July 3, 1999, June 27, 1998, and
June 28, 1997, keyboard sales were $134.7, $145.3, and $151.0, respectively.
ODM sales for the years ended July 3, 1999, June 27, 1998, and June 28, 1997
were $37.1, $18.4, and $26.8, respectively. The remainder of external revenues
for all years presented were from sales of miscellaneous other products and
services.
Information concerning geographic areas for the years ended July 3, 1999, June
27, 1998 and June 28, 1997 is summarized in the following table. Revenues
provided below are based on the shipping destination.
(in thousands) Domestic Internationl Total
- ------------------------------------------------------------------------
1999
Sales to external customers $102,872 $75,432 $178,304
Long-lived assets $23,433 $1,089 $24,522
- ------------------------------------------------------------------------
1998
Sales to external customers $99,123 $70,927 $170,050
Long-lived assets $28,364 $1,566 $29,930
- ------------------------------------------------------------------------
1997
Sales to external customers $106,696 $78,231 $184,927
Long-lived assets $30,212 $1,808 $32,020
- ------------------------------------------------------------------------
For the year ended July 3, 1999, fifty-eight percent of the Company's domestic
exports were sold to customers in Europe, thirty percent were sold to customers
in the Far East, and the remaining twelve percent were spread among customers in
Mexico, South America, and Canada. For the year ended June 28, 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.
SIGNIFICANT CUSTOMERS
One customer accounted for approximately 24%, 31%, and 34% of net sales for the
years ended July 3, 1999, June 27, 1998, and June 28, 1997, respectively. This
customer accounted for approximately 9% and 24% of trade receivables at July 3,
1999 and June 27, 1998, respectively. Another customer accounted for
approximately 11%, 13%, and 7% of net sales in 1999, 1998, and 1997,
respectively. This customer accounted for approximately 4% and 13% of trade
receivables at July 3, 1999 and June 27, 1998, respectively. A third customer
accounted for approximately 13% and 7% of sales in fiscal years 1999 and 1998.
A fourth customer accounted for 2% and 11% of sales in fiscal years 1998 and
1997. No other customer accounted for more than 10% of net sales for the years
ended July 3, 1999, June 27, 1998, and June 28, 1997.
13. SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION
Year Ended
July 3, June 27, June 28,
1999 1998 1997
- ------------------------------------------------------------------------
(in thousands)
Interest payments $1,892 $2,142 $2,414
Income tax payments 50 104 847
Note received for sale of Ireland $1,479 $ - $ -
property (see Note 11)
- ------------------------------------------------------------------------
14. QUARTERLY FINANCIAL DATA
(Unaudited)
Year Ended July 3,
1999
- -----------------------------------------------------------------------
First Second Third Fourth
quarter quarter Quarter quarter
- -----------------------------------------------------------------------
(in thousands, except per share
amounts)
- -----------------------------------------------------------------------
Net sales $42,304 $47,973 $45,155 $42,872
Gross profit 6,996 7,589 7,630 5,805
Income before income taxes 771 1,288 1,720 966
Net income 493 859 1,002 690
Earnings per share:
Earnings per common share basic
and diluted 0.05 0.09 0.10 0.07
Weighted average shares
Outstanding 9,631 9,631 9,631 9,631
Diluted shares outstanding 9,631 9,705 9,857 9,877
Common stock price range 1
High 2.813 4.812 5.938 5.625
Low 1.75 2.375 3.188 3.625
Year Ended June 27, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
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 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 2
High 5.688 5.625 4.75 4.125
Low 4.375 4 3.125 2.25
1High 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, and 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 three 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 July 3, 1999, there were approximately 1,482 common shareholders of
record.
2High 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, and 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 three 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.
15. RESTRUCTURING CHARGES
For the year ended June 28, 1997, the Company made $1,108,000 in provisions
during the fourth quarter for further restructuring of the Company's facility in
Ireland, which serves as a distribution center for its European sales. This
provision included $734,000 for repayment of grants to the Irish Development
Authority (IDA) and $374,000 for severance.
When the subsidiary in Ireland was established, it received reimbursement grants
from the Irish government for capital expenditures. Certain significant events
such as closure of the Irish plant or the reduction of headcount levels could
cause repayment of these grants. With the reorganization of the subsidiary in
Ireland resulting in a significant decrease in employment at the facility, the
grant agreement with the Irish government was re-negotiated. As of July 3, 1999,
the Company had a remaining reserve of approximately $222,000 for restructuring
charges in Ireland. This amount is expected to cover remaining restructuring and
severance costs. The Company currently plans to maintain the Irish plant as its
sales, marketing, and distribution facility to service the European community.
Reserve for Restructuring Obligations
-----------------------------------------------------------------
1999 1998
Balance at beginning of year $457,000 $1,365,000
Amounts paid 235,000 908,000
-----------------------------------------------------------------
Balance at end of year $222,000 $457,000
=================================================================
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
STANLEY HILLER, JR - Director
Mr. Hiller, age 74, 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 81, 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 49, 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 77, 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 73, 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 54, 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 74, 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 66, 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 53, 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 47, 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 40, 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 1999 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 1999 Proxy Statement to Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page in
Form 10-K
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<S> <C>
Independent Auditors' Report 16
Consolidated Balance Sheets, as of July 3, 1999 and June 27, 1998 17
Consolidated Statements of Operations for
the years ended July 3, 1999, June 27, 1998, and June 28, 1997 18
Consolidated Statements of Shareholders' Equity
for the years ended July 3, 1999, June 27, 1998, and June 28, 1997 18
Consolidated Statements of Cash Flows for the
years ended July 3, 1999, June 27, 1998, and June 28, 1997 19
Notes to Consolidated Financial Statements 20-32
SCHEDULE
Independent Auditors' Consent and Report on Financial Statement
Schedule 36
II. Consolidated Valuation and Qualifying Accounts 37
</TABLE>
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
(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.
<TABLE>
<CAPTION>
Exhibit No.
- -------------
<S> <C>
(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
</TABLE>
<TABLE>
<S> <C>
(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) 1999 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.
</TABLE>
(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 corporation
Washington
Incorporated in Guam
3 KTI Limited 4 Key Tronic Europe, LTD
100% owned by Key Tronic Europe, 100% owned subsidiary
LTD
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 8 Key Tronic Computer Peripherals
(Shanghai) Co. LTD
100% owned subsidiary 100% owned subsidiary
Incorporated in Singapore Incorporated in Republic of China
(23) Independent Auditors' Consent and Report on Financial Statement Schedule
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE
We consent to the incorporation by reference in Registration Statement No. 333-
70917 on Form S-8 of our report dated August 27, 1999, appearing in this Annual
Report on Form 10-K of Key Tronic Corporation and subsidiaries (the Company) for
the year ended July 3, 1999.
We have audited the consolidated financial statements of the Company as of July
3, 1999 and June 27, 1998, and for each of the three years in the period ended
July 3, 1999 and have issued our report thereon dated August 27, 1999; such
report is included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of the Company, 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
September 28, 1999
PART IV
SCHEDULE II
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 3, 1999
JUNE 27, 1998 AND JUNE 28, 1997
1999 1998 1997
Allowance for Obsolete Inventory
<S> <C> <C> <C>
Balance at beginning of year $2,739,390 $2,937,609 $4,322,071
Provision charged to income 1,673,574 1,850,199 1,953,331
Dispositions (1,347,063) (2,048,418) (3,337,793)
- -----------------------------------------------------------------------------------
Balance at end of year $3,065,901 $2,739,390 $2,937,609
Allowance for Doubtful Accounts
Balance at beginning of year $885,042 $905,129 $932,237
Provision charged to income 333,873 75 -
Write-offs and reinstatements (676,485) (20,162) (27,108)
----------- --------- ---------
Balance at end of year $542,430 $885,042 $905,129
Reserve for Litigation
Balance at beginning of year $900,000 $900,000 $969,143
Cost incurred-net of recoveries (900,000) - (69,143)
----------- --------- ---------
Balance at end of year $ - $900,000 $900,000
Accrued Warranty Costs
Balance at beginning of year $664,379 $576,201 $437,207
Provision charged to income 1,269,096 1,476,796 1,290,236
Costs incurred (1,209,591) (1,388,618) (1,151,242)
- -----------------------------------------------------------------------------------
Balance at end of year $723,884 $664,379 $576,201
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 30, 1999
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 30, 1999
Jack W. Oehlke Date
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter September 30, 1999
Ronald F. Klawitter Date
(Principal Financial Officer)
/s/ Keith D. Cripe September 30, 1999
Keith D. Cripe Date
(Principal Accounting Officer)
/s/ Stanley Hiller, Jr. September 30, 1999
Stanley Hiller, Jr. Date
(Director)
/s/ Wendell J. Satre September 30, 1999
Wendell J. Satre Date
(Director)
/s/ Yacov A. Shamash September 30, 1999
Yacov A. Shamash Date
(Director)
/s/ Dale F. Pilz September 30, 1999
Dale F. Pilz Date
(Director)
/s/ William E. Terry September 30, 1999
William E. Terry Date
(Director)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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