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 1, 2000 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 non affiliates of the
Registrant was $39,434,112 as of August 25, 2000.
The number of shares of Common Stock of the Registrant outstanding as of August
25, 2000 was 9,663,830 shares.
The Exhibit Index is located at Page 32.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the extent specified
herein:
Document Description 10-K Part
Proxy Statement dated September 26, 2000 III
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KEY TRONIC CORPORATION
2000 FORM 10-K
TABLE OF CONTENTS
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Page
PART I
Item 1. Business...................................................................3-6
Item 2. Properties...................................................................6
Item 3. Legal Proceedings..........................................................6-7
Item 4. Submission of Matters to a Vote of Security Holders..........................7
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.....7
Item 6. Selected Financial Data....................................................7-8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................8-12
Item 7A.Quantitative and Qualitative Disclosures about Market Risk..................12
Item 8. Financial Statements and Supplementary Data..............................13-29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.....................................................29
PART III
Item 10. Directors and Executive Officers of the Registrant......................29-30
Item 11. Executive Compensation.....................................................31
Item 12. Security Ownership of Certain Beneficial Owners and Management.............31
Item 13. Certain Relationships and Related Transactions.............................31
PART IV
Item 14. Exhibits, Financial Statement Schedule, Reports on Form 8-K and
Signatures............................................................32-36
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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 engaged in contract design and
manufacturing (CDM) services for OEM's (original equipment manufacturers) and
manufacturing of 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
Historically Key Tronic was a manufacturer of electronic keyboards, but during
the course of the past two fiscal years, its focus has changed to contract
design and manufacturing (CDM). Presently Key Tronic is known as an independent
provider of a mix of CDM services for OEM's. Products include computer
peripherals, medical equipment, industrial controls, telecommunications and
industrial electronic instrumentation. The Company's manufacturing capabilities
include circuit board assemblies, tool making, precision molding, proto
building, liquid plastic injection molding and printed circuit board assembly
(both through-hole and surface mounting).
Operations are currently conducted in facilities in the United States, China,
Ireland and Mexico. This global production capability provides customers with
benefits of improved supply chain management, reduced inventory, lower
transportation costs and reduced product fulfillment time.
The CDM industry (generally known as Electronic Manufacturing Services or EMS)
is comprised of companies that provide a range of manufacturing services for
OEM's. The CDM industry has experienced rapid growth over the past several
years as more and more OEM's shift to external manufacturing. Reports have
stated that the CDM market has grown at an annual rate of 25%.
KEYBOARD PRODUCTS
During fiscal years 2000, 1999, and 1998, the Company realized revenues of
approximately $70.5 million, $134.7 million, and $145.3 million, respectively,
from the sale of keyboards representing approximately 43%, 76%, and 85% of total
sales. 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. In 1983, Key Tronic
began supplying fully enclosed plug-compatible keyboards to the retail market.
These products serve as enhancements to or replacements for the original system-
supplied keyboard.
MANUFACTURING
Since inception, the Company has made substantial investments in developing and
expanding its now 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 the products it manufactures. Additionally, the Company has
invested in equipment to produce switch membranes as a means to reduce cost and
improve quality.
The OEM keyboard 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 processes and skills the Company developed and uses
in the keyboard market are transferable to and valued in the CDM market. This
has resulted in the Company gaining new customers and CDM programs.
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 in preparation of the tool design layout and tool
fabrication, to reduce tooling costs, improve component and product quality and
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 products
it manufactures. 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 its products 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 provides manufacturing services for outsourced OEM products. The
Company also manufactures and supplies custom keyboards to leading OEMs in the
keyboard market. The Company currently sells keyboards to more than 170 active
OEM customers.
Hewlett Packard accounted for approximately 38 percent, 24 percent and 31
percent of net sales in 2000, 1999 and 1998, respectively. Lexmark accounted for
13 percent of net sales in 2000. Microsoft accounted for approximately 9
percent, 11 percent and 13 percent of net sales in 2000, 1999 and 1998,
respectively. Gateway accounted for approximately 8 percent, 13 percent and 7
percent of net sales in fiscal years 2000, 1999 and 1998, respectively. No
other customer accounted for more than 10 percent of net sales during any of the
last three years. In 2000, 1999 and 1998, the five largest customers accounted
for 72 percent, 60 percent and 61 percent of total sales, respectively.
The Company markets its products and services primarily through its direct sales
organization aided by distribution sales in the U.S., Canada and Europe.
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 1, 2000, July
3, 1999 and June 27, 1998 is summarized in the following table.
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(in Domestic U.S. Mexico Ireland Far East
thousands) Exports Operations Operations Operations Operations Eliminations Consolidated
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2000
Net sales:
Unaffiliated
customers $53,657 $ 97,956 $ - $11,616 $ 1,124 $ - $164,353
Affiliates - 10,571 22,311 142 20,987 (54,011) -
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Total $53,657 $108,527 $ 22,311 $11,758 $22,111 $ (54,011) $164,353
=====================================================================================================
Income (loss)
before
income $ - $ (6,016) $ 1,318 $(1,786) $ 1,418 $ (103) $ (5,169)
taxes
=====================================================================================================
Total $ - $103,271 $ 7,714 $11,401 $18,854 $ (45,425) $ 95,815
assets
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1999
Net sales:
Unaffiliated
customers $57,192 $102,872 $ - $17,650 $ 590 $ - $178,304
Affiliates - 9,581 20,297 190 3,493 (33,561) -
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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
=====================================================================================================
Total
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) -
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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)
=====================================================================================================
Total
assets $ - $ 81,299 $ 15,661 $12,213 $ - $ (12,088) $ 97,085
=====================================================================================================
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Transfers to affiliates are made at prices which approximate market.
Intercompany margins are eliminated upon consolidation.
In 2000, $65.3 million, or 39.7% percent of the Company's revenues were from
foreign sales, primarily sales in Europe, the Far East, Canada, Mexico, and
South America. Foreign sales in 1999 and 1998 were $75.4 million and $70.9
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 12 to
the Consolidated Financial Statements.
BACKLOG
At August 5, 2000, the Company had an order backlog of approximately $35
million. This compares with a backlog of approximately $14 million at August
14, 1999. The increase in backlog is attributable in part to increased customer
orders for the CDM products. 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. 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 $2.8 million,
$4.9 million, and $4.6 million in 2000, 1999 and 1998, respectively. Research,
development and engineering expenses as a percentage of sales were 1.7 percent,
2.7 percent and 2.7 percent in 2000, 1999, and 1998, respectively. The
significant decrease in fiscal year 2000 is a result of greater recovery of
engineering design costs.
COMPETITION
The Company believes that its principal competitors in the contract design and
manufacturing market are, Plexus Corp, SCI Systems, ACT Manufacturing,
Celestica, Flextronics International, Jabil Circuits, and Solectron. The
principal methods of competition are price, quality and capability.
The Company believes that its principal competitors in the keyboard market are
Chicony, NMB, and Siletek.
TRADEMARKS AND PATENTS
The Company owns several keyboard patents. However, since the Company's focus
is now Contract Design and Manufacturing, management believes that patents will
not have a significant impact on future revenues. The Key Tronic name and logo
are federally registered trademarks, and the Company believes they are valuable
assets in its business.
EMPLOYEES
As of August 5, 2000, the Company had approximately 2,007 employees compared to
1,981 on September 7, 1999. Management considers its employee relations to be
excellent. The Company's employees in Ireland and Reynosa 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 165,000 sq. ft.
assembly and molding facility in Juarez, Mexico in addition to a 45,000 sq. ft.
manufacturing and assembly facility in Las Cruces, New Mexico. The Company
leases two manufacturing facilities in the Spokane Industrial Park which total
156,000 sq. ft. and two warehouses in El Paso, Texas, totaling 52,800 sq. ft.
The Spokane Industrial Park leases expire on January 31, 2001. The El Paso
leases expire on July 31, 2000. In Dundalk, Ireland, the Company leases 24,200
sq. ft. of office and warehouse space. This lease expires on March 1, 2002. In
March 2000, the Company entered into a five-year lease for a 140,000 sq. ft.
manufacturing facility in Reynosa, Mexico. In September 1997, the Company
signed a five-year operating lease with a local company for property owned by
the Company which is located in Cheney, Washington. The lease terms give the
lessee 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 36,000 sq. ft. 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 suitable for operations. The Company considers the productive capacity of
its current facilities sufficient to carry on the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company currently has fifteen lawsuits by computer keyboard users that are
in state or federal courts in New York. 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 123 suits have been dismissed in
California, Connecticut, Florida, Illinois, Kansas, Kentucky, Maryland,
Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas.
Also see Note 10 to the July 1, 2000 Consolidated Financial Statements.
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 2000 and 1999 were as follows:
2000 1999
High Low High Low
----------------------------------------
First Quarter 7.250 4.125 2.813 1.750
Second Quarter 4.750 3.500 4.812 2.375
Third Quarter 4.688 3.125 5.938 3.188
Fourth Quarter 3.625 2.500 5.625 3.625
HOLDERS AND DIVIDENDS
As of August 5, 2000, 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.
The following selected consolidated financial data of the Company should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the other financial information included
elsewhere in this Form 10-K.
ITEM 6: SELECTED FINANCIAL DATA
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KEY TRONIC TEN-YEAR FINANCIAL HIGHLIGHTS
(Dollars in millions, except share amounts)
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2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
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Net sales $164.4 $178.3 $170.1 $184.9 $201.0 $207.5 $159.4 $123.3 $124.0 $141.0
Operating income (loss) (3.5) 5.2 1.2 1.9 0.2 9.8 (8.3) 3.7 (7.7) (7.5)
Net income (loss) (5.3) 3.0 (0.9) 0.3 (1.8) 4.4 (1.1) 3.8 (7.5) (7.7)
Net income (loss) per share (.55) 0.32 (0.09) 0.03 (0.22) 0.53 (0.13) 0.49 (0.97) (1.00)
Depreciation/amortization 6.3 6.9 9.6 8.9 10.0 8.9 8.6 6.3 6.9 5.4
Total assets 95.8 101.0 97.0 100.2 93.5 115.1 101.9 61.8 62.2 68.6
Net working capital 37.1 41.8 34.6 38.5 28.0 37.7 28.5 20.0 17.2 19.7
Long-term debt (net of current) 17.6 20.6 22.9 27.0 17.3 28.5 26.6 0.8 0.8 0.1
Shareholders' equity 46.6 51.9 48.8 49.8 49.5 51.3 44.5 43.4 40.5 46.4
Book value/share 4.83 5.39 5.06 5.18 5.80 6.06 5.38 5.54 5.21 6.00
Cash dividends per share 0 0 0 0 0 0 0 0 0 0
Number of shares outstanding
at year end (thousands) 9,641 9,631 9,631 9,611 8,534 8,456 8,271 7,837 7,757 7,736
Number of employees
at year end 1,926 1,951 2,721 2,429 2,824 2,925 2,163 1,204 1,618 2,241
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal year 2000: Fiscal year 2000 sales decreased 8% from the prior year. This
decrease is primarily due to a decline in the Company's distribution keyboard
sales. Unit Keyboard sales decreased 42.4% from the prior year, and the average
selling price decreased 13.7%. The Company was successful in expanding its
Contract Design and Manufacturing (CDM) business from 21% of total revenue in
1999 to 56% in 2000. 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, price erosion is expected to continue
in future years. The Company continues to focus its molding and manufacturing
capabilities on increasing production in CDM. At the present time, return on
investment in this market tends to be more lucrative than for keyboards. The
Company's gross profit percentage decreased 6.9% to 8.8% in fiscal year 2000
compared to fiscal year 1999. This decrease is primarily due to lower sales in
the distribution keyboard business which traditionally has much higher margins.
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.
Unit keyboard sales increased 10% in fiscal year 1999 compared to the prior
year, but the average selling price declined by 13%. In the third quarter of
fiscal year 1999, the Company opened an assembly facility in China to support
one of its major customers in this area.
The Company's gross profit percentage for fiscal year 1999 was 15.7%, an
increase of 2.5% in comparison to fiscal year 1998. The increase was due to
aggressive cost reduction programs, tight cost controls, and revenue mix.
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. Forward-looking
statements are based on management's opinions 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 Contract Design and Manufacturing (CDM) business and the
keyboard industry are intensely competitive. The Company's major competitors in
the CDM business are much larger and may be able to offer customers lower prices
and less risk particularly on large volume programs. Most of the Company's
principal competitors in the keyboard industry 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 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 38%, 9% and 8% of net sales during fiscal
year 2000. In 1999, these same customers accounted for 24%, 11% and 13% 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 fifteen lawsuits by computer keyboard
users which are in state or federal courts in New York. 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 123 lawsuits have been dismissed in
California, Connecticut, Florida, Illinois, Kansas, Kentucky, Maryland,
Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas.
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 1, 2000, there were outstanding
options and warrants for the purchase of approximately 2,300,000 shares of
common stock of the Company (Common Stock), of which options and warrants for
approximately 1,700,000 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.
NET SALES
Net sales in 2000 were $164.4 million compared to $178.3 million and $170.1
million in 1999 and 1998, respectively. This represents an approximate decrease
of 7.8% in 2000. The average unit selling prices of the Company's keyboard
products declined by 13.7% in 2000 compared to 12.8% in 1999. Offsetting these
price declines were increases in contract design and manufacturing (CDM) sales.
CDM sales were 55.5% of total revenue in fiscal 2000 compared to 20.8% and
10.8% in fiscal years 1999 and 1998, respectively.
COST OF SALES
In 2000, cost of sales was 91.2% of sales compared to 84.3% in 1999 and 86.8% in
1998. The increase in 2000 was due primarily to the decline in distribution
keyboard revenues. The decrease in 1999 was due primarily to cost control
efforts and the mix of revenues, specifically the increase of CDM sales. The
Company provides for warranty costs based on historical experience and
anticipated product returns. The amounts charged to expense were $372,000,
$1,269,000, and $1,477,000 in 2000, 1999, and 1998, 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 $(359,000), $1,674,000, and $1,850,000 in 2000,
1999, and 1998, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering (RD&E) expenses were $2.8
million, $4.9 million, and $4.6 million, in 2000, 1999, and 1998, respectively.
As a percent of sales, these expenses were 1.7%, 2.7%, and 2.7%, respectively.
In 2000, 1999, and 1998, 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 decrease in fiscal year 2000
is primarily the result of increased cost recovery for services performed on CDM
projects.
SELLING
Selling expenses were $6.3 million, $9.3 million, and $8.3 million, in 2000,
1999, and 1998, respectively. Selling expenses as a percentage of revenues were
3.9%, 5.2%, and 4.9%, respectively. The decrease in 2000 is due to the decline
in distribution keyboard sales, which resulted in lower costs for volume
incentive rebates and cooperative advertising. 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).
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $8.7 million, $8.6 million and $8.5
million, in 2000, 1999, and 1998, respectively. General and administrative
costs as a percentage of sales were 5.3%, 4.9%, and 5.0%, in 2000, 1999 and
1998, respectively. The increase in 2000 was due in part to an increase in the
Company's provision for doubtful accounts receivable. General and
administrative expenses for 1999 remained about the same as 1998. The Company
recorded $979,000 for its Incentive Compensation Program in 1999 based upon the
Company's fiscal year 1999 performance.
INTEREST EXPENSE
The Company had interest expense of $1,987,000, $1,887,000, and $2,108,000 in
2000, 1999 and 1998, respectively. The increase in 2000 was due to higher
interest rates on the Company's debt. The decrease in 1999 was due to
additional paydown of the Company's term debt.
OTHER INCOME, NET
The Company had other income of $278,000 in 2000, $1,480,000 in 1999 and
$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 $164,000, $1,701,000, and $156,000 in
2000, 1999, and 1998, respectively. Income tax expense on foreign operations
represented $43,000, $513,000 and $481,000 of the income tax expense in 2000,
1999, and 1998, respectively. The Company has U.S. tax loss carryforwards of
approximately $34.4 million that expire in varying amounts in the years 2006
through 2020.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," (See Note 7 to the July 1, 2000 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 1, 2000 was
$4,516,000, which was net of a valuation allowance of $11,158,000.
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. The Company also leases a manufacturing
facility in Reynosa, Mexico. This subsidiary, KTC Reynosa, S.A. de C.V., is
used exclusively to manufacture products for a CDM customer.
Key Tronic Europe, Ltd. (KTEL), the Company's operation in Dundalk, Ireland, was
restructured in fiscal years 1997 and 1996 to become a sales and distribution
operation. The keyboards previously manufactured in Dundalk, Ireland to support
the European market are now 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.
Through Key Tronic Shanghai (KTS), the Company operates a facility in Shanghai,
China, which began operations in 1999 and is used to support customers in that
area as well as for export.
Foreign sales from worldwide operations, including domestic exports, were $65.3
million in 2000 compared to $75.4 million and $70.9 million in 1999 and 1998,
respectively. Foreign sales were 39.7% of net sales in 2000 compared to 42.3%
and 41.0% in 1999 and 1998, respectively. Sales from KTEL represented 7.1 % of
consolidated sales to external customers in 2000, compared to 9.9% in 1999 and
10.8% in 1998, respectively. Sales from KTS represented 0.7% of total sales in
2000 (See Note 12 to the July 1, 2000 Consolidated Financial Statements).
CAPITAL RESOURCES AND LIQUIDITY
The Company generated cash flows from operating activities of $3.3 million, $4.2
million, and $7.8 million in 2000, 1999, and 1998, respectively. Capital
expenditures were $1.4 million, $2.3 million, and $7.1 million in 2000, 1999,
and 1998, respectively. The Company's cash position decreased by $0.9 million
in 2000, compared to an increase of $1.6 million and a decrease of $2.5 million
in 1999 and 1998, respectively. Cash generated from operating and financing
activities allowed the payment of $2.8 million in long-term debt and the
purchase of $1.4 million in property and equipment. The Company had working
capital of $37.1 million and $41.8 million at July 1, 2000 and July 3, 1999.
The decrease in working capital was due primarily to increased accounts payable.
Accounts payable was $24.3 million at July 1, 2000, an increase of $5.6 million
from 1999. The increase in accounts payable was primarily due to increased
liabilities for shipments in-transit at period end.
On December 31, 1996, the Company entered into a secured credit agreement with
General Electric Capital Corporation (GECC). The credit facility provided by
this agreement, originally contained 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 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 credit agreement
restricts investments, disposition of assets, and payment of dividends. At July
1, 2000 and July 3, 1999, the Company was in compliance with all debt covenants.
The Company anticipates that capital expenditures of approximately $3.0 million
will be required during the next fiscal year. Capital expenditures are expected
to be financed through cash flow from operating activities.
Real estate held for sale is carried at the lower of cost or net realizable
value. In September of 1997, the Company entered into a five-year operating
lease with a local firm for property owned by the Company which is located in
Cheney, Washington. Monthly lease payments received by the Company are $21,000,
and the proceeds are used to pay down the Company's term debt in accordance with
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. In 2000 the Company collected an additional
$1.0 million of the amount due. The remaining amount is included in other
current assets. Under the terms of the sale agreement, the Company had rent
free possession of the premises until March 29, 2000. During March of 2000, the
Company's Irish operations were moved from the premises to the Finnabair
Industrial Park in Dundalk. In fiscal year 1999, 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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was adopted by the Company on July 2, 2000. 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. The impact
of adoption of SFAS133 will not be material to the Company's financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements", which summarized the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The adoption of SAB No. 101 is not
expected to have a material impact on the Company's operations or financial
position.
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 6.68% at the end of June
2000. The rate fluctuated between 5.18% and 6.68% during fiscal year 2000. At
July 1, 2000, the effective LIBOR rates were 6.65% and 6.67% for the revolving
debt and 6.68% for the term debt. The difference among these three 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 2001 through 2003 are estimated based
on implied forward rates in the yield curve as of July 1, 2000. These forward
rates have been increased by 3% for the term debt and 2.75% for the revolving
debt based on debt service coverage of less than 1.4 (see Note 5 to the July 1,
2000 Consolidated Financial Statements). If the debt service coverage ratio
were to be greater than 1.4, the weighted average interest rates would decrease
by .25% for each year. All items described in the table are non-trading and
assume a debt coverage ratio of less than 1.4.
<TABLE>
<CAPTION>
Fiscal Years Fair
Value
(In thousands) 2001 2002 2003 Total July 1, 2000
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate risk:
Long-term debt-
floating rate:
Secured term debt $2,000 $1,307 $3,307 $3,307
Average interest rate 9.08% 9.38% 9.31%
Secured revolving $15,735 $15,735 $15,735
debt
Average interest rate 8.83% 9.13% 9.06%
---------------------------------------------------------------------------
</TABLE>
The weighted average variable interest rates for the secured revolving debt were
7.30% and 6.81% for fiscal years 2000 and 1999, respectively. The weighted
average variable interest rates for the secured term debt were 7.55% and 6.96%
for fiscal years 2000 and 1999, respectively. At July 1, 2000, the Company had
two LIBOR contracts in effect covering its revolving debt. The sum of these
contracts was $15.0 million. An index interest rate of prime less .25% applied
to the revolving debt in excess of LIBOR contracts. The weighted average
variable interest rates for the index revolving debt for fiscal years 2000 and
1999 were 8.36% and 7.75%, 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 1, 2000 and July 3, 1999,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended July 1, 2000, July 3, 1999, and June 27, 1998.
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 auditing standards generally accepted
in the United States of America. 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 1, 2000 and July 3, 1999, and the results of their
operations and their cash flows for the years ended July 1, 2000, July 3, 1999,
and June 27, 1998, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
August 25, 2000
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands) July 1, 2000 July 3,1999
--------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,013 $ 1,866
Trade receivables, less allowance for
doubtful accounts of $855 and $542 34,008 31,285
Inventories 22,720 24,896
Real estate held for sale 1,843 1,988
Deferred income tax asset, net 889 1,033
Customer tooling 1,748 2,449
Other 6,565 6,720
--------------------------------------------------------------------------------------------
Total current assets 68,786 70,237
--------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT-AT COST 103,175 102,681
Less accumulated depreciation 81,825 78,159
--------------------------------------------------------------------------------------------
Total property, plant and equipment 21,350 24,522
--------------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred income tax asset, net 3,627 3,604
Other (net of accumulated amortization of 1,031 1,436
$964 and $540)
Goodwill (net of accumulated amortization 1,021 1,148
of $767 and $639)
--------------------------------------------------------------------------------------------
$ 95,815 $100,947
--------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 2,105 $ 2,105
Accounts payable 24,315 18,720
Accrued compensation and vacation 2,303 3,269
Accrued taxes other than income taxes 1,146 1,099
Interest payable 54 27
Other 1,735 3,227
--------------------------------------------------------------------------------------------
Total current liabilities 31,658 28,447
--------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term obligations, less current portion 17,555 20,596
--------------------------------------------------------------------------------------------
Total long-term liabilities 17,555 20,596
--------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 6, AND 10)
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 25,000 shares;
issued and outstanding 9,641 and 9,631 38,304 38,273
shares, respectively
Retained earnings 8,053 13,386
Accumulated other comprehensive income 245 245
--------------------------------------------------------------------------------------------
Total shareholders' equity 46,602 51,904
--------------------------------------------------------------------------------------------
$ 95,815 $100,947
--------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
(In thousands, except per share amounts) July 1, 2000 July 3, 1999 June 27, 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $164,353 $178,304 $170,050
Cost of sales 149,895 150,284 147,541
----------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 14,458 28,020 22,509
OPERATING EXPENSES:
Research, development and engineering 2,846 4,879 4,579
Selling 6,333 9,341 8,291
General and administrative 8,739 8,648 8,465
----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,460) 5,152 1,174
INTEREST EXPENSE 1,987 1,887 2,108
OTHER INCOME, NET (278) (1,480) (204)
----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (5,169) 4,745 (730)
INCOME TAX PROVISION 164 1,701 156
----------------------------------------------------------------------------------------
NET INCOME (LOSS) $(5,333) $3,044 $(886)
----------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Earnings (loss) per common share
Earnings per common share _ basic ($0.55) $0.32 ($0.09)
- diluted $0.31
Weighted average shares outstanding 9,637 9,631 9,626
Diluted shares outstanding 9,786
----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive
(In thousands) Shares Amount Earnings Income Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 translation (179) (179)
Total comprehensive income (1,065)
Exercise of stock options 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
----------------------------------------------------------------------------------------
Comprehensive income:
Net loss _ 2000 (5,333) (5,333)
Exercise of stock options 10 31 31
----------------------------------------------------------------------------------------
BALANCES, JULY 1, 2000 9,641 $38,304 $8,053 $245 $46,602
----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
(In thousands) July 1, 2000 July 3, 1999 June 27, 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,333) $3,044 $(886)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 6,330 6,882 9,577
Provision for obsolete inventory (359) 1,674 1,850
Provision for doubtful receivables 562 334 75
Provision for warranty 372 1,269 1,477
Provision for litigation - (900) -
Gain on disposal of assets (43) (1,263) (244)
Deferred income tax provision 121 836 (578)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade receivables (3,286) (8,516) 3,811
Inventories 2,535 (1,847) (4,142)
Customer tooling 701 2,406 (1,839)
Other assets (1,182) (1,951) (1,083)
Accounts payable 5,595 3,195 1,206
Accrued compensation and accrued vacation (966) 519 (283)
Other liabilities (1,791) (1,457) (1,127)
----------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 3,256 4,225 7,814
----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,439) (2,288) (7,096)
Proceeds from sale of property and equipment 92 1,043 80
----------------------------------------------------------------------------------------
CASH USED BY INVESTING ACTIVITIES (1,347) (1,245) (7,016)
----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - - (44)
Proceeds from issuance of common stock 31 - 108
Proceeds from long-term obligations - - 3,047
Payments on long-term obligations (2,793) (1,402) (6,433)
----------------------------------------------------------------------------------------
CASH USED BY FINANCING ACTIVITIES (2,762) (1,402) (3,322)
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (853) 1,578 (2,524)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,866 288 2,812
CASH AND CASH EQUIVALENTS, END OF YEAR $1,013 $1,866 $288
----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Key Tronic Corporation and subsidiaries (the Company) is engaged in contract
design and manufacturing (CDM) services for original equipment manufacturers
(OEMs), and also manufactures keyboards and other input devices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its wholly owned
subsidiaries in Ireland, Mexico, and China. Intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 primarily the allowance for
doubtful receivables, the provision for obsolete and non-saleable inventories,
the valuation allowances on deferred tax assets, and the provision 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 provision to
adjust inventory to market value for obsolete and non-saleable inventories was
approximately $2,349,000 and $3,066,000 at July 1, 2000 and July 3, 1999,
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 1, 2000, it was determined that the Company's assets were
appropriately valued. No assets were written down during the fiscal year ended
July 1, 2000.
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 1, 2000 and July 3, 1999, were $454,000 and
$724,000, respectively.
NET SALES
Sales are generally 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 unreimbursed costs of
contract design and manufacturing (CDM) services as well as design and
engineering costs associated with the production of custom keyboards. Such
costs are charged to expense as incurred.
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 comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reflected in the balance sheets at July 1, 2000 and July 3,
1999, 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 $19.0 million and $22.0 million, respectively, as of July 1, 2000 and July 3,
1999, which approximates the carrying values of $19,041,557 as of July 1, 2000
and $22,082,485 as of July 3, 1999.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees", and "SFAS No. 123 "Accounting for Stock-Based Compensation". Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models. These models 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, 73 months in 2000, 72
months in 1999, and 69 months in 1998, respectively; stock volatility, 64.34% in
2000, 57.2% in 1999, and 58.36% in 1998, respectively; risk free interest rates,
6.16% in 2000, 6.03% in 1999, and 5.81% in 1998, 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 2000, 1999, and 1998 awards had been amortized to
expense over the vesting period of the awards, pro forma net income (loss) would
have been ($5,747,000) ($.60 loss per share) in 2000, $2,122,000 ($.22 income
per share) in 1999, and ($1,764,000) ($.19 loss per share) in 1998. The
weighted average fair values of options granted during fiscal years 2000, 1999,
and 1998 were $4.38, $2.88, and $2.34 per share, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended, was adopted by the Company on July 2, 2000. SFAS No. 133 and the
related amendments 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. The impact of adoption will not be material to
the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements", which summarized the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The adoption of SAB No. 101 did not have a
material impact on the Company's operations or financial position.
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 2000, 1999, and 1998 ended on
July 1, 2000, July 3, 1999, and June 27, 1998, respectively. Fiscal year 2001
will end on June 30, 2001.
2. INVENTORIES
July 1, 2000 July 3, 1999
-------------------------------
Components of inventories were as follows: (in thousands)
Finished goods $8,378 $13,008
Work-in-process 2,512 2,134
Raw materials 14,179 12,820
Reserve for obsolescence (2,349) (3,066)
-------------------------------------------
$22,720 $24,896
===========================================
3. PROPERTY, PLANT AND EQUIPMENT
Life
(in years) July 1, 2000 July 3, 1999
----------------------------------------------
(in thousands)
Land $ 2,486 $ 2,486
Buildings and improvements 3 to 30 16,944 16,795
Equipment 1 to 10 70,473 69,821
Furniture and fixtures 3 to 5 13,272 13,579
----------------------------------------------
$103,175 $102,681
==============================================
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 $339,000 and $439,000 in 2000 and
1999, respectively, and are included in other noncurrent assets.
(b) Hiller Investment Company (HIC), beneficially owned by Stanley Hiller,
Jr., who resigned as a member of the Board of Directors effective March 1, 2000,
incurred various overhead expenses, consulting services and travel expenses on
behalf of the Company. The cost of these services, which were charged against
general and administrative expense, amounted to approximately $164,000 in 1998.
There were no services provided in either fiscal year 2000 or 1999, and no
amounts were owed to HIC as of July 1, 2000 and July 3, 1999.
(c) Stanley Hiller Jr. has a 66.73% equity interest in Hiller Key Tronic
Partners, L.P. (HKT Partners), a Washington limited partnership. Current
directors and officers collectively have a 5.73% equity interest in HKT
Partners. HKT Partners received 1,070,396 shares of restricted common stock in
1997 pursuant to a restricted stock agreement. The restrictions lapse at a rate
of one third each year over the course of three years beginning in March of
1998. During fiscal years 2000 and 1999, distributions in kind of 356,798
shares and 356,798 shares, respectively, were completed among the partners. As
of July 1, 2000, HKT Partners continues to hold 356,798 shares of restricted
common stock of the Company (see Note 9).
5. LONG-TERM OBLIGATIONS
The Company maintains secured financing with General Electric Capital
Corporation (GECC). This secured financing agreement originally contained 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 1, 2000 and July 3, 1999, the Company was in compliance with
all debt covenants.
The term note is payable in quarterly installments of principal, each in the
amount of $500,000 which began in March 1998 and matures 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 to an outside party.
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. Subsequent to July 1, 2000, these interest rates were increased to
two and three-quarters (2.75%) and three percent (3.00%), respectively. At July
1, 2000, the applicable LIBOR rate was 6.68%, and the applicable interest rate
was 8.43%.
The revolving loan with GECC is renewable and covers an initial period of five
years expiring on December 31, 2001. If debt service coverage is greater than
1.4, the applicable interest rate is one and one-half percent (1.50%) in excess
of the applicable LIBOR rate. If debt service coverage is less than or equal to
1.4, the applicable interest rate is one and three-quarters percent (1.75%) in
excess of the applicable LIBOR rate. Subsequent to July 1, 2000, these interest
rates were increased to two and one-half (2.50%) and two and three-quarters
(2.75%), respectively. At July 1, 2000, the Company had two LIBOR contracts in
place to cover its revolving debt. The applicable LIBOR rates were 6.65% and
6.67%, and the applicable interest rates were 8.15% and 8.17%. At July 1, 2000,
approximately $10.1 million was 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 1, 2000 July 3, 1999
-------------------------------------------
(in thousands)
Note payable $ 3,307 $ 5,559
Revolving loan 15,735 16,524
Deferred compensation obligation 618 618
----------------------------------------------------------------
Total long-term obligations 19,660 22,701
Less current portion (2,105) (2,105)
----------------------------------------------------------------
$17,555 $20,596
================================================================
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 $175,000 in 2000, $181,000 in 1999
and $165,000 in 1998 was charged against general and administrative expenses.
Principal maturities of long-term obligations at July 1, 2000 are:
Fiscal Years Ending (in thousands)
-------------------------------------------
2001 $ 2,105
2002 17,146
2003 105
2004 105
2005 105
Future Years 94
-------------------------------------------
Total $19,660
===========================================
6. LEASES
The Company has operating leases for certain equipment and production facilities
which expire over periods from one to five years. Future minimum payments under
non-cancelable operating leases with initial or remaining terms of one year or
more at July 1, 2000, are summarized as follows:
Fiscal Years Ending (in thousands)
-------------------------------------------
2001 $2,788
2002 1,107
2003 56
2004 5
2005 0
-------------------------------------------
Total minimum lease payments $3,956
===========================================
Rental expenses under operating leases were $2,908,000, $2,313,000, and
$1,797,000 in 2000, 1999, and 1998, respectively.
7. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ - $ (94) $ 244
Foreign 43 513 449
State - 40 41
----------------------------------
43 459 734
Deferred income taxes:
Federal (2,085) 879 (517)
Foreign - - (16)
State 64 (43) (45)
----------------------------------
(2,021) 836 (578)
Change in valuation allowance 2,142 406 -
----------------------------------
Total income taxes $ 164 $1,701 $ 156
----------------------------------
</TABLE>
The Company's effective tax rate differs from the federal tax rate as follows:
<TABLE>
<CAPTION>
Year Ended
July 1, 2000 July 3, 1999 June 27, 1998
-------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income tax provision (benefit)
at statutory rates $(1,757) $1,613 $(248)
Effect of foreign income (loss)
at statutory rates 160 (815) (65)
Permanent differences:
Life insurance premiums 37 30 33
Other (461) (46) 3
Foreign tax provision (benefit) at
foreign statutory rate 43 513 481
Change in valuation allowance 2,142 406 -
Adjustment for effect of beneficial tax rate
on foreign manufacturing (income) loss - - (48)
-------------------------------------------------
Income tax provision $164 $1,701 $156
-------------------------------------------------
</TABLE>
In fiscal year 2000, foreign losses increased the Company's effective income tax
rate, because such losses are not deductible for U.S. income tax purposes. In
1999 and 1998, foreign income decreased the Company's effective income tax rate,
because such income is taxed at a lower rate than U.S. income. The domestic and
foreign components of income (loss) before income taxes were:
<TABLE>
<CAPTION>
Year Ended
July 1, 2000 July 3, 1999 June 27, 1998
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Domestic $(4,698) $3,551 $(3,136)
Foreign (471) 1,194 2,406
-------------------------------------------------
Income (loss) before income taxes $(5,169) $4,745 $ (730)
==========================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
(in thousands)
---------------------------------
<S> <C> <C>
Allowance for doubtful accounts $270 $132
Inventory 1,296 1,450
Vacation accrual 337 401
Self insurance accrual 104 118
Warranty accrual 154 246
State deferred asset 186 250
Other 357 444
---------------------------------------------------------------------------------
Current deferred income tax assets 2,704 3,041
Current portion of valuation allowance (1,815) (2,008)
---------------------------------------------------------------------------------
Current deferred income tax assets net
of valuation allowance 889 1,033
=================================================================================
Deferred compensation 210 210
Depreciation and amortization 603 627
Net operating loss carryforwards 11,713 9,094
Tax credit carryforwards 680 680
Other (236) -
---------------------------------------------------------------------------------
Noncurrent deferred income tax assets 12,970 10,611
Valuation allowance net of current portion (9,343) (7,007)
---------------------------------------------------------------------------------
Noncurrent deferred income tax assets net
of valuation allowance $3,627 $3,604
=================================================================================
</TABLE>
At July 1, 2000, the Company had tax loss carryforwards of approximately $34.4
million, which expire in varying amounts in the years 2006 through 2020.
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
allow the realization of the net deferred tax assets within the next five to
seven fiscal years.
8. EARNINGS PER SHARE
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 for the
years ended July 1, 2000, July 3, 1999, and June 27, 1998. 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 1, 2000 9,636,506 Antidilutive 9,636,506
July 3, 1999 9,630,830 155,086 9,785,916
June 27, 1998 9,625,775 Antidilutive 9,625,775
The adjustment for potential common shares of 276,280 and 129,230 as of July 1,
2000 and 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 1, 2000, July 3, 1999, and
June 27, 1998 were 1,425,760, 1,054,376, and 1,537,813 respectively.
9. SHAREHOLDERS' EQUITY
The Company has executive stock option plans for certain key employees. Options
under these plans vest over one 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 1, 2000, 2,795,000 shares have been reserved for issuance and 1,903,640
options were outstanding of which 1,297,140 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 2000, 1999 or 1998
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 1, 2000, 300,000 shares have been reserved for issuance and 142,500
options were outstanding of which 78,750 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).
<TABLE>
<CAPTION>
Following is a summary of employee plan activity:
Number Weighted Average
Price Range of Options Exercise Price
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, June, 28, 1997 $3.56 to $16.25 1,253,559 $ 9.93
Granted during 1998 $2.75 to $ 5.00 763,500 $ 3.83
Expired or canceled $5.63 to $16.25 (404,366) $12.84
Outstanding, June 27, 1998 $2.75 to $16.25 1,612,693 $ 6.31
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
Granted during 2000 $2.81 to $ 6.50 583,500 $ 3.70
Expired or canceled $2.75 to $16.25 (217,876) $ 8.00
Options exercised $2.75 to $ 3.88 (10,500) $ 3.02
Outstanding, July 1, 2000 $2.75 to $16.25 2,046,140 $ 4.98
</TABLE>
Additional information regarding options outstanding as of July 1, 2000, is as
follows:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
-----------------------------------------------------------------------------------------
Weighted Avg.
Range of Remaining Weighted Weighted
Exercise Number Contractual Avg. Exercise Number Avg. Exercise
Prices Outstanding Life (yrs.) Price Exercisable Price
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.75-$ 4.13 920,380 8.6 $ 2.80 488,630 $ 2.77
$ 4.14-$ 6.20 706,960 6.6 $ 5.11 556,960 $ 5.22
$ 6.21-$ 9.32 299,460 6.0 $ 7.60 210,960 $ 8.07
$ 9.33-$13.99 40,340 4.1 $10.88 40,340 $10.88
$14.00-$16.25 79,000 5.1 $16.25 79,000 $16.25
------------------------------------------------------------------------------------------
$ 2.75-$16.25 2,046,140 7.3 $ 4.98 1,375,890 $ 5.59
</TABLE>
Of the 2,046,140 options outstanding as of July 1, 2000, 1,375,890 were
exercisable, 1,691,016 options outstanding as of July 3, 1999, 1,090,766 were
exercisable, and of the 1,612,693 options outstanding as of June 27, 1998,
673,843 were exercisable.
The Company had one remaining stock warrant outstanding at July 1, 2000. 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
expired on July 30, 2000.
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 $321,724, $397,538, and $416,683, in 2000, 1999, and 1998, respectively.
The Company has an Employee Stock Ownership Plan. No contributions were made to
the plan in 2000, 1999, or 1998. The investment in the Company's stock at July
1, 2000, by all employee trusts amounted to 381,344 shares.
In fiscal year 2000, the Company's Board of Directors approved an additional
employee stock option plan which increased the number of shares of common stock
available for issuance to employees by 425,000 shares.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company currently has fifteen lawsuits by computer keyboard users, which are
in state or federal courts in New York. 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 123 suits have been dismissed in
California, Connecticut, Florida, Illinois, Kansas, Kentucky, Maryland,
Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas. One of
the 123 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 $555,000 at July 1, 2000.
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 outsourcing needs and 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 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, NET
<TABLE>
<CAPTION>
Other income, net consists of:
Year Ended
July 1, July 3, June 27,
2000 1999 1998
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gain on sale of real estate - Ireland $ - $ 775 $ -
Other 278 705 204
---------------------------------------------------------------------------
Total $278 $1,480 $204
---------------------------------------------------------------------------
</TABLE>
The Company's subsidiary in Dundalk, Ireland sold its building in Dundalk at the
end of fiscal year 1999 for approximately $2.3 million and received
approximately $1 million at closing. In May of 2000, the Company received $1.0
million payment on this sale. Approximately $300,000 remains in an escrow
account in Ireland pending final closing adjustments.
12. ENTERPRISE-WIDE DISCLOSURES
Management organizes its business around CDM services and keyboards and based on
geographic area. 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 revenues for the years ended July 1, 2000, July 3, 1999, and June 27,
1998, CDM sales were $91.2 million, $37.1 million, and $18.4 million,
respectively. Keyboard sales for the years ended July 1, 2000, July 3, 1999,
and June 27, 1998 were $70.5 million, $134.7 million, and $145.3 million,
respectively. The remainder of revenues for all years presented were from sales
of miscellaneous other products and services.
Information concerning geographic areas for the years ended July 1, 2000, July
3, 1999 and June 27, 1998 is summarized in the following table. Revenues
provided below are based on the shipping destination.
<TABLE>
<CAPTION>
(in thousands) Domestic International Total
-------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Net sales $ 99,077 $65,276 $164,353
Long-lived assets $ 20,066 $ 1,284 $ 21,350
-------------------------------------------------------------------------
1999
Net sales $102,872 $75,432 $178,304
Long-lived assets $ 23,433 $ 1,089 $ 24,522
-------------------------------------------------------------------------
1998
Net sales $ 99,123 $70,927 $170,050
Long-lived assets $ 28,364 $ 1,566 $ 29,930
-------------------------------------------------------------------------
</TABLE>
For the year ended July 1, 2000, 43% of the Company's domestic exports were sold
to customers in Europe, 36% were sold to customers in the Far East, and the
remaining 21% were spread among customers in Mexico, South America, and Canada.
For the year ended July 3, 1999, 58% of the Company's domestic exports were
sold to customers in Europe, 30% were sold to customers in the Far East, and the
remaining 12% were spread among customers in Mexico, South America, and Canada.
For the year ended June 28, 1998, 68% of the Company's domestic exports were
sold to customers in Europe, 19% were sold to customers in the Far East, and the
remaining 13% were spread among customers in Mexico, South America, and Canada.
SIGNIFICANT CUSTOMERS
One customer accounted for approximately 38%, 24%, and 31% of net sales for the
years ended July 1, 2000, July 3, 1999, and June 27, 1998, respectively. This
customer accounted for approximately 45% and 23% of trade receivables at July 1,
2000 and July 3, 1999, respectively. Another customer accounted for
approximately 13% of net sales in fiscal year 2000. This customer accounted for
9% of trade receivables in 2000. Another customer accounted for approximately
9%, 11% and 13% of net sales in 2000, 1999, and 1998, respectively. This
customer accounted for approximately 4% and 6% of trade receivables at July 1,
2000 and July 3, 1999, respectively. A fourth customer accounted for
approximately 8%, 13%, and 7% of sales in fiscal years 2000, 1999 and 1998,
respectively. This customer accounted for approximately .9% and 5% of trade
receivables in 2000 and 1999, respectively. No other customers accounted for
more than 10% of net sales for years ended July 1, 2000, July 3, 1999, and June
27, 1998.
13. SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION
<TABLE>
<CAPTION>
Year Ended
July 1, 2000 July 3, 1999 June 27, 1998
--------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest payments $ 1,960 $ 1,892 $ 2,142
Income tax payments $ 395 $ 412 $ 104
Note received for sale of Ireland
property (see Note 11) $ - $ 1,479 $ -
</TABLE>
14. RESTRUCTURING CHARGES
As of July 1, 2000, the Company had no remaining reserve for restructuring
charges in Ireland. In fiscal year 2000, the Company repaid $177,000 to the
Irish Development Authority (IDA) for the repayment of grants, and the remaining
amount of $45,000 was paid for severance. 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
2000 1999
-----------------------------------------------------------------
Balance at beginning of year $222,000 $457,000
Amounts paid 222,000 235,000
-----------------------------------------------------------------
Balance at end of year $ - $222,000
=================================================================
15. QUARTERLY FINANCIAL DATA (Unaudited)
Year Ended July 1, 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
(in thousands, except per share amounts)
Net sales $41,775 $41,285 $34,342 $46,951
Gross profit $ 5,968 $ 3,339 $ 563 $ 4,588
Income (loss) before income taxes $ 285 $(1,819) $(3,754) $ 119
Net income (loss) $ 210 $(1,833) $(3,729) $ 19
Earnings (loss) per common share
basic and diluted $ .02 $ (.19) $ (.39) $ 0
Weighted average shares 9,633 9,635 9,637 9,641
outstanding 9,935 NA NA 9,667
Diluted shares outstanding
Common stock price range 1
High $ 7.250 $ 4.750 $ 4.688 $ 3.625
Low $ 4.125 $ 3.500 $ 3.125 $ 2.500
Year Ended July 3, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
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 (loss) per common $ .05 $ .09 $ .10 $ .07
share basic and diluted
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 $1.750 $ 2.375 $ 3.188 $ 3.625
-----------------
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 1, 2000 and July 3, 1999 there were approximately 1,442 and 1,482
common shareholders of record, respectively.
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
DALE F. PILZ - Director
Mr. Pilz, age 74, has been a director of the Company since April 1992. On March
1, 2000, Mr. Pilz was elected Chairman of the Board. 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.
WENDELL J. SATRE - Director
Mr. Satre, age 82, 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 Output Technology Corporation and
The Coeur d'Alenes Company.
YACOV A. SHAMASH - Director
Dr. Shamash, age 50, 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.
CLARENCE W. SPANGLE - Director
Mr. Spangle, age 75, 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 67, 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.
PATRICK SWEENEY - Director
Mr. Sweeney, age 65, has been a director of the Company since July 27, 2000.
Mr. Sweeney was President and CEO of Hadco Corporation from 1991 through 1995
and formerly served as Hadco's Vice President/Chief Financial Officer and Vice
President of Operations. Prior to that, Mr. Sweeney was the Vice President of
International Manufacturing at Wang - USA from 1981 through 1986 and also served
as Managing Director of Ireland for Wang and as Plant Manager of its Galway
division and its Clonmel division. Mr. Sweeney also serves on the Board of
Directors of Photo Machining Inc., Manufacturers' Services Ltd. Advisory Board,
Aimware, Pentus, Piercom, Asic Alliance, Raidtec and Info.Mosaic.
JACK W. OEHLKE - Director, President and Chief Executive Officer
Mr. Oehlke, age 54, 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 48, has been Executive Vice President of Administration, CFO,
and Treasurer 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 41, 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.
EFREN R. PEREZ - Vice President of S.W. Operations
Mr. Perez, age 60, has served as Vice President of S.W. Operations since July
1997. Previously he was the Managing Director of S.W. Operations from July 1996
to July 1997 and Director of S.W. Operations from July 1995 to June 1996.
Following the Company's acquisition of the Honeywell, Inc. Keyboard Division,
Mr. Perez served as Plant Manager in Juarez from July 1993 to July 1995. He
served as Plant Manager in Juarez for the Keyboard Division of Honeywell, Inc.
from February 1989 to July 1993. Mr. Perez is a graduate of the University Of
Mexico with a B.S. in Physics.
MICHAEL D. CHARD - Vice President of Materials
Mr. Chard, age 42, has been Vice President of Materials of the Company since
July 28, 2000. From February 1999 to July 28, 2000, he held various management
positions with the Company in planning, quality assurance, and materials. From
January 1997 to January 1999, he was Vice President of Product Delivery at Wang
Global and its predecessor Olivetti North America. From 1983 to 1996, he held
various management positions in finance, marketing, and operations at ISC
Systems, the predecessor to Olivetti North America. He holds a BA Degree in
Business and Accounting from Washington State University and is a Certified
Public Accountant.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
Incorporated by reference to Key Tronic Corporation's 2000 Proxy Statement to
Shareholders.
ITEMS 11, 12 AND 13: EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSAC-
TIONS.
Information appearing under the captions "Executive Compensation", "Beneficial
Ownership of Securities", "Certain Relationships and Transactions" and
"Compensation Committee Interlocks and Insider Participation" in the Company's
2000 Proxy Statement is incorporated herein by this reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULE
Page in
Form 10-K
FINANCIAL STATEMENTS
Independent Auditors' Report 13
Consolidated Balance Sheets, as of July 1, 2000 and July 3, 1999 14
Consolidated Statements of Operations for
the years ended July 1, 2000, July 3, 1999, and June 27, 1998 15
Consolidated Statements of Shareholders' Equity
for the years ended July 1, 2000, July 3, 1999, and June 27, 1998 15
Consolidated Statements of Cash Flows for the
years ended July1, 2000, July 3, 1999, and June 27, 1998 16
Notes to Consolidated Financial Statements 17-29
SCHEDULE
Independent Auditors' Consent and Report on Financial Statement Schedule 34
II. Consolidated Valuation and Qualifying Accounts 35
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.
Exhibit No.
(3) (a) Articles of Incorporation 3.1
(b) By-Laws, as amended (iii)
(4) Certain long-term debt is described in Note 5 to the
Consolidated Financial Statements of the Company. The
Company agrees to furnish to the Commission, upon request,
copies of any instruments defining rights of holders of
long-term debt described in Note 5. N/A
(10) Material Contracts
(a) The Key Tronic Corporation Variable Investment Plan. (iii)
(b) Key Employee Stock Option Plan, as amended. 10.3
(c) Executive Stock Option Plan. (iii)
(d) Stock Bonus Plan (PAYSOP). (iii)
(e) Directors and Officers Liability and Company
Reimbursement Policies. 10.5
(f) Leases with Spokane Industrial Park, Inc. 10.7
(g) Amended and Restated Employment Agreement with Lewis
G. Zirkle. (iii)
(h) Agreement Regarding Split Dollar Life Insurance Policies,
as amended. (iv)
(i) Executive SAR Stock Option Plan of Key Tronic Corporation (v)
(j) Key Tronic Corporation 1990 Stock Option Plan for
Non-Employee Directors (v)
(k) Employee Stock Ownership Plan (vi)
(l) Registration Rights Agreement with Hiller
Key Tronic Partners (vii)
(m) Officer Severance Agreements (vii)
(n) Purchase agreement with Honeywell, Inc. (viii)
(o) Officer Employment Agreement (ix)
(p) Executive Stock Option Plan (x)
(q) Secured Financing Agreement With The CIT Business Group, Inc. (xi)
(r) Secured Financing Agreement With General Electric Capital
Corporation (xii)
(s) Executive Stock Option Plan 2000 (xiii)
(t) Employment Contract (xiv)
(13) 2000 Annual Report to Shareholders (to the extent set forth in
Parts I, II, and IV (a) of this report).
(i) Previous filing on Form S-1 is incorporated by reference,
exhibit number indicated
(ii) Incorporated by reference to report on Form 10-K for the year ended
06/30/87
(iii) Incorporated by reference to report on Form 10-K for the year ended
06/30/86
(iv) Incorporated by reference to report on Form 10-K for the year ended
06/30/85
(v) Incorporated by reference, Key Tronic Corporation 1990 Proxy
Statement, pages C-1 - D3
(vi) Incorporated by reference to report on Form 10-K for the year ended
06/30/91
(vii) Incorporated by reference to report on Form 10-K for the year ended
07/04/92
(viii) Incorporated by reference to report on Form 8-K filed August 12, 1993.
(ix) Incorporated by reference, Key Tronic Corporation 1996 Proxy Statement,
pages 10-11
(x) Incorporated by reference, Key Tronic Corporation 1995 Proxy Statement,
pages 19-22
(xi) Incorporated by reference to report on Form 8-K filed October 24, 1994.
(xii) Incorporated by reference to report on Form 8-K filed January 14, 1997.
(21) Subsidiaries of Registrant
1 KT Services, Inc. 2 KT FSC
100% owned subsidiary 100% owned subsidiary,
Incorporated in the State of a foreign sales 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 the Cayman Islands
Incorporated in Ireland
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
100% owned subsidiary (Shanghai) Co. LTD
Incorporated in Singapore 100% owned subsidiary
Incorporated in Republic of China
9 Key Tronic Reynosa, S.A. de CV
100% owned subsidiary
Incorporated in Mexico
(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 25, 2000 appearing in this Annual
Report on Form 10-K of Key Tronic Corporation and subsidiaries (the Company) for
the year ended July 1, 2000.
We have audited the consolidated financial statements of the Company as of July
1, 2000 and July 3, 1999, and for each of the three years in the period ended
July 1, 2000 and have issued our report thereon dated August 25, 2000; 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 12, 2000
PART IV
<TABLE>
<CAPTION>
SCHEDULE II
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 1, 2000
JULY 3, 1999 AND JUNE 27, 1998
2000 1999 1998
--------------------------------------
<S> <C> <C> <C>
Allowance for Obsolete Inventory
Balance at beginning of year $3,065,901 $2,739,390 $2,937,609
Provision charged to income (358,922) 1,673,574 1,850,199
Dispositions (358,139) (1,347,063) (2,048,418)
--------------------------------------
Balance at end of year $2,348,840 $3,065,901 $2,739,390
Allowance for Doubtful Accounts
-------------------------------
Balance at beginning of year $ 542,430 $ 885,042 $ 905,129
Provision charged to income 562,000 333,873 75
Write-offs and reinstatements (249,096) (676,485) (20,162)
---------------------------------------
Balance at end of year $ 855,334 $ 542,430 $ 885,042
Reserve for Litigation
----------------------
Balance at beginning of year $ - $ 900,000 $ 900,000
Cost incurred-net of recoveries - (900,000) -
---------------------------------------
Balance at end of year $ - $ 900,000 $ -
Accrued Warranty Costs
----------------------
Balance at beginning of year $ 723,884 $ 664,379 $ 576,201
Provision charged to income 371,861 1,269,096 1,476,796
Costs incurred (641,986) (1,209,591) (1,388,618)
---------------------------------------
Balance at end of year $ 453,759 $ 723,884 $ 664,379
</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 13, 2000
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 13, 2000
Jack W. Oehlke Date
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter September 13, 2000
Ronald F. Klawitter Date
(Principal Financial Officer)
/s/ Dale F. Pilz September 13, 2000
Dale F. Pilz Date
(Director)
/s/ Wendell J. Satre September 13, 2000
Wendell J. Satre Date
(Director)
/s/ Yacov A. Shamash September 13, 2000
Yacov A. Shamash Date
(Director)
/s/ Clarence Spangle September 13, 2000
Clarence Spangle Date
(Director)
/s/ Patrick Sweeney September 13, 2000
Patrick Sweeney Date
(Director)
/s/ William E. Terry September 13, 2000
William E. Terry Date
(Director)
