SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 1, 2000 Commission File Number
Number 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
Identification No.)
----------------------
North 4424 Sullivan
Spokane, Washington 99216
(509) 928-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
At April 20, 2000, 9,641,330 shares of Common Stock, no par value (the only
class of common stock), were outstanding.
KEY TRONIC CORPORATION
Index
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Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets _ April 1, 2000
(Unaudited) and July 3, 1999 3-4
Consolidated Statements of Income (Unaudited)
Third Quarters Ended April 1, 2000 and April 3, 1999 5
Consolidated Statements of Income (Unaudited)
Three Quarters Ended April 1, 2000 and April 3, 1999 6
Consolidated Statements of Cash Flows (Unaudited)
Three Quarters Ended April 1, 2000 and April 3, 1999 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Events 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 1, 2000 July 3 , 1999
- -------------------------------------------------------------------------------------
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 2,184 $ 1,866
Trade receivables, less allowance for doubtful
accounts of $553 and $542 29,477 31,285
Inventories 25,427 24,896
Real estate held for sale 1,879 1,988
Deferred income tax asset - current, net 765 1,033
Customer tooling 962 2,449
Other 6497 6,720
------- -------
Total current assets 67,191 70,237
------- -------
Property, plant and equipment - at cost 103,506 102,681
Less accumulated depreciation 80,925 78,159
------- -------
Total property, plant and equipment 22,581 24,522
------- -------
Other assets:
Deferred income tax asset, net 3,751 3,604
Other, (net of accumulated amortization
of $317 and $540) 1,256 1,436
Goodwill (net of accumulated amortization
of $703 and $639) 1,053 1,148
------- -------
$95,832 $100,947
======= =======
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued, in thousands)
April 1, 2000 July 3, 1999
- ------------------------------------------------------------------------------------
(Unaudited)
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 2,380 $ 2,105
Accounts payable 18,828 18,720
Accrued compensation and vacation 2,647 3,269
Accrued taxes other than income taxes 1,187 1,099
Interest payable 44 27
Other 3,046 3,227
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Total current liabilities 28,132 28,447
------- -------
Long-term obligations, less current portion 21,117 20,596
------- -------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,641 and 9,631 shares 38,304 38,273
Retained earnings 8,034 13,386
Accumulated other comprehensive income 245 245
------- -------
Total shareholders' equity 46,583 51,904
------- -------
$95,832 $100,947
======= =======
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Third Quarter Ended
April 1, 2000 April 3, 1999
- ------------------------------------------------------------------------------------
(in thousands, except per share amounts)
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Net sales $34,342 $45,155
Cost of sales (including warranty
provision of $150 and $300) 33,779 37,525
------- -------
Gross profit 563 7,630
Operating expenses:
Research, development and engineering 666 1,005
Selling 1,257 2,400
General and administrative 1,942 2,101
------- -------
Operating income (3,302) 2,124
Interest expense 495 463
Other income (43) (59)
------- -------
Income (Loss) before income tax provision (3,754) 1,720
Income tax provision (benefit) (25) 718
------- -------
Net income (Loss) $ (3,729) $1,002
======== =======
Earnings per share:
Earnings per common share - basic and diluted $ (.39) $ 0.10
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Quarters Ended
April 1, 2000 April 3 , 1999
- ------------------------------------------------------------------------------------
(in thousands, except per share amounts)
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Net sales $117,402 $135,433
Cost of sales (including warranty
provision of $322 and $969) 107,532 113,218
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Gross profit 9,870 22,215
Operating expenses:
Research, development and engineering 2,413 3,881
Selling 5,035 6,935
General and administrative 6,430 6,337
------- -------
Operating income (4,008) 5,062
Interest expense 1,482 1,455
Other income (202) (172)
------- -------
Income before income tax provision (5,288) 3,779
Income tax provision 64 1,424
------- -------
Net income $ (5,352) $2,355
======= =======
Earnings per share:
Earnings per common share - basic and diluted $ (.56) $ 0.24
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Quarters Ended
April 1, 2000 April 3, 1999
- ------------------------------------------------------------------------------------
(in thousands)
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Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) $(5,352) $2,355
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 4,912 5,258
Provision for obsolete inventory (399) 1,115
Provision for doubtful receivables 132 334
Provision for warranty 322 969
Provision for litigation 0 (900)
Gain on disposal of assets (34) (31)
Deferred income taxes 121 1,064
Changes in operating assets and liabilities:
Trade receivables 1,676 (3,919)
Inventories (132) 213
Customer tooling 1,487 3,189
Other assets (1,047) (3,378)
Accounts payable 108 (263)
Accrued compensation and vacation (622) 394
Other liabilities (398) (827)
------- -------
Cash provided by operating activities 774 5,573
------- -------
Cash flows from investing activities:
Proceeds from sale of property plant and equipment 83 42
Purchase of property and equipment (1,366) (1,480)
------- -------
Cash used in investing activities (1,283) (1,438)
------- -------
Cash flows from financing activities:
Issuance of common stock 31 0
Proceeds from long-term obligations 796 0
Payments on long-term obligations 0 (3,065)
------- -------
Cash (used in) provided by financing activities 827 (3,065)
------- -------
Net increase (decrease) in cash and cash equivalents 318 1,070
------- -------
Cash and cash equivalents, beginning of period 1,866 288
------- -------
Cash and cash equivalents, end of period $2,184 $1,358
====== ======
See accompanying notes to consolidated financial statements.
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KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments of a normal and recurring nature necessary
for a fair presentation of results of operations for such periods. The results
of operations for any interim period are not necessarily indicative of results
for the full year. These financial statements should be read in conjunction with
the financial statements and notes thereto contained in the Company's annual
report for the year ended July 3, 1999.
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1. INVENTORIES
April 1, 2000 July 3, 1999
(in thousands)
- ----------------------------------------------------------------------------
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Finished goods $12,149 $13,008
Work-in-process 2,772 2,134
Raw materials and supplies 12,814 12,820
Reserve for obsolescence (2,308) (3,066)
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$25,427 $24,896
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2. COMMITMENTS
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $500,000 at April 1,2000.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
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April 1, 2000 July 3, 1999
(in thousands)
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Note payable _ GECC (General $ 3,870 $ 5,559
Electric Capital Corporation)
Revolving line 18,622 16,524
Other 387 0
Deferred compensation obligation 618 618
------- -------
23,497 22,701
Less current portion (2,380) (2,105)
------- -------
$21,117 $20,596
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4. SUPPLEMENTAL CASH FLOW INFORMATION
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Three Quarters Ended
April 1, 2000 April 3, 1999
(in thousands)
- ----------------------------------------------------------------------------
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Interest payments $1,383 $1,561
Income tax payments 309 146
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5. INCOME TAXES
The income tax benefits for the third quarter of fiscal 2000 were $24,500
versus income tax provisions of $718,000 for the third fiscal quarter of 1999.
The $24,500 benefit for the third quarter of fiscal 2000 is the net result of
both provisions and benefits on the earnings and losses of foreign subsidiaries.
The Company's tax benefit associated with the domestic loss reported for the
third quarter was offset by a corresponding valuation allowance. $21,000 of
expenses in the third quarter of the fiscal 2000 provision relates to taxes on
the earnings of foreign subsidiaries. For the nine months ended April 1, 2000
and April 3, 1999, the income tax provisions were $64,000 and $1,424,000
respectively. Included in the nine months ended April 1, 2000 provision is
$349,000 of net tax benefits resulting from losses incurred by foreign
subsidiaries. Included in the nine months ended April 3, 1999 is $292,000 for
taxes on foreign earnings. The Company has tax loss carryforwards of
approximately $28.2 million that expire in varying amounts in the years 2006
through 2019.
6. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The Company has adopted Financial Accounting Standards No. 128 which
requires the presentation of "basic EPS" and "diluted EPS". Basic EPS is
computed by dividing income available to common shareholders (the numerator) by
the weighted-average number of common shares outstanding (the denominator)
during the period. Diluted EPS is computed by dividing income available to
common shareholders by the weighted-average number of common shares and common
share equivalents outstanding during the period. Key Tronic uses the Treasury
Stock Method required by the standard in calculating the dilutive effect of
common stock equivalents.
Because of the dilutive nature of outstanding options and warrants, the
current quarter's loss creates an antidilutive effect. Therefore the weighted
average diluted shares equals the basic wieghted average shares.
There were no adjustments to the income available to common shareholders
for the third quarters and three quarters ended April 1, 2000 and April 3, 1999.
The following table presents the Company's calculations of weighted average
shares outstanding (number of shares):
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Weighted Avg. Shares Adjustment for Potential Total
Common Shares
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For the Quarter Ended
April 1, 2000 9,636,660 118,136 9,754,796
April 3, 1999 9,630,830 225,923 9,856,753
For Three Quarters Ended
April 1, 2000 9,634,913 189,990 9,824,903
April 3, 1999 9,630,830 122,289 9,753,219
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FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements in addition to
historical information. Forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in the forward-looking statements. Risks and uncertainties that
might cause such differences include, but are not limited to those outlined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations_ Risks and Uncertainties That May Affect Future Results." Readers are
cautioned not to place undue reliance on forward-looking statements, which
reflect management's opinions only as of the date hereof. The Company
undertakes no obligation to revise or publicly release the results of any
revision to forward-looking statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including Quarterly Reports on Form
10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $0.8 million of cash during the first three
quarters of fiscal 2000 versus $5.6 million of cash provided by operating
activities during the same period of the prior year. The fiscal 2000 change in
cash is due primarily to the Company's net loss offset by decreased accounts
receivable, and depreciation and amortization expense. The net loss and the
decrease in accounts receivable are caused by lower than planned revenues for
the quarter due in part to market demand for certain components that created
shortages.
During the first three quarters of fiscal 2000, $1.37 million was expended
in capital additions versus $1.5 million spent in capital additions in the same
period in the previous fiscal year. The Company anticipates capital expenditures
of approximately $0.34 million through the remainder of the current fiscal year
ending July 1, 2000. Actual capital expenditures may vary from anticipated
expenditures depending upon future results of operations. See RISKS AND
UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 12-13. Capital expenditures
are expected to be financed with internally generated funds.
The Company has a secured financing agreement which contains a term note
for up to $11,000,000 and a revolving loan for up to $30 million. During the
second quarter of fiscal year 1998, the company entered into an operating lease
arrangement with GECC which reduced the borrowing limit by $4.2 million. The
revolving loan agreement and term note are secured by the assets of the
corporation. The agreement contains financial covenants that relate to maximum
capital expenditures, minimum debt service coverage, minimum earnings before
interest expense, income tax, depreciation, amortization, and maximum leverage
percentages. In addition to these financial covenants, the financing agreement
restricts investments, disposition of assets, and payment of dividends. At
April 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, commencing in March 1998 and ending in December 2002.
In addition to these scheduled payments, the Company is also paying $21,000 per
month against the term note, which is a special agreement with GECC resulting
from the Company's lease of its Cheney facility. If debt service coverage is
greater than 1.4, this note bears interest at one and three-quarters percent
(1.75%) in excess of the applicable London Interbank Offered Rate (LIBOR). If
debt service coverage is less than or equal to 1.4, this note bears interest at
two percent (2.00%) in excess of the applicable LIBOR rate. At April 1, 2000,
the applicable LIBOR rate was 6.1325%, and the applicable interest rate was
7.8825%.
The revolving loan with GECC is renewable and covers an initial period of
five years expiring on December 31, 2001. If debt service coverage is greater
than 1.4, the applicable interest rate is one and one-half percent (1.5%) in
excess of the applicable LIBOR rate. If debt service coverage is less than or
equal to 1.4, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At April 1, 2000, the Company
had two LIBOR contracts outstanding, one for $4 million and one for $10.5
million. The LIBOR rate on the $4 million LIBOR contract was 6.09625%, and the
applicable interest rate was 7.59625%, on the $10.5 million revolver the LIBOR
rate was 6.12875%, and the applicable interest was 7.62875%. The difference
between the rates on the contracts is due to LIBOR contract renewals on separate
days during the period. LIBOR rates fluctuate on a daily basis. Interest on
additional borrowing under the revolving loan is charged at an index rate which
is equivalent to the current prime rate less 0.25%. At April 1, 2000, there was
$18.6 million borrowed on the revolving loan and approximately $7.2 million
available for use under the revolving loan. The Company is required to pay fees
of .0375% on the unused revolving loan balance.
The revolving loan balance has increased $2.1 million since the Company's
fiscal year end at July 3, 1999. This increase can be attributed to cash needs
resulting from lower revenues and higher than expected operating costs.
Real estate held for sale is carried at the lower of cost or net
realizable value. In September of 1997, the Company signed a five year
operating lease with a local company for this property. The lease terms include
an option to buy the property upon notice at any time during the course of the
lease.
The Company believes that cash, cash equivalents, funds available under
the line of credit, and internally generated funds can satisfy cash requirements
for a period in excess of 12 months.
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 LIBOR. Over the past fiscal
quarter the highest LIBOR rate was 6.1325%. 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.
NET SALES
Net sales for the fiscal 2000 third quarter ended April 1, 2000 were $34.3
million compared to $45.2 million for the third quarter of the previous year.
For the nine months ended April 1, 2000, sales were $117.4 million compared to
$135.4 million for the same period of the previous year.
Keyboard shipments decreased 52% for the third quarter of fiscal year 2000
compared to third quarter of 1999, while the average selling price decreased
approximately 13.2%. For the nine months ended April 1, 2000, unit shipments
decreased approximately 39% over the same period of the prior year, while the
average selling price decreased 12.2%. The decrease in units shipped and average
selling price is due primarily to our second and third tier-manufacturing
customers that are losing market share to brand-name manufacturers who have cut
prices dramatically. The decrease in keyboard revenues was offset in part by the
increase in contract design and manufacturing (CDM) revenue.
Non-keyboard revenue accounted for 50.7% of total revenue in the third
quarter of fiscal 2000 versus 13.4% of total revenue in the third quarter of
fiscal 1999. For the nine months ended April 1, 2000, non-keyboard revenue
accounted for 47.8% of total revenue versus 16.7% of total revenue for the same
time period of the prior fiscal year. The increase in non-keyboard revenue as
a percentage of sales is a direct result of the Company's stategy to grow
this part of its business.
COST OF SALES
Cost of sales were 98.4% of revenue in the third quarter of 2000, compared
to 83.1% for the third quarter of 1999. Cost of sales were 91.6% of revenue for
the nine months ended April 1, 2000, compared to 83.6% for the same period of
the prior year. The cost of sales percentage increased in part as a result of
lower sales volume and reduced prices through the Company's direct distribution
channels. During the third quarter of fiscal 2000, additional emphasis was
placed on material cost reductions through negotiations with major suppliers, as
well as changes to product designs that were conducive to lower costs.
During fiscal 1999, the Company's keyboard products were produced by a
subcontractor in Mainland China. The Company's keyboards will eventually be
produced almost entirely within China. The Company plans to use its facilities
in Mexico to increase available capacity for new and existing CDM products. The
Company's facilities in Mexico in conjunction with a subsidiary in Shanghai,
China, which began activity in third quarter 1999, will enable the Company to
increase its presence in this growing market.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering (RD&E) expenses were $0.7 million in
the third quarter of fiscal year 2000 and $1 million for the same period of
fiscal year 1999. As a percentage of sales, RD&E expenditures were 1.9% in the
third quarter of 2000, compared to 2.2% for the same period of the prior year.
RD&E expenses were $2.4 million for the nine months ended April 1, 2000 compared
to $3.9 million for the same period of the prior year. As a percentage of
sales, R D & E expenditures were 2.1% for the current nine month period versus
2.9% for the same period of the prior fiscal year. These decreases were due
primarily to project delays and cost controls during the fiscal year 2000.
SELLING EXPENSES
Selling expenses were $1.3 million in the third quarter of fiscal 2000
compared to $2.4 million in the third quarter of fiscal year 1999. Selling
expenses as a percentage of revenue were 3.7% for the quarter compared to 5.3%
in the same quarter of fiscal 1999. For the nine months ended April 1, 2000,
selling expenses were $5 million compared to $6.9 million for the same period of
the prior year. As a percentage of revenue for the current nine month period,
selling expenses were 4.3% compared to 5.1% for the same period of the prior
year. These decreases can be attributed to decreased sales volume, which
resulted in decreased commissions and decreased promotional expenses for the
Company's retail product lines.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) expenses remained fairly constant. They
were $1.9 million in the third quarter of fiscal 2000 and $2.1 million for
1999. As a percentage of revenue, G&A expenses were 5.7% in the third quarter of
fiscal year 2000 versus 4.7% in the same quarter of the prior year. For the
nine months ended April 1, 2000, G&A expenses were $6.4 million compared to $6.3
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first nine months of fiscal year 2000 were 5.5% versus 4.7% for
the same period of the prior year. As a percentage of revenue the increase is
primarily due to increased spending in various administrative costs, as well as
decreased revenue in fiscal year 2000.
INTEREST
Interest expense was $495,000 in the third quarter of fiscal 2000 compared
to $463,000 for the third quarter of fiscal 1999. For the nine months ended
April 1, 2000, and April 3, 1999 interest expense was $1,482,000 and $1,455,000
respectively. The level of long-term debt has increased due to scheduled term
loan payments and additional borrowing required to cover operating expenses.
INCOME TAXES
The income tax benefits for the third quarter of fiscal 2000 were $24,500
versus income tax provisions of $718,000 for the third fiscal quarter of 1999.
The $24,500 benefit for the third quarter of fiscal 2000 is the net result of
both provisions and benefits on the earnings and losses of foreign subsidiaries.
The Company's tax benefit associated with the domestic loss reported for the
third quarter was offset by a corresponding valuation allowance. $21,000 of
expenses in the third quarter of the fiscal 2000 provision relates to taxes on
the earnings of foreign subsidiaries. For the nine months ended April 1, 2000
and April 3, 1999, the income tax provisions were $64,000 and $1,424,000
respectively. Included in the nine months ended April 1, 2000 provision is
$349,000 of net tax benefits resulting from losses incurred by foreign
subsidiaries. Included in the nine months ended April 3, 1999 is $292,000 for
taxes on foreign earnings. The Company has tax loss carryforwards of
approximately $28.2 million that expire in varying amounts in the years 2006
through 2019.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the third quarter of fiscal years 2000 and 1999.
BACKLOG
The Company's backlog at the end of the third fiscal quarter of 2000 was
$17.5 million compared to $11.2 million at the end of the 1999 fiscal year and
$8.9 million at the end of the third quarter of fiscal year 1999. The increase
in the backlog from fiscal year end is attributable in part to increased
customer orders for the Company's non-keyboard CDM products. Approximately $5
million of the backlog resulted from orders that could not be shipped in the
third quarter due to parts shortages from Asian suppliers. These parts will be
available in the fourth quarter.
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The following risks and uncertainties could affect the Company's actual
results and could cause results to differ materially from past results or those
contemplated by the Company's forward-looking statements. When used herein, the
words "expects", "believes", "anticipates" and similar expressions are intended
to identify forward-looking statements.
Potential Fluctuations in Quarterly Results. The Company's quarterly operating
results have varied in the past and may vary in the future due to a variety of
factors, including changes in overall demand for computer products, success of
customers' programs, timing of new programs, new product introductions or
technological advances by the Company, its customers and its competitors and
changes in pricing policies by the Company, its customers and its competitors.
For example, the Company relies on customers' forecasts to plan its business.
If those forecasts are overly optimistic, the Company's revenues and profits may
fall short of expectations. Conversely, if those forecasts are too
conservative, the Company could have an unexpected increase in revenues and
profits.
Competition. The keyboard and contract design and manufacturing industries are
intensely competitive. Most of the Company's principal competitors are
headquartered in Asian countries that have a low cost labor force. Those
competitors may be able to offer customers lower prices on certain high volume
programs. This could result in price reductions, reduced margins and loss of
market share, all of which would materially and adversely affect the Company's
business, operating results and financial condition. In addition, competitors
can copy the Company's non-proprietary designs after the Company has invested in
development of products for customers, thereby enabling such competitors to
offer lower prices on such products due to savings in development costs.
Concentration of Major Customers. At present, the Company's customer base is
highly concentrated, and there can be no assurance that its customer base will
not become more concentrated. Three of the Company's OEM customers accounted
for 24%, 13%, and 11% of net sales during fiscal 1999. In 1998, these same
customers accounted for 31%, 8% and 13% of the Company's net sales. There can
be no assurance that the Company's principal customers will continue to purchase
products from the Company at current levels. Moreover, the Company typically
does not enter into long-term volume purchase contracts with its customers, and
the Company's customers have certain rights to extend or delay the shipment of
their orders. The loss of one or more of the Company's major customers or the
reduction, delay or cancellation of orders from such customers could materially
and adversely affect the Company's business, operating results and financial
condition.
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key technical, marketing and management
personnel and on its ability to continue to attract and retain qualified
employees. The competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of key employees could have a material adverse effect on
the Company's business, operating results and financial condition.
Litigation. The Company currently has fifteen lawsuits by computer keyboard
users which are in State or Federal Courts in Illinois, New Jersey, and
Pennsylvannia. These lawsuits allege that specific keyboard products
manufactured by the company were sold with manufacturing, design and warning
defects which caused or contributed to their injuries. The alleged injuries are
not specifically identified but are referred to as repetitive stress injuries
(RSI) or cumulative trauma disorders (CTD). These suits seek compensatory
damages and some seek punitive damages. It is more likely than not that
compensatory damages, if awarded, will be covered by insurance, however the
likelihood that punitive damages, if awarded, will be covered by insurance is
remote. A total of one hundred twenty-three lawsuits have been dismissed in
California, Connecticut, Florida, Illinois, Kansas, Kentucky, Maryland,
Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas. One of
the one hundred twenty-three dismissed lawsuits is on appeal in New York.
Technological Change and New Product Risk. The market for the Company's
products is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and relatively short product life
cycles. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products obsolete or
unmarketable. The Company's success will depend upon its ability to enhance
its existing products and to develop and introduce, on a timely and cost-
effective basis, new products that keep pace with technological developments
and emerging industry standards and address evolving and increasingly
sophisticated customer requirements. Failure to do so could substantially harm
the Company's competitive position. There can be no assurance that the Company
will be successful in identifying, developing, manufacturing and marketing
products that respond to technological change, emerging industry standards or
evolving customer requirements.
Dilution and Stock Price Volatility. As of April 1, 2000, there were
outstanding options and warrants for the purchase of approximately 2,000,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 1,500,000 shares were vested and exercisable.
Holders of the Common Stock will suffer immediate and substantial dilution to
the extent outstanding options and warrants to purchase the Common Stock are
exercised. The stock price of the Company may be subject to wide fluctuations
and possible rapid increases or declines over a short time period. These
fluctuations may be due to factors specific to the Company such as variations
in quarterly operating results or changes in analysts' earnings estimates, or
to factors relating to the computer industry or to the securities markets in
general, which, in recent years, have experienced significant price
fluctuations. These fluctuations often have been unrelated to the operating
performance of the specific companies whose stocks are traded.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY TRONIC CORPORATION
/s/ Jack W. Oehlke May 15, 2000
Jack W. Oehlke Date:
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter May 15, 2000
Ronald F. Klawitter Date:
Principal Financial Officer
Principal Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
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This schedule contains summary financial information extracted from the
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