SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
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 2, 1994 0-11559
KEY TRONIC CORPORATION
Washington 91-0849125
(State of Incorporation) (I.R.S. Employer
------------------ Identification No.)
N. 4424 Sullivan Road
Spokane, Washington 99216
(509) 928-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities and Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements during the past 90 days.
Indicate by checkmark if delinquent filers pursuant to Item 405 of Regulation S-
K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $45,709,142 as of September 2, 1994.
The number of shares of Common Stock of the Registrant outstanding as of
September 2, 1994 was 8,271,740 shares.
The Exhibit Index is located at Page 18.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1994 Annual Report to Shareholders , pages 1 and 10
- - 28, are incorporated by reference into Parts I, II, and IV; a portion of the
Registrant's Proxy Statement, pages 1 - 20, pursuant to Regulation 14A, covering
the Annual Meeting of Shareholders to be held October 27, 1994 is incorporated
by reference into Part III.
KEY TRONIC CORPORATION
1994 FORM 10-K/A
TABLE OF CONTENTS
Page
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 3-7
Item 8. Financial Statements and Supplementary Data 8-36
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form
8-K and Signatures 37-39
PART II
ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
1994: The first quarter of 1994 saw the acquisition of substantially all of the
assets and liabilities of the Honeywell Keyboard Division (HKD) (See Note 15 to
the financial statements). As a result of this acquisition the Company
broadened both its revenue base and its product base. The Company also took
advantage of many cost saving opportunities. The acquisition had an
insignificant impact on Research, Development and Engineering costs as most
functions of the combined companies were similar and duplicate functions were
eliminated. Similarly, most Sales and Marketing costs were duplicate and only
an outside sales force was retained. Certain General and Administrative
functions remained as they were necessary to support facilities in New Mexico
and Mexico. Manufacturing labor was reduced in the fourth quarter as labor
intensive products were relocated to the facility in Juarez Mexico.
Despite declining average selling prices (ASP), revenue for 1994 increased by
29.3% due to strong unit volume growth and the addition of HKD products. Cost
reduction efforts continued into 1994 but were outpaced by the decline in ASP
resulting in decreased gross profit margins. To compensate for this, decisions
were made in the third quarter to restructure manufacturing operations. The
Company's assembly plant in Cheney Washington was closed and production of that
plant was redeployed to other Company plants where lower costs can be attained.
The resulting provisions for this restructuring generated a charge of $1.0
million in the third quarter (see Note 14 to the financial statements). $144,000
of this was paid in the fourth quarter. The balance of this charge is
anticipated to be paid in the first two quarters of fiscal 1995.
Unit sales increased by 75.5% over the year while ASP declined 25.6%. Gross
profit percentage decreased by 12.2% in 1994 compared to 1993.
1993: Revenue for the first three quarters of 1993 increased by 7.7% due to
strong unit volume growth which more than offset declining average selling
prices. Increased gross profit margins resulted from the higher revenue,
coupled with cost reductions from manufacturing efficiencies achieved in
restructuring actions initiated in late 1992 (see Note 14 to the financial
statements), and reduced component costs. The higher gross profit enabled the
Company to spend more in research and engineering, providing for the development
of new products which will contribute to future growth.
The fourth quarter saw large Original Equipment Manufacturers accelerate price
reductions, evidently in an effort to improve market share. In response, the
Company's distribution customers began to reduce their inventory levels, which
resulted in a decrease in unit volumes from the comparable quarter of the
previous year. The Company took actions in the fourth quarter to reduce
workforce and operating expenses in order to resize the operation to its revenue
level.
For the year, total unit volume increased by 34% and average selling prices
declined by 23.4%. Gross profit percentage increased by 4.8% in 1993 compared to
1992.
NET SALES
Net sales in 1994 were $159.4 million compared to $123.3 million and $124.0
million in 1993 and 1992. This was an increase of 29.3% in 1994 after a decrease
of .5% the previous year. The average unit selling prices of the Company's
keyboard products declined by 25.6% in 1994 and by 23.4% in 1993. Offsetting
these price declines were increases in unit volumes of 75.5% and 34% in 1994 and
1993, respectively. HKD products accounted for 76.5% of the increase in 1994.
COST OF SALES
In 1994, cost of sales was 89.3% of sales compared to 77.1% in 1993 and 81.9% in
1992. The increase in cost of sales as a percent of revenue resulted from the
need to sell older, base line products at significantly reduced prices in order
to remain in the market. After the acquisition of HKD the Company operated two
assembly facilities at significantly less than full capacity. The improvement
was made in 1993 by reducing fixed cost structure by eliminating the internal
manufacture of nonstrategic product components and their associated overhead.
In addition, new commodity product designs assisted in generating higher unit
volumes and lower production costs. The cost of sales percentage in 1992
improved compared to 1991 because of cost cutting measures taken by management.
The Company provides for warranty costs based on historical analysis and
anticipated product returns. The amount charged to expense was $647,000,
$766,000, and $685,000 in 1994, 1993, and 1992, respectively. The Company
provides for obsolete and nonsalable inventories based on specific
identification of inventory against current demand and recent usage. The amount
charged to expense was $1,758,000, $534,000, and $2,452,000 in 1994, 1993, and
1992, respectively. The increase in 1994 was due to the discontinuance of
certain products and the reduction of the related inventory to net realizable
value. The reduction in 1993 was from 1992 non-recurring costs for
restructuring (see note 14) and for the discontinuance of certain products and
the reduction of the related inventory to net realizable value.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering (RD&E) expenses were $5.8
million, $6.7 million, and $5.3 million in 1994, 1993, and 1992. As a
percentage of sales, these expenses were 3.7%, 5.4%, and 4.3%, respectively. In
1994 the Company focused most of its RD&E efforts on products for large Original
Equipment Manufacturers, thereby reducing the quantity of projects that the
Company was working on in 1993. Consequently, spending reduced both in dollars
and as a percentage of revenue. In 1993 the Company's renewed emphasis on core-
product development resulted in increased research and development costs in
dollars and as a percentage of revenue, when compared to 1992.
SELLING EXPENSES
Selling expenses were $7.4 million, $7.6 million, and $6.2 million in 1994,
1993, and 1992. Selling expenses as a percent of sales were 4.6%, 6.2%, and
5.0%, respectively. The acquisition of HKD did not have a material impact on
selling costs as they were duplicate costs and therefore eliminated.
Consequently, 1994 selling expenses remained relatively unchanged in real terms
from the prior year but declined as a percent of revenue. In 1993 selling
expenses increased in real and percentage terms due to higher introduction costs
of new products and expansion of international distribution channels.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $11.0 million, $9.8 million, and $13.2
million in 1994, 1993, and 1992. The increase in 1994 was primarily due to
severance costs related to management personnel changes and costs related to
administrative functions added as a result of the HKD acquisition. The
reduction in 1993 came principally from the elimination of the unusual expenses
incurred in 1992. Specifically, these were severance costs incurred as a result
of the reduction in the Company's workforce ($589,000), an increase in the
provision for legal matters ($420,000) and one-time costs associated with the
retention of an entirely new executive management team ($1,404,000). The Company
provides for doubtful accounts primarily based on specific identification. The
amount charged to expense was $542,000, $713,000, and $466,000 in 1994, 1993,
and 1992, respectively. General and administrative costs as a percentage of
sales were 6.9%, 7.9%, and 10.6% in 1994, 1993, and 1992 respectively.
INTEREST INCOME/EXPENSE AND OTHER
The Company had net interest income (expense) of (1,703,000), $251,000, and
$328,000 in 1994, 1993, and 1992. The Company earned $146,000, $374,000, and
$581,000, from investing in short-term securities and commercial paper.
Interest expense was $1,849,000, $123,000, and $253,000 in 1994, 1993, and 1992.
Nonoperating expenses of $30,000 incurred in 1993 included a gain of $470,000
recognized upon the sale of the Company's printed circuit board and sheet metal
operations and a $500,000 charge for certain compensation related agreements
with two former employees. Nonoperating expenses are included in Net Interest
Income (Expense) and Other.
INCOME TAXES
The Company's income tax expense of $8,000, $522,000 and $137,000 in 1994, 1993
and 1992, respectively, was a result of income tax on foreign operations. The
Company has a tax loss carryforward of approximately $27.7 million which expires
in varying amounts in the years 2003 through 2009. In 1993 the Company's
effective tax rate was 11.9%, differing from the statutory rate principally
because of lower tax rates on foreign earnings. In 1994 the Company adopted
"Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes" (See Note 7). The effect on the Company's operations was to increase net
income by $8,750,000. Additionally, a deferred tax asset of $8,750,000 was
recorded, which is net of a valuation allowance of $5,416,000. In recording
this deferred tax asset, the Company considered both negative and positive
evidence. Negative evidence includes the fact that the Company had sustained
taxable losses in three of the last four years. The Company operates in a
volatile industry which has seen average selling prices decline significantly
due to foreign competition. Also, the Company incurred a significant amount of
debt as a result of the acquisition of the keyboard division of Honeywell in
1994. This is offset by positive evidence including greatly reduced product
costs as a result of moving production to Juarez, Mexico, where a lower wage
base can be attained and lower operating expenses by reducing commissions for
sales representatives. The Company was awarded significant new programs by new
large OEM customers, which have and are expected to improve revenues and
profits. As a result, backlogs have grown to $35.5 million at the end of fiscal
year 1994 from $15.1 million at the previous year end. In order to fully
utilize this deferred tax asset, the Company must generate approximately
$25,000,000 in taxable income before the net operating loss carryovers expire.
These loss carryovers expire in varying amounts in the years 2003 through 2009.
Management believes that the positive evidence outweighs the negative evidence,
and it is more likely than not that the Company will generate sufficient taxable
income to allow the realization of the deferred tax asset within the next three
or four fiscal years.
INTERNATIONAL (ASIA, EUROPE, MEXICO)
As part of the acquisition of HKD, the Company acquired an assembly facility in
Juarez Mexico. This subsidiary, Key Tronic Juarez, SA de CV, is primarily used
to support the Company's domestic operations. At the end of 1992, the Company
decided to discontinue the activities of one of its subsidiaries, Key Tronic
Taiwan Corporation. This subsidiary, which was primarily an assembly facility,
began operations in January 1984 and was initially set up to serve the Asian
market. In July 1985, the Company opened Key Tronic Europe, Ltd. (KTEL), a
keyboard manufacturing facility in Dundalk, Ireland. KTEL serves the European
market.
Foreign sales from worldwide operations, including domestic exports, were $68.2
million in 1994 compared to $53.0 and $46.8 million in 1993 and 1992. Foreign
sales were 42.8% of net sales in 1994 compared to 43% and 37.7% in 1993 and
1992. Sales from KTEL represented 19.5% of consolidated sales to unaffiliated
customers in 1994, down from 27.5% in 1993. (Note 10).
CAPITAL RESOURCES AND LIQUIDITY
The Company generated (used) cash flow from operating activities of $(.7)
million, $3.6 million, and $4.0 million in 1994, 1993 and 1992. Capital
expenditures were $5.2 million, $7.8 million, and $5.4 million in 1994, 1993 and
1992. The Company's cash position decreased by $1.9 million in 1994 compared to
a decrease of $3.9 million and an increase of $.05 million in 1993 and 1992. The
Company had working capital of $27.6 million and $20.0 million at July 2, 1994
and July 3, 1993. The increase in working capital was due primarily to higher
trade receivables resulting from increased sales.
Trade receivables were $25.4 million at July 2, 1994, an increase of $9.1
million from 1993. Trade receivables increased primarily because of higher
sales. Inventories were $21.8 million and $11.3 million at July 2, 1994 and July
3, 1993. The increase in inventory is to support the increase in sales.
The Company maintains a $5.0 million secured revolving credit agreement. At
July 2, 1994 there was $.7 million available for use under this agreement. In
1993 the Company maintained a $7.5 million unsecured revolving credit agreement.
This credit line was unused at July 3, 1993. The Company is currently
negotiating alternative increased financing and expects to have an agreement in
place early in 1995. The Company intends to use this financing to replace the
revolving credit agreement and the note payable to a financial institution (Note
5). At July 2, 1994 and July 3, 1993, the Company was in compliance with all
debt covenants and restrictions.
The Company anticipates that capital expenditures of approximately $6.2 million
will be required during the next fiscal year. Capital expenditures are expected
to be financed through cash balances, cash flow from operating activities and
capital leases.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
July 2, 1994 July 3, 1993
------------ ------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $4,996 $6,930
Trade receivables, less allowance for
doubtful accounts of $1,539 and $1,128 25,435 16,290
Inventories (Notes 2 and 14) 21,787 11,291
Real estate held for sale 2,339 0
Deferred income tax asset (Note 7) 2,940 0
Other 1,838 3,119
------------ ------------
Total current assets 59,335 37,630
------------ ------------
Property, Plant, and Equipment - at cost
(Notes 3,6,7, and 14) 82,348 68,742
Less accumulated depreciation 47,579 46,294
------------ ------------
Total property, plant, and equipment 34,769 22,448
------------ ------------
Other Assets:
Real estate held for investment and sale 0 467
Other 254 1,301
Deferred income tax asset (Note 7) 5,810 0
Goodwill 1,760 0
------------ ------------
$101,928 $61,846
============ ============
See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
July 2, 1994 July 3, 1993
------------ ------------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 17,159 $ 9,049
Current portion of long-term obligations
(Note 5) 4,721 457
Interest payable 687 0
Accrued compensation and vacation (Note 14) 2,929 2,262
Accrued taxes other than income taxes 1,496 1,471
Commissions payable 339 744
Other (Notes 9 and 14) 4,389 3,669
------------ ------------
Total current liabilities 31,720 17,652
------------ ------------
Long-term Liabilities:
Long-term obligations, less current portion
(Note 5) 25,696 804
------------ ------------
Total long-term liabilities 25,696 804
------------ ------------
Commitments and Contingencies
(Notes 5,6, and 9)
Shareholders' Equity (Note 8):
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,271 and 7,837 shares 36,251 32,887
Retained earnings 8,320 9,380
Foreign currency translation adjustment (59) 1,123
------------ ------------
Total shareholders' equity 44,512 43,390
$101,928 $61,846
============ ============
See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended
July 2, 1994 July 3, 1993 July 4, 1992
------------ ------------ ------------
(in thousands,except per share amounts)
Net Sales $159,447 $123,318 $123,983
Cost of sales (Notes 1 and 2) 142,397 95,073 101,526
------------ ------------ ------------
Gross Profit on Sales 17,050 28,245 22,457
Operating Expenses:
Research, development and engineering (Note 1) 5,836 6,701 5,293
Selling 7,409 7,616 6,168
General and administrative (including
provision for doubtful receivables
of $542, $713, and $466) (Note 1) 11,031 10,278 13,168
Provision for restructuring (Note 14) 1,021 0 5,480
------------ ------------ ------------
Operating Income (Loss) (8,247) 3,650 (7,652)
Interest Expense (Note 5) 1,849 123 253
Other (Income) Expense (Note 5) (294) (844) (581)
------------ ------------ ------------
Income (Loss) Before Income Taxes (9,802) 4,371 (7,324)
Income Tax Provision (Note 7) 8 522 137
------------ ------------ ------------
Income (Loss) before cumulative
effect of change in accounting principle (9,810) 3,849 (7,461)
Cumulative effect to July 4, 1993, of
change in accounting principle for income
taxes (Notes 1 and 7) 8,750 0 0
------------ ------------ ------------
Net Income (Loss) $ (1,060) $ 3,849 $ (7,461)
============ ============ ============
Earnings (Loss) Per Share:
Before cumulative effect of change
in accounting principle $ (1.19) $ N.A. $ N.A.
============ ============ ============
Primary Earnings (Loss) Per Common Share $ (.13) $ .42 $ (.96)
============ ============ ============
Fully Diluted Earnings Per Common Share $ N.A. $ .42 $ N.A.
============ ============ ============
Primary Shares Outstanding 8,231 9,102 7,740
============ ============ ============
Fully Diluted Shares Outstanding N.A. 9,204 N.A.
============ ============ ============
See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
July 2, 1994 July 3, 1993 July 4, 1992
------------ ------------ ------------
(in thousands)
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net Income (Loss) $ (1,060) $ 3,849 $ (7,461)
Adjustments to Reconcile Net Income (Loss) to
Cash Provided (used) by Operating Activities:
Depreciation and amortization 8,596 6,276 6,926
Provision for restructuring of business line 1,021 0 5,480
Provision for obsolete inventory 1,758 534 2,452
Provision for doubtful receivables 542 713 466
Provision for litigation 0 0 470
Provision for warranty 647 766 685
(Gain) or loss on disposal of assets (43) 19 577
Cumulative effect of change in accounting
for income taxes (Notes 1 and 7) (8,750) 0 0
Changes in Operating Assets and Liabilities:
Trade receivables (1,182) (1,713) (1,671)
Inventories (1,290) (1,301) 157
Other current assets 1,769 (1,545) 583
Accounts payable 3,723 1,119 (2,577)
Employee compensation and accrued vacation 383 (1,183) 424
Other liabilities (6,839) (3,984) (2,495)
------------ ------------ ------------
Cash provided (used) by operating activities (725) 3,550 4,016
------------ ------------ ------------
Cash Flows from Investing Activities:
Cash Paid for assets acquired and liabilities
assumed, net (Note 15) (21,961)
Purchase of property and equipment (5,231) (7,786) (5,369)
Proceeds from sale of property and equipment 448 1,452 165
Change in other assets 1,047 (175) (14)
------------- ------------ ------------
Cash used in investing activities (25,697) (6,509) (5,218)
------------ ------------ ------------
See notes to consolidated financial statements
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
July 2, 1994 July 3, 1993 July 4, 1992
------------ ------------ ------------
(in thousands)
Cash Flows from Financing Activities:
Issuance of common stock 164 369 96
Proceeds from long-term obligations 31,711 0 257
Payments on long-term obligations (6,205) (31) (538)
------------ ------------ ------------
Cash provided by (used in) financing
activities 25,670 338 (185)
------------ ------------ ------------
Effect of exchange rate changes on cash (1,182) (1,282) 1,432
------------ ------------ ------------
Increase (Decrease) in Cash
and Cash Equivalents (1,934) (3,903) 45
Cash and Cash Equivalents,
Beginning of Year 6,930 10,833 10,788
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 4,996 $ 6,930 $ 10,833
KEY TRONIC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Foreign
Currency
Common Stock Retained Translation
Shares Amount Earnings Adjustment Total
---------- ---------- ---------- ---------- ----------
(in thousands)
Balances, June 30, 1991 7,736 32,422 12,992 973 46,387
========== ========= ========== ========== =========
Net Loss - 1992 (7,461) (7,461)
Issuance of stock under
stock options 21 96 96
Foreign currency translation
adjustment 1,432 1,432
---------- ---------- ---------- ---------- ----------
Balances, July 4, 1992 7,757 32,518 5,531 2,405 40,454
========== ========= ========== ========== =========
Net Income - 1993 3,849 3,849
Issuance of stock under
stock options 80 369 369
Foreign currency translation
adjustment (1,282) (1,282)
---------- ---------- ---------- ---------- ----------
Balances, July 3, 1993 7,837 32,887 9,380 1,123 43,390
========== ========= ========== ========== =========
Net Loss - 1994 (1,060) (1,060)
Issuance of stock under
stock options 34 164 164
Stock issued (Note 15) 400 3,200 3,200
Foreign currency translation
adjustment (1,182) (1,182)
---------- ---------- ---------- ---------- ----------
Balances, July 2, 1994 8,271 $ 36,251 $ 8,320 $ (59) $ 44,512
========== ========= ========== ========== =========
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Key Tronic Corporation and subsidiaries (the "Company") principally
manufactures input devices, primarily keyboards, for computers, terminals,
and work stations. The Company also is in various stages of developing,
marketing, and manufacturing a variety of computer related products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Key Tronic Corporation and
its wholly owned subsidiaries in Ireland, Mexico, Taiwan, and the United
States. Significant intercompany balances and transactions have been
eliminated in consolidation.
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 market.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined principally using the first-in, first-out (FIFO) method. The
inventory adjustments to market value for obsolete and nonsalable inventories
were approximately $3,581,000 and $727,000 at July 2, 1994 and July 3, 1993,
respectively. The Company provides for obsolete and nonsalable inventories
based on specific identification of inventory against current demand and
recent usage.
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.
GOODWILL
Goodwill resulted from the acquisition of substantially all of the
assets and liabilities of Honeywell, Inc.'s Keyboard Division (see Note 15).
Goodwill is amortized on a straight-line basis over a period of fifteen
years.
ACCRUED WARRANTY
An accrual is made within other current liabilities 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 2,
1994 and July 3, 1993 were $762,000 and $332,000, respectively.
NET SALES
Sales are recognized when products are shipped. Provisions for estimated
sales returns are not significant. The Company provides for doubtful
accounts primarily based on specific identification.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses include costs of
developing new products and production processes as well as design and
engineering costs associated with the production of custom keyboards.
Generally product customizations are targeted at perceived market needs and
precede the obtaining of customer orders and/or contracts. Such costs are
charged to expense as incurred. Product customization costs incurred pursuant
to customer orders and/or contracts are included in cost of sales.
INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" as of July 4, 1993.
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 basis 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
Net income per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding and is adjusted for
shares issuable upon exercise of stock options. The computation assumes the
proceeds from the exercise of stock options were used to repurchase common
shares at the average market price (for primary earnings per share) or
greater of average or ending market price (for fully diluted earnings per
share) of the Company's common stock during each period. In 1992 and 1994
stock options have an antidilutive effect on loss per share and, accordingly,
are omitted from the calculation.
SIGNIFICANT CUSTOMERS
In 1994, one customer accounted for approximately 21 percent of net
sales. This customer accounted for approximately 20 percent of trade
receivables at July 2, 1994. In 1993 and 1992, sales to this customer were
approximately 32 and 24 percent of net sales, respectively. Two other
customers accounted for approximately 11 and 10 percent of net sales in 1994,
respectively.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Assets and liabilities of the Company's subsidiaries in Ireland, Mexico,
and Taiwan are translated to U.S. dollars at year-end exchange rates.
Revenues and expenses are translated at average exchange rates. Translation
gains and losses are included in a separate component of shareholders'
equity. Realized foreign currency transaction gains and losses are included
in general and administrative expenses.
RECLASSIFICATION
Certain amounts have been reclassified for 1993 and 1992 to be
consistent with the presentation of 1994 amounts.
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 1994, 1993, and 1992
ended on July 2, 1994, July 3, 1993, and July 4, 1992, respectively. Fiscal
year 1995 will end of July 1, 1995.
2. INVENTORIES
Components of inventories were as follows: July 2, July 3,
1994 1993
------- -------
(in thousands)
Finished goods $ 2,888 $ 2,810
Work-in-process 2,589 1,680
Raw materials 16,310 6,801
------- -------
$21,787 $11,291
======= =======
Cost of goods sold includes charges of $1.0 million, $.6 million, and
$1.9 million resulting from reduction of inventories to estimated realizable
value in 1994, 1993, and 1992, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Equipment includes property leased under capital leases (See Note 6) of
$1,148,000 at July 2, 1994 and $3,111,000 at July 3, 1993. Related
accumulated amortization is $606,000 and $2,911,000, respectively.
Classification Life (in years) July 2, July 3,
-----------------------------------------------------
1994 1993
(in thousands)
Land $ 2,486 $ 813
Buildings and
improvements 3 to 50 12,969 13,180
Equipment 1 to 10 55,182 45,321
Furniture and
fixtures 3 to 5 11,711 9,428
------- -------
$82,348 $68,742
======= ========
In 1993, the Company sold substantially all of the assets of its printed
circuit board and sheet metal operations for $1.1 million, resulting in a
gain of $470,000 (See Note 14). This gain was included in Net Interest
Income (Expense) and Other.
4. RELATED PARTY TRANSACTIONS
(a) The Company has life insurance policies on the life of its
founder/director 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/director'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 $81,000 and $996,000 in 1994 and 1993, respectively, and are
included in other assets. The decrease in net cash values is due primarily
to loans taken against the policies in fiscal 1994.
(b) Hiller Investment Company (HIC), beneficially owned by Stanley
Hiller, the Company's Chief Executive Officer and a Director, incurs various
overhead expenses, consulting services and travel expenses on behalf of the
Company. The manner in which costs incurred by HIC are charged to the Company
is through specific identification. The cost of these services, which was
charged against General and Administrative Expense, amounted to approximately
$411,000 and $362,000 in 1994 and 1993, respectively. For the year ended
July 4, 1992, various consulting services in connection with the retention of
the Hiller Group were charged against Net Interest Income (Expense) and Other
in the amount of $266,000. The amount owed to HIC as of July 2, 1994 and
July 3, 1993 was approximately $98,000 and $45,000, respectively.
(c) Stanley Hiller and Royce G. Pearson (a Director) have substantial
equity interests in Hiller Key Tronic Partners (Hiller Partners), a
California limited partnership. Hiller Partner's has a significant stock
option agreement with the Company (see note 8).
5. LONG-TERM OBLIGATIONS
On July 2, 1994, the Company had a $5.0 million secured revolving credit
agreement. The agreement contains covenants that relate to minimum tangible
net worth and balance sheet ratios and restrict investments, disposition of
assets, and payment of dividends. The agreement covers a period of twenty
three months expiring July 1, 1995. This agreement bears interest at one and
three quarters percent (1.75%) in excess of the financial institutions
reference rate, which approximates prime (7.25% at July 2, 1994). The
agreement is secured by the assets of the Company. Borrowings outstanding,
under this agreement at July 2, 1994 amounted to $3,715,000. At July 2, 1994
and July 3, 1993, the Company was in compliance with all debt covenants and
restrictions.
Long-term obligations consist of: July 2 July 3
------- -------
1994 1993
(in thousands)
Installment contracts $ 34 $ 429
Note Payable - financial institution 22,000 0
Note Payable - Honeywell, Inc. 3,649 0
Capital lease obligations (See Note 6) 321 54
Revolving Line 3,715 0
Deferred compensation obligation 698 778
------- -------
30,417 1,261
Less current portion (4,721) (457)
------- -------
$25,696 $ 804
======= =======
The note payable to the financial institution is payable in quarterly
installments of principle, each in the amount of $1.1 million, and interest
commencing in July 1994 and maturing in July 1999. This note bears interest
at two percent (2%) in excess of the financial institutions reference rate,
which approximates prime (7.25% at July 2, 1994). This note is secured by
the assets of the corporation.
The note payable to Honeywell, Inc. is payable in four installments of
principal and interest on the last business day of July and October of 1995
and January and April of 1996. This unsecured note bears interest at the
prime rate.
The installment contracts and capital lease obligations have monthly
repayment terms through December 1996, with fixed interest rates from 8.96%
to 16.76% and are collateralized by equipment with a net book value
approximately equal to amounts borrowed.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other
than Pensions" (SFAS 106), as of July 5, 1992. Under SFAS 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 $81,000
in 1994, $500,000 in 1993 and $422,000 in 1992 was charged against General
and Administrative Expenses.
Principal maturities of long-term obligations at July 2, 1994 are:
Fiscal Years Ending (in thousands)
1995 $ 4,721
1996 11,939
1997 4,534
1998 4,485
1999 4,493
2000 and later 245
-------------
Total $ 30,417
=============
Other (Income) Expense consists of:
Years Ended
July 2, July 3, July 4,
------- ------- -------
1994 1993 1992
(in thousands)
Interest income (146) (374) (581)
Gain on sale (Note 3) 0 (470) 0
------- ------- -------
Miscellaneous (148) 0 0
$ (294) $ (844) $ (581)
======= ======= =======
At July 2, 1994, the Company was contingently liable for $182,000 in
outstanding trade letters of credit and $612,000 in standby letters of
credit.
In November 1992, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 112, Employers' Accounting
for Postemployment Benefits" (SFAS 112). The Company is required to comply
with the provisions of SFAS 112 in fiscal year 1995. The provisions of SFAS
112 have not yet been adopted by the Company. SFAS 112 is not expected to
have a material impact on the Company's financial position or results of
operations.
6. LEASES
The Company has capital and operating leases for certain equipment and
production facilities which expire over periods from one to five years.
Future minimum payments under capital leases and noncancelable operating
leases with initial or remaining terms of one year or more at July 2, 1994,
are summarized as follows:
Capital Operating
Fiscal Years Ending Leases Leases
-----------------------------------------------------------------------------
(in thousands)
1995 $ 182 $ 787
1996 115 748
1997 57 629
1998 0 88
1999 0 18
------ -------
Total minimum lease payments 354 $ 2,270
=======
Amount representing interest 33
------
Present value of net minimum
lease payments (including $149
classified as current) $ 321
======
Rental expenses under operating leases were $751,000, $520,000, and
$597,000 in 1994, 1993, and 1992, respectively.
7. INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes", as of July 4, 1993. The
standard changes the method of accounting for income taxes to the asset and
liability method. The result of this accounting change, recorded
cumulatively in the first quarter of 1994, was to increase net earnings for
the year ended July 2, 1994, by $8,750,000 or $1.16 per primary common share.
This change did not have a material effect on the income tax provision
recorded in 1994. In recording this deferred tax asset, the Company
considered both negative and positive evidence. Negative evidence includes
the fact that the Company had sustained taxable losses in three of the last
four years. The Company operates in a volatile industry which has seen
average selling prices decline significantly due to foreign competition.
Also, the Company incurred a significant amount of debt as a result of the
acquisition of the keyboard division of Honeywell in 1994. This is offset by
positive evidence including greatly reduced product costs as a result of
moving production to Juarez, Mexico, where a lower wage base can be attained
and lower operating expenses by reducing commissions for sales
representatives. The Company was awarded significant new programs by new
large OEM customers, which have and are expected to improve revenues and
profits. As a result, backlogs have grown to $35.5 million at the end of
fiscal year 1994 from $15.1 million at the previous year end. In order to
fully utilize this deferred tax asset, the Company must generate
approximately $25,000,000 in taxable income before the net operating loss
carryovers expire. These loss carryovers expire in varying amounts in the
years 2003 through 2009. Management believes that the positive evidence
outweighs the negative evidence, and it is more likely than not that the
Company will generate sufficient taxable income to allow the realization of
the deferred tax asset within the next three or four fiscal years.
The Company's effective tax rate differs from the federal tax rate as
follows:
Year Ended Year Ended Year Ended
July 2, July 3, July 4,
------- ------- -------
(in thousands) 1994 1993 1992
Federal income tax provision (benefit)
at statutory rates $(3,333) $ 1,486 $(2,490)
Effect of foreign loss (income)
not subject to federal income tax 340 (2,028) (500)
Increase in valuation allowance 2,965 0 0
Unrecognized benefit of tax loss 0 642 2,917
Permanent differences:
Life insurance premiums 31 31 49
Other (3) (131) 24
Foreign tax provision (benefit) at foreign
statutory rate (412) 2,186 492
Adjustment for effect of beneficial tax rate on
foreign manufacturing income (loss) 420 (1,664) (355)
Current portion of income tax provision $ 8 $ 522 $ 137
======= ======= ======
The low statutory income tax rate granted manufacturers in Ireland is subject
to an expiration date of December 31, 2010.
Foreign losses increase the Company's effective income tax rate since such
losses are not deductible for U.S. income tax purposes. The domestic and
foreign components of income (loss) before income taxes were (in thousands):
December 31, 1994 1993 1992
- ------------ ------- ------- -------
Domestic ($7,825) ($1,742) ($6,840)
Foreign (1,977) 6,113 (484)
- ------------ ------- ------- -------
Income (loss) before income taxes ($9,802) $ 4,371 ($7,324)
======= ======== =======
Deferred income tax provision (benefit)
consists of the following for the year
ended July 2, 1994:
Allowance for doubtful accounts $(145)
Inventory (1,752)
Accrued liabilities (478)
Deferred compensation 27
Depreciation and amortization 312
Net operating loss carryforward (1,127)
Tax credit carryovers 0
Other 108
Change in valuation allowance 3,055
-------
Deferred income tax provision (benefit) $ 0
=======
Deferred income tax assets and liabilities consist of the following at:
July 4, July 2,
--------- ---------
1993 1994
(in thousands)
Allowance for doubtful accounts $ 378 $ 523
Inventory 947 2,699
Vacation accrual 285 387
Self Insurance accrual 224 198
Litigation accrual 510 502
Warranty accrual 113 259
Restructuring accrual 72 298
Other (146) (107)
--------- ---------
Current deferred income tax assets 2,383 4,759
Current portion of valuation allowance (506) (1,819)
--------- ---------
Current deferred income tax assets net of
valuation allowance 1,877 2,940
--------- ---------
Deferred compensation 265 237
Depreciation and amortization (492) (804)
Net operating loss carryforward 8,286 9,413
Tax credit carryovers 397 397
Other 271 164
--------- ---------
Noncurrent deferred income tax assets 8,727 9,407
Valuation allowance net of current portion (1,854) (3,597)
--------- ---------
Noncurrent deferred income tax assets net of
valuation allowance $ 6,873 $ 5,810
--------- ---------
At July 2, 1994 the Company had tax loss carryforwards of
approximately $27.7 million, which expire in varying amounts in the years
2003 through 2009. Additionally, for federal income tax purposes, the Company
has approximately $397,000 of general business credit carryforwards which
expire in varying amounts in the years 2004 through 2007. Approximately
$121,000 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.
8. SHAREHOLDERS' EQUITY
The Company has an Incentive Stock Option Plan, an Executive Stock
Option Plan, and an Executive Stock Appreciation Rights Plan for certain key
employees. Options under the plans are generally exercisable at various
percentages each year anytime on or after the anniversary date of the grant.
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 2, 1994, 1,480,000 shares have been reserved for issuance and 505,803
options were outstanding of which 147,665 shares were exercisable under these
plans. 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 1994, 1993 or 1992 as all options were granted at fair market
value.
The Company also has a Stock Option Plan for "Nonemployee Directors."
This plan is exercisable at thirty-three (33) percent each year anytime on or
after the anniversary date of the grant. As of July 2, 1994, 300,000 shares
have been reserved for issuance and 70,000 options were outstanding of which
40,000 shares were exercisable.
In fiscal year 1992 the shareholders ratified and approved an option
agreement dated February 29, 1992 (Hiller Option Agreement) between the
Company and Hiller 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. Options under this agreement are generally exercisable as
follows; half of the shares after March 1, 1993 and the remainder of the
shares after March 1, 1994.
Following is a summary of all plan activity:
Number
Price Range Of Options
- -------------------------------------------------------------------
Outstanding, June 30, 1991 $3.56 to $ 5.06 744,314
Granted during 1992 $5.87 to $ 6.75 25,000
Stock appreciation rights exercised $4.50 (77,000)
Options exercised $4.50 to $ 4.69 (21,340)
Expired or canceled $3.56 to $ 4.69 (396,574)
---------------------------
Outstanding, July 4, 1992 $3.56 to $ 6.75 274,400
---------------------------
Granted during 1993 $8.25 to $11.88 206,330
Stock appreciation rights exercised $4.50 (5,500)
Options exercised $3.56 to $ 5.06 (80,350)
Expired or canceled $3.56 to $10.75 (42,673)
---------------------------
Outstanding, July 3, 1993 $3.56 to $11.88 352,207
---------------------------
Granted during 1994 $6.25 to $10.12 412,858
Options exercised $3.56 to $ 8.25 (33,930)
Expired or canceled $3.56 to $11.13 (155,332)
---------------------------
Outstanding, July 2, 1994 $3.56 to $11.88 575,803
===========================
Stock warrants dated August 17, 1990 exist entitling a consultant to
purchase 15,000 shares of common stock at $4.69 per share. A stock warrant
dated July 30, 1993 also exists entitling Honeywell, Inc. to purchase 300,000
shares of common stock at $14.00 per share (see Note 15).
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 in 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 $485,287, $388,001, and $437,435 in 1994, 1993, and 1992,
respectively. The investment in the Company's stock at July 2, 1994 by all
employee trusts amounted to 370,226 shares.
The Company has an Employee Stock Ownership Plan. No contributions were
made to the plan in 1994, 1993, or 1992. The investment in the Company's
stock at July 2, 1994 by this plan amounted to 239,700 shares.
9. COMMITMENTS & CONTINGENCIES
LITIGATION
The Company used Mica Sanitary landfill, a public dump site operated by
the County of Spokane, until early 1975. Mica landfill is a state lead
National Priority List site ("NPL"). Mica landfill was placed on the NPL in
1985. In l988 the Washington Department of Ecology and Spokane County
entered into a Consent Decree requiring the County to conduct a Remedial
Investigation (RI) followed by appropriate Remedial Action (RA). The County's
RI was completed by the County in September 1992. An interim remedial action
plan was completed in late 1993 and instituted in mid 1994 to be followed by
a 5 year performance monitoring program to be conducted by the County to
determine if additional remedial measures are needed. The Company has not
been named as a Potentially Liable Party ("PLP") under the State Toxic
Control Act ("STCA") or as a Potentially Responsible Party ("PRP") under
CERCLA, as amended ("CERCLA"). To date, test results have not shown the
waste disposed of by the Company at Mica to be a source of pollution or
contamination. Prior to 1989 certain third parties were designated PRP's and
PLP's . The Company made a provision prior to the beginning of fiscal year
1992 based on information then currently available to it and the Company's
prior experience in connection with another NPL landfill site where the
Company disposed of a similar type of waste which it disposed of at Mica, for
its estimate of probable legal costs to be associated with this matter. No
provision has been made for probable liability for remedial action, because
management does not believe a range of probable or reasonably possible costs
is estimable at this time based upon the fact that the Company to date has
not been named a PRP or PLP and the uncertainty as to what additional
pollution or contamination will be disclosed over the course of the County's
5 year monitoring and testing program. At fiscal year end 1994, 1993 and
1992 respectively, the accrued balance for probable legal costs was $900,000,
$1.250 million and $1.306 million. The reduction in the accrued balance
reflects charges for expenditures of $3,988 and $56,488 during fiscal years
1994 and 1993 respectively and a reduction in the accrued balance for legal
costs of $346,276 in 1994 based on management's revised estimate of the
probable future legal costs associated with this matter. Management does not
believe there to be any reasonably possible losses for legal costs beyond
the existing accrual for probable losses which could be material to future
financial position or results of operations. No provision has been made to
cover any future costs to the Company of any remedial action or clean-up
activities because those costs, if any, can not be determined at this time.
Given the inherent uncertainty in environmental matters, limited information
available with respect to any future remedial measures, uncertainty of the
results of future monitoring tests, limited information as to the number of
PRP's and PLP's , the uncertainty as to whether the Company will be
designated a PRP or PLP with respect to the site and the complexity of the
circumstances surrounding this matter, management's estimate is subject to
and will change as facts and circumstances warrant. Based upon publicly
available cost estimates of remediation and clean-up at the site and the
contributions to date of designated PRP's and PLP's, management believes that
insurance coverage is probable for any reasonably possible future remedial or
clean-up costs to the Company.
Pursuant to the Amended and Restated Purchase and Sale Agreement between
Honeywell, Inc. and Key Tronic Corporation, dated as of July 30, 1993 (the
"Agreement"), the Company assumed known and unknown product liabilities and
unknown but potentially incurred environmental liabilities for a portion of
any pre-existing claims against Honeywell, Inc. ("Honeywell") which are
asserted after the closing date relating to environmental matters and to
product liability matters associated with products manufactured by Honeywell
prior to its ceasing manufacture of those products on the closing date of the
Agreement. Honeywell retained responsibility for unasserted claims not
assumed by the Company as follows: Honeywell retained responsibility for
environmental and product liability claims, incurred but not reported as of
the closing date, in excess of $1,000,000 in the aggregate which 1) in the
case of environmental claims are asserted within two years following the
closing date or which 2) in the case of product liability claims are asserted
within five years following the closing date. Management estimated on the
closing date of the acquisition that it was probable that $1.0 million of
incurred but not reported product liability claims would be recorded during
the 5 year period following the closing of the Agreement and the Company
recorded this liability as part of the acquisition costs. At fiscal year end
1994 the accrued balance for these product liability claims was $949,273.
The reduction in the accrued balance reflects charges for expenses in fiscal
1994. Management does not believe there to be any reasonably possible
product liability losses beyond the existing accrual for probable losses
which could be material to future financial position or results of
operations. The Company has not made a provision for Honeywell environmental
claims which may be discovered and asserted after the closing date or product
liability claims which may be asserted five or more years after the closing
date, because management does not believe such potential liabilities are
reasonably possible at this time. No environmental claims have been asserted
as of fiscal year end 1994. Given the inherent uncertainty in litigation, in
environmental matters and in contract interpretation, the inherently limited
information available with respect to unasserted claims and the complexity of
the circumstances surrounding these matters, management's estimates are
subject to and will change or be established as facts and circumstances
warrant.
The Company has assumed certain obligations under the Agreement related
to a patent infringement claim associated with Honeywell products. The
Company made a provision in 1994 in the amount of $455,000, based upon
information which became available to it after the closing date, for its
estimate of probable costs to be associated with this patent infringement
claim. These matters are in the early stages of investigation. Management
does not believe there to be any reasonably possible losses beyond the
existing accrual for probable losses which could be material to future
financial position or results of operations.
The Company currently has ninety- six suits by computer keyboard users
which are in State or Federal Courts in California, Florida, Kentucky,
Pennsylvania, New Jersey and 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 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. The Florida, one New Jersey and the
Pennsylvania suits were removed from New York. A total of eight suits have
been dismissed from New York, California and Texas, the dismissal of one
California suit was recently reversed on appeal. The Company believes it has
valid defenses and will vigorously defend these claims. These claims are in
the early stages of discovery. Given the early stage of litigation, the
complexity of the litigation, the inherent uncertainty of litigation and the
ultimate resolution of insurance coverage issues, the range of reasonably
possible losses in connection with these suits is not estimable at this time.
Therefore no provision has been made to cover any future costs. Management's
position will change if warranted by facts and circumstances.
The Company's total accrual for litigation related matters, including
compensatory damages, and legal costs, was $2.4 million and $1.5 million as
of July 2, 1994 and July 3, 1993, respectively. $1.0 million of the increase
during 1994 was a liability recorded with the acquisition of Honeywell,
Inc.'s Keyboard Division (see Note 15). A $470,000 provision was recorded in
1992 within general and administrative expenses. No net change in the
provision was recorded in 1994 or 1993.
CAPITAL EXPENDITURES AND OTHER
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $227,000 at July 2, 1994.
The subsidiary in Ireland has received reimbursement grants from the
Irish government for capital expenditures which may become repayable under
certain circumstances through 2003, which are not deemed to be probable.
Capital expenditures are recorded net of reimbursement grants received. The
amount of the grants which may become repayable were approximately $2,413,000
at July 2, 1994. Certain significant events such as closure of the Irish
plant would cause such repayment.
The Company has also entered into several contracts, extending one to two
years, which require the Company to purchase minimum quantities of certain
raw materials and components. As of July 2, 1994, minimum purchase contracts
amounted to $1.2 million for fiscal 1995 and $.8 million for fiscal 1996.
OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
At July 2, 1994, the Company had entered into forward exchange contracts
with financial institutions to buy $5.5 million of Irish punts. Forward
exchange contracts, which are valued in U.S. dollars based on the year - end
spot rate, had maturity dates ranging from 19 days to four months. In the
event of a failure to honor one of these contracts by the contracting bank,
management believes any loss would be limited to the exchange rate
differential from the time the contract was made until the time it was
compensated.
The Company distributes products primarily to Original Equipment
Manufacturers (OEM's) and as a result maintains individually significant
accounts receivable balances from various major OEM's. 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.
10. FOREIGN OPERATIONS
The Company currently operates in one business segment, the manufacture of
computer peripheral equipment, primarily keyboards and other input devices.
Information concerning geographic areas for the years ended July 2, 1994,
July 3, 1993 and July 4, 1992 is summarized in the following table.
Domestic U.S. Mexico Ireland Taiwan
Exports Operations Operations Operations Operations Eliminations Consolidated
-------- ---------- ---------- ---------- ---------- ------------ ------------
1994 (in thousands)
Net Sales:
Unaffiliated customers $ 37,133 $ 91,220 $ 0 $ 31,094 $ 0 $ 0 $ 159,447
Affiliates 7,311 7,175 1,386 0 (15,872) 0
-------- ---------- ---------- ---------- ---------- ---------- ------------
Total $ 37,133 $ 98,531 $ 7,175 $ 32,480 $ 0 $ (15,872) $ 159,447
======== ========== ========== ========== ========== ========== ============
Income before
income taxes $ (7,817) $ 119 $ (1,096) $ 0 $ (1,008) $ (9,802)
======== ========= ========== ========== ========== ============
Identifiable assets $ 86,892 $ 761 $ 16,323 $ 2,016 $ (4,064) $ 101,928
======== ========= ========== ========== ========== ============
1993
Net Sales:
Unaffiliated customers $ 19,060 $ 70,339 $ 33,919 $ 0 $ 0 $ 123,318
Affiliates 6,785 1,709 0 (8,494) 0
---------- ---------- ----------- ---------- -----------
Total $ 19,060 $ 77,124 $ 35,628 $ 0 $ (8,494) $ 123,318
======== ========== ========== =========== ========== ============
Income (loss) before
income taxes $ (1,742) $ 5,966 $ 0 $ 147 $ 4,371
======== ========== =========== =========== ============
Identifiable assets $ 43,765 $ 15,857 $ 3,129 $ (905) $ 61,846
======== ========== =========== =========== ============
1992
Net Sales:
Unaffiliated customers $ 13,431 $ 77,162 $ 30,876 $ 2,514 $ 0 $ 123,983
Affiliates $ 9,651 340 1,061 (11,052) 0
--------- --------- ---------- ----------- ------------
Total $ 13,431 $ 86,813 $ 31,216 $ 3,575 $ (11,052) $ 123,983
======== ========= ========= ========== =========== ============
Income (loss) before
income taxes $ (6,840) $ 1,470 $ (1,934)$ (20) $ (7,324)
========= ========= ========== =========== ============
Identifiable assets $ 47,219 $ 12,807 $ 6,229 $ (4,032) $ 62,223
========= ========= ========== =========== ============
Historically, exports from domestic operations are sold primarily to
European customers. Transfers to affiliates are made at prices which
approximate market.
There are no customer countries or regions which are individually significant to
total export sales for any of the Company's individual operations or for
operations in the aggregate.
Mexico had no operations in 1993 and 1992 as the Mexican operation was acquired
in the business combination with HKD in fiscal year 1994 (see Note 15).
11. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended
July 2, July 3, July 4,
1994 1993 1992
------- ------- -------
(in thousands)
Interest payments $ 1,849 $ 123 $ 251
Income tax payments 0 342 137
Stock exchange for net assets (Note 15) $ 3,200 0 0
12. SUPPLEMENTAL INCOME STATEMENT INFORMATION
Years Ended
July 2, July 3, July 4,
1994 1993 1992
------- ------- -------
(in thousands)
Maintenance and repairs $ 2,509 $ 2,363 $ 2,459
13. QUARTERLY FINANCIAL DATA (Unaudited)
Year Ended July 2, 1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
Net sales $ 36,071 $ 41,262 $ 39,423 $ 42,692
Gross profit 4,535 4,554 3,481 5,053
Income (loss) before income taxes (1,569) (2,345) (4,762) (1,126)
Net income (loss) 7,109 (2,303) (4,772) (1,094)
Primary earnings per common share 0.77 (0.28) (0.58) (0.13)
Fully diluted earnings per common share 0.77 N.A. N.A. N.A.
Weighted average shares outstanding 8,130 8,255 8,266 8,271
Primary shares outstanding 9,418 N.A. N.A. N.A.
Fully diluted shares outstanding 9,427 N.A. N.A. N.A.
Common stock price range 1
High 10.750 9.250 9.000 8.000
Low 8.750 6.000 6.250 6.000
Year Ended July 3, 1993
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share amounts)
Net sales $ 31,581 $ 32,613 $ 32,226 $ 26,898
Gross profit 7,015 7,743 8,701 4,786
Income (loss) before income taxes 870 1,520 2,031 (50)
Net income (loss) 891 1,419 1,684 (145)
Primary earnings per common share 0.11 0.16 0.18 (.02)
Fully diluted earnings per common share 0.11 0.15 0.18 N.A.
Weighted average shares outstanding 0 0 0 0
Primary shares outstanding 8,884 9,046 9,366 7,828
Fully diluted shares outstanding 8,884 9,288 9,439 N.A.
Common stock price range<FN> 1
High 7.125 10.500 12.875 14.000
Low 5.250 6.625 9.500 9.500
[FN]1High and low stock prices are based on the daily closing price reported by
theNASDAQ National Market System. These quotations represent prices between
dealers without adjustment for markups, markdowns or 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
two 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 March 31, 1995, there were approximately 1,715 common shareholders of
record.
14. RESTRUCTURING CHARGES
For the years ended July 2, 1994 and July 4, 1992 the Company made
provisions for the restructuring of certain business lines. The charges were
$1,021,000 in 1994 and $5,480,000 in 1992.
In 1994 this provision represented costs to redeploy production from the
Company's Cheney WA plant to other Company plants where lower costs can be
attained. The provision included $592,000 to reduce certain assets to estimated
realizable value, $207,000 for severance and $222,000 for other costs directly
associated with this plant closure. The restructuring activities were
implemented during the Company's third fiscal quarter of 1994 and were scheduled
for completion in the fourth fiscal quarter of 1994 or the first fiscal quarter
of 1995.
The writedown of assets is comprised of equipment writedown and facility
writedown. The equipment writedown was estimated as the difference between book
value and the highest firm offer on the equipment. The building writedown was
estimated as the difference between book value and average value determined from
multiple independent market valuations. This writedown had no effect on cash or
cash equivalents.
The severance charge was calculated by applying the Company's standard
severance policy to the employee's affected.
The direct cost charge is primarily transportation costs associated with
the relocation of equipment from the closing facility to other Company
facilities
In 1992 this provision represented costs to close the Company's plant in
Taiwan and printed circuit board and sheet metal operations to redeploy
production to other locations or outside vendors where lower costs can be
attained. The provision included $2,606,000 to reduce certain assets to
estimated realizable value, $954,000 for severance and $1,921,000 for other
directly associated costs. The restructuring activities were implemented during
the Company's fourth fiscal quarter of 1992 and were completed in fiscal 1993,
except the amount provided for Taiwanese liquidation taxes has not yet been
paid. The formal dissolution is pending governmental approval from Taiwan and is
anticipated to occur in the fourth fiscal quarter of 1995 or the first fiscal
quarter of 1996.
The writedown of assets is comprised of writedowns on equipment and
inventory. The equipment writedown was estimated as the difference between book
value and the estimated fair value of the equipment. The inventory writedown
was estimated as the difference between book value and estimated realizable
value of the inventory. These writedowns have no effect on cash or cash
equivalents.
The severance charge was calculated by applying the Company's standard
severance policy to the employee's affected.
The direct cost charge consists of approximately $502,000 in restoration
costs on leased facilities, $416,000 of rent under lease obligations, $395,000
in Taiwanese liquidation taxes, $230,000 for environmental impact statements and
related costs, and $378,000 for other direct costs.
In 1994, the provision reduced property and equipment and real estate held
for sale by $242,000 and $350,000, respectively. In 1992, the provision reduced
inventory and property and equipment by $1,075,000 and $1,531,000, respectively.
Additionally, accrued wages increased by $426,000 and other current liabilities
increased by $2,448,000 for estimated costs that relate to this restructuring.
Reserve for Restructuring Obligations 1994 1993 1992
---------- ---------- ----------
Balance at beginning of year $ 621,000 $2,430,000 $1,705,000
Provision charged to income 1,021,000 0 5,480,000
Amounts paid (765,000) (1,809,000) (4,755,000)
---------- ---------- ----------
Balance at end of year $ 877,000 $ 621,000 $2,430,000
========== ========== ==========
15. BUSINESS COMBINATION
On July 30, 1993, the Company acquired substantially all of the assets and
liabilities of Honeywell, Inc.'s Keyboard Division (HKD). The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the underlying acquired assets and assumed
liabilities at their estimated fair market values at July 30, 1993.
Acquisition costs are summarized as follows (in thousands):
Cash $ 22,000
Liabilities assumed 5,832
Acquisition costs 5,000
Note payable, Honeywell Inc. 3,648
Common stock issued 3,200
----------
Total $ 39,680
----------
These costs were allocated based on fair value as follows:
Trade receivables $ 8,505
Inventories 10,964
Other current assets 489
Property, plant and equipment 17,922
Goodwill 1,800
----------
Total $ 39,680
----------
The stock was recorded at a twenty percent discount to the closing market
price on July 30, 1993 due to the three year trading restrictions on the stock
at the acquisition date. The costs incurred as part of the acquisition included
$1,125,000 for severance for terminating employees of HKD, $175,000 for
transition payroll for terminating employees of HKD, $1,100,000 for relocation
of employees of HKD, $700,000 for the closure of an acquired facility,
$1,000,000 for the assumption of certain potential liabilities (see note 9), and
$900,000 for certain other direct purchase and integration costs.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
NOTE 1 - General
The objective of the Pro Forma Statement of Operations is to show what the
significant effects on the historical financial information might have been had
the Company acquired the Keyboard Division of Honeywell, Inc. on July 5, 1992.
The amounts are based upon certain assumptions and estimates which Key Tronic
Corporation believes are reasonable.
NOTE 2 - Pro Forma Statement of Operations
As required by APB Opinion No. 16, pro forma information on results of
operations is presented for the years ended July 2, 1994 and July 3, 1993. The
results of operations is being reported as if the companies had combined at the
beginning of each respective fiscal year.
For year July 3, 1993 the information reported is actual results of
operations for both companies. Adjustments to the Pro Forma Statement of
Operations primarily give effect to the elimination of corporate allocations
from Honeywell, Inc., the recognition of interest expense on the acquisition
debt, and the effect on per share earnings as a result of the additional shares
issued in the acquisition. The corporate allocations were predominately charged
as a percentage of division revenues for general corporate overhead and do not
represent specific costs incurred on behalf of the division.
For the year ended July 2, 1994 the information reported is one month of
results of operations for the Honeywell Keyboard Division and the actual results
of operations for Key Tronic Corporation, as Key Tronic Corporation's actual
results include eleven months of operations of the former Honeywell Keyboard
Division.
NOTE 3 - Allocations
Corporate allocations for services provided by Honeywell headquarters for
the Keyboard Division were eliminated. These services were for payroll
processing, employee benefit administration, treasury and banking services and
in-house legal services. Key Tronic already performs these functions and does
not anticipate increased costs in these areas.
The following pro forma information represents the results of operations of
the Company and HKD for the years ended July 2, 1994 and July 3, 1993, on an
individual as well as combined basis. The pro forma results do not necessarily
indicate the actual results that would have been obtained, nor are they
necessarily indicative of the future operations of the combined companies. The
unaudited pro forma results of operations were as follows:
Year Ended July 2, 1994
Honeywell
Keyboard Key Tronic
Division Corporation Combined
--------- ----------- --------
(dollars in thousands, except per share amounts)
Net Sales $5,539 $159,447 $164,986
Cost of sales 5,296 142,397 147,693
---------- ---------- ----------
Gross Profit on Sales 243 17,050 17,293
Operating Expenses:
Research, development and engineering 383 5,836 6,219
Selling 417 7,409 7,826
General and administrative 324 10,950 11,274
Restructuring of business line 0 1,021 1,021
---------- ---------- ----------
OPERATING INCOME (LOSS) (881) (8,166) (9,047)
Net Interest Income (Expense) and Other 46 (1,636) (1,590)
---------- ---------- ----------
Income (Loss) Before federal taxes on income
and cumulative effect of change in accounting
principle (835) (9,802) (10,637)
Provision (Benefit) for Income Taxes 0 8 8
---------- ---------- ----------
Earnings (Loss) before cumulative effect
of change in accounting principle (835) (9,810) (10,645)
Cumulative effect to July 4, 1993, of
change in accounting for income taxes 0 8,750 8,750
---------- ---------- ----------
Net Income (Loss) $ (835) $ (1,060) $ (1,895)
========== ========== ==========
Earnings (Loss) Per Share:
Before cumulative effect of change
in accounting principle $ N.A. $ (1.19) $ (1.29)
========== ========== ==========
Primary Earnings Per Common Share net
of cumulative effect of change in
accounting principle $ N.A. $ (0.13) $ (0.23)
========== ========== ==========
Fully Diluted Earnings Per Common Share
net of cumulative effect of change in
accounting principle $ N.A. $ N.A. $ N.A.
========== ========== ==========
Weighted Average Shares Outstanding N.A. 8,231 8,231
========== ========== ==========
Primary Shares Outstanding N.A. N.A. N.A.
========== ========== ==========
Fully Diluted Shares Outstanding N.A. N.A. N.A.
========== ========== ==========
Year Ended July 3, 1993
Honeywell
Keyboard Key Tronic
Division Corporation Adjustments Combined
---------- ----------- ----------- ----------
(dollars in thousands, except per share amounts)
Net Sales $83,109 $123,318 0 $206,427
Cost of sales 66,736 95,073 0 161,809
---------- ----------- ----------- ----------
Gross Profit on Sales 16,373 28,245 0 44,618
Operating Expenses:
Research, development and engineering 4,923 6,701 (118) 11,506
Selling 5,561 7,616 13,177
General and administrative 4,671 9,778 (1,126) 13,323
----------- ----------- ----------- ----------
Operating Income 1,218 4,150 1,244 6,612
Net Interest Income and Other 306 221 (1,759) (1,232)
---------- ----------- ----------- ----------
Income before income taxes 1,524 4,371 (515) 5,380
Provision for Income Taxes 0 522 0 522
---------- ----------- ----------- ----------
Net Income $ 1,524 $ 3,849 $ (515) $ 4,858
========== =========== =========== ==========
Earnings Per Share:
Primary Earnings Per Common Share $ N.A. $ 0.42 $ .09 $ 0.51
========== =========== =========== ==========
Fully Diluted Earnings Per Common Share $ N.A. $ 0.42 $ .09 $ 0.51
========== =========== =========== ==========
Primary Shares Outstanding N.A. 9,102 400 9,502
========== =========== =========== ==========
Fully Diluted Shares Outstanding N.A. 9,204 400 9,604
========== =========== =========== =========
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND
SIGNATURES
SCHEDULE VIII
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 2, 1994
JULY 3, 1993 AND JULY 4, 1992
1994 1993 1992
---------- ---------- ----------
Allowance for Obsolete Inventory
Balance at beginning of year $ 726,838 $3,053,786 $5,053,467
Assets acquired in acquisition 2,071,558 0 0
Provision charged to income 1,757,713 534,200 2,451,959
Dispositions (974,662) (2,861,148) (4,451,640)
---------- ---------- ----------
Balance at end of year $3,581,447 $ 726,838 $ ,053,786
Allowance for Doubtful Accounts
Balance at beginning of year $ 1,110,582 $ 791,505 $ 521,944
Assets acquired in acquisition 637,156 0 0
Provision charged to income 542,179 713,390 465,556
Write-offs and reinstatements (751,400) (394,313) (195,995)
---------- ---------- ----------
Balance at end of year $ 1,538,517 $1,110,582 $ 791,505
=========== ========== ==========
Reserve for Litigation
Balance at beginning of year $ 1,500,091 $2,755,879 $2,367,157
Assets acquired in acquisition 1,000,000 0 0
Provision charged (credited) to income 0 0 470,000
Cost incurred-net of recoveries (73,716) (1,255,788) (81,278)
----------- ---------- ----------
Balance at end of year 2,426,375 1,500,091 2,755,879
Less long-term portion 0 0 0
---------- ---------- ----------
Current portion $ 2,426,375 $1,500,091 $2,755,879
=========== ========== ==========
Accrued Warranty Costs
Balance at beginning of year $ 332,093 $ 570,532 $ 420,000
Assets acquired in acquisition 627,341 0 0
Provision charged to income 646,759 765,535 684,567
Costs incurred (843,909) (1,003,974) (534,035)
----------- ---------- ----------
Balance at end of year $ 762,284 $ 332,093 $ 570,532
========== ========== ==========
Long-term Investment Allowance
Balance at beginning of year $ 290,490 $ 290,490 $ 290,000
Provision charged to income 0 0 490
---------- ---------- ----------
Balance at end of year $ 290,490 $ 290,490 $ 290,490
========== ========== ==========
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: May 19, 1995
KEY TRONIC CORPORATION
By: /s/ Stanley Hiller, Jr.
--------------------------------------------
Stanley Hiller, Jr., 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/ Stanley Hiller, Jr. 5-19-95
- ------------------------ --------
Stanley Hiller, Jr. Date
(Chief Executive Officer
and Director)
/s/ Ronald F. Klawitter 5-19-95
- ------------------------ --------
Ronald F. Klawitter Date
(Principal Financial
and Accounting Officer)
/s/ Thomas W. Cason 5-19-95
- ------------------------ --------
Thomas W. Cason Date
(President, Chief Operating Officer
and Director)
/s/ Wendell J. Satre 5-19-95
- ------------------------ --------
Wendell J. Satre Date
(Chairman)
/s/ Lewis G. Zirkle 5-19-95
- ------------------------ --------
Lewis G. Zirkle Date
(Director)
SIGNATURES
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/ Yacov A. Shamash 5-19-95
- ------------------------ --------
Yacov A. Shamash Date
(Director)
/s/ Dale F. Pilz 5-19-95
- ------------------------ --------
Dale F. Pilz Date
(Director)
/s/ William E. Terry 5-19-95
- ------------------------ --------
William E. Terry Date
(Director)