UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
---------------------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to ____
Commission File No. 0-21820
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KEY TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Oregon 93-0822509
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Avery Street, Walla Walla, Washington 99362
(Address of principal executive offices) (Zip Code)
(509) 529-2161
(Registrant's telephone number, including area code)
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
The number of shares outstanding of the Registrant's common stock, no par
value, on July 31, 2002 was 4,764,893 shares.
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2002
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed unaudited consolidated balance sheets, June 30, 2002
and September 30, 2001.........................................3
Condensed unaudited consolidated statements of operations for the
three months ended June 30, 2002 and 2001......................4
Condensed unaudited consolidated statements of operations for the
nine months ended June 30, 2002 and 2001.......................6
Condensed unaudited consolidated statements of cash flows for
the nine months ended June 30, 2002 and 2001..................8
Notes to condensed unaudited consolidated financial statements......9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................30
SIGNATURES...................................................................31
EXHIBIT INDEX................................................................32
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
June 30, September 30,
2002 2001
-------- ------------
(in thousands)
Assets
- ----------------------------------------------------------
Current assets:
Cash and cash equivalents $ 1,818 $ 738
Trade accounts receivable, net 10,286 13,072
Inventories:
Raw materials 6,760 6,099
Work-in-process and sub-assemblies 6,195 6,057
Finished goods 2,320 2,305
------- -------
Total inventories 15,275 14,461
Other current assets 3,122 2,708
Assets held for sale - 8,460
------- -------
Total current assets 30,501 39,439
Property, plant and equipment, net 6,857 11,436
Deferred income taxes 3,780 5,376
Intangibles and other assets, net 13,580 18,590
------- -------
Total $54,718 $74,841
======= =======
Liabilities and Shareholders' Equity
- ---------------------------------------------------------
Current liabilities:
Short-term borrowings $ - $ 2,000
Accounts payable 3,206 5,395
Accrued payroll liabilities and commissions 2,992 2,533
Income tax payable 267 338
Other accrued liabilities 2,889 2,076
Customers' deposits 2,790 2,200
Current portion of long-term debt 5,529 11,739
Liabilities held for sale - 2,436
------- -------
Total current liabilities 17,673 28,717
Long-term debt 1,450 6,581
Deferred income taxes 249 301
Mandatorily redeemable preferred stock and warrants 12,118 13,531
Total shareholders' equity 23,228 25,711
------- -------
Total $54,718 $74,841
======= =======
See notes to condensed unaudited consolidated financial statements.
3
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------------- ----------------
(in thousands, except per share data)
Net sales $ 19,890 $ 20,518
Cost of sales 11,607 12,362
-------- --------
Gross profit 8,283 8,156
Operating expenses:
Selling 2,875 3,122
Research and development 1,104 1,208
General and administrative 1,953 1,905
Amortization of intangibles 331 507
-------- --------
Total operating expenses 6,263 6,742
Gain on sale of assets 884 -
-------- --------
Earnings from operations 2,904 1,414
Other expense (208) (482)
-------- --------
Earnings from continuing operations 2,696 932
Income tax expense 965 347
-------- --------
Net earnings from continuing operations 1,731 585
Net earnings from discontinued operation (net of income tax) - 157
-------- --------
Net earnings before extraodinary item 1,731 742
Extraordinary item: Loss on early extinguishment of
debt, net of income tax (341) -
-------- --------
Net earnings 1,390 742
Accretion of mandatorily redeemable preferred stock (189) (235)
-------- --------
Net earnings available to common shareholders $ 1,201 $ 507
======== ========
Net earnings from continuing operations per share
- - basic $ 0.32 $ 0.08
======== ========
- - diluted $ 0.31 $ 0.07
======== ========
Net earnings from discontinued operation per share -
- - basic $ - $ 0.03
======== ========
- - diluted $ - $ 0.03
======== ========
Continued
See notes to condensed unaudited consolidated financial statements.
4
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------------- ----------------
(in thousands, except per share data)
Net earnings per share before extraordinary item
- - basic $ 0.32 $ 0.11
======= =======
- - diluted $ 0.31 $ 0.10
======= =======
Net loss from extraordinary item per share
- - basic $ (0.07) $ -
======= =======
- - diluted $ (0.06) $ -
======= =======
Net earnings per share
- - basic $ 0.25 $ 0.11
======= =======
- - diluted $ 0.25 $ 0.10
======= =======
Shares used in per share calculations - basic 4,762 4,742
Shares used in per share calculations - diluted 5,570 4,941
Concluded
See notes to condensed unaudited consolidated financial statements.
5
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------------- -----------------
(in thousands, except per share data)
Net sales $ 52,684 $57,644
Cost of sales 31,444 36,593
-------- --------
Gross profit 21,240 21,051
Operating expenses:
Selling 8,244 10,332
Research and development 3,365 4,280
General and administrative 5,275 5,769
Amortization of intangibles 992 1,535
-------- --------
Total operating expenses 17,876 21,916
Gain on sale of assets 931 63
-------- --------
Earnings (loss) from operations 4,295 (802)
Other income expense (800) (1,137)
-------- --------
Earnings (loss) from continuing operations 3,495 (1,939)
Income tax expense (benefit) 1,220 (732)
-------- --------
Net earnings (loss) from continuing operations 2,275 (1,207)
Net earnings (loss) from discontinued operation (net of
income tax) 39 (161)
-------- --------
Net earnings (loss) before extraordinary item and change
in accounting principle 2,314 (1,368)
Extraordinary item: Loss on early extinguishment of
debt, net of income tax (385) -
Change in accounting principle: Impairment of goodwill,
net of income tax (4,302) -
-------- --------
Net loss (2,373) (1,368)
Accretion of mandatorily redeemable preferred stock (582) (704)
-------- --------
Net loss available to common shareholders (2,955) (2,072)
======== ========
Net earnings (loss) from continuing operations per share
- basic and diluted $ 0.35 $ (0.40)
======== ========
Net earnings (loss) from discontinued operation per share -
- basic and diluted $ 0.01 $ (0.04)
======== ========
Continued
See notes to condensed unaudited consolidated financial statements.
6
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------------- -----------------
(in thousands, except per share data)
Net earnings (loss) per share before extraordinary item and
change in accounting principle
- basic and diluted $ 0.36 $ (0.44)
======= ========
Net loss from extraordinary item per share
- basic and diluted $ (0.08) $ -
======= ========
Net loss from change in accounting principle per share
- basic and diluted $ (0.90) $ -
======= ========
Net loss per share
- basic and diluted $ (0.62) $ (0.44)
======= ========
Shares used in per share calculations - basic 4,757 4,738
======= ========
Shares used in per share calculations - diluted 4,757 4,738
======= ========
Concluded
See notes to condensed unaudited consolidated financial statements.
7
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
-------- --------
(in thousands)
Net cash provided by operating activities $ 7,702 $ 2,255
Cash flows from investing activities:
Cash proceeds from sale of discontinued operation 3,577 -
Proceeds from sale of property 4,337 317
Additions to property, plant and equipment (464) (498)
------- --------
Net cash provided by (used in) investing activities 7,450 (181)
------- --------
Cash flows from financing activities:
Repayment of short-term borrowings (2,000) -
Additions to long-term debt 6,500 -
Repayment of long-term debt (17,965) (4,929)
Prepayment penalty on retirement of debt (516) -
Proceeds from issuance of common stock 39 58
Redemption of warrants (78) (1,807)
------- --------
Net cash used in financing activities (14,020) (6,678)
------- --------
Effect of exchange rates on cash 125 (68)
------- --------
Net increase (decrease) in cash and cash equivalents from
continuing operations 1,257 (4,672)
Net decrease in cash and cash equivalents from
discontinued operation (177) (392)
Cash and cash equivalents, beginning of the period 738 6,427
------- --------
Cash and cash equivalents, end of the period $ 1,818 $ 1,363
======= ========
Supplemental information:
Cash paid during the period for interest $ 700 $ 1,472
Cash refunded during the period for income taxes $ (674) $ (702)
Equipment obtained through lease financing $ 100 $ 126
Accounts payable paid through lease financing $ - $ 856
See notes to condensed unaudited consolidated financial statements.
8
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Condensed unaudited consolidated financial statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted from these
condensed unaudited consolidated financial statements. These condensed
unaudited consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended September 30, 2001. The results of
operations for the three- and nine-month periods ended June 30, 2002 are
not necessarily indicative of the operating results for the full year.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, have been made to present fairly the Company's
financial position at June 30, 2002 and the results of its operations for
the three- and nine-month periods ended June 30, 2002 and 2001 and its cash
flows for the nine-month periods ended June 30, 2002 and 2001.
2. Income taxes
The provision for income taxes is based on the estimated effective income
tax rate for the year.
3. Comprehensive income (loss)
The Company's consolidated comprehensive income (loss) was $1,894,000 and
$583,000 for the three months ended June 30, 2002 and 2001, respectively,
and ($1,940,000) and ($1,596,000) for the nine months ended June 30, 2002
and 2001, respectively. The differences between the net earnings (loss)
reported in the consolidated statement of operations and the consolidated
comprehensive net income (loss) for the periods consisted of changes in
foreign currency translation adjustments.
4. Sale of building
In April 2002, the Company completed the sale of its Medford facility,
which had a net book value of approximately $3.5 million, for $4.6 million
and moved its remaining Medford operations into a small leased portion of
the facility. The proceeds of the sale were used to retire the mortgage on
the building totaling $2.8 million, requiring an early payment penalty of
$516,000, resulting in net cash proceeds from the sale of $972,000 after
paying the costs associated with the sale. The lease is for a five year
term at approximately $9,600 per month plus shared occupancy costs. The
base lease will be accounted for as an operating lease. As a result of the
debt repayment, a loss on early extinguishment of debt of $533,000, and
related income tax benefits of $192,000, was recorded as an extraordinary
item in the third quarter.
9
5. Goodwill and other intangible assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, which is effective October 1, 2002 and may be
adopted early. The Company elected to adopt SFAS No. 142 prior to its
filing of its first quarter financial statements on Form 10-Q for the
quarter ending December 31, 2001. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill, and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No.
142 also requires the Company to complete a transitional goodwill
impairment test within six months from the date of adoption. As a result of
the implementation of this change in accounting principle, the Company
recorded an impairment of goodwill associated with the automated inspection
systems reporting unit, based on a discounted cash-flow analysis, effective
at the beginning of the fiscal year, of $4.4 million, and related income
tax benefits of $71,000,. The Company determined there was no impairment to
the $2.4 million of goodwill associated with the process systems reporting
unit.
As of September 30, 2001 the Company had approximately $6.9 million of
intangible assets which are no longer being amortized. Amortization of
these assets was $177,000 and $532,000 in the three and nine-month periods
ended June 30, 2001, respectively. In addition, amortization of goodwill
and other indefinite life intangible assets included in discontinued
operations was $49,000 and $148,000 in the three and nine-month periods
ended June 30, 2001, respectively.
In compliance with SFAS No. 142, the results for the prior year's quarter
and nine months ended June 30, 2001 have not been restated. A
reconciliation of net loss and loss per share as if SFAS No. 142 had been
adopted in the prior periods in fiscal 2001 is presented below. These
proforma results do not include the impairment of goodwill.
10
Three months ended Nine months ended
June 30, 2001 June 30, 2001
As Previously As Previously
Reported Adjustments Proforma Reported Adjustments Proforma
-------------------------------------- -------------------------------------------
Net earnings (loss) from continuing
operations-net of tax $585 $140 $725 ($1,207) $421 ($786)
Net earnings (loss) from discontinued
operations-net of tax $157 $31 $188 ($161) $95 ($66)
Net earnings (loss) $742 $171 $913 ($1,368) $516 ($852)
Net earnings (loss) from continuing
operations per share - basic $0.08 $0.02 $0.10 ($0.40) $0.08 ($0.32)
- diluted $0.07 $0.03 $0.10 ($0.40) $0.08 ($0.32)
Net earnings (loss) from discontinued
operation per share - basic and diluted $0.03 $0.01 $0.04 ($0.04) $0.03 $0.01
Net earnings (loss) per share - basic $0.11 $0.03 $0.14 ($0.44) $0.11 ($0.33)
- diluted $0.10 $0.04 $0.14 ($0.44) $0.11 ($0.33)
As of September 30, 2001 the Company had approximately $10.9 million of
intangible assets related to patents and developed technologies with a net
book value of approximately $9.1 million; $1.7 million of intangible assets
related to purchased trademarks and trade names with a net book value of
approximately $1.5 million; and $900,000 of intangible assets related to
purchased customer development with a net book value of approximately
$800,000. The significant majority of these assets are being amortized over
10 years. Amortization expense for the next five fiscal years is expected
to be approximately $1.3 million per year.
6. Mandatorily redeemable preferred stock and warrants
The Company issued 1,340,366 shares of Series B convertible preferred stock
("Series B") and 365,222 warrants in conjunction with the acquisition of
Advance Machine Vision Company ("AMVC") in July 2000.
At June 30, 2002, there were 1,137,404 shares of Series B and 74,110
warrants still outstanding. If all holders were to redeem their preferred
stock and warrants at the earliest possible time, the cash requirements
would have been $741,000 at June 30, 2002 and an additional $11.4 million
after July 12, 2002. At June 30, 2002, the credit facilities then in place,
together with available cash reserves, were not sufficient to provide for
these potential redemption claims should they be made at the earliest
possible time.
11
In anticipation of these obligations, the Company commenced an offer in
April 2002 to exchange one share of a newly authorized Series D Convertible
Preferred for each outstanding share of Series B Convertible Preferred. The
new Series D Preferred would accrue a cumulative dividend of $0.50 per
share per year, payable quarterly when and as declared; would be
convertible at any time into 1 1/3 shares of Key Technology common stock
for each share of Series D Preferred; and would allow the holder to request
redemption of up to 50% of their Series D Preferred stock for $10.00 per
share in cash after July 12, 2003 and another 50% after July 12, 2004. The
Exchange Offer was subject to certain conditions, including a requirement
that the Company receive an acceptable number (70%) of Series B for
exchange.
With the completion of the refinance of its credit facility described
below, which provides funding for all potential redemption claims for the
preferred stock and warrants, the Exchange Offer was terminated on August
12, 2002.
As of the close of business on August 9, 2002, approximately 628,927, or
55.29%, of the shares of Series B Convertible Preferred Stock had been
submitted to the Company for redemption.
7. Financing agreements
The Company had a domestic credit accommodation with a commercial bank
which provided for revolving credit loans and an operating line up to $4.5
million. The operating line expired November 30, 2001 and the outstanding
balance of $2.0 million was repaid. In January 2002, the Company completed
the refinancing of its domestic credit accommodation. The refinanced
domestic credit accommodation provided for a term loan of $6.5 million and
a revolving credit facility of up to the lesser of $10.0 million or the
available borrowing base, which is based on varying percentages of eligible
accounts receivable and inventories. As of June 30, 2002 the borrowing base
on the revolving credit facility was $9.2 million. The refinanced domestic
credit accommodation bears interest at the bank's prime rate plus 2% per
annum, was secured by all of the personal property of the Company and its
subsidiaries and contains covenants, effective beginning March 31, 2002,
which require the maintenance of a defined debt service ratio, and limits
capital expenditures. The $6.5 million term loan requires quarterly
principal installments of $500,000, the first of which was made as
scheduled on March 31, 2002, plus 50% of excess cash flow (as defined in
the borrowing agreement), subject to certain minimum payments through
October 2003. The $10.0 million credit facility expires in November 2002.
The accompanying balance sheet for the period ended September 30, 2001
reflects the effect of the January 2002 refinancing and the associated
scheduled debt maturities. As of June 30, 2002, borrowings under these
facilities were $4.9 million and $1.1 million, respectively. The interest
rate was 6.75%. As of June 30, 2002, the Company had made all required
principle payments and was in compliance with the loan covenants. As a
result of the refinancing of the previous credit accommodations, a loss on
the early extinguishment of debt of $68,000, and related income tax
benefits of $24,000, was recorded as an extraordinary item.
12
On August 9, 2002, subsequent to the close of the third fiscal quarter, the
Company refinanced its credit facility with a new credit facility provided
by a new principal lender. The new credit facility includes a credit
accommodation totaling $18.0 million in the United States consisting of a
term loan of $4.0 million, a revolving credit facility of up to the lesser
of $10.0 million or the available borrowing base, which is based on varying
percentages of eligible accounts receivable and inventories, and a $4.0
million standby line of credit. The revolving credit facility and the
standby line of credit mature on July 31, 2003. The term loan requires
quarterly payments of principal of $200,000 beginning November 2002 and
matures on July 31, 2007. The standby line of credit reduces in amount of
availability beginning November 1, 2002 by the greater of $1,000,000 or 50%
of net cash generated from operations for the previous fiscal quarter. The
refinanced term loan and operating line bear interest at the Wall Street
Journal prime rate plus 1% per annum, which totaled 5.75% at closing, while
the standby line of credit, should it be utilized, bears interest at the
Wall Street Journal prime rate plus 2%. The credit facility is secured by
all of the US personal property, including patents and other intangibles,
of the Company and its subsidiaries, and contains covenants, effective
beginning August 31, 2002, which require the maintenance of a defined debt
service ratio, a defined net worth balance and ratio, minimum working
capital and current ratio, and minimum profitability. Had this credit
facility been in place at June 30, 2002, the Company would have been in
compliance with all loan covenants and would have had an available
borrowing base of approximately $8.5 million under the revolving credit
facility.
Additionally, the Company is in final negotiations with a commercial bank
in The Netherlands to provide a credit facility for its European
subsidiary. As proposed, this credit accommodation totals (euro)3.3 million
and will include a term loan of (euro)836,000, an operating line of the
lesser of (euro)1.5 million or the available borrowing base, which will be
based on varying percentages of eligible accounts receivable and
inventories, and a bank guarantee facility of (euro)1.0 million. The term
loan will be secured by real property of the Company's European subsidiary,
while the operating line and bank guarantee facility will be secured by all
of the subsidiary's personal property. The credit facility will bear
interest at the bank's prime rate plus 1.75%, which at August 9, 2002
totaled 5.75%. The Company expects to close on this credit facility by the
end of August 2002.
8. Future accounting changes
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which is effective October 1, 2003. SFAS No. 143
requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development, or normal operation of a
long-lived asset. The Company is currently assessing but has not yet
determined the effect of SFAS No. 143 on its financial position, results of
operations, and cash flows.
In the fourth quarter of fiscal 2001, the Company adopted Emerging Issues
Task Force Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs ("EITF 00-10"). As a
13
result, the Company now accounts for revenue generated by shipping
products to customers as net sales. Previously, these amounts were
included in other income (expense) along with the related costs incurred
to ship the products. Net sales, cost of sales, and other income (expense)
for prior periods have been restated to reflect EITF 00-10. This change
has no effect on reported net earnings (loss) or earnings (loss) per share.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which is effective October 1, 2002. Earlier application of
this Statement was encouraged, but not required. SFAS No. 145, among other
things, rescinds the requirement of SFAS No. 4 to treat gains and losses on
the early extinguishment of debt as extraordinary items. Restatement of
prior periods is required. As a result, management believes that amounts
recorded in the current fiscal year as extraordinary items from the early
extinguishment of debt will be restated to part of net income from
continuing operations when this Statement is adopted in the next fiscal
year.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring.
This statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company believes that
this statement will not have a material effect on its financial statements.
9. Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth below may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements to
differ from those expressed or implied by the forward-looking statements. With
respect to the Company, the following factors, among others, could cause actual
results or outcomes to differ materially from current expectations:
o the effect of adverse economic conditions in markets served by the Company
and the financial capacity of customers to purchase capital equipment;
o the ability of new products to compete successfully in either existing or
new markets;
o increased competition and its effects on our product pricing and customer
capital spending;
o the risks involved in expanding international operations and sales;
o availability and future costs of materials and other operating expenses;
o risks associated with adverse fluctuations in the foreign currency exchange
rates;
o the potential for patent-related litigation expenses and other costs
resulting from claims asserted against the Company or its customers by
third parties; and
o other factors discussed in Exhibit 99.1 to the Company's Annual Report on
Form 10-K filed with the SEC in January 2002 which exhibit is hereby
incorporated by reference.
Given these uncertainties, readers are cautioned not to place undue reliance on
the forward-looking statements. The Company disclaims any obligation
subsequently to revise or update forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Application of Critical Accounting Policies
The Company has identified its critical accounting policies, the application of
which have the potential for material effect on the financial statements, either
because of the significance of the financial statement item to which they
relate, or because they require management judgement to make estimates and
assumptions in measuring, at a specific point in time, events which will be
settled in the future. The critical accounting policies, judgments and
estimates, which management believes have the most significant effect on the
financial statements are set forth below:
o Revenue recognition
o Allowances for doubtful accounts and warranties
o Valuation of inventories
o Long-lived assets and Statement of Financial Accounting Standards ("SFAS)
No. 142
o Accounting for income taxes
Revenue Recognition. The Company recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred or services have been provided, the
sale price is fixed or determinable, and collectibility is reasonably assured.
Accordingly, revenue recognition from product sales occurs when the terms of
sale transfer title and risk of loss, which occurs either upon shipment or upon
receipt by customers. Revenue earned from service is recognized ratably over the
contractual period or as the services are performed. If all conditions of
revenue recognition are not met, the Company defers revenue recognition.
15
Allowances for doubtful accounts and warranties. The Company establishes
allowances for doubtful accounts and warranties for specifically identified, as
well as anticipated, doubtful accounts and warranty claims based on credit
profiles of our customers, current economic trends, contractual terms and
conditions, and historical payment and warranty experience. As of June 30, 2002
the balance sheet included allowances for doubtful accounts of $371,000 and for
warranties of $772,000. If the Company experiences actual bad debt and warranty
expense different from estimates, or if estimates are adjusted in future
periods, the operating results, cash flows and financial position of the Company
could be materially adversely affected.
Valuation of inventories. Inventories are stated at the lower of cost or market.
Cost is determined based on a currently-adjusted standard basis. The Company's
inventory includes purchased raw materials, manufactured components, work in
process, finished goods and demonstration equipment. Provisions for excess and
obsolete inventories are made after periodic evaluation of historical sales,
current economic trends, forecasted sales, predicted product lifecycles and
current inventory levels. If actual demand, market conditions or product
lifecycles are different from those estimated by management, the Company's
operating results, cash flows and financial position could be materially
adversely affected.
Long-lived assets and SFAS No. 142. The Company regularly reviews all of its
long-lived assets, including property, plant and equipment and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. If the total of future undiscounted
cash flows is less than the carrying amount of assets, an impairment loss based
on the excess of the carrying amount over the fair value of the assets is
recorded. As of June 30, 2002, the Company held $19.7 million of property, plant
and equipment and other intangible assets, net of depreciation and amortization.
Estimates of future cash flows arising from the utilization of these long-lived
assets and estimated useful lives associated with the assets are critical to the
assessment of fair values. Changes in these estimates could have a material
effect on the financial statements in any given period.
The Company elected to adopt SFAS No. 142 prior to its filing of its first
quarter financial statements on Form 10-Q for the quarter ending December 31,
2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill, and the identification
of reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test within six months from the date of adoption. As a
result of the implementation of this change in accounting principle, the Company
recorded an impairment of goodwill associated with the automated inspection
systems reporting unit, effective at the beginning of the fiscal year, of $4.4
million, and related income tax benefits of $71,000. The Company determined
there was no impairment to the $2.4 million of goodwill associated with the
process systems reporting unit. The impairment of goodwill was reported as a
change in accounting principle, which is reported separately from the results of
continuing operations, and included separate earnings per share disclosures.
16
Accounting for income taxes. The Company's provision for income taxes and the
determination of the resulting deferred tax assets and liabilities involves a
significant amount of management judgement. The quarterly provision for income
taxes is based partially upon estimates of pre-tax financial accounting income
for the full year and is affected by various differences between financial
accounting income and taxable income. Judgement is also applied in determining
whether the deferred tax assets will be realized in full or in part. In
management's judgement, when it is more likely than not that all or some portion
of specific deferred tax assets such as foreign tax credit carryovers will not
be realized, a valuation allowance must be established for the amount of the
deferred tax assets that are determined not to be realizable. There was no
valuation allowance at June 30, 2002, due to anticipated utilization of all tax
deferred tax assets. If the Company's facts or financial results were to change,
thereby affecting the likelihood of realizing the deferred tax assets, judgement
would have to be applied to determine the amount of the valuation allowance
required to be included in the financial statements established in any given
period.
Results of Operations
Sales for the three-month period ended June 30, 2002 totaled $19.9 million,
compared with $20.5 million for the same quarter in fiscal 2001. Net earnings
from continuing operations for the quarter were $1.7 million, or $0.31 per
diluted share, compared with net earnings from continuing operations of
$585,000, or $0.07 per diluted share, in the same period a year ago. For the
quarter just ended, the Company also reported an extraordinary loss on the early
extinguishment of debt. The net earnings after extraordinary items were $1.4
million, or $0.25 per diluted share, compared to net earnings of $742,000, or
$0.10 per diluted share, in the same period a year ago.
Sales for the nine months ended June 30, 2002 were $52.7 million compared with
$57.6 million for the comparable period in fiscal 2001. The Company reported net
earnings from continuing operations for the period of $2.3 million, or $0.35 per
diluted share, compared with a net loss from continuing operations of $1.2
million, or $0.40 per diluted share, for the corresponding nine-month period in
fiscal 2001. The Company also recorded a loss on the impairment of goodwill,
resulting from the implementation of Statement of Financial Accounting Standards
(SFAS) No. 142, which was reported as a change in accounting principle and was
effective as of the beginning of the Company's 2002 fiscal year. The net loss
for the nine months ended June 30, 2002, after extraordinary items and the
change in accounting principle, was $2.4 million, or $0.62 per diluted share,
compared to a net loss of $1.4 million, or $0.44 per diluted share, for the
nine-month period in fiscal 2001.
Net earnings from continuing operations for the quarter and nine-month periods
ended June 30, 2002 include a one-time gain on the sale of the Company's Medford
facility and decreased amortization expense as a result of the Company's
implementation of SFAS No. 142, as set forth in the accompanying income
statements. Sales, expenses and operating results for the quarter
17
and nine-month periods ended June 2001 exclude the activities of a discontinued
operation, Ventek, Inc., the divestiture of which was completed in the quarter
ended December 2001.
Three Months. Net sales decreased approximately $628,000 or 3% in the
three-month period ended June 30, 2002 compared to the corresponding period in
fiscal 2001. The decrease in net sales between the two periods resulted
principally from decreased sales in the process systems product group and
replacement parts, partially offset by increased sales in the automated
inspection system product group. Multiple units of the Company's new Optyx(R)
sorter were shipped in the most recent quarter, with orders for additional units
received for future shipment. The system is now operating in multiple plants on
over a dozen applications. Additionally, an increase in shipments of Tegra(R)
was more than offset by a decreases in Tobacco Sorter(TM)3, the Company's
tobacco sorting system, and the ADR(R)4, an automated inspection system for
frozen french fry processing. The results in the most recent quarter included a
significant increase in shipments to the vegetable processing market, a market
that had shown capital spending restraint in previous quarters.
Orders for the third quarter of fiscal 2002 totaled $21.2 million, an increase
of 20% from $17.7 million for the corresponding period in fiscal 2001. Orders
for process systems and automated inspection systems increased 59% and 16%,
respectively, compared to the same quarter of fiscal 2001, and were partially
offset by a decrease in orders for parts and service. Orders for process systems
products increased significantly in both North America and Europe. Orders for
the Tegra and Tobacco Sorter product lines in the automated inspection group
were quite strong compared with the same period of last year.
The Company's backlog at the close of the June 30, 2002 quarter totaled $18.9
million, a 40% increase from a backlog of $13.5 million at the same time last
year. Process systems represented 47% of the total backlog at the more recent
quarter-end compared to 39% one year ago, resulting in a less favorable product
mix in backlog going into the Company's fourth quarter. However, increased
efficiencies in the Company's manufacturing operations, when compared to a year
ago, should yield gross profit margins in the range of those experienced in the
completed quarters of the current fiscal year.
Gross profit for the third quarter of fiscal 2002 was $8.3 million compared to
$8.2 million in the corresponding quarter last year, or 41.6% and 39.8% of net
sales, respectively. Gross profit for the third quarter also improved over the
39.9% recorded in the second quarter of this fiscal year, representing a third
consecutive quarter of improved profit margins as a percent of sales. Gross
margins for the quarter were favorably affected by a comparatively favorable
product mix and improvements in manufacturing efficiencies across most product
lines, including improvements in utilization of production and service capacity
resulting in decreased costs associated with under-utilized resources.
Operating expenses were $6.3 million in the three-month period ended June 30,
2002, a 7% decrease compared to $6.7 million for the three-month period ended
June 30, 2001. In the more recent period, selling expenses decreased by 8% to
$2.9 million, research and development
18
expenses decreased by 9% to $1.1 million and general and administrative
expenses increased 3% to $2.0 million. The Company implemented SFAS No. 142 at
the beginning of its fiscal 2002, which reduced goodwill amortization by
approximately $177,000 per quarter, the primary contributor to a 35% decrease in
amortization when compared with fiscal 2001. The Company experienced higher than
normal professional service fees during its most recent quarter than is typical,
due to current analytical activities related to among other things, SFAS No.
142, and does not anticipate the same level of spending in that classification
of expenses in its fourth quarter. The Company anticipates that operating
expenses in its fourth fiscal quarter will be lower than levels experienced in
the third quarter and more similar to levels experienced in its first and second
quarters.
For the fiscal quarter ended June 30, 2002, other expense totaled $208,000
compared to $482,000 for the corresponding period in fiscal 2001, due
principally to reduced interest expense related to reductions of
interest-bearing debt and decreased losses in foreign currency exchange. As a
result of the cancellation of the Exchange Offer and the refinance of its credit
facility completed subsequent to the end of the third fiscal quarter, the
Company expects to record certain one-time charges in its fourth fiscal quarter.
These charges are currently estimated at $170,000 of additional other expense
related to the cancellation of the Exchange Offer and a $120,000 extraordinary
charge for unamortized costs of the January 2002 refinancing the Company's
credit facility.
In April 2002 the Company completed the sale of its Medford, Oregon facility for
$4.6 million and moved its remaining Medford operations into a small leased
portion of the sold facility. As a result of this sale, the Company included a
gain of approximately $884,000 in earnings from continuing operations. A loss
from the early extinguishment of debt of $341,000 (net of income taxes), related
to the early payment penalty on the retirement of the mortgage on the building,
was recorded as an extraordinary item.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
which is effective October 1, 2002. Earlier application of this Statement was
encouraged, but not required. SFAS No. 145, among other things, rescinds the
requirement of SFAS No. 4 to treat gains and losses on the early extinguishment
of debt as extraordinary items. Restatement of prior periods is required. As a
result, management believes that amounts recorded in the current fiscal year as
extraordinary items from the early extinguishment of debt will be restated to
part of net income from continuing operations when this Statement is adopted in
the next fiscal year.
Nine months. Net sales for the nine-month period ended June 30, 2002 decreased
9% to $52.7 million from $57.6 million in the comparable period last year. The
decrease in net sales for the nine-month period over the fiscal 2001 period
resulted from decreased sales across all three product groups. Significant
incremental shipments of the Company's new Optyx sorter were more than offset by
decreases in sales of other automated inspection products, together with
decreased shipments in the process system and parts and service product groups
compared to the prior nine-month period. While sales of process systems products
into North American markets
19
were at levels comparable to a year ago, shipments of that product group in the
European market decreased, principally due to the nonrecurrance of a large sale
to a french fry processor during the first nine months of fiscal 2001.
Total European sales for the nine-month period ended June 30, 2002 decreased 34%
compared to the corresponding period last year. This decrease consisted of a 48%
decrease in automated inspection systems manufactured in the United States and a
23% decrease in process systems and parts and service manufactured and supplied
from the Company's facility in The Netherlands. International orders received
through the first nine months of fiscal 2001 represented 49% of total orders, an
amount somewhat higher than levels in prior years.
Orders for the nine months ended June 30, 2002 totaled $58.7 million, an
increase of 4% from $56.7 million for the corresponding period in fiscal 2001.
Orders for process systems increased 16% compared to the same period of fiscal
2001, but were partially offset by decreases in orders for automated inspection
systems. Orders for the Tegra product line and the recently introduced Optyx
inspection system were quite strong compared with the same period last year,
while orders for TS3 and ADR4 systems were well off of fiscal 2001 activity.
Even with comparatively lower sales volumes for the nine months ended June 30,
2002, gross profit increased to $21.2 million, or 40.3% of net sales, compared
to $21.1 million, or 36.5% of net sales, in the nine months ended June 30, 2001.
Gross profit margin during the nine-month period ended June 30, 2002 increased
over the corresponding period in 2001 due principally to improvements in
manufacturing efficiencies and improvements in utilization of production and
service capacity, which resulted in decreased costs associated with
under-utilized resources. Increased margins provided by the process systems
product group were partially offset by decreased margins from the automated
inspection systems and parts and service groups.
Total operating expenses decreased by $4.0 million, or 18%, to $17.9 million in
the nine-month period ended June 30, 2002 from $21.9 million in the comparable
period in the previous fiscal year. In the more recent period, selling expenses
decreased by 20% to $8.2 million, research and development expenses decreased by
21% to $3.4 million and general and administrative expenses decreased 9% to $5.3
million. The Company implemented SFAS No. 142 at the beginning of its fiscal
2002, which reduced the goodwill amortization for the nine-month period by
approximately $532,000, the primary contributor to a 35% decrease in
amortization when compared with the same period in fiscal 2001, and effectively
increasing the Company's reported earnings from operations. The decrease in each
area of operating expenses is the result of cost reduction programs, which were
implemented in prior periods.
The gain on the sale of the Company's Medford facility and the sale of a vacant
lot contributed $931,000 to earnings from operations for the nine-month period
ended June 30, 2002 compared to gain on sale of a vacant lot of $63,000 in the
same period last year.
For the nine-month period ended June 30, 2002, other expense was $800,000
compared to $1.1 million for the corresponding period in fiscal 2001. Decreased
interest expense, resulting from decreased interest-bearing debt in the most
recent period, was the principal contributor to the
20
decrease in other expense, partially offset by increases in foreign currency
losses due to adverse fluctuations in exchange rates.
The Company reported income from continuing operations of $2.3 million for the
nine months ended June 30, 2002 compared to a loss from continuing operations of
$1.2 million for the nine months ended June 30, 2001. The decrease in sales
revenue was more than offset by improved gross profit margins, decreased
operating expenses and increased other income.
For the nine month period ended June 30, 2002, total extraordinary losses from
the early extinguishment of debt, which also includes the Company's January
refinancing of its credit facilities with its principal lender, were $385,000
(net of income taxes).
The Company implemented SFAS No. 142 at the beginning of its fiscal 2002, which
reduced the goodwill amortization by approximately $177,000 per quarter before
taxes, when compared to fiscal 2001. SFAS No. 142 also required the Company to
complete a transitional goodwill impairment test. As a result of this
transitional test, the Company recorded an impairment loss on goodwill
associated with the automated inspection systems reporting unit of $4.4 million,
and related income tax benefits of $71,000. This impairment loss has been
reported as a change in accounting principle. Per the requirements of SFAS No.
142, although the transitional impairment test was not completed until the
fiscal third quarter, it is treated as being effective as of the beginning of
the fiscal year. As such, the nine-month period ended June 30, 2002 has been
presented to reflect the impairment as of the beginning of the fiscal year. The
Company determined that there was no impairment related to the $2.4 million in
goodwill associated with the process systems reporting unit.
As a result of the effects of the extraordinary loss and the change in
accounting principle, the Company reported a net loss of $2.4 million for the
nine months ended June 30, 2002 compared with a net loss of $1.4 million for the
corresponding period last year.
Management's diligent focus on reduced operating expenses and manufacturing
execution allowed the Company to return to profitability in the second quarter
and formed the foundation of solid overall performance through the third
quarter. The Company anticipates continued profitability in the fourth quarter,
even though no growth is anticipated in top-line revenues in fiscal 2002 over
fiscal 2001.
From time to time in the normal course of business, the Company is party to
litigation concerning patent infringement or employment issues, either as
claimant or defendant. At June 30, 2002 the Company is not a party to any
intellectual property legal proceeding or contingency. However, a claim has been
filed against the Company's European subsidiary relative to an employment
contract termination. In management's opinion, the claim is without merit and,
if necessary, could be settled at an amount that would not materially adversely
affect the Company's operating results, cash flows and financial position.
In compliance with SFAS No. 142, the results for the prior year's quarter and
nine months ended have not been restated. A reconciliation of net loss and loss
per share as if SFAS No. 142 had
21
been adopted in the prior periods is presented below. These proforma
results do not include the impairment of goodwill. As of September 30, 2001 the
Company had approximately $6.9 million of intangible assets, prior to the
recording of the impairment, which are no longer being amortized. Amortization
of these assets was $177,000 and $532,000 in the three and nine-month periods
ended June 30, 2001, respectively. In addition, amortization of goodwill and
other indefinite life intangible assets included in discontinued operations was
$49,000 and $148,000 in the three and nine-month periods ended June 30, 2001,
respectively.
Three months ended Nine months ended
June 30, 2001 June 30, 2001
As As
Previously Previously
Reported Adjustments Proforma Reported Adjustments Proforma
-------------------------------------------- -------------------------------------------
Net earnings (loss) from continuing
operations-net of tax $585 $140 $725 ($1,207) $421 ($786)
Net earnings (loss) from discontinued
operation-net of tax $157 $31 $188 ($161) $95 ($66)
Net earnings (loss) $742 $171 $913 ($1,368) $516 ($852)
Net earnings (loss) from continuing
operations per share - basic $0.08 $0.02 $0.10 ($0.40) $0.08 ($0.32)
- diluted $0.07 $0.03 $0.10 ($0.40) $0.08 ($0.32)
Net earnings (loss) from discontinued
operation per share - basic and diluted $0.03 $0.01 $0.04 ($0.04) $0.03 $0.01
Net earnings (loss) per share - basic $0.11 $0.03 $0.14 ($0.44) $0.11 ($0.33)
- diluted $0.10 $0.04 $0.14 ($0.44) $0.11 ($0.33)
As of September 30, 2001 the Company had approximately $10.9 million of
intangible assets related to patents and developed technologies with a net book
value of approximately $9.1 million; $1.7 million of intangible assets related
to purchased trademarks and trade names with a net book value of approximately
$1.5 million; and $900,000 of intangible assets related to purchased customer
development with a net book value of approximately $800,000. The significant
majority of these assets are being amortized over 10 years. Amortization expense
for the next five fiscal years is expected to be approximately $1.3 million per
year.
Liquidity and Capital Resources
For the nine-month period ended June 30, 2002, net cash provided by operating
activities totaled $7.7 million compared with $2.3 million in the corresponding
period of the prior fiscal year. During the most recent nine-month period, net
earnings, net of non-cash charges, contributed cash of $5.7 million from
operating activities. Non-cash charges consisted primarily of
22
depreciation, amortization, deferred income taxes (due to application of
net operating loss carryforwards) and the provision for impairment of goodwill.
Cash from operations was also provided by a decrease in trade accounts
receivable of $3.2 million, a net decrease in income tax receivables due to
refunds of previously paid income tax of $652,000, an increase in customer
deposits of $535,000, an increase in accrued payroll liabilities of $429,000 and
increases in other accrued liabilities of $612,000, which changes were partially
offset by cash used to increase inventories by $436,000, increase prepaid
expenses and other assets by $498,000, increase other long term assets by
$245,000 and decrease trade accounts payable by $2.3 million.
Cash flows from investing activities during the nine months ended June 30, 2002
included cash proceeds from the sale of Ventek of $3.6 million. Cash proceeds
during the nine months ended June 30, 2002 included $4.3 million from the sale
of the Company's Medford facility, compared to proceeds of $317,000 from sales
of property in nine months ended June 30, 2001. Net cash resources totaling
$464,000 were also used to fund the acquisition of capital goods in the most
recent nine-month period compared to $498,000 in the corresponding period last
year. At June 30, 2002, the Company had no significant commitments for capital
expenditures.
The Company's cash flows from financing activities for the nine months ended
June 30, 2002 were principally affected by the repayment of short-term
borrowings of $2.0 million, net repayments of long-term debt of $11.5 million, a
$516,000 early payment penalty on retirement of the mortgage on the sold Medford
facility, and redemption of $78,000 of warrants that were issued as part of the
acquisition of AMVC. In the corresponding period in fiscal 2001, the Company
repaid long-term debt totaling $4.9 million, and redeemed $1.8 million of
warrants. Proceeds from the issuance of common stock during the first nine
months of fiscal 2002 under the Company's employee stock option and stock
purchase plans totaled $39,000 compared to $58,000 in the corresponding period
last year.
During the nine-month period ended June 30, 2002, working capital increased by
$2.1 million to $12.8 million. At the end of the period, the balance of cash and
cash equivalents totaled $1.8 million, a $1.1 million increase compared to the
balance at the beginning of the period, resulting from the Company's operating,
investing and financing activities during the period. Trade accounts receivable
decreased by $2.8 million principally as a result of improved collections of
aged accounts. Inventories increased by $814,000 principally as a result of
increases in raw materials inventories to support the future production
requirements represented in the increased backlog. Assets held for sale
decreased by $8.5 million as a result of the sale of Ventek, Inc. Current
liabilities decreased by a net amount of $11.0 million during the quarter,
including decreases of $8.2 million in short term borrowings and debt, $2.2
million in accounts payable and $2.4 million in liabilities held for sale, the
latter as a result of the sale of Ventek, Inc. The decreases in these current
liabilities were partially offset by an increase of $590,000 in customers'
deposits, $459,000 in accrued payroll and $742,000 in income tax payable and
other accrued liabilities.
During its fiscal third quarter, the Company completed the sale of its Medford
facility, which had a net book value of approximately $3.5 million, for $4.6
million and moved its remaining Medford operations into a small leased portion
of the facility. The proceeds of the sale were used
23
to retire the mortgage on the building totaling $2.8 million, requiring an
early payment penalty of $516,000, resulting in net cash proceeds from the sale
of $972,000 after paying the costs associated with the sale. The lease is for a
five year term at approximately $9,600 per month plus shared occupancy costs.
The base lease will be accounted for as an operating lease.
Cash contributed from operations of $7.7 million, and cash provided from the
sale of Ventek in November and the sale of the Medford facility in April
totaling $7.9 million, was used primarily to reduce debt by $13.5 million during
the nine months ended June 30, 2002. Additionally, the cancellation of $2.0
million of redemption value of the Series B Preferred Stock as part of the
Ventek sale contributed to the Company's improved balance sheet during the most
recent nine-month period. This together with the improved operating results
presented the Company with the opportunity to approach the credit markets to
replace its existing credit facilities with facilities sufficient to accommodate
the potential demands that could be made upon the Company to redeem its Series B
Preferred Stock as described below.
The Company had a domestic credit accommodation with a commercial bank which
provided for revolving credit loans and an operating line up to $4.5 million.
The operating line expired November 30, 2001 and the outstanding balance of $2.0
million was repaid. In January 2002, the Company completed the refinancing of
its domestic credit accommodation. The refinanced domestic credit accommodation
provided for a term loan of $6.5 million and a revolving credit facility of up
to the lesser of $10.0 million or the available borrowing base, which is based
on varying percentages of eligible accounts receivable and inventories. As of
June 30, 2002 the borrowing base on the revolving credit facility was $9.2
million. The refinanced domestic credit accommodation bears interest at the
bank's prime rate plus 2% per annum, was secured by all of the personal property
of the Company and its subsidiaries and contains covenants, effective beginning
March 31, 2002, which require the maintenance of a defined debt service ratio,
and limits capital expenditures. The $6.5 million term loan requires quarterly
principal installments of $500,000, the first of which was made as scheduled on
March 31, 2002, plus 50% of excess cash flow (as defined in the borrowing
agreement), subject to certain minimum payments through October 2003. The $10.0
million credit facility expires in November 2002. The accompanying balance sheet
for the period ended September 30, 2001 reflects the effect of the January 2002
refinancing and the associated scheduled debt maturities. As of June 30, 2002,
borrowings under these facilities were $4.9 million and $1.1 million,
respectively. The interest rate was 6.75%. As of June 30, 2002, the Company had
made all required principle payments and was in compliance with the loan
covenants. As a result of the refinancing of the previous credit accommodations,
a loss on the early extinguishment of debt of $68,000, and related income tax
benefits of $24,000, was recorded as an extraordinary item.
On August 9, 2002, subsequent to the close of the third fiscal quarter, the
Company refinanced its credit facility with a new credit facility provided by a
new principal lender. The new credit facility includes a credit accommodation
totaling $18.0 million in the United States consisting of a term loan of $4.0
million, a revolving credit facility of up to the lesser of $10.0 million or the
available borrowing base, which is based on varying percentages of eligible
accounts receivable and inventories, and a $4.0 million standby line of credit.
The revolving credit facility and the standby line of credit mature on July 31,
2003. The term loan requires quarterly payments of
24
principal of $200,000 beginning November 2002 and matures on July 31, 2007.
The standby line of credit reduces in amount of availability beginning November
1, 2002 and each quarter thereafter by the greater of $1,000,000 or 50% of net
cash generated from operations for the previous fiscal quarter. The refinanced
term loan and operating line bear interest at the Wall Street Journal prime rate
plus 1% per annum, which totaled 5.75% at closing, while the standby line of
credit, should it be utilized, bears interest at the Wall Street Journal prime
rate plus 2%. The credit facility is secured by all of the US personal property,
including patents and other intangibles, of the Company and its subsidiaries,
and contains covenants, effective beginning August 31, 2002, which require the
maintenance of a defined debt service ratio, a defined net worth balance and
ratio, minimum working capital and current ratio, and minimum profitability. Had
this credit facility been in place at June 30, 2002, the Company would have been
in compliance with all loan covenants and would have had an available borrowing
base of approximately $8.5 million under the revolving credit facility.
Additionally, the Company is in final negotiations with a commercial bank in The
Netherlands to provide a credit facility for its European subsidiary. As
proposed, this credit accommodation totals (euro)3.3 million and will include a
term loan of (euro)836,000, an operating line of the lesser of (euro)1.5 million
or the available borrowing base, which will be based on varying percentages of
eligible accounts receivable and inventories, and a bank guarantee facility of
(euro)1.0 million. The term loan will be secured by real property of the
Company's European subsidiary, while the operating line and bank guarantee
facility will be secured by all of the subsidiary's personal property. The
credit facility will bear interest at the bank's prime rate plus 1.75%, which at
August 9, 2002 totaled 5.75%. The Company expects to close on this credit
facility by the end of August 2002.
In connection with the acquisition of AMVC in fiscal 2000, the Company issued
Series B Convertible Preferred stock and warrants, both of which carry
conversion or redemption privileges. A complete description of these instruments
is contained in the Company's Registration Statement on Form S-4, Post-Effective
Amendment No. 1, filed March 23, 2001. A brief description of the securities
outstanding at June 30, 2002 is as follows:
o Outstanding Series B Convertible Preferred stock at June 30, 2002
totaled 1,137,404 shares. Each share is convertible at the election of
the holder at any time for 2/3 of a share of the Company's common
stock, or is redeemable at the election of the holder for a three-year
period beginning July 12, 2002 for $10.00 per share.
o Outstanding warrants at June 30, 2002 totaled 74,110. Each whole
warrant entitles the holder to purchase one share of the Company's
common stock for $15.00 or is redeemable by the holder at any time
prior to expiration for $10.00.
If all holders were to redeem their warrants and preferred stock at the earliest
possible time, the cash requirements would have been $741,000 at June 30, 2002
and an additional $11.4 million after July 12, 2002. At June 30, 2002, the
credit facilities then in place, together with available cash reserves, were not
sufficient to provide for these potential redemption claims should they be made
at the earliest possible time.
25
In anticipation of these obligations, the Company commenced an offer on April
25, 2002 to exchange one share of a newly authorized Series D Convertible
Preferred for each outstanding share of Series B Convertible Preferred. The new
Series D Preferred would accrue a cumulative dividend of $0.50 per share per
year, payable quarterly when and as declared; would be convertible at any time
into 1 1/3 shares of Key Technology common stock for each share of Series D
Preferred; and would allow the holder to request redemption of up to 50% of
their Series D Preferred stock for $10.00 per share in cash after July 12, 2003,
and another 50% after July 12, 2004. The Exchange Offer was subject to certain
conditions, including a requirement that the Company receive an acceptable
number (70%) of Series B for exchange.
The exchange offer was extended on June 14, 2002, June 28, 2002 and again on
July 25, 2002 to a final expiration date of August 16, 2002. With the completion
of the refinance of its credit facility, which provides funding for all
potential redemption claims for the preferred stock and warrants, the Exchange
Offer was terminated on August 12, 2002.
As of the close of business on August 9, 2002, approximately 628,927, or 55.29%,
of the shares of Series B Convertible Preferred Stock had been submitted to the
Company for redemption. The redemption price for all shares submitted was paid
by the Company on August 12, 2002. The Company anticipates that future
redemption claims will be paid in the normal course as they are presented.
The Company's continuing contractual obligations and commercial commitments
existing on June 30, 2002 are as follows:
Payments due by period (in Thousands)
Less than 1 After 5
Contractual Obligations Total year 1-3 years 4-5 years years
- -------------------------------------------------------------------------------------------------
Long-term debt * $ 6,300 $ 5,232 $ 960 $ 108 $ -
Capital lease obligations 679 296 328 55 -
Operating leases 10,878 1,129 2,487 2,568 4,694
Warrant redemption
obligations ** 741 741 - - -
Series B redemption
obligations 11,374 11,374 - - -
-----------------------------------------------------------------
Total contractual cash
obligations $29,972 $18,772 $ 3,775 $ 2,731 $ 4,694
=================================================================
* Includes the revolving credit line, term loan and mortgage payments on
the Company's owned facility in Europe. Subsequent to the close of the third
fiscal quarter, the Company made a required payment of $1,275,000, reducing its
long-term debt with its principle lender. On August 9, 2002 the Company
refinanced its credit facility with a new principle lender. If the payment of
principal and the refinance were reflected in the above table, amounts due in
less than one year would be reduced by $3,659,000, amounts due in one to three
years would be increased by $784,000 and amounts due in four to five years would
be increased by $1,600,000.
26
** As of August 9, 2002, the total number of shares of preferred stock that
had been submitted for redemption totaled 628,927 shares, or 55.29% of the total
shares outstanding. The redemption price for all shares placed was paid on
August 12, 2002, a total of $6,289,270. The Company anticipates that future
redemption claims will be paid in the normal course as they are presented. The
effect of the payment of the redemption claims on August 12, 2002 reduced the
Series B redemption obligation and increased the long-term debt obligations due
in less than one year by the same $6,289,270. If all remaining potential
redemption claims associated with the warrant and Series B preferred were
submitted, payment could be accommodated within the credit limits of the new
credit facility, and would be reflected on the above table as a reduction to
warrants and Series B with a like increase in long-term debt due in less than
one year.
(In Thousands) Amount of commitment expiration by period
Total
Other commercial amounts Less than 1 After 5
commitments committed year 1-3 years 4-5 years years
- -------------------------------------------------------------------------------------------------
Revolving line of credit ** $10,000 $10,000 $ - $ - $ -
Standby letters of credit 300 300 - - -
----------------------------------------------------------------
Total contractual cash
obligations $10,300 $10,300 $ - $ - $ -
================================================================
** Balance of this revolving line of credit at June 30, 2002 was $1.1
million, payment of which is included in the payments due schedule above.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Market Risk
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are generally
limited to those affected by the relative strength of the U.S. Dollar against
the Euro.
The terms of sales to European customers by Key Technology B.V., the Company's
European subsidiary, are typically denominated in either Euros, U.S. Dollars, or
to a far lesser extent, the respective currencies of its European customers. The
Company expects that its standard terms of sales to international customers,
other than those in Europe, will continue to be denominated in U.S. dollars. For
sales transactions between the Company's domestic operations and international
customers, including European customers, which are denominated in currencies
other than U.S. dollars, the Company assesses its currency exchange risk and may
enter into a currency hedging transaction to minimize such risk. Based on
existing rights to receive funds from customer contracts denominated in euros,
the Company evaluated its foreign exchange risks during the quarter, and at June
30, 2002, the Company held non-designated forward exchange contracts to sell
euros totaling 1.1 million euros. As of June 30, 2002, management estimates that
a 10% change in foreign exchange rates would affect net income before taxes by
approximately $84,000 on an annual basis as a result of converted cash and
accounts receivable denominated in foreign currencies offset by the current
holdings of foreign exchange contracts.
During the nine-month period ended June 30, 2002, the Euro regained nearly 8% of
its value against the U.S. dollar, most of which occurred in the final weeks of
the quarter. The effect of the stronger Euro on the operations and financial
results of the Company were:
o Favorable translation adjustments of $434,000, net of income tax, were
recognized as a component of comprehensive income or loss during the nine
months ended June 30, 2002 as a result of converting the Euro denominated
balance sheet of Key Technology B.V. into U.S. dollars.
o Foreign currency transaction gains of $12,000 were recognized in the other
income and expense section of the consolidated income statement as a result
of conversion of Euro denominated receivables, cash and forward exchange
contracts carried on the balance sheet of the U.S. operations.
o Foreign currency transaction losses of $89,000 were recognized in the other
income and expense section of the consolidated income statement as a result
of conversion of non-euro denominated receivables and cash carried on the
balance sheet of the European operations.
A relatively weaker U.S. dollar on the world markets makes the Company's
U.S.-manufactured goods relatively less expensive to foreign customers when
denominated in U.S. dollars or potentially more profitable to the Company when
denominated in a foreign currency. Although the U.S. dollar weakened during the
final weeks of the quarter just ended, it continues to be relatively strong
against major currencies, including the euro. A continuing strength of the U.S.
dollar on the world markets may unfavorably affect the Company's market and
economic outlook for these international sales.
The Company believes that the reduction of U.S. interest rates early in its
current fiscal year resulted in a corresponding reduction of customers' cost of
capital, which had previously delayed
28
certain projects. However, there can be no assurance that customers in the
Company's markets will maintain or increase their investment in Company products
as a result of those changes in the cost of capital or other market or economic
factors.
Subsequent to June 30, 2002, the Company entered into a new credit
accommodations with a domestic bank. Under this new facility the Company may
borrow at rates ranging from prime rate plus 100 basis point to prime rate plus
200 basis points. At June 30, 2002, the Company had $6.0 million of borrowings
carrying variable interest rates. During the quarter then ended, interest on the
credit facility was 6.75%. Currently, the rates range between 5.75% and 6.75%.
As of June 30, 2002 management estimates that a 100 basis point change in the
interest rate would affect net income before taxes by approximately $60,000 on
an annual basis.
29
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(99.1) Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(99.2) Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three
months ended June 30, 2002.
30
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
SIGNATURES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements 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.
KEY TECHNOLOGY, INC.
(Registrant)
Date: August 14, 2002 By /s/ Thomas C. Madsen
Thomas C. Madsen,
Chairman and Chief Executive Officer
Date: August 14, 2002 By /s/ Ted R. Sharp
Ted R. Sharp,
Chief Financial Officer
(Principal Financial and Accounting Officer)
31
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2002
EXHIBIT INDEX
Exhibit Page
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002...........................33
99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002...........................34
32
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Key Technology, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas
C. Madsen, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Thomas C. Madsen
- -----------------------
Thomas C. Madsen
Chief Executive Officer
August 14, 2002
33
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Key Technology, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ted R.
Sharp, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(3) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Ted R. Sharp
- -----------------------
Ted R. Sharp
- -----------------------
Chief Financial Officer
August 14, 2002
34