UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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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 December 31, 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)
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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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of the Registrant's common stock, no par
value, on January 31, 2003 was 4,769,733 shares.
1
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed unaudited consolidated balance sheets,
December 31, 2002 and September 30, 2002.............................3
Condensed unaudited consolidated statements of
earnings (loss) for the three months ended
December 31, 2002 and 2001...........................................4
Condensed unaudited consolidated statements of
cash flows for the three months ended
December 31, 2002 and 2001...........................................6
Notes to condensed unaudited consolidated financial statements.........7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............17
Item 4. Controls and Procedures...............................................18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................19
SIGNATURES....................................................................20
EXHIBIT INDEX.................................................................23
2
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------
December 31, September 30,
2002 2002
---------- ----------
(in thousands)
Assets
- --------------------------------------------------------
Current assets:
Cash and cash equivalents $ 427 $ 1,707
Trade accounts receivable, net 8,376 7,556
Inventories:
Raw materials 7,299 6,416
Work-in-process and sub-assemblies 5,861 5,320
Finished goods 2,141 2,233
---------- ----------
Total inventories 15,301 13,969
Other current assets 3,297 3,207
---------- ----------
Total current assets 27,401 26,439
Property, plant and equipment, net 6,064 6,407
Deferred income taxes 3,049 3,472
Intangibles and other assets, net 13,090 13,502
---------- ----------
Total $ 49,604 $ 49,820
========== ==========
Liabilities and Shareholders' Equity
- --------------------------------------------------------
Current liabilities:
Short-term borrowings $ 3,469 $ 6,596
Accounts payable 3,331 1,437
Accrued payroll liabilities and commissions 2,414 2,769
Accrued customer support and warranty costs 957 999
Other accrued liabilities 2,306 1,969
Customers' deposits 5,035 3,328
Current portion of long-term debt 1,147 1,668
---------- ----------
Total current liabilities 18,659 18,766
Long-term debt 4,037 3,747
Deferred income taxes 230 238
Mandatorily redeemable preferred stock and warrants 2,508 3,467
Total shareholders' equity 24,170 23,602
---------- ----------
Total $ 49,604 $ 49,820
========== ==========
See notes to condensed unaudited consolidated financial statements.
3
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------
2002 2001
---------- ----------
(in thousands, except per share data)
Net sales $ 15,395 $ 13,945
Cost of sales 9,090 8,500
---------- ----------
Gross profit 6,305 5,445
Operating expenses:
Selling 2,681 2,606
Research and development 1,209 1,199
General and administrative 1,586 1,603
Amortization of intangibles 331 331
---------- ----------
Total operating expenses 5,807 5,739
Gain on sale of assets - 46
---------- ----------
Earnings (loss) from operations 498 (248)
Other expense (163) (311)
---------- ----------
Earnings (loss) from continuing operations 335 (559)
Income tax (benefit) expense 114 (236)
---------- ----------
Net earnings (loss) from continuing operations 221 (323)
Net earnings from discontinued operation (net of income tax) - 39
---------- ----------
Net earnings (loss) before change in accounting principle 221 (284)
Change in accounting principle, net of tax - (4,302)
---------- ----------
Net earnings (loss) 221 (4,586)
Accretion of mandatorily redeemable preferred stock - (204)
---------- ----------
Net earnings (loss) available to common shareholders $ 221 $ (4,790)
========== ==========
Net earnings (loss) from continuing operations per share
- basic $ 0.05 $ (0.11)
========== ==========
- diluted $ 0.04 $ (0.11)
========== ==========
Net earnings from discontinued operation per share -
- basic and diluted $ - $ 0.01
========== ==========
Net earnings (loss) before change in accounting principle
per common share
- basic $ 0.05 $ (0.10)
========== ==========
- diluted $ 0.04 $ (0.10)
========== ==========
See notes to condensed unaudited consolidated financial statements.
4
Net loss from change in accounting principle per common
share - basic and diluted $ - $ (0.91)
========== ==========
Earnings (loss) per share
- basic $ 0.05 $ (1.01)
========== ==========
- diluted $ 0.04 $ (1.01)
========== ==========
Shares used in per share calculations - basic 4,767 4,751
Shares used in per share calculations - diluted 4,983 4,751
5
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------
2002 2001
---------- ----------
(in thousands)
Net cash provided by (used in) operating activities $ 3,004 $ (215)
Cash flows from investing activities:
Cash proceeds from sale of discontinued operation - 3,577
Additions to property, plant and equipment (95) (21)
---------- ----------
Net cash provided by (used in) investing activities (95) 3,556
---------- ----------
Cash flows from financing activities:
Repayment of short-term borrowings (3,127) (2,000)
Additions to long-term debt 500 1,520
Repayment of long-term debt (782) -
Redemption of preferred stock (910) -
Redemption of warrants (48) (14)
Proceeds from issuance of common stock 11 14
--------- ----------
Net cash used in financing activities (4,356) (480)
--------- ----------
Effect of exchange rates on cash 167 40
Net increase (decrease) in cash and cash equivalents from
continuing operations (1,280) 2,901
Net decrease in cash and cash equivalents from
discontinued operation - (177)
Cash and cash equivalents, beginning of the period 1,707 738
---------- ----------
Cash and cash equivalents, end of the period $ 427 $ 3,462
========== ==========
Supplemental information:
Cash paid during the period for interest $ 170 $ 270
Cash refunded during the period for income taxes $ (37) $ (25)
See notes to condensed unaudited consolidated financial statements.
6
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 (GAAP) 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, 2002. The
results of operations for the three month period ended December 31, 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 December 31, 2002 and the results of its operations
and its cash flows for the three month periods ended December 31, 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 $557,000 and
($4,561,000) for the three months ended December 31, 2002 and 2001,
respectively. The differences between the net earnings (loss) reported in
the condensed unaudited consolidated statements of earnings (loss) and the
consolidated comprehensive net income (loss) for the periods consisted of
changes in foreign currency translation adjustments.
4. 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 was effective October 1, 2002. The Company
elected to early adopt SFAS No. 142 prior to the 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.
7
5. Product warranties
In November 2002, the FASB issued FASB Interpretation No. 45, which, among
other things, requires additional disclosure related to a company's product
warranties. As described in the Company's "Application of Critical
Accounting Policies", the Company's products are covered by warranty plans
that extend between 90 days and 2 years, depending upon the product and
contractual terms on sale. The Company establishes allowances for
warranties on an aggregate basis for specifically identified, as well as
anticipated, warranty claims based on contractual terms, product conditions
and actual warranty experience by product line.
A reconciliation for the charges in the Company's product warranty
liability for the three months ended December 31, 2002 (in 000's) is as
follows:
Accured Warranty
------------------
Beginning balance, September 30, 2002 $ 869
Warranty costs incurred (450)
Warranty expense accrued 371
-----------
Ending balance, December 31, 2002 $ 790
===========
6. 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 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 fiscal year 2002 as extraordinary items from the early
extinguishment of debt will be restated to part of net income from
continuing operations.
8
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.
In November 2002, the Emerging Issues Task Force (EITF) ratified a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which is effective for the Company beginning October 1, 2003.
Issue No. 00-21 addresses accounting and reporting of a company's delivery
or performance of multiple products, services, and/or rights customers
might have to use a company's held assets to fulfill its' needs, with
delivery or performance that may occur at different points in time or over
different periods of time. Management is currently evaluating the effects
of this issue on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which is effective for fiscal
years ending after December 31, 2002, and effective for interim information
for interim periods beginning after December 15, 2002. SFAS No. 148
provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company is currently assessing but has not yet determined the effect of
SFAS No. 148 on its financial position, results of operations, and cash
flows.
7. 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.
9
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:
- -- the effect of adverse economic conditions in markets served by the Company
and the financial capacity of customers to purchase capital equipment;
- -- the possible adverse effect on sales and prices of competition and advances
in technology;
- -- the ability of new products to compete successfully in either existing or
new markets;
- -- the risks associated with adverse fluctuations in the foreign currency
exchange rates;
- -- the risks involved in expanding international operations and sales;
- -- the availability and future costs of materials and other operating
expenses;
- -- the potential for patent-related litigation expenses and other costs
resulting from claims asserted against the Company or its customers by
third parties; and
- -- other factors discussed in Exhibit 99.1 to the Company's Annual Report on
Form 10-K filed with the SEC in December 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 may materially affect the financial statements, either
because of the significance of the financial statement item to which they
relate, or because they require management judgment 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:
-- Revenue recognition
-- Allowances for doubtful accounts
-- Valuation of inventories
-- Long-lived assets and Statement of Financial Accounting Standards
("SFAS) No. 142
-- Reserves for warranties
-- Accounting for income taxes
Management has discussed the development and selection of these critical
accounting estimates with the audit committee of the Company's board of
directors, and the audit committee has discussed the related disclosures in the
MD&A section of the Company's periodic reports.
10
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. Additionally, the Company sells its goods on terms that
transfer title and risk of loss at a specified location, typically shipping
point, port of loading or port of discharge, depending on the final destination
of the goods. Accordingly, revenue recognition from product sales occurs when
all factors are met, including transfer of title and risk of loss, which occurs
either upon shipment by the Company or upon receipt by customers at the location
specified in the terms of sale. Revenue earned from services 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. In the event of revenue deferral, the sale value is not recorded as
revenue to the Company, accounts receivable are reduced by any amounts owed by
the customer, and the cost of the goods or services deferred is carried in
inventory. The Company believes that revenue recognition is a "critical
accounting estimate" because the Company's terms of sale may vary significantly,
and management exercises judgment in determining whether to defer revenue
recognition. Such judgments may materially affect net sales for any period.
Management exercises judgment within the parameters of GAAP in determining when
contractual obligations are met, title and risk of loss are transferred, sales
price is fixed or determinable and collectibility is reasonably assured. During
fiscal 2002, some customers were more aggressive in requiring additional
contractual commitments from the Company before final acceptance of equipment
and associated transfer of title could occur, which has resulted in additional
deferrals of revenue recognition. Increased customer contractual obligations may
affect revenue recognition on an increased, yet indeterminate, amount of
shipments in future periods. At December 31, 2002, the Company had deferred
revenues of $379,000.
Allowances for doubtful accounts. The Company establishes allowances for
doubtful accounts for specifically identified, as well as anticipated, doubtful
accounts based on credit profiles of customers, current economic trends,
contractual terms and conditions, and customers' historical payment patterns.
Factors that affect collectibility of receivables include customer satisfaction
and general economic or political factors in certain countries that affect the
ability of customers to meet current obligations. The Company actively manages
its credit risk by utilizing an independent credit rating and reporting service,
by requiring certain percentages of down payment and progress payments on
significant customer projects and by requiring secured forms of payment for
customers with uncertain credit profiles or locations in certain countries.
Forms of secured payment could include irrevocable letters of credit, bank
guarantees, third-party leasing arrangements or EX-IM Bank guarantees, each
utilizing Uniform Commercial Code filings, or the like, with governmental
entities where possible. The Company believes that the accounting estimate
related to allowances for doubtful accounts is a "critical accounting estimate"
because it requires management judgment in making assumptions relative to
customer or general economic factors that are outside the Company's control. As
of December 31, 2002, the balance sheet included allowances for doubtful
accounts of $412,000. Actual credits to the allowance for doubtful accounts for
the three month period ended December 31, 2002 was a net recovery of $8,000. If
the Company experiences actual bad debt expense in excess of estimates, or if
estimates are adversely adjusted in future periods, the carrying value of
accounts receivable would decrease and charges for bad debts would increase,
resulting in decreased net profits.
Valuation of inventories. Inventories are stated at the lower of cost or
market. The Company's inventory includes purchased raw materials, manufactured
components, purchased 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, estimated product lifecycles and estimated inventory levels.
The factors that contribute to inventory valuation risks are the Company's
purchasing practices, electronic component obsolescence, accuracy of sales and
production forecasts, introduction of new products, product lifecycles and the
associated product support. The Company actively manages its exposure to
inventory valuation risks by maintaining low safety stocks and minimum purchase
lots, utilizing just in time purchasing practices, managing product end-of-life
issues brought on by aging components or new product introductions, and by
utilizing such inventory minimization strategies as vendor-managed inventories.
The Company believes that the accounting estimate related to valuation of
inventories is a "critical accounting estimate" because it is susceptible to
changes from period to period due to the requirement for management to make
estimates relative to each of the underlying factors ranging from purchasing to
sales to production to after-sale support. At December 31, 2002, cumulative
inventory adjustments to lower of cost or market totaled $2.5 million compared
to $2.3 million at September 30, 2002. If actual demand, market conditions or
product lifecycles are adversely different from those estimated by management,
inventory adjustments to lower market values would result in a reduction to the
carrying value of inventory, an increase in inventory write-offs, a decrease to
gross margins and may adversely affect the borrowing base available under the
Company's credit facilities.
11
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, if any, based on the excess of the carrying amount over the
fair value of the assets, is recorded. As of December 31, 2002, the Company held
$18.3 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. The Company
believes that the accounting estimate related to long-lived assets is a
"critical accounting estimate" because: (1) it is susceptible to change from
period to period due to the requirement for management to make assumptions about
future sales and cost of sales generated throughout the lives of several product
lines over extended periods of time; and (2) the potential effect that
recognizing an impairment could have on the assets reported on the Company's
balance sheet and the potential material adverse effect on the reported earnings
or loss. Changes in these estimates could result in a determination of asset
impairment, which would result in a reduction to the carrying value, a charge to
income from continuing operations and a reduction to net profit in the affected
period, and may affect the Company's ability to meet the tangible net worth
covenant of it credit facilities.
Reserves for warranties. The Company's products are covered by warranty
plans that extend between 90 days and 2 years, depending upon the product and
contractual terms of sale. The Company establishes allowances for warranties for
specifically identified, as well as anticipated, warranty claims based on
contractual terms, product conditions and actual warranty experience by product
line. Company products include both manufactured and purchased components, and
therefore warranty plans include third-party sourced parts that may not be
covered by the third-party manufacturer's warranty. Ultimately, the warranty
experience of the Company is directly attributable to the quality of its
products. The Company actively manages its quality program by using a structured
product introduction plan, process monitoring techniques utilizing statistical
process controls, vendor quality metrics, a quality training curriculum for
every employee and feedback loops to communicate warranty claims to designers
and engineers for remediation in future production. Warranty expense has varied
widely in the past due to such factors as significant new product introductions
containing latent defects and design errors on individual large projects. The
Company believes that the accounting estimate related to reserves for warranties
is a "critical accounting estimate" because: (1) it is susceptible to
significant fluctuation period-to-period due to the requirement for management
to make assumptions about future warranty claims relative to potential unknown
issues arising in both existing and new products, which assumptions are derived
from historical trends of known or resolved issues; and (2) risks associated
with third-party supplied components being manufactured using processes that the
Company does not control. As of December 31, 2002, the balance sheet included
warranty reserves of $790,000, while $450,000 of warranty charges were incurred
during the quarter ended December 31, 2002. If the Company's actual warranty
costs are higher than estimates, warranty plan coverages are adversely varied,
or estimates are adversely adjusted in future periods, reserves for warranty
would decrease, warranty expense would increase and gross margins would
decrease.
12
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 judgment. 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. Judgment is also applied in determining
whether the deferred tax assets will be realized in full or in part. In
management's judgment, 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 December 31, 2002, due to anticipated utilization of all
tax deferred tax assets. The Company believes that the accounting estimate
related to income taxes is a "critical accounting estimate" because it relies on
significant management judgment in making assumptions relative to temporary and
permanent timing differences of tax effects, estimates of future earnings,
prospective application of changing tax laws in multiple jurisdictions, and the
resulting ability to utilize tax assets at those future dates. If the Company's
operating results were to fall short of expectations, thereby affecting the
likelihood of realizing the deferred tax assets, judgment 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.
Establishing or increasing a valuation allowance would reduce the carrying value
of the deferred tax asset, increase tax expense and reduce net income.
Results of Operations
- ---------------------
Sales for the three-month period ended December 31, 2002 totaled $15.4 million,
compared with $13.9 million in the same quarter last year, an increase of 10.4%.
A 50% increase in sales of the Company's automated inspection systems product
line, particularly in Tegra and Prism systems, was partially offset by a 13%
decrease in the process systems product line when compared to the same quarter
last year.
The Company reported earnings from continuing operations of $221,000, or $0.04
per diluted share, for the most recent quarter compared to a net loss from
continuing operations of $323,000, or $0.11 per diluted share, in the
corresponding quarter last year. Net earnings reported from all operations were
$221,000, or $0.04 per diluted share, for the quarter ended December 31, 2002.
After giving effect to a loss of $4.3 million resulting from the Company's
implementation of SFAS No. 142, the Company reported a net loss from all
operations of $4.6 million, or $1.01 per diluted share, for the corresponding
quarter last year.
New orders received for the first quarter of fiscal 2003 totaled $18.8 million,
an increase of 12% from $16.7 million for the corresponding period in fiscal
2002. Orders for automated inspection systems increased 56% compared to the same
quarter of fiscal 2002, and were partially offset by a decrease in orders for
process systems and parts and service. Orders for the Tegra and Optyx product
lines in the automated inspection group were especially strong compared with the
same period last year.
The Company's backlog at the close of the December 2002 quarter totaled $18.6
million, a 21% increase from a backlog of $15.3 million at the same time last
year. Process systems represented 49% of the total backlog at the more recent
quarter-end compared to 38% one year ago, while automated inspection systems
decreased to 45% of total backlog from last year's 54%, which may result in a
less favorable product mix going into the Company's second quarter due to the
lower margins typically associated with sales of process systems.
13
Gross profit for the first quarter of fiscal 2003 was $6.3 million compared to
$5.4 million in the corresponding quarter last year, or 41.0% and 39.1% of net
sales, respectively. A higher sales volume of automated inspection systems and
improved manufacturing efficiencies in that product group favorably affected
gross margins for the quarter. These margin improvements were partially offset
by decreased margins in process systems products and in the service business.
Operating expenses were $5.8 million in the quarter ended December 31, 2002, or
37.7% of sales compared to $5.7 million, or 41.2% of sales for the previous year
quarter. As a percentage of net sales, each category of operating expense
decreased when compared to the same quarter of the previous year, reflecting the
Company's continued emphasis on cost controls.
For the fiscal quarter ended December 31, 2002, other expense totaled $0.2
million compared to $0.3 million for the corresponding period in fiscal 2001,
due principally to reduced interest expense related to reductions of
interest-bearing debt and foreign currency exchange gains recorded in the more
recent quarter.
The Company reported income from continuing operations of $0.3 million for the
three months ended December 31, 2002 compared to a loss from continuing
operations of $0.6 million for the three months ended December 31, 2001. The
increase in sales volume contributed to this improvement as well as the
continued emphasis on manufacturing efficiencies and cost controls.
Liquidity and Capital Resources
For the quarter ended December 31, 2002, net cash provided by operating
activities totaled $3.0 million compared with cash used by operating activities
of $0.2 million in the corresponding period of the prior fiscal year. During the
most recent quarter, net earnings, net of non-cash charges, contributed cash of
$1.4 million from operating activities. Non-cash charges consisted primarily of
depreciation, amortization, and deferred income taxes (due to application of net
operating loss carry forwards). Cash from operations was also provided by an
increase in advances from customers of $1.6 million, and increases in accounts
payable of $1.9 million. These contributions to cash were partially offset by
increases in inventories of $1.1 million, increases in accounts receivable of
$0.7 million and decreases in accrued payroll and other accrued liabilities of
$0.2 million.
Net cash resources used in investing activities was $95,000 in the quarter ended
December 31, 2002 compared to $3.6 million provided in the comparable period a
year ago. The entire current quarter spending funded the acquisition of capital
goods compared to $21,000 spent for capital goods in the corresponding period
last year. The corresponding quarter last year also included cash proceeds of
$3.6 million from sale of a discontinued operation. At December 31, 2002, the
Company had no significant commitments for capital expenditures.
Net cash used in financing activities during the first quarter ended December
31, 2002 totaled $4.4 million, reflecting repayments of short term debt of $3.1
million, repayments of long term debt of $0.8 million, long term borrowing of
$0.5 million, redemption of preferred stock and warrants of $1.0 million. This
compares to net cash flows used in financing activities of $0.5 million for the
prior year, consisting of repayments of short-term debt of $2.0 million, and
$1.5 million additions to long-term debt.
14
During the three-month period ended December 31, 2002, working capital increased
by $1.1 million to $8.7 million. At the end of the period, the balance of cash
and cash equivalents totaled $0.4 million, a $1.3 million decrease 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 increased by $0.8 million principally as a result of a high volume of
shipments during the month of December. Inventories increased by $1.3 million as
a result of increases in raw materials and work-in-process inventories to
support the future production requirements represented by the increased backlog.
Current liabilities remained relatively flat at $18.7 million overall. Accounts
payable and customer's deposits were up for the quarter, but short-term
borrowings and the current portion of long term debt were down compared to the
beginning of the quarter for a net overall decrease of $0.1 million for the
period.
The Company's domestic credit facility provides a credit accommodation totaling
$16.8 million, consisting of a term loan of $3.8 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 $3.0 million standby line of credit. The revolving credit
facility and the standby line of credit mature on July 31, 2003, and the Company
expects to be able to renew the revolving credit facility at that time. The
standby line of credit is no longer needed and will not be renewed. The term
loan requires quarterly payments of principal of $0.2 million and matures on
July 31, 2007. The standby line of credit reduces in amount of availability each
quarter by $1.0 million and will expire on July 31, 2003. The term loan and
operating line bear interest at the Wall Street Journal prime rate plus 1% per
annum, which totaled 5.25% at December 31, 2002, 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 United States
personal property, including patents and other intangibles, of the Company and
its subsidiaries, and contains covenants 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. At December 31,
2002, the Company was in compliance with all loan covenants and had an available
borrowing base of approximately $7.3 million under the revolving credit
facility. At December 31, 2002, borrowings were $2.3 million under this
facility, $3.8 million under the term loan with no borrowings under the standby
line of credit.
Additionally, the Company's credit accommodation with a commercial bank in The
Netherlands provides a credit facility for its European subsidiary. This credit
accommodation totals $3.4 million and includes a term loan of $829,000, an
operating line of the lesser of $1.6 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 $1.0 million. The term loan
facility requires quarterly payments of principal and matures in August 2012.
The term loan is secured by real property of the Company's European subsidiary,
while the operating line and bank guarantee facility is secured by all of the
subsidiary's personal property. The credit facility bears interest at the bank's
prime rate plus 1.75%, which at December 31, 2002 totaled 5.75%. At December 31,
2002, the Company had borrowings under this facility of $1.2 million on the
operating line, and $829,000 in term loans. Additionally, the Company had
secured bank guarantees of $516,000 under the agreement.
15
Outstanding Series B Convertible Preferred stock totaled 190,562 shares as of
December 31, 2002, and outstanding warrants totaled 60,285. Preferred stock and
warrants are redeemable upon demand and will require $2.5 million from cash flow
when presented. Presentments for preferred stock and warrants redemption have
slowed considerably recently, and therefore the Company expects to fund future
redemptions from normal cash flows.
The Company has a long term note receivable that is currently in arrears.
Payments aggregating less than $100,000 were past due at December 31, 2002. The
Company does not believe that an allowance for any uncollectible amount is
warranted at this time, and is actively managing this issue.
The Company anticipates that the future cash flows from operations along with
currently available operating credit lines will be sufficient to fund the
current year's cash needs.
The Company's continuing contractual obligations and commercial commitments
existing on December 31, 2002 are as follows:
Payments due by period (in Thousands)
Contractual Obligations Less than 1 After 5
Total year 1-3 years 4-5 years years
- -----------------------------------------------------------------------------------------------------------
Long-term debt * $ 8,098 $ 4,345 $ 1,910 $ 1,581 $ 262
Capital lease obligations 555 271 255 29 -
Operating leases 12,609 1,278 2,535 2,540 6,256
Warrant redemption obligations ** 604 604 - - -
Series B redemption obligations ** 1,904 1,904 - - -
------------ ------------- ------------ ------------ -------------
Total contractual cash obligations $ 23,770 $ 8,402 $ 4,700 $ 4,150 $ 6,518
============ ============= ============ ============ =============
* Includes the revolving credit line, term loan and mortgage payments on the
Company's owned facility in Europe.
** If all remaining potential redemption claims associated with the warrants
and Series B preferred were submitted to the company, payment could be
accommodated through a combination of cash reserves and the standby lines
of credit until July 31, 2003, 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.
At December 31, 2002 the Company had standby letters of credit totaling $1.1
million, which includes secured letters of credit under the Company's credit
facility in Europe and letters of credit securing certain self-insurance
contracts and lease commitments.
16
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 strength of the U.S. Dollar against the Euro
and to a lesser extent the Australian dollar.
The terms of sales to European customers are typically denominated in either
Euros, U.S. Dollars, or to a far lesser extent, the respective legacy currencies
of its European customers. The terms of sales to customers in Australia/New
Zealand are typically denominated in their local currency. The Company expects
that its standard terms of sale to international customers, other than those in
Europe and Australia/New Zealand, will continue to be denominated in U.S.
dollars. For sales transactions between international customers, including
European customers, and the Company's domestic operations, 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. At December 31, 2002, the Company was not a party to any currency hedging
transaction. As of December 31, 2002, management estimates that a 10% change in
foreign exchange rates would affect net income before taxes by approximately
$98,000 on an annual basis as a result of converted cash and accounts receivable
denominated in foreign currencies.
During the Company's December 2002 first quarter, the Euro gained a net of 7% in
value against the U.S. dollar. The effect of the weaker dollar on the operations
and financial results of the Company were:
- -- Translation adjustments of $336,000, net of income tax, were recognized as
a component of comprehensive income in the Company's Statement of
Shareholders' Equity as a result of converting the Euro denominated balance
sheet of Key Technology B.V. Into U.S. dollars.
- -- Foreign exchange gains of $33,000 were recognized in the other income and
expense section of the consolidated income statement as a result of
conversion of Euro and other foreign currency denominated receivables and
cash carried on the balance sheet of the U.S. operations, as well as the
result of the conversion of other non-functional currency 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 international customers
when denominated in U.S. dollars or potentially more profitable to the Company
when denominated in a foreign currency. A relatively weaker U.S. dollar on the
world markets, especially as measured against the Euro, may favorably affect the
Company's market and economic outlook for international sales.
The Company anticipates that the reduction of U.S. interest rates during the
quarter ended December 31, 2002 will result in a corresponding reduction of
customers' cost of capital, which had previously contributed to the delay of
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 changes in the cost of capital and other market or economic
factors.
Under the Company's current credit facilities the Company may borrow at the
lender's prime rate plus between 100 - 200 basis points. At December 31, 2002,
the Company had $7.3 million of borrowings that had variable interest rates.
During the quarter then ended, interest on its various credit facilities varied
from 5.25% to 6.75%. At December 31, 2002, the rate ranged from 5.25% to 6.25%.
As of December 31, 2002 management estimates that a 100 basis point change in
the interest rate would affect net income before taxes by approximately $73,000
on an annual basis.
17
ITEM 4. CONTROLS AND PROCEDURES.
The Company's Chairman and Chief Executive Officer and the Chief Financial
Officer have reviewed the disclosure controls and procedures relating to the
Company within the 90 days preceding the date of this report and concluded that
such controls and procedures are effective to make known to them all material
information about the financial and operational activities of the Company. There
were no deficiencies identified in such controls or procedures and there have
been no changes in such controls and procedures since such evaluation that could
significantly affect their effectiveness.
18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10.22) Credit Agreement dated August 8, 2002 between Suplusco Holding B.V.,
Key Technology B.V. and ABN AMRO Bank N.V.
(10.23) Amendment to Loan Documents dated December 11, 2002 between
Registrant and Banner Bank
(10.24) Addendum No. 1 to Construction and Lease Agreement executed
December 31, 2002 between the Port of Walla Walla and Registrant
(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
The following reports on Form 8-K were filed during the first quarter of
fiscal 2003.
1. Registrant' Form 8-K dated November 1, 2002 and filed with the
Securities and Exchange Commission on November 12, 2002
announcing the receipt of a $4.0 million order.
2. Registrant' Form 8-K dated December 20, 2002 and filed with the
Securities and Exchange Commission on December 20, 2002
announcing the appointment of a new Chief Financial Officer.
19
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: February 14, 2003 By /s/ Thomas C. Madsen
--------------------------------------------
Thomas C. Madsen,
Chairman and Chief Executive Officer
Date: February 14, 2003 By /s/ Phyllis C. Best
--------------------------------------------
Phyllis C. Best,
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Thomas C. Madsen, Chief Executive Officer and Chairman of Key Technology,
Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Key Technology, Inc.,
(the "registrant");
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Thomas C. Madsen
- ---------------------
Thomas C. Madsen
Chief Executive Officer and Chairman
February 14, 2003
21
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Phyllis C. Best, Chief Financial Officer of Key Technology, Inc., certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q of Key Technology, Inc.,
(the "registrant");
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Phyllis C. Best
- --------------------
Phyllis C. Best
Chief Financial Officer
February 14, 2003
22
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
- -------
(10.22) Credit Agreement dated August 8, 2002 between Suplusco Holding B.V., Key
Technology B.V. and ABN AMRO Bank N.V.
(10.23) Amendment to Loan Documents dated December 11, 2002 between Registrant
and Banner Bank
(10.24) Addendum No. 1 to Construction and Lease Agreement executed December 31,
2002 between the Port of Walla Walla and Registrant
(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
23