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 March 31, 2003
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
----- ------
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 April 30, 2003 was 4,773,543 shares.
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2003
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed unaudited consolidated balance sheets, March 31, 2003
and September 30, 2002......................................................................3
Condensed unaudited consolidated statements of earnings for the
three months ended March 31, 2003 and 2002..................................................4
Condensed unaudited consolidated statements of earnings (loss) for the
six months ended March 31, 2003 and 2002....................................................5
Condensed unaudited consolidated statements of cash flows for
the six months ended March 31, 2003 and 2002...............................................7
Notes to condensed unaudited consolidated financial statements..................................8
Item 2........Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................19
Item 4. Controls and Procedures........................................................................20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................20
Item 6. Exhibits and Reports on Form 8-K...............................................................21
SIGNATURES.......................................................................................................22
EXHIBIT INDEX....................................................................................................25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
March 31, September 30,
2003 2002
----------- -----------
(in thousands)
Assets
- --------------------------------------------------------
Current assets:
Cash and cash equivalents $2,074 $1,707
Trade accounts receivable, net 9,287 7,556
Inventories:
Raw materials 7,317 6,416
Work-in-process and sub-assemblies 5,740 5,320
Finished goods 2,241 2,233
----------- -----------
Total inventories 15,298 13,969
Other current assets 2,886 3,207
----------- -----------
Total current assets 29,545 26,439
Property, plant and equipment, net 5,754 6,407
Deferred income taxes 2,298 3,472
Intangibles and other assets, net 12,669 13,502
----------- -----------
Total $50,266 $49,820
=========== ===========
Liabilities and Shareholders' Equity
- --------------------------------------------------------
Current liabilities:
Short-term borrowings $1,208 $6,596
Accounts payable 3,233 1,437
Accrued payroll liabilities and commissions 3,754 2,769
Accrued customer support and warranty costs 1,150 999
Other accrued liabilities 2,302 1,969
Customers' deposits 5,915 3,328
Current portion of long-term debt 1,159 1,668
----------- -----------
Total current liabilities 18,721 18,766
Long-term debt 3,723 3,747
Deferred income taxes 221 238
Mandatorily redeemable preferred stock and warrants 2,172 3,467
Total shareholders' equity 25,429 23,602
----------- -----------
Total $50,266 $49,820
=========== ===========
See notes to condensed unaudited consolidated financial statements.
3
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
(in thousands, except per share data)
Net sales $20,927 $18,849
Cost of sales 12,812 11,337
----------- -----------
Gross profit 8,115 7,512
Operating expenses:
Selling 2,986 2,763
Research and development 1,203 1,062
General and administrative 1,796 1,719
Amortization of intangibles 330 330
----------- -----------
Total operating expenses 6,315 5,874
Gain on sale of assets 2 1
----------- -----------
Earnings from operations 1,802 1,639
Other expense (55) (349)
----------- -----------
Earnings before income taxes 1,747 1,290
Income tax expense 594 467
----------- -----------
Net earnings 1,153 823
Accretion of mandatorily redeemable preferred stock - (189)
----------- -----------
Net earnings available to common shareholders $1,153 $634
=========== ===========
Earnings per share
- - basic $0.24 $0.13
=========== ===========
- - diluted $0.23 $0.13
=========== ===========
Shares used in per share calculations - basic 4,770 4,758
Shares used in per share calculations - diluted 4,964 4,759
See notes to condensed unaudited consolidated financial statements.
4
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
(in thousands, except per share data)
Net sales $36,322 $32,794
Cost of sales 21,902 19,837
----------- -----------
Gross profit 14,420 12,957
Operating expenses:
Selling 5,667 5,369
Research and development 2,412 2,261
General and administrative 3,382 3,322
Amortization of intangibles 661 661
----------- -----------
Total operating expenses 12,122 11,613
Gain on sale of assets 2 47
----------- -----------
Earnings from operations 2,300 1,391
Other expense (218) (660)
----------- -----------
Earnings from continuing operations 2,082 731
Income tax expense 708 231
----------- -----------
Net earnings from continuing operations 1,374 500
Net earnings from discontinued operation (net of income
tax) - 39
----------- -----------
Net earnings before change in accounting principle 1,374 539
Change in accounting principle, net of tax - (4,302)
----------- -----------
Net earnings (loss) 1,374 (3,763)
Accretion of mandatorily redeemable preferred stock - (393)
----------- -----------
Net earnings (loss) available to common shareholders $1,374 $(4,156)
=========== ===========
Net earnings from continuing operations per share
- - basic $0.29 $0.02
=========== ===========
- - diluted $0.28 $0.02
=========== ===========
Net earnings from discontinued operation per share
- - basic and diluted $- $0.01
=========== ===========
Continued
See notes to condensed unaudited consolidated financial statements.
5
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
(in thousands, except per share data)
Net earnings before change in accounting principle
per common share
- - basic $0.29 $0.03
=========== ===========
- - diluted $0.28 $0.03
=========== ===========
Net loss from change in accounting principle per common
share - basic and diluted $- $(0.90)
=========== ===========
Earnings (loss) per share
- - basic $0.29 $(0.87)
=========== ===========
- - diluted $0.28 $(0.87)
=========== ===========
Shares use in per share calculations - basic 4,769 4,755
Shares use in per share calculations - diluted 4,973 4,755
Concluded
See notes to condensed unaudited consolidated financial statements.
6
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
(in thousands)
Net cash provided by operating activities $7,680 $4,109
Cash flows from investing activities:
Cash proceeds from sale of discontinued operation - 3,577
Proceeds from sale of property 3 30
Additions to property, plant and equipment (168) (213)
----------- -----------
Net cash provided by (used in) investing activities (165) 3,394
----------- -----------
Cash flows from financing activities:
Repayment of short-term borrowings (5,430) (2,000)
Additions to long-term debt 500 6,500
Repayment of long-term debt (1,116) (11,920)
Redemption of preferred stock (1,107) -
Redemption of warrants (188) (35)
Proceeds from issuance of common stock 25 25
----------- -----------
Net cash used in financing activities (7,316) (7,430)
----------- -----------
Effect of exchange rates on cash 168 30
Net increase in cash and cash equivalents from
continuing operations 367 103
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 $2,074 $664
=========== ===========
Supplemental information:
Cash paid during the period for interest $290 $565
Cash refunded during the period for income taxes $(32) $(8)
See notes to condensed unaudited consolidated financial statements.
7
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- and six-month periods ended March 31,
2003 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 March 31, 2003 and the results of its operations for
the three- and six-month periods ended March 31, 2003 and 2002 and its cash
flows for the six-month periods ended March 31, 2003 and 2002.
2. Stock Compensation
The Company has elected to account for its stock-based compensation plans
under APB 25. If the Company had accounted for its stock-based compensation
plans under SFAS No. 123, the Company's net earnings and earnings per share
would approximate the pro forma disclosures below (in thousands, except per
share amounts):
Six months ended
------------------------
March 31, 2003 March 31, 2002
------------------------ --------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net earnings (loss) $1,374 $1,246 $(3,763) $(3,909)
Earnings (loss) per share
- basic $0.29 $0.26 $(0.87) $(0.90)
- diluted $0.28 $0.25 $(0.87) $(0.90)
Three months ended
------------------------
March 31, 2003 March 31, 2002
------------------------ --------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net earnings $1,153 $1,092 $823 $748
Earnings per share
- basic $0.24 $0.23 $0.13 $0.12
- diluted $0.23 $0.22 $0.13 $0.12
8
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. Income taxes
The provision for income taxes is based on the estimated effective income
tax rate for the year.
4. Comprehensive income (loss)
The Company's consolidated comprehensive income (loss) was $1,246,000 and
$727,000 for the three months ended March 31, 2003 and 2002, respectively
and $1,803,000 and ($3,834,000) for the six months ended March 31, 2003 and
2002, 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.
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 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.
6. 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" section of its Management's Discussion and Analysis of
Financial Condition and Results of Operations, 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 six months ended March 31, 2003 and 2002 (in 000's) is as
follows:
9
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Six months ended
-------------------
March 31, 2003 March 31, 2002
-------------- --------------
Beginning balance $869 $748
Warranty costs incurred (839) (1276)
Warranty expense accrued 759 1226
Translation adjustments 14 (5)
---------- -------------------
Ending balance $803 $693
========== ===================
7. 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, amounts recorded in fiscal year
2002 as extraordinary items from the early extinguishment of debt have been
restated to part of net income from continuing operations.
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 did 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. 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 about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
10
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
results. The Company has adopted the disclosure requirements (see Note 2).
The Company is currently assessing but has not yet determined the effect of
the remaining provisions of SFAS No. 148 on its financial position, results
of operations, and cash flows.
8. Use of estimates
The preparation of financial statements in conformity with GAAP 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.
11
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 and their related disclosures in the MD&A section of the
Company's periodic reports with the audit committee of the Company's board of
directors.
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
12
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 and 2003, 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 March 31, 2003, the Company had deferred
revenues of $1,313,000 as compared to $1,463,000 at September 30, 2002.
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 March 31, 2003, the balance sheet included allowances for doubtful accounts
of $424,000. Actual credits to the allowance for doubtful accounts for the
six-month period ended March 31, 2003 was a net recovery of $12,000. 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, production and to after-sale support. At March 31, 2003, 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
13
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.
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 March 31, 2003, the Company held $17.7 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. 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 March 31, 2003, the balance sheet included
warranty reserves of $803,000, while $839,000 of warranty charges were incurred
during the six months ended March 31, 2003. 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.
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
14
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 March 31, 2003, 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 March 31, 2003 totaled $20.9 million,
compared with $18.8 million in the corresponding quarter last year. Net earnings
for the quarter were $1.2 million, or $0.23 per diluted share compared with net
earnings of $0.8 million, or $0.13 per diluted share, in the corresponding
period a year ago.
Sales for the six months ended March 31, 2003 were $36.3 million compared with
$32.8 million for the comparable period in fiscal 2002. The company reported net
earnings for the period of $1.4 million, or $0.28 per diluted share, compared
with a net loss of $3.8 million, or $0.87 per diluted share, for the six-month
period in fiscal 2002. The six-month period ended March 31, 2002 included a $4.3
million charge for the impairment of goodwill resulting from the Company's
implementation of SFAS No. 142. Excluding this charge, net earnings from
continuing operations for the six-month period ended March 31, 2002 were $0.5
million, or $.02 per diluted share.
Three Months. Net sales increased $2.1 million, or 11%, in the 2003 second
quarter to $20.9 million from $18.8 million in the 2002 second quarter.
Vibratory equipment sales increased 33%, Tegra sales grew 102%, and Optyx sales
grew by 667% over the prior year's corresponding period. Optyx was introduced in
the last month of fiscal year 2001. These increases were partially offset by
decreases in sales of the Prism, tobacco sorter and Farmco product lines.
Orders increased $8.6 million, or 41%, in the 2003 second quarter to $29.4
million, compared to $20.8 million in the 2002 second quarter. Total orders for
the second quarter of fiscal 2003 were 27% higher than the Company's previous
best quarter in the second quarter of fiscal 1999. Order volumes were strong
across all market segments and all geographics. Particularly notable were orders
for the Company's tobacco sorter product line from customers in Asia and orders
for Process Systems products from the European market. A significant order was
received from one of the Company's major Asian customers for upgrades to the
customer's existing inspection systems. The record orders and the diversity and
breadth of customers placing orders may be an indication of improved capital
spending in the Company's core markets and an improved competitive position in
several new markets.
The Company's backlog increased $9.7 million, or 56%, at the end of the 2003
second quarter to $27.2 million from $17.5 million at the end of the 2002 second
quarter. The current backlog level represents only the second time that the
Company's quarter-ending backlog has closed above $20.0 million. Included in the
backlog are large and nearly equal components of both Automated Inspection
System and Process System products, and the backlog is distributed across all
four of the Company's sales regions.
Gross profit increased $0.6 million, or 8%, in the second quarter to $8.1
million from $7.5 million in the 2002 second quarter due to increased sales in
the product lines mentioned above. The increase in gross
15
margin due to volume was partially offset by lower margins in the Company's
European operations. Gross profit as a percent of sales declined to 38.8%
compared to 39.9% in the second quarter of fiscal 2002 due to a product mix that
included a larger component of lower-margin equipment.
Operating expenses increased by $0.4 million, or 7.5%, in the second quarter of
2003 to $6.3 million from $5.9 million in the 2002 second quarter due to
increased sales for the quarter. Operating expenses as a percent of sales
declined from 31.2% in the second quarter of 2002 to 30.2% in the second quarter
of 2003 reflecting the Company's continued emphasis on cost controls.
Other expense declined by $0.3 million, or 84.2%, in the 2003 second quarter to
$55,000, from $349,000 in the 2002 second quarter due principally to reduced
interest expense related to reductions of interest-bearing debt.
Six Months. Net sales increased by $3.5 million, or 10.8%, in the six-month
period to $36.3 million from $32.8 million in the 2002 six-month period.
Increases in the sales of the Tegra and the Optyx product lines, partially
offset by declines in the sales of Prism and tobacco sorters, drove the
year-over-year increase in sales. Sales of Process Systems and the Parts/Service
business were mostly flat between the two periods.
Orders increased by $10.6 million, or 28.3%, in the 2003 six-month period to
$48.1 million from $37.5 million in the prior six-month period. Automated
Inspection Systems and Process Systems increased 59% and 22%, respectively, over
the prior year with Parts and Service remaining relatively unchanged.
Gross profit increased by $1.5 million, or 11.3%, in the 2003 six-month period
to $14.4 million from $13.0 million in the prior six-month period. The increase
was driven by the stronger sales volume mentioned above. Gross margins as a
percent of sales for the current and prior year period were 40%.
Operating expenses increased by $0.5 million, or 4.4%, in the six-month period
to $12.1 million from $11.6 million in the 2002 corresponding period. Operating
expenses as a percentage of sales were 33.4% for the current period compared to
35.4% in the prior year. Spending was in line with the Company's expectations
and reflects strategic investments in specific markets while maintaining a
continued commitment to disciplined spending.
Other expense decreased by $0.5 million in the six-month period to $0.2 million,
from the $0.7 million in the 2002 six-month period. Improvements are due to
reduced interest expense resulting from decreased interest-bearing debt plus a
favorable foreign currency exchange rate for the current period.
Net earnings from continuing operations increased by $0.9 million, or 175%, in
the 2003 six-month period to $1.4 million from $0.5 million in the 2002
six-month period. The increase in sales volume and continued emphasis on cost
controls contributed to this improvement.
Outlook. Based on the strong backlog position at the end of the second quarter,
the Company currently anticipates earnings in the third quarter to be
substantially better than both the second quarter of this year and the third
quarter of fiscal 2002. The Company expects revenue growth for fiscal 2003 in
the range of 10% to 20% over fiscal 2002.
Liquidity and Capital Resources
For the six months ended March 31, 2003, net cash provided by operating
activities totaled $7.7 million compared with cash provided by operating
activities of $4.1 million in the corresponding period of the prior fiscal year.
During the most recent period, net earnings, net of non-cash charges,
contributed cash of $3.9 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
16
from operations was also provided by an increase in advances from customers
of $2.5 million, increases in accounts payable of $1.8 million, and increases in
accrued payroll and other accrued liabilities of $1.3 million. These
contributions to cash were partially offset by increases in inventories of $0.9
million, increases in accounts receivable of $1.5 million.
Net cash resources used in investing activities was $0.2 million in the six
months ended March 31, 2003 compared to cash provided of $3.4 million in the
comparable period a year ago. The current period spending funded the acquisition
of capital goods in the amount of $0.2 million and was equal to capital spending
in the corresponding period last year. The corresponding period last year also
included cash proceeds of $3.6 million from sale of a discontinued operation. At
March 31, 2003, the Company had no significant commitments for capital
expenditures.
Net cash used in financing activities during the six months ended March 31, 2003
totaled $7.3 million, reflecting repayments of short term borrowings of $5.4
million, repayments of long term debt of $1.1 million, long term borrowing of
$0.5 million, and redemption of preferred stock and warrants of $1.3 million.
This use of cash compares to net cash flows used in financing activities of $7.4
million in the six-month period of the prior year, consisting of repayments of
short-term debt of $2.0 million, repayment of long-term debt of $11.9 million
and $6.5 million of additions to long-term debt. The Company continues to
maintain strong cash flows from operating activities and has therefore been able
to make significant reductions to bank debt and redeemable preferred stock and
warrants. The Company anticipates making further reductions to bank debt,
convertible preferred stock, and warrants in the remainder of 2003.
During the six-month period ended March 31, 2003, working capital increased by
$3.2 million to $10.8 million. At the end of the period, the balance of cash and
cash equivalents totaled $2.1 million, a $0.4 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
increased by $1.7 million principally as a result of a high volume of shipments
during the most recent quarter. 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 approximately $18.7 million overall.
Accounts payable and customer's deposits were up for the period, but short-term
borrowings and the current portion of long term debt were down compared to the
beginning of the six-month period.
The Company's domestic credit facility provides a credit accommodation totaling
$15.6 million, consisting of a term loan of $3.6 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 $2.0 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 March 31, 2003, while the standby line of credit,
should it be utilized, bears interest at the Wall Street Journal prime rate plus
2%. Effective May 1, 2003, the interest rate on the operating line was reduced
to prime plus 0.5% per annum. 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
March 31, 2003, the Company was in compliance with all loan covenants and had an
available borrowing base of approximately $8.0 million under the revolving
credit facility. At March 31, 2003, borrowings were $553,000 under this
facility, and $3.6 million under the term loan with no borrowings under the
standby line of credit.
17
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 $3.6 million and includes a term loan of $828,000, 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 $1.1 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 March 31, 2003 totaled 5.00%. At March 31, 2003,
the Company had borrowings under this facility of $655,000 on the operating
line, and $828,000 in term loans. Additionally, the Company had secured bank
guarantees of $1,623,000 under the agreement.
Outstanding Series B convertible preferred stock totaled 170,801 shares as of
March 31, 2003, and outstanding warrants totaled 46,400. Preferred stock and
warrants are redeemable upon demand and will require $2.2 million from cash flow
when presented. Presentments for preferred stock and warrants redemption have
slowed recently, and therefore the Company expects to fund future redemptions
from operating cash flows.
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 March 31, 2003 are as follows:
Payments due by period (in Thousands)
Contractual Total Less than 1-3 years 4-5 years After 5 years
Obligations 1 year
- -----------------------------------------------------------------------------------------
Long-term debt * $5,636 $2,142 $1,922 $1,368 $204
Capital lease
obligations 454 225 226 3 -
Operating leases 12,355 1,262 2,566 2,517 6,010
Warrant redemption
obligations ** 464 464 - - -
Series B
redemption
obligations ** 1,708 1,708 - - -
-----------------------------------------------------------------------
Total contractual
cash obligations $20,617 $5,801 $4,714 $3,888 $6,214
=======================================================================
* 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 March 31, 2003 the Company had standby letters of credit totaling $2.2
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.
18
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 March 31, 2003, the Company was not a party to any currency hedging
transaction. As of March 31, 2003, management estimates that a 10% change in
foreign exchange rates would affect net income before taxes by approximately
$130,000 on an annual basis as a result of converted cash and accounts
receivable denominated in foreign currencies.
During the six month period ended March 31, 2003, the Euro gained a net of 10%
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 $429,000, net of income tax, were recognized as
a component of comprehensive income as a result of converting the Euro
denominated balance sheet of Key Technology B.V. into U.S. dollars.
- - Foreign exchange gains of $177,000 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,
payables 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 outlook for international sales.
The Company anticipates that the reduction of U.S. interest rates during the
fiscal first quarter of the year 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 March 31, 2003, the
Company had $4.8 million of borrowings that had variable interest rates. During
the quarter then ended, interest on its various credit facilities varied from
5.00% to 5.25%. At March 31, 2003, the rate ranged from 5.00% to 5.25%. As of
March 31, 2003 management estimates that a 100 basis point change in the
interest rate would affect net income before taxes by approximately $48,000 on
an annual basis.
19
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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on
February 5, 2003. Voting shareholders took the following
actions at the meeting:
1. The shareholders voted to elect the following nominees to the
Company's Board of Directors:
Votes Votes
For Withheld
---------------- -------------------
Michael L. Shannon 4,325,060 13,167
Donald A. Washburn 4,325,060 13,167
There were no broker non-votes.
Other directors whose terms of office as a director
continued after the meeting are as follows:
John E. Pelo
Peter H. Van Oppen
Thomas C. Madsen
Gordon Wicher
2. The shareholders voted to ratify management's appointment
of independent auditors for fiscal 2003 by the affirmative
vote of 4,329,596 shares, with 7,754 shares voting against
the proposal and 19,330 shares abstaining. There were no
broker non-votes.
20
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 March 31, 2003.
21
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: May 15, 2003 By /s/ Thomas C. Madsen
----------------------------------
Thomas C. Madsen,
Chairman and Chief Executive Officer
Date: May 15, 2003 By /s/ Phyllis C. Best
-------------------------------------
Phyllis C. Best,
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
SIGNATURES
- --------------------------------------------------------------------------------
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
May 15, 2003
23
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
SIGNATURES
- --------------------------------------------------------------------------------
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
May 15, 2003
24
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE SIX MONTHS ENDED MARCH 31, 2003
- --------------------------------------------------------------------------------
EXHIBIT INDEX
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
99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
25
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 March 31, 2003 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
May 15, 2003
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Phyllis
C. Best, 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/ Phyllis C. Best
- -----------------------
Phyllis C. Best
Chief Financial Officer
May 15, 2003