<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
---------------------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended September 30, 1997
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
--------------------------------------------
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)
---------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates on December 4, 1997 (based on the last sale price of such shares)
was approximately $57,423,970.
The number of shares of the Registrant's common stock outstanding on
December 4, 1997 was 4,687,671 shares of common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of Registrant's Proxy Statement dated January 5, 1998 prepared in
connection with the Annual Meeting of Shareholders to be held on February 4,
1998 are incorporated by reference into Part III of this Report.
<PAGE> 2
KEY TECHNOLOGY, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1. BUSINESS................................................................ 1
Item 2. PROPERTIES.............................................................. 8
Item 3. LEGAL PROCEEDINGS....................................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 8
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................... 9
Item 6. SELECTED FINANCIAL DATA................................................. 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .......................................................... 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 33
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 33
Item 11. EXECUTIVE COMPENSATION.................................................. 33
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................... 33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................................ 34
SIGNATURES ........................................................................ 37
EXHIBIT INDEX...................................................................... 38
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
Key Technology, Inc. (the "Company") was incorporated in 1982 to acquire
a vegetable processing equipment business founded in 1948. The Company designs,
manufactures, sells and services process automation systems for the food
processing industry and other industries that process product streams of
discrete pieces. These systems integrate electro-optical automated inspection
and sorting systems, specialized conveying systems and product preparation
systems.
In the first quarter of fiscal 1997, the Company completed a
reorganization of its domestic operations into business units comprised of the
Company's two major product groups: Automated Inspection Systems (AIS) and
Specialized Conveying Systems (SCS). The AIS business unit, which includes the
Tegra(R) product line, remained in the Company's present 150,000 square foot
facility. The SCS business unit was relocated into a 100,000 square foot
manufacturing facility which was leased in fiscal 1996 and is near the Company's
headquarters facility in Walla Walla, Washington. Both of these business units
continue to serve customers in the Company's primary market, the food processing
industry, through common sales and distribution channels.
During fiscal 1997, the Company also reorganized the ownership structure
of its European operations by transferring the common stock of those entities to
the Company's wholly-owned domestic subsidiary, Key Technology Holdings U.S.A.,
LLC. Suplusco Holding B.V. is a wholly-owned European subsidiary of Key
Technology Holdings U.S.A., LLC and in turn owns Key Technology B.V. and
Superior B.V. The Company utilizes Key Technology B.V. as the primary sales and
service organization for its European operations. Superior B.V. is a
manufacturer of specialized conveying systems. Suplusco Holding B.V. and its
subsidiaries are located in The Netherlands.
Subsequent to the end of the year, the Company and GE Capital's Vendor
Financial Services business entered into an agreement creating Key Technology
Financial Services (KTFS). Through KTFS, GE Capital will provide customized
financial services to customers of the Company for the acquisition and servicing
of equipment manufactured and distributed by the Company. Under the terms of the
agreement, the Company will not retain recourse obligations unless it
specifically elects to do so on an individual transaction basis.
INDUSTRY BACKGROUND
FOOD PROCESSING INDUSTRY
Historically, defect removal and quality control in the food processing
industry have been labor intensive and dependent upon and limited by the
variability of the work force. Food processors must process large quantities of
raw product through different stages, including sorting to remove defective
pieces and inspection for quality. The frequency and severity of defects in the
raw product is highly variable depending upon local factors affecting crops. The
industry has sought to replace manual methods with automated systems that
achieve higher yield, better quality and reduced cost.
In addition, quality analysis usually involves the manual removal of a
sample of product from the processing line at periodic intervals (typically
every 15 to 30 minutes). Such samples are then analyzed
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in the plant's laboratory for color, length, width, area, perimeter, shape and
defects. These imprecise sampling techniques and the potential for human error
in performing the laboratory analysis are sources of error in generating
statistical quality control data. The delay between taking the sample and
completing the laboratory analysis may also result in large amounts of product
being produced that do not meet quality specifications.
The Company's strategy is to solve processing industry problems of high
labor costs, inadequate yields and inconsistent quality by providing automated
inspection systems, real-time quality analysis systems and specialized conveying
systems. The Company's automated inspection systems use advanced optical
inspection technology to improve product yield (more of the good product
recovered) and quality (higher percentage of defective product being removed)
over the manual sorting and defect removal methods historically used by food
processors. In a typical application, a single automated inspection system can
replace 25 to 75 processing line employees, resulting in labor cost savings and
improved yield sufficient to pay for the system in less than one year, as well
as providing significant improvements in product quality.
PRODUCTS
The Company has developed a modular family of product lines that can be
configured in a variety of ways and integrated to provide complete solutions for
specific applications. Advances in any one module can therefore benefit a number
of the Company's products that incorporate optical scanning and image analysis.
Despite the incorporation of sophisticated technology, the Company's products
can be operated by plant personnel with minimal specialized training and are
built to withstand the harsh environments found in processing plants.
The following table sets forth sales by product category for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Automated inspection systems ...... $21,388 $27,699 $17,454
Specialized conveying systems ..... 24,388 17,108 14,954
Parts, service and other processing
equipment ..................... 11,492 9,534 10,245
------- ------- -------
Net sales ......................... $57,268 $54,341 $42,653
======= ======= =======
</TABLE>
AUTOMATED INSPECTION SYSTEMS
Automated inspection systems are used in processing applications to
detect and eliminate defects during raw product processing. The Company's
systems within this group include the ADR(R) and Tegra systems, representing the
Company's third and fourth generation, respectively, of automated inspection
systems.
All systems in this group use proprietary linear array charged coupled
device ("CCD") mono-chromatic (black and white), color or multi-spectral
cameras. Each of the cameras scan the product-streams, which move at five or ten
feet per second, at the rate of 1,500 or 4,000 times per second and can identify
defects as small as 1/16 of an inch (1.5 mm) in diameter. Systems with
monochromatic cameras are less expensive and are most effective for product that
has a marked disparity in shade between the defect and the good product. Systems
with color cameras are required when a variety of defect and
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product colors occur simultaneously or when the difference in shade between the
defect and the good product is more subtle. In 1997, the Company developed
multi-spectral systems which utilize either infra-red or ultraviolet
technologies, individually or in combination with visible light, to identify
defects that may not be detectable by solely using visible light spectra.
Tegra Automated Inspection System. In fiscal 1996, the Company
introduced its fourth generation of automated inspection system sorters. Named
Tegra, this generation of automated inspection systems incorporates a number of
technological and mechanical advances that result in significant improvements to
processing efficiency and product throughput with higher recovery and
defect-removal rates. Tegra was designed to replace the Company's third
generation ColorSort(R)II and Opti-Sort(R)II systems while providing a
technology platform for future product development and potential entry into
applications and markets not previously served by the Company. Certain present
and potential applications for Tegra systems include potato products, green
beans, dried beans, corn, carrots, peas, spinach, peaches, pears, nuts, grains
and tobacco.
Tegra incorporates object-specific IntelliSort(TM) technology.
IntelliSort sorting technology recognizes not only color and size, but also
shape. This capability provides a solution to previously difficult sorting
problems, such as differentiation between green beans and green bean stems.
Tegra cameras are capable of high fidelity color-image processing to scan
product at a rate of over 4,000 times per second, offering a sensitivity to
color subtleties beyond human vision. Tegra also incorporates KeyWare(TM)
software that substantially reduces operational complexity. KeyWare consists of
application packages, each specifically designed for a single product category
that, together with the system's computer hardware capability and networking
software, support all standard factory control and automation interfaces. These
features allow Tegra to establish data connectivity and communication with a
processing plant's computer network system.
ADR Systems. The Company's ADR systems are used to transport, inspect
and remove defects from potato french fries. The Company believes its ADR system
is the principal optical inspection and defect removal system used in the french
fry processing market. The Company's full capacity ADR systems can process up to
26,000 pounds of product per hour.
ADR systems incorporate proprietary specialized conveyors made up of
dozens of individual urethane belts of alternating profiles that align french
fries into 44 "lanes." Cameras locate defects on the french fries as they travel
at five feet per second on the conveyor belts. Upon detection of a defect,
computers that analyze the image data from the cameras actuate knives mounted in
two rotary cutter wheels to cut the defect from the individual french fry.
AccuScan(R) Quality Control Monitor. AccuScan uses sophisticated optical
scanning technology for automated inspection of products. AccuScan is a
high-definition, true-color optical scanning system that samples and analyzes
product streams on a moving conveyor belt for various quality attributes.
AccuScan consists of an on-line scanner connected to a remote UNIX workstation.
AccuScan uses proprietary color image processing software to provide an
automated analysis of product quality. Data are obtained by analysis of product
images that are captured approximately every 7 seconds from a slip stream of
product on the conveyor belt. Information regarding customer-defined product
variables such as color, length, width, area, perimeter, shape and defects are
statistically analyzed to produce accurate, real-time information about product
quality. The AccuScan's workstation analyzes the image data and provides
real-time quality analysis information in graphical form. The system distributes
this information simultaneously to multiple process locations, allowing
correction of process trends before the process yields large quantities of
out-of-tolerance product. Historical quality data may also be
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presented to determine trends, review process limits and provide customer
documentation of product quality.
In 1996, the Company was issued a patent covering the combined use of
the AccuScan and Tegra systems in closed-loop process control applications. In
this application, the AccuScan simultaneously monitors product quality and
adjusts sorter operation to ensure product quality meets final specifications,
regardless of incoming product condition.
Pharmaceutical Inspection System. In fiscal 1996, the Company purchased
certain inventory, trademarks and patents related to a pharmaceutical inspection
product line, the I-300 Pharmaceutical Inspection System, from the Imaging
Division of Oncor, Inc. Using patented spatial color analysis technology, this
product line inspects solid-dose pharmaceuticals, including tablets, capsules
and softgels for broken or missing pieces, foreign products, discoloration or
coating defects, as well as the integrity of capsules. The pharmaceutical
inspection system also verifies labels and the presence of printing and detects
color, size, location and shape defects at processing rates over one million
parts per hour. During fiscal 1997, the Company's revenues from sales of the
I-300 Pharmaceutical Inspection System to the pharmaceutical market were not
material. The Company expects sales of these systems will likely remain at
moderate levels during fiscal 1998.
SPECIALIZED CONVEYING SYSTEMS
Conveying systems are utilized throughout the food industry, as well as
other industries, to move large quantities of product within a processing plant,
The Company's specialized conveying systems include the Iso-Flo(R) vibratory
conveyor systems, food pumping systems and belt conveyors. The acquisition of
Superior B.V. in fiscal 1996 added electromagnetic conveyor and spiral elevator
technologies to the Companies conveying systems product line.
Iso-Flo Vibratory Conveying Systems. The Company's principal specialized
conveying system is its patented Iso-Flo vibratory conveyor system, which was
introduced in 1978. The Iso-Flo conveyor is a type of pan conveyor. Pan
conveyors are common throughout industries that process product streams of
discrete pieces, especially the food processing industry. Pan conveyors move
product pieces by vibrating the pan at high frequency along a diagonal axis,
upward and forward. This action propels the product ahead in small increments
and distributes it evenly for close control of movement and presentation.
Most Iso-Flo conveyors are custom designed and engineered by the Company
to customer specifications. Iso-Flo systems are used in a variety of processing
applications, including potato products, vegetables and fruits (green beans,
peas, carrots, corn, peaches, pears, cranberries and apples), snack foods,
cereals, pet foods, poultry, seafood and certain nonfood products.
Food Pumping Systems and Belt Conveyors. The Company's hydro food
pumping systems are used to transport food items over distances and elevations
in processing plants. A typical pumping system consists of a stainless steel
contoured tank and food pump to propel the product, lengths of piping to reach
the destination, and a water removal/product spreading subsystem at the
destination. The systems can be configured so that food processing functions,
such as blanching, cooling and cutting, can also occur during pumping. The
Company also designs and manufactures belt conveyors using a variety of belt
materials.
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RAW FOOD PREPARATION SYSTEMS
The Company designs and manufactures raw food preparation systems to
prepare vegetables prior to freezing, canning or other processing. Products in
this group include blanchers, air cleaners, air coolers, froth flotation
cleaners, vegetable metering systems, and bulk handling equipment. These
products represent the Company's most mature product line. Sales of these
products over the years have formed a customer base for sales of other Company
products and are also establishing a customer base in developing country
markets.
PARTS AND SERVICE
The Company typically provides system installation support services
which are included in the sales price of certain of its products, principally
the AIS systems. In addition, the Company generates revenues from the sale of
spare parts and post-sale field and telephone-based repair services to support
its customers' routine maintenance requirements and seasonal equipment startup
and winterization processes. The Company considers its parts and maintenance
service sales to be important potential sources of future revenue growth and
expects to devote additional resources in fiscal 1998 to increase such sales.
CUSTOMERS AND MARKETS
The Company's primary market is the food processing industry. The
largest market segments for the Company's products have been potatoes
(principally french fries), vegetables and snack foods. The Company has also
penetrated other food market segments, including fruits, cereals and pet foods.
The Company believes many additional applications for its systems exist in both
food and nonfood markets.
The principal potato market served by the Company's systems is french
fries. French fries comprise approximately 85% of the over eight billion pounds
of frozen potato products processed annually in the United States. The expansion
of American-style fast food chains in foreign countries is resulting in parallel
development of the frozen french fry market overseas.
The Company's products are used in the fruit and vegetable processing
market where field-harvested products are cleaned, graded, automatically sorted,
blanched and processed prior to freezing, canning or packaging for sale to
institutional and retail markets. Principal fruit and vegetable market segments
for the Company are green beans, corn, carrots, peas, onions, apples, pears,
cranberries and peaches. The Company's prospects for sales in the vegetable and
fruit industry benefit from its recent development of reliable and accurate
color automated inspection systems, since defect detection in most fruit and
vegetable segments requires color analysis. The Company's sales to the fruit and
vegetable market segments have also increased as a result of the introduction of
the Tegra automated inspection system which more accurately detects the subtle
defects typically found in vegetables and fruits.
The acquisition of Superior B.V. in fiscal 1996 provides the Company
with a manufacturing base from which it can more rapidly manufacture and deliver
conveying systems to European customers. With a historical mix of up to 30% of
Superior's business outside of the food industry in mining, automotive and
foundry applications, the acquisition also positions the Company for further
market diversification. The Company also advanced its diversification strategy
in fiscal 1996 by acquiring a pharmaceutical inspection system. The Company
expects to sell pharmaceutical systems together with other current and
anticipated products to address the needs of pharmaceutical manufacturers in the
United States, Puerto Rico and Europe.
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Export and foreign sales for the fiscal years ended September 30, 1997,
1996 and 1995 accounted for 32%, 34% and 27% of net sales in each such year,
respectively. Nearly all export sales of products manufactured in the United
States have been denominated in U.S. dollars. Sales in Europe of spare parts and
service, as well as products manufactured in Europe, are generally denominated
in European currencies. In its export and foreign sales, the Company is subject
to the risks of conducting business internationally, including unexpected
changes in regulatory requirements; fluctuations in the value of the U.S.
dollar, which could increase the sales prices in local currencies of the
Company's products in international markets; tariffs and other barriers and
restrictions; and the burdens of complying with a variety of international laws.
Additional information regarding export and foreign sales is set forth in Note
13 to the Company's Consolidated Financial Statements for the year ended
September 30, 1997.
The Company does not rely on annual recurring sales to particular
customers. However, the Company's customers often make periodic large purchases
of complete systems. Therefore, while in any given fiscal year sales to a single
customer might represent 10 percent or more of the Company's consolidated
revenues, the Company believes the loss of such customer would not have a
material adverse effect on the Company. No single customer accounted for more
than 10% of net sales during fiscal 1997.
The Company markets its products directly and through independent sales
representatives. In North America, the Company operates sales offices in Walla
Walla, Washington; Rockville, Maryland; and Beaver Dam, Wisconsin. The Company
also has two subsidiaries in The Netherlands, a sales and service office in
Rijssen and a manufacturing facility in Beusichem. Sales are made in Australia
and New Zealand through an independent distributor which the Company also
licenses to manufacture certain of its products.
ENGINEERING, RESEARCH AND DEVELOPMENT
At September 30, 1997, the Company's engineering department had 80
technical and support employees who conduct new product research and
development, sustaining engineering for released products and project
engineering for custom systems. The department includes electronic, mechanical
and software engineers, mathematicians and technical support personnel.
The Company's project engineering teams are responsible for engineering
and designing the details of each custom order. A document control team
maintains and controls product documentation and the product modeling database
for the development engineering and project engineering teams as well as the
manufacturing department.
In fiscal 1997, the Company's engineering, research and development
expenses were approximately $4.4 million, compared to $4.3 million and $4.0
million in 1996 and 1995, respectively.
MANUFACTURING
The Company maintains two domestic manufacturing facilities, both
located in Walla Walla, and a European manufacturing facility located in The
Netherlands. The Company's current manufacturing facilities and its product
design and manufacturing processes integrate Computer Aided Engineering (CAE),
Computer Aided Design (CAD), Computer Aided Manufacturing (CAM) and Computer
Integrated Manufacturing (CIM) technologies. Manufacturing activities include
process engineering; cutting, welding, fabrication and assembly of custom
designed stainless steel systems; camera and electronics assembly; subsystem
assembly; and system test and integration. The Company manufactures products for
its AIS business unit in a 150,000 square foot facility constructed in 1990. In
response to
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increased market demand for its products, the Company increased its
manufacturing capacity by leasing another 100,000 square foot facility in Walla
Walla in early 1996. The Company initiated full-scale production operations for
its SCS business unit in this facility during early fiscal 1997. The Company
further increased its manufacturing capacity as a result of the acquisition in
July 1996 of Superior B.V.
The Company manufactures certain of its products to Underwriters
Laboratories, United States Department of Agriculture and Occupational Safety
and Health Administration standards and became qualified in January 1995 for
certification to the ISO-9001 quality management and assurance standards. The
Company's products also comply with the Canadian Standards Association (CSA) and
European CE (Conformite Europeene) safety standards.
Certain components and subassemblies included in the Company's products
are obtained from single-source or sole-source suppliers. The Company attempts
to ensure that adequate supplies are available to maintain manufacturing
schedules. Although the Company seeks to reduce its dependence on sole and
limited source suppliers, the partial or complete loss of certain sources of
supply could have an adverse effect on the Company's results of operations and
relations with customers.
BACKLOG
The Company's backlog as of September 30, 1997 and September 30, 1996
was approximately $8.2 million and $14.7 million, respectively. Gross shipments
exceeded orders by $6.5 million in fiscal 1997, resulting in a corresponding
decrease in backlog from the closing backlog in fiscal 1996. The Company
schedules production based on firm customer commitments and forecasted
requirements. The Company includes in backlog only those customer orders for
which it has accepted purchase orders. However, the Company believes that
backlog is not necessarily a meaningful indicator of future financial results as
it typically ships products ordered within eight to thirteen weeks from the date
of receipt of the order. Large multiple-unit system orders or orders for systems
in high demand may result in longer delivery times.
COMPETITION
The markets for automated inspection systems and specialized conveying
systems are highly competitive. Important competitive factors include price,
performance, reliability, and customer support and service. The Company believes
that it currently competes effectively with respect to these factors, although
there can be no assurance that existing or future competitors will not introduce
comparable or superior products at lower prices. Most of the company's
competitors are small, privately held companies located in the United States and
Europe that serve specialized market segments. Certain of the Company's
competitors may have substantially greater financial, technical, marketing and
other resources. The Company's principal competitors are believed to be the SRC
Vision subsidiary of Advanced Machine Vision Corporation, Sortex Inc., the
Pulsarr B.V. and Elbicon N.V. subsidiaries of Barco N.V., Allen Machinery Co.
and FMC Corporation.
PATENTS AND TRADEMARKS
The Company currently owns twenty outstanding United States patents
issued from 1982 through 1997 and nine outstanding patents issued by foreign
countries, the first of which expires in 1999. As of December 4, 1997, sixteen
United States and foreign patent applications had been filed and are pending.
Additional information regarding royalties received by the Company as a result
of holding certain patents is set forth in Note 14 to the Company's Consolidated
financial Statements for the year ended September 30, 1997.
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The Company has nineteen registered trademarks and applications pending
for three trademarks. The Company also attempts to protect its trade secrets and
other proprietary information through proprietary information agreements with
employees and consultants and other security measures. The laws of certain
countries in which the Company's products are or may be manufactured or sold may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
EMPLOYEES
At September 30, 1997, the Company had 464 full-time employees,
including 242 in manufacturing, 80 in engineering, research and development, 97
in marketing, sales and service and 45 in general administration and finance.
None of the Company's employees in the United States are represented by a labor
union. The Company has never experienced a work stoppage, slowdown or strike.
The Company considers its employee relations to be excellent.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and the manufacturing and research
and development facilities for its AIS business unit are in a 150,000 square
foot building located on a 20-acre site in Walla Walla, Washington. This modern
and efficient facility was custom designed and built for the Company, with
construction completed in October 1990. The Company occupies the facility under
a lease expiring in 2010. The Company has the option to purchase the facility
and related real property at any time during the remaining lease term. In
response to increased market demand for its products, the Company increased its
manufacturing capacity by occupying another 100,000 square foot facility in
Walla Walla beginning in 1996 under a lease expiring in 2005. The Company may
extend the lease until 2010. The Company manufactures most of its SCS products
in this facility. The Company also manufactures SCS products in an 18,000 square
foot facility it owns in Beusichem, The Netherlands. The Company leases office
space in the United States in Rockville, Maryland and Beaver Dam, Wisconsin and
in Rijssen, The Netherlands. In addition, the Company still owns a manufacturing
facility located in Milton-Freewater, Oregon which it vacated in 1991 and
intends to sell.
ITEM 3. LEGAL PROCEEDINGS.
From time-to-time, the Company is named as a defendant in legal
proceedings arising out of the normal course of its business. As of December 4,
1997, the Company was not party to any material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of the Company's common stock are quoted on the NASDAQ National
Market System under the symbol "KTEC" and the following table shows the high and
low trading prices per share of the Company's common stock for the two most
recent fiscal years ended September 30:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1997
1st Quarter $27.75 $20.00
2nd Quarter 25.75 15.25
3rd Quarter 19.375 14.00
4th Quarter 17.50 11.75
Fiscal 1996
1st Quarter $15.50 $ 9.75
2nd Quarter 18.00 12.25
3rd Quarter 27.25 16.75
4th Quarter 28.50 20.25
</TABLE>
The Company had approximately 3,100 beneficial owners of its common
stock, of which 166 are of record, as of December 4, 1997.
The Company has not historically paid dividends on its common stock. The
Board of Directors does not anticipate payment of any dividends in the
foreseeable future and intends to continue its present policy of retaining
earnings for reinvestment in the operations of the Company. The current credit
facility with the Company's principal domestic bank restricts the payment of
dividends on its common stock, other than dividends payable in its stock, or to
retire any of the Company's outstanding shares or alter or amend the Company's
capital structure without the prior written consent of the bank.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information set forth below for each
of the five years in the period ended September 30, 1997 has been derived from
the audited consolidated financial statements of the Company. The financial data
for fiscal years ended September 30, 1993 and 1994 has been derived from
consolidated financial statements not included herein. The information below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's Consolidated
Financial Statements and Notes thereto as provided in Item 7 and Item 8,
respectively.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales .............................. $57,268 $54,341 $42,653 $31,135 $ 35,293
Cost of sales .......................... 39,451 33,050 25,063 19,500 20,730
------- ------- ------- ------- --------
Gross profit ........................... 17,817 21,291 17,590 11,635 14,563
Total operating expenses ............... 17,648 15,226 13,638 10,814 10,194
------- ------- ------- ------- --------
Income from operations ................. 169 6,065 3,952 821 4,369
Other income (expense) ................. 450 1,061 1,175 613 (56)
------- ------- ------- ------- --------
Earnings before income taxes ........... 619 7,126 5,127 1,434 4,313
Income tax expense ..................... 197 2,252 1,589 488 1,434
======= ======= ======= ======= ========
Net earnings ........................... $ 422 $ 4,874 $ 3,538 $ 946 $ 2,879
======= ======= ======= ======= ========
Earnings per share ..................... $ 0.09 $ 1.05 $ 0.76 $ 0.20 $ 0.79
======= ======= ======= ======= ========
Weighted average common and
common equivalent shares outstanding
4,674 4,652 4,639 4,635 3,645
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ......... $ 2,896 $ 9,528 $13,699 $10,008 $ 8,085
Working capital ................. 17,308 17,736 18,783 16,371 15,249
Property, plant and equipment,
net.............................. 9,380 8,703 4,096 3,845 4,316
Total assets .................... 39,441 45,252 31,556 28,981 26,912
Notes payable and current portion
of long-term debt ............. 852 923 415 385 355
Long-term debt, less current
portion.......................... 1,293 1,467 825 1,240 1,625
Shareholders' equity ............ 28,031 27,583 22,760 19,202 18,207
</TABLE>
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Annual Report on Form 10-K may include "forward-looking statements"
within the meaning of federal securities laws, including statements as to
anticipated future results that are based on current expectations and are
subject to a number of risks and uncertainties. The following factors, among
others, could cause actual results or outcomes to differ materially from current
expectations: the ability of the Tegra product line to rebound and sustain an
improved level of customer acceptance, achievement of product performance
specifications and reduction of related product upgrade or warranty expenses,
the ability of new products to compete successfully in either existing or new
markets, the cost of product development activities, future costs of materials
and other operating expenses, competitive factors, the potential impact of
technology advances on inventory obsolescence, the performance and needs of
industries served by the Company and the financial capacity of customers in
these industries to purchase capital equipment.
RESULTS OF OPERATIONS
For the fiscal years ended September 30, 1997, 1996 and 1995, the
Company's net sales were $57.3 million, $54.3 million, and $42.7 million,
respectively. Net sales in fiscal 1997 increased by 5% over fiscal 1996. The
increased sales in fiscal 1997 resulted principally from a 43% increase in
revenues from sales of specialized conveying systems followed by a 21% increase
in sales of parts, service and other processing equipment, partially offset by a
23% decrease in sales of automated inspection systems. While domestic sales of
specialized conveying systems increased in fiscal 1997 over 1996, the increased
sales in this product group benefited principally from the contribution of a
full year of revenues by Superior B.V., the Company's European subsidiary which
was acquired early in the fourth quarter of fiscal 1996. The decrease in sales
of automated inspection systems in fiscal 1997 resulted principally from
decreased sales of Tegra automated inspection systems followed by decreased
sales of ADR systems. Net sales in fiscal 1996 increased by 27% over fiscal 1995
resulting principally from a 59% increase in sales of automated inspection
systems which, in turn, resulted principally from a substantial volume of
shipments of Tegra systems, the Company's latest generation of electro-optical
sorting systems. The Tegra product line was introduced first to the U.S. market
during the first fiscal quarter of 1996 with delivery of systems in full
production quantities beginning in the third fiscal quarter of that year. Export
and foreign sales accounted for 32%, 34% and 27% of total net sales in fiscal
1997, 1996 and 1995, respectively. While sales to European customers in fiscal
1997 increased by 27% over the prior year, sales to customers in other foreign
markets were the principal contributors to an overall increase of 60% in export
and foreign sales in fiscal 1996 over 1995.
The decreased sales volume of the Company's Tegra automated inspection
systems was due partially to certain customers deferring orders for additional
systems pending the results of the Company's completion of certain field
upgrades to improve performance of installed systems. The technical
modifications to previously shipped Tegra systems, which the Company considers
as a long-term investment in its customer base, were substantially completed
late in fiscal 1997. The Company believes these modifications have resulted in
significant improvements in performance and reliability and has modified its
current product design accordingly. The Company received repeat orders from
multiple customers for Tegra systems throughout fiscal 1997 and expects that new
and repeat orders for the Tegra product line will contribute to growth in
revenues in fiscal 1998 as the advantages of this product line become more
widely known, as the Company continues to develop new applications utilizing the
Tegra system as a technology platform and as customers of earlier generation
products consider upgrading to the new Tegra systems.
11
<PAGE> 14
Gross profit was 31%, 39% and 41% of sales in fiscal 1997, 1996 and
1995, respectively. The reduced gross profit margins, as a percentage of net
sales, in fiscal 1997 compared to fiscal 1996 resulted principally from a shift
in product mix toward lower margin products combined with a substantial increase
in Tegra system warranty expenses. Increased manufacturing labor and overhead
expenses as percentages of sales also contributed to the decrease in gross
profit contribution. While gross profit margin contribution rates within the
automated inspection system product line improved in the more recent annual
period compared to fiscal 1996, the increased sales of specialized conveying
systems and other processing equipment combined with the decreased sales of
Tegra and ADR systems resulted in a shift in product mix to lower margined
systems. Warranty expenses, principally related to the technical modifications
of previously installed Tegra systems upgraded in the field, increased by
approximately 100% to $3.2 million in fiscal 1997 compared to the preceding
year. The Company has offered a two-year warranty on Tegra systems compared to
an industry standard one-year warranty on its other products. However, the
Company expects to reposition its warranty policy during fiscal 1998 to offer
the industry standard one-year warranty across all of its product offerings.
Additionally, management believes that gross profit margins on its automated
inspection systems and specialized conveying systems will improve as a result of
cost reduction and value engineering activities, which the Company is currently
undertaking. The lower profit margins in fiscal 1996 compared to fiscal 1995
resulted principally from increased production costs, manufacturing variances
and warranty reserves for Tegra systems relative to the cost structures of the
Company's third generation electro-optical sorting systems that Tegra replaced.
Operating expenses increased to $17.6 million in fiscal 1997 from $15.2
million in fiscal 1996 and from $13.6 million in fiscal 1995 and represented
31%, 28% and 32% of net sales in each such year, respectively. The Company
expects that, as a percentage of net sales, total operating expenses in fiscal
1998 may decrease slightly from fiscal 1997 due to anticipated increases in
sales volume and moderation in the rate of increase in selling and marketing, as
well as general and administrative, expenses.
Selling and marketing expenses increased to $8.1 million in fiscal 1997
from $7.4 million in fiscal 1996 and $6.8 million in fiscal 1995, and
represented 14%, 14% and 16% of net sales in each such year, respectively. In
fiscal 1997, selling and marketing expenses increased by approximately 9%
compared to fiscal 1996 due principally to increased staffing and travel
expenses resulting from the Company's reorganization into business units and
expenses associated with the Company's activities in developing a presence in
the pharmaceutical inspection systems market. Selling and marketing expenses in
fiscal 1996 increased compared to fiscal 1995 as a result of several factors,
including increased commission expenses related to the higher level of product
sales combined with an increased volume of those sales sold through outside
representatives to whom the Company pays higher commission rates. Increased
marketing and product promotion expenditures related to the introduction of the
Tegra product line also contributed to higher selling and marketing expenses in
fiscal 1996. The Company expects to continue devoting additional resources in
fiscal 1998 to expand its selling efforts and market presence, both domestically
and internationally.
Research and development expenses increased in fiscal 1997 to $4.4
million from $4.3 million in fiscal 1996 and $4.0 million in fiscal 1995, and
represented 8%, 8% and 9% of net sales in each such year, respectively. The
majority of the research and development expenses in fiscal 1997 resulted
principally from expenditures associated with the development of performance
improvements and technical modifications for the Tegra product line. In both
fiscal 1996 and 1995, research and development expenses were incurred
principally due to Tegra-related new product development activities. The Company
expects that research and development expenses in fiscal 1998 may increase
slightly compared to fiscal 1997. The Company further expects that research and
development activities
12
<PAGE> 15
in fiscal 1998 will focus on extending the capabilities and applications of the
technologies contained in Tegra, developing a new product for the potato
industry and developing the Company's pharmaceutical product line.
General and administrative expenses increased to $5.1 million in fiscal
1997 from $3.5 million in fiscal 1996 and $2.9 million in fiscal 1995, and
represented 9%, 6% and 7% of net sales in each such year, respectively. The
increase in general and administrative expenses in the more recent fiscal year
principally reflected the effect of increased staffing levels resulting from the
reorganization of the Company into two separate business units. Certain of these
increased general and administrative expenses were classified as manufacturing
overhead expenses in the comparable period in fiscal 1996. General and
administrative expenses also increased as a result of expenses associated with
the Company's new European subsidiaries which were included for only the fourth
quarter of fiscal 1996. Management expects that almost all such increased
general and administrative expenses will also be incurred in future periods. The
increased general and administrative expenses in fiscal 1996 compared to 1995
resulted from increased staffing levels and related expenses, as well as
expenses associated with the acquisition of Suplusco Holding B.V.
Other income and expense includes interest income and expense, royalty
income and other income from miscellaneous sources. During fiscal 1997, the
Company received a royalty payment of $125,000 as part of an agreement to sell
certain equipment to one customer, pursuant to which the Company may receive
royalty payments through 2001. In an unrelated matter, the Company received
payments of $400,000 in each of the fiscal years of 1996 and 1995 related to the
settlement of patent litigation in fiscal 1992. The final installment of these
settlement payments was received in fiscal 1996. Net interest income in fiscal
1997 was $34,000 compared to $546,000 in fiscal 1996 and $539,000 in 1995.
Decreased interest earnings on reduced balances of funds invested in cash
equivalents and short-term investments and increased long-term debt resulted in
the reduced net interest income in fiscal 1997 compared to fiscal 1996.
The Company's effective income tax rate was 32.0%, 31.6%, and 31.0% for
fiscal 1997, 1996 and 1995, respectively.
Net earnings were $422,000 in fiscal 1997 compared to $4.9 million in
fiscal 1996 and $3.5 million in fiscal 1995. Net earnings per share were $0.09,
$1.05 and $0.76 in fiscal years 1997, 1996 and 1995, respectively. The decrease
in net earnings in fiscal 1997 compared to fiscal 1996 resulted principally from
the reduced gross margin, which was due to the shift in product mix to lower
margin products and increased warranty expenses, the increased operating
expenses and from the decreased interest and other income. The increase in net
earnings in fiscal 1996 resulted principally from increased sales volume,
increases in gross margin resulting from the effect of increased volume, offset
by increased production costs, increased warranty reserve expenses and increased
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, net cash used in operating activities totaled $3.8
million compared to net cash provided by operating activities totaling $2.6
million and $5.3 million in fiscal 1996 and 1995, respectively. The Company used
$4.0 million in cash during fiscal 1997 to decrease trade accounts payable
balances and accrued customer support and warranty costs and to pay accrued
income taxes and certain accrued payroll liabilities, including profit sharing
and incentive compensation expenses, which had been accrued in the previous
fiscal year. By comparison, cash provided during fiscal 1996 totaled $4.4
million resulting from increases in these liabilities and net cash used during
1995 totaled $122,000 as a result of decreases in such liabilities. As a result
of increased sales volumes, accounts receivable
13
<PAGE> 16
during fiscal 1997 and 1996 increased by $73,000 and $5.1 million, respectively,
compared to cash provided by a decrease in accounts receivable during fiscal
1995 of $2.7 million. Additionally, operating activities during 1997, 1996 and
1995 resulted in the use of $360,000, $3.8 million and $1.2 million,
respectively, to fund increases in inventories.
Cash flows from investing activities in the form of maturities of
short-term investments for the net amounts of $6.1 million and $2.3 million were
utilized to partially fund the Company's operating requirements in fiscal 1997
and 1996, respectively, compared to net purchases of short-term investments
totaling $6.9 million during 1995. Net cash resources totaling $2.5 million,
$3.1 million and $1.3 million were used to fund the acquisition of capital
equipment during 1997, 1996 and 1995, respectively. At September 30, 1997, the
Company had no material commitments for capital expenditures. During fiscal
1996, cash resources totaling $2.8 million were invested in the acquisition of a
subsidiary in Europe, Suplusco Holding B.V., and $377,000 was invested for the
purchase of a product line. No such investing activities for acquisitions or
product line purchases occurred in either fiscal 1997 or 1995.
The Company's cash flows from financing activities were affected by the
repayments of long-term debt during fiscal 1997, 1996 and 1995 totaling $1.6
million, $1.4 million and $385,000, respectively. Separately, cash flows from
the issuance of long-term debt totaled $1.3 million in fiscal 1997 and $833,000
in 1996, with no additional long-term debt being incurred in fiscal 1995.
Proceeds from the issuance of common stock under the Company's employee stock
option and stock purchase plans during fiscal 1997, 1996 and 1995 totaled
$239,000, $96,000 and $82,000, respectively.
The Company's facility with a domestic commercial bank provides for an operating
line of credit up to $4.0 million. The accommodation also provides for a letter
of credit of $410,000 for an Industrial Revenue Bond. Collateral for the letter
of credit is primarily manufacturing equipment financed by the Industrial
Revenue Bond. At September 30, 1997, the Company had no borrowings under this
credit facility.
The Company also maintains a credit facility with a Dutch bank providing for
operating lines of credit totaling up to approximately $757,000, which are
available to the Company's subsidiaries in the Netherlands. At September 30,
1997, the Company had no borrowings under this credit facility.
The Company's operating, investing and financing activities resulted in
decreases in cash and cash equivalents during fiscal 1997, 1996 and 1995
totaling $562,000 $1.9 million and $3.2 million respectively. The balance of
cash and cash equivalents totaled $2.9 million, $3.5 million and $5.3 million at
the end of fiscal 1997, 1996 and 1995, respectively. The Company believes that
its cash and cash equivalents, cash generated from operations and available
borrowings under its operating lines of credit will be sufficient to provide for
its working capital needs and to fund future growth.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
14
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
Title Page
----- ----
<S> <C>
Independent Auditors' Report................................................ 16
Consolidated Balance Sheets at September 30, 1997 and 1996.................. 17
Consolidated Statements of Earnings for the three years ended
September 30, 1997...................................................... 18
Consolidated Statements of Shareholders' Equity for the three years
ended September 30, 1997................................................ 19
Consolidated Statements of Cash Flows for the three years ended
September 30, 1997...................................................... 20
Notes to Consolidated Financial Statements.................................. 22
</TABLE>
15
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Key Technology, Inc.
Walla Walla, Washington
We have audited the accompanying consolidated balance sheets of Key Technology,
Inc. and Subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended September 30, 1997. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Key Technology, Inc. and
Subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Portland, Oregon
October 31, 1997
16
<PAGE> 19
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,896 $ 3,458
Short-term investments -- 6,070
Trade accounts and notes receivable, net 8,716 8,824
Inventories 13,846 13,486
Deferred income taxes 1,243 918
Prepaid expenses 608 714
-------- --------
Total current assets 27,309 33,470
PROPERTY, PLANT, AND EQUIPMENT, NET 9,380 8,703
PROPERTY HELD FOR SALE, NET 650 650
GOODWILL AND OTHER INTANGIBLES, NET 2,102 2,429
-------- --------
TOTAL $ 39,441 $ 45,252
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,496 $ 4,797
Accrued payroll liabilities and commissions 2,332 3,251
Accrued customer support and warranty costs 1,126 1,368
Income tax payable 738 1,300
Other accrued liabilities 1,113 1,103
Customers' deposits 1,344 2,992
Current portion of long-term debt 852 813
Notes payable -- 110
-------- --------
Total current liabilities 10,001 15,734
LONG-TERM DEBT 1,293 1,467
OTHER LIABILITIES -- 121
DEFERRED INCOME TAXES 116 347
COMMITMENTS (Note 9) -- --
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock - no par value; 15,000,000 shares authorized;
4,684,446 and 4,657,822 issued and outstanding at September 30,
1997 and 1996, respectively 8,969 8,730
Retained earnings 19,484 19,062
Cumulative foreign currency translation adjustment (422) (209)
-------- --------
Total shareholders' equity 28,031 27,583
-------- --------
TOTAL $ 39,441 $ 45,252
======== ========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 20
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED SEPTEMBER 30, 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET SALES $ 57,268 $ 54,341 $ 42,653
COST OF SALES 39,451 33,050 25,063
-------- -------- --------
Gross profit 17,817 21,291 17,590
-------- -------- --------
OPERATING EXPENSES:
Selling 8,104 7,430 6,799
Research and development 4,417 4,312 3,956
General and administrative 5,127 3,484 2,883
-------- -------- --------
Total operating expenses 17,648 15,226 13,638
-------- -------- --------
INCOME FROM OPERATIONS 169 6,065 3,952
-------- -------- --------
OTHER INCOME (EXPENSE):
Royalty income 125 400 400
Interest income 280 616 606
Interest expense (246) (70) (67)
Other, net 291 115 236
-------- -------- --------
Total other income 450 1,061 1,175
-------- -------- --------
Earnings before income taxes 619 7,126 5,127
Income tax expense 197 2,252 1,589
-------- -------- --------
NET EARNINGS $ 422 $ 4,874 $ 3,538
======== ======== ========
EARNINGS PER SHARE $ 0.09 $ 1.05 $ 0.76
======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,674 4,652 4,639
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 21
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK CURRENCY
------------------------ RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
--------- ------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1994 4,637,600 $8,552 $10,650 $ -- $ 19,202
Issuance of common stock upon
exercise of stock options 10,050 82 -- -- 82
Foreign currency translation
adjustment -- -- -- (62) (62)
Net earnings -- -- 3,538 -- 3,538
--------- ------ ------- ----- --------
Balance at September 30, 1995 4,647,650 8,634 14,188 (62) 22,760
Issuance of common stock upon
exercise of stock options 8,467 59 -- -- 59
Issuance of stock for Employee
Stock Purchase Plan 1,705 37 -- -- 37
Foreign currency translation
adjustment -- -- -- (147) (147)
Net earnings -- -- 4,874 -- 4,874
--------- ------ ------- ----- --------
Balance at September 30, 1996 4,657,822 8,730 19,062 (209) 27,583
Issuance of common stock upon
exercise of stock options 20,425 149 -- -- 149
Issuance of stock for Employee
Stock Purchase Plan 6,199 90 -- -- 90
Foreign currency translation
adjustment -- -- -- (213) (213)
Net earnings -- -- 422 -- 422
--------- ------ ------- ----- --------
Balance at September 30, 1997 4,684,446 $8,969 $19,484 $(422) $ 28,031
========= ====== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED SEPTEMBER 30, 1997
(Amounts In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 422 $ 4,874 $ 3,538
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,145 1,327 1,049
Deferred income taxes, net (557) (468) 159
Deferred rent 70 34 (6)
Bad debt expense 181 56 41
Changes in, net of effects of acquisitions:
Trade accounts and notes receivable (73) (5,090) 2,703
Inventories (360) (3,820) (1,169)
Prepaid expenses 106 (286) 116
Goodwill and other intangibles 83 (35) (499)
Accounts payable (2,301) 1,657 (299)
Accrued payroll liabilities and commissions (919) 479 909
Accrued customer support and warranty costs (242) 924 (86)
Income taxes payable (562) 1,300 (646)
Other accrued liabilities (60) 115 (26)
Customers' deposits (1,648) 1,629 (435)
Other liabilities (121) (67) (27)
------- ------- -------
Cash provided by (used in) operating activities (3,836) 2,629 5,322
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short-term investments, net 6,070 2,306 (6,903)
Purchases of property, plant, and equipment, net (2,526) (3,055) (1,266)
Purchase of product line -- (377) --
Acquisition of subsidiary -- (2,754) --
------- ------- -------
Cash provided by (used in) investing activities 3,544 (3,880) (8,169)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 239 96 82
Payments on long-term debt (1,608) (1,396) (385)
Proceeds from issuance of long-term debt 1,312 833 --
------- ------- -------
Cash used in financing activities (57) (467) (303)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (213) (147) (62)
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (562) (1,865) (3,212)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,458 5,323 8,535
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,896 $ 3,458 $ 5,323
======= ======= =======
</TABLE>
(Continued)
20
<PAGE> 23
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED SEPTEMBER 30, 1997
(Amounts In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 240 $ 58 $ 62
Cash paid during the year for income taxes 1,266 1,671 2,014
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
- Equipment obtained through capital leases $ 51 $ 274 $ -
</TABLE>
(Concluded)
See notes to consolidated financial statements.
21
<PAGE> 24
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED SEPTEMBER 30, 1997
1. THE COMPANY
Key Technology, Inc. and its wholly-owned subsidiaries (the "Company")
design, manufacture, and sell process automation systems, integrating
electro-optical inspection and sorting, specialized conveying and product
preparation equipment. The consolidated financial statements include the
accounts of Key Technology, Inc. and its wholly-owned subsidiaries, Key
Technology Holdings U.S.A., LLC, and Key Technology FSC, Inc., a foreign
sales corporation (FSC). Suplusco Holding B.V., a wholly-owned European
subsidiary of Key Technology Holdings U.S.A., LLC includes the accounts of
Key Technology B.V. and Superior B.V. All significant intercompany accounts
and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Sales revenue net of allowances is generally
recognized at the time equipment is shipped to customers or when title
passes. Upon receipt of an order, the Company generally receives a deposit
which is recorded as customers' deposits. The Company makes periodic
evaluations of the creditworthiness of its customers and generally does not
require collateral. An allowance for credit losses is provided based upon
historical experience and anticipated losses.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company
considers all highly liquid investments with original maturities of 90 days
or less to be cash equivalents. Short-term investments consist of bankers
acceptances and commercial paper with original maturities of greater than
90 days and less than one year. Short-term investments are held to maturity
and the carrying value approximates fair value.
INVENTORIES are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT, AND EQUIPMENT are recorded at cost and depreciated over
estimated useful lives on the straight-line method. The range in lives for
the assets is as follows:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and improvements 7 to 40
Manufacturing equipment 7 to 10
Office equipment, furniture, and fixtures 3 to 7
</TABLE>
GOODWILL AND OTHER INTANGIBLES - Goodwill is amortized over 10 years.
Patent costs are amortized over the estimated useful lives of the related
patents or 17 years, whichever is shorter. Management periodically
evaluates the recoverability of goodwill and other intangibles based upon
current and anticipated net income and undiscounted future cash flows.
Amortization of goodwill and other intangibles was $327,000, $335,000, and
$97,000 for the years ended September 30, 1997, 1996, and 1995,
respectively.
ACCRUED CUSTOMER SUPPORT AND WARRANTY COSTS - The Company provides customer
support services consisting of installation and training to its customers.
The Company also provides a warranty on its products for one or two years
following the date of shipment. Management establishes the reserve for
customer support and warranty costs based upon the types of products
22
<PAGE> 25
shipped, customer support and product warranty experience and estimates
such costs for related new products where experience is not available. The
provision of customer support and warranty costs is charged to cost of
sales at the time such costs are known or estimable.
INCOME TAXES - Deferred income taxes are provided for the effects of timing
differences arising from differences in the reporting of revenues and
expenses for financial statement and income tax purposes under the asset
and liability method using currently enacted tax rates.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities denominated in a
foreign currency are translated to U.S. dollars at the exchange rate on the
balance sheet date. Translation adjustments are shown separately in
shareholders' equity. Revenues, costs, and expenses are translated using an
average rate. Realized and unrealized foreign currency transaction gains
and losses are included in the consolidated statement of earnings and are
not material.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards
("SFAS") No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the estimated fair value of financial instruments.
The carrying value of the Company's cash, short-term investments,
receivables, trade payables, and other accrued liabilities approximates
their estimated fair values due to the short maturities of those
instruments.
EARNINGS PER SHARE - Earnings per share is computed on the basis of the
weighted average number of common and common equivalent shares outstanding.
When dilutive, outstanding options for common stock have been included in
the calculation of common and common equivalent shares outstanding using
the treasury stock method.
FUTURE ACCOUNTING CHANGES - In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, Earnings per Share. SFAS No.
128 requires all companies whose capital structures include convertible
securities and options to make a dual presentation of basic and diluted
earnings per share. The new standard becomes effective beginning with the
Company's first quarter ending on December 31, 1997. The effect of adopting
SFAS No. 128 on net earnings per share for all periods reported is
immaterial.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 established requirements for disclosure of comprehensive
income and becomes effective for the Company's fiscal year ending September
1999. Reclassification of earlier financial statements for comparative
purposes is required.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 established new standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. The new standard becomes
effective for the Company's fiscal year ending September 1999, and requires
that comparative information from earlier years be restated to conform to
the requirements of this standard. The Company has not yet completed its
analysis of which, if any, operating segments it will report on.
RECLASSIFICATIONS - Certain reclassifications were made to prior years'
consolidated financial statements to conform with the 1997 presentation.
23
<PAGE> 26
3. ACQUISITIONS
Effective July 1, 1996, the Company acquired all of the outstanding common
stock of Suplusco Holding B.V. and a subsidiary, a manufacturer of
specialized conveying equipment. The purchase price was $3,092,000 and was
accounted for by the purchase method. The excess of the purchase price over
the estimated fair value of net assets acquired amounted to $1,607,000,
which is accounted for as goodwill. The results of operations of Suplusco
Holding B.V. and its subsidiary from July 1, 1996 are included in the
statement of earnings. Assets and liabilities acquired were as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired $5,841
Cash paid for common stock, less cash acquired of $338,000 (2,754)
---------
Liabilities assumed $3,087
=========
</TABLE>
Pro forma unaudited consolidated operating results of the Company and
Suplusco Holding B.V. and subsidiary for the years ended September 30, 1996
and 1995, assuming the acquisition had been made as of October 1, 1995 and
1994, are summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
(Unaudited) 1996 1995
<S> <C> <C>
Net sales $57,428 $47,352
Net earnings 5,207 3,800
Earnings per share 1.12 0.82
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as
a result of a step-up in the basis of property, plant, and equipment,
additional amortization expense as a result of goodwill and certain other
adjustments, together with related income tax effects. They do not purport
to be indicative of the results of operations which actually would have
resulted had the acquisition been in effect on October 1, 1995 and 1994 or
of future results of operations of the consolidated entities.
Effective July 15, 1996, the Company purchased certain inventories,
trademarks, and patents relating to the pharmaceutical inspection product
line from the Imaging Division of Oncor, Inc. for $377,000.
4. TRADE ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
<S> <C> <C>
Trade accounts receivable $ 9,160 $ 9,097
Allowance for doubtful accounts (444) (273)
------- -------
Total trade accounts and notes receivable $ 8,716 $ 8,824
======= =======
</TABLE>
24
<PAGE> 27
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
<S> <C> <C>
Purchased components and raw materials $ 5,393 $ 5,728
Sub-assemblies 2,386 2,055
Work-in-process 2,971 3,267
Finished goods 3,096 2,436
------- -------
Total inventories $13,846 $13,486
======= =======
</TABLE>
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
<S> <C> <C>
Land $ 277 $ 277
Buildings and improvements 2,203 1,430
Manufacturing equipment 8,715 6,868
Office equipment, furniture, and fixtures 6,522 5,609
Building improvements and equipment purchases in process 108 1,340
-------- --------
17,825 15,524
Accumulated depreciation (8,445) (6,821)
-------- --------
Total property, plant, and equipment - net $ 9,380 $ 8,703
======== ========
</TABLE>
7. PROPERTY HELD FOR SALE
The Company intends to sell a manufacturing plant which it vacated in 1991.
The property held for sale is carried at its estimated net realizable
value.
8. FINANCING AGREEMENTS
The Company has a domestic credit accommodation with a commercial bank
which provides for an unsecured operating line up to $4,000,000, at the
bank's prime interest rate less 1/4%. This accommodation expires January
23, 1998. The accommodation also provides for a letter of credit of
$410,000 for an Industrial Revenue Bond. Collateral for the letter of
credit is primarily manufacturing equipment financed by the Industrial
Revenue Bond. At September 30, 1997 and 1996, the Company had no borrowings
under the domestic operating line. The domestic credit accommodation
contains covenants which require certain levels of tangible equity and
working capital and ratios of current assets to current liabilities and
debt to equity. The Company was in compliance with all such covenants.
The Company also maintains a credit facility with a Dutch bank which
provides for operating lines of credit up to $1.5 million guilders or
approximately $757,000 at an interest rate of 5.25%. Collateral for this
credit facility is certain receivables and inventories of the Company's
Dutch
25
<PAGE> 28
subsidiaries and by the guarantee of the Company. At September 30, 1997 and
1996, borrowings of zero and $110,000, respectively, were outstanding.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
<S> <C> <C>
Industrial Revenue Bond, variable interest rate of 4.4% at September 30,
1997 (interest rate not to exceed 12%), due in annual principal
installments with interest payable monthly, secured by letter of credit $ 370 $ 825
Note payable, interest rate of 8.5%, due in monthly principal and interest
installments, secured by certain land, buildings,
and receivables -- 527
Note payable, interest rate of 6%, due in monthly principal and
interest installments, secured by certain land and buildings 747 --
Note payable, interest rate of 5.625%, due in monthly principal
and interest installments, secured by receivables 429 --
Notes payable, interest rate of 7%, due in annual principal
and interest installments, secured by letter of credit 414 697
Equipment note payable, interest rate of 4.9%, due in monthly principal and
interest installments, secured by certain office
equipment 142 231
Other capital leases, interest rates of 6% and 11%, due in monthly
principal and interest installments, secured by certain office
equipment 43 --
------- -------
2,145 2,280
Less current portion (852) (813)
------- -------
Total long-term debt $ 1,293 $ 1,467
======= =======
</TABLE>
Principal payments on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
<S> <C>
1998 $ 852
1999 466
2000 194
2001 184
2002 106
Thereafter 343
------
Total $2,145
======
</TABLE>
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of long-term debt at
September 30, 1997 approximates carrying value.
26
<PAGE> 29
9. LEASES
The Company has agreements with the Port of Walla Walla to lease two
operating facilities. The Company has the option to purchase the land and
plant under one of the agreements after the fifth full lease year (1995).
The purchase price is determined by reducing the original plant
construction costs of approximately $8,800,000 by one thirty-fifth for each
lease year prior to the exercise of the option and adding $600,000 for the
land, subject to further reductions if exercised after the fifteenth year
of the lease.
Rental expense for the Company's operating leases referred to above was
$925,000 for the year ended September 30, 1997, $805,000 for the year ended
September 30, 1996, and $651,000 for the year ended September 30, 1995.
The following is a schedule of future minimum rental payments required
under the operating leases and the future rental expense (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING RENTAL RENTAL
SEPTEMBER 30, PAYMENTS EXPENSE
------------- -------- -------
<S> <C> <C>
1998 $ 875 $ 925
1999 883 925
2000 894 925
2001 900 925
2002 910 925
Thereafter 7,995 7,474
------- -------
Total $12,457 $12,099
======= =======
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 680 $ 2,515 $1,398
State 74 205 32
------- ------- ------
754 2,720 1,430
------- ------- ------
Deferred:
Federal (505) (445) 151
State (52) (23) 8
------- ------- ------
(557) (468) 159
------- ------- ------
Total $ 197 $ 2,252 $1,589
======= ======= ======
</TABLE>
27
<PAGE> 30
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996 1995
<S> <C> <C> <C>
Deferred tax asset:
Reserves and accruals $ 1,444 $ 1,111 $ 679
Deferred tax liability:
Accumulated depreciation (317) (540) (576)
------- ------- -----
Net deferred tax asset $ 1,127 $ 571 $ 103
======= ======= =====
Deferred tax:
Current asset $ 1,243 $ 918 $ 412
Long-term liability (116) (347) (309)
------- ------- -----
Net deferred tax asset $ 1,127 $ 571 $ 103
======= ======= =====
</TABLE>
Income tax expense is computed at rates different than statutory rates. The
reconciliation between effective and statutory rates is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
<S> <C> <C> <C>
Statutory rates 34.0% 34.0% 34.0%
Increase (reduction) in income taxes resulting from:
FSC commissions (3.7) (3.3) (1.0)
FSC tax 1.9 1.1 0.8
R&D credit (11.3) (0.6) (3.3)
State income taxes, net of federal benefit 2.4 1.7 0.8
Other permanent differences 6.9 0.4 0.4
Other 1.8 (1.7) (0.7)
----- ---- ----
Income tax combined effective rate 32.0% 31.6% 31.0%
===== ==== ====
</TABLE>
11. SHAREHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN - Effective February 6, 1996, the Company
adopted an Employee Stock Purchase Plan (the "Plan"). Most employees are
eligible to participate in the Plan. Shares are not available to employees
who already own 5% or more of the Company's stock. Employees can withhold,
by payroll deductions, up to 5% of their regular compensation to purchase
shares. The purchase price is 85% of the fair market value of the common
stock on the purchase date. There were 500,000 shares reserved for purchase
under the Plan. During the years ended September 30, 1997 and 1996, the
Company issued 6,199 and 1,705 shares, respectively.
EMPLOYEES' STOCK OPTION PLAN - Under the 1996 Employees' Stock Option Plan
(the "1996 Plan"), eligible employees may receive either incentive stock
options or nonstatutory stock options and such options may be exercised
only after an employee has remained in continuous employment for one year
after the date of grant. Thereafter, the options become exercisable as
stipulated by the
28
<PAGE> 31
individual option agreements, generally 25% per year on the anniversary
date of the grant. The option price is determined to be fair market value
at date of grant.
The following table summarizes activity under this Plan.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE
SHARES PER SHARE
<S> <C> <C> <C>
Balance at October 1, 1994 137,700 $ 7.95
Options granted 68,900 $ 8.92
Options exercised (10,050) $ 8.15
Options forfeited (18,025) $ 8.32
--------------
Balance at September 30, 1995 178,525 $ 8.28
Options granted 176,200 $22.04
Options exercised (8,467) $ 6.98
Options forfeited (9,575) $13.52
--------------
Balance at September 30, 1996 336,683 $15.37
Options granted 148,450 $17.20
Options exercised (20,425) $ 7.28
Options forfeited (1,375) $14.52
--------------
Balance at September 30, 1997 463,333 $16.31
==============
</TABLE>
At September 30, 1997, total of shares reserved were 705,558, of which
242,225 were available for grant. At September 30, 1997, options for
137,308 shares were exercisable at prices from $7.00 to $23.25 per share.
At September 30, 1996, options for 74,279 shares were exercisable at prices
from $5.28 to $10.75 per share.
During 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting for
employee stock options and similar equity instruments and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25").
Entities electing to remain with the accounting in APB 25 must make pro
forma disclosures of net income and, if presented, earnings per share, as
if the fair value based method of accounting defined in SFAS No. 123 has
been adopted.
The Company has elected to account for its stock-based compensation plans
under APB 25. The Company has computed, for pro forma disclosure purposes,
the value of all stock and stock options granted under the Employee Stock
Purchase Plan and the 1996 Employees' Stock Option Plan during 1997 and
1996 using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following weighted average assumptions for both the years
ended September 30, 1997 and 1996:
<TABLE>
<S> <C>
Risk-free interest rate 5.5%
Expected dividend yield 0%
Expected lives 6 years
Expected volatility 61%
</TABLE>
29
<PAGE> 32
Using the Black-Scholes methodology, the total value of stock options
granted during 1997 and 1996 was $1,525,000 and $2,320,000, respectively,
which would be amortized on a pro forma basis over the vesting period of
the options (typically five years). The weighted average fair value of
options granted during 1997 and 1996 was $10.64 per share and $13.64 per
share, respectively.
The total compensatory value of stock purchased under the Employee Stock
Purchase Plan during 1997 and 1996 was $16,000 and $7,000, respectively.
The weighted average fair value of the stock purchased during 1997 and 1996
was $2.63 per share and $3.85 per share, respectively.
If the Company had accounted for its 1996 Plan and Employee Stock Purchase
Plan in accordance with 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):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C>
Net earnings (loss) $ 422 $ (104) $ 4,874 $ 4,713
Earnings (loss) per share $ 0.09 $ (0.02) $ 1.05 $ 1.01
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards
prior to October 1, 1995, and additional awards are anticipated in
future years.
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$5.28 - $10.00 132,783 6.1 $ 8.33 86,783 $ 8.34
$10.01 - $15.00 10,000 6.6 10.75 7,500 10.75
$15.01 - $20.00 158,450 9.5 17.14 2,500 16.25
$20.01 - $23.25 162,100 8.6 22.39 40,525 22.39
--------------- ------- ------------ --------- ----------- ---------
$5.28 - $23.25 463,333 8.1 $ 16.31 137,308 $ 12.76
=============== ======= ============ ========= =========== =========
</TABLE>
30
<PAGE> 33
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan which covers substantially all
employees. The Company is required to match 50% of employee contributions
up to 2% of each participating employee's compensation. The Company
contributed $247,000, $193,000, and $173,000 in matching funds to the plan
for the years ended September 30, 1997, 1996, and 1995, respectively.
The 401(k) plan also permits the Company to make discretionary profit
sharing contributions to all employees. Discretionary profit sharing
contributions are determined annually by the Board of Directors. Profit
sharing plan expense was estimated and provided at zero, $723,000 and
$483,000 for the years ended September 30, 1997, 1996, and 1995,
respectively.
The Company has a phantom stock plan for certain key employees and the
Company's estimated purchase price of the phantom stock units is shown as
other liabilities. No additional awards of phantom stock units can occur,
with final settlement occurring in 1998. The Company paid $75,000, $92,000,
and $90,000 in settlement of certain phantom stock unit awards during the
years ended September 30, 1997, 1996, and 1995, respectively.
13. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The following table sets forth certain information for Key Technology, Inc.
(the "Parent") and its European subsidiary ("Key Europe") (in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1997 1996 1995
<S> <C> <C> <C>
Parent sales:
Sales to customers $39,127 $35,804 $31,119
Export sales to customers 10,115 15,537 9,851
Sales to affiliates 2,159 1,183 1,398
--------- --------- ---------
Total parent sales 51,401 52,524 42,368
Key Europe sales:
Sales to customers 8,026 3,000 1,683
Sales to affiliates 1,951 416 586
Eliminations (4,110) (1,599) (1,984)
--------- --------- ---------
Net sales $57,268 $54,341 $42,653
========= ========= =========
Earnings (loss) before taxes:
Parent $ (110) $ 7,556 $ 5,609
Key Europe 737 (279) (369)
Eliminations (8) (151) (113)
--------- --------- ---------
Earnings before taxes $ 619 $ 7,126 $ 5,127
========= ========= =========
Total assets:
Parent $36,699 $41,105 $30,624
Key Europe 8,284 9,361 1,384
Eliminations (5,542) (5,214) (452)
--------- --------- ---------
Total assets $39,441 $45,252 $31,556
========= ========= =========
</TABLE>
31
<PAGE> 34
Sales by the Parent to Key Europe are recorded at arms-length prices.
Intercompany profits are eliminated in consolidation.
No single customer accounted for more than 10% of net sales during the year
ended September 30, 1997. For the years ended September 30, 1996 and 1995,
the Company sold equipment to one nonaffiliated customer totaling 12% and
11% of net sales.
14. ROYALTY INCOME
During 1992, the Company received $1,000,000 in connection with the
settlement of a patent infringement lawsuit brought by the Company. As part
of the settlement, the Company entered into a license agreement under which
the Company received royalty payments through 1996. The Company received
royalty payments of $400,000 during each of the years ended September 30,
1996 and 1995.
During 1997, as part of a settlement, the Company entered into an agreement
not to sell certain equipment to a selected market segment under which the
Company may receive royalty payments through 2001. The payment is reduced
by a percentage of the purchases of equipment from the Company. The Company
received a royalty payment of $125,000 during the year ended September 30,
1997.
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of operating results by quarter for the years
ended September 30, 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 13,416 $ 15,287 $ 13,951 $ 14,614 $ 57,268
Gross profit 3,538 5,112 4,344 4,823 17,817
Net earnings (loss) (782) 690 94 420 422
Net earnings (loss) per
share (0.17) 0.15 0.02 0.09 0.09
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 9,110 $ 8,084 $17,304 $19,843 $54,341
Gross profit 3,630 2,353 7,672 7,636 21,291
Net earnings (loss) 328 (620) 2,779 2,387 4,874
Net earnings (loss) per share 0.07 (0.13) 0.60 0.51 1.05
</TABLE>
* * * * * *
32
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is hereby incorporated by reference the information under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed
with the Securities and Exchange Commission within 120 days after the end of
Registrant's fiscal year ended September 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
There is hereby incorporated by reference the information under the
caption "Executive Compensation" in the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be
filed with the Securities and Exchange Commission within 120 days after the end
of Registrant's fiscal year ended September 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is hereby incorporated by reference the information under the
caption "Principal Shareholders" in the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be
filed with the Securities and Exchange Commission within 120 days after the end
of Registrant's fiscal year ended September 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
33
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS:
Reference is made to Part II, Item 8 for a listing of required financial
statements filed with this report........................................... 15
2. FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules are omitted because they are not
applicable or the required information is included in the
accompanying consolidated financial statements or notes thereto.
3. EXHIBITS:
(3) Articles of Incorporation and Bylaws
(3.1) Restated Articles of Incorporation (filed as Exhibit
3.1 to the Registration Statement on Form S-1
(Registration No. 33-63194) filed with the
Securities and Exchange Commission on May 24, 1993
and incorporated herein by reference)
(3.2) Restated Bylaws, as amended, (filed as Exhibit 3.2
to the Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1993 and
incorporated herein by reference)
(10) Material contracts
(10.1) Construction and Lease Agreement dated October 17,
1989 between the Port of Walla Walla and Registrant
(filed as Exhibit 10.1 to the Registration Statement
on Form S-1 (Registration No. 33-63194) filed with
the Securities and Exchange Commission on May 24,
1993 and incorporated herein by reference)
(10.2) Indenture of Trust dated as of February 1, 1993
between Port of Walla Walla Public Corporation and
Key Bank of Washington, as Trustee (filed as Exhibit
10.2 to the Registration Statement on Form S-1
(Registration No. 33-63194) filed with the
Securities and Exchange Commission on May 24, 1993
and incorporated herein by reference)
(10.3) Loan Agreement dated February 1, 1993 between Port
of Walla Walla Public Corporation and Registrant
(filed as Exhibit 10.3 to the Registration Statement
on Form S-1 (Registration No. 33-63194) filed with
the Securities and Exchange Commission on May 24,
1993 and incorporated herein by reference)
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C>
(10.4) Pledge and Security Agreement dated as of February 1, 1993
between Registrant and U.S. Bank of Washington, N.A. (filed as
Exhibit 10.4 to the Registration Statement on Form S-1
(Registration No. 33-63194) filed with the Securities and
Exchange Commission on May 24, 1993 and incorporated herein by
reference)
(10.5)* Registrant's 1989 Employees' Stock Option Plan, as amended
(filed as Exhibit 10.5 to the Registration Statement on Form S-1
(Registration No. 33-63194) filed with the Securities and
Exchange Commission on May 24, 1993 and incorporated herein by
reference)
(10.6)* Registrant's 401(k) Profit Sharing Plan dated May 11, 1992
(filed as Exhibit 10.6 to Amendment No. 1 to Form S-1
(Registration No. 33-63194) filed with the Securities and
Exchange Commission on May 24, 1993 and incorporated herein by
reference)
(10.7)* Registrant's Restated Phantom Stock Plan, as amended (filed as
Exhibit 10.7 to the Registration Statement on Form S-1
(Registration No. 33-63194) filed with the Securities and
Exchange Commission on May 24, 1993 and incorporated herein by
reference)
(10.8) License Agreement effective July 1, 1992 between Registrant and
Simco/Ramic Corporation (filed as Exhibit 10.8 to the
Registration Statement on Form S-1 (Registration No. 33-63194)
filed with the Securities and Exchange Commission on May 24,
1993 and incorporated herein by reference)
(10.9)* Registrant's Restated 1989 Employees' Stock Option Plan, as
amended (filed as Exhibit 10.1 to the Form 10-Q filed with the
Securities and Exchange Commission on May 12, 1995 and
incorporated herein by reference)
(10.10) Business Loan Agreement dated as of February 2, 1995 between
Registrant and U.S. Bank of Washington, N.A. (filed as Exhibit
10.10 to the Form 10-K filed with the Securities and Exchange
Commission on December 22, 1995 and incorporated herein by
reference)
(10.11)* Registrant's 1996 Employees' Stock Option Plan (filed as Exhibit
10.1 to the Form 10-Q filed with the Securities and Exchange
Commission on May 2, 1996 and incorporated herein by reference)
(10.12)* Registrant's 1996 Employees Stock Purchase Plan (filed as
Exhibit 10.2 to the Form 10-Q filed with the Securities and
Exchange Commission on May 2, 1996 and incorporated herein by
reference)
(10.13) Lease Agreement dated April 18, 1996 between the Port of Walla
Walla and Registrant (filed as Exhibit 10.1 to the Form 10-Q
filed with the Securities and Exchange Commission on August 7,
1996 and incorporated herein by reference)
(10.14) Business Loan Agreement dated as of January 29,1997 between
Registrant and U.S. Bank of Washington, N.A. (filed as Exhibit
10.1 to the Form 10-Q filed with the Securities and Exchange
Commission on May 15, 1997 and incorporated herein by reference)
</TABLE>
35
<PAGE> 38
<TABLE>
<S> <C>
(21) List of Subsidiaries
(23) Consent of Deloitte & Touche LLP
</TABLE>
- -----------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the fiscal year ended September 30, 1997.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KEY TECHNOLOGY, INC.
By: /s/ Thomas C. Madsen
-------------------------------------------
Thomas C. Madsen
President and Chief Executive Officer
By: /s/ Steven D. Evans
-------------------------------------------
Steven D. Evans
Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Harold R. Frank December 18, 1997
- ------------------------------------------------------------
Harold R. Frank, Director
/s/ Edfred L. Shannon, Jr. December 18, 1997
- ------------------------------------------------------------
Edfred L. Shannon, Jr. Director
/s/ Thomas C. Madsen December 18, 1997
- ------------------------------------------------------------
Thomas C. Madsen, Director, President and Chief Executive
Officer
/s/ Gordon Wicher December 18, 1997
- ------------------------------------------------------------
Gordon Wicher, Director
/s/ James H. Stanton December 18, 1997
- ------------------------------------------------------------
James H. Stanton, Director
/s/ Glenn A. Waller December 18, 1997
- ------------------------------------------------------------
Glenn A. Waller, Director
/s/ Steven D. Evans December 18, 1997
- ------------------------------------------------------------
Steven D. Evans, Vice President of Finance and Administration
and Chief Financial Officer (Principal Financial and
Accounting Officer)
</TABLE>
37
<PAGE> 40
KEY TECHNOLOGY, INC.
FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<S> <C> <C>
21.1 List of Subsidiaries.................................................... 39
23.1 Consent of Deloitte & Touche LLP........................................ 40
27 Financial Data Schedule................................................. 41
</TABLE>
38
<PAGE> 1
Exhibit 21.1
List of Subsidiaries
Key Technology FSC, Inc., a Guam corporation
Key Technology Holdings U.S.A., LLC, an Oregon corporation
Suplusco Holding B.V., a Netherlands corporation
Key Technology B.V., a Netherlands corporation
Superior B.V., a Netherlands corporation
39
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Key Technology, Inc.
We consent to the incorporation by reference in Registration Statement Nos.
33-71108 and 33-32396 of Key Technology, Inc. on Form S-8 of our report dated
October 31, 1997, appearing in this Annual Report on Form 10-K of Key
Technology, Inc. for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Portland, Oregon
December 18, 1997
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KEY
TECHNOLOGY, INC.'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS ANNUAL
REPORT ON FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,896
<SECURITIES> 0
<RECEIVABLES> 9,160
<ALLOWANCES> (444)
<INVENTORY> 13,846
<CURRENT-ASSETS> 27,309
<PP&E> 17,825
<DEPRECIATION> (8,445)
<TOTAL-ASSETS> 39,441
<CURRENT-LIABILITIES> 10,001
<BONDS> 1,293
0
0
<COMMON> 8,969
<OTHER-SE> 19,062
<TOTAL-LIABILITY-AND-EQUITY> 39,441
<SALES> 57,268
<TOTAL-REVENUES> 57,964
<CGS> 39,451
<TOTAL-COSTS> 39,451
<OTHER-EXPENSES> 17,467
<LOSS-PROVISION> 181
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> 619
<INCOME-TAX> 197
<INCOME-CONTINUING> 422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 422
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
