** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549-1004**

 

----

 

**FORM 10-K/A**

**AmendmentNo. 1**

 

**ý**** ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**forthe fiscal year ended September 30, 2003**

 

**or**

 

**o**** TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the transitionperiodfrom              to              .**

 

**CommissionFile No. 0-21820**

 

----

 

**KEYTECHNOLOGY, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **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**

**Series B Convertible Preferred Stock, parvalue $.01 per share**

**Warrants to purchase Common Stock, datedJuly 12, 2000**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Sections 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     Yes  ýNo  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ý]

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

Yes  o No  ý

 

The aggregate market value of the Registrant’s common stock held bynon-affiliates on March 31, 2003 and December 3, 2003 (based on thelast sale price of such shares) was approximately $21,570,125 and $58,576,022,respectively.

 

There were 4,846,486 shares of the Registrant’s common stockoutstanding on December 3, 2003.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Parts of Registrant’s Proxy Statement dated on or about January 8,2004 prepared in connection with the Annual Meeting of Shareholders to be heldon February 4, 2004 are incorporated by reference into Part III of thisReport.

 

 

----

 

**EXPLANATORY NOTE**

 

Key Technology, Inc. is filing this Amendmentto its Annual Report on Form 10-K/A (the “Form 10-K/A”) to amend certain itemsin its Annual Report on Form 10-K for the fiscal year ended September 30,2003, which was originally filed with the Securities and Exchange Commission onDecember 19, 2003 (the “Annual Report”).

 

Item 8 is amended to add the conformedsignature of the Company’s independent auditor, Deloitte & Touche LLP, tothe Independent Auditor’s Report.  As aresult, the rules of the Securities and Exchange Commission require thatcertain exhibits previously provided in Item 15 also be amended.  Item 15 is therefore amended to provide theconsent of Deloitte & Touche LLP as Exhibit 23.2 and to provide thecertifications required by the Sarbanes-Oxley Act of 2002 as Exhibits 31.3,31.4, 32.3 and 32.4.

 

This amendment is limited in scope to theportions of the Annual Report set forth above and does not amend, update, orchange any other items or disclosures contained in the Annual Report.  Accordingly, all other items that remainunaffected are omitted in this filing. None of the amendments to the Annual Report reflected in this Form10-K/A resulted in a change to or restatement of the financial statements orother financial information included in the Annual Report.

 

This Form 10-K/A continues to speak as of thedate of the original filing of the Annual Report and we have not updated thedisclosures contained therein to reflect any events that occurred at anysubsequent date.  The filing of thisForm 10-K/A shall not be deemed an admission that the original filing, whenmade, included any untrue statement of a material fact or omitted to state amaterial fact necessary to make a statement therein not misleading.

 

1

----

 

KEY TECHNOLOGY, INC.

2003 FORM 10-K/A

TABLE OF CONTENTS

 
| Part II        |                                                                              |
|----------------|-----------------------------------------------------------------------------------|
|           |                                                                              |   |
|           | Item 8.    Financial Statements and Supplemental Data              |   |
|           |                                                                              |   |
| Part IV        |                                                                              |
|           |                                                                              |   |
|           | Item  15.  Exhibits, Financial Statement  Schedules, and Reports on Form 8-K |   |
|           |                                                                              |   |
| Signatures     |                                                                              |
|           |                                                                              |   |
| Exhibit  Index |                                                                              |

 

2

----

 

 

**ITEM 8****. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

 
| Title                                                                                                   |   |
|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                                    |   |
| Independent Auditors’ Report                                                                       |   |
|                                                                                                    |   |
| Consolidated Balance Sheets at September 30, 2003 and 2002                                         |   |
|                                                                                                    |   |
| Consolidated Statements of Operations for  the three years ended September 30, 2003                |   |
|                                                                                                    |   |
| Consolidated Statements of Shareholders’  Equity for the three years ended September 30, 2003 |   |
|                                                                                                    |   |
| Consolidated Statements of Cash Flows for  the three years ended September 30, 2003                |   |
|                                                                                                    |   |
| Notes to Consolidated Financial Statements                                                              |   |
|                                                                                                    |   |
| Supplementary Data                                                                                      |   |

 

3

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

Board of Directors and ShareholdersKey Technology, Inc.Walla Walla, Washington

 

We have audited the accompanying consolidated balance sheets of KeyTechnology, Inc. and subsidiaries as of September 30, 2003 and 2002, andthe related consolidated statements of operations, shareholders’ equity, andcash flows for each of the three years in the period ended September 30,2003.  The consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve 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. andsubsidiaries as of September 30, 2003 and 2002, and the results of theiroperations and their cash flows for each of the three years in the period endedSeptember 30, 2003 in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements,the Company adopted Statement of Financial Accounting Standards No. 145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections*, which resulted in amountsrecorded in fiscal year 2002 as an extraordinary item from the earlyextinguishment of debt to be reclassified as part of net income from continuingoperations.  As discussed in Notes 1 and4 to the consolidated financial statements, effective October 1, 2001, theCompany adopted Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets.*

 

 

DELOITTE & TOUCHE LLP

 

 

Portland,Oregon

December 16, 2003

 

4

----

 

**KEY TECHNOLOGY, INC. ANDSUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2003 AND 2002**

(In thousands)

 
| **ASSETS**                          |   | **2003** |       | **2002** |       |
|-------------------------------------|--------|----------|------------|----------|------------|
|                                |   |     | ** ** |     | ** ** |
| CURRENT ASSETS:                     |   |     |       |     |       |
| Cash and cash equivalents           |   | $        | 6,442      |     | $          | 1,707 |   |
| Trade accounts receivable, net      |   | 9,479    |       | 7,556    |       |
| Inventories                         |   | 13,968   |       | 13,969   |       |
| Deferred income taxes               |   | 1,935    |       | 1,730    |       |
| Prepaid expenses and other assets   |   | 1,062    |       | 1,477    |       |
|                                |   |     |       |     |       |
| Total current assets                |   | 32,886   |       | 26,439   |       |
|                                |   |     |       |     |       |
| PROPERTY, PLANT, AND EQUIPMENT, Net |   | 5,503    |       | 6,407    |       |
|                                |   |     |       |     |       |
| DEFERRED INCOME TAXES               |   | 768      |       | 3,472    |       |
|                                |   |     |       |     |       |
| OTHER ASSETS                        |   | 819      |       | 940      |       |
|                                |   |     |       |     |       |
| GOODWILL AND OTHER INTANGIBLES, Net |   | 11,239   |       | 12,562   |       |
|                                |   |     |       |     |       |
| TOTAL                               |   | $        | 51,215     |     | $          | 49,820 |   |

 

Seenotes to consolidated financial statements.

 

5

----

 

**KEY TECHNOLOGY, INC. ANDSUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2003 AND 2002**

(In thousands, except shares)

 
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                              |   | **2003** |       | **2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                                                                                       |   |     | ** ** |     | ** ** |
| CURRENT LIABILITIES:                                                                                                                       |   |     |       |     |       |
| Short-term borrowings                                                                                                                      |   | $        | —     |     | $          | 6,596 |   |
| Accounts payable                                                                                                                           |   | 1,587    |       | 1,437    |       |
| Accrued payroll liabilities and commissions                                                                                                |   | 4,547    |       | 2,769    |       |
| Accrued customer support and warranty costs                                                                                                |   | 1,058    |       | 999      |       |
| Income tax payable                                                                                                                         |   | 185      |       | —   |       |
| Other accrued liabilities                                                                                                                  |   | 2,419    |       | 1,969    |       |
| Customers’ deposits                                                                                                                   |   | 4,798    |       | 3,328    |       |
| Current portion of long-term debt                                                                                                          |   | 1,066    |       | 1,668    |       |
|                                                                                                                                       |   |     |       |     |       |
| Total current liabilities                                                                                                                  |   | 15,660   |       | 18,766   |       |
|                                                                                                                                       |   |     |       |     |       |
| LONG-TERM DEBT                                                                                                                             |   | 3,249    |       | 3,747    |       |
|                                                                                                                                       |   |     |       |     |       |
| DEFERRED INCOME TAXES                                                                                                                      |   | 205      |       | 238      |       |
|                                                                                                                                       |   |     |       |     |       |
| MANDATORILY REDEEMABLE PREFERRED STOCK                                                                                                     |   | 1,526    |       | 2,815    |       |
|                                                                                                                                       |   |     |       |     |       |
| WARRANTS                                                                                                                                   |   | 356      |       | 652      |       |
|                                                                                                                                       |   |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                              |   |     |       |     |       |
|                                                                                                                                       |   |     |       |     |       |
| 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; 4,785,961 and 4,767,206 issued and outstanding 2003 and 2002,  respectively |   | 9,568    |       | 9,456    |       |
| Retained earnings                                                                                                                          |   | 20,729   |       | 14,970   |       |
| Other accumulated comprehensive income (loss)                                                                                              |   | (78      | )          | (824     | )          |
|                                                                                                                                       |   |     |       |     |       |
| Total shareholders’ equity                                                                                                            |   | 30,219   |       | 23,602   |       |
|                                                                                                                                       |   |     |       |     |       |
| TOTAL                                                                                                                                      |   | $        | 51,215     |     | $          | 49,820 |   |

 

Seenotes to consolidated financial statements.

 

6

----

 

**KEY TECHNOLOGY, INC. ANDSUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**THREE YEARS ENDEDSEPTEMBER 30, 2003**

(In thousands, except per share data)

 
|                                                                                     |   | **2003** |       | **2002** |       | **2001** |       |
|------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                                     |   |     | ** ** |     | ** ** |     | ** ** |
| NET SALES                                                                                |   | $        | 82,622     |     | $          | 70,234   |       | $ | 72,954 |   |
|                                                                                     |   |     |       |     |       |     |       |
| COST OF SALES                                                                            |   | 48,626   |       | 42,352   |       | 47,186   |       |
|                                                                                     |   |     |       |     |       |     |       |
| Gross profit                                                                             |   | 33,996   |       | 27,882   |       | 25,768   |       |
|                                                                                     |   |     |       |     |       |     |       |
| OPERATING EXPENSES:                                                                      |   |     |       |     |       |     |       |
| Selling                                                                                  |   | 11,695   |       | 10,733   |       | 13,248   |       |
| Research and development                                                                 |   | 4,874    |       | 4,467    |       | 5,371    |       |
| General and administrative                                                               |   | 7,329    |       | 6,963    |       | 7,487    |       |
| Amortization of intangibles                                                              |   | 1,323    |       | 1,323    |       | 2,084    |       |
|                                                                                     |   |     |       |     |       |     |       |
| Total operating expenses                                                                 |   | 25,221   |       | 23,486   |       | 28,190   |       |
|                                                                                     |   |     |       |     |       |     |       |
| GAIN ON SALE OF ASSETS                                                                   |   | 4        |       | 883      |       | 76       |       |
|                                                                                     |   |     |       |     |       |     |       |
| INCOME (LOSS) FROM OPERATIONS                                                            |   | 8,779    |       | 5,279    |       | (2,346   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| OTHER INCOME (EXPENSE):                                                                  |   |     |       |     |       |     |       |
| Royalty income                                                                           |   | 18       |       | 9        |       | 131      |       |
| Interest income                                                                          |   | 59       |       | 109      |       | 126      |       |
| Interest expense                                                                         |   | (399     | )          | (843     | )          | (1,673   | )          |
| Other, net                                                                               |   | (5       | )          | (1,008   | )          | 76       |       |
|                                                                                     |   |     |       |     |       |     |       |
| Total other income (expense)—net                                                    |   | (327     | )          | (1,733   | )          | (1,340   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Earnings (loss) from continuing operations before  income taxes                          |   | 8,452    |       | 3,546    |       | (3,686   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Income tax (benefit) expense                                                             |   | 2,693    |       | 1,238    |       | (1,343   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) from continuing operations                                           |   | 5,759    |       | 2,308    |       | (2,343   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Earnings (loss) from discontinued operation net of  tax                                  |   | —   |       | 39       |       | (436     | )          |
| Loss on sale of discontinued operation, net of tax                                       |   | —   |       | —   |       | (2,145   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Total earnings (loss) from discontinued operation                                        |   | —   |       | 39       |       | (2,581   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) before change in accounting  principle                               |   | $        | 5,759      |     | $          | 2,347    |       | $ | (4,924 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Change in accounting principle, net of tax                                               |   | —   |       | (4,302   | )          | —   |       |
|                                                                                     |   |     |       |     |       |     |       |
| NET EARNINGS (LOSS)                                                                      |   | 5,759    |       | (1,955   | )          | (4,924   | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Accretion of mandatorily redeemable preferred  stock                                     |   | —   |       | (582     | )          | (939     | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) available to common  shareholders                                    |   | $        | 5,759      |     | $          | (2,537   | )          | $ | (5,863 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) from continuing operations per  share—basic                     |   | $        | 1.21       |     | $          | 0.36     |       | $ | (0.69 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) from continuing operations per  share—diluted                   |   | $        | 1.15       |     | $          | 0.36     |       | $ | (0.69 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) from discontinued operation  per share—basic and diluted        |   | $        | —     |     | $          | 0.01     |       | $ | (0.55 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) before change in accounting  principle per common share—basic   |   | $        | 1.21       |     | $          | 0.37     |       | $ | (1.24 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net earnings (loss) before change in accounting  principle per common share—diluted |   | $        | 1.15       |     | $          | 0.37     |       | $ | (1.24 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| Net loss from change in accounting principle per  common share—basic and diluted    |   | $        | —     |     | $          | (0.90    | )          | $ | — |   |
|                                                                                     |   |     |       |     |       |     |       |
| EARNINGS (LOSS) PER SHARE—Basic                                                     |   | $        | 1.21       |     | $          | (0.53    | )          | $ | (1.24 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| EARNINGS (LOSS) PER SHARE—Diluted                                                   |   | $        | 1.15       |     | $          | (0.53    | )          | $ | (1.24 | ) |
|                                                                                     |   |     |       |     |       |     |       |
| SHARES USED IN PER SHARE CALCULATION—Basic                                          |   | 4,774    |       | 4,759    |       | 4,740    |       |
|                                                                                     |   |     |       |     |       |     |       |
| SHARES USED IN PER SHARE CALCULATION—Diluted                                        |   | 4,989    |       | 4,759    |       | 4,740    |       |

 

Seenotes to consolidated financial statements.

 

7

----

 

**KEY TECHNOLOGY, INC.AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**THREE YEARS ENDEDSEPTEMBER 30, 2003**

(Dollars in thousands)

 
|                                                                           |   |             |   |       |   | **Retained  Earnings** |   | **Other********Accumulated********Comprehensive********Income (Loss)** |   | **Total** |   |
|--------------------------------------------------------------------------------|--------|------------------|--------|------------|--------|------------------------|--------|------------------------------------------------------------------------|--------|-----------|--------|
|                                                                           |   |             |   |       |   |
|                                                                           |   | **Common Stock** |   |       |   |                   |
|                                                                           |   | **Shares**       |   | **Amount** |   |                   |   |                                                                   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Balance at October 1, 2000                                                |   | 4,733,560        |   | $          | 9,329  |                   | $      | 23,370                                                                 |   | $         | (1,234 | ) | $ | 31,465 |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Components of comprehensive income (loss):                                     |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Net loss                                                                       |   |             |   |       |   | (4,924                 | )      |                                                                   |   | (4,924    | )      |
| Comprehensive income—foreign currency translation  adjustment, net of tax |   |             |   |       |   |                   |   | 31                                                                     |   | 31        |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Total comprehensive loss                                                       |   |             |   |       |   |                   |   |                                                                   |   | (4,893    | )      |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Accretion of mandatorily redeemable preferred stock                            |   |             |   |       |   | (939                   | )      |                                                                   |   | (939      | )      |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Issuance of common stock upon exercise of preferred  stock and warrants        |   | 602              |   | 7          |   |                   |   |                                                                   |   | 7         |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Issuance of stock for Employee Stock Purchase Plan                             |   | 17,184           |   | 71         |   |                   |   |                                                                   |   | 71        |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Balance at September 30, 2001                                             |   | 4,751,346        |   | 9,407      |   | 17,507                 |   | (1,203                                                                 | )      | 25,711    |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Components of comprehensive income (loss):                                     |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Net loss                                                                       |   |             |   |       |   | (1,955                 | )      |                                                                   |   | (1,955    | )      |
| Comprehensive income—foreign currency translation  adjustment, net of tax |   |             |   |       |   |                   |   | 379                                                                    |   | 379       |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Total comprehensive loss                                                       |   |             |   |       |   |                   |   |                                                                   |   | (1,576    | )      |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Accretion of mandatorily redeemable preferred stock                            |   |             |   |       |   | (582                   | )      |                                                                   |   | (582      | )      |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Issuance of stock for Employee Stock Purchase Plan                             |   | 15,860           |   | 49         |   |                   |   |                                                                   |   | 49        |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Balance at September 30, 2002                                             |   | 4,767,206        |   | 9,456      |   | 14,970                 |   | (824                                                                   | )      | 23,602    |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Components of comprehensive income (loss):                                     |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Net earnings                                                                   |   |             |   |       |   | 5,759                  |   |                                                                   |   | 5,759     |   |
| Comprehensive income—foreign currency translation  adjustment, net of tax |   |             |   |       |   |                   |   | 746                                                                    |   | 746       |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Total comprehensive income                                                     |   |             |   |       |   |                   |   |                                                                   |   | 6,505     |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Issuance of common stock upon exercise of stock  options                       |   | 11,837           |   | 67         |   |                   |   |                                                                   |   | 67        |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Issuance of stock for Employee Stock Purchase Plan                             |   | 6,918            |   | 45         |   |                   |   |                                                                   |   | 45        |   |
|                                                                           |   |             |   |       |   |                   |   |                                                                   |   |      |   |
| Balance at September 30, 2003                                             |   | 4,785,961        |   | $          | 9,568  |                   | $      | 20,729                                                                 |   | $         | (78    | ) | $ | 30,219 |   |

 

Seenotes to consolidated financial statements.

 

8

----

 

**KEY TECHNOLOGY, INC. ANDSUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**THREE YEARS ENDEDSEPTEMBER 30, 2003**

(In thousands)

 
|                                                                                        |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |   |     |   |     |   |     |   |
| Net earnings (loss)                                                                         |   | $        | 5,759  |     | $      | (1,955   | )      | $ | (4,924 | ) |
| Adjustments to reconcile net earnings (loss) to  net cash provided by operating activities: |   |     |   |     |   |     |   |
| Loss from sale of discontinued operation, net of  tax                                       |   | —   |   | —   |   | 2,145    |   |
| (Earnings) loss from discontinued operation, net  of tax                                    |   | —   |   | (39      | )      | 436      |   |
| (Gain) loss on sale of assets                                                               |   | (4       | )      | (883     | )      | (76      | )      |
| Losses on early extinguishment of debt, net of tax                                          |   | —   |   | 471      |   | —   |   |
| Foreign currency exchange (gain) loss                                                       |   | (242     | )      | (80      | )      | (242     | )      |
| Depreciation and amortization                                                               |   | 3,698    |   | 3,791    |   | 4,530    |   |
| Change in accounting principle—rovision for  goodwill, net of tax                      |   | —   |   | 4,302    |   | —   |   |
| Deferred income taxes                                                                       |   | 2,080    |   | 1,503    |   | (1,343   | )      |
| Deferred rent                                                                               |   | 66       |   | 279      |   | 26       |   |
| Bad debt expense                                                                            |   | 162      |   | 39       |   | 63       |   |
| Changes in assets and liabilities:                                                          |   |     |   |     |   |     |   |
| Trade accounts receivable                                                                   |   | (1,646   | )      | 5,956    |   | (4,204   | )      |
| Inventories                                                                                 |   | 799      |   | 816      |   | 5,052    |   |
| Prepaid expenses and other current assets                                                   |   | 365      |   | (651     | )      | 830      |   |
| Income taxes receivable                                                                     |   | 76       |   | 831      |   | —   |   |
| Accounts payable                                                                            |   | 27       |   | (4,063   | )      | 2,212    |   |
| Accrued payroll liabilities and commissions                                                 |   | 1,702    |   | 210      |   | (1,259   | )      |
| Accrued customer support and warranty costs                                                 |   | 35       |   | (17      | )      | (104     | )      |
| Income taxes payable                                                                        |   | 237      |   | (346     | )      | 171      |   |
| Other accrued liabilities                                                                   |   | 317      |   | 612      |   | (735     | )      |
| Customers’ deposits                                                                    |   | 1,275    |   | 1,081    |   | (183     | )      |
| Other                                                                                       |   | (183     | )      | (696     | )      | 323      |   |
|                                                                                        |   |     |   |     |   |     |   |
| Cash provided by operating activities                                                       |   | 14,523   |   | 11,161   |   | 2,718    |   |
|                                                                                        |   |     |   |     |   |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |   |     |   |     |   |     |   |
| Proceeds from sale of subsidiary                                                            |   | —   |   | 3,577    |   | —   |   |
| Proceeds from sale of property                                                              |   | 12       |   | 4,355    |   | 478      |   |
| Purchases of property, plant, and equipment                                                 |   | (836     | )      | (532     | )      | (545     | )      |
|                                                                                        |   |     |   |     |   |     |   |
| Cash provided by (used in) investing activities                                             |   | (824     | )      | 7,400    |   | (67      | )      |
|                                                                                        |   |     |   |     |   |     |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |   |     |   |     |   |     |   |
| Proceeds from (repayments of) short-term  borrowings                                        |   | $        | (6,650 | )        | $      | 4,596    |   | $ | 2,000 |   |
| Payments on long-term debt                                                                  |   | (1,740   | )      | (23,535  | )      | (5,591   | )      |
| Proceeds from issuance of long-term debt                                                    |   | 500      |   | 10,500   |   | —   |   |
| Prepayment penalty on early extinguishment of debt                                          |   | —   |   | (516     | )      | —   |   |
| Redemption of warrants                                                                      |   | (296     | )      | (170     | )      | (2,122   | )      |
| Redemption of mandatorily redeemable preferred  stock                                       |   | (1,289   | )      | (8,559   | )      | (2,382   | )      |
| Proceeds from issuance of common stock                                                      |   | 112      |   | 49       |   | 71       |   |
|                                                                                        |   |     |   |     |   |     |   |
| Cash used in financing activities                                                           |   | (9,363   | )      | (17,635  | )      | (8,024   | )      |
|                                                                                        |   |     |   |     |   |     |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                     |   | 399      |   | 220      |   | (42      | )      |
|                                                                                        |   |     |   |     |   |     |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS FROM CONTINUING OPERATIONS            |   | 4,735    |   | 1,146    |   | (5,415   | )      |
|                                                                                        |   |     |   |     |   |     |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS FROM DISCONTINUED OPERATION           |   | —   |   | (177     | )      | (274     | )      |
|                                                                                        |   |     |   |     |   |     |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                |   | 1,707    |   | 738      |   | 6,427    |   |
|                                                                                        |   |     |   |     |   |     |   |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                                      |   | $        | 6,442  |     | $      | 1,707    |   | $ | 738 |   |
|                                                                                        |   |     |   |     |   |     |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                          |   |     |   |     |   |     |   |
| Cash paid during the year for interest                                                      |   | $        | 443    |     | $      | 783      |   | $ | 1,818 |   |
| Cash paid (received) during the year for income  taxes                                      |   | 306      |   | (472     | )      | (731     | )      |
|                                                                                        |   |     |   |     |   |     |   |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND  FINANCING ACTIVITIES:                     |   |     |   |     |   |     |   |
| Equipment obtained through capital leases                                                   |   | $        | — |     | $      | 110      |   | $ | 126 |   |
| Accounts payable paid through lease financing                                               |   | —   |   | —   |   | 856      |   |

 

Seenotes to consolidated financial statements.

 

9

----

 

**KEY TECHNOLOGY, INC.AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**THREE YEARS ENDEDSEPTEMBER 30, 2003**

 

**1.****                        THECOMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Key Technology, Inc. and its wholly-owned subsidiaries (the “Company”)design, manufacture, and sell process automation systems, integratingelectro-optical inspection and sorting, specialized conveying and productpreparation equipment.  The consolidatedfinancial statements include the accounts of Key Technology, Inc. and itswholly-owned subsidiaries, Key Technology Holdings U.S.A., LLC, Key TechnologyAMVC LLC, Key Technology Australia Pty. Ltd., and Key Technology FSC, Inc., aforeign sales corporation (FSC). Suplusco Holding B.V., a wholly-owned European subsidiary of KeyTechnology Holdings U.S.A., LLC includes the accounts of Key TechnologyB.V.  Key Technology AMVC LLC includesthe accounts of Applied Laser Systems, Inc. (inactive).  All significant intercompany accounts andtransactions have been eliminated.

 

***Revenue Recognition***—Salesrevenue net of allowances is recognized at the time equipment is shipped tocustomers or when title and risk of loss passes, or in the case of trial units,upon the customers’ acceptance of the product. Revenue from maintenance and support contracts is recognized over theperiod the service is provided.  Revenuefrom other service contracts is recognized at the time the service isprovided.  Upon receipt of an order, theCompany generally receives a deposit which is recorded as customers’deposits.  The Company makes periodicevaluations of the creditworthiness of its customers and generally does notrequire collateral.  An allowance forcredit losses is provided based upon historical experience and anticipatedlosses.

 

***Cash and CashEquivalents******—***The Company considers all highly liquid investmentswith original maturities of 90 days or less at date of acquisition to be cashequivalents.

 

***Inventories***are stated at the lower of cost (first-in, first-out method) or market.

 

***Property, Plant, andEquipment*** are recorded at cost and depreciatedover estimated useful lives on the straight-line method.  The range in lives for assets is as follows:

 
|                                       |   | **Years** |       |
|--------------------------------------------|--------|-----------|------------|
|                                       |   |      | ** ** |
| Buildings  and improvements                |   | 7  to 40  |       |
| Manufacturing  equipment                   |   | 5  to 10  |       |
| Office  equipment, furniture, and fixtures |   | 3  to 7   |       |

 

***Goodwill and OtherIntangibles***—Prior to October 1, 2001,goodwill was amortized over the estimated useful lives of the related goodwillor 15 years, whichever was shorter. Beginning October 1, 2001, the Company adopted Statement of FinancialAccounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*, andas a result, ceased amortization of goodwill. Assessment of potential goodwill impairment is performed by the Companyon an annual basis or sooner, if necessary.

 

Other intangibles which consist of patents, developed technologies,trademarks and trade names, and purchased customer development are amortizedover the estimated useful lives of the related assets, which is 10 years forthe majority of the assets.  Managementperiodically evaluates the

 

10

----

 

recoverability of other intangibles based upon current and anticipatednet income and undiscounted future cash flows. Amortization of other intangibles (including goodwill in fiscal 2001)was $1,323,000, $1,323,000, and $2,084,000 for the years endedSeptember 30, 2003, 2002, and 2001, respectively (see Note 4).

 

***Accrued Customer Support and Warranty Costs***—TheCompany provides customer support services consisting of installation andtraining to its customers.  The Companyalso provides a warranty on its products ranging from ninety days to two yearsfollowing the date of shipment. Management establishes allowances for customer support and warrantycosts based upon the types of products shipped, customer support and productwarranty experience and estimates such costs for related new products whereexperience is not available.  Theprovision of customer support and warranty costs is charged to cost of sales atthe time such costs are known or estimable.

 

A reconciliation for the changes in the Company’s allowances forwarranties is as follows (in thousands):

 
|                     |   | **2003** |       | **2002** |       |
|--------------------------|--------|----------|------------|----------|------------|
|                     |   |     | ** ** |     | ** ** |
| Beginning balance        |   | $        | 869        |     | $          | 748 |   |
|                     |   |     |       |     |       |
| Warranty costs incurred  |   | (1,736   | )          | (2,426   | )          |
| Warranty expense accrued |   | 1,680    |       | 2,545    |       |
| Translation adjustments  |   | 24       |       | 2        |       |
|                     |   |     |       |     |       |
| Ending balance           |   | $        | 837        |     | $          | 869 |   |

 

***Income Taxes***—Deferredincome taxes are provided for the effects of temporary differences arising fromdifferences in the reporting of revenues and expenses for financial statementand income tax purposes under the asset and liability method using currentlyenacted tax rates.

 

***Foreign CurrencyTranslation***—Assets and liabilities denominated ina foreign currency are translated to U.S. dollars at the exchange rate on thebalance sheet date.  Translationadjustments are shown as part of other accumulated comprehensive income(loss).  Revenues, costs, and expensesare translated using an average rate. Realized and unrealized foreign currency transaction gains and lossesare included in the consolidated statement of operations.

 

***Impairment ofLong-Lived Assets******—***The Company evaluates its long-lived assetsfor financial impairments based upon undiscounted cash flows and will continueto evaluate them if events or changes in circumstances indicate the carryingamount of such assets may not be fully recoverable.

 

***Estimates******—***The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom those estimates.

 

***FinancialInstruments***—The carrying value of the Company’scash and cash equivalents, short-term investments, accounts and notesreceivable, trade payables, and other accrued liabilities approximates theirestimated fair values due to the short maturities of those instruments.

 

***Earnings Per Share***—Basicearnings (loss) per share (“EPS”) has been computed by dividing net earnings(loss) available to common shareholders by the weighted average number ofshares

 

11

----

 

outstanding during each period. Diluted EPS has been computed by dividing net earnings (loss) availableto common shareholders by the weighted average common stock and common stockequivalent shares outstanding during each period using the treasury stockmethod for employee stock option plans and warrants, and the if-convertedmethod for mandatorily redeemable preferred stock, if the common equivalentshares were not anti-dilutive.  Infiscal years 2002 and 2001, all common stock equivalents wereanti-dilutive.  Net earnings (loss) forthe calculation of both basic and diluted EPS is the same for each periodpresented.  The calculation of theweighted average outstanding shares is as follows (in thousands):

 
|                                             |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |     |   |
| Weighted average shares outstanding—basic   |   | 4,774    |   | 4,759    |   | 4,740    |   |
| Common stock options and warrants                |   | 215      |   | —   |   | —   |   |
|                                             |   |     |   |     |   |     |   |
| Weighted average shares outstanding—diluted |   | 4,989    |   | 4,759    |   | 4,740    |   |

 

Options to purchase 714,125, 818,933, and 699,433 shares of commonstock were outstanding as of September 30, 2003, 2002, and 2001,respectively, but were not included in the computation of diluted EPS for theyear then ended because the options were anti-dilutive.  These options expire on dates beginning inJanuary 2004 through February 2013. As of September 30, 2003, common equivalent shares of 35,553 fromassumed conversion of warrants were not included in the computation of dilutedEPS due to anti-dilution.  As ofSeptember 30, 2002, common equivalent shares of 187,663 and 65,162 fromassumed conversion of mandatorily redeemable preferred stock and warrants,respectively, were not included in the computation of diluted EPS due toanti-dilution.  As of September 30,2001, common equivalent shares of 892,756 and 82,200 from assumed conversion ofmandatorily redeemable preferred stock and warrants, respectively, were notincluded in the computation of diluted EPS due to anti-dilution.

 

***Accounting for Stock-Based Compensation***—During1995, the Financial Accounting Standards Board (FASB) issuedSFAS No. 123, *Accounting for Stock-Based Compensation*,which defines a fair value based method of accounting for employee stockoptions and similar equity instruments and encourages all entities to adoptthat method of accounting for all of their employee stock compensationplans.  However, it also allows anentity to continue to measure compensation cost for those plans using themethod of accounting prescribed by Accounting Principles BoardOpinion No. 25 (“APB 25”). Entities electing to remain with the accounting in APB 25 must makepro forma disclosures of net income and, if presented, earnings per share, asif the fair value based method of accounting defined in SFAS No. 123has been adopted.

 

The Company has elected to account for its stock-based compensationplans under APB 25.  The Companyhas computed, for pro forma disclosure purposes, the value of all stock andstock options granted under the Employee Stock Purchase Plan and the RestatedEmployees’ Stock Option Plan during 2003, 2002, and 2001 using theBlack-Scholes option pricing model as prescribed by SFAS No. 123using the following weighted average assumptions for the years endedSeptember 30, 2003, 2002, and 2001:

 
|                     |   | **2003**    |   | **2002**   |   | **2001**   |   |
|--------------------------|--------|-------------|--------|------------|--------|------------|--------|
|                     |   |        |   |       |   |       |   |
| Risk-free  interest rate |   | 2.36        | %      | 1.6        | %      | 3.7        | %      |
| Expected  dividend yield |   | 0           | %      | 0          | %      | 0          | %      |
| Expected  lives          |   | 4.55  years |   | 6.0  years |   | 5.5  years |   |
| Expected  volatility     |   | 74          | %      | 75         | %      | 71         | %      |

 

Using the Black-Scholes methodology, the total value of stock optionsgranted during 2003, 2002, and 2001 was $991,000, $311,000, and $192,000,respectively, which would be amortized on a pro

 

12

----

 

forma basis over the vesting period of the options (typically fiveyears).  The weighted average fair valueof options granted under the Restated Employees’ Stock Option Plan during 2003,2002, and 2001 was $5.43 per share, $1.94 per share, and $5.03 per share,respectively.

 

The total compensatory value of stock purchased under the EmployeeStock Purchase Plan during 2003, 2002, and 2001 was $8,000, $9,000, and$12,000, respectively.  The weightedaverage fair value of the stock purchased during 2003, 2002, and 2001 was $1.14per share, $0.54 per share, and $0.73 per share, respectively.

 

If the Company had accounted for the Restated Employee’s Stock OptionPlan and Employee Stock Purchase Plan in accordance withSFAS No. 123, the Company’s net earnings and earnings per share wouldapproximate the pro forma disclosures below (in thousands, except per shareamounts):

 
|                             |   | **Year Ended  September 30, 2003** |   | **Year Ended  September 30, 2002** |   | **Year Ended  September 30, 2001** |   |
|----------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                             |   | **As Reported**                         |   | **Pro Forma**                           |   | **As Reported**                         |   | **Pro Forma** |   | **As Reported** |   | **Pro Forma** |   |
|                             |   |                                    |   |                                    |   |                                    |   |   |   |   |   |   |   |
| Net  earnings (loss)             |   | $                                       | 5,759  |                                    | $      | 5,261                                   |   | $ | (1,955 | ) | $ | (2,408 | ) | $ | (4,924 | ) | $ | (5,542 | ) |
| Earnings  (loss) per share— |   |                                    |   |                                    |   |                                    |   |   |   |   |   |   |   |
| basic                            |   | $                                       | 1.21   |                                    | $      | 1.11                                    |   | $ | (0.53 | ) | $ | (0.63 | ) | $ | (1.24 | ) | $ | (1.37 | ) |
| diluted                          |   | $                                       | 1.15   |                                    | $      | 1.06                                    |   | $ | (0.53 | ) | $ | (0.63 | ) | $ | (1.24 | ) | $ | (1.37 | ) |

 

The effects of applying SFAS No. 123 in this pro formadisclosure are not indicative of future amounts.  SFAS No. 123 does not apply to awards prior toOctober 1, 1995, and additional awards may occur in future years.

 

***Future AccountingChanges—***In August 2001, the FASB issued SFAS No. 143,*Accounting for Asset Retirement Obligations*,which is effective October 1, 2003. SFAS No. 143 requires, among other things, the accounting andreporting of legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, or normaloperation of a long-lived asset.  TheCompany does not believe this will have a material effect on its financialstatements.

 

In November 2002, the Emerging Issues Task Force (“EITF”) ratifieda consensus on Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*,which is effective for the Company beginning October 1, 2003.  Issue No. 00-21 addresses accountingand reporting of a company’s delivery or performance of multiple products,services, and/or rights customers might have to use a company’s held assets tofulfill its needs, with delivery or performance that may occur at differentpoints in time or over different periods of time.  Management believes this will not have a material effect on theCompany’s consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation — Transition and Disclosure*, which iseffective for fiscal years ending after December 31, 2002.  SFAS No. 148 provides alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation.  In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The Companyhas adopted the disclosure requirements. The Company has elected not to implement any transitional method ofaccounting for stock-based compensation. The Company will defer action until the FASB has issued its finaldefinitive pronouncement on this issue, which is expected sometime in 2004.

 

In November 2002, the FASB issued Financial InterpretationNo. (“FIN”) 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*,on the accounting and disclosure guidance for guarantors.  The standard

 

13

----

 

requires guarantors to recognize at inception the fair value of all itsobligations it has undertaken to issue a guarantee and requires additionaldisclosures related to such.  Thisstatement, as it relates to the recognition and measurement of the liability,if any, would be effective in fiscal 2004 and the Company does not believe thiswill have a material effect on its financial statements.

 

***Reclassifications—***Certainreclassifications have been made to prior year amounts to conform to thecurrent year presentation.

 

In April 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,and Technical Corrections*, which was effective October 1,2002.  SFAS No. 145, among otherthings, rescinds the requirement of SFAS No. 4 to treat gains and losseson the early extinguishment of debt as extraordinary items.  Reclassification of prior periods isrequired.  As a result of the adoptionof this statement, amounts recorded in fiscal year 2002 as extraordinary itemsfrom the early extinguishment of debt have been reclassified to part of netincome from continuing operations.

 

**2.****                        DISCONTINUEDOPERATION**

 

Prior to September 30, 2001, management, with Board of Directorsapproval, committed to a plan to sell Ventek, Inc. (“Ventek”), a wholly-ownedsubsidiary that supplied machine vision systems to the forest productsindustry.  Ventek was acquired by theCompany as part of its acquisition of Advanced Machine Vision Corporation(“AMVC”) in July 2000.  InOctober 2001, the Company signed a definitive agreement to sell Ventek toVeneer Technology, Inc., a company owned by four current managers ofVentek.  The terms of the sale include acash payment of approximately $3.6 million, a note for $0.9 million and thecashless tender of Veneer Technology’s holdings of Key Technology Series Bconvertible preferred stock having a stated redemption value of $2.0million.  As a result of the sale ofVentek, the Company recorded a one-time charge of approximately $2.1 million,with no tax effect, in its fiscal 2001 results.

 

Accordingly, the financial statements for fiscal years 2001 and 2002reflect Ventek as a discontinued operation.

 

For the one month of fiscal year 2002 prior to the sale, Ventekrevenues were $577,000 with pre-tax earnings of $61,000.  In fiscal year 2001, Ventek revenues were$4,992,000 with a pre-tax loss of $678,000.

 

**3.****                        SALEOF BUILDING**

 

In April 2002, the Company completed the sale of its Medfordfacility, which had a net book value of approximately $3.5 million, for $4.6million and moved its remaining Medford operations into a small leased portionof the facility.  The proceeds of thesale were used to retire the mortgage on the building totaling $2.8 million,requiring an early payment penalty of $516,000, resulting in net cash proceedsfrom the sale of $972,000 after paying the costs associated with the sale.  The lease is for a five-year term atapproximately $9,600 per month, plus shared occupancy costs.  The base lease is being accounted for as anoperating lease.

 

**4.****                        GOODWILLAND OTHER INTANGIBLE ASSETS**

 

In July 2001, the FASB issued SFAS No. 142, *Goodwill andOther Intangible Assets*, which was effective October 1, 2002and may be adopted early.  The Companyelected to adopt SFAS No. 142 prior to its filing of its firstquarter financial statements on Form 10-Q for the quarter endedDecember 31, 2001. SFAS No. 142 requires, among other things, the discontinuanceof goodwill amortization.  In addition,the standard includes provisions for the reclassification of certain existingrecognized intangibles, reclassification of certain intangibles out ofpreviously reported

 

14

----

 

goodwill, and the identification of reporting units for purposes ofassessing potential future impairments of goodwill.  SFAS No. 142 also required the Company to complete atransitional goodwill impairment test within six months from the date ofadoption.  As a result of theimplementation of this change in accounting principle, the Company recorded animpairment of goodwill associated with the automated inspection systemsreporting unit, based on a discontinued cash flow analysis, effective at thebeginning of fiscal 2002, of $4.4 million, and related income tax benefits of$71,000.  The Company determined therewas no impairment of the $2.5 million of goodwill associated with the processsystems reporting unit.

 

As of September 30, 2001, the Company had approximately$6.9 million of intangible assets which are no longer beingamortized.  Amortization of these assetswas $749,000 in the year ended September 30, 2001.  In addition, amortization of goodwill andother indefinite life intangible assets included in discontinued operations was$197,000 in the year ended September 30, 2001.  In compliance with SFAS No. 142, the results for theyear ended September 30, 2001 have not been restated.  A reconciliation of net loss and loss pershare as if SFAS No. 142, exclusive of the charges for the impairmentof goodwill, had been adopted in the prior period is shown below.

 
|                                                                              |   | **September 30, 2001**  |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                              |   | **As  Previously  Reported** |   | **Adjustments** |   | **Pro Forma** |   |
| Net  earnings (loss) from continuing operations—net of tax                   |   | $                            | (2,343 | ) | $ | 601 |   | $ | (1,742 | ) |
|                                                                              |   |                         |   |   |   |   |   |
| Net  earnings (loss) from discontinued operation—net of tax                  |   | (2,581                       | )      | 126 |   | (2,455 | ) |
|                                                                              |   |                         |   |   |   |   |   |
| Net  earnings (loss)                                                              |   | (4,924                       | )      | 727 |   | (4,197 | ) |
|                                                                              |   |                         |   |   |   |   |   |
| Net  earnings (loss) from continuing operations per share—basic and diluted  |   | (0.69                        | )      | 0.13 |   | (0.56 | ) |
|                                                                              |   |                         |   |   |   |   |   |
| Net  earnings (loss) from discontinued operation per share—basic and diluted |   | (0.55                        | )      | 0.03 |   | (0.52 | ) |
|                                                                              |   |                         |   |   |   |   |   |
| Net  earnings (loss) per share—basic and diluted                             |   | (1.24                        | )      | 0.16 |   | (1.08 | ) |
|                                                                                   |        |                              |        |  |  |  |  |  |  |  |

 

As of September 30, 2003, the Company has approximately $10.9million of intangible assets related to patents and developed technologies witha net book value of approximately $7.0 million; $1.7 million of intangibleassets related to purchased trademarks and trade names with a net book value ofapproximately $1.1 million; and $900,000 of intangible assets related topurchased customer development with a net book value of approximately$600,000.  The significant majority ofthese assets are being amortized over 10 years.  Amortization expense for the next five fiscal years is expectedto be approximately $1.3 million per year.

 

As of September 30, 2003, the Company had $2.5 million of goodwillassociated with the process systems reporting unit which is not beingamortized.

 

15

----

 

**5.****                        TRADEACCOUNTS RECEIVABLE**

 

Trade accounts receivable consist of the following (in thousands):

 
|                                  |   | **September 30,** |   |
|---------------------------------------|--------|------------------------|--------|
|                                  |   | **2003**               |   | **2002** |   |
|                                  |   |                   |   |   |   |
| Trade  accounts receivable            |   | $                      | 10,021 |   | $ | 7,942 |   |
| Allowance  for doubtful accounts      |   | (542                   | )      | (386 | ) |
|                                  |   |                   |   |   |   |
| Total  trade accounts receivable, net |   | $                      | 9,479  |   | $ | 7,556 |   |

 

**6.****                        INVENTORIES**

 

Inventories consist of the following (in thousands):

 
|                                   |   | **September 30,** |   |
|----------------------------------------|--------|------------------------|--------|
|                                   |   | **2003**               |   | **2002** |   |
|                                   |   |                   |   |   |   |
| Purchased components and raw materials |   | $                      | 6,746  |   | $ | 6,416 |   |
| Sub-assemblies                         |   | 1,476                  |   | 1,770 |   |
| Work-in-process                        |   | 3,907                  |   | 3,550 |   |
| Finished goods                         |   | 1,839                  |   | 2,233 |   |
|                                   |   |                   |   |   |   |
| Total inventories                      |   | $                      | 13,968 |   | $ | 13,969 |   |

 

**7.****                        PROPERTY,PLANT, AND EQUIPMENT**

 

Property, plant, and equipment consist of the following (in thousands):

 
|                                       |   | **September 30,** |   |
|--------------------------------------------|--------|------------------------|--------|
|                                       |   | **2003**               |   | **2002** |   |
|                                       |   |                   |   |   |   |
| Land                                       |   | $                      | 434    |   | $ | 394 |   |
| Buildings  and improvements                |   | 3,855                  |   | 3,547 |   |
| Manufacturing  equipment                   |   | 12,192                 |   | 11,872 |   |
| Office  equipment, furniture, and fixtures |   | 11,128                 |   | 10,686 |   |
|                                       |   |                   |   |   |   |
|                                       |   | 27,609                 |   | 26,499 |   |
| Accumulated  depreciation                  |   | (22,106                | )      | (20,092 | ) |
|                                       |   |                   |   |   |   |
| Total  property, plant, and equipment, net |   | $                      | 5,503  |   | $ | 6,407 |   |

 

**8.****                        FINANCINGAGREEMENTS**

 

The Company’s domestic credit facility provides a credit accommodationtotaling $13.2 million in the United States consisting of a term loan of$3.2 million and a revolving credit facility of up to the lesser of $10.0million or the available borrowing base, which is based on varying percentagesof eligible accounts receivable and inventories.  The revolving credit facility matures on July 31, 2004.  The term loan requires quarterly payments ofprincipal of $200,000 and matures on July 31, 2007.

 

16

----

 

The term loan and operating line bear interest at the Wall StreetJournal prime rate, which was 4.00% at September 30, 2003.  The credit facility is secured by all of theU.S. personal property, including patents and other intangibles of the Companyand its subsidiaries, and contains covenants which require the maintenance of adefined debt service ratio, a defined debt ratio, minimum working capital andcurrent ratio, and minimum profitability. At September 30, 2003, the Company was in compliance with all loancovenants and had an available borrowing base of approximately$6.9 million under the revolving credit facility.  At September 30, 2003, borrowings underthe term loan were $3.2 million. There were no borrowings under the revolving credit facility.  At September 30, 2002, borrowings were$6.6 million under the revolving credit facility, and borrowings under the termloan and under a standby line of credit were $4.0 million and $500,000,respectfully.

 

Additionally, the Company’s credit accommodation with a commercial bankin The Netherlands provides a credit facility for its European subsidiary.  This credit accommodation totals$3.7 million and includes a term loan facility of $814,000, an operatingline of the lesser of $1.7 million or the available borrowing base, whichis based on varying percentages of eligible accounts receivable andinventories, and a bank guarantee facility of $1.2 million.  The term loan facility requires quarterlyprincipal payments of $36,000 and matures in August 2012.  Itis secured by real property of the Company’s European subsidiary, while theoperating line and bank guarantee facility are secured by all of thesubsidiary’s personal property.  Thecredit facility bears interest at the bank’s prime rate plus 1.75%, which atSeptember 30, 2003 was 4.5%.  AtSeptember 30, 2003, the Company had borrowings under this facility ofapproximately $814,000 in term loans. Additionally, the Company had received bank guarantees of $882,000 underthis agreement.

 

Long-term debt consists of the following (in thousands):

 
|                                                                                                                                                                                                                                             |   | **September 30,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                                                                                                                                                                             |   | **2003**               |       | **2002** |   |
| Term  loan dated August 2002, variable interest payable quarterly at the  bank’s prime rate (4.0% at September 30, 2003), due in quarterly  principal payments of $200,000 through July 2007. Secured by business  property. |   | $                      | 3,200      |   | $ | 4,000 |   |
|                                                                                                                                                                                                                                             |   |                   |       |   |   |
| Reducing  non-revolving $4 million note dated August 2002, fully maturing in  July 2003.  Secured by business  property.                                                                                                          |   | —                 |       | 500 |   |
|                                                                                                                                                                                                                                             |   |                   | ** ** |   | ** ** |
| Note  payable, interest of 5.25%, due in quarterly principal and interest  installments through August 2012, secured by certain land and buildings.                                                                                         |   | 539                    |       | — |   |
|                                                                                                                                                                                                                                             |   |                   |       |   |   |
| Note  payable, interest rate of 5.25%, due in quarterly principal and interest  installments through October 2006, secured by certain land and  buildings.                                                                                  |   | 275                    |       | 302 |   |
|                                                                                                                                                                                                                                             |   |                   |       |   |   |
| Capital  leases, interest rates between 6% and 11%, due in principal and interest  installments through September 2005, secured by certain office and  manufacturing equipment.                                                             |   | 301                    |       | 613 |   |
|                                                                                                                                                                                                                                             |   |                   |       |   |   |
|                                                                                                                                                                                                                                             |   | 4,315                  |       | 5,415 |   |
| Current  portion                                                                                                                                                                                                                                 |   | (1,066                 | )          | (1,668 | ) |
|                                                                                                                                                                                                                                             |   |                   |       |   |   |
| Total  long-term debt                                                                                                                                                                                                                            |   | $                      | 3,249      |   | $ | 3,747 |   |

 

17

----

 

Principal payments on long-term debt are as follows (in thousands):

 
| **Year Ending  September 30** |   |   |   |
|------------------------------------|--------|--------|--------|
|                               |   |   |   |
| 2004                               |   | $      | 1,066  |   |
| 2005                               |   | 1,088  |   |
| 2006                               |   | 974    |   |
| 2007                               |   | 881    |   |
| 2008                               |   | 58     |   |
| Thereafter                         |   | 248    |   |
|                               |   |   |   |
| Total                              |   | $      | 4,315  |   |

 

Based on the borrowing rates currently available to the Company for loanswith similar terms and average maturities, the fair value of long-term debt atSeptember 30, 2003 approximates carrying value.

 

**9.        LEASES**

 

The Company has agreements with the Port of Walla Walla to lease twooperating facilities one of which expires in 2010 and the other in 2015.  The Company currently has the option topurchase the land and plant under both of the agreements.  The purchase price of one facility isdetermined 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 theoption and adding $600,000 for the land, subject to further reductions ifexercised after the fifteenth year of the lease.  The other facility may be purchased at the appraised fair marketvalue.  The Company also has two leasedoperating facilities in Oregon.  Bothleases expire in 2007.  The Company hasleased an operating facility in The Netherlands.  This lease expires in 2008.

 

Rent expense is recognized on a straight-line basis over the term ofthe lease.  Rental expense for theCompany’s operating leases referred to above was $1,367,000 for the year endedSeptember 30, 2003, $1,368,000 for the year ended September 30, 2002,and $1,322,000 for the year ended September 30, 2001.

 

The following is a schedule of future minimum rental paymentsrequired under operating leases and future rental expense (in thousands):

 
| **Year Ending  September 30** |   | **Rental  Payments** |   | **Rental  Expense** |   |
|------------------------------------|--------|----------------------|--------|---------------------|--------|
|                               |   |                 |   |                |   |
| 2004                               |   | $                    | 1,429  |                | $      | 1,376 |   |
| 2005                               |   | 1,456                |   | 1,376               |   |
| 2006                               |   | 1,482                |   | 1,376               |   |
| 2007                               |   | 1,393                |   | 1,278               |   |
| 2008                               |   | 1,156                |   | 1,082               |   |
| Thereafter                         |   | 5,469                |   | 5,046               |   |
|                               |   |                 |   |                |   |
| Total                              |   | $                    | 12,385 |                | $      | 11,534 |   |

 

18

----

 

**10.****                 MANDATORILYREDEEMABLE PREFERRED STOCK AND WARRANTS**

 

The Company issued 1,340,366 shares of Series B convertible preferredstock (“Series B”) at a price of $8.60 per share in conjunction with theacquisition of AMVC.  Each share ofSeries B, par value of $0.01 per share, may be converted into 2/3 of ashare of common stock.  The Series B isconvertible at the option of the holder at any time, unless previouslyredeemed, or by the Company upon a merger, consolidation, share exchange orsale of substantially all of its assets. The holders of Series B may require the Company to repurchase anyor all of their shares at any time after July 12, 2002 at the redemptionprice of $10.00.  If not converted tocommon stock or redeemed at the option of the Series B holder after July 12,2002, the Company must redeem the Series B for $10.00 per share onJuly 12, 2005.  The redemption datemay be accelerated if the average closing price of Key Technology common stock,as listed on the Nasdaq National Market, is $15.00 or more for thirty consecutivetrading days.  The Series B wasaccreted from its issue price to its scheduled redemption price using theeffective interest method.  Inconnection with the sale of Ventek (see Note 2), 200,595 shares ofSeries B were redeemed in a cash-less tender of Veneer Technology’sholdings.

 

The holders of Series B are entitled to vote on all matters basedon the number of whole shares of common stock into which the holder’s stockcould be converted.  The holders ofSeries B are not entitled to any dividends.  In the event of any liquidation, dissolution, or winding up ofthe company’s business, the holders of Series B would be entitled to apayment of $10.00 per share before any amount is distributed to holders ofcommon stock.  If assets wereinsufficient to permit this payment to the holders of Series B, the entireassets available for distribution to holders of capital stock would bedistributed ratably among the holders of Series B.

 

The Company also issued 119,106 shares of Series C convertiblepreferred stock (“Series C”) at a price of $20.00 per share in conjunctionwith the acquisition of AMVC.  In fiscalyear 2001, the Series C shareholder redeemed the entire outstanding amountof its shares and warrants.

 

The Company issued 365,222 warrants at a fair market value of $10.00per warrant in conjunction with the issuance of the convertible preferredstock.  Each warrant entitles its holderto purchase at any time for a period of five years from July 12, 2000 oneshare of common stock at $15.00 per share, subject to certain adjustments.  The warrants permit the holder to engage ina net exercise of the warrants if the fair market value of one share of commonstock is greater than $15.00 per share on the date of exercise.  Prior to the expiration date of the warrant,the holder may require the Company to redeem the warrant for cash at a priceequal to $10.00 for each whole share of common stock that may be purchasedunder the warrant.  The warrant holdersdo not have the right to vote or participate in any matters as shareholders.

 

As of September 30, 2003, there were 152,630 shares ofSeries B convertible preferred stock outstanding and 35,553 warrants whichhad not been redeemed or converted.

 

19

----

 

**11.****                 INCOMETAXES**

 

The provision (benefit) for income taxes from continuing operationsconsists of the following (in thousands):

 
|                                |   | **Year Ended September 30,** |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **2003**                          |   | **2002** |   | **2001** |   |
| Current:                            |   |                              |   |   |   |   |   |
| Federal                             |   | $                                 | 352    |   | $ | — |   | $ | — |   |
| State                               |   | 261                               |   | — |   | — |   |
|                                |   |                              |   |   |   |   |   |
|                                |   | 613                               |   | — |   | — |   |
| Deferred:                           |   |                              |   |   |   |   |   |
| Federal                             |   | 2,133                             |   | 1,127 |   | (1,247 | ) |
| State                               |   | (53                               | )      | 111 |   | (96 | ) |
|                                |   |                              |   |   |   |   |   |
|                                |   | 2,080                             |   | 1,238 |   | (1,343 | ) |
|                                |   |                              |   |   |   |   |   |
| Total  income tax expense (benefit) |   | $                                 | 2,693  |   | $ | 1,238 |   | $ | (1,343 | ) |

 

The tax effects of temporary differences that give rise to significantportions of deferred tax assets and deferred tax liabilities are as follows (inthousands):

 
|                                   |   | **September 30,** |   |
|----------------------------------------|--------|------------------------|--------|
|                                   |   | **2003**               |   | **2002** |   |
| Deferred tax asset:                    |   |                   |   |   |   |
| Reserves and accruals                  |   | $                      | 2,014  |   | $ | 2,126 |   |
| NOL and other tax credit carryforwards |   | 3,391                  |   | 5,756 |   |
| Translation adjustment to equity       |   | 40                     |   | 425 |   |
| Deferred tax liability:                |   |                   |   |   |   |
| Accumulated depreciation               |   | (224                   | )      | (259 | ) |
| Intangible assets                      |   | (2,723                 | )      | (3,084 | ) |
|                                   |   |                   |   |   |   |
| Net deferred tax asset                 |   | $                      | 2,498  |   | $ | 4,964 |   |
|                                   |   |                   |   |   |   |
| Deferred tax:                          |   |                   |   |   |   |
| Current asset                          |   | $                      | 1,935  |   | $ | 1,730 |   |
| Long-term asset                        |   | 768                    |   | 3,472 |   |
| Long-term liability                    |   | (205                   | )      | (238 | ) |
|                                   |   |                   |   |   |   |
| Net deferred tax asset                 |   | $                      | 2,498  |   | $ | 4,964 |   |

 

Income tax expense (benefit) is computed at rates different thanstatutory rates.  The reconciliationbetween effective and statutory rates is as follows:

 
|                                                  |   | **Year Ended September 30,** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|
|                                                  |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                  |   |                              |   |   |   |   |   |
| Statutory  rates                                      |   | 34.0                              | %      | 34.0 | % | (34.0 | )% |
| Increase  (reduction) in income taxes resulting from: |   |                              |   |   |   |   |   |
| ETI  deductions                                       |   | (2.3                              | )      | (2.0 | ) | (3.5 | ) |
| R&D  credit                                       |   | (0.3                              | )      | (0.6 | ) | (1.6 | ) |
| State  income taxes, net of federal benefit           |   | 1.6                               |   | 2.0 |   | (1.7 | ) |
| Change  in tax laws                                   |   | (1.8                              | )      | — |   | — |   |
| Other  permanent differences                          |   | 0.7                               |   | 1.5 |   | 4.3 |   |
|                                                  |   |                              |   |   |   |   |   |
| Income  tax combined effective rate                   |   | 31.9                              | %      | 34.9 | % | (36.5 | )% |

 

20

----

 

At September 30, 2003, there were $8.5 million of netoperating loss carryforwards which expire between 2007 and 2019, $110,000 ofresearch and development credit carryforwards which expire between 2020 and2022, $335,000 of foreign tax credit carryforwards which expire between 2005and 2007, and $74,000 of AMT credit carryforwards which do not expire.

 

**12.****                 SHAREHOLDERS’EQUITY**

 

***Employee StockPurchase Plan—***Most employees are eligible toparticipate in the Company’s Employee Stock Purchase Plan (the “PurchasePlan”).  Shares are not available toemployees who already own 5% or more of the Company’s stock.  Employees can withhold, by payrolldeductions, up to 5% of their regular compensation to purchase shares at apurchase price of 85% of the fair market value of the common stock on thepurchase date.  There were 500,000shares reserved for purchase under the Purchase Plan.  During the years ended September 30, 2003, 2002, and 2001,the Company issued shares totaling 6,918, 15,860, and 17,184, respectively,under the Purchase Plan.

 

***Employees’ StockOption Plan***—Under the Restated Employees’ StockOption Plan (the “Option Plan”), eligible employees may receive eitherincentive stock options or nonstatutory stock options and such options may beexercised only after an employee has remained in continuous employment for oneyear after the date of grant. Thereafter, the options become exercisable as stipulated by theindividual option agreements, generally 25% per year on the anniversary date ofthe grant.  The option price is fairmarket value determined at date of grant. The following table summarizes activity under this Option Plan:

 
|                                |   | **Outstanding Options** |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | **Number of  Shares**   |   | **Weighted  Average  Price  Per Share** |   |
|                                |   |                    |   |   |   |
| Balance  at October 1, 2000    |   | 724,833                 |   | $ | 12.20 |   |
|                                |   |                    |   |   |   |
| Options  granted                    |   | 40,000                  |   | $ | 7.89 |   |
| Options  forfeited                  |   | (65,400                 | )      | $ | 13.21 |   |
|                                |   |                    |   |   |   |
| Balance  at September 30, 2001 |   | 699,433                 |   | $ | 11.86 |   |
|                                |   |                    |   |   |   |
| Options  granted                    |   | 169,100                 |   | $ | 2.96 |   |
| Options  forfeited                  |   | (49,600                 | )      | $ | 9.85 |   |
|                                |   |                    |   |   |   |
| Balance  at September 30, 2002 |   | 818,933                 |   | $ | 10.14 |   |
|                                |   |                    |   |   |   |
| Options  granted                    |   | 182,500                 |   | $ | 8.98 |   |
| Options  exercised                  |   | (11,837                 | )      | $ | 5.71 |   |
| Options  forfeited                  |   | (52,033                 | )      | $ | 9.32 |   |
|                                |   |                    |   |   |   |
| Balance  at September 30, 2003 |   | 937,563                 |   | $ | 10.02 |   |

 

At September 30, 2003, the total number of shares reserved foroption exercises was 1,187,483, of which 238,083 were available for grant.  At that date, options for 565,046 shareswere exercisable at prices from $2.51 to $23.25 per share.  At September 30, 2002, the total numberof shares reserved for option exercises was 1,187,483, of which 368,550 wereavailable for grant.  At that date,options for 493,958 shares were exercisable at prices from $7.00 to $23.25 per share.  At September 30, 2001, the total numberof shares reserved for option exercises was 1,187,483, of

 

21

----

 

which 488,050 were available for grant.  At that date, options for 410,066 shares were exercisable atprices from $7.00 to $23.25 per share.

 

The following table summarizes information about stock optionsoutstanding at September 30, 2003:

 
|                           |   | **Options Outstanding** |   | **Options Exercisable**                                     |   |
|--------------------------------|--------|-------------------------|--------|-------------------------------------------------------------|--------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding** |   | **Weighted  Average  Remaining  Contractual  Life (years)** |   | **Weighted  Average  Exercise  Price** |   | **Number of  Shares  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                           |   |                    |   |                                                        |   |   |   |   |   |   |   |
| $2.51 - 5.00                   |   | 149,538                 |   | 4.1                                                         |   | $ | 2.95 |   | 33,585 |   | $ | 2.95 |   |
| $5.00 - 10.00                  |   | 496,825                 |   | 3.3                                                         |   | 8.63 |   | 260,261 |   | 8.52 |   |
| $10.01 - 15.00                 |   | 129,700                 |   | 4.3                                                         |   | 11.46 |   | 109,700 |   | 11.69 |   |
| $15.01 - 20.00                 |   | 88,700                  |   | 3.4                                                         |   | 17.25 |   | 88,700 |   | 17.25 |   |
| $20.01 - 23.25                 |   | 72,800                  |   | 2.6                                                         |   | 22.58 |   | 72,800 |   | 22.58 |   |
|                           |   |                    |   |                                                        |   |   |   |   |   |   |   |
| $2.51 - 23.25                  |   | 937,563                 |   | 3.5                                                         |   | $ | 10.02 |   | 565,046 |   | $ | 11.99 |   |

 

**13.****                 EMPLOYEEBENEFIT PLANS**

 

The Company has a 401(k) profit sharing plan which covers substantiallyall employees.  The Company is requiredto match 50% of employee contributions up to 2% of each participatingemployee’s compensation.  The Companycontributed $285,000, $250,000, and $331,000 in matching funds to the plan forthe years ended September 30, 2003, 2002, and 2001, respectively.

 

The 401(k) plan also permits the Company to make discretionary profitsharing contributions to all employees. Discretionary profit sharing contributions are determined annually bythe Board of Directors.  Profit sharingplan expense was $860,000, $238,000, and zero for the years endedSeptember 30, 2003, 2002, and 2001, respectively.

 

**14.****                 SEGMENTINFORMATION**

 

The Company’s business units serve customers in its primary market—thefood processing and agricultural products industry—through common sales anddistribution channels.  Therefore, theCompany reports on one segment.  The followingtable summarizes information about products and services (in thousands).

 
|                                 |   | **Year Ended September 30,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net  sales by product category:      |   |                              |   |   |   |   |   |
| Automated  inspection systems        |   | $                                 | 30,230 |   | $ | 24,965 |   | $ | 26,884 |   |
| Process  systems                     |   | 31,759                            |   | 25,767 |   | 27,050 |   |
| Parts  and service/contracts         |   | 20,633                            |   | 19,502 |   | 19,020 |   |
|                                 |   |                              |   |   |   |   |   |
| Total  net sales by product category |   | $                                 | 82,622 |   | $ | 70,234 |   | $ | 72,954 |   |

 

Net sales for service/contracts were less than 10% of total net salesfor the years ended September 30, 2003, 2002, and 2001, respectively, andare therefore summarized with parts.

 

22

----

 

The following table summarizes information about geographic areas:

 
|                     |   | **Year Ended September 30,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net  sales:              |   |                              |   |   |   |   |   |
| Domestic                 |   | $                                 | 41,538 |   | $ | 40,590 |   | $ | 37,496 |   |
| International            |   | 41,084                            |   | 29,644 |   | 35,458 |   |
|                     |   |                              |   |   |   |   |   |
| Total  net sales         |   | $                                 | 82,622 |   | $ | 70,234 |   | $ | 72,954 |   |
|                     |   |                              |   |   |   |   |   |
| Long-lived  assets:      |   |                              |   |   |   |   |   |
| Domestic                 |   | $                                 | 14,067 |   | $ | 16,286 |   | $ | 26,995 |   |
| International            |   | 2,677                             |   | 2,683 |   | 3,031 |   |
|                     |   |                              |   |   |   |   |   |
| Total  long-lived assets |   | $                                 | 16,744 |   | $ | 18,969 |   | $ | 30,026 |   |

 

There was no customer that accounted for greater than 10% of net salesduring fiscal 2003.  During fiscal 2002and 2001, net sales to one major customer amounted to approximately 16% and 17%of total net sales, respectively.

 

During 2003, net sales to various customers in Canada accounted forapproximately 11% of total net sales. During 2001, net sales to various customers in France accounted forapproximately 10% of total net sales. No single international geographic location accounted for more than 10%of net sales during 2002.  Location ofthe customer is the basis for the categorization of net sales.

 

**15.****                 ROYALTYINCOME**

 

As part of a settlement agreement entered into during 1997, the Companyreceived royalty payments through 2001 related to the sale of certain equipmentto a selected market.  The payment maybe reduced by a percentage of the purchases of equipment from the Company bythe other party.  The Company recognizedroyalty income from this agreement of zero, zero, and $122,000 during the yearsended September 30, 2003, 2002, and 2001, respectively.

 

* * * * * *

 

23

----

 

**SUPPLEMENTARYDATA**

 

**QUARTERLY FINANCIAL INFORMATION***(Unaudited)*

 

The following is a summary of operating results by quarter for theyears ended September 30, 2003 and 2002 (in thousands, except per sharedata):

 
| **2003 Quarter Ended**               |   | **December 31,** |   | **March 31,** |   | **June 30,** |   | **September 30,** |   | **Total** |   |
|--------------------------------------|--------|-----------------------|--------|--------------------|--------|-------------------|--------|------------------------|--------|-----------|--------|
|                                 |   |                  |   |               |   |              |   |                   |   |      |   |
| Net  sales                           |   | $                     | 15,395 |               | $      | 20,927            |   | $                      | 25,013 |      | $      | 21,287 |   | $ | 82,622 |   |
| Gross  profit                        |   | 6,305                 |   | 8,115              |   | 10,983            |   | 8,593                  |   | 33,996    |   |
| Net  earnings                        |   | 221                   |   | 1,153              |   | 3,002             |   | 1,383                  |   | 5,759     |   |
| Net  earnings per share—basic   |   | 0.05                  |   | 0.24               |   | 0.63              |   | 0.29                   |   | 1.21      |   |
| Net  earnings per share—diluted |   | 0.04                  |   | 0.23               |   | 0.60              |   | 0.27                   |   | 1.15      |   |
|                                      |        |                       |        |                    |        |                   |        |                        |        |           |        |  |  |  |  |  |

 
| **2002 Quarter Ended**                                                         |   | **December 31,** |   | **March 31,** |   | **June 30,** |   | **September 30,** |   | **Total** |   |
|--------------------------------------------------------------------------------|--------|-----------------------|--------|--------------------|--------|-------------------|--------|------------------------|--------|-----------|--------|
|                                                                           |   |                  |   |               |   |              |   |                   |   |      |   |
| Net  sales                                                                     |   | $                     | 13,945 |               | $      | 18,849            |   | $                      | 19,890 |      | $      | 17,550 |   | $ | 70,234 |   |
| Gross  profit                                                                  |   | 5,445                 |   | 7,512              |   | 8,283             |   | 6,642                  |   | 27,882    |   |
| Net  earnings (loss) from continuing operations                                |   | (323                  | )      | 823                |   | 1,390             |   | 418                    |   | 2,308     |   |
| Net  earnings from discontinued operation                                      |   | 39                    |   | —             |   | —            |   | —                 |   | 39        |   |
| Net  loss from change in accounting principle                                  |   | (4,302                | )      | —             |   | —            |   | —                 |   | (4,302    | )      |
| Net  earnings (loss)                                                           |   | (4,586                | )      | 823                |   | 1,390             |   | 418                    |   | (1,955    | )      |
| Net  earnings (loss) from continuing operations per share—basic           |   | (0.11                 | )      | 0.13               |   | 0.25              |   | 0.09                   |   | 0.36      |   |
| Net  earnings (loss) from continuing operations per share—diluted         |   | (0.11                 | )      | 0.13               |   | 0.25              |   | 0.08                   |   | 0.36      |   |
| Net  earnings from discontinued operations per share—basic and diluted    |   | 0.01                  |   | —             |   | —            |   | —                 |   | 0.01      |   |
| Net  loss from change in accounting principle per share—basic and diluted |   | (0.90                 | )      | —             |   | —            |   | —                 |   | (0.90     | )      |
| Net  earnings (loss) per share—basic                                      |   | (1.00                 | )      | 0.13               |   | 0.25              |   | 0.09                   |   | (0.53     | )      |
| Net  earnings (loss) per share—diluted                                    |   | (1.00                 | )      | 0.13               |   | 0.25              |   | 0.08                   |   | (0.53     | )      |
|                                                                                |        |                       |        |                    |        |                   |        |                        |        |           |        |  |  |  |  |  |

 

* * * * * *

 

24

----

 

**ITEM 15****.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K.**

 

(a) The following documents are filed as part of this Form 10-K/A:

 

1.  Exhibits:

 

(23.2)                   Consentof Deloitte & Touche LLP

(31.3)                   Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(31.4)                   Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32.3)                   Certificationpursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002

(32.4)                   Certificationpursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

25

----

 

***SIGNATURES***

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this AmendmentNo. 1 to its Form 10-K to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |   | KEY TECHNOLOGY, INC. |
|--------|--------|----------------------|
|   |   |
|   |   | By:                  | /s/   Kirk W. Morton |   |
|   |   |                 | Kirk W. Morton |
|   |   |                 | President and Chief Executive Officer |
|        |        |                      |  |  |  |

 

 

January 23, 2004

 

26

----

 

KEY TECHNOLOGY, INC.

 

**FORM10-K/A**

**AmendmentNo. 1**

**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** |   |                                                                                                                             |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                             |
| 23.2                |   | Consent of Deloitte & Touche LLP                                                                                             |
| 31.3                |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                    |
| 31.4                |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                    |
| 32.3                |   | Certification pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.4                |   | Certification pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

27

----