**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 24,2005**

 

**OR**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom               to               **

 

**Commission File No. 0-22384**

 

**MICRO COMPONENT TECHNOLOGY, INC.**

(Exact name of registrant as specified in its charter)

 
| **Minnesota**                                        | ** ** | **41-0985960**      |
|------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                      |       | (I.R.S. Employer    |
| incorporation or organization)                       |       | Identification No.) |
|                                                 |       |                |
| **2340 West County Road C, St. Paul, MN 55113-2528** |
| (Address of principal executive offices)             |
|                                                 |       |                |
| **(651) 697-4000**                                   |
| (Registrant’s telephone number)                 |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days

 

Yes     ý     No     o

 

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

 

Yes     o     No     ý

 

The number of sharesoutstanding of the Registrant’s Common Stock, as of November 4, 2005, was26,215,388.

 

 

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**MICRO COMPONENT TECHNOLOGY, INC.**

 

FORM 10-Q

 

TABLE OF CONTENTS

 
| **PART I - FINANCIAL INFORMATION** | ** **                                                          |
|-----------------------------------------|---------------------------------------------------------------------|
| ** **                              | ** **                                                          |
| ** **                              | **ITEM 1.**                                                         | **FINANCIAL  STATEMENTS** | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **CONSOLIDATED BALANCE SHEETS**                                     | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **CONSOLIDATED STATEMENTS OF  OPERATIONS**                          | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **CONSOLIDATED STATEMENTS OF  CASH FLOWS**                          | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **NOTES TO UNAUDITED CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS** | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **ITEM 2.**                                                         | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION** | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **ITEM 3.**                                                         | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **ITEM 4.**                                                         | **CONTROLS  AND PROCEDURES** | ** ** |
| ** **                              | ** **                                                          |
| **PART II. OTHER INFORMATION**     | ** **                                                          |
| ** **                              | ** **                                                          |
|                                    | ITEM 1.                                                             | LEGAL PROCEEDINGS |   |
|                                    |                                                                |
|                                    | ITEM 2.                                                             | UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS |   |
|                                    |                                                                |
| ** **                              | **ITEM 6.**                                                         | ** EXHIBITS** | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | **SIGNATURES**                                                      | ** ** |
| ** **                              | ** **                                                          |
| ** **                              | CERTIFICATIONS                                                      |   |

 

2

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

# PART I.  FINANCIAL INFORMATION

## ITEM 1. FINANCIAL STATEMENTS

## CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 
| ** **                                                                                           | ** ** | **September 24,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **Assets**                                                                                           |       |                   |       |                  |       |
| Current assets                                                                                       |       |                   |       |                  |       |
| Cash and cash equivalents                                                                            |       | $                      | 346        |                  | $          | 166 |   |
| Accounts receivable, less allowance for doubtful  accounts of $215 and $215, respectively            |       | 1,552                  |       | 2,035                 |       |
| Inventories                                                                                          |       | 2,541                  |       | 3,057                 |       |
| Other                                                                                                |       | 148                    |       | 189                   |       |
| Total current assets                                                                                 |       | 4,587                  |       | 5,447                 |       |
|                                                                                                 |       |                   |       |                  |       |
| Property, plant  and equipment, net                                                                  |       | 169                    |       | 270                   |       |
|                                                                                                 |       |                   |       |                  |       |
| Debt issuance  costs, net                                                                            |       | 329                    |       | 371                   |       |
| Other assets                                                                                         |       | 20                     |       | 34                    |       |
|                                                                                                 |       |                   |       |                  |       |
| Total assets                                                                                         |       | $                      | 5,105      |                  | $          | 6,122 |   |
|                                                                                                 |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                      |       |                   |       |                  |       |
| Current  liabilities:                                                                                |       |                   |       |                  |       |
| Current portion of long-term debt, net of discount  of $212 and $0                                   |       | $                      | 1,341      |                  | $          | 67 |   |
| Line of credit, net of discounts of $51 and $78                                                      |       | 1,778                  |       | 1,583                 |       |
| Accounts payable                                                                                     |       | 359                    |       | 967                   |       |
| Accrued compensation                                                                                 |       | 360                    |       | 430                   |       |
| Accrued interest                                                                                     |       | 133                    |       | 56                    |       |
| Accrued warranty                                                                                     |       | 165                    |       | 162                   |       |
| Customer prepayments and unearned service revenue                                                    |       | 212                    |       | 237                   |       |
| Other accrued liabilities                                                                            |       | 154                    |       | 208                   |       |
| Total current liabilities                                                                            |       | 4,502                  |       | 3,710                 |       |
|                                                                                                 |       |                   |       |                  |       |
| Long-term portion of lease payable                                                                   |       | 271                    |       | —                |       |
| Long-term convertible notes, net of discount of $392  and $208                                       |       | 2,325                  |       | 1,458                 |       |
| 10% senior subordinated convertible debt                                                             |       | 3,630                  |       | 3,630                 |       |
|                                                                                                 |       |                   |       |                  |       |
| Stockholders’  deficit:                                                                         |       |                   |       |                  |       |
| Preferred stock, $.01 par value, 1,000,000  authorized, none issued and outstanding                  |       | —                 |       | —                |       |
| Common stock, $.01 par value, 55,000,000 authorized,  26,215,388 and 25,566,511 issued, respectively |       | 262                    |       | 256                   |       |
| Additional paid-in capital                                                                           |       | 97,670                 |       | 97,022                |       |
| Cumulative other comprehensive loss                                                                  |       | (69                    | )          | (69                   | )          |
| Accumulated deficit                                                                                  |       | (103,486               | )          | (99,885               | )          |
| Total stockholders’ deficit                                                                     |       | (5,623                 | )          | (2,676                | )          |
| Total  liabilities and stockholders’ deficit                                                    |       | $                      | 5,105      |                  | $          | 6,122 |   |

 

See notes to unaudited condensed consolidated financial statements

 

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**MICRO COMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTSOF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **Sept. 24,**          | ** ** | **Sept. 25,**         | ** ** | **Sept. 24,** | ** ** | **Sept. 25,** | ** ** |
| ** **                                                  | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Net sales                                                   |       | $                      | 1,758      |                  | $          | 3,859 |   | $ | 5,040 |   | $ | 12,351 |   |
| Cost of sales                                               |       | 984                    |       | 1,902                 |       | 2,910 |   | 5,892 |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Gross profit                                                |       | 774                    |       | 1,957                 |       | 2,130 |   | 6,459 |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Operating  expenses:                                        |       |                   |       |                  |       |   |   |   |   |
| Selling, general and administrative                         |       | 945                    |       | 1,442                 |       | 3,221 |   | 4,053 |   |
| Research and development                                    |       | 435                    |       | 788                   |       | 1,514 |   | 2,111 |   |
| Restructuring charge                                        |       | 40                     |       | —                |       | 106 |   | — |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Total operating  expenses                                   |       | 1,420                  |       | 2,230                 |       | 4,841 |   | 6,164 |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Income (loss)  from operations                              |       | (646                   | )          | (273                  | )          | (2,711 | ) | 295 |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Interest income                                             |       | 2                      |       | 1                     |       | 10 |   | 4 |   |
| Loss on sale of assets                                      |       | —                 |       | —                |       | — |   | (14 | ) |
| Interest expense and other, net                             |       | (348                   | )          | (204                  | )          | (900 | ) | (576 | ) |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Total interest  and other                                   |       | (346                   | )          | (203                  | )          | (890 | ) | (586 | ) |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Net loss                                                    |       | $                      | (992       | )                     | $          | (476 | ) | $ | (3,601 | ) | $ | (291 | ) |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Net loss per  share:                                        |       |                   |       |                  |       |   |   |   |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Basic                                                       |       | $                      | (0.04      | )                     | $          | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
| Diluted                                                     |       | $                      | (0.04      | )                     | $          | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Weighted average  common and equivalent shares outstanding: |       |                   |       |                  |       |   |   |   |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Basic                                                       |       | 26,187                 |       | 25,237                |       | 25,776 |   | 24,908 |   |
| Diluted                                                     |       | 26,187                 |       | 25,237                |       | 25,776 |   | 24,908 |   |

 

See notes to unaudited condensed consolidated financial statements

 

4

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**MICRO COMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTSOF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **Sept. 24,**         | ** ** | **Sept. 25,** | ** ** |
| ** **                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                         |       |                  |       |   |   |
| Cash flows from  operating activities:                                       |       |                  |       |   |   |
| Net loss                                                                     |       | $                     | (3,601     | ) | $ | (291 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                |       | 470                   |       | 530 |   |
| Loss on sales and write-offs of property                                     |       | —                |       | 14 |   |
| Changes in assets and liabilities:                                           |       |                  |       |   |   |
| Accounts receivable                                                          |       | 483                   |       | (1,545 | ) |
| Inventories                                                                  |       | 452                   |       | (191 | ) |
| Other assets                                                                 |       | 63                    |       | (102 | ) |
| Accounts payable                                                             |       | (233                  | )          | (216 | ) |
| Other accrued liabilities                                                    |       | 76                    |       | (1,096 | ) |
|                                                                         |       |                  |       |   |   |
| Net cash used in  operating activities                                       |       | (2,290                | )          | (2,897 | ) |
|                                                                         |       |                  |       |   |   |
| Cash flows from  investing activities:                                       |       |                  |       |   |   |
| Additions to property, plant and equipment                                   |       | (12                   | )          | (131 | ) |
| Proceeds from disposition of property                                        |       | —                |       | — |   |
|                                                                         |       |                  |       |   |   |
| Net cash used in  investing activities                                       |       | (12                   | )          | (131 | ) |
|                                                                         |       |                  |       |   |   |
| Cash flows from  financing activities:                                       |       |                  |       |   |   |
| Payments of long-term debt                                                   |       | (67                   | )          | (67 | ) |
| Repayment of bank line of credit                                             |       | —                |       | (348 | ) |
| Proceeds from institutional line of credit                                   |       | 169                   |       | 1,170 |   |
| Issuance of long-term convertible note, net of debt  issue costs             |       | 2,396                 |       | 1,657 |   |
| Proceeds from issuance of stock                                              |       | —                |       | 16 |   |
| Stock issuance costs                                                         |       | (16                   | )          | (58 | ) |
|                                                                         |       |                  |       |   |   |
| Net cash  provided by financing activities                                   |       | 2,482                 |       | 2,370 |   |
|                                                                         |       |                  |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 180                   |       | (658 | ) |
|                                                                         |       |                  |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 166                   |       | 1,078 |   |
|                                                                         |       |                  |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                     | 346        |   | $ | 420 |   |
|                                                                         |       |                  |       |   |   |
| Supplemental  cash flow information:                                         |       |                  |       |   |   |
|                                                                         |       |                  |       |   |   |
| Non-cash financing activities:                                               |       |                  |       |   |   |
| Stock issued in lieu of interest                                             |       | $                     | 146        |   | $ | 496 |   |
| Stock issued in conversion of 10% senior  subordinated convertible debt      |       | —                |       | 3,710 |   |
| Cash paid for interest                                                       |       | $                     | 358        |   | $ | 82 |   |

 

See notes to unaudited condensed consolidated financial statements

 

5

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

**1.****              INTERIMFINANCIAL STATEMENTS**

 

Theconsolidated financial statements include the accounts of the parent companyand our subsidiaries after elimination of all significant intercompany balancesand transactions.  All significantsubsidiaries are 100% owned.

 

Theunaudited consolidated financial statements included herein have been preparedin accordance with accounting principles generally accepted in the UnitedStates (generally accepted accounting principles) for interim financialinformation and with the instructions for Form 10-Q and Article 10 ofRegulation S-X.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations.  In the opinion of management all adjustments,including normal recurring adjustments, necessary for a fair presentation ofthe interim periods presented have been included.  The interim results are not necessarilyindicative of the operating results expected for the full fiscal year ending onDecember 31, 2005.

 

Ourconsolidated financial statements have been prepared on the assumption that wewill continue as a going concern, which contemplates the realization of assetsand liquidation of liabilities in the normal course of business.  The Report of the Independent RegisteredPublic Accounting Firm on the financial statements of the Company as of and forthe fiscal year ended December 31, 2004 included in Form 10-Kcontained an explanatory paragraph that expresses substantial doubt about ourability to continue as a going concern. The financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the outcomeof this uncertainty.

 

As of September 24,2005 the Company had an accumulated deficit of $103.5 million and incurred anet loss of $1.0 million and $3.6 million for the three-month and nine-monthperiods ended September 24, 2005, respectively.  As of September 24, 2005, the Companyhad cash and cash equivalents of $0.3 million, working capital of $0.1 million,a current ratio of 1.02, total assets of $5.1 million and total liabilities of$10.7 million.  Our ability to generatecash and operating income is dependent on the realization of additionalrestructuring efforts, our responsiveness to further negative impacts resultingfrom downturns in the semiconductor capital equipment market and increasing ourcustomer base to expand the penetration of our product technology.

 

Asdiscussed in Note 5, on January 28, 2005, we completed an amendment to thefinancing agreement with the institutional lender whereby our payments underthe long-term convertible note have been deferred for one year, resulting in$800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-tem convertible

 

6

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note hasalso been extended for one year from March 2007 to March 2008.  As part of this amendment, the fixedconversion prices related to both the $3.0 million secured working capital lineof credit and the $2.0 million long-term convertible note were reduced to $0.60and $0.56, respectively.  On February 25,2005, we completed a new restructuring agreement with our 10% SeniorConvertible Noteholders.  Under theagreement, the Noteholders representing $2.9 million in debt, or 80% of thedebt existing as of December 31, 2004, have agreed to continue to acceptstock in lieu of cash for their interest payments for the remaining term of thenotes through December 2006.  Aspart of this agreement, the conversion price of the underlying notes has beenreduced from $1.00 per share to $0.85 per share for the remaining term of thenotes through December 2006.  This results in approximately $290,000 ofinterest expense to be incurred in 2005 to be satisfied through the issuance ofshares of our common stock.  On April 29,2005, we completed a financing transaction with the institutional lender inwhich we borrowed an additional $2,500,000. The agreement provides for monthlyinterest payments at a rate equal to prime plus 1.75%.  Beginning six months after the closing, weare required to make monthly payments equal to 1/30th of the principal amountuntil three years after the closing, at which time the entire remainingprincipal and accrued interest is due and payable in full.  The loan is convertible into shares of theCompany’s common stock at a price of $0.23 per share.  The Company also issued the lender an optionto purchase 2,556,651 shares of common stock for an exercise price of $.01 pershare.  The Company received net proceedsof approximately $2.4 million at the closing.

 

Weestimate that we may need to raise additional capital through debt or equityofferings, further modify our existing credit agreements, sell assets, makesignificant structural cost reductions or take a combination of these actions.  We are actively pursing these activities;however, there is no assurance that we will be successful in any of theseactivities.  If we are unsuccessful inobtaining sufficient financing, further restructuring our existing creditagreements, or completing further restructuring initiatives, our operations andfinancial condition will be materially negatively impacted and we could berequired to take actions that could harm our business, including potentiallyceasing certain or all of our operations.

 

Interimunaudited financial results should be read in conjunction with the auditedfinancial statements included in the SEC Report on Form 10-K, for theperiod ended December 31, 2004.

 

**2.****              EARNINGSPER SHARE**

 

Basic earnings per share are computed using theweighted average number of common shares outstanding during each period.  Diluted earnings per share include thedilutive effect of common shares potentially issuable upon the exercise ofstock options, the 10% Senior Subordinated Convertible Notes and otherconvertible notes outstanding.  Thefollowing table reconciles the denominators used in computing basic and dilutedearnings per share:

 

7

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| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **Sept. 24,**          | ** ** | **Sept. 25,**         | ** ** | **Sept. 24,** | ** ** | **Sept. 25,** | ** ** |
| **(in thousands)**                             | ** ** | **2005 (1)**           | ** ** | **2004(1)**           | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** |
| Weighted average  common shares outstanding    |       | 26,187                 |       | 25,237                |       | 25,776 |   | 24,908 |   |
| Effect of  dilutive stock options and warrants |       | —                 |       | —                |       | — |   | — |   |
|                                           |       | 26,187                 |       | 25,237                |       | 25,776 |   | 24,908 |   |

 

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(1)       We reported aloss for the period indicated.  Noadjustments were made for the effect of stock options and warrants, whichtotaled 5,359,398 and 3,566,817 shares at September 24, 2005 and September 25,2004,respectively, as the effect is antidilutive.

 

**3.****              COMPREHENSIVENET INCOME OR LOSS**

 

Certain revenues, expenses, gains, and lossesrecognized during the period are included in comprehensive loss, regardless ofwhether they are considered to be results of operations of the period.  During the three-month and nine-month periodsended September 24, 2005 and September 25, 2004, total comprehensiveloss equaled net loss as reported on the Consolidated Statements of Operations.

 

**4.****              BALANCESHEET INFORMATION**

 

Majorcomponents of net inventories were as follows (in thousands):

 
| ** **      | ** ** | **Sept. 24,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|---------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**      | ** ** | **2004**              | ** ** |
|            |       |          |       |                  |       |
| Raw materials   |       | $             | 1,073      |                  | $          | 2,079 |   |
| Work-in-process |       | 984           |       | 765                   |       |
| Finished goods  |       | 484           |       | 213                   |       |
|            |       | $             | 2,541      |                  | $          | 3,057 |   |

 

We provide a standard thirteen monthwarranty program for our equipment products.  We record provisions for warranty claims forthese products based upon historical claim performance.  The following table provides the expenserecorded and charges against our reserves for the nine-months ended September 24,2005 (in thousands):

 
| Accrued warranty balance at December 31, 2004   |   | $      | 162    |   |
|------------------------------------------------------|--------|--------|--------|--------|
|                                                 |   |   |   |
| Provision                                            |   | 62     |   |
|                                                 |   |   |   |
| Warranty claims                                      |   | (59    | )      |
|                                                 |   |   |   |
| Accrued warranty  balance at September 24, 2005 |   | $      | 165    |   |

 

8

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**5.**              **FINANCING TRANSACTIONS**

 

On March 9,2004 we completed a $5.0 million secured financing transaction with aninstitutional lender.  Under the terms ofthe three-year agreement, we put in place a $3.0 million secured workingcapital line of credit and a $2.0 million long-term convertible note.  $750,000 of the secured working capital lineof credit can be converted to shares of our common stock by the lender undercertain market conditions and initially at a price of $1.92 per share.  The $2.0 million long-term convertible noteis convertible to shares of our common stock initially at a price of$1.79.  In connection with the executionof this credit facility, we issued to the lender a seven-year warrant to purchase400,000 shares of our common stock at exercise prices ranging from $2.30 to$2.88.  The fair value of the warrant wasdetermined using the Black-Scholes option-pricing model.  This resulted in a value of $391,000, whichwas recorded as an increase to additional paid-in- capital and a discount tothe working capital line of credit and long-term convertible note.  This discount is amortized to interestexpense over the three-year agreement. Our then existing secured lending relationship was terminated as aresult of this transaction.  This creditfacility is secured by all the assets of the Company.  On January 28, 2005, we completed anamendment to the financing agreement with the institutional lender whereby ourpayments under the long-term convertible note have been deferred for one year,resulting in $800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-term convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note were reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of$0.67.  The fair value of the warrant wasdetermined using the Black-Scholes option-pricing model.  This resulted in a value of $51,000, whichwas recorded as an increase to additional paid-in-capital and a discount to thelong-term convertible note.  Theaforementioned restructuring amendment was not a troubled debt restructuringunder SFAS 15 (as interpreted by EITF 02-04) or a substantial modification asdefined by EITF 96-19; therefore no extinguishment gain or loss was recognizedin our financial statements.

 

On April 29,2005, we completed a financing transaction with the institutional lender inwhich we borrowed an additional $2,500,000. The agreement provides for monthlyinterest payments at a rate equal to prime plus 1.75%.  Beginning six months after the closing, weare required to make monthly payments equal to 1/30th of the principal amountuntil three years after the closing, at which time the entire remaining principaland accrued interest is due and payable in full.  The loan is convertible into shares of theCompany’s common stock at a price of $0.23 per share.  The Company received net proceeds ofapproximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option topurchase 2,556,651 shares at $0.01 per share.  The fair value of the option was determinedusing the Black-Scholes option-pricing model. This resulted in a value of $473,000, which was recorded as in increaseto additional paid-in-capital and a discount to the long-term convertiblenote.  This discount is amortized tointerest expense over the three-year agreement. The issuance was exempt from registration under Rule 506 under theSecurities Act of 1933, because all of the noteholders were accredited, therewas no general solicitation, and the shares were subject to restrictions ontransfer.

 

9

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On February 25,2005, we completed a second amendment to the agreement with the holders of our10% Senior Subordinated Convertible Notes, wherein holders of 80% of theremaining Notes, representing $2.9 million, agreed to continue to accept stockin payment of interest for the remaining four interest payments through December 24,2006.  As part of this amendment, weagreed to reduce the Note conversion price to $0.85 per share, and use our bestefforts to register the shares with the SEC. The aforementioned restructuring amendment was not a troubled debtrestructuring under SFAS 15 (as interpreted by EITF 02-04) or a substantialmodification as defined by EITF 96-19; therefore no extinguishment gain or losswas recognized in our financial statements.

 

Duringthe third quarter of 2005, we issued 648,874 shares of our common stock to theholders of our 10% Senior Subordinated Convertible Notes (“the Notes”) inpayment of interest due on June 30, 2005. The issuance was exempt from registration under Rule 506 under theSecurities Act of 1933, because all of the noteholders were accredited, therewas no general solicitation, and the shares were subject to restrictions ontransfer.

 

Duringthe first quarter of 2004, we issued 228,618 shares of our common stock to theholders of our 10% Senior Subordinated Convertible Notes (“the Notes”) inpayment of interest due on December 31, 2003.  The issuance was exempt from registrationunder Rule 506 under the Securities Act of 1933, because all of thenoteholders were accredited, there was no general solicitation, and the shareswere subject to restrictions on transfer.

 

Duringthe first quarter of 2004, we issued a total of 3,721,532 shares of our commonstock to holders of the Notes pursuant to conversion of their Notes at $1.00per share including accrued interest due at the time of conversion.  The issuance was exempt from registrationunder Rule 506 under the Securities Act of 1933, because all of thenoteholders were accredited, there was no general solicitation, and the shareswere subject to restrictions on transfer.

 

**6.**              **RESTRUCTURING CHARGES**

 

During the second quarter of 2005, in response to thecontinuing downturn in the semiconductor capital equipment market, we reducedour workforce across all functional areas by approximately 7% resulting in arestructuring charge of $66,000.  Thischarge reflected severance and other benefit costs associated with thisreduction.  This workforce reductionaffected a total of 7 employees across all functional areas.

 

During the third quarter of 2005, in connection withour restructuring activities, we reduced our workforce within manufacturing andsales by approximately 2% resulting in a restructuring charge of $40,000.  This charge reflected severance and other benefitcosts associated with this reduction. This workforce reduction affected a total of two employees.

 

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**7.**              **STOCK BASED COMPENSATION**

 

Weaccount for stock-based transactions under SFAS No. 123*, Accounting for Stock-Based Compensation*.  As permitted by SFAS No. 123, we haveelected to continue following the guidance of APB Opinion No. 25 (asinterpreted by FIN 44) for measurement and recognition of stock-basedtransactions with employees and non-employee directors.  Because stock options have been granted atexercise prices at least equal to the fair market value of the stock at thegrant date, no compensation cost has been recognized for stock options issuedto employees and non-employee directors under the stock option plans.  Stock-based transactions with non-employeesare accounted for in accordance with SFAS No. 123 and relatedinterpretations.

 

In December 2002,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure.”  SFAS No. 148 is an amendmentto SFAS No. 123 providing alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation and also provides required additional disclosures aboutthe method of accounting for stock-based employee compensation.  TheCompany adopted the annual disclosure provision of SFAS No. 148 during theyear ended December 31, 2003.  The Company chose to not adoptthe voluntary change to the fair value based method of accounting forstock-based employee compensation, pursuant to SFAS No. 148.

 

Ifcompensation cost for our stock option and employee stock purchase plans hadbeen determined based on the fair value at the grant dates, consistent with themethod provided in SFAS No. 148 and SFAS No. 123, our net loss andnet loss per share would have been as follows:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Sept. 24,**          | ** ** | **Sept. 25,**         | ** ** | **Sept. 24,** | ** ** | **Sept. 25,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss):                                    |       |                   |       |                  |       |   |   |   |   |
| As reported                                            |       | $                      | (992       | )                     | $          | (476 | ) | $ | (3,601 | ) | $ | (291 | ) |
| Fair value compensation expense                        |       | (20                    | )          | (219                  | )          | (184 | ) | (658 | ) |
| Pro forma                                              |       | $                      | (1,012     | )                     | $          | (695 | ) | $ | (3,785 | ) | $ | (949 | ) |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Net income  (loss) per share – basic and diluted: |       |                   |       |                  |       |   |   |   |   |
| As reported                                            |       | $                      | (0.04      | )                     | $          | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
| Fair value compensation expense                        |       | —                 |       | (0.01                 | )          | (0.01 | ) | (0.03 | ) |
| Pro forma                                              |       | $                      | (0.04      | )                     | $          | (0.03 | ) | $ | (0.15 | ) | $ | (0.04 | ) |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Stock based  compensation:                             |       |                   |       |                  |       |   |   |   |   |
| As reported                                            |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | — |   |
| Fair value compensation expense                        |       | (20                    | )          | (219                  | )          | (184 | ) | (658 | ) |
| Pro forma                                              |       | $                      | (20        | )                     | $          | (219 | ) | $ | (184 | ) | $ | (658 | ) |

 

Thefair value of options granted under the stock options for the three andnine-months ended September 24, 2005 and September 25, 2004 wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions.

 

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| ** **                               | ** ** | **Quarters Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Sept. 24,**      | ** ** | **Sept. 25,**         | ** ** | **Sept. 24,** | ** ** | **Sept. 25,** | ** ** |
| ** **                               | ** ** | **2005**           | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |               |       |                  |       |   |   |   |   |
| Dividend yield                           |       | 0.00               | %          | 0.00                  | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                     |       | 117.06             | %          | 93.53                 | %          | 94.31 | % | 93.53 | % |
| Risk-free  interest rate                 |       | 3.93               | %          | 3.41                  | %          | 3.89 | % | 3.41 | % |
| Expected life of  options                |       | 3.5 years          |       | 3.5 years             |       | 3.5 years |   | 3.5 years |   |
| Fair value per  share of options granted |       | $                  | 0.13       |                  | $          | 0.87 |   | $ | 0.21 |   | $ | 0.87 |   |
|                                          |            |                    |            |                       |            |  |  |  |  |  |  |  |  |

 

**8.**              **RECENT ACCOUNTINGPRONOUNCEMENTS**

 

***SFAS No. 154,Accounting Changes and Error Corrections***.  In June 2005,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 154, “*AccountingChanges and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. Thestatement applies to all voluntary changes in accounting principle, and changesthe requirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005.  Earlier application is permittedfor accounting changes and corrections of errors made occurring in fiscal yearsbeginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement.  The Company does not expect the adoptionof SFAS No. 154 to have a material effect on its financial statements.

 

***SFAS No. 153, Exchanges of NonmonetaryAssets.***  In December 2004, FASB issued SFAS No. 153*Exchanges of Nonmonetary Assets*amends APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*.  APB No. 29 is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged.  The guidance inthat Opinion, however, included certain exceptions to that principle.  SFAS No. 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance.  Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurringin fiscal periods beginning after June 15, 2005. Earlier application ispermitted for nonmonetary asset exchanges occurring in fiscal periods beginningafter the date SFAS No. 153 was issued.  SFAS No. 153 shall be appliedprospectively.  We do not expect the adoption of SFAS No. 153 to havea material effect on our financial statements.

 

***SFAS No. 123(revised 2004), Share-Based Payment***.  In December 2004,FASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*, that focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based

 

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payment transactions.  This statementreplaces SFAS No. 123, *Accounting forStock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  Beginning with our quarterly period thatbegins January 1, 2006, we will be required to expense the fair value ofemployee stock options and similar awards.  As a public company, we areallowed to select from two alternative transition methods, each havingdifferent reporting implications.  We do not expect the adoption of SFAS No. 123Rto have a material effect on our financial statements.

 

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## ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION

##  

*Thefollowing discussion of our results of operations and financial conditionshould be read together with the other financial information and condensedconsolidated financial statements included in this document.  This discussion contains forward-lookingstatements that involve risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated in the forward-looking statements as a result of avariety of factors, including those discussed in “Risk Factors” and elsewherein this document.*

 

*Overview*

 

Wesupply equipment automation solutions for the global semiconductor test andassembly manufacturing market.  Oursolutions include automated test handlers, factory automation software and ournew integrated Smart Solutions equipment product line.  We believe that our products can significantlyimprove the productivity, yield and throughput of the back-end, or to thepost-wafer manufacturing process, including assembling, packaging, testing andsingulating semiconductor devices.

 

Thedemand for our products and services is dependent upon growth in thesemiconductor industry and the increasing automation needs of semiconductormanufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which intensified andcontinued through the majority of 2003, resulting in a significant adverseimpact on our business.  In late 2003,worldwide semiconductor bookings began showing signs of stabilization anddemand for our products increased during this period and continued through thefirst half of 2004.  However, in thethird quarter of 2004 the markets again retracted, impacting our financialresults through the end of 2004 and continuing into 2005. At this juncture, thereturn to sustained market growth cannot be predicted in the short term.  As we have disclosed in our Forms 10-K forthe years ended December 31, 2004, 2003 and 2002, and each of our Forms 10-Qfor the years 2005, 2004 and 2003, a continued or renewed market downturn mightresult in significant losses, charges for inventory revaluation, assetimpairment or restructuring charges. Consequently, in response to these changing market conditions, inaddition to the actions taken prior to 2004, we took the following additionalsteps in 2004 and 2005:

 

•                  On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 million long-term convertible note. $750,000 of the secured working capital line of credit can be convertedto shares of our common stock by the lender under certain market conditions andinitially at a price of $1.92 per share. The $2.0 million long-term convertible note is convertible to shares ofour common stock initially at a price of $1.79. In connection with the execution of this credit facility, we issued tothe lender a seven-year warrant to purchase 400,000 shares of our common stock atexercise prices ranging from $2.30 to $2.88. The secured lending relationship at the time was terminated as a resultof this transaction.  This creditfacility is secured by all the assets of the Company.  On January 28, 2005, we completed anamendment

 

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to thefinancing agreement with the institutional lender whereby our payments underthe long-term convertible note have been deferred for one year, resulting in$800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-term convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note were reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of $0.67.  The fair value of the warrant was determinedusing the Black-Scholes option-pricing model. This resulted in a value of $51,000, which was recorded as in increaseto additional paid-in-capital and a discount to the long-term convertiblenote.  On April 29, 2005, wecompleted a financing transaction with the institutional lender in which weborrowed an additional $2,500,000. The agreement provides for monthly interestpayments at a rate equal to prime plus 1.75%. Beginning six months after the closing, we are required to make monthlypayments equal to 1/30th of the principal amount until three years after theclosing, at which time the entire remaining principal and accrued interest isdue and payable in full.  The loan isconvertible into shares of the Company’s common stock at a price of $.23 pershare.  The Company received net proceedsof approximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option topurchase 2,556,651 shares at $0.01 per share.  The fair value of the option was determinedusing the Black-Scholes option-pricing model. This resulted in a value of $473,000, which was recorded as in increaseto additional paid-in-capital and a discount to the long-term convertiblenote.  This discount is amortized tointerest expense over the three-year agreement.

 

•                  During thefourth quarter of 2004, we reduced our manufacturing workforce by 11% at thetime, resulting in a restructuring charge of $35,000.  This charge reflected severance and other benefitcosts associated with the reduction. This workforce reduction affected a total of 12 employees all within themanufacturing area.

 

•                  On February 25, 2005, wecompleted a second amendment to the agreement with the holders of our 10%Senior Subordinated Convertible Notes, wherein holders of 80% of the remainingNotes, representing $2.9 million, agreed to continue to accept stock in paymentof interest for the remaining four interest payments through December 24,2006.  As part of this amendment, we agreedto reduce the Note conversion price to $0.85 per share, and use our bestefforts to register the shares with the SEC.

 

•                  During the second quarter of 2005, wefurther reduced our workforce by 7% at the time, resulting in a restructuringcharge of $66,000. This charge reflected severance and other benefit costsassociated with the reduction.  Thisworkforce reduction affected a total of 7 employees all within themanufacturing area.

 

•                  During the third quarter of 2005, inconnection with our restructuring activities, we reduced our workforcemanufacturing and sales by approximately 2% resulting in a restructuring chargeof $40,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total oftwo employees.

 

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Mostindustry forecasts are presently predicting that capacity-driven purchases ofcapital equipment are expected to improve over the next six-month period.  However, the level of improvement and theability for the market to sustain an improvement continues to beuncertain.  Therefore, we will continueto monitor the market and examine opportunities to further reduce our coststhrough further consolidation of operations, limiting capital expenditures,monitoring inventory purchases and additional strategic restructuringinitiatives.  Certain of these types ofactions have the potential for further charges in future periods.  The impact of a continuing contraction of thesemiconductor capital equipment market has the potential to have a materialadverse effect on our financial condition, results of operations, and cashflows.

 

**Critical Accounting Policies**

 

*Revenue Recognition*

 

UnderStaff Accounting Bulletin 104 (“SAB 104”), we recognize revenue upon shipment,as our terms are FOB shipping point, for established equipment products thathave previously satisfied existing customer performance specifications and thatprovide for full payment tied to shipment. Revenue for products that have not previously satisfied customer performancespecifications or from sales where all or a portion of customer payment isbased upon acceptance are only recognized upon customer acceptance.  As such, in periods of increasing shipments,revenues will be deferred if the shipments are for new customers, new productsor the payment terms are tied to acceptance criteria.  Consequently, if these conditions exist, wemay report revenue levels that are not reflective of actual shipment growthrates.  Conversely, in periods ofdecreasing shipments, we potentially could recognize revenues related toshipments made in prior periods.  Ifthese conditions exist, we may report revenue levels that are greater thanactual shipments.

 

*Allowance for Doubtful Accounts*

 

We recorda provision for doubtful accounts based on specific identification of ouraccounts receivable.  This involves adegree of judgment based on discussion with our internal sales and marketinggroups, our customer base and the examination of the financial stability of ourcustomers.  There can be no assurancethat our estimates will match actual amounts ultimately written off.  During periods of downturn in the market forsemiconductor capital equipment or economic recession, a greater degree of riskexists concerning the ultimate collectability of our accounts receivable due tothe impact that these conditions might have on our customer base.

 

*Valuation of Inventories*

 

Ourinventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out(“FIFO”) method.  We maintain a standardcosting system for our inventories. Assumptions with respect to direct labor utilization, standard directand indirect cost rates, vendor pricing and utilization of factory capacitiesare formulated in the development of our standard costing system.  Sudden or continuing changes in the semiconductorcapital equipment market affecting our shipments can result in significantproduction variances from our standard

 

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rates.  These variances directly impact our grossprofit performance and may cause variability in gross profits results fromreporting period-to-reporting period. Our labor and overhead rates are set for production rates that matchtypical market conditions.  Productionvariances are charged to cost of sales each quarter as incurred.  Material standards are based upon normalpurchase volumes.  Purchase pricevariances are charged to costs of sales each quarter as incurred.

 

Provisionsto reduce inventories to the lower of cost or market are made based on a reviewof excess and obsolete inventories through an examination of historicalcomponent consumption, current market demands and shifting producttechnology.  Significant assumptions withrespect to market trends and customer product acceptance are utilized toformulate our provision methods.  Suddenor continuing downward changes in the semiconductor capital equipment marketmay cause us to record additional inventory revaluation charges in future periods.  No write-off provision was made to ourinventories for the quarter and nine-month periods ended September 24,2005.  Pursuant to SAB Topic 5-BB,inventory revaluations establish a new cost basis for inventory.  Included in our gross margins dollars for thequarters ended September 24, 2005 and September 25, 2004, were zeroand $419,000, respectively, resulting from sales of products that had beenpreviously written down to lower of cost or market.  Included in our gross margins dollars for thenine-months ended September 24, 2005 and September 25, 2004, were$61,000 and $1.4 million respectively, resulting from sales of products thathad been previously written down to lower of cost or market.  The reduction in sales of products that werepreviously written down to lower of cost or market for the three month and ninemonth periods ending September 24, 2005 as compared to the prior yearperiods, is directly related to our overall decline in sales.

 

*Accrued Warranty*

 

Weprovide a standard thirteen-month warranty program for our equipment products.  We record provisions for warranty claims forthese products based upon historical claim performance.  This approach has been applied since theinception of the warranty program and involves a degree of subjectivity in thathistorical performance is used to estimate future warranty claims.  There can be no assurance that our estimateswill match the actual amount of future warranty claims.

 

###### **Results of Operations for the Three Months Ended September 24,2005 and September 25, 2004**

 

Netsales for the three months ended September 24, 2005, decreased $2.1million or 54.4% to $1.8 million compared to $3.9 million for the three monthsended September 25, 2004.  Productacceptance requirements related to product and customer had no impact on netsales, as there were no timing differences associated with revenue recognitionrules.  The decline in sales is directlyattributable to the recent retraction in the semiconductor capital equipmentmarket.  This decline impacted our salesacross all of our product lines.

 

Grossprofit for the third quarter of 2005 decreased by $1.2 million to $0.8 millionor 44.0% of net sales, from $2.0 million, or 50.7% of net sales, for thecomparable period in the prior year.  Thedecrease in gross margin in the current year period is directly attributable tothe decline in sales, resulting in fixed costs being spread over smaller salesvolumes.  We expect the

 

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continuing contraction ofthe market for semiconductor capital equipment to continue to negatively impactour gross margin contribution in future periods.

 

Selling,general and administrative expense in the third quarter of 2005 was $0.9million, or 53.8% of net sales, compared to $1.4 million, or 37.4% of net salesfor the third quarter of 2004.  Theincrease in expense as a percentage of sales is a result of the reduced netsales levels.  The reduction in dollarspending is a result of cost reduction measures completed in 2004 and thereduction of certain variable expenses related to sales.

 

Researchand development expense for the third quarter of 2005 was $0.4 million, or24.7% of net sales compared to $0.8 million, or 20.4% of net sales in the thirdquarter of 2004.  The increase in expenseas a percentage of sales is a result of the reduction in net sales.  The reduction in dollar spending is a resultof cost reduction measures completed in 2004.

 

The restructuring charge in the currentyear quarter totaled $40,000 or 2.2% of net sales.  This charge resulted from reductions of ourworkforce within maunfacturing and sales in the third quarter of 2005.  This workforce reduction affected two employees.

 

Interestincome for the third quarter of 2005 was $2,000 compared to $1,000 in the thirdquarter of 2004.  The increase ininterest income is due to additional funds available for investment compared tothe prior year.  Interest expense andother totaled $348,000 or 19.8% of net sales for the third quarter of 2005compared to $204,000 or 5.3% of net sales in the prior year’s quarter.  The interest expense increase resulted fromincreases in the underlying interest percentage, increases in average debtlevels and increases in amortization costs associated with debt discounts.

 

Net lossfor the quarter ended September 24, 2005 was $1.0 million or $0.04 pershare, as compared to a net loss of $0.5 million, or $0.02 per share in theprior year period.

 

###### **Results of Operations for the Nine Months Ended September 24,2005 and September 25, 2004**

 

Netsales for the nine months ended September 24, 2005 decreased $7.3 millionor 59.2% to $5.0 million compared to $12.3 million for the nine months ended September 25,2004.  Product acceptance requirementsrelated to product and customer mix had no impact on net sales, as there wereno timing differences associated with revenue recognition rules.  The decline in sales is directly attributableto the recent retraction in the semiconductor capital equipment market.  This decline impacted our sales across all ofour product lines.

 

Grossprofit for the first nine months of 2005 decreased by $4.4 million to $2.1million, or 42.3% of net sales, from $6.5 million, or 52.3% of net sales, forthe comparable period in the prior year. The decrease in gross margin in the current year period is directlyattributable to the decline in sales, resulting in fixed costs being spreadover smaller sales volumes.  We expectthe continuing contraction of the market for semiconductor capital equipment tocontinue to negatively impact our gross margin contribution in future periods.

 

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Selling,general and administrative expense for the first nine months of 2005 was $3.2million or 63.9% of net sales, compared to $4.1 million, or 32.8% of net salesfor the first nine months of 2004.  Theincrease in expense as a percentage of sales is a result of the reduced netsales levels.  The reduction in dollarspending is a result of cost reduction measures completed in 2004 and the reductionof certain variable expenses related to sales.

 

Researchand development expense for the first nine months of 2005 was $1.5 million, or30.0% of net sales compared to $2.1 million, or 17.1% of net sales for thefirst nine months of 2004.  The increasein expense as a percentage of sales is a result of the reduction in netsales.  The reduction in dollar spendingis a result of cost reduction measures completed in 2004.

 

The restructuring charge for thenine-months ended September 24, 2005 totaled $106,000 or 2.1% of netsales.  This charge resulted fromreductions of our workforce across all functional areas in the second and thirdquarters of 2005.  This workforce reduction affected nine employees, across allfunctional areas.

 

Interestincome for the first nine months of 2005 was $10,000 compared to $4,000 for thecomparable period in the prior year.  Theincrease in interest income is due to additional funds available for investmentcompared to the prior year.  Interestexpense and other totaled $900,000 or 17.9% of net sales for the first ninemonths of 2005 compared to $576,000 or 4.7% of net sales for the comparableperiod in the prior year.  The interestexpense increase resulted from increases in the underlying interest percentage,increases in the average debt levels and increases in amortization costsassociated with debt discounts.

 

Weincurred a $14,000 loss or 0.1% of sales in the first nine months of 2004 fromthe disposition of certain assets resulting from the restructuring of our leasesthroughout 2004.

 

Netloss for the nine-month period ended September 24, 2005 was $3.6 millionor $0.14 per share, as compared to a net loss of $291,000, or $0.01 per sharein the prior year period.

 

**Liquidityand Capital Resources**

 

Thenet loss was the primary use of cash in the first nine months of 2005.  The increase in accounts receivable andreduction of other accrued liabilites were the primary uses of cash in thefirst nine months of 2004.  Cash used inoperations was $2.3 million for the first nine months of 2005 and $2.9 millionin the comparable prior year period.

 

Capitalexpenditures were $12,000 for the first nine months of 2005 compared to$131,000 in the comparable prior year period.  The capital spending in the current yearperiod was primarily in the area of information technology equipment.  The prior year spending was primarily in thearea of technology equipment and facility costs related to our Penang, Malaysiaoperations.

 

On March 9,2004 we completed a $5.0 million secured financing transaction with aninstitutional lender.  Under the terms ofthe three-year agreement, we put in place a $3.0 million secured workingcapital line of credit and a $2.0 million long-term convertible note.  On January 28, 2005, we completed anamendment to the financing agreement with the lender whereby our payments underthe long-term convertible notes have been deferred for one year, resulting in

 

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$800,000 of principalpayments being rescheduled to begin on February 1, 2006.  These payments were previously scheduled tobe paid in 2005.  The maturity date ofthe long-term convertible note has also been extended for one year from March 2007to March 2008.  As a part of thisamendment the fixed conversion prices related to both the $3.0 million securedworking capital line of credit and the $2.0 long-term convertible note werereduced to $0.60 and $0.56, respectively. On April 29, 2005, we completed an financing transaction with theinstitutional lender in which we borrowed an additional $2,500,000. Theagreement provides for monthly interest payments at a rate equal to prime plus1.75%.  Beginning six months after theclosing, we are required to make monthly payments equal to 1/30th of theprincipal amount until three years after the closing, at which time the entireremaining principal and accrued interest is due and payable in full.  The loan is convertible into shares of theCompany’s common stock at a price of $.23 per share.  The Company received net proceeds ofapproximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option topurchase 2,556,651 shares at $0.01 per share.

 

On February 25,2005, we completed a new restructuring agreement with our 10% Senior ConvertibleNoteholders.  Under the agreement, theNoteholders representing $2.9 million in debt, or 80% of the debt existing asof December 31, 2004, have agreed to continue to accept stock in lieu ofcash for their interest payments for the remaining term of the notes through December 2006.  As part of this agreement, the conversionprice of the underlying notes has been reduced from $1.00 per share to $0.85per share for the remaining term of the notes through December 2006.  Thisresults in approximately $145,000 of interest expense scheduled to be paid in2005 in cash to be satisfied through the issuance of shares of our commonstock.  During the first quarterof 2004, $3.7 million of the Notes were converted to equity under the prioragreement resulting in the issuance of 3,710,000 shares of our common stock tothe noteholders.

 

On April 11,2005, judgment was entered against the Company in Superior Court of Californiain the amount of $379,000 plus legal and court costs for a total amount of$547,000 in a lawsuit brought by a prior landlord.  The Company has reached an agreement with thelandlord that will allow the Company to pay the judgment over a 30-month periodfor a total amount of $443,000 plus interest at 10% per annum.

 

Weestimate that we may need to raise additional capital through debt or equityofferings, further modify our existing credit agreements, sell assets, makesignificant structural cost reductions or take a combination of theseactions.  We are actively pursing theseactivities; however, there is no assurance that we will be successful in theseactivities.  If we are unsuccessful inobtaining sufficient financing, restructuring our existing credit agreements,or completing further restructuring initiatives, our operations and financialcondition could be materially negatively impacted and we could be required totake actions that will harm our business, including potentially ceasing certainor all of our operations.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Thevast majority of our transactions are denominated in U.S. dollars; as such,fluctuations in foreign currency exchange rates have historically had littleimpact on us.  Inflation

 

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has not been asignificant factor in our operations in any of the periods presented, and it isnot expected to affect operations in the future.  At September 24, 2005, our 10% seniorsubordinated convertible debt carries interest at a fixed rate of 10%. Our debtassociated with both our bank line of credit and long-term convertible notescarries interest at prime plus 1.75% or 8.50% at September 24, 2005. Thereis no material market risk relating to our long-term debt.

 

**IMPACT OFACCOUNTING STANDARDS**

 

InJune 2005, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 154, “*Accounting Changes and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. Thestatement applies to all voluntary changes in accounting principle, and changesthe requirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005.  Earlier application is permittedfor accounting changes and corrections of errors made occurring in fiscal yearsbeginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement.  The Company does not expect the adoptionof SFAS No. 154 to have a material effect on its financial statements.

 

In December 2004,FASB issued SFAS No. 153 *Exchanges ofNonmonetary Assets* amends APB Opinion No. 29, *Accounting for Nonmonetary Transactions*.  APB No. 29 is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged.  The guidance inthat Opinion, however, included certain exceptions to that principle.  SFAS No. 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance.  Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurringin fiscal periods beginning after June 15, 2005. Earlier application ispermitted for nonmonetary asset exchanges occurring in fiscal periods beginningafter the date SFAS No. 153 was issued.  SFAS No. 153 shall be appliedprospectively.  We do not expect the adoption of SFAS No. 153 to havea material effect on our financial statements.

 

In December 2004,FASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*, that focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based paymenttransactions.  This statement replaces SFAS No. 123, *Accounting for Stock-Based**Compensation*, and supersedes APB Opinion No. 25,*Accounting for Stock Issued to Employees*.  Beginning with our quarterly period thatbegins January 1, 2006, we will be required to expense the fair value ofemployee stock options and similar awards.  As a public company, we areallowed to select from two alternative transition methods, each havingdifferent reporting implications.  We do not expect the adoption of SFAS No. 123Rto have a material effect on our financial statements.

 

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**RISKFACTORS**

 

Exceptfor the historical information contained herein, certain of the mattersdiscussed in this report are “forward-looking statements” as defined in thePrivate Securities Litigation Reform Act of 1995.  These “forward-looking statements” involvecertain risks and uncertainties, including, but not limited to, the following: (1) ourability to continue as a “going concern” is uncertain.  The Report of the Independent RegisteredPublic Accounting Firm on the financial statements of the Company as of and forthe fiscal year ended December 31, 2004 included in Form 10-Kcontained an explanatory paragraph that expresses substantial doubt about ourability to continue as a going concern; (2) the continuing of the reneweddownturn in the semiconductor market which often has a disproportionatelynegative impact on manufacturers of semiconductor capital equipment, and whichcould cause us to incur significant cash losses decreasing our cash and exposeus to potential further charges for restructuring, excess and obsoleteinventory and/or impairment of assets; (3) the market for our products ishighly competitive throughout the world, primarily from manufacturers in theUnited States, Europe and Asia, and many of our competitors are considerablylarger and have considerably greater financial resources than we do which mayallow them to develop superior or lower priced products; (4) rapid changesin technology and in tester and handler products, which we must respond tosuccessfully in order for our products to avoid becoming noncompetitive orobsolete; (5) customer acceptance of our new products, including thestrip-based Tapestry handling systems and Smart Solutions products, and othersingulated device handler products in which we have invested significantamounts of inventory; (6) possible loss of any of our key customers, whoaccount for a substantial percentage of our business; (7) the possibleadverse impact of competition in markets which are highly competitive; (8) thepossible adverse impact of economic or political changes in markets we serve;and (9) other factors detailed from time to time in our SEC reports,including but not limited to the discussion in the Management’s Discussion &Analysis included in Form 10-K for the year ended December 31, 2004.

 

Weexpect losses and negative cash flows to continue at least through theremainder of 2005, which may require us to obtain additional capital or pursueother strategic alternatives including the restructuring of our existing lineof credit and other certain internal expense reduction initiatives.  We are actively pursing these activities;however, there is no assurance that we will be successful in these activities.  Further, if future financing requirements aresatisfied through the issuance of equity or debt instruments, shareholders mayexperience additional dilution in terms of their percentage of ownership of oursecurities.  In the event that the we areunable to obtain additional capital, restructure our existing lines of creditand / or successfully realize the benefits of our restructuring initiatives,our operations and financial condition could be materially negatively impactedand we could be required to take actions that may harm our business, includingpotentially ceasing certain or all of our operations.

 

Allforecasts and projections in this report are “forward-looking statements,” andare based on our current expectations of our near-term results, based oncurrent information available pertaining to us, including risk factorsdiscussed above.  Actual results coulddiffer materially.

 

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**ITEM 4.CONTROLS AND PROCEDURES**

 

Evaluation of disclosurecontrols and procedures.

 

Underthe supervision and with the participation of our management, including theCompany’s Chief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Exchange Act) asof the end of period covered by this report. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the evaluation date, the Company’sdisclosure controls and procedures are effective.

 

Changes in internalcontrols.

 

Therehave been no changes in internal control over financial reporting that occurredduring the quarter covered by this report that have materially affected, or arereasonably likely to materially affect, the registrant’s internal control overfinancial reporting.

 

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# PART II.  OTHER INFORMATION

#  

**Item 1.  LegalProceedings**

 

On April 11, 2005, judgment was entered againstthe Company in Superior Court of California in the amount of $379,000 pluslegal and court costs for a total amount of $547,000 in a lawsuit brought by aprior landlord.  The Company has reachedan agreement with the landlord that will allow the Company to pay the judgmentover a 30-month period for a total amount of $443,000 plus interest at 10% perannum.

 

### **Item2.  Unregistered Sales Of EquitySecurities And Use Of Proceeds**

 

During the third quarter of 2005, we issued 648,874shares of our common stock to the holders of our 10% Senior SubordinatedConvertible Notes (“the Notes”) in payment of interest due on June 30,2005.  The issuance was exempt fromregistration under Rule 506 under the Securities Act of 1933, because allof the noteholders were accredited, there was no general solicitation, and theshares were subject to restrictions on transfer.

 

### **Item 6.  Exhibits**

 
| 10.0   |   | Employment  agreement with Jesse P. DeGennaro (filed herewith). |
|--------|--------|-----------------------------------------------------------------|
|   |   |                                                            |
| 31.1   |   | Certification of  Chief Executive Officer (filed herewith).     |
|   |   |                                                            |
| 31.2   |   | Certification of  Chief Financial Officer (filed herewith).     |
|   |   |                                                            |
| 32     |   | Section 1350  Certification (filed herewith).              |

 

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## SIGNATURES

##  

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Micro Component  Technology, Inc. |   |
|--------|----------------------------------------|--------|
|   | Registrant                             |
|   |                                   |
|   |                                   |
| Dated: | November 4,  2005                 | By:    | /s/ Roger E.  Gower |   |
|   | Roger E. Gower                         |
|   | President and  Chief Executive Officer |
|   |                                   |
|   |                                   |
|   |                                   | And    |
|   |                                   |
|   |                                   |
| Dated: | November 4,  2005                 | By:    | /s/ Thomas P.  Maun |   |
|   | Thomas P. Maun                         |
|   | Chief Financial  Officer               |
|   | Chief Accounting  Officer              |
|        |                                        |        |  |  |  |  |

 

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