**SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

| **ý**                                                                                                                                      |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 or 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|
|                                                                                                                                            |
| **For  the quarterly period ended September 27, 2003**                                                                                     |
|                                                                                                                                            |
| **OR**                                                                                                                                          |
|                                                                                                                                            |
| **o**                                                                                                                                           |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                            |
| **For  the transition period from                     to** |
|                                                                                                                                            |
| **Commission  File No. 0-22384**                                                                                                                |

 

**MICROCOMPONENT TECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

 

| **Minnesota**                                                     |   | **41-0985960**                          |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |   | (I.R.S. Employer    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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

| Yes         ý |   | No                                o |
|------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

| Yes         o |   | No                                ý |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The number of shares outstanding of the Registrant’s Common Stock, asof November 3, 2003 was 19,642,224.

 

 

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**MICROCOMPONENT 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 2. | CHANGES IN SECURITIES  AND USE OF PROCEEDS |
|                                 |   |   |
|                                 | ITEM 4. | SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS |
|                                 |   |   |
|                                 | ITEM 5. | OTHER INFORMATION |
|                                 |   |   |
|                                 | **ITEM 6.** | **EXHIBITS  AND REPORTS ON FORM 8-K** |
|                                 |   |   |
|                                 | **SIGNATURES** |

 

2

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**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

# PART I.  FINANCIAL INFORMATION

## ITEM 1.  FINANCIAL STATEMENTS

## CONSOLIDATED BALANCE SHEETS

(In thousands,except share and per share data)

(Unaudited)

 
|                                                                                                 |   | **September 27,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| **Assets**                                                                                           |   |                         |   |                        |   |
| Current assets                                                                                       |   |                         |   |                        |   |
| Cash and cash  equivalents                                                                           |   | $                            | 568    |                        | $      | 1,560 |   |
| Accounts  receivable, less allowance for doubtful accounts of $324 and $319,  respectively           |   | 2,193                        |   | 786                         |   |
| Inventories                                                                                          |   | 2,742                        |   | 3,850                       |   |
| Other                                                                                                |   | 212                          |   | 212                         |   |
| Total current assets                                                                                 |   | 5,715                        |   | 6,408                       |   |
|                                                                                                 |   |                         |   |                        |   |
| Property, plant and  equipment, net                                                                  |   | 397                          |   | 605                         |   |
| Debt issuance costs,  net                                                                            |   | 540                          |   | 665                         |   |
| Other assets                                                                                         |   | 57                           |   | 75                          |   |
|                                                                                                 |   |                         |   |                        |   |
| Total assets                                                                                         |   | $                            | 6,709  |                        | $      | 7,753 |   |
|                                                                                                 |   |                         |   |                        |   |
| **Liabilities  and Stockholders’ Deficit**                                                      |   |                         |   |                        |   |
| Current liabilities:                                                                                 |   |                         |   |                        |   |
| Current portion of  long-term debt                                                                   |   | $                            | 2      |                        | $      | 29 |   |
| Bank line of credit                                                                                  |   | 702                          |   | —                      |   |
| Accrued restructuring  costs                                                                         |   | 7                            |   | 194                         |   |
| Accounts payable                                                                                     |   | 1,421                        |   | 1,010                       |   |
| Accrued compensation                                                                                 |   | 443                          |   | 419                         |   |
| Accrued interest                                                                                     |   | 262                          |   | 500                         |   |
| Accrued warranty                                                                                     |   | 175                          |   | 200                         |   |
| Customer prepayments  and unearned service revenue                                                   |   | 519                          |   | 300                         |   |
| Deferred revenue in  excess of costs incurred                                                        |   | 312                          |   | 48                          |   |
| Other accrued  liabilities                                                                           |   | 482                          |   | 847                         |   |
| Total current  liabilities                                                                           |   | 4,325                        |   | 3,547                       |   |
|                                                                                                 |   |                         |   |                        |   |
| Long-term portion of  accounts payable                                                               |   | 329                          |   | —                      |   |
| 10% senior subordinated  convertible debt                                                            |   | 9,750                        |   | 10,000                      |   |
|                                                                                                 |   |                         |   |                        |   |
| Stockholders’ deficit:                                                                          |   |                         |   |                        |   |
| Preferred stock, $.01  par value, 1,000,000 authorized, none issued and outstanding                  |   | —                       |   | —                      |   |
| Common stock, $.01 par  value, 40,000,000 authorized, 18,513,874 and 14,152,520 issued, respectively |   | 185                          |   | 142                         |   |
| Additional paid-in  capital                                                                          |   | 90,056                       |   | 88,302                      |   |
| Cumulative other  comprehensive loss                                                                 |   | (69                          | )      | (69                         | )      |
| Accumulated deficit                                                                                  |   | (97,867                      | )      | (94,169                     | )      |
| Total stockholders’  deficit                                                                    |   | (7,695                       | )      | (5,794                      | )      |
| Total liabilities and  stockholders’ deficit                                                    |   | $                            | 6,709  |                        | $      | 7,753 |   |

 

See notes tounaudited condensed consolidated financial statements

 

3

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**MICROCOMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OFOPERATIONS

(In thousands,except per share data)

(Unaudited)

 
|                                                        |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                        |   | **Sept.  27,  2003**    |   | **Sept.  28,  2002**   |   | **Sept.  27,  2003** |   | **Sept.  28,  2002** |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Net sales                                                   |   | $                       | 2,852  |                   | $      | 2,732 |   | $ | 7,385 |   | $ | 10,074 |   |
| Cost of sales                                               |   | 1,581                   |   | 1,558                  |   | 4,505 |   | 6,199 |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Gross profit                                                |   | 1,271                   |   | 1,174                  |   | 2,880 |   | 3,875 |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Operating expenses:                                         |   |                    |   |                   |   |   |   |   |   |
| Selling, general and  administrative                        |   | 1,178                   |   | 2,092                  |   | 3,800 |   | 6,796 |   |
| Research and  development                                   |   | 464                     |   | 1,012                  |   | 1,798 |   | 3,368 |   |
| Restructuring charge                                        |   | —                  |   | 345                    |   | 266 |   | 193 |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Total operating  expenses                                   |   | 1,642                   |   | 3,449                  |   | 5,864 |   | 10,357 |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Loss from operations                                        |   | (371                    | )      | (2,275                 | )      | (2,984 | ) | (6,482 | ) |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Interest income                                             |   | 2                       |   | 25                     |   | 4 |   | 101 |   |
| Gain (loss) on sale of  assets                              |   | —                  |   | —                 |   | 213 |   | (4 | ) |
| Interest expense and  other, net                            |   | (332                    | )      | (289                   | )      | (931 | ) | (870 | ) |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Total interest and  other                                   |   | (330                    | )      | (264                   | )      | (714 | ) | (773 | ) |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Net loss                                                    |   | $                       | (701   | )                      | $      | (2,539 | ) | $ | (3,698 | ) | $ | (7,255 | ) |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Net loss per share,  basic and diluted:                     |   |                    |   |                   |   |   |   |   |   |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Net loss                                                    |   | $                       | (0.04  | )                      | $      | (0.18 | ) | $ | (0.22 | ) | $ | (0.51 | ) |
|                                                        |   |                    |   |                   |   |   |   |   |   |
| Weighted average common  and equivalent shares outstanding: |   |                    |   |                   |   |   |   |   |   |
| Basic and diluted                                           |   | 17,964                  |   | 14,152                 |   | 16,739 |   | 14,115 |   |

 

See notes to unaudited condensed consolidated financialstatements

 

4

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**MICROCOMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OFCASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                         |   | **Nine  Months Ended** |   |
|------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                         |   | **Sept.  27,  2003**   |   | **Sept.  28,  2002** |   |
|                                                                         |   |                   |   |   |   |
| Cash  flows from operating activities:                                       |   |                   |   |   |   |
| Net  loss                                                                    |   | $                      | (3,698 | ) | $ | (7,255 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                   |   |   |   |
| Depreciation                                                                 |   | 365                    |   | 317 |   |
| Amortization of debt  issuance costs                                         |   | 125                    |   | 129 |   |
| (Gain) loss on sales  and write-offs of property                             |   | (213                   | )      | 4 |   |
| Changes in assets and  liabilities:                                          |   |                   |   |   |   |
| Accounts receivable                                                          |   | (1,407                 | )      | 1,055 |   |
| Inventories                                                                  |   | 983                    |   | 244 |   |
| Other assets                                                                 |   | 18                     |   | (39 | ) |
| Accounts payable                                                             |   | 740                    |   | (14 | ) |
| Accrued restructuring  costs                                                 |   | (146                   | )      | (540 | ) |
| Other accrued liabilities                                                    |   | 343                    |   | (1,198 | ) |
|                                                                         |   |                   |   |   |   |
| Net cash used in  operating activities                                       |   | (2,890                 | )      | (7,297 | ) |
|                                                                         |   |                   |   |   |   |
| Cash flows from  investing activities:                                       |   |                   |   |   |   |
| Additions to property,  plant and equipment                                  |   | (108                   | )      | (149 | ) |
| Proceeds from  disposition of property                                       |   | 248                    |   | 37 |   |
|                                                                         |   |                   |   |   |   |
| Net cash provided by  (used in) investing activities                         |   | 140                    |   | (112 | ) |
|                                                                         |   |                   |   |   |   |
| Cash flows from  financing activities:                                       |   |                   |   |   |   |
| Payments of long-term  debt                                                  |   | (27                    | )      | (31 | ) |
| Proceeds from bank line  of credit                                           |   | 702                    |   | — |   |
| Proceeds from issuance  of stock                                             |   | 1,366                  |   | 159 |   |
| Stock issuance costs                                                         |   | (283                   | )      | — |   |
|                                                                         |   |                   |   |   |   |
| Net cash provided by  financing activities                                   |   | 1,758                  |   | 128 |   |
|                                                                         |   |                   |   |   |   |
| Net decrease in cash  and cash equivalents                                   |   | (992                   | )      | (7,281 | ) |
|                                                                         |   |                   |   |   |   |
| Cash and cash  equivalents at beginning of period                            |   | 1,560                  |   | 11,086 |   |
|                                                                         |   |                   |   |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                      | 568    |   | $ | 3,805 |   |
|                                                                         |   |                   |   |   |   |
| Supplemental cash flow  information:                                         |   |                   |   |   |   |
| Non-cash financing  activities:                                              |   |                   |   |   |   |
| Stock issued in lieu of  interest                                            |   | $                      | 464    |   | $ | — |   |
| Stock issued in conversion  of 10% senior subordinated convertible debt      |   | 250                    |   | — |   |
| Cash paid for interest                                                       |   | 563                    |   | 500 |   |

 

See notes tounaudited condensed consolidated financial statements

 

5

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**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

**1.****                          INTERIM FINANCIAL STATEMENTS**

 

*Basisof Presentation*

 

The consolidated financial statements include the accounts of theparent company and our subsidiaries (“the Company”) after elimination of allsignificant intercompany balances and transactions.  All subsidiaries are 100% owned.

 

The unaudited consolidated financial statements included herein havebeen prepared in accordance with accounting principles generally accepted inthe United States (generally accepted accounting principles) for interimfinancial information and with the instructions for Form 10-Q andArticle 10 of Regulation S-X. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  In the opinion ofmanagement all adjustments, including normal recurring adjustments, necessaryfor a fair presentation of the interim periods presented have beenincluded.  The interim results are notnecessarily indicative of the operating results expected for the full fiscalyear ending on December 31, 2003.

 

Our consolidated financial statements have been prepared on theassumption that we will continue as a going concern, which contemplates therealization of assets and liquidation of liabilities in the normal course ofbusiness. The independent auditors’ report on the financial statements of theCompany as of and for the fiscal year ended December 31, 2002 included inForm 10-K contained an explanatory paragraph that expresses substantial doubtabout our ability to continue as a going concern.   The financial statements do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets or the amounts and classification of liabilities that may result fromthe outcome of this uncertainty.

 

As of September 27, 2003, the Company had an accumulated deficitof $97.9 million and incurred a net loss of $0.7 million and $3.7 million forthe three-month and nine-month periods ended September 27, 2003,respectively.  As of September 27,2003, the Company had cash and cash equivalents of $568,000, working capital of$1.4 million, a current ratio of 1.32, total assets of $6.7 million and totalliabilities of $14.4 million. We expect to incur operating losses at thecurrent net sales levels at least through the remainder of 2003 and our abilityto generate cash and operating income is dependent on the realization of ourrestructuring efforts and our responsiveness to further negative impacts due tothe continued downturn in the semiconductor capital equipment market.  During the first quarter of 2003, we completedthe negotiation of the sub-letting of our St. Paul, Minnesota operations andhave subsequently exited or renegotiated leases in several other of ourfacilities pursuant to those lease terms to further lower our operating costs.

 

6

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As discussed in Note 5, in March 2003, we completed a privateequity placement of our common stock, which resulted in net proceeds to us of$1.1 million.  On June 9, 2003, wecompleted a secured $2.5 million working capital line of credit with abank.   On June 30, 2003, wecompleted the restructuring of $9.29 million, or 92.9%, of our 10% SeniorSubordinated Convertible Notes, wherein the participating noteholders agreed toaccept stock in lieu of cash for the next four semi-annual interest paymentdates beginning June 30, 2003 through December 31, 2004.  In July of 2003, wecompleted negotiations with the majority of our vendors to extend the paymentterms of the total amounts owed to them at the time.  This resulted in $1.2 million of our payables, or 67% of our totalaccounts payable at the time,  beingrestructured with a total of 281 vendors. Under the terms of the extended payment plan, we have agreed to makefour to eight equal payments beginning on July 30, 2003 until the balancesare satisfied.  The number of vendorsagreeing to this plan represented approximately 61% of our active vendors.

 

It is possible that in addition to these efforts we will need to raiseadditional capital though additional debt or equity offerings; however, thereis no assurance that additional financing will be available on terms andconditions acceptable or favorable to us, if at all.  If we are unsuccessful in obtaining additional financing, ifneeded, our operations could be materially negatively impacted and we will berequired to take actions that will harm our business, including potentiallyceasing certain or all of our operations.

 

Interim unauditedfinancial results should be read in conjunction with the audited financialstatements included in the SEC Report on Form 10-K, for the period endedDecember 31, 2002.

 

**2.****                          EARNINGS PER SHARE**

 

Earnings per shareare computed in accordance with Statement of Financial Accounting Standards(SFAS) No. 128, *Earnings per Share*.  Basic earnings per share are computed usingthe weighted average number of common shares outstanding during eachperiod.  Diluted earnings per shareinclude the dilutive effect of common shares potentially issuable upon theexercise of stock options and warrants outstanding.  The following table reconciles the denominators used in computingbasic and diluted earnings per share:

 
|                                           |   | **Three  Months Ended**  |   | **Nine  Months Ended**  |   |
|------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| **(in  thousands)**                            |   | **Sept.  27,  2003 (1)** |   | **Sept.  28,  2002(1)** |   | **Sept.  27,  2003(1)** |   | **Sept.  28,  2002(1)** |   |
| Weighted average common  shares outstanding    |   | 17,964                   |   | 14,152                  |   | 16,739 |   | 14,115 |   |
| Effect of dilutive  stock options and warrants |   | —                   |   | —                  |   | — |   | — |   |
|                                           |   |                     |   |                    |   |   |   |   |   |
|                                           |   | 17,964                   |   | 14,152                  |   | 16,739 |   | 14,115 |   |

 

----

(1) We reported a loss for the periods indicated.  No adjustments were made for the effect ofstock options and warrants, which totaled 3,112,265 shares atSeptember 27, 2003 and 2,546,515 shares at September 28, 2002, as theeffect is antidilutive.

 

7

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**3.****                          COMPREHENSIVE NET INCOME ORLOSS**

 

In 1997, theFinancial Accounting Standards Board (FASB) issued SFAS, No. 130 *Reporting Comprehensive Income* whichestablishes standards for the reporting and display of comprehensive income(loss) and its components in a full set of general-purpose financialstatements.  Under this standard,certain revenues, expenses, gains, and losses recognized during the period areincluded in comprehensive income (loss), regardless of whether they areconsidered to be results of operations of the period.  During the three and nine-month periods ended September 27,2003 and September 28, 2002 total comprehensive loss equaled net loss asreported on the Consolidated Statements of Operations.

 

**4.****                          BALANCE SHEET INFORMATION**

 

Major componentsof inventories were as follows (in thousands):

 
|            |   | **September,  2003** |   | **December 31,  2002** |   |
|-----------------|--------|----------------------|--------|-----------------------------|--------|
|            |   |                 |   |                        |   |
| Raw materials   |   | $                    | 2,130  |                        | $      | 2,541 |   |
| Work-in-process |   | 227                  |   | 778                         |   |
| Finished goods  |   | 385                  |   | 531                         |   |
|            |   | $                    | 2,742  |                        | $      | 3,850 |   |

 

We provide a standard thirteen month warranty program for our equipmentproducts. We record provisions for warranty claims for these products basedupon historical claim performance.  Thefollowing table provides the expense recorded and charges against our reservesthrough the quarter ended Septmber 27, 2003 (in thousands):

 
| Accrued warranty balance at December 31, 2002   |   | $      | 200     |   |
|------------------------------------------------------|--------|--------|---------|--------|
|                                                 |   |   |    |
| Provision                                            |   | 42     |    |
|                                                 |   |   |    |
| Warranty claims                                      |   | (67    | )  |
|                                                 |   |   |    |
| Accrued warranty balance  at September 27, 2003 |   | $      | 175     |   |

 

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

** **

On March 7, 2003 and March 26, 2003, pursuant to a privateequity placement with a group of accredited investors, we issued a total of3,166,869 shares of common stock, which resulted in net proceeds to us ofapproximately $1.1 million.  Stockissuance costs associated with this offering totaled approximately$241,000.  As part of this offering, wealso issued warrants to purchase 253,350 shares of common stock that have aterm of five years with an exercise price of $0.43 per share.

 

8

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On June 9,2003, the company completed a one-year, $2.5 million secured working capitalline of credit agreement with a bank. Under the terms of the agreement, the company may borrow up to eightypercent (80%) of qualified receivables. Additionally, under this agreement the company granted a first securityinterest in all assets of the company. As of September 27, 2003, $0.7 million was outstanding under thisagreement.

 

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

 

**2003 Restructuring Charges**

 

During the first quarter, inresponse to the continued and prolonged downturn in the semiconductor capitalequipment industry, we reduced our workforce across all functional areas byapproximately 24% at the time, resulting in a restructuring charge of$19,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of26 employees across all functional areas.

 

During the second quarter,we completed the restructuring of our master lease for our St. Paul, MNfacility resulting in a restructuring charge of $227,000, which includedwrite-offs of $41,000 related to leasehold improvements in the vacated spacewhich provided no future economic benefit to us.  Additionally, we further reduced our workforce across allfunctional areas by approximately 4% at the time, resulting in a restructuringcharge of $19,000.  This chargereflected severance and other benefit costs associated with thisreduction.  This workforce reductionaffected a total of 4 employees across all functional areas.

 

**2002 Restructuring Charges**

 

In 2002, in response to thecontinued and prolonged downturn in the semiconductor capital equipmentindustry, we took the following actions:

 

During the first quarter, wereduced our workforce across all functional areas by approximately 25% at thetime, resulting in a restructuring charge of $323,000.  This charge reflected severance and otherbenefits costs associated with this reduction. This workforce reduction affected 44 employees, principally in the areasof manufacturing, sales and marketing and engineering.

 

During the second quarter,we further reduced our workforce by an additional 7% at the time, resulting ina restructuring charge of $199,000. This charge reflected severance and other benefit costs associated with thereduction, which affected 9 employees across all functional areas.  We also completed a lease settlementagreement related to our Marlborough, Massachusetts’ facility.  This agreement required us to pay $450,000or approximately 35% of the outstanding lease obligation, which was to expire inApril 2003.  As ofDecember 31, 2002, the full amount of this settlement was paid. Thesettlement of this lease resulted in a $674,000 recovery.

 

During the third quarter, asa result of the on-going transfer of our core manufacturing operations to our Penang,Malaysia facility, we incurred a restructuring charge of $345,000, representingseverance and other benefit costs associated with further reductions to ourworkforce.  This reduction wasimplemented in the third and fourth quarters of 2002 and affected a total of 38employees or 30% of our workforce at the time, across all functional areas.

 

9

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During the fourth quarter,we further reduced our workforce, resulting in a restructuring charge of$14,000.  This charge reflectedseverance and other benefit costs associated with the reduction, which affected9 employees or 8% of our workforce at the time, principally in the area ofsales and marketing.

 

The following tablesummarizes these charges related to workforce and manufacturing cost reductions(in thousands):

 
|                                                                       |   | **Employee  Separation  Costs** |   | **Idle  Facility  Costs** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------|------------|-----------|------------|
| Accrued  restructuring costs at  December 31, 2001                    |   | $                               | 66     |                      | $          | 890       |       | $ | 956 |   |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring  charge for the  quarter ended March 30, 2002           |   | 323                             |   | —                    |       | 323       |       |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  March 30, 2002                    |   | (272                            | )      | (167                      | )          | (439      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring  charge (recovery) for the  quarter ended June 29, 2002 |   | 199                             |   | (674                      | )          | (475      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  June 29, 2002                     |   | (126                            | )      | (49                       | )          | (175      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring charge  for the  quarter ended September 28, 2002       |   | 345                             |   | —                    |       | 345       |       |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  September 28, 2002                |   | (119                            | )      | —                    |       | (119      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring charge  for the  quarter ended December 31, 2002        |   | 14                              |   | —                    |       | 14        |       |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  December 31, 2002                 |   | (236                            | )      | —                    |       | (236      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring charge  for the  quarter ended March 29, 2003           |   | 19                              |   | —                    |       | 19        |       |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  March 29, 2003                    |   | (114                            | )      | —                    |       | (114      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Restructuring charge  for the  quarter ended June 28, 2003            |   | 19                              |   | 227                       |       | 246       |       |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  June 28, 2003                     |   | (102                            | )      | (193                      | )          | (295      | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Utilization  for the quarter ended  September 27, 2003                |   | (9                              | )      | (34                       | )          | (43       | )          |
|                                                                       |   |                            |   |                      |       |      |       |
| Accrued  restructuring costs at  September 27, 2003                   |   | $                               | 7      |                      | $          | —    |       | $ | 7 |   |

 

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

 

In October 2002, the FASB issued SFAS No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure”, providing alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure requirement of SFAS No.123, “Accounting for Stock-Based Compensation” to include prominent disclosuresin annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reportedresults.  The Company adopted thedisclosure provisions of SFAS No. 148 on December 31, 2002.

 

Had the Company determined stock-based compensation costs based on theestimated fair value at the grant date for its stock options, the Company’s netloss per share for the three and nine months ended September 27, 2003 andSeptember 28, 2002, respectively, would have been as follows (inthousands, except per share data):

 
|                                          |   | **Three Months Ended** |   | **Nine Months Ended** |       |
|-----------------------------------------------|--------|------------------------|--------|-----------------------|------------|
|                                          |   | **Sept.  27,  2003**   |   | **Sept.  28,  2002**  | ** ** | **Sept.  27,  2003** | ** ** | **Sept.  28,  2002** | ** ** |
| Net loss:                                     |   |                   |   |                  |       |   |   |   |   |
| As reported                                   |   | $                      | (701   | )                     | $          | (2,539 | ) | $ | (3,698 | ) | $ | (7,255 | ) |
| Fair value compensation  expense              |   | (346                   | )      | (287                  | )          | (724 | ) | (860 | ) |
| Pro forma                                     |   | $                      | (1,047 | )                     | $          | (2,826 | ) | $ | (4,422 | ) | (8,115 | ) |
|                                          |   |                   |   |                  |       |   |   |   |   |
| Net loss per share – basic  and diluted: |   |                   |   |                  |       |   |   |   |   |
| As reported                                   |   | $                      | (0.04  | )                     | $          | (0.18 | ) | $ | (0.22 | ) | $ | (0.51 | ) |
| Fair value compensation  expense              |   | (0.02                  | )      | (0.02                 | )          | (0.04 | ) | (0.06 | ) |
| Pro forma                                     |   | $                      | (0.06  | )                     | $          | (0.20 | ) | $ | (0.26 | ) | $ | (0.57 | ) |

 

The fair value of options granted under the stock options for the threeand nine months ended September 27, 2003 and September 28, 2002 wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions.

 
|                                     |   | **Quarters Ended**   |   | **Nine Months Ended** |       |
|------------------------------------------|--------|----------------------|--------|-----------------------|------------|
|                                     |   | **Sept.  27,  2003** |   | **Sept.  28,  2002**  | ** ** | **Sept.  27,  2003** | ** ** | **Sept  28,  2002** | ** ** |
|                                     |   |                 |   |                  |       |   |   |   |   |
| Dividend yield                           |   | 0.00                 | %      | 0.00                  | %          | 0.00 | % | 0.00 | % |
| Expected volatility                      |   | 139.37               | %      | 102.51                | %          | 139.37 | % | 102.51 | % |
| Risk-free interest rate                  |   | 2.50                 | %      | 4.62                  | %          | 2.50 | % | 4.62 | % |
| Expected life of options                 |   | 3.5 years            |   | 3.5 years             |       | 3.5 years |   | 3.5 years |   |
| Fair value per share of  options granted |   | $                    | 0.73   |                  | $          | 1.94 |   | $ | 0.73 |   | $ | 1.94 |   |
|                                          |        |                      |        |                       |            |  |  |  |  |  |  |  |  |

** **

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**8.**             **RECENTACCOUNTING PRONOUNCEMENTS**

 

***EITF Issue No. 00-21 – Revenue Arrangementswith Multiple Deliverables.***  In November 2002, theEmerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*,which provides guidance on how to account for arrangements that involve thedelivery or performance of multiple products, services and/or right to useassets.  The provisions of EITF IssueNo. 00-21 will apply to revenue arrangements entered into in fiscal periodsbeginning after June 15, 2003.  Theadoption of EITF Issue No. 00-21 did not have a material effect on our resultsof operations and financial condition.

*** ***

***SFAS No. 150 – Accounting for CertainFinancial Instruments with Characteristics of Both******Liabilities and Equity***.  In May 2003, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity.*  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that and issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Thisrequirement of this statement applies to an issuer’s classification andmeasurement of free-standing financial instruments, including those thatcomprise more than one option or forward contract.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have amaterial effect on our results of operations and financial condition.

 

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**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF

## RESULTSOF 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 materially from those anticipatedin the forward-looking statements as a result of a variety of factors,including those discussed in “Risk Factors” and elsewhere in this document.*

 

Overview

 

We supply automationsolutions for the global semiconductor test and assembly manufacturingmarket.  Our solutions include automatedtest handlers, factory automation software and our new integrated SmartSolutions product line.  We believe thatour products can significantly improve the productivity, yield and throughputof the back-end (post wafer) parts of the manufacturing process, includingassembling, packaging, testing and singulating semiconductor devices.

 

The demand for our products and services is dependent upon growth inthe semiconductor 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 and hascontinued through the first nine months of 2003, resulting in significantadverse impacts on our business including inventory revaluations charges, writedowns of impaired intangible assets and significant reductions in our employeebase.  Although worldwide semiconductorbookings are showing signs of stabilization, the return to market growth cannotbe predicted in the short term.  Asdisclosed in our Form 10-K for the year ended December 31, 2002 acontinued or intensified market downturn might result in significant losses,charges for inventory revaluation, asset impairment or restructuringcharges.  Consequently, as a result ofthis downturn, in addition to the actions taken in 2002, the following stepshave been taken in 2003:

 

•                  We further reduced our workforce in the firstand second quarters of 2003 by 24% and 4% at the time, respectively, affectinga total of 30 employees across all functional areas.

 

•                  In the second quarter of 2003, we completedthe restructuring of our master lease agreement related to our St. Paulfacility resulting in the reduction of future lease commitment under thiscontract.

 

•                  On June 30, 2003, we completed therestructuring of $9.29 million, or 92.9%, of our 10% Senior SubordinatedConvertible Notes, wherein the participating noteholders agreed to accept stockin lieu of cash for the next four semi-annual interest payment dates beginningJune 30, 2003 through December 31, 2004.

 

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•                  InJuly of 2003, we completed negotiations with the majority of our vendorsto extend the payment terms of the total amounts owed to them at the time.  This resulted in $1.2 million of ourpayables, or 67% of our total accounts payable at the time,  being restructured with a total of 281vendors.  Under the terms of theextended payment plan, we have agreed to make four to eight equal paymentsbeginning on July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors.

 

**Critical Accounting Policies**

 

*Revenue Recognition*

 

Under Staff Accounting Bulletin 101 (“SAB 101”), we recognize revenueupon shipment, as our terms are FOB shipping point, for established equipmentproducts that have previously satisfied existing customer performancespecifications and that provide for full payment tied to shipment.  Revenue for products that have notpreviously satisfied customer performance specifications or from sales whereall or a portion of customer payment is based upon acceptance are onlyrecognized upon customer acceptance.  Assuch, in periods of increasing shipments, revenues will be deferred if theshipments are for new customers, new products or the payment terms are tied toacceptance criteria.  Consequently, ifthese conditions exist, we may report revenue levels that are not reflective ofactual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially couldrecognize revenues related to shipments made in prior periods.  Consequently, if these conditions exist, wemay report revenue levels that are greater than actual shipments.

 

*Allowance for Doubtful Accounts*

 

We record a provision for doubtful accounts based on specificidentification of our accounts receivable. This involves a degree of judgmentbased on discussion with our internal sales and marketing groups, our customer baseand the examination of the financial stability of our customers.  There can be no assurance that our estimateswill match actual amounts ultimately written off.  During periods of downturn in the market for semiconductorcapital equipment or economic recession, a greater degree of risk existsconcerning the ultimate collectability of our accounts receivable due to theimpact that these conditions might have on our customer base.

 

*Valuation of Inventories*

 

Our inventories are stated at the lower of cost or market.  Cost is determined by the first-in,first-out (“FIFO”) method.  We maintaina standard costing 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 thesemiconductor capital equipment market affecting our shipments can result insignificant production variances from our standard rates. These variancesdirectly impact our gross profit performance and may cause variability in grossprofits results from reporting period-to-reporting period.  Our labor and overhead rates are set forproduction rates that match typical market conditions.  Production variances are charged

 

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to cost of sales each quarter as incurred. Material standards are basedupon normal purchase volumes.  Purchaseprice variances 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 product technology.  Significant assumptions with respect tomarket trends and customer product acceptance are utilized to formulate ourprovision methods.  Sudden or continuingdownward changes in the semiconductor capital equipment market may cause us torecord additional inventory revaluation charges in future periods

 

*Accrued Warranty*

 

Weprovide a standard thirteen-month warranty program for our equipment products.We record provisions for warranty claims for these products based uponhistorical claim performance.  Thisapproach has been applied since the inception of the warranty program andinvolves a degree of subjectivity in that historical performance is used toestimate future warranty claims.  Therecan be no assurance that our estimates will match the actual amount of futurewarranty claims.

 

###### **Resultsof Operations for the Three Months Ended September 27, 2003 andSeptember 28, 2002**

###### ** **

Net sales for the three months ended September 27, 2003, increased$0.2 million or 4.4% to $2.9 million compared to $2.7 million for the threemonths ended September 28, 2002. Product acceptance requirements related to product and customer mixresulted in a net increase of $0.3 million to revenues over shipments in thirdquarter of 2003, while these same factors caused a $0.5 million increase torevenues over shipments in the third quarter of 2002.  Current quarter product sales continue to be severely impacted bythe continued downturn in the semiconductor capital equipment market.  We expect net sales to continue to beadversely impacted by the market downturn.

 

Gross profit for the third quarter of 2003 increased by $0.1 million to$1.3 million, or 44.6% of net sales, from $1.2 million, or 43.0% of net sales,for the comparable period in the prior year. The improvement in gross margin in the current year period primarilyresulted from lower production costs associated with our Malaysia manufacturingfacility coupled with the restructuring activities that have been undertakenover the last twelve months.  We expectgross margins to continue to be adversely impacted by the market downturn,partially offset by the benefits of the restructuring steps we have initiatedalong with the cost benefits realized in our foreign manufacturing.

 

Selling, general andadministrative expense in the third quarter of 2003 was $1.2 million, or 41.3%of net sales, compared to $2.1 million, or 76.6% of net sales for the thirdquarter of 2002.   The decrease inexpense for the current year period is a result of the cost reduction measuresinitiated in 2002 and continuing throughout 2003.

 

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Research and development expense for the third quarter of 2003 was $0.5million, or 16.3% of net sales compared to $1.0 million, or 37.0% of net salesin the third quarter of 2002.  Thedecrease in expense for the current year period is a result of the costreduction measures initiated in 2002 and continuing throughout 2003.

 

Interest income for thethird quarter of 2003 was $2,000 compared to $25,000 in the third quarter of2002.  This decrease resulted from thedecrease in investment in interest-bearing cash and cash equivalents.  Interest expense and other totaled $332,000or 11.6% of net sales in the current year’s quarter, compared to $289,000 or10.6% of net revenue for the comparable period in the prior year.  The interest expense resulted from our 10%Senior Subordinated Convertible Notes, which were issued in December of2001, the amortization of debt issuance costs associated with the note offeringand interest associated with our bank line of credit.

 

Net loss for the quarterended September 27, 2003 was $0.7 million or $0.04 per share, as comparedto a net loss of $2.5 million, or $0.18 per share in the prior year period.

 

###### **Resultsof Operations for the Nine Months Ended September 27, 2003 andSeptember 28, 2002**

 

Net sales for the nine months ended September 27, 2003, decreased$2.7 million or 26.7% to $7.4 million compared to $10.1 million for the ninemonths ended September 28, 2002. Product acceptance requirements related to product and customer mixresulted in a net decrease to revenues of $0.8 million over shipments for the2003 nine month period compared to a net increase to revenues of $2.6 millionover shipments for the comparable prior year period.  Current product sales continue to be severely impacted by thecontinued downturn in the semiconductor capital equipment market.  We expect net sales to continue to beadversely impacted by the market downturn.

 

Gross profit for the first nine months of 2003 decreased by $1.0million to $2.9 million, or 39.0% of net sales, from $3.9 million, or 38.5% ofnet sales, for the comparable period in the prior year.  The decrease in gross margin dollars isdirectly related to the reduction in net sales. The maintenance of the grossmargin percentage resulted from the cost benefits associated with our transferof manufacturing to our Malaysia facility and other restructuring efforts.  We expect gross margins to continue to be adverselyimpacted by the market downturn, partially offset by the benefits of therestructuring steps we have initiated along with the cost benefits realized inour foreign manufacturing.

 

Selling, general andadministrative expense for the first nine months of 2003 was $3.8 million, or51.5% of net sales, compared to $6.8 million, or 67.5% of net sales for thefirst nine months of 2002.  The decreasein expense for the current year period is a result of the cost reductionmeasures initiated in 2002 and continuing throughout 2003.

 

Research and development expense for the first nine months of 2003 was$1.8 million, or 24.3% of net sales, compared to $3.4 million, or 33.4% of netsales for the first nine months of 2002.  The decrease in expense for the current year period is a result of thecost reduction measures initiated in 2002 and continuing throughout 2003.

 

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The restructuring charge totaled $266,000 or 3.6% of net sales for thecurrent year period.  This chargeresulted from reductions of our workforce across all functional areas in thefirst and second quarter of 2003.  Thischarge reflects severance and other benefits costs paid in 2003 related to exitactivities commenced in 2002.  However,certain criterion under EITF 94-3 were not satisfied for these 2003 severanceand benefit costs to be accrued at December 31, 2002.  This workforce reduction affected 30employees, across all functional areas. Additionally included in this charge,are restructuring costs associated with our St. Paul facility for $227,000resulting from the restructuring of our master lease agreement related to thisfacility The restructuring charge for the first nine months of 2002 totaled$193,000 or 1.9% of net sales.  Thisresulted from the following:

 

•                  During the first quarter, we reduced ourworkforce across all functional areas by approximately 25% at the time,resulting in a restructuring charge of $323,000.  This charge reflected severance and other benefits costsassociated with this reduction.  Thisworkforce reduction affected 44 employees, principally in the areas ofmanufacturing, sales and marketing and engineering.

 

•                  During the second quarter, we further reducedour workforce by an additional 7% at the time, resulting in a restructuringcharge of $199,000.  This chargereflected severance and other benefit costs associated with the reduction,which affected 9 employees across all functional areas.  We also completed a lease settlementagreement related to our Marlborough, Massachusetts’ facility.  This agreement required us to pay $450,000or approximately 35% of the outstanding lease obligation, which was to expirein April 2003.  As ofDecember 31, 2002, the full amount of this settlement was paid. The settlementof this lease resulted in a $674,000 recovery.

 

•                  During the third quarter, as a result of theon going transfer of our core manufacturing operations to our Penang, Malaysiafacility, we incurred a restructuring charge of $345,000, representingseverance and other benefit costs associated with further reductions to ourworkforce.  This reduction wasimplemented in the third and fourth quarters of 2002 and affected a total of 38employees or 30% of our workforce at the time, across all functional areas.

 

Interest income for thefirst nine months of 2003 was $4,000 compared to $101,000 for the comparableperiod in the prior year.  This decreaseresulted from the decrease in investment in interest-bearing cash and cashequivalents.  In connection with thetransfer of our manufacturing operations to Penang, we sold certain fixed andother assets from our St. Paul, Minnesota facility resulting in a gain on saleof $213,000 or 2.9% of net sales for the nine-month period of 2003 endedSeptember 27, 2003.  Interest expenseand other totaled $931,000 or 12.6% of net sales in the current year, comparedto $870,000 or 8.6% of net sales for the comparable period in the prioryear.  The interest expense resultedfrom our 10% Senior Subordinated Convertible Notes, which were issued inDecember of 2001, the amortization of debt issuance costs associated withthe note offering and interest associated with our bank line of credit.

 

Net loss for thenine-month period ended September 27, 2003 was $3.7 million or $0.22 pershare, as compared to a net loss of $7.3 million, or $0.51 per share in theprior year period.

 

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**Liquidityand Capital Resources**

 

The Company’s consolidated financial statements areprepared and presented on a going concern basis.  As of September 27, 2003, the Company had an accumulateddeficit of $97.9 million and incurred a net loss of $0.7 million and $3.7 forthe three-month and nine-month periods ended September 27, 2003,respectively.  As of September 27,2003, the Company had cash and cash equivalents of $568,000, working capital of$1.4 million, a current ratio of 1.32, total assets of $6.7 million and totalliabilities of $14.4 million.  AtDecember 31, 2002, we had cash and cash equivalents of $1.6 million, acurrent ratio of 1.81 and working capital of $2.9 million.

 

Thenet loss and increase in accounts receivable were the primary uses of cash inthe first nine months of 2003.  The netloss, change in accounts receivable and other accrued liabilities were theprimary uses of cash in the first nine months of the prior year.  Cash used in operations was $3.4 million inthe first nine months of 2003 and $7.3 million in the first nine months of2002.

 

Capital expenditures were $108,000 for the first nine months of 2003compared to $149,000 for the first nine months of 2002. The current yearcapital spending relates to the establishment of our Malaysian manufacturingfacility.

 

On March 7, 2003 and March 26, 2003, pursuant to a privateequity placement with a group of accredited investors, we issued a total of3,166,869 shares of common stock, which resulted in net proceeds to us ofapproximately $1.1 million.  Stockissuance costs associated with this offering totaled approximately $241,000.  As part of this offering, we also issuedwarrants to purchase 253,350 shares of common stock that have a term of fiveyears with an exercise price of $0.43 per share.

 

OnJune 9, 2003, we completed a one-year, $2.5 million secured workingcapital line of credit agreement with a bank. Under the terms of the agreement, we may borrow up to eighty percent(80%) of qualified receivables. Additionally, under this agreement the company granted a first securityinterest in all assets of the company. As of September 27, 2003, $0.7 million was outstanding under thisagreement.

 

On June 30, 2003, we completed the restructuringof $9.29 million, or 92.9%, of our 10% Senior Subordinated Convertible Notes,wherein the participating noteholders agreed to accept stock in lieu of cashfor the next four semi-annual interest payment dates beginning June 30,2003 through December 31, 2004.  Aspart of this restructuring, the company amended the notes of the participatingnoteholders to reduce the conversion price from $2.60 per share to $1.00 pershare for the remainder of the term through December 2006.  The agreement also included standardanti-dilution provisions, and required the company to register the shares withthe Securities and Exchange Commission.

 

In July of 2003, wecompleted negotiations with the majority of our vendors to extend the paymentterms of the total amounts owed to them at the time.  This resulted in $1.2 million of our payables, or 67% of ourtotal accounts payable at the time, being restructured with a total of 281 vendors.  Under the terms of the extended paymentplan, we have agreed to make four to eight equal payments beginning onJuly 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this plan representedapproximately 61% of our active vendors.

 

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We estimate that we might need to raise additional capital, dependenton our financial performance, through debt or equity offerings, or by sellingassets of the Company.  We believe thatour ability to fund our operations and capital requirements for 2003, and ourability to obtain financing, are dependent on the success of our strip producttechnology in the currently depressed semiconductor capital equipment marketand the realization of the cost benefits associated with our restructuringactivities.  There is no assurance thatadditional financing, if needed, will be available on terms and conditionsacceptable or favorable to us, if at all. If we are unsuccessful in obtaining additional financing, if needed, ouroperations could be materially negatively impacted and we will be required totake actions that will harm our business, including potentially ceasing certainor all of our operations.

 

**Impactof Accounting Standards**

 

In November 2002, the EITF reached a consensus on Issue No. 00-21,*Revenue Arrangements with MultipleDeliverables*, which provides guidance on how to account forarrangements that involve the delivery or performance of multiple products,services and/or right to use assets. The provisions of EITF Issue No. 00-21 will apply to revenuearrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of EITF Issue No.00-21 did not have a material effect on our results of operations and financialcondition.

 

In May 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 150,   *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.*  SFAS No. 150 establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150 requires that and issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  This requirement ofthis statement applies to an issuer’s classification and measurement offree-standing financial instruments, including those that comprise more thanone option or forward contract.  SFASNo. 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have a material effect onour results of operations and financial condition.

** **

**RiskFactors**

 

Except for the historical information contained herein, certain of thematters discussed in this report are “forward-looking statements” as defined inthe Private Securities Litigation Reform Act of 1995.  These “forward-looking statements” involve certain risks anduncertainties, including, but not limited to, the following: (1) the prolongedor intensified downturn in the semiconductor market which often has adisproportionately negative impact on manufacturers of semiconductor capitalequipment, and which could cause us to continue to incur significant cashlosses decreasing our cash and expose us to potential further charges forrestructuring, excess and obsolete inventory and/or impairment of assets; (2)the market for our products is highly competitive throughout the world,primarily from manufacturers in the United States, Europe and Asia, and many ofour competitors are considerably larger and have considerably greater financialresources than we do which may allow them to develop superior or lower pricedproducts; (3) rapid changes in technology and in tester and handler products,which we must

 

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respond to successfully in order for our products to avoid becomingnoncompetitive or obsolete; (4) customer acceptance of our new products,including the strip-based Tapestry handling systems and Smart Solutionsproducts, and other singulated device handler products in which we haveinvested significant amounts of inventory; (5) possible loss of any of our keycustomers, who account for a substantial percentage of our business; (6) thepossible adverse impact of competition in markets which are highly competitive;(7) the possible adverse impact of economic or political changes in markets weserve;  and (8) other factors detailedfrom time to time in our SEC reports, including but not limited to thediscussion in the Management’s Discussion & Analysis included in Form 10-Kfor the year ended December 31, 2002. Further, our consolidated financial statements have been prepared on theassumption that we will continue as a going concern, which contemplates therealization of assets and liquidation of liabilities in the normal course ofbusiness.  The independent auditors’report on the financial statements of the Company as of and for the year endedDecember 31, 2002 included in Form 10-K contained an explanatory paragraphthat expresses substantial doubt about our ability to continue as a goingconcern.

 

We expect losses to continue for the remainder of 2003, which couldrequire us to obtain additional capital or pursue other strategicalternatives.  It is uncertain whetherwe will be able to obtain a sufficient amount of additional capital, if needed,on acceptable terms, or at all. Further, if future financing requirements are satisfied through theissuance of equity or debt instruments, shareholders may experience additionaldilution in terms of their percentage of ownership of our securities.  If we are unsuccessful in obtainingadditional financing, if needed, our operations could be materially negativelyimpacted and we will be required to take actions that will harm our business,including potentially ceasing certain or all of our operations.

 

All forecasts and projections in this report are “forward-lookingstatements,” and are based on our current expectations of our near-termresults, based on current information available pertaining to us, includingrisk factors discussed above.  Actualresults could differ materially.

 

**ITEM 3****.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The vast majority of our transactions are denominated in U.S. dollars;as such, fluctuations in foreign currency exchange rates have historically hadlittle impact on us.  Inflation has notbeen a significant factor in our operations in any of the periods presented,and it is not expected to affect operations in the future.  At September 27, 2003, all of ouroutstanding long-term debt carries interest at a fixed rate. There is nomaterial interest rate risk relating to our long-term debt.

 

**ITEM 4****. CONTROLS AND PROCEDURES**

 

(a)                Evaluation ofdisclosure controls and procedures.

 

Under thesupervision 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) as of theend of period covered by this report. Based upon that

 

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evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the Evaluation Date,our disclosure controls and procedures are effective in timely alerting them tothe material information relating to us (or our consolidated subsidiaries)required to be included in our periodic SEC filings.

 

(b)         Changes in internalcontrols.

 

There wereno significant changes made in our internal controls or, to our knowledge, inother factors that could significantly affect these controls, subsequent to thedate of their evaluation.

 

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**MICROCOMPONENT TECHNOLOGY, INC.**

## FORM10-Q

# PART II.  OTHER INFORMATION

 

### **Item 2**.  Changes in Securities and Use of Proceeds

 

(c) On March 7, 2003 and March 26, 2003, pursuant to aprivate equity placement with a group of accredited investors, we issued atotal of 3,166,869 shares of common stock, which resulted in net proceeds to usof approximately $1.1 million.  Stockissuance costs associated with this offering totaled approximately $241,000.  As part of this offering, we also issuedwarrants to purchase 253,350 shares of common stock that have a term of fiveyears with an exercise price of $0.43 per share.  The offering was exempt from registration under Rule 506 underthe Securities Act of 1933, because all of the purchasers were accredited,there was no general solicitation, and the shares are subject to restrictionson transfer.

 

On June 9,2003, we issued a seven-year warrant to purchase 30,000 shares of our commonstock at an exercise price of $0.458 to the bank that granted us a workingcapital line of credit.  The issuancewas exempt from registration under Section 4 (2) of the Securities Act of1933, because it involved one sophisticated purchaser who had access to currentinformation about the Company.  Thepurchaser represented that it was purchasing for investment, and the securitiesare subject to restriction on transfer.

 

As ofJune 30, 2003, we issued 936,485 shares of our common stock to the holdersof our 10% Senior Subordinated Convertible Notes (“the Notes”) in payment ofinterest due on June 30, 2003.  Theissuance was exempt from registration under Rule 506 under the Securities Actof 1933, because all of the noteholders were accredited, there was no generalsolicitation, and the shares were subject to restrictions on transfer.

 

During the period covered by this report, we issued a total of 250,000shares of our common stock to holders of the Notes pursuant to conversion oftheir Notes at $1.00 per share.  Theissuance was exempt from registration under Rule 506 under the Securities Actof 1933, because all of the noteholders were accredited, there was no generalsolicitation, and the shares were subject to restrictions on transfer.

 

### **Item 4**.  Submission Of Matters To A Vote Of SecurityHolders

 

TheCompany’s annual meeting of stockholders was held on June 26, 2003. Themeeting has been subsequently adjourned until October 23, 2003 to allowfor the receipt of additional proxies on approval of the 2003 Incentive StockOption Plan.

 

### **Item 5**.  Other Information

 

***Restructuring Charge.*** During the first quarter of 2003, in response to the continued andprolonged downturn in the semiconductor capital equipment industry, we furtherreduced our workforce across all functional areas by approximately 24% at thetime, resulting in a restructuring charge of $19,000.  This charge reflects severance and other benefits costs

 

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associated with this reduction. This workforce reduction affected 26 employees across all functionalareas. During the second quarter, we completed the restructuring of our masterlease agreement related to our St. Paul, MN facility, resulting in arestructuring charge of $227,000, which included write-offs of $41,000 relatedto leasehold improvements. Additionally, we further reduced our workforce across all functionalareas by approximately 4% at the time, resulting in a restructuring charge of$19,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of4 employees across all functional areas.

 

On June 9, 2003, we completed a one-year, $2.5 million securedworking capital line of credit agreement with a bank.  Under the terms of the agreement, the company may borrow up toeighty percent (80%) of qualified receivables. Additionally, under this agreement the company granted a first securityinterest in all assets of the company. As of September 27, 2003, $0.7 million was outstanding under thisagreement.

 

On June 30, 2003, we completed the restructuring of $9.29 million,or 92.9%, of our 10% Senior Subordinated Convertible Notes, wherein theparticipating noteholders agreed to accept stock in lieu of cash for the nextfour semi-annual interest payment dates beginning June 30, 2003 throughDecember 31, 2004.  As part of thisrestructuring, the company amended the notes of the participating noteholdersto reduce the conversion price from $2.60 per share to $1.00 per share for theremainder of the term through December 2006.  The negotiated agreement also included standard anti-dilutionprovisions, and requires the company to register the shares with the Securitiesand Exchange Commission.

 

In July of 2003, wecompleted negotiations with the majority of our vendors to extend thepaymentterms of the total amounts owed to them at the time.  This resulted in $1.2 million of our payables, or 67% of ourtotal accounts payable at the time, being restructured with a total of 281 vendors.  Under the terms of the extended paymentplan, we have agreed to make four to eight equal payments beginning onJuly 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this plan represented approximately61% of our active vendors.

 

### **Item 6**.  Exhibits and Reports on Form 8-K

 

(a)          Reportson Form 8-K

 

On August 6, 2003, we issued a press release disclosing financialinformation regarding the quarter ended June 28, 2003 for which a Form 8-Kwas filed on August 11, 2003.

 

(b)         Exhibit Index

 

10                                    AccountsReceivable Financing Agreement with Silicon Valley Bank (filed herewith).

 

31.1                           Certificationof Chief Executive Officer (filed herewith).

 

31.2                            Certificationof Chief Financial Officer (filed herewith).

 

32                                    Section 1350Certification (filed herewith).

 

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** **

**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## 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 3, 2003 | By:                                                               | /s/ Roger E. Gower |   |
|                                     | Roger E. Gower  President and Chief Executive Officer             |
|                                     |                                                              |
|                                     |                                                              |
|                                     | And                                                               |
|                                     |                                                              |
|                                     |                                                              |
| Dated:   November 3, 2003 | By:                                                               | /s/ Thomas P. Maun |   |
|                                     | Thomas P. Maun  Chief Financial Officer  Chief Accounting Officer |
|                                          |                                                                   |                    |  |  |

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