** **

**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 endedApril 1, 2006**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d)**

**OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|-----------------------------------------------------------------------------------------------------|------------|

 

**For thetransition period from                       to                        **

 

**CommissionFile No. 0-22384**

 

**MICROCOMPONENT TECHNOLOGY, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Minnesota**                    |   | **41-0985960**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

**2340 WestCounty Road C, St. Paul, MN 55113-2528**

(Address ofprincipal executive offices)

 

**(651)697-4000**

(Registrant’stelephone number)

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days

 

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

 

Large AcceleratedFiler o    AcceleratedFiler o    Non-Accelerated Filer ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes   o   No   ý   

 

The number ofshares outstanding of the Registrant’s Common Stock, as of May 10, 2006 was27,365,358.

** **

** **

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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 6.**                                                         | **EXHIBITS** | ** ** |
| ** **                          | ** **                                                          |
| ** **                          | **SIGNATURES**                                                      | ** ** |

 

2

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** **

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

FORM 10-Q

# PARTI.  FINANCIAL INFORMATION

## ITEM1.  FINANCIAL STATEMENTS

## CONSOLIDATEDBALANCE SHEETS

(In thousands,except share and per share data)

(Unaudited)
| ** **                                                                                            | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                            |       |                    |       |                        |       |
| Current assets                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                            |       | $                       | 299        |                        | $          | 77 |   |
| Accounts  receivable, less allowance for doubtful accounts of $127 and $148,  respectively            |       | 2,016                   |       | 1,661                       |       |
| Inventories                                                                                           |       | 2,423                   |       | 2,194                       |       |
| Other                                                                                                 |       | 147                     |       | 169                         |       |
| Total current  assets                                                                                 |       | 4,885                   |       | 4,101                       |       |
|                                                                                                  |       |                    |       |                        |       |
| Property, plant  and equipment, net                                                                   |       | 130                     |       | 148                         |       |
|                                                                                                  |       |                    |       |                        |       |
|                                                                                                  |       |                    |       |                        |       |
| Debt issuance  costs, net of accumulated amortization of $1,252 and $1,005, respectively              |       | 376                     |       | 276                         |       |
| Other assets                                                                                          |       | 15                      |       | 21                          |       |
|                                                                                                  |       |                    |       |                        |       |
| Total assets                                                                                          |       | $                       | 5,406      |                        | $          | 4,546 |   |
|                                                                                                  |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Deficit**                                                       |       |                    |       |                        |       |
| Current  liabilities:                                                                                 |       |                    |       |                        |       |
| Current portion  of long-term debt, net of discounts of $19 and $0, respectively                      |       | $                       | 3,862      |                        | $          | 133 |   |
| Bank line of  credit, net of discounts of $0 and $42, respectively                                    |       | 2,596                   |       | 2,630                       |       |
| Accounts payable                                                                                      |       | 783                     |       | 425                         |       |
| Accrued  compensation                                                                                 |       | 337                     |       | 382                         |       |
| Accrued interest                                                                                      |       | 160                     |       | 234                         |       |
| Accrued warranty                                                                                      |       | 161                     |       | 153                         |       |
| Customer  prepayments and unearned service revenue                                                    |       | 263                     |       | 152                         |       |
| Other accrued  liabilities                                                                            |       | 120                     |       | 180                         |       |
| Total current  liabilities                                                                            |       | 8,282                   |       | 4,289                       |       |
|                                                                                                  |       |                    |       |                        |       |
| Long-term debt,  net of discounts of $1,103 and 545, respectively                                     |       | 4,242                   |       | 3,683                       |       |
| 10% senior  subordinated convertible debt                                                             |       | —                  |       | 3,630                       |       |
| Total  liabilities                                                                                    |       | 12,524                  |       | 11,602                      |       |
|                                                                                                  |       |                    |       |                        |       |
| Stockholders’  deficit:                                                                          |       |                    |       |                        |       |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                   |       | —                  |       | —                      |       |
| Common stock,  $.01 par value, 55,000,000 authorized, 27,365,358 and 26,215,388 issued,  respectively |       | 274                     |       | 262                         |       |
| Additional  paid-in capital                                                                           |       | 98,679                  |       | 97,670                      |       |
| Accumulated deficit                                                                                   |       | (106,071                | )          | (104,988                    | )          |
| Total  stockholders’ deficit                                                                     |       | (7,118                  | )          | (7,056                      | )          |
| Total  liabilities and stockholders’ deficit                                                     |       | $                       | 5,406      |                        | $          | 4,546 |   |

 

See notes tounaudited condensed consolidated financial statements

 

3

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**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

## CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **April 1,  2006**          | ** ** | **March 26,  2005** | ** ** |
| Net sales                                                   |       | $                                | 2,375      |   | $ | 1,960 |   |
| Cost of sales                                               |       | 1,181                            |       | 1,057 |   |
|                                                        |       |                             |       |   |   |
| Gross profit                                                |       | 1,194                            |       | 903 |   |
|                                                        |       |                             |       |   |   |
| Operating  expenses:                                        |       |                             |       |   |   |
| Selling, general  and administrative                        |       | 945                              |       | 1,131 |   |
| Research and  development                                   |       | 518                              |       | 588 |   |
|                                                        |       |                             |       |   |   |
| Total operating  expenses                                   |       | 1,463                            |       | 1,719 |   |
|                                                        |       |                             |       |   |   |
| Loss from  operations                                       |       | (269                             | )          | (816 | ) |
|                                                        |       |                             |       |   |   |
| Interest income                                             |       | —                           |       | 1 |   |
| Interest expense  and other                                 |       | (814                             | )          | (238 | ) |
|                                                        |       |                             |       |   |   |
| Total interest  and other                                   |       | (814                             | )          | (237 | ) |
|                                                        |       |                             |       |   |   |
| Net loss                                                    |       | $                                | (1,083     | ) | $ | (1,053 | ) |
|                                                        |       |                             |       |   |   |
| Net loss per  share:                                        |       |                             |       |   |   |
|                                                        |       |                             |       |   |   |
| Basic                                                       |       | $                                | (0.04      | ) | $ | (0.04 | ) |
| Diluted                                                     |       | $                                | (0.04      | ) | $ | (0.04 | ) |
|                                                        |       |                             |       |   |   |
| Weighted average  common and equivalent shares outstanding: |       |                             |       |   |   |
|                                                        |       |                             |       |   |   |
| Basic                                                       |       | 27,225                           |       | 25,567 |   |
| Diluted                                                     |       | 27,225                           |       | 25,567 |   |

 

See notes tounaudited condensed consolidated financial statements

 

4

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**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

## CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **April 1,  2006**          | ** ** | **March 26,  2005** | ** ** |
|                                                             |       |                             |       |   |   |
| Cash flows from  operating activities:                           |       |                             |       |   |   |
| Net loss                                                         |       | $                                | (1,083     | ) | $ | (1,053 | ) |
| Adjustments to  reconcile net loss to net cash used in operating |       |                             |       |   |   |
| Activities:                                                      |       |                             |       |   |   |
| Depreciation and  amortization                                   |       | 554                              |       | 174 |   |
| Changes in  assets and liabilities:                              |       |                             |       |   |   |
| Accounts  receivable                                             |       | (355                             | )          | 169 |   |
| Inventories                                                      |       | (229                             | )          | (83 | ) |
| Other assets                                                     |       | 28                               |       | 9 |   |
| Accounts payable                                                 |       | 358                              |       | 86 |   |
| Other accrued  liabilities                                       |       | 87                               |       | (7 | ) |
|                                                             |       |                             |       |   |   |
| Net cash used in  operating activities                           |       | (640                             | )          | (705 | ) |
|                                                             |       |                             |       |   |   |
| Cash flow from  investing activities:                            |       |                             |       |   |   |
| Purchases of  property, plant and equipment                      |       | (3                               | )          | (12 | ) |
|                                                             |       |                             |       |   |   |
| Net cash used in  investing activities                           |       | (3                               | )          | (12 | ) |
|                                                             |       |                             |       |   |   |
| Cash flows from  financing activities:                           |       |                             |       |   |   |
| Payments of  long-term debt                                      |       | (96                              | )          | (67 | ) |
| Repayment of  long term note                                     |       | (4,000                           | )          | — |   |
| Proceeds on long  term note, net of discounts                    |       | 4,907                            |       | 812 |   |
| Proceeds from  issuance of stock                                 |       | 54                               |       | — |   |
|                                                             |       |                             |       |   |   |
| Net cash  provided by financing activities                       |       | 865                              |       | 745 |   |
|                                                             |       |                             |       |   |   |
| Net increase in  cash and cash equivalents                       |       | 222                              |       | 28 |   |
|                                                             |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                |       | 77                               |       | 166 |   |
|                                                             |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                      |       | $                                | 299        |   | $ | 194 |   |
|                                                             |       |                             |       |   |   |
| Supplemental  cash flow information:                             |       |                             |       |   |   |
| Non-cash  financing activities:                                  |       |                             |       |   |   |
| Stock issued in  lieu of interest                                |       | $                                | 146        |   | $ | — |   |
| Cash paid for  interest                                          |       | 205                              |       | 101 |   |

 

See notes tounaudited condensed consolidated financial statements

 

5

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**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

*Basis ofPresentation*

 

The consolidatedfinancial statements include the accounts of the parent company and oursubsidiaries after elimination of all significant intercompany balances andtransactions.  All significant subsidiariesare 100% owned.

 

The unauditedconsolidated financial statements included herein have been prepared inaccordance with accounting principles generally accepted in the United States(generally accepted accounting principles) for interim financial informationand with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  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, 2006.

 

Our consolidatedfinancial statements have been prepared on the assumption that we will continueas a going concern, which contemplates the realization of assets andliquidation of liabilities in the normal course of business. The Report of theIndependent Registered Public Accounting Firm on the financial statements ofthe Company as of and for the fiscal year ended December 31, 2005 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 anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the outcome of this uncertainty.

 

Asof April 1, 2006, the Company had an accumulated deficit of $106.1 million andincurred a net loss of $1.1 million for the three-month period ended April 1,2006.  As of April 1, 2006, the Companyhad cash and cash equivalents of $299,000, working capital of negative $3.4million, a current ratio of negative 0.59, total assets of $5.4 million andtotal liabilities of $12.5 million.  Weexpect to continue to expend cash and incur operating losses at the current netsales levels at least through the first half of 2006.  Our ability to generate cash and operatingincome is dependent on increasing our customer base to expand the penetrationof our product technology and the realization of our lower operating expensetargets.

 

Asdiscussed in Note 4, onFebruary 17, 2006, we restructured the financing with Laurus, and increased thetotal maximum secured indebtedness with Laurus to $9.25 million from $7.0

 

6

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million.  The restructured financingnow includes a $5.25 million term note.  Interest is payable monthly onthe term note at the prime rate plus 2.5%.  Beginning 360 days after closing,we are required to make monthly payments equal to 1/60th of the principalamount until three years after the closing, at which time the entire remainingprincipal and accrued interest is due and payable in full.  The note isnon-convertible.  In addition to the $5.25 million note, the workingcapital line of credit was increased from $3.0 million to $4.0 million, andmade non-convertible.  The note is payable in full on March 8, 2008. Interest is payable monthly on the note at the prime rate plus 2.5%.  Theexisting $1.2 million over-advance in excess of the borrowing base on theworking capital line of credit was extended until April 30, 2007. However, commencing on December 1, 2006, the over-advance is to be reduced by$200,000 each month.  The Company also issued Laurus a 10-year option topurchase 2,500,000 shares at an exercise price of $.01 per share.  Theshares issuable upon exercise of the option have standard registration rights.  As a result of the new financing with Laurus,the conversion price for all of the Noteholders who accepted the priorrestructuring agreements has been reduced to $0.56 per share.

 

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, 2005.

 

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

 

Basic earnings per shareare computed using the weighted average number of common shares outstandingduring each period.  Diluted earnings pershare include the dilutive effect of common shares potentially issuable uponthe exercise of stock options, warrants and the 10% Senior SubordinatedConvertible Notes outstanding.  Thefollowing table reconciles the denominators used in computing basic and dilutedearnings per share:

 
| **(in thousands)**                               | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **April 1,  2006 (1)** | ** ** | **March 26,  2005 (1)** | ** ** |
| Weighted average  common shares outstanding           |       | 27,225                           |       | 25,567 |   |
| Effect of  dilutive stock options, warrants and notes |       | —                           |       | — |   |
|                                                  |       |                             |       |   |   |
|                                                  |       | 25,567                           |       | 25,567 |   |

----

(1)                       We reporteda loss for the period indicated.  Noadjustments were made for the effect of stock options and warrants, whichrepresented 7,305,398 and 4,148,058shares at April 1, 2006 and March 26, 2005, respectively, as the effect isantidilutive.

 

**3.****                          BALANCESHEET INFORMATION**

 

Major componentsof inventories were as follows (in thousands):

                                                                                                                                
| ** **      | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
|            |       |                    |       |                        |       |
| Raw materials   |       | $                       | 1,859      |                        | $          | 1,783 |   |
| Work-in-process |       | 405                     |       | 394                         |       |
| Finished goods  |       | 159                     |       | 17                          |       |
|            |       | $                       | 2,423      |                        | $          | 2,194 |   |

 

7

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In accordance withaccounting principles generally accepted in the United States of America, wevalue our inventories at the lower of cost or market.

 

The following table provides theinventory reserves for the quarter ended April 1, 2006.

 
| Inventory  reserve balance at December 31, 2005 |   | $7,401 |   |
|-------------------------------------------------|--------|--------|--------|
| Release of  inventory reserve on sale of goods  |   | — |   |
| Release of  inventory reserve on scrap of goods |   | (56    | )      |
| Additional  inventory reserve                   |   | — |   |
| Inventory  reserve balance at April 1, 2006     |   | $7,345 |   |

 

We provide a standard thirteen month warranty program for ourequipment products. We record provisions for warranty claims for these productsbased upon historical claim performance. The following table provides the expense recorded and charges againstour reserves for the quarter ended April 1, 2006.

 
| Accrued warranty  balance at December 31, 2005 |   | $153 |   |
|------------------------------------------------|--------|------|--------|
| Provision                                      |   | 25   |   |
| Warranty claims                                |   | (17  | )      |
| Accrued warranty  balance at April 1, 2006     |   | $161 |   |

 

**4.**                          **FINANCINGTRANSACTIONS**

 

OnMarch 9, 2004, we completed a $5.0 million financing transaction with aninstitutional lender, Laurus Master Fund, Ltd. (“Laurus”), secured by all ofthe assets of the Company. The financing included a $3.0 million workingcapital line of credit and a $2.0 million long-term note. The notes werepartially convertible into shares of our common stock. In connection with thetransaction, we issued to Laurus a seven-year warrant to purchase 400,000shares of common stock at exercise prices ranging from $2.30 to $2.88 per share.The secured loan in existence at that time with a prior lender was terminated.

 

OnJanuary 28, 2005, we completed an amendment to the financing agreement withLaurus to defer payments on the long-term convertible note. As part of thisamendment, the conversion prices on both notes were reduced. We also issuedLaurus at that time a seven-year warrant to purchase 150,000 shares of commonstock at $.67 per share.

 

OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock. We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. Wereceived net proceeds of approximately $2.4 million at the closing.

 

On February 17, 2006, we restructured thefinancing with Laurus, and increased the total maximum secured indebtednesswith Laurus to $9.25 million. The restructured financing now includes a $5.25million term note. Interest is payable monthly on the term note at the primerate plus 2.5%. Beginning 360 days after closing, we are required to makemonthly payments equal to 1/60th of the principal amount until three yearsafter the closing, at which time the entire

 

8

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remaining principal and accrued interestis due and payable in full. The note is non-convertible. In addition to the$5.25 million note, the working capital line of credit was increased from $3.0million to $4.0 million, and made non-convertible. The note is payable in fullon March 8, 2008. Interest is payable monthly on the note at the prime rateplus 2.5%. The existing $1.2 million over-advance in excess of the borrowingbase on the working capital line of credit was extended until April 30, 2007.However, commencing on December 1, 2006, the over-advance is to be reduced by$200,000 each month. The Company also issued Laurus a 10-year option topurchase 2,500,000 shares at an exercise price of $.01 per share. The shares issuableupon exercise of the option have standard registration rights.  As a result of the new financing with Laurus,the conversion price for all of the Noteholders who accepted the priorrestructuring agreements has been reduced to $0.56 per share.

 

**5.**        **STOCK BASED COMPENSATION**

 

The Company adoptedStatement of Financial Accounting Standards (SFAS) No. 123R “Share-BasedPayment”, on January 1, 2006.  Thisstatement requires us to recognize the cost of employee and director servicesreceived in exchange for the stock options it has awarded.  Under SFAS 123R, we are required to recognizecompensation expense over an award’s vesting period based on the award’s fairvalue at the date of grant.  We haveelected to adopt SFAS 123R on a modified prospective basis; accordingly thefinancial statements for periods prior to January 1, 2006 do not includestock-based compensation costs calculated under the fair value method.

 

If compensation cost forour stock option and employee stock purchase plans had been determined for thefirst quarter of 2005 based on the fair value at the grant dates, consistentwith the method provided in SFAS No. 123R, our net loss and net loss per share forthat quarter would have been as follows:

 
| ** **                                             | ** ** | **Quarter Ended**   | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|
| ** **                                             | ** ** | **March 26,  2005** | ** ** |
| Net income  (loss):                                    |       |                     |       |
| As reported                                            |       | $                        | (1,053     | ) |
| Fair value  compensation expense                       |       | (156                     | )          |
| Pro forma                                              |       | $                        | (1,209     | ) |
|                                                   |       |                     |       |
| Net income  (loss) per share – basic and diluted: |       |                     |       |
| As reported                                            |       | $                        | (0.04      | ) |
| Fair value  compensation expense                       |       | (0.01                    | )          |
| Pro forma                                              |       | $                        | (0.05      | ) |
|                                                   |       |                     |       |
| Stock Based  Compensation:                             |       |                     |       |
| As reported                                            |       | $                        | —     |   |
| Fair value  compensation expense                       |       | (156                     | )          |
| Pro forma                                              |       | $                        | (156       | ) |

 

9

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The fair value of optionsgranted under the stock options for the quarters ended April 1, 2006 and March26, 2005 was estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions for the threemonths ended April 1, 2006 and March 26, 2005.

** **
| ** **                               | ** ** | **Quarters ended** | ** **  |
|------------------------------------------|------------|-------------------------|-------------|
| ** **                               | ** ** | **April 1,  2006** | ** **  | **March 26,  2005** | ** ** |
|                                     |       |                    |        |   |   |
| Dividend yield                           |       | 0.00                    | %           | 0.00 | % |
| Expected  volatility                     |       | 122.09                  | %           | 88.47 | % |
| Risk-free  interest rate                 |       | 4.62                    | %           | 3.89 | % |
| Expected life of  options                |       | 10                      |  years | 3.5 |  years |
| Fair value per  share of options granted |       | $                       | 0.33        |   | $ | 0.22 |   |
|                                          |            |                         |             |  |  |  |  |

** **

**6.**        **RECENT ACCOUNTINGPRONOUNCEMENTS**

 

***SFAS No. 154, Accounting Changes and Error Corrections. *** In June2005, FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statementapplies to all voluntary changes in accounting principle, and changes therequirements 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 December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors made occurring infiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective 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. 123 (revised 2004), Share-Based Payment***.  In December 2004, FASB issued SFAS No.123 (revised 2004), *Share-Based Payment*,that focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions.  Thisstatement replaces SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  As discussed in Note 5, we implemented SFASNo. 123R on January 1, 2006.  We do notexpect the adoption of SFAS No. 123R to have a material effect on our financialstatements.

 

10

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF

## RESULTSOF OPERATIONS AND FINANCIAL CONDITION

 

*This Report on Form 10-Q containsforward-looking statements that have been made pursuant to the provisions of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements are nothistorical facts, but rather are based on our current expectations, estimatesand projections about the semiconductor capital equipment industry, and ourbeliefs and assumptions.   We intendwords such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates” and similar expressions to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties and other factors,some of which are beyond our control and are difficult to predict.  These factors could cause actual results todiffer materially from those expressed or forecasted in the forward-lookingstatements.  These risks anduncertainties are described elsewhere in this report on Form 10-Q and ourreport on Form 10-K for the year ended December 31, 2005.  We caution you not to place undue reliance onthese forward-looking statements, which reflect our management’s view only asof the date of this Report on Form 10-Q. We are not obligated to update these statements or publicly release theresult of any revisions to them to reflect events or circumstances after thedate of this Report on Form 10-Q or to reflect the occurrence of unanticipatedevents.*

 

*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 cansignificantly improve the productivity, yield and throughput of the back-end,or to the post-wafer manufacturing process, including assembling, packaging,testing and singulating semiconductor devices.

 

Beginning in 1999 andcontinuing into 2000, we broadened our strategy from that of a test handler manufacturerto becoming a provider of comprehensive equipment automation solutions for theback-end of the semiconductor manufacturing process.  First, we developed and introduced inFebruary 1999 our Tapestry strip handler. Tapestry combines strip handling capability with robotics, machinevision technology and critical software, enabling the testing and tracking ofsemiconductor devices in strip form and the generation of critical process datathroughout the test process.  Second, inJune 1999 we acquired the Infinity Systems division of Fico.  Infinity Systems has been involved in thedevelopment of factory automation software for the semiconductor manufacturingindustry.  Infinity Systems’ softwareexpertise was integral to the development of our integrated Smart Solutionsequipment product line, introduced in May 2000. Together with a third party tester, our Smart Solutions equipmentproducts including our Tapestry handler enable complete automation of the test,laser mark, mark inspect and other processes of the back end.

 

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 continued through2005.

 

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Most industry forecastsare presently predicting that capacity-driven purchases of capital equipmentare expected to improve in 2006. However, the level of improvement and the ability for the market tosustain an improvement continues to be uncertain.  Therefore, we will continue to monitor themarket and if required, 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.

 

**CriticalAccounting Policies**

 

*Revenue Recognition*

 

Under SAB 104, we recognize revenue upon shipment, as ourterms are FOB shipping point, for established equipment products that havepreviously 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. Consequently, if these conditions exist, we may report revenue levelsthat are greater than actual shipments. During the quarter ended April 1, 2006, revenue recorded approximatedshipments.

 

*Allowance forDoubtful Accounts*

 

We record a provisionfor doubtful accounts based on specific identification of our accountsreceivable. This involves a degree of judgment based on discussion with ourinternal sales and marketing groups, our customer base and the examination ofthe financial stability of our customers. There can be no assurance that our estimates will match actual amountsultimately written off.  During periodsof downturn in the market for semiconductor capital equipment  or economic recession, a greater degree ofrisk exists concerning the ultimate collectability of our accounts receivabledue to the impact that these conditions might have on our customer base.  No provisions were recorded for the quarterended April 1, 2006.

 

*Valuationof Inventories*

 

Our inventories are stated at the lower of cost ormarket.  Cost is determined by the first-in,first-out (“FIFO”) method.  Wemaintain a standard costing system for our inventories.  Assumptions with respect to direct laborutilization, standard direct and indirect cost rates, vendor pricing andutilization of factory capacities are formulated in the development of ourstandard costing system.  Sudden orcontinuing changes in the semiconductor capital equipment market affecting ourshipments

 

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can result in significant production variances from our standard rates.These variances directly impact our gross profit performance and may causevariability in gross profits results from reporting period-to-reportingperiod.  Our labor and overhead rates areset for production rates that match typical market conditions.  Production variances are charged to cost ofsales each quarter as incurred. Material standards are based upon normalpurchase volumes.  Purchase pricevariances are charged to costs of sales each quarter as incurred.

 

Provisions to reduce inventories to the lower of cost ormarket are made based on a review of excess and obsolete inventories through anexamination of historical component consumption, current market demands andshifting product technology.  Significantassumptions with respect to market trends and customer product acceptance areutilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capitalequipment market may cause us to record additional inventory revaluationcharges in future periods.  No write-downof our inventories occurred for the quarter ended April 1, 2006.

 

*AccruedWarranty*

 

We provide a standard thirteen month warranty program for our equipmentproducts. We record provisions for warranty claims for these products basedupon historical claim performance.  Thisapproach has been applied since the inception of the warranty program andinvolves a degree of subjectivity in that historical performance is used to estimatefuture warranty claims. There can be no assurance that our estimates will matchthe actual amount of future warranty claims.

###### ** **

###### **Results ofOperations for the Three Months Ended April 1, 2006 and March 26, 2005**

###### ** **

Net sales for the threemonths ended April 1, 2006 increased by $415,000 or 21% to $2.4 millioncompared to $2.0 million for the three months ended March 26, 2005.  Sales have steadily increased over the lastfour quarters due to a recent upturn in the capital equipment market.  The Strip Test and Mark product line enjoyedthe largest percentage increase.

 

Gross margin for the threemonths ended April 1, 2006 increased by $291,000 to $1.2 million or 50.3% ofnet sales from $0.9 million or 46.1% of net sales for the comparable period inthe prior year.  The increase in grossmargin in the current year period is directly attributable to the increase insales resulting in fixed costs being spread over a larger sales volume.

 

Total operating expensedeclined by $256,000 or 14.9% from $1.7 million to $1.5 million.  Selling, general and administrative expensesfor the three months ended April 1, 2006 were $0.9 million or 39.8% of netsales compared to $1.1 million or 57.7% of net sales for the three months endedMarch 26, 2005.  Research and developmentexpenses for the first quarter of 2006 were $518,000 or 21.8% of net salescompared to $588,000 or 30.0% of net sales in the first quarter of 2005.  The decrease in operating expense is a directresult from the restructuring that occurred in prior year period.

 

Of the loss for thefirst quarter of 2006, $414,000 or 17.4% of net sales relates to prior yearsdebt issuance cost and FAS 123 discounts from the Laurus refinancing.

 

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The net loss for the threemonths ended April 1, 2006 was $1.1 million or $0.04 per basic and fully-dilutedshare compared to net loss for the three months ended March 26, 2005 of $1.1million or $0.04 per basic and fully-diluted share

 

**Liquidity and Capital Resources**

 

Cash used in operations was$640,000 in the first quarter of 2006 as compared to $705,000 in thefirst quarter 2005.  Accounts receivables increased from year-endto $2.0 million from $1.7 million. Inventory finished at $2.4 million, which consists of $9.8 million ofgross inventories and $7.4 million of reserves. Capital expenditures were $3,000 for the first quarter of 2006 comparedto $12,000 in the first quarter of 2005.

 

We ended the quarter with$299,000 in cash and cash equivalents up from $77,000 at the end of 2005 yearand cash availability from our credit line of $1.3 million.  Working capital finished at a negative $3.4million compared to a negative $1.7 million at the end of 2005 year.  The negative working capital position is dueto the Laurus $5.25 million term note and the over-advance of $1.2 millioncoming into classification from long term to short term, as this debt is duewithin the upcoming 12 months.

 

OnFebruary 17, 2006, we restructured the financing with Laurus, and increased thetotal maximum secured indebtedness with Laurus to $9.25 million. Therestructured financing now includes a $5.25 million term note. Interest ispayable monthly on the term note at the prime rate plus 2.5%. Beginning 360days after closing, we are required to make monthly payments equal to 1/60th ofthe principal amount until three years after the closing, at which time theentire remaining principal and accrued interest is due and payable in full. Thenote is non-convertible. In addition to the $5.25 million note, the workingcapital line of credit was increased from $3.0 million to $4.0 million, andmade non-convertible. The note is payable in full on March 8, 2008. Interest ispayable monthly on the note at the prime rate plus 2.5%. The existing $1.2million over-advance in excess of the borrowing base on the working capitalline of credit was extended until April 30, 2007. However, commencing onDecember 1, 2006, the over-advance is to be reduced by $200,000 each month. TheCompany also issued Laurus a 10-year option to purchase 2,500,000 shares at anexercise price of $.01 per share. The shares issuable upon exercise of theoption have standard registration rights. As a result of the new financingwith Laurus, theconversion price for all of the Noteholders who accepted the priorrestructuring agreements has been reduced to $0.56 per share.

 

**IMPACT OF ACCOUNTING STANDARDS**

 

***SFAS No. 154, Accounting Changes and ErrorCorrections. *** InJune 2005, FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statementapplies to all voluntary changes in accounting principle, and changes therequirements 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 December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors made occurring infiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective date of this statement.  The Company does not expect the adoptionof SFAS No. 154 to have a material effect on its financial statements.

 

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***SFAS No.123 (revised 2004), Share-Based Payment***.  InDecember 2004, FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment*, that focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions.  This statement replacesSFAS No. 123, *Accounting for Stock-Based**Compensation*, and supersedes APBOpinion No. 25, *Accounting for Stock Issuedto Employees*.   On January 1, 2006, we implemented SFAS No.123R.  We do not expect the adoption ofSFAS No. 123R to have a material effect on our financial statements.

 

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

 

The vast majority of ourtransactions are denominated in U.S. dollars; as such, fluctuations in foreigncurrency exchange rates have historically had little impact on us.  Inflation has not been a significant factorin our operations in any of the periods presented, and it is not expected toaffect operations in the future.  AtApril 1, 2006, our 10% senior subordinated convertible debt carries interest ata fixed rate of 10%. Our debt associated with both our bank line of credit andlong-term convertible note carries interest at prime plus 2.5% or 10.0% atApril 1, 2006. There is no material market risk relating to our long-term debt.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

(a)                Evaluation of disclosure controls andprocedures.

 

Under the supervision andwith the participation of our management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Exchange Act) as of the end of the period covered bythis report.  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that, as ofthe evaluation date, our disclosure controls and procedures were effective toensure that the information required to be disclosed by us in our periodic SECfilings is recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

 

(b)         Changes in internal controls over financialreporting.

 

During the course of the audit of ourconsolidated financial statements for December 31, 2005, our independent registeredpublic accounting firm, Virchow, Krause & Company, LLP (Virchow Krause),advised management and the Audit Committee that our internal controls hadallowed an error in the inventory reserve calculation due to inconsistenttreatment of work in process items from 2004 to 2005.  Based on Virchow Krause’s recommendation,management decided that an increase in the inventory reserve of approximately$525,000 was required as of December 31, 2005, to reflect a revaluation ofexcess inventory and adjustments to inventory consumption rates.  The inventory reserve error had no effect onreported results for any of the individual quarters in 2005.  As a result of this experience, during thefirst quarter, we revised and expanded our procedures for valuations of excessinventory and estimates of inventory consumption rates, and the relatedinternal controls, to involve greater analysis of historical and projectedusage of inventory as well as other data.

 

In addition, Virchow Krauserecommended changes to certain other of the Company’s controls and procedures,none of which had any impact on the audited financial statements for 2005 orprior

 

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years. During the first quarter of 2006, management implemented changes tothese controls and procedures.

 

There have been noadditional changes in our internal control over financial reporting during thefirst quarter of 2006 that have materially affected, or are reasonably likelyto affect, our internal control over financial reporting.

 

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**MICROCOMPONENT TECHNOLOGY, INC.**

## FORM10-Q

# PARTII.  OTHER INFORMATION

 

### **Item 6. Exhibits**

 
| 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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**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:   May 10, 2006 | By:                                   | /s/ Roger E. Gower |   |
|                                 | Roger E. Gower                        |
|                                 | President and Chief Executive Officer |
|                                 |                                  |
|                                 | And                                   |
|                                 |                                  |
|                                 |                                  |
| Dated:   May 10, 2006 | By:                                   | /s/ BachThuy T. Vo |   |
|                                 | BachThuy T. Vo                        |
|                                 | Interim Chief Financial Officer       |
|                                      |                                       |                    |  |  |

 

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