** **

** **

**SECURITIESAND EXCHANGE COMMISSION**

**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 thequarterly period ended March 27, 2004**

** **

**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**

** **

**MICRO COMPONENT TECHNOLOGY, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**2340West County 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 file suchreports), and (2) has been subject to such filing requirements for the past 90days

Yes  ý      No  o

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

Yes  o      No  ý

The number ofshares outstanding of the Registrant’s Common Stock, as of May 7, 2004 was25,123,757.

 

 

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**MICRO COMPONENT TECHNOLOGY, INC**.

 

FORM 10-Q

 

TABLE OF CONTENTS

 
| **PART I - FINANCIAL  INFORMATION**  |                                                                                            |
|--------------------------------------|-------------------------------------------------------------------------------------------------|
|                                 |                                                                                            |
| **ITEM 1.**                          | **FINANCIAL STATEMENTS**                                                                        |   |
|                                 |                                                                                            |   |
|                                 | **CONSOLIDATED BALANCE SHEETS**                                                                 |   |
|                                 |                                                                                            |   |
|                                 | **CONSOLIDATED  STATEMENTS OF OPERATIONS**                                                      |   |
|                                 |                                                                                            |   |
|                                 | **CONSOLIDATED  STATEMENTS OF CASH FLOWS**                                                      |   |
|                                 |                                                                                            |   |
|                                 | **NOTES  TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**                             |   |
|                                 |                                                                                            |   |
| **ITEM  2.**                         | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION** |   |
|                                 |                                                                                            |   |
| ITEM  3.                             | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |   |
|                                 |                                                                                            |   |
| ITEM 4.                              | CONTROLS AND PROCEDURES                                                                         |   |
|                                 |                                                                                            |   |
| **PART II.  OTHER INFORMATION** |                                                                                            |
|                                 |                                                                                            |
| ITEM  2.                             | CHANGES  IN SECURITIES AND USE OF PROCEEDS                                                      |   |
|                                 |                                                                                            |   |
| ITEM 5.                              | OTHER INFORMATION                                                                               |   |
|                                 |                                                                                            |   |
| **ITEM 6.**                          | **EXHIBITS AND  REPORTS ON FORM 8-K**                                                           |   |
|                                 |                                                                                            |   |
| **SIGNATURES**                       |                                                                                            |
|                                 |                                                                                            |
| CERTIFICATIONS                       |                                                                                            |

 

2

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

# PART I.  FINANCIAL INFORMATION

## ITEM 1. FINANCIAL STATEMENTS

## CONSOLIDATED BALANCE SHEETS

(In thousands,except share and per share data)

(Unaudited)

 
|                                                                                                  |   | **March 27,** |   | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------|--------|-------------------|--------|
|                                                                                                  |   | **2004**      |   | **2003**          |   |
| **Assets**                                                                                            |   |          |   |              |   |
| Current assets                                                                                        |   |          |   |              |   |
| Cash and cash  equivalents                                                                            |   | $             | 1,113  |              | $      | 1,078 |   |
| Accounts  receivable, less allowance for doubtful accounts of $303 and $303,  respectively            |   | 3,177         |   | 1,539             |   |
| Inventories                                                                                           |   | 3,338         |   | 3,413             |   |
| Other                                                                                                 |   | 413           |   | 273               |   |
| Total current  assets                                                                                 |   | 8,041         |   | 6,303             |   |
|                                                                                                  |   |          |   |              |   |
| Property, plant  and equipment, net                                                                   |   | 298           |   | 336               |   |
|                                                                                                  |   |          |   |              |   |
| Debt issuance  costs, net                                                                             |   | 506           |   | 499               |   |
| Other assets                                                                                          |   | 64            |   | 56                |   |
|                                                                                                  |   |          |   |              |   |
| Total assets                                                                                          |   | $             | 8,909  |              | $      | 7,194 |   |
|                                                                                                  |   |          |   |              |   |
| **Liabilities and Stockholders’  Deficit**                                                       |   |          |   |              |   |
| Current  liabilities:                                                                                 |   |          |   |              |   |
| Line of credit                                                                                        |   | $             | 645    |              | $      | 348 |   |
| Accounts payable                                                                                      |   | 1,728         |   | 1,518             |   |
| Accrued  compensation                                                                                 |   | 564           |   | 469               |   |
| Accrued interest                                                                                      |   | 100           |   | 370               |   |
| Accrued warranty                                                                                      |   | 174           |   | 181               |   |
| Customer  prepayments and unearned service revenue                                                    |   | 672           |   | 1,410             |   |
| Deferred revenue  in excess of costs incurred                                                         |   | —        |   | 16                |   |
| Other accrued  liabilities                                                                            |   | 293           |   | 373               |   |
| Total current  liabilities                                                                            |   | 4,176         |   | 4,685             |   |
|                                                                                                  |   |          |   |              |   |
| Long-term  portion of accounts payable                                                                |   | 97            |   | 195               |   |
| Long-term  convertible note                                                                           |   | 1,721         |   | —            |   |
| 10% senior  subordinated convertible debt                                                             |   | 3,630         |   | 7,340             |   |
|                                                                                                  |   |          |   |              |   |
| Stockholders’  deficit:                                                                          |   |          |   |              |   |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                   |   | —        |   | —            |   |
| Common stock,  $.01 par value, 40,000,000 authorized, 25,114,700 and 21,145,300 issued,  respectively |   | 251           |   | 212               |   |
| Additional  paid-in capital                                                                           |   | 96,764        |   | 92,668            |   |
| Cumulative other  comprehensive loss                                                                  |   | (69           | )      | (69               | )      |
| Accumulated  deficit                                                                                  |   | (97,661       | )      | (97,837           | )      |
| Total  stockholders’ deficit                                                                     |   | (715          | )      | (5,026            | )      |
| Total  liabilities and stockholders’ deficit                                                     |   | $             | 8,909  |              | $      | 7,194 |   |

 

See notes tounaudited condensed consolidated financial statements

 

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**MICRO COMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
|                                                        |   | **Three Months Ended** |   |
|-------------------------------------------------------------|--------|------------------------|--------|
|                                                        |   | **March 27,**          |   | **March 29,** |   |
|                                                        |   | **2004**               |   | **2003** |   |
| Net sales                                                   |   | $                      | 4,268  |   | $ | 2,200 |   |
| Cost of sales                                               |   | 1,975                  |   | 1,476 |   |
|                                                        |   |                   |   |   |   |
| Gross profit                                                |   | 2,293                  |   | 724 |   |
|                                                        |   |                   |   |   |   |
| Operating  expenses:                                        |   |                   |   |   |   |
| Selling, general  and administrative                        |   | 1,273                  |   | 1,333 |   |
| Research and  development                                   |   | 649                    |   | 734 |   |
| Restructuring  charge                                       |   | —                 |   | 19 |   |
|                                                        |   |                   |   |   |   |
| Total operating  expenses                                   |   | 1,922                  |   | 2,086 |   |
|                                                        |   |                   |   |   |   |
| Income (loss)  from operations                              |   | 371                    |   | (1,362 | ) |
|                                                        |   |                   |   |   |   |
| Interest income                                             |   | 1                      |   | 1 |   |
| (Loss) gain on  disposition of assets                       |   | (12                    | )      | 153 |   |
| Interest expense  and other                                 |   | (184                   | )      | (283 | ) |
|                                                        |   |                   |   |   |   |
| Total interest  and other                                   |   | (195                   | )      | (129 | ) |
|                                                        |   |                   |   |   |   |
| Net income  (loss)                                          |   | $                      | 176    |   | $ | (1,491 | ) |
|                                                        |   |                   |   |   |   |
| Net income  (loss) per share:                               |   |                   |   |   |   |
|                                                        |   |                   |   |   |   |
| Basic                                                       |   | $                      | 0.01   |   | $ | (0.10 | ) |
| Diluted                                                     |   | $                      | 0.01   |   | $ | (0.10 | ) |
|                                                        |   |                   |   |   |   |
| Weighted average  common and equivalent shares outstanding: |   |                   |   |   |   |
|                                                        |   |                   |   |   |   |
| Basic                                                       |   | 24,336                 |   | 14,871 |   |
| Diluted                                                     |   | 27,985                 |   | 14,871 |   |

 

See notes tounaudited condensed consolidated financial statements

 

4

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**MICRO COMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OFCASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                         |   | **Three Months Ended** |   |
|------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                         |   | **March 27,**          |   | **March 29,** |   |
|                                                                         |   | **2004**               |   | **2003** |   |
| Cash flows from  operating activities:                                       |   |                   |   |   |   |
| Net income  (loss)                                                           |   | $                      | 176    |   | $ | (1,491 | ) |
| Adjustments to  reconcile net loss to net cash used in operating Activities: |   |                   |   |   |   |
| Depreciation and  amortization                                               |   | 147                    |   | 135 |   |
| (Gain) loss on  disposal of property                                         |   | 12                     |   | (153 | ) |
| Changes in  assets and liabilities:                                          |   |                   |   |   |   |
| Accounts  receivable                                                         |   | (1,638                 | )      | (1,425 | ) |
| Inventories                                                                  |   | 13                     |   | 37 |   |
| Other current  assets                                                        |   | (146                   | )      | (41 | ) |
| Accounts payable                                                             |   | 112                    |   | 656 |   |
| Accrued  restructuring costs                                                 |   | —                 |   | (95 | ) |
| Other accrued  liabilities                                                   |   | (667                   | )      | (126 | ) |
|                                                                         |   |                   |   |   |   |
| Net cash used in  operating activities                                       |   | (1,991                 | )      | (2,503 | ) |
|                                                                         |   |                   |   |   |   |
| Cash flow from  investing activities:                                        |   |                   |   |   |   |
| Purchases of  property, plant and equipment                                  |   | (27                    | )      | — |   |
| Proceeds from  disposition of property                                       |   | —                 |   | 173 |   |
|                                                                         |   |                   |   |   |   |
| Net cash (used  in) provided by investing activities                         |   | (27                    | )      | 173 |   |
|                                                                         |   |                   |   |   |   |
| Cash flows from  financing activities:                                       |   |                   |   |   |   |
| Payments of  long-term debt                                                  |   | —                 |   | (11 | ) |
| Repayment of  bank line of credit                                            |   | (348                   | )      | — |   |
| Proceeds from  institutional line of credit                                  |   | 750                    |   | — |   |
| Issuance of  long-term convertible note, net of debt issue costs             |   | 1,657                  |   | — |   |
| Proceeds from  issuance of stock                                             |   | 16                     |   | 1,362 |   |
| Stock issuance  costs                                                        |   | (22                    | )      | (218 | ) |
|                                                                         |   |                   |   |   |   |
| Net cash  provided by financing activities                                   |   | 2,053                  |   | 1,133 |   |
|                                                                         |   |                   |   |   |   |
| Net decrease in  cash and cash equivalents                                   |   | 35                     |   | (1,197 | ) |
|                                                                         |   |                   |   |   |   |
| Cash and cash  equivalents at beginning of period                            |   | 1,078                  |   | 1,560 |   |
|                                                                         |   |                   |   |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                      | 1,113  |   | $ | 363 |   |
|                                                                         |   |                   |   |   |   |
| Supplemental  cash flow information:                                         |   |                   |   |   |   |
| Non-cash  financing activities:                                              |   |                   |   |   |   |
| Stock issued in  lieu of interest                                            |   | $                      | 349    |   | $ | — |   |
| Stock issued in  conversion of 10% senior subordinated convertible debt      |   | 3,710                  |   | — |   |
| Cash paid for  interest                                                      |   | 55                     |   | 501 |   |

 

See notes tounaudited condensed consolidated financial statements

 

5

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

*Basis of Presentation*

 

The consolidatedfinancial statements include the accounts of the parent company and oursubsidiaries after elimination of all significant intercompany balances andtransactions.  All significantsubsidiaries are 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 opinionof management all adjustments, including normal recurring adjustments,necessary for 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, 2004.

 

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, 2003.

 

 

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

 

Basic earnings per shareare computed using the weighted average number of common shares outstandingduring each period.  Diluted earningsper share include the dilutive effect of common shares potentially issuableupon the 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** |
|-------------------------------------------------------|--------|------------------------|
|                                                  |   | **March 29,**          |   | **March 29,** |
|                                                  |   | **2004 (1)**           |   | **2003 (2)** |
| Weighted average  common shares outstanding           |   | 24,336                 |   | 14,871 |
| Effect of  dilutive stock options, warrants and notes |   | 3,649                  |   | — |
|                                                  |   |                   |   |   |
|                                                  |   | 27,985                 |   | 14,871 |

 

6

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                          (1)       The total number of stock options,warrants and 10% Senior Convertible Notes excluded from the calculation ofpotentially dilutive securities due to the exercise price exceeding the averagemarket price for the three months ended March 27, 2004, was 3,643,589.

 

                          (2)       We reported a loss for the periodindicated.  No adjustments were made forthe effect of stock options, which totaled 2,459,251        shares at March 29, 2003 as the effect is antidilutive.

 

**3.****                         ****REPORTING OF COMPREHENSIVE NET INCOME (LOSS)**

 

In 1997, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards(SFAS), No. 130 *Reporting Comprehensive Income* which establishes standardsfor the reporting and display of comprehensive income (loss) and its componentsin a full set of general-purpose financial statements.  Under this standard, certain revenues,expenses, gains, and losses recognized during the period are included incomprehensive loss, regardless of whether they are considered to be results ofoperations of the period.  During thethree-month periods ended March 27, 2004 and March 29, 2003, totalcomprehensive income (loss) equaled net income (loss) as reported on theConsolidated Statements of Operations.

 

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

 

Major components ofinventories were as follows (in thousands):

 

|            |   | **March  27,** |   | **December  31,** |
|-----------------|--------|---------------------|--------|-------------------|
|            |   | **2004**            |   | **2003**          |
| Raw materials   |   | $                   | 1,406  |              | $ | 1,775 |
| Work-in-process |   | 1,477               |   | 1,254             |
| Finished goods  |   | 455                 |   | 384               |
|            |   | $                   | 3,338  |              | $ | 3,413 |

 

We provide a standardthirteen-month warranty program for our equipment products. We recordprovisions for warranty claims for these products based upon historical claimperformance.  The following tableprovides the expense recorded and charges against our reserves for the quarterended March 27, 2004 (in thousands):

 

| Accrued warranty  balance at December 31, 2003 |   | $      | 181    |   |
|------------------------------------------------|--------|--------|--------|--------|
|                                           |   |   |   |
| Provision                                      |   | — |   |
|                                           |   |   |   |
| Warranty claims                                |   | (7     | )      |
|                                           |   |   |   |
| Accrued warranty  balance at March 27, 2004    |   | $      | 174    |   |

 

7

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

 

On March 9, 2004 wecompleted a $5.0 million secured financing transaction with an institutionallender.  Under the terms of thethree-year agreement, we put in place a $3.0 million secured working capitalline of credit and a $2.0 long-term convertible note.  $750,000 of the secured working capital line of credit can be convertedto shares of our common stock by the lender under certain market conditions andat a price of $1.92 per share.  The $2.0million long-term convertible note is convertible to shares of our common stockat a price of $1.79.  In connection withthe execution of this credit facility, we issued to the lender a seven-yearwarrant to purchase 400,000 shares of our common stock at exercise prices rangingfrom $2.30 to $2.88. The fair value of the warrants was determined usingthe  Black-Scholes option pricingmodel.  This resulted in a value of$391,000, which was recorded as an increase to additional paid-in- capital anda discount to the working capital line of credit and long-term convertiblenote.  This discount is amortized tointerest expense over the three-year agreement.  Our existing secured lending relationship was terminated as aresult of this transaction.  This creditfacility is secured by all the assets of the Company.

 

During the period coveredby this report, we issued 228,618 shares of our common stock to the holders ofour 10% Senior Subordinated Convertible Notes (“the Notes”) in payment ofinterest due on December 31, 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 coveredby this report, we issued a total of 3,721,532 shares of our common stock toholders of the Notes pursuant to conversion of their Notes at $1.00 per shareincluding accrued interest due at the time of conversion.  The issuance was exempt from registrationunder Rule 506 under the Securities Act of 1933, because all of the noteholderswere accredited, there was no general solicitation, and the shares were subjectto restrictions on transfer.

 

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

 

**2003Restructuring Charges**

 

During the first quarterof 2003, in response to the continued and prolonged downturn in thesemiconductor capital equipment industry, we reduced our workforce across allfunctional areas by approximately 24%, resulting in a restructuring charge of$19,000.  This charge reflectedseverance and other benefits costs associated with this reduction.  This workforce reduction affected a total of26 employees across all functional areas.

 

 

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

 

We account forstock-based transactions under SFAS No. 123*, Accounting for Stock-Based Compensation*.  As permitted by SFAS No. 123, we haveelected to continue following the guidance of APB Opinion No. 25 (asinterpreted by FIN 44) for measurement and recognition of stock-basedtransactions with employees and non-employee directors.  Because stock options

 

8

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have been granted atexercise prices at least equal to the fair market value of the stock at thegrant date, no compensation cost has been recognized for stock options issuedto employees and non-employee directors under the stock option plans.  Stock-based transactions with non-employeesare accounted for in accordance with SFAS No. 123 and related interpretations.

 

If compensation cost forour stock option and employee stock purchase plans had been determined based onthe fair value at the grant dates, consistent with the method provided in SFASNo. 148 and SFAS No. 123, our net loss and net loss per share would have beenas follows:

 

|                                                   |   | **Quarters Ended** |   |
|--------------------------------------------------------|--------|--------------------|--------|
|                                                   |   | **March 27,**      |   | **March 29,** |   |
|                                                   |   | **2004**           |   | **2003** |   |
| Net income  (loss):                                    |   |               |   |   |   |
| As reported                                            |   | $                  | 176    |   | $ | (1,491 | ) |
| Fair value  compensation expense                       |   | (219               | )      | (241 | ) |
| Pro forma                                              |   | $                  | (43    | ) | $ | (1,732 | ) |
|                                                   |   |               |   |   |   |
| Net income  (loss) per share – basic and diluted: |   |               |   |   |   |
| As reported                                            |   | $                  | 0.01   |   | $ | (0.10 | ) |
| Fair value  compensation expense                       |   | (0.01              | )      | (0.02 | ) |
| Pro forma                                              |   | $                  | 0.00   |   | $ | (0.12 | ) |
|                                                   |   |               |   |   |   |
| Stock Based  Compensation:                             |   |               |   |   |   |
| As reported                                            |   | $                  | — |   | $ | — |   |
| Fair value  compensation expense                       |   | (219               | )      | (241 | ) |
| Pro forma                                              |   | $                  | (219   | ) | $ | (241 | ) |

 

The fair value of optionsgranted under the stock options for the quarters ended March 27, 2004 and March29, 2003 was estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions for the threemonths ended March 27, 2004 and March 29, 2003.

** **

|                                     |   | **Quarters ended** |   |
|------------------------------------------|--------|--------------------|--------|
|                                     |   | **March 27,**      |   | **March 29,** |   |
|                                     |   | **2004**           |   | **2004** |   |
|                                     |   |               |   |   |   |
| Dividend yield                           |   | 0.00               | %      | 0.00 | % |
| Expected  volatility                     |   | 112.26             | %      | 88.17 | % |
| Risk-free  interest rate                 |   | 3.02               | %      | 3.87 | % |
| Expected life of  options                |   | 3.5           | years  | 3.5  | years |
| Fair value per  share of options granted |   | $1.47              |   | $1.28 |   |

 

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

 

***FASB Interpretation No. 46 —(RevisedDecember 2003), Consolidation of Variable Interest Entities, an Interpretationof ARB No. 51 (FIN 46R***).  In December 2003, the Financial

9

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Accounting StandardsBoard (FASB) issued FASB Interpretation No. 46 (Revised December 2003), *Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51 (FIN 46R)*. This standard replaces FIN 46, “*Consolidation of Variable Interest Entities*” that was issued on January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN 46Raddresses the consolidation of business enterprises of variable interestentities. (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from its requirements and provides forspecial effective dates for entities that have fully or partially applied FIN46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements ofpublic entities that have interest in structures commonly referred to asspecial purpose entities for periods ending after December 15, 2003.  FIN 46 had no effect on our financial statementsfor the quarter ended March 27, 2004, as we had no interests in special purposeentities.  Application by us for allother types of VIEs is required in financial statements for periods ending nolater than the quarter ended January 31, 2005. We do not expect the adoption of FIN 46R to have a material effect onour financial statements.

10

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

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

## RESULTS OF OPERATIONS ANDFINANCIAL 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 are a leading supplier of integrated automationsolutions for the global semiconductor test and assembly industry.  We offer complete and comprehensiveequipment automation solutions for the test, laser mark, mark inspect,singulation, sort, and packaging for shipment portions of the back-end of thesemiconductor manufacturing process that significantly improve our customers’productivity, yield and throughput.  Oursolutions include automated test handlers, factory automation software and ournew integrated Smart Solutions product line. We believe that our products can significantly improve the productivity,yield and throughput of the back-end (post wafer) parts of the manufacturingprocess, including assembling, packaging, testing and singulating semiconductordevices.

 

Thedemand for our products and services is dependent upon growth in thesemiconductor industry and the increasing automation needs of semiconductormanufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which intensified and continuedthrough the first nine months of 2003, resulting in significant adverse impactson our business including inventory revaluations charges, write downs of impairedintangible assets and significant reductions in our employee base.  In the fourth quarter of 2003 worldwidesemiconductor bookings began showing signs of stabilization; however, thecontinuance or strength of this stabilization cannot be predicted in the shortterm.

 

  As disclosed in our Form 10-K for the yearsended December 31, 2002 and December 31, 2003 a continued or intensified marketdownturn might result in significant losses, charges for inventory revaluation,asset impairment or restructuring charges. As a result of this downturn continuing throughout most of 2003, thefollowing steps were taken in 2003 and the first quarter of 2004 as part of acomprehensive restructuring effort:

 

•                    Wefurther reduced our workforce in the first and second quarters of 2003 by 24%and 4% at the time, respectively, affecting a total of 30 employees across allfunctional areas.

 

•                    Inthe second quarter of 2003, we completed the restructuring of our master leaseagreement related to our St. Paul facility resulting in the reduction of futurelease commitment under this contract.

 

•                    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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•                    In July of 2003, we completednegotiations with the majority of our vendors to extend the payment terms ofthe 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,  being restructuredwith a total of 281 vendors.  Under theterms of the extended payment plan, we have agreed to make four to eight equalpayments beginning on July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors.

 

•                    OnMarch 9, 2004 we completed a $5.0 million secured financing transaction with aninstitutional lender.  Under the termsof the three-year agreement, we put in place a $3.0 million secured workingcapital line of credit and a $2.0 long-term convertible note.  $750,000 of the secured working capital lineof credit can be converted to shares of our common stock by the lender undercertain market conditions and at a price of $1.92 per share.  The $2.0 million long-term convertible noteis convertible to shares of our common stock at a price of $1.79.  In connection with the execution of thiscredit facility, we issued to the lender a seven-year warrant to purchase400,000 shares of our common stock at exercise prices ranging from $2.30 to$2.88.  Our existing secured lendingrelationship was terminated as a result of this transaction.  This credit facility is secured by all theassets of the Company.

 

**Critical Accounting Policies**

 

*Revenue**Recognition*

 

Under SAB 104, we recognizerevenue upon shipment, as our terms are FOB shipping point, for establishedequipment products 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 could recognize revenuesrelated to shipments made in prior periods. Consequently, if these conditions exist, we may report revenue levelsthat are greater than actual shipments. During the quarter ended March 27, 2004, revenue recorded approximatedshipments.

 

*Allowance for Doubtful Accounts*

 

We record a provision for doubtful accounts based onspecific identification of our accounts receivable. This involves a degree ofjudgment based on discussion with our internal sales and marketing groups, ourcustomer base and the examination of the financial stability of ourcustomers.  There can be no assurancethat our estimates will match actual amounts ultimately written off.  During periods of downturn in the market forsemiconductor capital equipment  oreconomic recession, a greater degree of risk exists concerning the ultimatecollectability of our accounts receivable due to the impact that theseconditions might have on our customer base. No provisions were recorded for the quarter ended March 27, 2004.

 

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*Valuation**of Inventories*

 

Our inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”)method.  We maintain a standard costingsystem for our inventories.  Assumptionswith respect to direct labor utilization, standard direct and indirect costrates, vendor pricing and utilization of factory capacities are formulated inthe development of our standard costing system.  Sudden or continuing changes in the semiconductor capitalequipment market affecting our shipments can result in significant productionvariances from our standard rates. These variances directly impact our grossprofit performance and may cause variability in gross profits results fromreporting period-to-reporting period. Our labor and overhead rates are set for production rates that matchtypical market conditions.  Productionvariances are charged to cost of sales each quarter as incurred. Material standardsare based upon normal purchase volumes. Purchase price variances are charged to costs of sales each quarter asincurred.

 

Provisions to reduceinventories to the lower of cost or market are made based on a review of excessand obsolete inventories through an examination of historical componentconsumption, 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.  No write-off provision was made to ourinventories for the quarter ended March 27, 2004.

 

*Accrued Warranty*

 

We provide a standardthirteen month warranty program for our equipment products. We recordprovisions for warranty claims for these products based upon historical claimperformance.  This approach has beenapplied since the inception of the warranty program and involves a degree ofsubjectivity in that historical performance is used to estimate future warrantyclaims. There can be no assurance that our estimates will match the actualamount of future warranty claims.

 

###### **Results of Operations for the Three Months Ended March27, 2004 and March 29, 2003**

###### ** **

Net sales for the threemonths ended March 27, 2004, increased $2.1 million or 94.0% to $4.3 millioncompared to $2.2 million for the three months ended March 29, 2003.  Product acceptance requirements related toproduct and customer mix resulted in a net decrease to revenues of $0.6 millionfor the quarter ended March 29, 2003, while shipments approximated revenue forthe first quarter of 2004.  Currentquarter product sales for our strip product offering increased significantlyover the prior year comparable period and comprised approximately 67% of totalsales compared to approximately 40% in the prior comparable period.

 

Gross profit for the first quarter of 2004 increasedby $1.6 million to $2.3 million, or 53.7% of net sales, from $0.7 million, or32.9% of net sales, for the comparable period in the prior year.  The increase in gross margin in the currentyear period primarily resulted from the many restructuring efforts that we havecompleted during 2003 coupled with stabilization in the semiconductor capitalequipment market.  This stabilizationhas directly resulted in increased shipment activity for our

 

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products, resulting in fixed costs being spread over a larger number ofproducts also contributing to the overall improvement in gross profitperformance.

 

Selling, general and administrative expense in thefirst quarter of 2004 was $1.3 million, or 29.8% of net sales, compared to $1.3million, or 60.6% of net sales for the first quarter of 2003. The decrease inexpense as a percentage of sales is a result of the cost reduction measurescompleted in 2003 coupled with the increase in sales.

 

Research and development expense for the first quarterof 2004 was $0.6 million, or 15.2% of net sales compared to $0.7 million, or33.4% of net sales in the first quarter of 2003.  The decrease in expense as a percentage of sales is a result ofthe cost reduction measures completed in 2003 coupled with the increase insales.

 

The restructuring charge in the prior year totaled$19,000 or 0.9% of net sales.  Thischarge resulted from reductions of our workforce across all functional areas inthe first quarter of 2003.  This chargereflects severance and other benefits costs associated with this reduction in excessof the amounts included in our restructuring accruals at December 31,2002.  This workforce reduction affected26 employees, across all functional areas.

 

We incurred a $12,000 loss or 0.3% of sales in thefirst quarter of 2004 from the disposition of certain assets resulting from therestructuring of leases throughout 2003. In connection with the transfer of our manufacturing operations toPenang, we sold certain fixed and other assets from our St. Paul, Minnesotafacility in the first quarter of 2003 resulting in a gain on sale of $153,000or 7.0% of net sales.  Interest expenseand other totaled $184,000 or 4.3% of net sales in the current year’s quarter,compared to $283,000 or 12.9% of net sales for the comparable period in theprior year.  The interest reductionresulted from the conversion of $6.4 million of our 10% Senior SubordinatedNotes into shares of our common stock during the last part of 2003 andcontinuing through the first quarter of 2004.

 

Net income for the quarter ended March 27, 2004 was$176,000 or $0.01 per basic and fully diluted share as compared to a  net loss for the quarter ended March 29,2003 of $1.5 million or $0.10 per share.

 

**Liquidityand Capital Resources**

 

The increase in accountsreceivable and reduction of other accrued liabilites were the primary uses ofcash in the first quarter of 2004.  Thenet loss and increase in accounts receivable were the primary uses of cash inthe first quarter of the prior year. Cash used in operations was $2.0 million in the first quarter of 2004and $2.6 million in the first quarter 2003.

 

Capital expenditures were$27,000 for the first quarter of 2004 compared to zero in the first quarter of2003. The increase in capital spending was primarily in the area of technologyequipment.

 

On March 7, 2003 andMarch 26, 2003, pursuant to a private equity placement with a group of accreditedinvestors, we issued a total of 3,166,869 shares of common stock, whichresulted in net proceeds to us of approximately $1.1 million.  Stock issuance costs associated with thisoffering totaled

 

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approximately $218,000.  As part of this offering, we also issued warrants to purchase253,350 shares of common stock that have a term of five years with an exercise priceof $0.43 per share.

 

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.  $10.0 million of the Notes were originallyissued in December 2002, resulting in proceeds to us of $9.2 million.  As part of this restructuring, the companyamended the Notes of the participating noteholders to reduce the conversionprice from $2.60 per share to $1.00 per share for the remainder of the termthrough December 2006.  The agreementalso included standard anti-dilution provisions, and required the company toregister the shares with the Securities and Exchange Commission. During thefirst quarter of 2004,  $3.7 million ofthe Notes were converted to equity under this agreement resulting in theissuance of 3,710,000 shares of our common stock to the noteholders.

 

We estimate that we mayneed to raise additional capital through debt or equity offerings to supportadditional working capital requirements due to the recent increases in ourbacklogs and the potential improvements in the semiconductor capital equipmentmarkets.  There is no assurance thatadditional financing, if needed, will be available on terms and conditions acceptableor favorable to us, if at all.  However,on March 9, 2004 we completed a $5.0million secured financing transaction with an institutional lender. Under theterms of the three-year agreement, we put in place a $3.0 million securedworking capital line of credit and a $2.0 long-term convertible note.  $750,000 of the secured working capital lineof credit can be converted to shares of our common stock by the lender undercertain market condition and at a price of $1.92 per share.  The $2.0 million long-term convertible noteis convertible to shares of our common stock at a price of $1.79.  In connection with the execution ofthis credit facility, we issued to the lender a seven-year warrant to purchase400,000 shares of our common stock at exercise prices ranging from $2.30 to$2.88.  Our existing secured lendingrelationship was terminated as a result of this transaction.  This credit facility is secured by all theassets of the Company.  We believe thatthis transaction in combination with our other restructering efforts completedin 2003 will provide the cash necessary to meet our operating, working capitaland capital resource obligations through all of 2004.

 

**QUANTITATIVEAND 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.  AtMarch 27, 2004, all of our outstanding long-term debt carries interest at afixed rate. There is no material market risk relating to our long-term debt.

 

 

**IMPACTOF ACCOUNTING STANDARDS**

 

In December of 2003 the Financial Accounting Standards Board (FASB)issued*******InterpretationNo. 46 —(Revised December 2003), Consolidation of Variable Interest Entities,an********Interpretationof ARB No. 51 (FIN46R).*  This standard replaces FIN 46, “*Consolidation of Variable InterestEntities*” that was issued onJanuary 2003.  FIN 46R modifies orclarifies various provisions of FIN 46. FIN 46R

 

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addresses the consolidation of businessenterprises of variable interest entities. (VIEs), as defined by FIN 46R.  FIN 46R exempts certain entities from itsrequirements and provides for special effective dates for entities that havefully or partially applied FIN 46 prior to issuance of FIN 46R.  Otherwise, application of FIN 46R isrequired in financial statements of public entities that have interest instructures commonly referred to as special purpose entities for periods endingafter December 15, 2003.  FIN 46 had noeffect on our financial statements for the quarter ended March 27, 2004, as wehad no interests in special purpose entities. Application by us for all other types of VIEs is required in financialstatements for periods ending no later than the quarter ended January 31,2005.  We do not expect the adoption ofFIN 46R to have a material effect on our financial statements.

 

**RISKFACTORS**

 

Except for the historicalinformation contained herein, certain of the matters discussed in this reportare “forward-looking statements” as defined in the Private SecuritiesLitigation Reform Act of 1995.  These“forward-looking statements” involve certain risks and uncertainties,including, but not limited to, the following: (1) a renewal of a downturn inthe semiconductor market which often has a disproportionately negative impacton manufacturers of semiconductor capital equipment, and which could cause usto incur significant cash losses decreasing our cash and expose us to potentialfurther charges for restructuring, excess and obsolete inventory and/orimpairment of assets; (2) the market for our products is highly competitivethroughout the world, primarily from manufacturers in the United States, Europeand Asia, and many of our competitors are considerably larger and haveconsiderably greater financial resources than we do which may allow them todevelop superior or lower priced products; (3) rapid changes in technology andin tester and handler products, which we must respond to successfully in orderfor our products to avoid becoming noncompetitive or obsolete; (4) customeracceptance of our new products, including the strip-based Tapestry handlingsystems and Smart Solutions products, and other singulated device handlerproducts in which we have invested significant amounts of inventory; (5)possible loss of any of our key customers, who account for a substantialpercentage of our business; (6) the possible adverse impact of competition inmarkets which are highly competitive; (7) the possible adverse impact ofeconomic or political changes in markets we serve;  and (8) other factors detailed from time to time in our SECreports, including but not limited to the discussion in the Management’sDiscussion & Analysis included in Form 10-K for the year ended December 31,2003.

 

All forecasts andprojections in this report are “forward-looking statements,” and are based onour current expectations of our near-term results, based on current informationavailable pertaining to us, including risk factors discussed above.  Actual results could differ materially.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation ofour management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, we evaluated the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a-15(e)under the Exchange Act) as of the end of period covered by this report.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls

 

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and procedures are effective in timely alerting them to the materialinformation relating to us (or our consolidated subsidiaries) required to beincluded in our periodic SEC filings.

 

Changes in internal controls.

 

There were no significant changes made in our internalcontrols or, to our knowledge, in other factors that could significantly affectthese controls, subsequent to the date of their evaluation.

 

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**MICRO COMPONENT TECHNOLOGY, INC.**

## FORM10-Q

# PART II.  OTHERINFORMATION

### ** **

### **Item2.  Changes in Securities and Use of Proceeds**

 

                  During the period covered by this report, we issued228,618 shares of our common stock to the holders of our 10% SeniorSubordinated Convertible Notes (“the Notes”) in payment of interest due onDecember 31, 2003.  The issuance wasexempt from registration under Rule 506 under the Securities Act of 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 issueda total of 3,721,532 shares of our common stock to holders of the Notespursuant to conversion of their Notes at $1.00 per share including accruedinterest due at the time of conversion. The issuance was exempt from registration under Rule 506 under the SecuritiesAct of 1933, because all of the noteholders were accredited, there was nogeneral solicitation, and the shares were subject to restrictions on transfer.

 

**Item5.  Other Information**

 

                  On March 9, 2004 we completeda $5.0 million secured financing transaction with an institutional lender.Under the terms of the three-year agreement, we put in place a $3.0 millionsecured working capital line of credit and a $2.0 long-term convertiblenote.  $750,000 of the secured workingcapital line of credit can be converted to shares of our common stock by thelender under certain market condition and at a price of $1.92 per share.  The $2.0 million long-term convertible noteis convertible to shares of our common stock at a price of $1.79.  In connection with the execution of this creditfacility, we issued to the lender a seven-year warrant to purchase 400,000shares of our common stock at exercise prices ranging from $2.30 to $2.88.  Our existing secured lending relationshipwas terminated as a result of this transaction.  This credit facility is secured by all the assets of the Company.

 

### **Item6.  Exhibits and Reports on Form 8-K**

 

(a)   Reports onForm 8-K

 

On February 17, 2004, weissued a press release disclosing financial information regarding the quarterand year ended December 31, 2003, for which a Form 8-K was filed on March 31,2004.

 

(b)   ExhibitIndex

 
| 14     |   | Code of Ethics (filed herewith).                            |
|--------|--------|-------------------------------------------------------------|
|   |   |                                                        |
| 31.1   |   | Certification of Chief Executive Officer (filed  herewith). |
|   |   |                                                        |
| 31.2   |   | Certification of Chief Financial Officer (filed  herewith). |
|   |   |                                                        |
| 32     |   | Section 1350 Certification (filed herewith).                |

 

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**MICRO COMPONENT 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 7, 2004 | By:                                                              | /s/ Roger E. Gower |
|                          | Roger E. Gower  President and Chief Executive Officer            |
|                          |                                                             |
|                          |                                                             |   |
|                          |                                                             | And |
|                          |                                                             |   |
|                          |                                                             |   |
| Dated:  May 7, 2004 | By:                                                              | /s/ Thomas P. Maun |
|                          | Thomas P. Maun  Chief Financial Officer Chief Accounting Officer |

#  

# 19

#