**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ý****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe year ended December 31, 2003**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number 0-22384**

**MICROCOMPONENT TECHNOLOGY, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**2340West County Road C, St. Paul, Minnesota 55113**

(Address of principal executive offices)

Registrant’s telephone number, including areacode**(651) 697-4000**

 

Securities registered pursuant toSection 12(b) of the Act: **None**

Securities registered pursuant toSection 12(g) of the Act:

**COMMONSTOCK, $.01 PAR VALUE**

(Title of Class)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes    ý                                                No    o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes o  No ý

 

The aggregate market value of the common stock held by non-affiliatesof the Registrant as of June 28, 2003 (the business day of theRegistrant’s most recently completed second fiscal quarter), was $7.79 millionbased upon the closing price $0.45 on that date for the shares.

 

Number of shares outstanding of the Registrant’s Common stock, as of****March 15, 2004****is 24,784,776.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Definitive Proxy Statement for the annualmeeting of stockholders (the “Proxy Statement”) to be filed within 120 daysafter the Registrant’s fiscal year ended December 31, 2003, are incorporatedby reference into Part III.

 

 

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

 

**TABLE OF CONTENTS**

 
| **PART I**                                     |      |
|------------------------------------------------|-----------|
|                                           |      |
|                                           | ITEM 1.   | Business |   |
|                                           |      |   |   |
|                                           | ITEM 2.   | Properties |   |
|                                           |      |   |   |
|                                           | ITEM 3.   | Legal  Proceedings |   |
|                                           |      |   |   |
|                                           | ITEM 4.   | Submission  of Matters to a Vote of Security Holders |   |
|                                           |      |   |   |
| **PART II**                                    |      |   |
|                                           |      |   |   |
|                                           | ITEM 5.   | Market for Registrant’s Common Stock, Related Stockholder Matters and  Issuer Purchases of Equity Securities |   |
|                                           |      |   |   |
|                                           | ITEM 6.   | Selected  Consolidated Financial Data |   |
|                                           |      |   |   |
|                                           | ITEM 7.   | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |   |
|                                           |      |   |   |
|                                           | ITEM  7A. | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                           |      |   |   |
|                                           | ITEM 8.   | Consolidated  Financial Statements and Supplementary Data |   |
|                                           |      |   |   |
|                                           | ITEM 9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |   |
|                                           |      |   |   |
|                                           | ITEM  9A. | Controls  and Procedures |   |
|                                           |      |   |   |
| **PART III**                                   |      |   |
|                                           |      |   |   |
|                                           | ITEM  10. | Directors  and Executive Officers of the Registrant |   |
|                                           |      |   |   |
|                                           | ITEM  11. | Executive  Compensation |   |
|                                           |      |   |   |
|                                           | ITEM  12. | Security Ownership of Certain Beneficial Owners and Management and  Related Stockholders Matters |   |
|                                           |      |   |   |
|                                           | ITEM  13. | Certain  Relationships and Related Transactions |   |
|                                           |      |   |   |
|                                           | ITEM  14. | Principal  Accountant Fees and Services |   |
|                                           |      |   |   |
|                                           | ITEM  15. | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |   |
|                                           |      |   |   |
| **Index to Consolidated Financial Statements** |      |
|                                           |      |   |
| Signatures  and Certifications                 |      |

 

2

----

 

**PART I**

 

This Form 10-K contains certain forward-looking statements.  For this purpose, any statements containedin this Form 10-K that are not statements of historical fact may be deemed tobe forward-looking statements.  Withoutlimiting the foregoing, words such as “may,” “will,” “expect,” “believe,”“anticipate,” “estimate” or “continue” or comparable terminology are intendedto identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties,and actual results may differ materially depending on a variety of factors,including those set forth in the section below entitled “Risk Factors.”****

 

**ITEM 1****.  Business **

 

**General**

 

Unless the context otherwise requires, references in this Report onForm 10-K to “MCT”, “ We”, “Us”, “Registrant” and the “Company” refer to Micro ComponentTechnology, Inc. and its consolidated subsidiaries. MCT was incorporatedin Minnesota on June 20, 1972, was reorganized as a Delaware corporationon June 28, 1983 and reorganized as a Minnesota corporation onNovember 6, 1996.  MCT has threewholly owned active operating subsidiaries, Micro Component Technology AsiaPte. Ltd., (“MCT Asia”), MCT Asia (Penang) Sdn. Bhd., (“Penang”), and MCT Philippines,Inc (“Philippines”).  Our principalexecutive offices are located at 2340 West County Road C, St. Paul, Minnesota55113 and our telephone number at that location is (651) 697-4000.

 

Our trademarks used in this Form 10-K are:  MCT, Infinity Systems, Aseco, ***Tapestry***â,Smart Solutions, SmartMark, SmartSort, SmartTrak, Isocut, MCT 5100, MCT 7632,S-170 and S-130.  All other trademarksor trade names referred to in this Form 10-K are the property of their respectiveowners.

 

**Background**

 

On June 29, 1999, we acquired certain assets and assumed certainliabilities of the Systems Integration unit of FICO America, Inc., forming theInfinity Systems Division to develop and implement Manufacturing ExecutionSystems, and factory control systems to customers in the semiconductorindustry.

 

On January 31, 2000, we completed our acquisition of AsecoCorporation, a Massachusetts based manufacturer of handling equipment.  The acquisition was structured as astock-for-stock purchase and was accounted for using the purchase method ofaccounting.  The purchase price totaled$24.0 million, consisting of 2.6 million shares of MCT common stock valued at$22.5 million issued to former Aseco shareholders and $1.5 million ofacquisition-related costs.

 

On April 11, 2000, our Board of Directors elected to change ourfiscal year end to a year ending on December 31, effectiveDecember 31, 1999.  Our interimthirteen-week quarters each end on a Saturday.

 

On August 16, 2000, we issued 3,000,000 shares of common stock,and on September 18, 2000, we issued 290,000 shares of common stock, in apublic stock offering.  Proceeds fromthe offering totaled $19.7 million.

 

On December 24, 2001, we issued $10.0 million of 10% SeniorSubordinated Convertible Notes due in 2006 to a group of accreditedinvestors.  These Notes are convertibleinto MCT common stock. The conversion price was initially $2.60 per share, andhas been reduced to $1.00 per share for substantially all of the Notes.  The reduction in conversion price was offered to Noteholders inexchange for their agreement to receive common stock in lieu of cash interestpayments for a period of two years.  TheNotes are redeemable by MCT at any time after January 3, 2004 as long asthe market price of our common stock equals or exceeds 150% of the conversion

 

3

----

 

price.  Proceeds of the Notes,net of debt issuance costs, totaled $9.2 million.  Holders of the Notes have standard registration rights if theyconvert the Notes to common stock.

 

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

 

On June 9, 2003, the company completed a one-year, $2.5 millionsecured working capital line of credit agreement with a bank.  Under the terms of the agreement, thecompany may borrow up to eighty percent (80%) of qualified receivables.  Additionally, under this agreement thecompany granted a first security interest in all assets of the company.  As of December 31, 2003, $0.38 millionwas outstanding under this agreement.

 

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, and weagreed to reduce the conversion price to $1.00 per share.

 

**Introduction**

 

We are a leading supplier of integrated automation solutions for theglobal semiconductor test and assembly industry.  We offer complete and comprehensive equipment automationsolutions for the test, laser mark, mark inspect, singulation, sort, and packagingfor shipment portions of the back-end of the semiconductor manufacturingprocess that significantly improve our customers’ productivity, yield andthroughput.  Our solutions include ourseries of integrated Smart Solutions, automated test handlers, factoryautomation software and equipment integration services.  Our customers include many leadingsemiconductor companies such as Microchip Technologies, Analog Devices,National Semiconductor, Phillips Semiconductor, Cypress Semiconductor and STMicroelectronics and many of the leading back-end contract test and assemblycompanies including Amkor and NS Electronics Bangkok.  We believe we have one of the world’s largest installed bases ofhandlers used to test semiconductor devices.

 

Semiconductor devices are becoming more complex and are characterizedby shrinking semiconductor device sizes, miniaturized packaging, increasedcircuitry and larger wafer sizes.  Thesetrends have led manufacturers to seek new tools and new solutions to meet theirdemanding requirements.  We believe thatour complete offering of equipment automation products and services allowsmanufacturers to effectively address evolving process technologies andpackaging formats, such as QFN (quad flat packages with no external leads) andminiaturized packaging.

 

Beginning in 1999, we broadened our strategy from that of a testhandler manufacturer to also a provider of comprehensive equipment automationsolutions for the back-end of the semiconductor manufacturing process.  Consistent with this new strategy, wecompleted two acquisitions.  Ouracquisition of Infinity Systems in June 1999, a company involved in thedevelopment of factory automation software, was integral to the development ofour integrated equipment Smart Solutions product suite.  In January 2000, we completed our acquisitionof Aseco, which provided us with increased machine vision and roboticsengineering technology critical to the handling of strips and wafers.

 

**Industry Overview**

 

The semiconductor device industry had grown tremendously over theten-year period ending in the year 2000. This growth had been driven bytraditional semiconductor markets like personal computers and data processing,and more recently by the proliferation of semiconductor devices intelecommunications, wireless communications,

 

4

----

 

and consumer electronics, as well as Internet infrastructureequipment.  However, the semiconductorcapital equipment market, in which we compete, has historically been subject tocyclical periods of high growth and contraction.  In the latter part of 2000, the semiconductor capital equipmentmarket went into a deep and prolonged downturn, which has continued throughmost of 2003.  Although the marketappears to have stabilized and shown signs of recent growth, there are noassurances that it will return to its historical growth rates or sustain itspresent improvement.

 

The process of semiconductor manufacturing is one of the mostcomplicated and logistically challenging manufacturing processes in theworld.  An advanced semiconductor devicecan travel thousands of miles and undergo as many as 500 production stepsbefore completion.  The semiconductordevice manufacturing process is traditionally divided into two parts: the front-end,which includes wafer fabrication from raw materials to a finished wafer; andthe back-end, which includes semiconductor device assembly, test, andpackaging.  Front-end and back-endmanufacturing facilities are expected to run 24 hours a day, 7 days a week toprovide the productivity needed to meet the requirements of the market.

 

Initially, semiconductor manufacturers concentrated their efforts onimproving the more expensive front-end wafer fabrication process.  They improved the front-end by firstautomating the individual production tools and more recently by integrating thevarious production tools through factory automation software.  Tool automation was significant because itreplaced most human handling of the wafers with robotics, resulting in dramaticallyincreased yields.  Factory automationsoftware is significantly improving productivity, yield and throughput in thefront-end by utilizing powerful production scheduling, materials handling andprocess tool control software.

 

Automation and process improvement of back-end tools and facilities isseverely lagging the front-end.  Onlyrecently have manufacturers begun to seek automation and process solutions forthe back-end production process.  Thisis because, historically, the cost of back-end assembly and test processes wasonly a small portion of the total semiconductor device cost and traditionalprocesses were able to provide adequate throughput.  Today the cost of back-end assembly and test per semiconductordevice often equals or exceeds the wafer fabrication cost per semiconductordevice.  We believe that asmanufacturers seek to raise the standards of yield, productivity, throughputand cost reduction in the back-end, the growth rate of the newly developingback-end automation market could increase rapidly.

 

**Traditional SemiconductorManufacturing Process**

 

Semiconductor devices arrive for test in strip or wafer format, witheach strip or wafer containing multiple individual devices.  Until recently, most semiconductormanufacturers believed it was necessary to test individual semiconductordevices after they were singulated, or cut from the strip or wafer.  However, as semiconductor device and packagesizes have shrunk, they have become extremely difficult to handleindividually.  For example,manufacturers’ chip scale packages, or CSPs, are nearly the same size as thedie they package.  Traditional handlingtools do not have the precision to adequately address the various semiconductordevice size and chip-scale packaging technologies demanded bymanufacturers.  As a result, handlingtools designed for singulated processes have become a bottleneck to throughput.

 

Manufacturers now acknowledge that post-test singulation can be done,in certain package formats, without damage to the device.  This understanding permits manufacturers toprocess, handle, and test multiple devices while still in strip or waferformat.  Strip handling increasesprocess flexibility by permitting the handling and testing of a variety ofpackages, substrates and semiconductor device sizes. In addition, striphandling significantly increases throughput by reducing the number of processsteps and by allowing the tester to easily test multiple semiconductor devicesin parallel.  We believe that asmanufacturers seek to increase productivity, yield and throughput, they willincreasingly adopt strip test processing. Consequently, we believe strip test processing technology will becritical to any back-end automation strategy and will facilitate re-tooling ofmany back end processes.

 

5

----

 

In implementing broader automation strategies in the back-end,manufacturers face other significant challenges besides the development ofstrip processing tools.  For example,production tools in the back-end historically have not communicated well withone another, if at all, and the transitions between production steps have notbeen integrated.  This lack ofcommunication and integration has prevented back-end manufacturers fromrealizing many of the benefits of factory automation and has prevented thecollection of critical process data.

 

**Our Solution**

 

We seek to provide our customers comprehensive equipment automationsolutions for their test and assembly processes.  By deploying our products and services, our customers are able toimprove their production yields, factory throughput, tool productivity andutilization while reducing product cost. The key components of our solution are:

 

• Tapestryseries automated strip handler,

• SmartSolutions integrated equipment product series,

• InfinitySystems factory automation software and equipment integration services, and

• Line oftraditional test handlers for singulated processes.

 

Our solution provides the following benefits to our customers:

 

***Flexibility toaddress new form factors, including wafers and strips.***  We believe that our Tapestry series ofhandler are among the first handlers capable of processing semiconductordevices in strip or wafer formats. Tapestry provides increased flexibility, permitting the handling andtesting of a variety of packages, substrates and semiconductor devicetypes.  Depending on the application, webelieve that our Tapestry handler’s throughput capability is three to ten timesgreater than existing singulated handling options available today.

 

***Ability to collectcritical process data. ***OurSmart Solutions equipment products utilize our factory automation software toprovide both the hardware and software necessary to accurately track importantyield events in the test and assembly portion of the back-end process.  We use state-of-the-art technology includingmachine vision to accurately track all semiconductor devices as they travelthrough the test and assembly processes. This machine vision technology is not only critical to the precisepositioning of strips, but also enables our software to generate criticalprocess data.  This information,together with yield information obtained in the assembly process and thefront-end facility, can provide real-time data on the entire semiconductor manufacturingprocess for each wafer, giving manufacturers the information they need toimprove their processes and increase their yields.

 

***Deployment ofintegrated, comprehensive solutions.***  Our suite of equipment automation tools,software products and services addresses the varied automation needs ofindividual back-end manufacturing facilities. Our factory automation software has the ability to integrate productiontools from various manufacturers into one total solution.  This allows our customers to fulfill a significantportion of their test and assembly automation needs through a single supplier,thereby simplifying training, maintenance, capacity expansion and supplier accountability.

 

***Worldwide serviceand support engineering.***  We provide worldwide service and support engineering to ourcustomers as part of the purchase of all of our products, which includescomprehensive installation support. As our products have expanded to offergreater functionality, we have provided application engineering support so thatour customers can take advantage of these advances to improve their processes.

 

**Strategy**

 

Our objective is to be the leading supplierfor the newly developing market of automated solutions for the semiconductortest and assembly market.  Key elementsof our strategy include:

 

6

----

 

***Providingcomprehensive automated solutions.***  Today, we provide equipment automationsolutions for the test and assembly portion of the semiconductor manufacturingprocess, including test, laser mark, mark inspect, and other processes.  In addition, we are expanding our automationsolutions to include equipment integration solutions compatible with productsfrom a greater number of other equipment manufacturers such as trim, form andsingulation system providers.  We haveenhanced the software component of our automation solutions by adding dataanalysis and report generating capabilities to increase our customer’s abilityto improve their manufacturing process. In the future we plan to expand the Smart Solution suite of products tohandle other processes within the semiconductor test and assembly area.

 

***Capitalizing onemerging chip scale packaging, or CSP, process development.***  Our Smart Solutions and Tapestry productsalready meet initial chip scale package process requirements through striphandling.  However, the vast numbers ofnew chip scale packages, recently introduced, have imposed additionalrequirements on semiconductor test and assembly processes, including theability to perform multi-pass testing and stacked die testing.  As a leader in providing equipmentautomation solutions that address chip scale packaging technologies, we arecontinuing development of next-generation handling and equipment automationsolutions for advanced semiconductor device packaging.

 

***Strengthening keycustomer relationships.***  Our customers include many of the world’s leading providers ofsemiconductor devices as well as major third-party test and assemblycompanies.  We expect that our customerswill look to us to help resolve their process as well as automation problemsthroughout the back-end.   As we solveour customers’ diverse needs, we will deepen our present customer relationshipsand also build our knowledge base so that we can develop similar relationshipswith others in the semiconductor manufacturing industry.

 

***Leveraging ourstrong sales and service capability.***  We predominantly sell our products throughour direct sales force and have established sales and service offices in theworld’s major centers of semiconductor manufacturing including Penang, Malaysiaand in the Philippines.  In addition toour sales and service engineers, we have several applications engineers in keycustomer support locations.  We haveplaced software engineers in several Asian locations to directly supportInfinity Systems’ pursuit of factory automation software sales.

 

***Continuing todevelop and support existing singulated test handling solutions and products.***  We believe that we have one of the largestinstalled bases of traditional test handlers in the world.  We intend to support our customers who usesingulated test handling with new product introductions for specialtyapplications.

 

# **Products**

 

***AutomationProducts***

 

Our Smart Solutions equipment suite of products, once integrated with atester, are designed to automate the entire test process from the point wherethe semiconductor devices have been packaged, through test, laser mark,inspection, singulation and sort, to the point of shipment to thecustomer.  Our Smart Solutions productfamily offers semiconductor manufacturers greater flexibility, yield andthroughput.  These products are designedto meet the back-end semiconductor manufacturer’s demand for greater productionefficiency, lower cost of test and manufacturing flexibility.  The following table sets forth our keyautomation product offerings by category, date introduced and application.

 

7

----

 
| **Automation Product Category** |   | **Product  Name**                   |   | **Introduced**             |   | **Applications**                                                                                                                                                                           |
|---------------------------------|--------|-------------------------------------|--------|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                |   |                       |   |                                                                                                                                                                                       |
| Smart Solutions                 |   | Tapestry SC                         |   | July 2003             |   | A next generation handling system for semiconductor devices that are  in strip or wafer package formats.                                                                                   |
|                            |   | Tapestry                            |   | February 1999         |   | A next generation handling system for semiconductor devices that are  in strip or wafer package formats.                                                                                   |
|                            |   | SmartMark                           |   | May 2000                   |   | An automated high-speed laser marker for integration with strip handling  or for marking strips with 2D codes.                                                                             |
|                            |   | SmartTrak                           |   | May 2000                   |   | Software management system providing a map with information about  each semiconductor device in the strip.                                                                                 |
|                            |   | Input/Output Module (Slotted)       |   | February 1999         |   | Automatic loading and unloading module of strips contained in a slotted  magazine assembly.                                                                                                |
|                            |   | Input/Output Module (Stacked)       |   | May 2000                   |   | Automated loading and unloading of strips contained in a stacked magazine  assembly.                                                                                                       |
| Automation Software             |   | Infinity Systems Software Solutions |   | Acquired in June 1999 |   | Manufacturing software control systems for semiconductor assembly and  test plants including equipment integration through overall factory and  corporate information systems integration. |

 

***Smart Solutions****.*  Our Smart Solutions equipment product familywas introduced to meet the anticipated evolution of back-end manufacturing fromsingulated handling to strip processing through the final stages of assemblyand electrical test.  Additionally, ourSmart Solutions products are designed with electronic strip mapping capabilityas a cornerstone.  As high-densitysemiconductor strips with tiny chip scale packages become the standard,electronic strip mapping addresses the problem of manually tracking individualsemiconductor devices within the strip. The new Smart Solutions systems provide customers enhanced performancein either stand-alone or integrated assembly lines.  The current average selling price for Smart Solutions productsvary from $300,000 for a single module to approximately $1.0 million for asystem that includes all of the components.

 

Tapestry SC, introduced in July 2003, is our next generationsystem for semiconductor devices that are in strip format.  The system is targeted to meet the growingneed for lower cost of ownership, greater flexibility, easier use, increasedprocess control, faster set-up and changeover times.  The Tapestry SC has several optional features and can be targetedat several different applications with the potential to add additional optionsand / or capability at a later time. The Tapestry SC is compatible and complementary to the Tapestry PH-1.

 

Tapestry, our strip handling system introduced in February 1999,is the flagship of the Smart Solution product family.  Tapestry is a versatile, high volume, parallel test handling andthermal conditioning system for semiconductor devices that are in stripformat.  Thermal conditioning isrequired to ensure that a semiconductor device can operate normally in a widerange of temperatures.  Tapestry cancondition devices at temperatures ranging from –40 degrees centigrade to +130degrees centigrade.  The system iscapable of handling fine pitch chip scale packages as well as traditionalleaded semiconductor devices in strip format. Using standard industry interfaces, the system is designed to functionas a stand-alone system, or can be integrated into an in-line process with ourother Smart Solution products or equipment of other manufacturers.

 

SmartMark, our intelligent laser marking system, offers customers amethod for marking individual semiconductor devices uniquely within stripaccording to their corresponding electronic strip map.  SmartMark utilizes a commercial laser systemand two-dimensional reader.  We alsoprovide an optional vision system for post-mark inspection.

 

Our suite of Smart Solution equipment products includes additionalmodules to assist companies in automating the back-end of the semiconductormanufacturing process using the new strip format.  These include the Isocut module for electrical isolation ofsemiconductor devices in order to allow them to be tested in strip form.  We also have input/output devices for bothslotted and stacked magazines used with strips.

 

***AutomationSoftware. **** *Infinity Systems SoftwareSolutions provide highly sophisticated systems integration services to thesemiconductor test and assembly industry. Infinity Systems’ solutions assist customers in creating either newmanufacturing environments or implementing new methods and control systems inexisting ones.  These installationsallow previously isolated stand-alone equipment to exchange information withother equipment and provide for remote monitoring and control of thesesystems.  Our engineering experience,efficient software development process, strong project management and ourunderstanding of semiconductor handling systems

 

8

----

 

allow us to assist customers in specifying equipment behavior andsoftware interfaces as a proactive component of the design and procurementprocess.

 

***SingulatedHandling Products***

 

We also provide more traditional singulated handling products utilizinggravity-feed technology.  As a result ofour shift in product strategy to strip-based solutions, we will build oursingulated products only when a sales order exists and if technologypermits.  We continue to support theseproducts for our installed base of systems for consumable and spare parts.

 
| **Singulated Handling Products** |   | **Product  Name** |   | **Introduced**      |   | **Applications**                                                                                              |
|----------------------------------|--------|-------------------|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------|
| Gravity Feed                     |   | 5100              |   | December 1996  |   | High-speed dual site test handler for small outline surface-mount packages,  utilizing tube input and output. |
|                             |   | 5105              |   | July 2002      |   | Optimized system for testing RF devices based on the 5100 design.                                             |
|                             |   | S-170             |   | September 1997 |   | Single site test handler for large surface-mount packages, utilizing  tray input and output.                  |
|                             |   | S-130             |   | January 1987   |   | Single site test handler for small outline surface-mount packages,  utilizing tube input and output.          |
|                             |   | 4610              |   | April 1985     |   | Dual site test handler for large surface-mount packages, utilizing  tube input and output.                    |

 

Our gravity-feed handling products are designed for test handling ofsurface mount semiconductor devices that are transported in bulk or in plastictubes.  Our handlers rely on gravity tomove untested semiconductor devices from the top of the handler, where thetemperature of the semiconductor device is modified to temperatures rangingfrom –55 degrees centigrade to +155 degrees centigrade, depending on thehandler, to the test site and then to the output bins based on the quality ofthe semiconductor device.

 

Our 5100/5105 gravity feed handlers are capable of testing one or twodevices in parallel with throughput of up to 14,400 devices per hour with anindex time of only 0.5 seconds.  It canbe configured to handle a variety of devices with several different kits forvarying customer requirements.

 

***Other Products and Services***

 

We provide service and spare parts for all of our current and many ofour discontinued products. We have also done significant business in supportservices for a semiconductor device tester that is still widely used but thatwas last manufactured by us in 1993.

 

**Researchand Development**

 

As an important element of our business strategy, we work closely withour customers to develop new products and enhancements of existing products tomeet the evolving needs of the test and assembly market, particularly withrespect to emerging semiconductor devices, while striving to provide the lowestcost of test.  These efforts,historically focused on test handler products, have resulted in the successfulintroduction of several new product platforms, including our 5100, S-130 andS-170, the Tapestry and Tapestry SC strip testing and associated handlingmodules, and our SmartMark products.

 

Although we rely primarily on our internal engineering capabilities todevelop new products and enhance existing products, we also utilize contractservices to enhance our technical capabilities or temporarily expand ourresources.  In addition, we work closelywith several manufacturers of products that are incorporated into our productsor are complementary to our products when we believe a higher quality, lowercost product would result.

 

An ongoing goal of our research and development activities is to reducethe time required to develop new products and bring them to market.  As the back-end process becomes increasinglyautomated and complex, the development of improved software for our productsbecomes increasingly important.

 

9

----

 

Our research and development expenses were$2.4 million, $4.2 million, and $7.9 million in the years endedDecember 31, 2003, 2002 and 2001, respectively.  Our combined resources totaled 16 employees andcontractors in research and development, or approximately 16% of our entireworkforce, at December 31, 2003. We expect research and developmentexpenses to remain consistent with 2003 levels, subject to increases due to customerrequirements for system related products.

 

**Customers**

 

Our customers include many of the leading manufacturers ofsemiconductor devices, as well as test and assembly companies, in the UnitedStates, Europe and Asia.  In recentyears, our significant customers have shifted from the major semiconductormanufacturers to test and assembly companies, corresponding to the increasedutilization of test and assembly companies by the major semiconductormanufacturers.  Microchip Technologiesand Analog Devices accounted for 32% and 9% of our net sales, respectively, inthe year ended December 31, 2003. Analog Devices and National Systems accounted for 16% and 15% of our netsales, respectively, in the year ended December 31, 2002.  AmkorTechnology, Inc. accounted for 17%, Analog Devices 13% and PhillipsSemiconductor 11% of our net sales in the year ended December 31, 2001,respectively.

 

Our customers tend to limit the number of qualified equipment vendorsthey purchase from in order to gain the efficiencies of standardization acrosstheir production process.  We thereforeexpend substantial efforts to maintain our relationships with our existingmajor customers to increase the likelihood that they will continue to selectour products for their future generations of semiconductor devices.

 

**Marketing, Sales andWorldwide Support**

 

We market our products primarily to semiconductor manufacturers andthird party test and assembly companies through our own sales force and inselected markets through independent sales representatives anddistributors.  Our automation solutions,however, are marketed directly by our employees to the key personnel atcustomers and potential customers who are in charge of capital equipment for theentire back-end.  These sales frequentlyinvolve major decisions by the customer as to the configuration and operationof its entire back-end operation. Consequently, the sales cycle for Smart Solutions products may be longerthan for our traditional handler products as the average order amount isgenerally larger.

 

We augment our sales efforts with direct customer support/serviceengineers and application engineers based in the field.  These engineers are specialists in ourproduct portfolio and partner with our customers to help determine productrequirements.  Our service engineersinstall our equipment and train the customers’ operators and maintenancetechnicians on the proper use and care of our equipment.  Our application engineers help identify emergingmarkets for new products.

 

We established a presence in Asia more than 20 years ago, where weoperate through our subsidiaries with offices in Singapore and Penang,Malaysia.  To supplement the region’ssales and service coverage, we use sales representative companies anddistributors in Korea, Taiwan and China. We also established an office in the Philippines to provide better salesand service support and the establishment of a software development group.  We have stationed service engineers in Singapore,Malaysia, Thailand and the Philippines for rapid response to customer needs inAsia.

 

**Manufacturing andSuppliers**

 

In 2002, we began the transition of our high volume manufacturingoperations from our St. Paul, Minnesota facility to Penang, Malaysia.  This was completed in early 2003.  It is our belief that our new Malaysian operationswill provide cost savings as well as an increased presence in our prime salesgeographical area.  We combineproprietary software and components developed in our facilities with componentsand subassemblies obtained from outside suppliers.  We have established relationships with suppliers in Malaysiawhich allow us to

 

10

----

 

out-source manufacturing of our components to a number of differentsuppliers. We do not maintain any long-term supply agreements with any of ourkey suppliers.

 

**Competition**

 

The semiconductor device testing and assembly equipment industry ishighly competitive, and the market for our automation products and services isexpected to become more competitive.  Weface substantial competition throughout the world primarily from manufacturersin Asia, the United States and Japan. The only companies that we are aware of that currently offer aproduction grade strip handling solution comparable to our Tapestry productsare Fico BV, ASM International, Electroglas, Tesec and Cohu, Inc., whoseproducts were introduced between 1995 and 2003.  However, we are aware that other companies are developing striphandling solutions, some have shipped beta versions to customers, and we expectother companies will offer automation systems for the back-end when striptesting technology becomes more accepted. Our primary competitors in the traditional handler market are AdvantestCorporation, Aetrium Incorporated, Cohu, Inc., Multitest Electronics SystemsGmbH, and Rasco AG.  Many of thesecompetitors are considerably larger and have considerably greater financialresources than we do.

 

The principal elements of competition in our markets include throughputcapability, quality, reliability, price, product performance, customer serviceand support, financial strength, versatility and the ability to deliver onschedule.  Although we believe that wecompete favorably with respect to each of these factors, new productintroductions by our competitors could cause a decline in sales or loss ofmarket acceptance of our existing products. If competitors introduce more technologically advanced products, thedemand for our similar products would likely be reduced.

 

**Intellectual PropertyRights**

 

We attempt to protect the proprietary aspects of our products withpatents, trademarks and copyrights, as well as contractual and other tradesecret protection strategies.  We haveseven patents issued and active in the U.S., and one foreign patent applicationpending.

 

We have developed and are using a number of trademarks, slogans andother commercial symbols to advertise and sell our products.  Six of our product marks have beenregistered with the U.S. Patent and Trademark Office.  Our proprietary computer programs are protected under federalcopyright law as unpublished original works. We also maintain the secrecy of our software source codes throughlicensing and other restrictions.

 

We frequently review our inventions and attempt to determine whichinventions will provide substantial differentiation between our products andthose of our competitors.  In certaincases, we may also choose to keep an invention or process a trade secret.  Key employees are required to enter intonondisclosure and invention assignment agreements, and customers, vendors andother third parties also must agree to nondisclosure restrictions prior todisclosure of our trade secrets or other confidential or proprietaryinformation.

 

The intellectual property position of any manufacturer, including us,is subject to uncertainties and may involve complex legal and factualissues.  Allowed claims for our existingor future patents issued may be challenged, invalidated or circumvented, andany rights granted by those patents may not provide us with adequate protection.  Additionally, it may be possible forcompetitors or customers to copy aspects of our products or to obtaininformation that we may regard as a trade secret.  Litigation may be necessary in the future to enforce our patentsand other intellectual property rights or to defend us against claims ofinfringement.

 

**Backlog**

 

At December 31, 2003, our backlog of unfilled orders for which apurchase order number has been assigned by the customer and for which adelivery schedule has been specified was $5.1 million. AtDecember 31, 2002, our backlog was $3.1 million. At December 31, 2001our backlog was $1.7 million.  Asignificant portion

 

11

----

 

of the backlog at December 31, 2003, is expected to be shipped inthe next two quarters.  Since a largemajority of the shipments made in a given quarter are usually made during thelatter part of the quarter, and since a significant portion of shipments in agiven quarter are booked during that same quarter, backlog as of a date in themiddle of the quarter will typically be greater than backlog at quarterend.  All orders are subject tocancellation by the customer with limited charges.  Our backlog at a particular date is not necessarily indicative ofactual sales for that or any succeeding period and does not reflect the effectsof the SEC’s Staff Accounting Bulletin No. 101, amended by Staff AccountingBulletin 104 (SAB 104) discussed in our revenue recognition policy in Note 1 ofNotes to Consolidated Financial Statements included elsewhere herein.

 

**Employees**

 

At December 31, 2003, we had a total of 99 employees plus 1contract personnel, in the following areas: 44 in manufacturing, 16 inengineering and research and development, 23 in sales, marketing, applicationengineering and service, and 17 in administration.  Our workforce declined by 10 positions during 2003 or approximately9% due to staff reductions as a result of the continued downturn in thesemiconductor capital equipment market and a shift of our operations to Penang,Malaysia.  These reductions were acrossall functional areas.  Many of ouremployees are highly skilled, and we believe our future success will depend inlarge part on our ability to attract and retain similar employees.  None of our employees are covered by acollective bargaining agreement, and we have experienced no workstoppages.  We consider our relationshipwith our employees to be good.

 

**Seasonality inQuarterly Operating Results**

 

During each quarter, we customarily sell a relatively small number ofsystems that carry a high average selling price.  Although we believe our sales are not seasonal in nature, a smallchange in the number of products ordered and/or shipped and accepted in aquarter can have a significant impact on results of operations for thatparticular quarter.  Moreover,production difficulties could delay shipments. Accordingly, our operating results may vary significantly from quarterto quarter and could be adversely affected for a particular quarter ifshipments and customer acceptances for that quarter were lower thananticipated.  Our quarterly operatingresults may also be affected by, among other factors, the timing of new productintroductions, fluctuations in the semiconductor market and the actions ofcompetitors.

 

**Financial Informationabout Foreign and Domestic Operations and Export Sales**

 

We operate in three geographic areas. Summarized data for our operations are included in Note 10 of Notes toConsolidated Financial Statements, included elsewhere herein.

 

**ITEM 2**.  Properties

 

We occupy approximately 22,000 square feet of leased space in St. Paul,Minnesota, for our principal executive offices and research and product developmentactivities.  This lease expires in2007.   We occupy approximately 54,000square feet of leased space in Penang, Malaysia, which is utilized as amanufacturing center for our mature products. This lease expires in June 2004, which we believe we will be ableto extend for a minimum of one year.  Webelieve that our current and committed facilities are adequate to support ourgrowth for at least the next twelve months.

 

**ITEM 3****.  Legal Proceedings**

 

There are no material pending legal, governmental, administrative orother proceedings to which we are a party.

 

12

----

 

**ITEM 4****.  Submission of Matters to a Vote of SecurityHolders**

 

The Company’s annual meeting of stockholderswas held on June 26, 2003. The meeting was adjourned untilOctober 23, 2003 to allow for the receipt of additional proxies onapproval of the 2003 Incentive Stock Option Plan.  The vote summaries for this item are as follows:

 
| For              |   | 3,567,337 |   |
|------------------|--------|-----------|--------|
| Against          |   | 3,598,904 |   |
| Abstain          |   | 45,024    |   |
| Broker non-votes |   | 7,841,325 |   |

**PART II**

 

**ITEM 5****.  Market for Registrant’s Common Stock,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

On May 20, 2002, The Nasdaq Stock Market, Inc. (“Nasdaq”) notified usthat we failed to meet the standards for continued listing of our common stockon the Nasdaq National Market.  OnAugust 8, 2002, we had a hearing before Nasdaq at which we presented aplan to meet those standards and requested Nasdaq to suspend its action to giveus time to complete the plan.  OnSeptember 5, 2002, in response to this meeting, Nasdaq notified us of itsdecision to transfer the listing of our securities to the Nasdaq SmallCapMarket effective with the open of business on September 10, 2002.  Further, certain financial covenants withrespect to equity maintenance were set forth that were required to be met byOctober 31, 2002 to maintain the Nasdaq SmallCap Market listing.  We were unable to meet those requirements.  On November 6, 2002, Nasdaq notified usthat effective November 7, 2002 our securities would be de-listed from theNasdaq SmallCap Market and would begin trading on the OTC Bulletin Board underthe symbol MCTI.  The following tablesets forth, for the periods indicated, the high and low closing sale prices pershare of our common stock, as reported by the OTC Bulletin Board, the NasdaqSmallCap Market and the Nasdaq National Market for the applicable periods.  The share prices represent pricesestablished between broker – dealers and therefore do not reflect prices ofactual transactions.

 
|                               |   | **High** |   | **Low** |   |
|------------------------------------|--------|----------|--------|---------|--------|
| Year ended December 31, 2003: |   |     |   |    |   |
| First Quarter                      |   | $        | 0.68   |    | $      | 0.29 |   |
| Second Quarter                     |   | 0.57     |   | 0.37    |   |
| Third Quarter                      |   | 0.95     |   | 0.46    |   |
| Fourth Quarter                     |   | 1.52     |   | 0.84    |   |
|                               |   |     |   |    |   |
| Year ended December 31, 2002: |   |     |   |    |   |
| First Quarter                      |   | $        | 3.92   |    | $      | 2.50 |   |
| Second Quarter                     |   | 4.47     |   | 1.95    |   |
| Third Quarter                      |   | 2.49     |   | .50     |   |
| Fourth Quarter                     |   | 1.04     |   | .27     |   |

 

The approximate number of holders of record of our common stock as ofDecember 31, 2003 was 334.

 

We have never declared or paid any cash dividends on our common stockand do not anticipate paying any cash dividends in the foreseeable future.  We currently intend to retain futureearnings to fund the development and growth of our business.  Under the Note Purchase Agreement  associated with the issuance of the 10%Senior Subordinated Convertible Notes (discussed in Note 6 in Notes toConsolidated Financial Statements contained elsewhere herein)  we are prohibited from paying dividends.

 

13

----

 

**ITEM 6****.  Selected Consolidated Financial Data**

 
|                                                 |   | **SELECTED  CONSOLIDATED  FINANCIAL DATA** |       |
|------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                 |   | **Years  Ended**                                |       |
|                                                 |   | **Dec. 31,  2003**                              |       | **Dec. 31,  2002** | ** ** | **Dec. 31,  2001** | ** ** | **Dec. 31,  2000** | ** ** | **Dec. 31,  1999** | ** ** |
|                                                 |   | **(in  thousands, except per share data)**      | ** ** |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| **Consolidated  Statement of Operations Data:**      |   |                                            |       |   |   |   |   |   |   |   |   |
| Net sales                                            |   | $                                               | 11,123     |   | $ | 12,211 |   | $ | 25,406 |   | $ | 49,902 |   | $ | 19,839 |   |
| Cost of sales:                                       |   |                                            |       |   |   |   |   |   |   |   |   |
| Product                                              |   | 6,295                                           |       | 7,604 |   | 15,832 |   | 26,905 |   | 9,485 |   |
| Inventory revaluation                                |   | —                                          |       | 913 |   | 8,092 |   | 3,979 |   | — |   |
| Total cost of sales                                  |   | 6,295                                           |       | 8,517 |   | 23,924 |   | 30,884 |   | 9,485 |   |
| Gross Profit                                         |   | 4,828                                           |       | 3,694 |   | 1,482 |   | 19,018 |   | 10,354 |   |
| Operating expenses:                                  |   |                                            |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                  |   | 4,872                                           |       | 8,556 |   | 10,864 |   | 16,177 |   | 7,423 |   |
| Research and development                             |   | 2,351                                           |       | 4,214 |   | 7,859 |   | 9,271 |   | 2,864 |   |
| Amortization of intangible assets                    |   | —                                          |       | — |   | 2,632 |   | 4,308 |   | 10 |   |
| Write-down of impaired intangible assets             |   | —                                          |       | — |   | 9,298 |   | 3,405 |   | — |   |
| Restructuring charges                                |   | 266                                             |       | 207 |   | 2,444 |   | — |   | — |   |
| Income (loss) from operations                        |   | (2,661                                          | )          | (9,283 | ) | (31,615 | ) | (14,143 | ) | 57 |   |
| Other income                                         |   | (1,007                                          | )          | (1,047 | ) | 196 |   | (46 | ) | (7 | ) |
| Income (loss) before income taxes                    |   | (3,668                                          | )          | (10,330 | ) | (31,419 | ) | (14,189 | ) | 50 |   |
| Income tax provision                                 |   | —                                          |       | — |   | — |   | — |   | — |   |
| Net income (loss) before cumulative effect           |   | (3,668                                          | )          | (10,330 | ) | (31,419 | ) | (14,189 | ) | 50 |   |
| Cumulative effect of change in accounting  principle |   | —                                          |       | — |   | — |   | (1,264 | ) | — |   |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                    |   | $                                               | (3,668     | ) | $ | (10,330 | ) | $ | (31,419 | ) | $ | (15,453 | ) | $ | 50 |   |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share:                     |   |                                            |       |   |   |   |   |   |   |   |   |
| Continuing operations                                |   | $                                               | (0.21      | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.23 | ) | $ | 0.01 |   |
| Cumulative adjustment                                |   | —                                          |       | — |   | — |   | (0.11 | ) | — |   |
| Net income (loss)                                    |   | $                                               | (0.21      | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.34 | ) | $ | 0.01 |   |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share:                   |   |                                            |       |   |   |   |   |   |   |   |   |
| Continuing operations                                |   | $                                               | (0.21      | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.23 | ) | $ | 0.01 |   |
| Cumulative adjustment                                |   | —                                          |       | — |   | — |   | (0.11 | ) |   |   |
| Net income (loss)                                    |   | $                                               | (0.21      | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.34 | ) | $ | 0.01 |   |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Proforma net loss (1)                                |   | —                                          |       | — |   | — |   | — |   | $ | (462 | ) |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Proforma net loss per share:                         |   |                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                |   | —                                          |       | — |   | — |   | — |   | $ | (0.06 | ) |
| Diluted                                              |   | —                                          |       | — |   | — |   | — |   | $ | (0.06 | ) |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                 |   |                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                |   | 17,606                                          |       | 14,125 |   | 14,027 |   | 11,531 |   | 7,435 |   |
| Diluted                                              |   | 17,606                                          |       | 14,125 |   | 14,027 |   | 11,531 |   | 7,682 |   |
|                                                 |   |                                            |       |   |   |   |   |   |   |   |   |
| **Selected Balance  Sheet Data:**                    |   |                                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                            |   | $                                               | 1,078      |   | $ | 1,560 |   | $ | 11,086 |   | $ | 12,047 |   | $ | 1,045 |   |
| Working capital                                      |   | 1,618                                           |       | 2,861 |   | 12,907 |   | 22,347 |   | 6,386 |   |
| Total assets                                         |   | 7,194                                           |       | 7,753 |   | 21,341 |   | 51,023 |   | 10,324 |   |
| Long-term debt                                       |   | 195                                             |       | — |   | 33 |   | 37 |   | 70 |   |
| Convertible notes                                    |   | 7,340                                           |       | 10,000 |   | 10,000 |   | — |   | — |   |
| Total stockholders equity (deficit)                  |   | $                                               | (5,026     | ) | $ | (5,794 | ) | $ | 4,377 |   | $ | 35,592 |   | $ | 7,256 |   |

 

Notes:

----

(1)       In December 1999, the Securities andExchange Commission staff issued Staff Accounting Bulletin No. 101 (“SAB 101”),which, among other things, establishes the SEC’s staff’s interpretation that ifuncertainty exists about customer acceptance of a product, revenue should notbe recognized until acceptance occurs. In the fourth quarter of 2000, wechanged our method of recognizing revenue to comply with SAB 101.  As a result of this change, we reported achange in accounting principle in accordance with APB Opinion No. 20 (APB 20),*AccountingChanges*, by a cumulative effect adjustment.  Proforma amounts reflect the impact of theadoption of SAB 104.

 

14

----

 

**ITEM 7****.  Management’s Discussion and Analysis ofResults of Operations and Financial Condition**

 

*The following discussion of our results of operations and financialcondition should be read together with the other financial information and consolidatedfinancial statements included in this document.  This discussion contains forward-looking statements that involverisks and uncertainties.  Our actualresults could differ materially from those anticipated in the forward-lookingstatements as a result of a variety of factors, including those discussed in“Risk Factors” and elsewhere in this document.*

 

**Overview**

 

We supply equipment automation solutions for the global semiconductortest and assembly manufacturing market. Our solutions include automated test handlers, factory automationsoftware and our new 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 and continuing into 2000, we broadened our strategyfrom that of a test handler manufacturer to becoming a provider ofcomprehensive equipment automation solutions for the back-end of the semiconductormanufacturing process.  First, wedeveloped and introduced in February 1999 our Tapestry strip handler.  Tapestry combines strip handling capabilitywith robotics, machine vision technology and critical software, enabling thetesting and tracking of semiconductor devices in strip form and the generationof critical process data throughout the test process.  Second, in June 1999 we acquired the Infinity Systemsdivision of Fico.  Infinity Systems hasbeen involved in the development of factory automation software for thesemiconductor manufacturing industry. Infinity Systems’ software expertise was integral to the development ofour integrated Smart Solutions equipment product line, introduced in May 2000.  Together with a third party tester, our SmartSolutions equipment products including our Tapestry handler enable completeautomation of the test, laser mark, mark inspect, singulation, sort-and-tapeand reel processes.

 

The demand for our products and services is dependent upon growth inthe semiconductor industry and the increasing automation needs of semiconductormanufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which intensified andcontinued through the majority of 2003, resulting in a significant adverseimpact on our business.  Althoughworldwide semiconductor bookings are showing signs of stabilization and demandfor our products has recently increased, the return to sustained market growthcannot be predicted in the short term. As disclosed in our Form 10-K for the year ended December 31, 2002and each of our Forms 10-Q for the first three quarters of 2003, a continued orintensified market downturn might result in significant losses, charges forinventory revaluation, or asset impairment or restructuring charges.  Consequently, as a result of this downturn,in addition to the actions taken in 2001 and 2002, we took the followingadditional steps in 2003:

 

*Workforce and Facility Cost Reductions*

 

During the first quarter, in response to the continued and prolongeddownturn in the semiconductor capital equipment industry, we reduced ourworkforce across all functional areas by approximately 24% at the time,resulting in a restructuring charge of $19,000.  This charge reflected severance and other benefit costsassociated with this reduction.  Thisworkforce reduction affected a total of 26 employees across all functional areas.

 

During the second quarter, we completed the restructuring of our masterlease for our St. Paul, MN facility, resulting in a restructuring charge of$227,000, which included write-offs of $41,000 related to leaseholdimprovements in the vacated space which provided no future economic benefit tous.  Additionally, we further reducedour workforce across all functional areas by approximately 4% at the time,resulting in a restructuring charge of $20,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of4 employees across all functional areas.

 

15

----

 

*Financingtransactions*

 

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

 

On June 9, 2003, the company completed a one-year, $2.5 millionsecured working capital line of credit agreement with a bank.  Under the terms of the agreement, thecompany may borrow up to eighty percent (80%) of qualified receivables.  Additionally, under this agreement thecompany granted a first security interest in all assets of the company.  As of December 31, 2003, $0.3 millionwas outstanding under this agreement.

 

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, and theconversion price was lowered to $1.00 per share.

 

In July of 2003, we completed negotiations with the majority ofour vendors to extend the payment terms of the total amounts owed to them atthe time.  This resulted in $1.2 millionof our payables, or 67% of our total accounts payable at the time,  being restructured with a total of 281vendors.  Under the terms of theextended payment plan, we have agreed to make four to eight equal paymentsbeginning on July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors. As of Decmber 31, 2003,all  scheduled payments have been madein accordance with the terms of the extended payment plan.

 

Most industry forecasts are presentlypredicting that  capacity-drivenpurchases of capital equipment are expected to improve in 2004.  However, the level of improvement and theability for the market to sustain an improvement continues to beuncertain.  Therefore, we will continueto examine opportunities to further reduce our costs through the consolidationof operations, limiting capital expenditures, monitoring inventory purchasesand additional strategic restructuring initiatives.  Certain of these types of actions have the potential for furthercharges in future periods.  The impactof a renewed contraction of the semiconductor capital equipment market has thepotential to have a material adverse effect on our financial condition, resultsof operations, and cash flows.

 

**Critical AccountingPolicies**

 

*Revenue Recognition*

 

Under SAB 104, we recognize revenue uponshipment, as our terms are FOB shipping point, for established equipmentproducts that have previously satisfied existing customer performancespecifications and that provide for full payment tied to shipment.  Revenue for products that have notpreviously satisfied customer performance specifications or from sales whereall or a portion of customer payment is based upon acceptance are onlyrecognized upon customer acceptance.  Assuch, in periods of increasing shipments, revenues will be deferred if theshipments are for new customers, new products or the payment terms are tied toacceptance criteria.  Consequently, ifthese conditions exist, we may report revenue levels that are not reflective ofactual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially couldrecognize revenues related to shipments made in prior periods.  Consequently, if these conditions exist, wemay report revenue levels that are greater than actual shipments.  During the year ended December 31,2003, revenue recorded approximated shipments.

 

16

----

 

*Allowance forDoubtful Accounts*

 

We record a provision for doubtful accounts based on specificidentification of our accounts receivable. This involves a degree of judgmentbased on discussion with our internal sales and marketing groups, our customerbase and the examination of the financial stability of our customers.  There can be no assurance that our estimateswill match actual amounts ultimately written off.  During periods of downturn in the market for semiconductorcapital equipment  or economicrecession, 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. For the year ended December 31, 2003, we charged approximately$16,000 against the allowance for accounts receivable write-offs that we deemedto be uncollectible.

 

*Valuation of Inventories*

 

Our inventories are stated at the lower of cost or market.  Cost is determined by the first-in,first-out (“FIFO”) method.  We maintaina standard costing system for our inventories. Assumptions with respect to direct labor utilization, standard directand indirect cost rates, vendor pricing and utilization of factory capacitiesare formulated in the development of our standard costing system.  Sudden or continuing changes in thesemiconductor capital equipment market affecting our shipments can result insignificant production variances from our standard rates. These variancesdirectly impact our gross profit performance and may cause variability in grossprofits results from reporting period-to-reporting period.  Our labor and overhead rates are set forproduction rates that match typical market conditions.  Production variances are charged 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 or market aremade based on a review of excess and obsolete inventories through anexamination of historical component consumption, current market demands andshifting product technology. Significant assumptions with respect to market trends and customerproduct acceptance are utilized to formulate our provision methods.  Sudden or continuing downward changes in thesemiconductor capital equipment market may cause us to record additionalinventory revaluation charges in future periods.  No write-off provision was made to our inventories for the yearended December 31, 2003.

 

*Accrued Warranty*

 

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 toestimate future warranty claims. There can be no assurance that our estimateswill match the actual amount of future warranty claims.

 

**Results of Operations**

 

The following table sets forth, for the periods indicated, certainitems in our statements of operations as a percentage of net sales:

 
|                                     |   | **Years  Ended**   |   |
|------------------------------------------|--------|--------------------|--------|
|                                     |   | **Dec. 31,  2003** |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   |
|                                     |   |               |   |   |   |   |   |
| Net sales                                |   | 100.0              | %      | 100.0 | % | 100.0 | % |
| Cost of sales                            |   | 56.6               |   | 69.7 |   | 94.2 |   |
| Gross profit                             |   | 43.4               |   | 30.3 |   | 5.8 |   |
| Operating expenses:                      |   |               |   |   |   |   |   |
| Selling, general and adminstrative       |   | 43.8               |   | 70.1 |   | 42.8 |   |
| Research and development                 |   | 21.1               |   | 34.5 |   | 30.9 |   |
| Amortization of intangible assets        |   | —             |   | — |   | 10.4 |   |
| Write-down of impaired intangible assets |   | —             |   | — |   | 36.6 |   |
| Restructuring charge                     |   | 2.4                |   | 1.7 |   | 9.6 |   |
| Total operating expenses                 |   | 67.3               |   | 106.3 |   | 130.3 |   |
| Loss from operations                     |   | (23.9              | )      | (76.0 | ) | (124.5 | ) |
| Other income (expense), net              |   | (9.1               | )      | (8.6 | ) | 0.8 |   |
| Net loss                                 |   | (33.0              | )%     | (84.6 | )% | (123.7 | )% |

 

17

----

 

***Year EndedDecember 31, 2003 versus Year Ended December 31, 2002***

 

*Net Sales.* Net sales for the year ended December 31, 2003 decreased  $1.1 million or  8.9% to $11.1 million, compared to net sales of $12.2 million forthe prior year.  Product acceptancerequirements related to product and customer mix resulted in a net increase torevenues of $0.1 million over shipments for the year ended December 31,2003, while these same factors caused a net increase to revenues of $2.6million over shipments in  2002.  Current year product sales, especiallycapacity-related singulated device handler products, continued to be severelyimpacted by the continued downturn in the semiconductor capital equipmentmarket, offset by increases in our Tapestry and other Smart Solutionproducts.  Sales of our Tapestry andSmart Solutions strip-based products increased $0.3 million or 5.13% over theprior year period, while sales of singulated device handler products decreased$1.2 million or 52.5% from the prior year period.  Sales of our Tapestry and Smart Solutions strip-based productmade up 49.6.% of our net sales for the year ended December 31, 2003compared to 43.0% in the prior year period. If the recent market stabilization fails to hold, it is likely that netsales would be adversely impacted in future periods.

 

Net sales to Asia comprised approximately 62.8% of our net sales forthe year ended December 31, 2003. Net sales to customers in the United States represented approximately33.5% and net sales to customers in Europe represented approximately 3.7% foryear ended December 31, 2003. Comparatively, net sales to customers in Asia comprised approximately61.6% of our net sales for the year ended December 31, 2002.  Net sales to customers in the United Statesrepresented approximately 29.0% and net sales to customers in Europerepresented approximately 9.4% for year ended December 31, 2002.

 

*Gross Profit.* For the year ended December 31, 2002, we recorded an inventoryrevaluation charge of $913,000. Exclusive of this prior year change, gross profit in the current yearperiod increased by $0.2 million to $4.8 million or 43.4% of net sales from$4.6 million or 37.7% of net sales in the prior year.  Inclusive of the inventory revaluation charges in the prior year,gross profit margin in the prior year was 30.3% compared to the current yearlevel of 43.4%.  The improvement in ourgross margin contribution resulted from the many cost reduction initiatives thatwe have undertaken in response to the downturn in the semiconductor capitalequipment market, including the shift of our operations to Penang,Malaysia.  However, the resumption of amarket decline would  negatively impactour gross margin contribution in future periods.

 

*Selling, General and Administrative Expense.*  Selling, general and administrative expensein 2003 was $4.9 million, or 43.8% of net sales compared to $8.6 million, or70.1% of net sales in the prior year. The decrease in expense for the current year is a result of the costreduction measures that we have performed throughout all of 2002 and continuinginto 2003.  These factors alsosignificantly contribute to the decrease in selling, general and administrativeexpense as a percentage of net sales in the current year from the prior yearperiod.  Selling, general andadministrative expense is expected to decline in 2004 from 2003 levels due therestructuring efforts that were completed in 2003.

 

*Research andDevelopment Expense*. Research and development expense in 2003 was $2.4 million, or 21.1% ofnet sales compared to $4.2 million, or 34.5% of net sales in 2002.  The decrease in expense for the current yearis a result of the cost reduction measures that we performed throughout all of 2002and continuing into 2003.  These factorsalso significantly contribute to the decrease in research and developmentexpense as a percentage of net sales in the current year from the prior yearperiod.  We expect research anddevelopment expenses to remain consistent with 2003 levels, subject to impactsresulting from market requirements.

 

18

----

 

*Restructuring Charge. *Inour continuing response to the downturn in the semiconductor capital equipmentmarket, we made further reductions to our workforce throughout 2003.  The restructuring charge totaled $266,000 or2.4% of net sales for the current year period. This charge resulted from reductions of our workforce across allfunctional areas in the first and second quarter of 2003.  This charge reflects severance and otherbenefits costs paid in 2003 related to exit activities commenced in 2002.  However, certain criterion under EITF 94-3were not satisfied for these 2003 severance and benefit costs to be accrued atDecember 31, 2002.  This workforcereduction affected 30 employees, across all functional areas. Additionallyincluded in this charge are restructuring costs associated with our St. Paulfacility for $227,000 resulting from the restructuring of our master leaseagreement related to this facility.

 

*Other Income (Expense).*  Interest income for the year endedDecember 31, 2003 was $5,000 compared to $102,000 for the comparableperiod in the prior year.  This decreaseresulted from the decrease in investment in interest-bearing cash and cashequivalents.  In connection with thetransfer of our manufacturing operations to Penang, we sold certain fixed andother assets from our St. Paul, Minnesota facility resulting in a gain on saleof $209,000 or 1.9% of net sales for the current year period.  Interest expense and other totaled $1.2million or 11.0% of net sales in the current year, compared to $1.1 million or9.4% of net sales for the comparable period in the prior year.  The interest expense resulted from our 10%Senior Subordinated Convertible Notes, which were issued in December of2001, the amortization of debt issuance costs associated with the note offeringand interest associated with our bank line of credit.

 

*Income Tax Provision.*  During both 2003 and 2002, we incurredminimal tax liabilities.  We haverecorded valuation allowances against all benefits associated with netoperating loss carry forwards due to uncertainty regarding their ultimateutilization.

 

*Net Loss.* Net loss for the year ended December 31, 2003 was $ 3.7 million, or$0.21 per diluted share, as compared to net loss of $10.3 million, or $ 0.73per diluted share for the comparable prior year period.

 

***Year EndedDecember 31, 2002 versus Year Ended December 31, 2001***

 

*Net Sales.* Net sales for the year ended December 31, 2002 decreased  $13.2 million or 51.9% to $12.2 million,compared to net sales of $25.4 million for the prior year.  Product acceptance requirements related toproduct and customer mix resulted in a net increase to revenues of $2.6 millionover shipments for the year ended December 31, 2002, while these samefactors caused a net increase to revenues of $6.8 million over shipmentsin  2001.  Current year product sales, especially capacity-relatedsingulated device handler products, continue to be severely impacted by thecontinued downturn in the semiconductor capital equipment market.  Sales of our Tapestry and Smart Solutionsstrip-based products decreased $3.7 million or 41.7% over the prior yearperiod, while sales of singulated device handler products decreased $11.1million or 83.4% from the prior year period. Sales of our Tapestry and Smart Solutions strip-based product made up43.0% of our net sales for the year ended December 31, 2002 compared to35.4% in the prior year period.  If themarket downturn continues, it is likely that net sales could continue to beadversely impacted.

 

Net sales to Asia comprised approximately 61.6% of our net sales forthe year ended December 31, 2002. Net sales to customers in the United States represented approximately29.0% and net sales to customers in Europe represented approximately 9.4% foryear ended December 31, 2002. Comparatively, net sales to customers in Asia comprised approximately47.5% of our net sales for the year ended December 31, 2001.  Net sales to customers in the United Statesrepresented approximately 45.8% and net sales to customers in Europerepresented approximately 6.7% for year ended December 31, 2001.

 

*Gross Profit.* For the year ended December 31, 2002, we recorded an inventoryvaluation charge of $0.9 million compared to a similar charge of $8.1 millionin the prior year, each of which was included in cost of sales.  Excluding these charges, gross profit in thecurrent year period decreased by $5.0 million to $4.6 million or

 

19

----

 

37.7% of net sales from $9.6 million or 37.6% of net sales in the prioryear.  Inclusive of the inventory revaluationcharges in both years, gross profit in the current year period increased by$2.2 million to $3.7 million or 30.3% of net sales from $1.5 million or 5.8% ofnet sales in the prior year.  Exclusiveof the inventory revaluation charges, the maintenance of our gross margincontribution resulted from the many cost reduction initiatives that we haveundertaken in response to the continued downturn in the semiconductor capitalequipment market.  However, thecontinuation of the downturn could potentially negatively impact our grossmargin contribution in future periods. This impact, if realized, would beoffset to some degree by the expected cost reductions from the transfer of ourcore manufacturing operations to Penang, Malaysia.

 

*Selling, General and Administrative Expense.*  Selling, general and administrative expensein 2002 was $8.6 million, or 70.1% of net sales compared to $10.8 million, or42.8% of net sales in the prior year. The decrease in expense for the current year is a result of the costreduction measures that we have performed throughout all of 2002.  The increase in selling, general andadministrative expense as a percentage of net sales in the current year isprimarily attributed to the decreased net sales base.

 

*Research and Development Expense*.  Research and development expense in 2002 was$4.2 million, or 34.5% of net sales compared to $7.9 million, or 30.9% of netsales in 2001.  The decrease in expensefor the current year is a result of the cost reduction measures that weperformed throughout all of 2002.  Theincrease in research and development expense as a percentage of net sales inthe current year is primarily attributed to the decreased net sales base.

 

*Amortization of Intangible Assets*.   Amortization expense was zero for the yearended December 31, 2002.  For theyear ended December 31, 2001, amortization expense totaled $2.6 million,or 10.4% of net sales.  The decrease ofamortization expense in the current year is directly attributed to thewrite-downs of impaired goodwill and other intangible assets that were recordedin the fourth quarter of 2000 and the third quarter of 2001.

 

*Write-down of Impaired Intangible Assets. *As a result of the significantsemiconductor industry downturn, which began in the fourth quarter of 2000 andcontinued through 2002, we reduced the carrying value of certain intangibleassets by $4.9 million and goodwill by $4.4 million.  This write-down was recorded in the third quarter of 2001.  In the fourth quarter of 2000, also as aresult of the industry downturn, we reduced the carrying value of certainintangible assets by $0.9 million and goodwill by $2.5 million.  These charges represented 36.6% and 6.8% ofnet sales for 2001 and 2000, respectively.

 

*Restructuring Charge. *Inresponse to the continuing downturn in the semiconductor capital equipmentmarket, we reduced our workforce throughout 2002.  Employee reductions in 2002 totaled 100 individuals or 57.8% ofour our workforce as of December 31, 2001 which resulted in a charge of$881,000 or 7.2% of net sales for the year ended December 31, 2002.  These reductions were across all functionalareas and principally represented separation and benefit costs.  These charges were offset by the completionof a lease settlement agreement related to our Marlborough, Massachusettsfacility.  This agreement required us topay $450,000 or approximately 35% of the outstanding lease obligation, whichwas to run through April 2003.  Asof December 31, 2002, the full amount of this settlement has beenpaid.  The settlement of this leaseresulted in a benefit of $674,000, which was recorded in the second quarter of2002.  For the year endedDecember 31, 2001,**we enacted a plan in the first quarter ofthat year to consolidate our operations and initiated other cost reductionmeasures, which resulted in a charge of $2.3 million.  This charge principally represented employee separation costs andcosts related to idle facilities over the remaining lease term of the facility,which ran through April 2003.  Inthe third quarter of 2001, we further reduced our workforce resulting in acharge of $0.1 million for a total restructuring charge in 2001 of $2.4 millionor 9.6% of net sales.

 

*Other Income (Expense).*  Interest expense was $1.2 million or 9.6% ofnet sales for the year ended December 31, 2002 compared to $26,000 in thecomparable prior year period.  Theincrease is directly attributable to the issuance of our 10% seniorsubordinated convertible debt, which was issued in December 2001 andincludes charges associated with the amortization of debt issuance costs.   Interest income for the year endedDecember 31,

 

20

----

 

2002, was $102,000 compared to $227,000 in the prior year.  This decrease resulted from the decrease ininterest-bearing cash and cash equivalents.

 

*Income Tax Provision.*  During both 2002 and 2001, we incurredminimal tax liabilities.  We haverecorded valuation allowances against all benefits associated with netoperating loss carry forwards due to uncertainty regarding their ultimateutilization.

 

*Net Loss.* Net loss for the year ended December 31, 2002 was $10.3 million, or$0.73 per diluted share, as compared to net loss of $31.4 million, or $2.24per  diluted share for the comparableprior year period.

 

21

----

 

***Quarterly Results***

 

The following tables present selected unaudited quarterly operatingresults for the eight fiscal quarters ended December 31, 2003, as well asthe data expressed as a percentage of net sales.  We believe that all necessary adjustments have been included topresent fairly the quarterly information when read in conjunction with ourconsolidated financial statements.  Theoperating results for any quarter are not necessarily indicative of the resultsfor any subsequent period.

 
|                                                               |   | **(in  thousands, except per share data)** |   |
|--------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                               |   | **Quarter  Ended**                         |   |
|                                                               |   | **Dec. 31  2003**                          |   | **Sept. 27  2003** |   | **June 28  2003** |   | **Mar.29  2003** |   | **Dec. 31  2002(1)** |   | **Sept. 28  2002** |   | **June 29  2002** |   | **Mar. 30  2002** |   |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |   | $                                          | 3,738  |   | 2,852 |   | $ | 2,333 |   | $ | 2,200 |   | $ | 2,137 |   | $ | 2,732 |   | $ | 3,879 |   | $ | 3,463 |   |
| Cost of sales                                                      |   | 1,790                                      |   | 1,581 |   | 1,448 |   | 1,476 |   | 2,318 |   | 1,558 |   | 2,454 |   | 2,187 |   |
| Gross profit (loss)                                                |   | 1,948                                      |   | 1,271 |   | 885 |   | 724 |   | (181 | ) | 1,174 |   | 1,425 |   | 1,276 |   |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                |   | 1,072                                      |   | 1,177 |   | 1,290 |   | 1,333 |   | 1,760 |   | 2,092 |   | 2,438 |   | 2,266 |   |
| Research and development                                           |   | 552                                        |   | 464 |   | 601 |   | 734 |   | 847 |   | 1,012 |   | 1,049 |   | 1,306 |   |
| Restructuring charge                                               |   | —                                     |   | — |   | 246 |   | 19 |   | 14 |   | 345 |   | (475 | ) | 323 |   |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                      |   | 324                                        |   | (371 | ) | (1,252 | ) | (1,362 | ) | (2,802 | ) | (2,275 | ) | (1,587 | ) | (2,619 | ) |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense)                                             |   | (292                                       | )      | (330 | ) | (256 | ) | (129 | ) | (273 | ) | (264 | ) | (262 | ) | (248 | ) |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                  |   | $                                          | 32     |   | $ | (701 | ) | $ | (1,508 | ) | $ | (1,491 | ) | $ | (3,075 | ) | $ | (2,539 | ) | $ | (1,849 | ) | $ | (2,867 | ) |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share: (2)                                   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |   | $                                          | 0.00   |   | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.22 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.20 | ) |
| Diluted (3)                                                        |   | $                                          | 0.01   |   | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.22 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.20 | ) |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common and common  equivalent shares outstanding: |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |   | 20,086                                     |   | 17,964 |   | 17,319 |   | 14,871 |   | 14,153 |   | 14,152 |   | 14,115 |   | 14,077 |   |
| Diluted                                                            |   | 27,274                                     |   | 17,964 |   | 17,319 |   | 14,871 |   | 14,153 |   | 14,152 |   | 14,115 |   | 14,077 |   |

 

22

----

 
|                                |   | **Quarter  Ended** |   |
|-------------------------------------|--------|--------------------|--------|
|                                |   | **Dec. 31  2003**  |   | **Sept. 27  2003** | ** ** | **June 28  2003** | ** ** | **Mar. 29  2003** | ** ** | **Dec. 31  2002** | ** ** | **Sept. 28  2002** | ** ** | **June 29  2002** | ** ** | **Mar. 30  2002** | ** ** |
|                                |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Percentage of Net  Sales:**       |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |   | 100.0              | %      | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales                       |   | 47.9               |   | 55.4 |   | 62.1 |   | 67.1 |   | 108.5 |   | 57.0 |   | 63.3 |   | 63.2 |   |
| Gross profit (loss)                 |   | 52.1               |   | 44.6 |   | 37.9 |   | 32.9 |   | (8.5 | ) | 43.0 |   | 36.7 |   | 36.8 |   |
| Operating expenses:                 |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |   | 28.6               |   | 41.3 |   | 55.3 |   | 60.6 |   | 82.4 |   | 76.6 |   | 62.9 |   | 65.4 |   |
| Research and development            |   | 14.8               |   | 16.3 |   | 25.8 |   | 33.4 |   | 39.6 |   | 37.0 |   | 27.0 |   | 37.7 |   |
| Restructuring charge                |   | —             |   | — |   | 10.5 |   | 0.8 |   | 0.7 |   | 12.6 |   | (12.2 | ) | 9.3 |   |
| Income (loss) from operations       |   | 8.7                |   | (13.0 | ) | (53.7 | ) | (61.9 | ) | (131.1 | ) | (83.2 | ) | (41.0 | ) | (75.6 | ) |
| Other income (expense)              |   | (7.8               | )      | (11.6 | ) | (11.0 | ) | (5.9 | ) | (12.8 | ) | (9.7 | ) | (6.8 | ) | (7.2 | ) |
| Net income (loss)                   |   | 0.9                | %      | (24.6 | )% | (64.7 | )% | (67.8 | )% | (143.9 | )% | (92.9 | )% | (47.8 | )% | (82.8 | )% |

 

----

(1)          Includes a $913,000inventory revaluation charge included in cost of sales.

 

(2)          The sum of loss pershare for the fiscal quarters may differ from annual loss per share due to therequired method of computing weighted average number of shares in therespective periods.

 

(3)          Diluted earnings pershare includes an increase of $166,000 in net income related to interestexpense that would not have been incurred had the amount of outstanding seniorconvertible subordinated notes as of December 31, 2003 been converted toequity pursuant to SFAS No. 128.

 

***Liquidity andCapital Resources***

 

The net loss and increase in accounts receivable were the primary usesof cash in 2003. The net loss was the primary use of cash in 2002.  The net loss and decrease in accountspayable were the primary uses of cash in 2001. Cash used in operations was $2.2 million, $9.5 million and $10.0 millionin 2003, 2002 and 2001, respectively.

 

We record provisions for doubtful accounts based on specificidentification of our accounts receivable. As a result of this examination, no provisions were recorded for theyear ended December 31, 2003; however, we wrote off approximately $16,000which we deemed uncollectible.  Werecorded a $0 and $225,000 provision for doubtful accounts for the years endedDecember 31, 2002 and December 31, 2001, respectively.

 

Capital expenditures totaled $0.1 million $0.2 million and $0.3 millionfor the years ended December 31, 2003, 2002 and 2001, respectively.  Capital purchases for all periods have beenprimarily for production and computer equipment and for leaseholdimprovements.   As of December 31,2003, we had approximately $0.5 million in committed purchase ordersoutstanding with our vendors and budgeted capital expenditures for 2004 isapproximately $ 0.1 million.

 

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

 

On June 9, 2003, we completed a one-year, $2.5 million securedworking capital line of credit agreement with a bank.  Under the terms of the agreement, we may borrow up to eightypercent (80%) of qualified receivables.

 

23

----

 

Additionally, under this agreement we granted a first security interestin all assets of the Company.  As ofDecember 31, 2003, $0.3 million was outstanding under this agreement.

 

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.  $10.0 million of the Notes were originally issued inDecember 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.  Theagreement also included standard anti-dilution provisions, and required thecompany to register the shares with the Securities and Exchange Commission. Asof December 31, 2003, $2.7 million of the Notes have been converted toequity under this agreement.

 

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

 

Our contractual obligations as of December 31, 2003 are as follows(in thousands):

 
|                                               |   | **2004** |   | **2005** |   | **2006** |    | **2007** |   | **2008** |   | **Thereafter** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|----------|---------|----------|--------|----------|--------|----------------|--------|
| Future rental payments under noncancelable  leases |   | $        | 577.0  |     | $      | 343.0    |    | $        | 283.0  |     | $      | 91.0           |   | — |   | — |   |
|                                               |   |     |   |     |   |     |    |     |   |     |   |           |   |
| Payments due under vendor payment plan             |   | $        | 587.0  |     | $      | 195.0    |    | —   |   | —   |   | —         |   | — |   |
|                                               |   |     |   |     |   |     |    |     |   |     |   |           |   |
| Payments due under long term debt  agreements      |   | —   |   | —   |   | $        | 7,340.0 |     | — |     | — |           | — |   |
|                                                    |        |          |        |          |        |          |         |          |        |          |        |                |        |  |  |  |  |

 

For the year ended December 31, 2003, we issued approximately 0.2million shares of common stock through the exercise of employee stock optionsand our stock purchase plan, which provided approximately $0.2 million in cashto us.  For the year endedDecember 31, 2002, we issued approximately, 0.1 million shares of commonstock through the exercise of employee stock options and our stock purchaseplan, which provided approximately $0.2 million in cash to us.  For the year ended December 31, 2001 weissued approximately 0.1 million shares of common stock though the exercise ofemployee stock options and our stock purchase plan, which provided approximately$0.2 million in cash to us.

 

At December 31, 2003, we had a current ratio of 1.35 and workingcapital of $1.6 million.  AtDecember 31, 2002, we had a current ratio of 1.81 and working capital of$2.9 million.

 

Our anticipated capital expenditure needs for 2004 are expected to beless than $0.5 million and concentrated in facility costs associated with ourrecently transferred manufacturing activities to Penang, Malaysia.

 

24

----

 

We estimate that we may need to raise additional capital through debtor equity offerings to support additional working capital requirements due tothe recent increases in our backlogs and the potential improvements in thesemiconductor capital equipment markets. There is no assurance that additional financing, if needed, will beavailable on terms and conditions acceptable or favorable to us, if atall.  However, on March 9, 2004 we completed a $5.0 million secured financingtransaction with an institutional lender as described in Note 12 of theconsolidated financial statements contained elsewhere herein.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 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 condition 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.  Inconnection with the execution of this credit facility, we issued to the lendera seven-year warrant to purchase 400,000 shares of our common stock at exerciseprices ranging from $2.30 to $2.88.  Ourpresent secured lending relationship was terminated as a result of thistransaction.  This credit facility issecured by all the assets of the Company. We believe that this transaction in combination with our otherrestructering efforts completed in 2003 will provide the cash necessary to meetour operating, working capital and capital resource obligations through all of2004.

 

**Federal Tax Matters**

 

We paid only nominal federal and state income taxes in the years endedDecember 31, 2003, 2002 and 2001. At December 31, 2003, we had federal net operating losscarryforwards for tax reporting purposes of approximately $93.0 million, aportion of which is subject to annual limitation under Section 382 of theInternal Revenue Code.

 

**ITEM 7A**. Quantitative And Qualitative Disclosures AboutMarket Risk 

 

The vast majority of our transactions are denominated in U.S. dollars;as such, fluctuations in foreign currency exchange rates have historically hadlittle impact on us.  Inflation has notbeen a significant factor in our operations in any of the periods presented,and it is not expected to affect operations in the future.  An increase in interest rates would notexpose us to market risk in that we have no debt tied to market interestrates.  At December 31, 2003, allof our outstanding long-term debt carried interest at a fixed rate.  There is no material market risk relating toour long-term debt.

 

**Impact of NewAccounting Standards**

 

***EITF Issue No. 00-21– Revenue Arrangements with Multiple Deliverables.***  In November 2002, the Emerging IssuesTask Force (EITF) reached a consensus on Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*, which providesguidance on how to account for arrangements that involve the delivery or performanceof multiple products, services and/or right to use assets.  The provisions of EITF Issue No. 00-21 willapply to revenue arrangements entered into in fiscal periods beginning afterJune 15, 2003.  The adoption ofEITF Issue No. 00-21 will not have a material effect on our results ofoperations and financial condition.

 

***SFAS No. 149 –Amendment of Statement 133 on Derivative Instruments and Hedging Activities***. InApril 2003, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging**Activities.*  SFASNo. 149 clarifies when a contract meets the characteristics of a derivative,clarifies when a derivative contains a financing component and amends certainother existing pronouncements.  The adoptionof SFAS No. 149 did not have a material effect on our results of operations andfinancial condition.

 

***SFAS No. 150 –Accounting for Certain Financial Instruments with Characteristics of Both******Liabilities and Equity***.  In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.*  SFAS No. 150 establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150

 

25

----

 

requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). This requirement of this statement applies to an issuer’s classificationand measurement of free-standing financial instruments, including those thatcomprise more than one option or forward contract.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  We do not have any financial instrumentsthat must be accounted for pursuant to SFAS No. 150. The adoption of SFAS No.150 did not have a material effect on our results of operations and financialcondition.

 

***FASB InterpretationNo. 46 – Consolidation of Variable Interest Entities.***  In January 2003, the FASB issued FASBInterpretation No. 46, *Consolidation of VariableInterest Entities* (“FIN No. 46”). FIN No. 46 states that companies that have exposure tothe economic risks and potential rewards from another entity’s assets andactivities have a controlling financial interest in variable interest entityand should consolidate that entity, despite the absence of clear controlthrough a voting equity interest.  Theconsolidation requirements apply to all variable interest entities createdafter January 31, 2003.  Forvariable interest entities that existed prior to February 1, 2003, theconsolidation requirements are effective for annual or interim periodsbeginning after December 15, 2004. Disclosure of significant variable interest entities is required in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest was created.   TheCompany does not expect the adoption of FIN No. 46 to have a material impact onthe Company’s financial statements.

 

**Risk Factors**

 

*Cautionary Note Regarding Forward-Looking Statements*

 

*This Report on Form 10-K contains forward-looking statements that havebeen made pursuant to the provisions of the Private Securities LitigationReform Act of 1995.  Theseforward-looking statements are not historical facts, but rather are based onour current expectations, estimates and projections about the semiconductorcapital equipment industry, and our beliefs and assumptions.   We intend words such as “anticipates,”“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similarexpressions to identify forward-looking statements.  These statements are not guarantees of future performance and aresubject to certain risks, uncertainties and other factors, some of which arebeyond our control and are difficult to predict.  These factors could cause actual results to differ materiallyfrom those expressed or forecasted in the forward-looking statements.  These risks and uncertainties are describedin  the following risk factors andelsewhere in the this Report on Form 10-K. We caution you not to place unduereliance on these forward-looking statements, which reflect our management’sview only as of the date of this Report on Form 10-K.  We are not obligated to update these statements or publiclyrelease the result of any revisions to them to reflect events or circumstancesafter the date of this Report on Form 10-K or to reflect the occurrence ofunanticipated events.*

 

**The success of ournew products depends upon customer acceptance of both the testing ofsemiconductor devices in strip form and the automation of the back-end of thesemiconductor manufacturing process.**

 

Several of our new products, including our Tapestry strip handler andother Smart Solutions products, are used to test and process semiconductordevices in strip form.  Assembly ofsemiconductor devices in strip form is the standard industry practice.  However, we cannot assure you that testingof semiconductor devices in strip form will become widely accepted by theindustry.  Until recently, mostsemiconductor manufacturers believed it was necessary to test semiconductorsafter they were cut from the strips because they believed the act of cuttingthe strips containing the semiconductor devices, referred to as singulation,could result in damage or contamination to the semiconductor devices and, as aconsequence, make the prior test results unreliable.

 

We introduced our Tapestry handling system in February 1999.  In May 2000, we introduced other SmartSolutions products, which provide additional process capability for handlingand testing semiconductor devices in strip form.  In July of 2003, we introduced our Tapestry SC, asecond-generation system.  Our new productsare

 

26

----

 

attractive to customers only if the customers can see the value ofautomating the test and assembly portions of their semiconductor manufacturingoperations.  Although semiconductormanufacturers have automated the wafer fabrication portion of their operation,or the front-end of the semiconductor manufacturing process, very fewsemiconductor manufacturers have invested a significant amount of capital toautomate the test and assembly portions of their operations.  We are introducing new products fortechnologies, which may not be accepted on a wide-scale basis by theindustry.  If either the testing ofsemiconductor devices in strip form or wide-scale automation of the back-end isnot accepted by the industry, our net sales likely will suffer.

 

**Downturns insemiconductor industry business cycles could have a negative impact on ouroperating results.**

 

Our business depends heavily upon capitalexpenditures by semiconductor manufacturers. The semiconductor industry is highly cyclical, with periods of capacityshortage and periods of excess capacity. In periods of excess capacity, the industry sharply cuts purchases ofcapital equipment, such as our products. Thus, a semiconductor industry downturn or slowdown substantiallyreduces our revenues and operating results and could hurt our financialcondition.  In the fourth quarter of2000, the semiconductor capital equipment industry went into a severedownturn.  This downturn has intensifiedand continued throughout most of 2003, which has adversely impacted ourrevenues, operating results and financial position over the last threeyears.  Although the market has shownrecent sign of stabilization, it is not certain that if this will be sustainednor if the market will return to its historical growth rates.

 

**We have offeredautomation solutions and, unless we effectively market our company as aprovider of automation solutions, our expected financial results will suffer.**

 

We offer equipment automation solutions and software developmentservices.  These solutions and servicesrequire different marketing techniques and involve a more extensivedecision-making process by customers than for our traditional handlerproducts.  We need to successfullymarket our automation products using different sales methods than we havepreviously used.

 

We acquired an automation software business in June 1999 andintroduced our first suite of products to provide an automation solution forthe testing portion of semiconductor manufacturing in May 2000.  The sales from these operations make up lessthan 6%, 5% and 6% of net sales for the years ended December 31, 2003,2002 and 2001, respectively.  Our futuresuccess is dependent upon being able to successfully market our automationproducts.  If we are not successful ineffectively marketing ourselves as an equipment automation solutions providerto the semiconductor industry, our results of operations and financialcondition will suffer.

 

**We invest heavily inresearch and development efforts and our financial results depend upon thesuccess of these efforts.**

 

We have spent, and expect to continue to spend, a significant amount oftime and resources developing new products and refining existing products andsystems.  In light of the long productdevelopment cycles inherent in our industry, these expenditures will be madewell in advance of the prospect of deriving revenue from the sale of newsystems.

 

Our ability to introduce and market new products successfully issubject to a wide variety of challenges during this development cycle, such asdesign defects or changing market requirements that could delay introduction ofthese systems.  In addition, since ourcustomers are not obligated by long-term contracts to purchase our products,our anticipated product orders may not materialize, or orders that domaterialize may be canceled.  As aresult, if we do not achieve market acceptance of new products, we may not beable to realize sufficient sales needed to recoup our research and developmentexpenditures.

 

**Our operating resultsoften have large changes from period to period, which may result in a decreasein our stock price.**

 

27

----

 

Our quarterly and annual operating results are affected by a widevariety of factors that could adversely affect sales or operating results orlead to significant variability in our operating results.  A variety of factors could cause thisvariability, including the following:

 

• thecyclical nature of the semiconductor industry; • delays in, orcancellation of, significant system purchases by customers; • delays in thedevelopment, introduction and production of our products; • changes in the mixof our products and their gross margins; • new productintroductions by competitors and competitive pricing pressures; • the time requiredfor us to adjust our operating expenses to respond to changes in sales andmarket conditions;• the timing of anyfuture acquisitions and their effect on our financial results;

• componentshortages resulting in manufacturing delays; and • pressure bycustomers to reduce prices, shorten delivery times and extend payment terms.

 

We cannot predict the impact of these and other factors on our sales oroperating results in any future period. Results of operations in any period, therefore, should not be consideredindicative of the results to be expected for any future period.  Because of this difficulty in predictingfuture performance, our operating results may fall below expectations ofsecurity analysts or investors in some future periods.  Our failure to meet these expectations wouldlikely adversely affect the market price of our common stock.

 

**Our stock price isvolatile and it may drop unexpectedly.**

 

Stock prices of companies in the semiconductor equipment industry,including ours, can swing dramatically with little relationship to operatingperformance.  Factors, which could causeour stock price to change, include:

 

• changesin the market’s view of the semiconductor industry in general;

• changesin our quarterly operating results for the reasons set out in the previous riskfactors for other reasons;

• changesin our reported financial results based on accounting pronouncements;

• changesin research analysts’ expectations for us or our industry or failure to meetresearch analysts’ estimates; 

• changesin the general economic conditions or developments in the semiconductorindustry which affect investors confidence;

•announcements by us or our competitors of technological innovations or new orenhanced products and;

• thepotential impact on the liquidity of our securities due to the de-listingaction from the Nasdaq SmallCap Market.

 

Additional factors, which may impact our results, include:

 

• We dependupon a few customers for the majority of our revenues and a reduction in theirorders could adversely affect us.

• Ouroperating results would be harmed if one of our key suppliers fails to delivercomponents for our products.

• The lossof any of our key personnel could harm our business.

• Ourmarkets are very competitive and demand for our products may decrease ifadditional competitors enter our markets.

• Ourdependence upon international sales involves significant risk.

• Thepossible adverse impact of economic or political changes in the market weserve.

• Ourinability to obtain financing to fund continuing or expanding operations.

 

28

----

 

Fluctuations or decreases in the trading price of our common stock mayadversely affect the ability to trade our shares.  In addition, these fluctuations could adversely affect ourability to raise capital through future equity financing.

 

**ITEM 8****.  Consolidated Financial Statements andSupplementary Data**

 

See Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K for the year ended December 31, 2003.  The financial information by quarter isincluded in Item 7 of this Annual Report on Form 10-K.

 

**ITEM 9****.  Changes in and Disagreements withAccountants on Accounting  and FinancialDisclosure**

 

On November 25, 2003, the Company’s Board of Directors, pursuantto the recommendation of the Audit Committee, approved the retention ofVirchow, Krause & Company, LLP as our independent auditors and dismissedDeloitte & Touche LLP effective November 18, 2003.  The change in independent auditors was filedon  a Form 8-K on November 25,2003.

 

**ITEM 9A****.  Controls and Procedures**

 

(a)                Evaluation of disclosure controls andprocedures.

 

Under the supervision and with the participation of our management,including the Company’s Chief Executive Officer and Chief Financial Officer, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the ExchangeAct) as of the end of period covered by this report.  Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the Evaluation Date, our disclosurecontrols 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.

 

(b)         Changes in internal controls.

 

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

 

**PART III**

 

**ITEM 10****.  Directors and Executive Officers of theRegistrant**

 

The information required by this item concerning directors andexecutive officers is incorporated by reference from the Proxy Statement to befiled no later than 120 days following our December 31, 2003 year-end.

 

**ITEM 11****.  Executive Compensation**

 

The information required under this item is hereby incorporated byreference from the Proxy Statement.

 

**ITEM 12**. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters

 

The information required under this item is hereby incorporated byreference from the Proxy Statement.

 

29

----

 

**ITEM 13****.  Certain Relationships and RelatedTransactions**

 

The information required under this item is hereby incorporated byreference from the Proxy Statement.

 

**ITEM 14****.  Principal Accountant Fee and Services**

 

The information required under this item is hereby incorporated byreference from the Proxy Statement.

 

**ITEM 15****.  Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

**(a)1.  Consolidated Financial Statements**
| Index to Consolidated Financial Statements                                                                                                                                 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Auditors                                                                                                                                             |   |
| Prior Independent Auditor’s Report                                                                                                                                    |   |
| Consolidated Balance Sheets as of December 31, 2003, and  December 31, 2002                                                                                      |   |
| Consolidated Statements of Operations for  the Years Ended December 31, 2003,  December 31, 2002, and December 31, 2001                                     |   |
| Consolidated Statements of Changes in  Stockholders’ (Deficit) Equity for the Years Ended  December 31, 2003, December 31, 2002, and December 31, 2001 |   |
| Consolidated Statements of Cash Flows for  the Years Ended December 31, 2003,  December 31, 2002, and December 31, 2001                                     |   |
| Notes to Consolidated Financial Statements                                                                                                                                 |   |

 

**(a)3. Exhibits**

 
| 3A.  | Bylaws of MCT. (7)                                                                                                        |   |
|------|---------------------------------------------------------------------------------------------------------------------------|--------|
| 3B.  | Articles of Incorporation of MCT. (7)                                                                                     |   |
| 3C.  | Articles of Amendment dated March 14, 2002 (11.)                                                                     |   |
| 4.   | Specimen Certificate of Common stock. (1)                                                                                 |   |
| 10A. | Form of Non-Competition Agreement between MCT and certain senior  executive officers. (1)                                 |   |
| 10B. | Stock Purchase Agreement and Commission Agreement between MCT and  Cardine & Levy, dated September 25, 1995. (3) |   |
| 10C. | Employment Agreement with Roger E. Gower dated March 28, 1995.  (2)                                                  |   |
| 10D. | Employment Agreement with Dennis L. Nelson dated May 30, 1996. (5)                                                        |   |
| 10E  | Offer Letter to Thomas P. Maun dated July 15, 2002. (14)                                                             |   |
| 10F. | Stock Option Plan for Outside Directors as amended through  April 10, 2001. (10)                                     |   |
| 10G. | Incentive Stock Option Plan as amended through April 10, 2001.  (10)                                                 |   |
| 10H. | Former Aseco Corp. 1986 Incentive Stock Option Plan. (9)                                                                  |   |
| 10I. | Former Aseco Corp. 1993 Omnibus Stock Plan. (9)                                                                           |   |
| 10J. | Former Aseco Corp. 1993 Non-Employee Director Stock Option Plan. (9)                                                      |   |
| 10K. | Lease for MCT’s corporate headquarters dated October 16, 1996.  (6)                                             |   |
| 10L. | Lease for space in Marlborough, Massachusetts dated April 13,  1993. (8)                                             |   |
| 10M. | Employee Stock Purchase Plan. (4)                                                                                         |   |
| 10U. | Warrant Purchase Agreement dated July 11, 1992. (1)                                                                  |   |
| 10V. | Second Common Stock Warrant Purchase Agreement dated August 10,  1993. (1)                                           |   |
| 10W. | Form of 10% Senior Subordinated Convertible Note. (11)                                                                    |   |
| 10X. | Agreement for Payment of Interest with Stock, effective June 30,  2003. (12)                                         |   |
| 10Y  | Accounts Receivable Financing Agreement with Silicon Valley Bank (13)                                                     |   |
| 10Z  | Security Agreement with Laurus Master Fund, Ltd. dated March 9,  2004. (filed herewith)                              |   |
| 10AA | Securities Purchase Agreement with Laurus Master Fund, Ltd. dated  March 9, 2004. (filed herewith)                   |   |
| 10BB | Secured Convertible Minimum Borrowing Note with Laurus Master Fund,  Ltd. dated March 9, 2004. (filed herewith)      |   |
| 10CC | Secured Revolving Note with Laurus Master Fund, Ltd dated  March 9, 2004. (filed herewith)                           |   |
| 10DD | Secured Convertible Term Note with Laurus Master Fund, Ltd dated  March 9, 2004. (filed herewith)                    |   |

 

30

----

 
| 10EE | Minimum Borrowing Note Registration Rights Agreement with Laurus  Master Fund, Ltd. dated March 9, 2004. (filed herewith) |   |
|------|--------------------------------------------------------------------------------------------------------------------------------|--------|
| 10FF | Registration Rights Agreement with Laurus Master Fund, Ltd. dated  March 9, 2004. (filed herewith)                        |   |
| 10GG | Common Stock Purchase Warrant with Laurus Master Fund, Ltd. dated  March 9, 2004. (filed herewith)                        |   |
| 21.  | Revised Listing of Subsidiaries of Micro Component Technology, Inc.  (11)                                                      |   |
| 23.1 | Consent of Virchow, Krause & Company, LLP (filed herewith)                                                                 |   |
| 23.2 | Consent of Deloitte & Touche LLP. (filed herewith)                                                                         |   |
| 31.1 | Certification of Chief Executive Officer (filed herewith)                                                                      |   |
| 31.2 | Certification of Chief Financial Officer (filed herewith)                                                                      |   |
| 32.0 | Section 1350 Certification (filed herewith.)                                                                              |   |

 

----

(1)                                  Incorporated byreference to the exhibits to the registration statement on Form S-1 filed byMCT on August 24, 1993, as amended, SEC File Number 33-67846.

 

(2)                                  Incorporated by referenceto the report on Form 10-Q filed by MCT for the quarter ended March 25,1995, SEC File No. 0-22384.

 

(3)                                  Incorporated byreference to the report on Form 10-Q filed by MCT for the quarter endedSeptember 30, 1995, SEC File No. 0-22384.

 

(4)                                  Incorporated byreference to the exhibits to the Post-Effective Amendment to RegistrationStatement on Form S-8 filed by MCT on July 15, 1996, as amended, SEC FileNo. 33-85766.

 

(5)                                  Incorporated byreference to the exhibits to the report on Form 10-K filed by MCT for thefiscal year ended June 29, 1996, SEC File No. 0-22384.

 

(6)                                  Incorporated byreference to the report on Form 10-Q filed by MCT for the quarter endedSeptember 28, 1996, SEC File No. 0-22384.

 

(7)                                  Incorporated byreference to the exhibits to the Post-Effective Amendment No. 1 to theRegistration Statement on Form S-1 filed by MCT on November 18, 1996, SECFile No. 33-98940.

 

(8)                                  Incorporated byreference to the Registration Statement on Form S-1, as amended, filed by AsecoCorporation on January 29, 1993, SEC File No. 33-57644.

 

(9)                                  Incorporated byreference to the exhibits to the Registration Statement on Form S-8 filed byMCT on January 31, 2000, SEC File No. 333-95765.

 

(10)                            Incorporated by referenceto the definitive proxy materials for the 2001 Annual Stockholders Meeting,filed April 30, 2001.

 

(11)                            Incorporated by referenceto the report on Form 10-K filed by MCT for the period ended December 31,2001, SEC File No. 0-22384.

 

(12)                            Incorporated by referenceto the report on Form 10-Q filed by MCT for the quarterly period endedJune 28, 2003, SEC File No. 0-22384.

 

(13)                            Incorporated by referenceto the report on Form 10-Q filed by MCT for the quarterly period endedSeptember 27, 2003, SEC File No. 0-22384.

 

(14)                            Incorporated by referenceto the report on Form 10-K filed by MCT for the period ended December 31,2002, SEC File No. 0-22384.

 

**(b)****                                  Reportson Form 8-K**

 

31

----

 

On October 22, 2003, we issued a press release disclosingfinancial information regarding the quarter ended September 27, 2003 forwhich a Form 8-K was filed on October 27, 2003.

 

On November 25, 2003 we filed a Form 8-K disclosing that theCompany’s Board of Directors, pursuant to the recommendation of the Audit Committee,approved the retention of Virchow, Krause & Company, LLP as theregistrants’ independent auditors and dismissed Deloitte & Touche LLPeffective November 18, 2003.

 

32

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

 

**Indexto Consolidated Financial Statements**

 

 
| Index to Consolidated Financial Statements                                                                                                                                 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Auditors                                                                                                                                             |   |
| Independent Auditors’ Report                                                                                                                                          |   |
| Consolidated Balance Sheets as of December 31, 2003, and  December 31, 2002                                                                                      |   |
| Consolidated Statements of Operations for  the Years Ended December 31, 2003,  December 31, 2002, and December 31, 2001                                     |   |
| Consolidated Statements of Changes in  Stockholders’ (Deficit) Equity for the Years Ended  December 31, 2003, December 31, 2002, and December 31, 2001 |   |
| Consolidated Statements of Cash Flows for  the Years Ended December 31, 2003,  December 31, 2002, and December 31, 2001                                     |   |
| Notes to Consolidated Financial Statements                                                                                                                                 |   |

 

F-1

----

 

##### **REPORT OFINDEPENDENT AUDITORS**

 

##### **To theAudit Committee, Stockholders and Board of Directors of**

##### **MicroComponent Technology, Inc.**

 

Wehave audited the accompanying consolidated balance sheet of Micro Component Technology,Inc. and subsidiaries (the Company) as of December 31, 2003 and therelated consolidated statements of operations, changes in stockholders’ deficitand cash flows for the year ended December 31, 2003.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believethat our audit provides a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material aspects, the financial position of the Company atDecember 31, 2003, and the results of their operations and their cashflows for the year ended December 31, 2003, in conformity with accountingprinciples generally accepted in the United States of America.

 
| /s/ Virchow, Krause & Company, LLP |   |
|----------------------------------------|--------|
|                                   |   |
|                                   |   |
| Minneapolis, Minnesota                 |   |
| February 6, 2004                  |   |
| (March 9, 2004 as to Note 12)     |   |
|                                        |        |  |

 

F-2

----

 

##### **INDEPENDENTAUDITORS’ REPORT**

 

To the Stockholders and Board of Directors of

Micro Component Technology, Inc.

 

Wehave audited the accompanying consolidated balance sheet of Micro ComponentTechnology, Inc. and subsidiaries (the Company) as of December 31, 2002and the related consolidated statements of operations, stockholders’ (deficit)equity and cash flows for the years ended December 31, 2002 and 2001.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believethat our audits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial aspects, the financial position of the Company at December 31,2002, and the results of its operations and its cash flows for the years endedDecember 31, 2002 and 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 1 to the financial statements, the Company’s recurring lossesfrom operations and stockholders’ deficit raises substantial doubt about itsability to continue as a going concern. Management’s plans concerning these matters are also described in Note.1.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 
| /s/ Deloitte & Touche LLP                             |   |
|-----------------------------------------------------------|--------|
|                                                      |
|                                                      |
| Minneapolis, Minnesota                                    |
| February 17, 2003                                    |
| (March 26, 2003 as to the first paragraph of Note 4) |

 

F-3

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**CONSOLIDATED BALANCESHEETS**

(in thousands, except share and per shareamounts)

 
|                                                                                                |   | **December 31,  2003** |   | **December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|------------|
|                                                                                                |   |                        |   |                        |       |
| **Assets**                                                                                          |   |                        |   |                        |       |
| Current assets:                                                                                     |   |                        |   |                        |       |
| Cash and cash equivalents                                                                           |   | $                           | 1,078  |                        | $          | 1,560 |   |
| Accounts receivable, less allowance for  doubtful accounts of $303 and $319, respectively           |   | 1,539                       |   | 786                         |       |
| Inventories                                                                                         |   | 3,413                       |   | 3,850                       |       |
| Other                                                                                               |   | 273                         |   | 212                         |       |
| Total current assets                                                                                |   | 6,303                       |   | 6,408                       |       |
|                                                                                                |   |                        |   |                        |       |
| Property, plant and equipment, net                                                                  |   | 336                         |   | 605                         |       |
| Debt issuance costs, net of accumulated  amortization of $350 and $170, respectively                |   | 499                         |   | 665                         |       |
| Other assets                                                                                        |   | 56                          |   | 75                          |       |
| Total assets                                                                                        |   | $                           | 7,194  |                        | $          | 7,753 |   |
|                                                                                                |   |                        |   |                        |       |
| **Liabilities and  Stockholders’ Deficit**                                                     |   |                        |   |                        |       |
| Current liabilities:                                                                                |   |                        |   |                        |       |
| Current portion of long-term debt                                                                   |   | $                           | — |                        | $          | 29 |   |
| Bank line of credit                                                                                 |   | 348                         |   | —                      |       |
| Current portion of accrued restructuring  costs                                                     |   | —                      |   | 194                         |       |
| Accounts payable                                                                                    |   | 1,518                       |   | 1,010                       |       |
| Accrued compensation                                                                                |   | 469                         |   | 419                         |       |
| Accrued interest                                                                                    |   | 370                         |   | 500                         |       |
| Accrued warranty                                                                                    |   | 181                         |   | 200                         |       |
| Customer prepayments and unearned service  revenue                                                  |   | 1,410                       |   | 300                         |       |
| Deferred revenue in excess of costs  incurred                                                       |   | 16                          |   | 48                          |       |
| Other accrued liabilities                                                                           |   | 373                         |   | 847                         |       |
| Total current liabilities                                                                           |   | 4,685                       |   | 3,547                       |       |
|                                                                                                |   |                        |   |                        |       |
| Long-term portion of accounts payable                                                               |   | 195                         |   | —                      |       |
| 10% senior subordinated convertible debt                                                            |   | 7,340                       |   | 10,000                      |       |
|                                                                                                |   |                        |   |                        |       |
| Commitments and contingencies (Note 8)                                                              |   |                        |   |                        |       |
|                                                                                                |   |                        |   |                        |       |
| Stockholders’ deficit:                                                                         |   |                        |   |                        |       |
| Preferred stock, $.01 par value, 1,000,000  authorized, none issued and outstanding                 |   |                        |   |                        |       |
| Common stock, $.01 par value, 40,000,000  authorized 21,145,300 and 14,152,520 issued, respectively |   | 212                         |   | 142                         |       |
| Additional paid-in capital                                                                          |   | 92,668                      |   | 88,302                      |       |
| Cumulative other comprehensive loss                                                                 |   | (69                         | )      | (69                         | )          |
| Accumulated deficit                                                                                 |   | (97,837                     | )      | (94,169                     | )          |
| Total stockholders’ deficit                                                                    |   | (5,026                      | )      | (5,794                      | )          |
| Total liabilities and stockholders’ deficit                                                    |   | $                           | 7,194  |                        | $          | 7,753 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-4

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands, except per share data)

 
|                                                               |   | **Years  Ended**            |   |
|--------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                               |   | **December 31,  2003** |   | **December 31,  2002** |   | **December 31,  2001** | ** ** |
|                                                               |   |                        |   |   |   |   |   |
| Net sales                                                          |   | $                           | 11,123 |   | $ | 12,211 |   | $ | 25,406 |   |
| Cost of sales:                                                     |   |                        |   |   |   |   |   |
| Product                                                            |   | 6,295                       |   | 7,604 |   | 15,832 |   |
| Inventory revaluation                                              |   | —                      |   | 913 |   | 8,092 |   |
| Total cost of sales                                                |   | 6,295                       |   | 8,517 |   | 23,924 |   |
| Gross profit                                                       |   | 4,828                       |   | 3,694 |   | 1,482 |   |
|                                                               |   |                        |   |   |   |   |   |
| Operating expenses:                                                |   |                        |   |   |   |   |   |
| Selling, general, and administrative                               |   | 4,872                       |   | 8,556 |   | 10,864 |   |
| Research and development                                           |   | 2,351                       |   | 4,214 |   | 7,859 |   |
| Amortization of intangible assets                                  |   | —                      |   | — |   | 2,632 |   |
| Write-down of impaired intangible assets                           |   | —                      |   | — |   | 9,298 |   |
| Restructuring charge                                               |   | 266                         |   | 207 |   | 2,444 |   |
| Total operating expenses                                           |   | 7,489                       |   | 12,977 |   | 33,097 |   |
|                                                               |   |                        |   |   |   |   |   |
| Loss from operations                                               |   | (2,661                      | )      | (9,283 | ) | (31,615 | ) |
|                                                               |   |                        |   |   |   |   |   |
| Other income (expense):                                            |   |                        |   |   |   |   |   |
| Interest income                                                    |   | 5                           |   | 102 |   | 227 |   |
| Interest expense                                                   |   | (1,195                      | )      | (1,175 | ) | (26 | ) |
| Gain (loss) on sale of property and  equipment                     |   | 209                         |   | (17 | ) | — |   |
| Other income (expense)                                             |   | (26                         | )      | 43 |   | (5 | ) |
|                                                               |   |                        |   |   |   |   |   |
| Loss before income taxes                                           |   | (3,668                      | )      | (10,330 | ) | (31,419 | ) |
| Income tax provision                                               |   | —                      |   | — |   | — |   |
|                                                               |   |                        |   |   |   |   |   |
| Net loss                                                           |   | $                           | (3,668 | ) | $ | (10,330 | ) | $ | (31,419 | ) |
|                                                               |   |                        |   |   |   |   |   |
| Net loss per common share:                                         |   |                        |   |   |   |   |   |
| Basic and diluted                                                  |   | $                           | (0.21  | ) | $ | (0.73 | ) | $ | (2.24 | ) |
|                                                               |   |                        |   |   |   |   |   |
| Weighted average common and common  equivalent shares outstanding: |   |                        |   |   |   |   |   |
| Basic                                                              |   | 17,606                      |   | 14,125 |   | 14,027 |   |
| Diluted                                                            |   | 17,606                      |   | 14,125 |   | 14,027 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-5

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’**(DEFICIT) EQUITY

(in thousands, except share data)

 
|                                                                     |       | **Common  Stock** |   | **Comprehensive  Loss**          |   | **Accumulated  Deficit** |   | **Cumulative  Other Comprehesive Loss** |    |
|--------------------------------------------------------------------------|------------|-------------------|--------|----------------------------------|--------|--------------------------|--------|-----------------------------------------|---------|
| **Shares**                                                               |       | **Par  Value**    |   | **Additional  Paid-in  Capital** |   |                     |   |                                    |
|                                                                     |       |              |   |                             |   |
|                                                                     | ** ** |              |   |                             |   |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Balance at December 31, 2000                                        |       | 13,949,974        |   | $                                | 139    |                     | $      | 87,942                                  |    |   |   | $ | (52,420 | ) | $ | (69 | ) |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Net loss                                                                 |       |              |   |                             |   |                     |   | $                                       | (31,419 | ) | (31,419 | ) |   |   |
| Shares issued on exercise of options, net                                |       | 87,510            |   | 1                                |   | 96                       |   |                                    |    |   |   |   |   |
| Shares issued through employee stock  purchase plan                      |       | 36,881            |   | 1                                |   | 106                      |   |                                    |    |   |   |   |   |
| Comprehensive loss                                                       |       |              |   |                             |   |                     |   | $                                       | (31,419 | ) |   |   |   |   |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Balance at December 31, 2001                                        |       | 14,074,365        |   | $                                | 141    |                     | $      | 88,144                                  |    |   |   | $ | (83,839 | ) | $ | (69 | ) |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Net loss                                                                 |       |              |   |                             |   |                     |   | $                                       | (10,330 | ) | (10,330 | ) |   |   |
| Shares issued on exercise of options, net                                |       | 49,176            |   | 1                                |   | 81                       |   |                                    |    |   |   |   |   |
| Shares issued through employee stock  purchase plan                      |       | 28,979            |   | —                           |   | 77                       |   |                                    |    |   |   |   |   |
| Comprehensive loss                                                       |       |              |   |                             |   |                     |   | $                                       | (10,330 | ) |   |   |   |   |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Balance at December 31, 2002                                        |       | 14,152,520        |   | $                                | 142    |                     | $      | 88,302                                  |    |   |   | $ | (94,169 | ) | $ | (69 | ) |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Net loss                                                                 |       |              |   |                             |   |                     |   | $                                       | (3,668  | ) | (3,668 | ) |   |   |
| Shares issued in private Placement, net of  offering costs               |       | 3,166,869         |   | 32                               |   | 1,005                    |   |                                    |    |   |   |   |   |
| Shares issued on conversion of 10% senior  subordinated convertible debt |       | 2,660,081         |   | 27                               |   | 2,634                    |   |                                    |    |   |   |   |   |
| Shares issued in lieu of interest                                        |       | 1,007,830         |   | 10                               |   | 543                      |   |                                    |    |   |   |   |   |
| Shares issued on exercise of options, net                                |       | 150,000           |   | 1                                |   | 181                      |   |                                    |    |   |   |   |   |
| Shares issued through employee stock  purchase plan                      |       | 8,000             |   | —                           |   | 3                        |   |                                    |    |   |   |   |   |
| Comprehensive loss                                                       |       |              |   |                             |   |                     |   | $                                       | (3,668  | ) |   |   |   |   |
|                                                                     |       |              |   |                             |   |                     |   |                                    |    |   |   |   |   |
| Balance at December 31, 2003                                        |       | 21,145,300        |   | $                                | 212    |                     | $      | 92,668                                  |    |   |   | $ | (97,837 | ) | $ | (69 | ) |

 

See Notes to Consolidated FinancialStatements.

 

F-6

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

###### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(in thousands)

 
|                                                                                        |   | **Years  Ended**            |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                        |   | **December 31,  2003** |   | **December 31,  2002** | ** ** | **December 31,  2001** | ** ** |
|                                                                                        |   |                        |   |   |   |   |   |
| Cash flows from operating activities:                                                       |   |                        |   |   |   |   |   |
| Net loss                                                                                    |   | $                           | (3,668 | ) | $ | (10,330 | ) | $ | (31,419 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                |   |                        |   |   |   |   |   |
| Depreciation                                                                                |   | 482                         |   | 403 |   | 734 |   |
| Amortization                                                                                |   | 180                         |   | 167 |   | 2,632 |   |
| Write-down of impaired intangible assets                                                    |   | —                      |   | — |   | 9,298 |   |
| Inventory revaluation                                                                       |   | —                      |   | 913 |   | 8,092 |   |
| (Gain) loss on disposal of property and  equipment                                          |   | (209                        | )      | 17 |   | — |   |
| Other, net                                                                                  |   | —                      |   | — |   | (41 | ) |
| Changes in operating assets and  liabilities:                                               |   |                        |   |   |   |   |   |
| Accounts receivable                                                                         |   | (753                        | )      | 2,350 |   | 8,769 |   |
| Inventories                                                                                 |   | 250                         |   | 321 |   | 242 |   |
| Other assets                                                                                |   | (56                         | )      | 39 |   | 116 |   |
| Accounts payable                                                                            |   | 703                         |   | (526 | ) | (5,420 | ) |
| Accrued restructuring costs                                                                 |   | (153                        | )      | (762 | ) | 996 |   |
| Other accrued liabilities                                                                   |   | 1,058                       |   | (2,084 | ) | (4,010 | ) |
| Net cash used in operating activities                                                       |   | (2,166                      | )      | (9,492 | ) | (10,011 | ) |
|                                                                                        |   |                        |   |   |   |   |   |
| Cash flows from investing activities:                                                       |   |                        |   |   |   |   |   |
| Additions to property, plant and equipment                                                  |   | (111                        | )      | (184 | ) | (325 | ) |
| Proceeds from disposition of property                                                       |   | 253                         |   | 37 |   | — |   |
| Net cash used in investing activities                                                       |   | 142                         |   | (147 | ) | (325 | ) |
|                                                                                        |   |                        |   |   |   |   |   |
| Cash flows from financing activities:                                                       |   |                        |   |   |   |   |   |
| Increase in long-term debt                                                                  |   | —                      |   | — |   | 41 |   |
| Payments on long-term debt                                                                  |   | (29                         | )      | (46 | ) | (34 | ) |
| Proceeds from bank line of credit                                                           |   | 348                         |   | — |   | — |   |
| Proceeds from issuance of senior  subordinated convertible debt, net of debt issuance costs |   | —                      |   | — |   | 9,164 |   |
| Proceeds from issuance of stock, net of  stock issuance costs                               |   | 1,223                       |   | 159 |   | 204 |   |
| Net cash provided by financing activities                                                   |   | 1,542                       |   | 113 |   | 9,375 |   |
|                                                                                        |   |                        |   |   |   |   |   |
| Net   decrease in cash and cash equivalents                                            |   | (482                        | )      | (9,526 | ) | (961 | ) |
|                                                                                        |   |                        |   |   |   |   |   |
| Cash and cash equivalents at beginning of  period                                           |   | 1,560                       |   | 11,086 |   | 12,047 |   |
|                                                                                        |   |                        |   |   |   |   |   |
| Cash and cash equivalents at end of period                                                  |   | $                           | 1,078  |   | $ | 1,560 |   | $ | 11,086 |   |
|                                                                                        |   |                        |   |   |   |   |   |
| Supplemental disclosure:                                                                    |   |                        |   |   |   |   |   |
| Non-cash investing and financing activities:                                                |   |                        |   |   |   |   |   |
| Equipment acquired by capital lease                                                         |   | $                           | — |   | $ | — |   | $ | 41 |   |
| Stock issued in lieu of interest                                                            |   | 553                         |   | — |   | — |   |
| Stock issued in conversion of 10% senior  subordinated debt                                 |   | 2,661                       |   | — |   | — |   |
| Cash paid for interest                                                                      |   | $                           | 591    |   | $ | 527 |   | $ | 210 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-7

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Business*

 

We design, manufacture, market and service automated test handlingequipment for the semiconductor industry. Our handlers are designed to handle most semiconductor or integratedcircuit device packages currently in production.  We operate in one business segment in three geographic locations.

 

A network of offices and representatives supports our customers acrossNorth America, Europe and Asia.  Ourcompany was formed in 1972 and is headquartered in St. Paul, Minnesota.

 

*Basis ofPresentation*

 

The consolidated financial statements include the accounts of theparent company and our subsidiaries after elimination of all significantintercompany balances and transactions. All significant subsidiaries are 100% owned.

 

Our consolidated financial statements have been prepared on theassumption that we will continue as a going concern, which contemplates therealization of assets and liquidation of liabilities in the normal course ofbusiness.  In their report accompanying theconsolidated financial statements, the predecessor independent auditorsexpressed an opinion that the Company’s recurring losses from operations andstockholders deficit raised substantial doubt about our ability to continue asa going concern at the time of issuing our consolidated financial statements asof and for the year ended December 31, 2002.  During 2003, the Company continued to incur net losses andnegative cash flows from operating activities, as in each of its prior twoyears, and has an accumulated deficit of $5.0 million at December 31,2003. In March of  2003, theCompany raised approximately $1.1 million pursuant to a private equityplacement with a group of accredited investors.  In June of 2003, the Company completed a one-year $2.5million working capital line of credit agreement with a bank.  In July of 2003, the Company completedthe restructuring of its 10% Senior Subordinated Convertible Notes, wherein92.9% of the investors agreed to take stock in lieu of cash for their next foursemi-annual interest payments beginning June 30, 2003 throughDecember 31, 2004.  In July of2003, the Company completed negotiations with the majority of our vendors torestructure the amounts owed to them wherein we would make four to eight equalquarterly payments beginning in July of 2003 in satisfaction of theirtotal obligation.

 

The Company believes that the combination of these restructuringefforts completed in 2003 and the addition of the new credit facility agreementdiscussed in Note 12, contained elsewhere herein, will provide the cash necessaryto meet our operating, working capital and capital resource obligations throughall of 2004.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requires that wemake estimates and assumptions that affect amounts reported therein.  Due to the inherent uncertainty involved inmaking estimates, actual results reported in future periods might differ fromthose estimates.

 

*Revenue Recognition*

 

Under SAB 104, our revenue is recognized uponshipment, as our terms are FOB shipping point, for established products thathave previously satisfied existing customer performance specifications and thatprovide for

 

F-8

----

 

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 only recognizedupon customer acceptance.  The relatedinventory costs are offset against the deferred revenue and reported as“deferred revenue in excess of costs incurred” in the consolidated balancesheet.  Product warranty and installationcosts are accrued in the period sales are recognized.  Installation services are considered to be perfunctory as definedunder SAB 104and average less than 5% of the contract price.  Revenue related to spare parts is recognizedupon shipment.  Revenue related tomaintenance and service contracts are deferred and amortized to earnings on astraight-line basis over the life of the service contract.  Custom integration software revenue is recognizedon a project basis with milestone acceptance provisions.  Shipping and handling costs are billed tothe customer and included in the net revenue with the cost of shipment andhanding charged to cost of goods sold.

 

*Research andDevelopment Expenses*

 

Research and development expenses for new product development arecharged to expense as incurred.

 

*Financial Instruments*

 

The carrying amounts for all financial instruments approximates fairvalue.  The carrying amounts for cashand cash equivalents, accounts receivable, account payable and accruedliabilities approximates fair value because of the short maturity of theseinstruments.  The fair value of capitallease obligations, note payable and long-term debt approximates the carryingamounts based upon the Company’s expected borrowing rate for debt with similarremaining maturities and comparable risk.

 

*Cash and Cash Equivalents*

 

We consider all highly liquid investments purchased with originalmaturities of 90 days or less to be cash equivalents.  We place our its temporary cash investments with high creditquality financial institutions.  Attimes such investments may be in excess of the Federal Deposit InsuranceCorporation (FDIC) insurance limit.

 

*Accounts Receivable*

 

We review customers’ credit history beforeextending unsecured credit and establish an allowance for doubtful accountsbased upon factors surrounding the credit risk of specific customers and otherinformation. Invoice terms can vary from net 30 days, to percentage amounts ofthe total customer purchase order tied to acceptance criteria.  The Company does not accrue interest on pastdue accounts receivable.  The Companywrites off receivables when they are deemed uncollectible after all collectionattempts have failed.  Accountsreceivable are shown net of an allowance for doubtful accounts of $303,000 and$319,000 at December 31, 2003 and 2002, respectively.

 

*Inventories*

 

Inventories are stated at the lower of cost or market.  Cost is determined by the first-in,first-out (“FIFO”) method.  Provision toreduce inventories to the lower of cost or market is made based on a review ofexcess and obsolete inventories, estimates of future sales, examination ofhistorical consumption rates and the related value of component parts.

 

 

F-9

----

 

*Property, Plant andEquipment*

 

Property, plant and equipment are stated at cost.  Depreciation is provided by thestraight-line method over the estimated useful lives of the assets forfinancial reporting and accelerated methods for tax purposes.  Leasehold improvements are amortized overthe shorter of the estimated useful life or the lease term for financialreporting purposes.  Estimated livesused in computing book depreciation are as follows:

 
| Leasehold improvements  |   | 3 to 10 years |
|-------------------------|--------|---------------|
| Machinery and equipment |   | 2 to 7        |
| Furniture and fixtures  |   | 3 to 5        |

 

*Impairment ofLong-Lived Assets*

 

We periodically evaluate the carrying value of long-lived assets forpotential impairment.  We considerprojected future operating results, cash flows, trends, and other circumstancesin making such estimates and evaluations. When the carrying value of any long-lived asset exceeds its projectedundiscounted cash flows, an impairment is recognized to reduce the carryingvalue to its fair market value.

 

*Product Warranty*

 

Estimated costs of warranty obligations to customers are charged toexpense and a related accrual is established at the time the product is sold.

 

*Income Taxes*

 

We account for income taxes in accordance with the provisions ofStatement of Financial Accounting Standards (SFAS) No. 109*, Accounting for Income Taxes*.  Deferred income taxes are recorded based ondifferences in the bases of assets and liabilities between the financialstatements and the tax returns as well as from loss carryforwards.  The valuation allowance for deferred incometax benefits is determined by us based upon the expectation of whether thebenefits are more likely than not to be realized.

 

*Stock-BasedCompensation*

 

We account for stock-based transactions under SFAS No. 123*, Accountingfor Stock-Based Compensation*. As permitted by SFAS No. 123, we have elected to continue following theguidance of APB Opinion No. 25 (as interpreted by FIN 44) for measurement andrecognition of stock-based transactions with employees and non-employeedirectors.  Because stock options havebeen granted at exercise prices at least equal to the fair market value of thestock at the grant date, no compensation cost has been recognized for stockoptions issued to employees and non-employee directors under the stock optionplans.  Stock-based transactions withnon-employees are accounted for in accordance with SFAS No. 123 and relatedinterpretations.

 

If compensation cost for our stock option and employee stock purchaseplans had been determined based on the fair value at the grant dates,consistent with the method provided in SFAS No. 148 and SFAS No. 123, our netloss and net loss per share would have been as follows:

 

F-10

----

 
|                               |   | **Years  Ended**  |   |
|------------------------------------|--------|-------------------|--------|
|                               |   | **Dec. 31  2003** |   | **Dec 31  2002** | ** ** | **Dec. 31  2001** | ** ** |
|                               |   |              |   |   |   |   |   |
| Net loss, in thousands:            |   |              |   |   |   |   |   |
| As reported                        |   | $                 | (3,668 | ) | $ | (10,330 | ) | $ | (31,419 | ) |
| Fair value compensation expense    |   | (985              | )      | (1,147 | ) | (1,240 | ) |
| Pro forma                          |   | $                 | (4,653 | ) | $ | (11,477 | ) | $ | (32,659 | ) |
|                               |   |              |   |   |   |   |   |
| Net loss per share – basic:   |   |              |   |   |   |   |   |
| As reported                        |   | $                 | (0.21  | ) | $ | (0.73 | ) | $ | (2.24 | ) |
| Fair value compensation expense    |   | (0.06             | )      | (0.08 | ) | (0.09 | ) |
| Pro forma                          |   | $                 | (0.27  | ) | $ | (0.81 | ) | $ | (2.33 | ) |
|                               |   |              |   |   |   |   |   |
| Net loss per share – diluted: |   |              |   |   |   |   |   |
| As reported                        |   | $                 | (0.21  | ) | $ | (0.73 | ) | $ | (2.24 | ) |
| Fair value compensation expense    |   | (0.06             | )      | (0.08 | ) | (0.09 | ) |
| Pro forma                          |   | $                 | (0.27  | ) | $ | (0.81 | ) | $ | (2.33 | ) |
|                               |   |              |   |   |   |   |   |
| Stock Based Compensation:          |   |              |   |   |   |   |   |
| As reported                        |   | $                 | — |   | $ | — |   | $ | — |   |
| Fair value compensation expense    |   | (985              | )      | (1,147 | ) | (1,240 | ) |
| Pro forma                          |   | $                 | (985   | ) | $ | (1,147 | ) | $ | (1,240 | ) |

 

The fair value of options granted under the stock option and employeestock purchase plans for the years ended December 31, 2003, 2002, and 2001was estimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions and results:

 
|                                    |   | **Years  Ended**   | ** **  |
|-----------------------------------------|--------|--------------------|-------------|
|                                    |   | **Dec. 31,  2003** |        | **Dec. 31,  2002** | ** ** | **Dec. 31,  2001** |   |
|                                    |   |               |        |   |   |   |   |
| Dividend yield                          |   | 0.00               | %           | 0.00 | % | 0.00 | % |
| Expected volatility                     |   | 139.76             | %           | 88.17 | % | 102.51 | % |
| Risk-free interest rate                 |   | 2.52               | %           | 3.87 | % | 4.62 | % |
| Expected life of options                |   | 3.6                |  years | 3.5 |  years | 3.5 |  years |
| Fair value per share of options granted |   | $                  | 0.70        |   | $ | 1.28 |   | $ | 1.94 |   |
|                                         |        |                    |             |  |  |  |  |  |  |  |  |

 

*Foreign CurrencyTranslation*

 

Assets and liabilities of the foreign subsidiary are translated to U.S.dollars at year-end rates, and the statements of operations are translated ataverage exchange rates during the year. Translation adjustments arising from the translation of the foreignaffiliates’ net assets into U.S. dollars were recorded in cumulative othercomprehensive income until 1999.  During1999, the foreign subsidiary’s functional currency changed to the U.S. dollardue principally to a significant shift in the amount of activity denominated inU.S. dollars versus the local currency. All translation adjustments are now recorded in the consolidatedstatements of operations.

 

*Reclassifications*

 

Certain amounts previously reported in the 2002 and 2001 consolidatedfinancial statements have been reclassified to conform to 2003presentation.  These reclassificationshad no effect in previously reported net loss or stockholders’ deficit.

 

*New AccountingStandards*

 

*EITF Issue No. 00-21 – Revenue Arrangementswith Multiple Deliverables.*  InNovember 2002, the Emerging Issues Task Force (EITF) reached a consensuson Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*, which provides guidance on how to account forarrangements that involve the delivery or performance

 

F-11

----

 

of multipleproducts, services and/or right to use assets. The provisions of EITF Issue No. 00-21 will apply to revenuearrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of EITF Issue No.00-21 will not have a material effect on our results of operations andfinancial condition.

 

*SFAS No. 149 – Amendment of Statement 133 onDerivative Instruments and Hedging Activities*. InApril 2003, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging**Activities.*  SFASNo. 149 clarifies when a contract meetings the characteristics of a derivative,clarifies when a derivative contains a financing component and amends certainother existing pronouncements.  The adoptionof SFAS No. 149 did not have a material effect on our results of operations andfinancial condition.

 

*SFAS No. 150 – Accounting for CertainFinancial Instruments with Characteristics of Both**Liabilities****andEquity*.  In May 2003, the FASB issuedSFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.*  SFAS No. 150 establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150 requires that and issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  This requirement ofthis statement applies to an issuer’s classification and measurement offree-standing financial instruments, including those that comprise more thanone option or forward contract.  SFASNo. 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. We do not have any financial instruments that must be accounted forpursuant to SFAS No. 150.  The adoptionof SFAS No. 150 did not have a material effect on our results of operations andfinancial condition.

 

*FASB Interpretation No. 46 – Consolidation ofVariable Interest Entities.*  InJanuary 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities* (“FIN No. 46”).FIN NO. 46 states that companies that have exposure to the economic risks andpotential rewards from another entity’s assets and activities have a controllingfinancial interest in variable interest entity and should consolidate thatentity, despite the absence of clear control through a voting equityinterest.  The consolidationrequirements apply to all variable interest entities created afterJanuary 31, 2003.  For variableinterest entities that existed prior to February 1, 2003, theconsolidation requirements are effective for annual or interim periodsbeginning after December 15, 2004. Disclosure of significant variable interest entities is required in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest was created.   TheCompany does not expect the adoption of FIN No. 46 to have a material impact onthe Company’s financial statements.

 

**NOTE 2 - LOSS PERCOMMON SHARE**

 

Loss per common share is computed in accordance with SFAS No. 128, *Earnings PerShare*.  Basic loss per shareis 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 outstanding and the conversion ofconvertible debt.  The following tablereconciles the denominators used in computing basic and diluted loss per sharefor the periods reported (in thousands):

 
|                                           |   | **Years  Ended**               |   |
|------------------------------------------------|--------|--------------------------------|--------|
|                                           |   | **December 31,  2003(1)** |   | **December 31,  2002(1)** |   | **December 31,  2001(1)** |   |
|                                           |   |                           |   |   |   |   |   |
| Weighted average common shares outstanding     |   | 17,606                         |   | 14,125 |   | 14,027 |   |
| Effect of dilutive stock options and  warrants |   | —                         |   | — |   | — |   |
| Effect of convertible debt                     |   | —                         |   | — |   | — |   |
|                                           |   |                           |   |   |   |   |   |
|                                           |   | 17,606                         |   | 14,125 |   | 14,027 |   |

 

F-12

----

 

----

(1)          We reported a loss for the period.  No adjustment was made for the effect ofstock options, warrants or convertible debt        as the effect was anti-dilutive.  Stock options and warrants outstanding totaled 2,882,468 sharesat December 31, 2003, 2,688,751 shares at December 31, 2002 and2,349,915 shares at December 31, 2001. We also have potentially issuable common shares of 6,902,996 related toour 10% Senior Subordinated Convertible Notes described in Note 6 containedelsewhere herein.

 

**NOTE 3 -RESTRUCTURING CHARGES**

 

**2003 Restructuring Charges**

 

During the first quarter, in response to the continued and prolongeddownturn in the semiconductor capital equipment industry, we reduced ourworkforce across all functional areas by approximately 24% at the time,resulting in a restructuring charge of $19,000.  This charge reflected severance and other benefit costs associatedwith this reduction.  This workforcereduction affected a total of 26 employees across all functional areas.

 

During the second quarter, we completed the restructuring of our masterlease for our St. Paul, MN facility, resulting in a restructuring charge of$227,000, which included write-offs of $41,000 related to leaseholdimprovements in the vacated space which provided no future economic benefit tous.  Additionally, we further reducedour workforce across all functional areas by approximately 4% at the time,resulting in a restructuring charge of $20,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of4 employees across all functional areas.

 

**2002Restructuring Charges**

 

In 2002, in response to the continued and prolonged downturn in thesemiconductor capital equipment industry, we took the following actions:

 

During the first quarter, we reduced our workforce across allfunctional areas by approximately 25% at the time, resulting in a restructuringcharge of $323,000.  This chargereflected severance and other benefits costs associated with thisreduction.  This workforce reductionaffected an additional 44 employees, principally in the areas of manufacturing,sales and marketing and engineering.

 

During the second quarter, we further reduced our workforce by 7% atthe time, resulting in a restructuring charge of $199,000.  This charge reflected severance and otherbenefit costs associated with the reduction, which affected 9 employees acrossall functional areas.  We also completeda lease settlement agreement related to our Marlborough, Massachusetts’facility.  This agreement required us topay $450,000 or approximately 35% of the outstanding lease obligation, whichwas to run through April 2003.  Asof December 31, 2002, the full amount of this settlement has been paid.The settlement of this lease resulted in a $674,000 benefit.

 

During the third quarter, as a result of the on going transfer of ourcore manufacturing operations to our Penang, Malaysia facility, we incurred arestructuring charge of $345,000, representing severance and other benefitcosts associated with further reductions to our workforce.  This reduction was implemented in the thirdand fourth quarters of 2002 and affected a total of 38 employees or 30% of ourworkforce at the time, across all functional areas.

 

During the fourth quarter, we further reduced our workforce, resultingin a restructuring charge of $14,000. This charge reflected severance and other benefit costs associated withthe reduction, which affected 9 employees or 8% of our workforce at the time,principally in the area of sales and marketing.

 

F-13

----

 

The following table summarizes these charges related to workforce andmanufacturing cost reductions for the year ended December 31, 2003. (inthousands):

 
|                                                            |   | **Employee  Separation****Costs** |   | **Idle Facility****Costs** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------|------------|-----------|------------|
|                                                            |   |                              |   |                       |       |      |       |
| Accrued restructuring costs at  December 31, 2002          |   | $                                 | 194    |                       | $          | —    |       | $ | 194 |   |
|                                                            |   |                              |   |                       |       |      |       |
| Restructuring charge for the quarter ended  March 29, 2003 |   | 19                                |   | —                     |       | 19        |       |
|                                                            |   |                              |   |                       |       |      |       |
| Utilization for the quarter ended  March 29, 2003          |   | (114                              | )      | —                     |       | (114      | )          |
|                                                            |   |                              |   |                       |       |      |       |
| Restructuring charge for the quarter ended  June 28, 2003  |   | 20                                |   | 227                        |       | 247       |       |
|                                                            |   |                              |   |                       |       |      |       |
| Utilization for the quarter ended  June 28, 2003           |   | (102                              | )      | (193                       | )          | (295      | )          |
|                                                            |   |                              |   |                       |       |      |       |
| Utilization for the quarter ended  September 27, 2003      |   | (10                               | )      | (34                        | )          | (44       | )          |
|                                                            |   |                              |   |                       |       |      |       |
| Utilization for the quarter ended  December 31, 2003       |   | (7                                | )      | —                     |       | (7        | )          |
|                                                            |   |                              |   |                       |       |      |       |
| Accrued restructuring costs at  December 31, 2003          |   | $                                 | — |                       | $          | —    |       | $ | — |   |

 

**NOTE 4 – FINANCINGTRANSACTIONS**

 

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

 

On June 9, 2003, the Company completed a one-year, $2.5 millionsecured working capital line of credit agreement with a bank.  Under the terms of the agreement, theCompany may borrow up to eighty percent (80%) of qualified receivables.  Additionally, under this agreement theCompany granted a first security interest in all assets of the company.  The advances bear interest at prime plus2.0% (6% at December 31, 2003). As of December 31, 2003, $348,000 wasoutstanding under this agreement.

 

F-14

----

 

**NOTE 5 –BALANCE SHEET INFORMATION**

 

The allowance for doubtful accounts receivable was as follows (inthousands):

 
|              |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------|--------|-----------------------------|--------|-----------------------------|--------|
|              |   |                        |   |                        |   |
| Beginning balance |   | $                           | 319    |                        | $      | 425 |   |
| Provisions        |   | —                      |   | —                      |   |
| Write offs        |   | (16                         | )      | (106                        | )      |
| Ending balance    |   | $                           | 303    |                        | $      | 319 |   |

 

Provisions are charged to selling, general and administrative expense.

 

Major components of inventories were as follows (in thousands):

 
|            |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-----------------|--------|-----------------------------|--------|-----------------------------|--------|
|            |   |                        |   |                        |   |
| Raw materials   |   | $                           | 1,775  |                        | $      | 2,541 |   |
| Work-in-process |   | 1,254                       |   | 778                         |   |
| Finished goods  |   | 384                         |   | 531                         |   |
|            |   | $                           | 3,413  |                        | $      | 3,850 |   |

 

In accordance with accounting principles generally accepted in theUnited States of America, we value our inventories at the lower of cost ormarket.  In the fourth quarter of 2002,we recorded a charge of $913,000 for excess inventory related to our oldersingulated technologies resulting from the continued downturn in thesemiconductor capital equipment market. This charge is included in costs of sales in the fourth quarter of 2002and the year ended December 31, 2002. In the third quarter of 2001, we recorded a charge of $8.1 million forexcess and obsolete inventory. Approximately $1.9 million of this charge represented discontinuedproducts and approximately $0.6 million represented obsolete componentsresulting from a shift in product focus. The remaining charge of approximately $5.6 million related to excessinventory, principally in our older singulated products, due to the protracteddownturn in the semiconductor capital equipment industry and our change inproduct strategy.  These provisions forexcess inventory resulted from the significant decrease in forecasted demandand consumption rates associated with the market downturn and were calculatedin accordance with our policy, which considers, among other factors,technological obsolescence, historical consumptions and expected demandlevels.  All inventory that has beendesignated as functionally obsolete is physically disposed of.

 

Property, plant and equipment were as follows (in thousands):

 
|                          |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                          |   |                        |   |                        |   |
| Leasehold improvements        |   | $                           | 379    |                        | $      | 473 |   |
| Machinery and equipment       |   | 2,241                       |   | 3,293                       |   |
| Furniture and fixtures        |   | 547                         |   | 600                         |   |
|                          |   | 3,167                       |   | 4,366                       |   |
| Less accumulated depreciation |   | (2,831                      | )      | (3,761                      | )      |
|                          |   | $                           | 336    |                        | $      | 605 |   |

 

F-15

----

 

For the year ended December 31, 2002,  we wrote off approximatly $1.7 million in fully depreciatedassets that are no longer utilized in the business.

 

Intangible assets and Goodwill charges:

 

In 2001 we shifted our product strategy and focused our resources onprofit contribution in high growth markets. These high contribution markets directly relate to the company’s newstrip testing technology and suite of automated equipment solutions.  We will continue to market and manufacturecertain of our older singulated products; however, the financial contributionof these products will continue to represent a lower percentage of our overallresults.  In accordance with accountingprinciples generally accepted in the United States of America, we evaluate ourcarrying values of long-lived assets (purchased intangibles) and goodwill basedon the analysis by which the carrying values exceed the present value of theestimated future cash flows for purchased intangible assets and goodwill.  Therefore, as a result of the significantindustry downturn, which began in the fourth quarter of 2000 and continuedthrough 2001, we reduced the carrying value of the purchased intangible assetsand goodwill as follows:

 
|                      |   | **For the  year  ended  December 31,  2001(b)(c)** | ** ** |
|---------------------------|--------|---------------------------------------------------------|------------|
|                      |   |                                                    |       |
| Customer list             |   | $                                                       | 667        |   |
| Established workforce (a) |   | 148                                                     |       |
| Developed products        |   | 695                                                     |       |
| Core products             |   | 3,333                                                   |       |
| Goodwill                  |   | 4,440                                                   |       |
| Other                     |   | 15                                                      |       |
| Total impairment charge   |   | $                                                       | 9,298      |   |

 

----

(a)          The reduction of the carrying values for theestablished workforce of $0.1 million affected a total of 6 principally in theareas of manufacturing and engineering.

 

(b)         These impairments fully relate to theJanuary 30, 2000 Aseco Corporation acquisition and reduced the carryingvalue of purchased intangible assets and goodwill to zero, as ofDecember 31, 2001.

 

(c)          As of December 31, 2001, the net bookvalue of all intangible assets and goodwill was reduced to $0.0 as a result ofthese reductions in carrying values.

 

We provide a standard thirteen month warranty program for our equipmentproducts. We record provisions for warranty claims for these products basedupon historical claim performance.  Thefollowing table provides the expense recorded and charges against our reservesfor the yeasr ended December 31, 2003 and 2002.

 
|                                 |   | **2003** |   | **2002** |   |
|--------------------------------------|--------|----------|--------|----------|--------|
|                                 |   |     |   |     |   |
| Accrued warranty balance - beginning |   | $        | 200    |     | $      | 400 |   |
|                                 |   |     |   |     |   |
| Provision                            |   | 60       |   | 30       |   |
|                                 |   |     |   |     |   |
| Warranty claims                      |   | (79      | )      | (231     | )      |
|                                 |   |     |   |     |   |
| Accrued warranty balance- ending     |   | $        | 181    |     | $      | 200 |   |

 

F-16

----

 

#### **NOTE 6 -LONG-TERM DEBT**

 

Long-term debt and financing obligations were as follows (inthousands):

 
|                                      |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                      |   |                        |   |                        |   |
| Equipment and software lease agreements   |   | $                           | — |                        | 29     |   |
| Less: Current Portion                     |   | —                      |   | (29                         | )      |
|                                      |   |                        |   |                        |   |
| Total long-term debt                      |   | $                           | — |                        | $      | — |   |
|                                      |   |                        |   |                        |   |
| 10% senior subordinated convertible notes |   | $                           | 7,340  |                        | $      | 10,000 |   |

 

In December 2001, we issued $10.0 million of 10% SeniorSubordinated Convertible Notes due in 2006 to a group of accreditedinvestors.  These Notes were initiallyconvertible into our common stock at a conversion price equal to $2.60 pershare.  The Notes are redeemable by usat any time after January 3, 2004 as long as the market price of ourcommon stock equals or exceeds 150% of the conversion price.  Proceeds from the Notes, net of debtissuance costs, totaled $9.2 million. Holders of the Notes have standard registration rights if they convertthe Notes to common stock.  The NotePurchase Agreement between us and the holders of the Notes contains certainaffirmative and negative covenants. Among other things, these covenants prohibit us from paying dividends toour shareholders or incurring more than $5.0 million of indebtedness that issenior to, or ranks the same as the Notes. The covenants also require us to comply with applicable laws andregulations, maintain a market for our common stock, and provide the Noteholders with copies of our SEC reports and certain other information. There areno financial covenants related to these Notes. 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, and theconversion price for the Notes was reduced to $1.00 per share.  During the year ended December 31,2003, principal in the amount of $2.66 million and interest in the amount of$553,000 were converted into 3,667,911 shares of common stock.  There was no beneficial conversion of theNotes payable into common stock as defined in EITF 00-27 of “Application ofIssue No. 98-5” to Certain Convertible Instruments.

 

We have manufacturing, phone and software equipment lease agreementsutilized in several of our facilities. Capitalized lease amounts included in property, plant and equipment atDecember 31, 2003 and 2002 were zero dollars and $123,000, respectively,with accumulated depreciation of zero dollars and $70,000 for the same periods,respectively.

 

Payments due under debt obligations at December 31, 2003 are asfollows: 2004 - $0; 2005 - $0; 2006 - $7,340; 2007 - $0 million and thereafter$0**.**

 

**NOTE7 - INCOME TAXES**

 

The Company incurred losses for the years ended December 31, 2003,2002, and 2001, respectively, and recorded no provision for income taxes.

 

The reconciliation of income tax computed at the U.S. federal statutoryrate to income tax expense recorded in the consolidated financial statementswas as follows:

 

F-17

----

 
|                               |   | **Years  Ended December 31,** |   |
|------------------------------------|--------|------------------------------------|--------|
|                               |   | **2003**                           |   | **2002** | ** ** | **2001** | ** ** |
|                               |   |                               |   |   |   |   |   |
| Tax (benefit) at statutory rate    |   | (35.0                              | )%     | (35.0 | )% | (35.0 | )% |
| Effect of graduated tax rates      |   | 1.0                                |   | 1.0 |   | 1.0 |   |
| State taxes                        |   | (3.0                               | )      | — |   | — |   |
| Nondeductible item – goodwill |   | —                             |   | — |   | 13.0 |   |
| Adjustment for valuation allowance |   | 37.0                               |   | 34.0 |   | 21.0 |   |
|                               |   | 0.0%                               |   | 0.0 | % | 0.0 | % |

 

As of December 31, 2003, we had federal net operating loss (NOL)carryforwards totaling approximately $90.0 million and tax credit carryforwardsof approximately $121,000 which can be used to reduce future taxableincome.  Such tax loss and tax creditcarryforwards begin to expire in 2004 as follows: 2004 - $5.6 million; 2005 -$2.9 million; 2006 - $2.3 million; 2007 - $6.8 million; 2008 - $10.0 million and$63.4 million thereafter.  Changes inthe ownership of the Company have placed limitations on the annual usage ofthese NOLs.  Future changes in ownershipmay place additional limitations on these losses.

 

We have recorded a total valuation allowance on deferred tax assets dueto uncertainity of their ultimate realization as follows:

 
|                            |   | **December 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                            |   |                        |   |                        |   |
| Net operating loss carryfowards |   | $                           | 32,971 |                        | $      | 32,339 |   |
| Inventories                     |   | 3,891                       |   | 3,790                       |   |
| Accrued expenses                |   | 194                         |   | 282                         |   |
| Deferred profit                 |   | 6                           |   | 20                          |   |
| Other                           |   | 356                         |   | 568                         |   |
| Valuation allowance             |   | (37,418                     | )      | (36,999                     | )      |
|                            |   | $                           | — |                        | $      | — |   |

 

**NOTE 8 -  ACCOUNTS PAYABLE – LONG TERM**

 

In July of 2003, we completed negotiations with the majority ofour vendors to extend the payment terms of the total amounts owed to them atthe time.  This resulted in $1.2 millionof our payables, or 67% of our total accounts payable at the time,  being restructured with a total of 281 vendors.  Under the terms of the extended paymentplan, we have agreed to make four to eight equal payments beginning onJuly 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this plan representedapproximately 61% of our active vendors. As of Decmber 31, 2003, all scheduledcontractual payments have been made under this plan.  The following amounts are outstanding as of December 31,2003.

 
| Total outstanding under the plan |   | $        | 782,000 |   |
|----------------------------------|--------|----------|---------|--------|
| Less: current portion            |   | (587,000 | )       |
|                             |   |     |    |
| Total long-term account payable  |   | $        | 195,000 |   |

 

**NOTE 9 - COMMITMENTSAND CONTINGENCIES**

 

We lease certain facilities and equipment under various operatingleases.  Effective April 1997, weentered into an operating lease agreement and relocated our headquarters to anew facility in St. Paul, Minnesota,

 

F-18

----

 

coinciding with the expiration of the operating lease at our previousheadquarters facility.  Under the termsof the new agreement, which extends through April 2007, we are responsiblefor base rent and all operating expenses associated with the portion of thefacility that we occupy.  The agreementprovides us with a one-time option to cancel the lease after seven years, atwhich time we would only be responsible for certain unamortized build-out costsincurred by the landlord.  In May 2000, we notified our landlord of ourintent to exercise our one-time option to lease the remaining additional 11,000square feet within the same building at a date to be mutually determined.  We occupy approximately 54,000 square feetof leased space in Penang, Malaysia, which is utilized as a manufacturingcenter for our mature products.  Thislease expires in June 2004, which we believe we will be able to extend fora minimum of one year.

 

Total rent expense charged to operations, primarily for facilities andequipment, was $847,000, $864,000 and $826,000 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

The future minimum rental payments at December 31, 2003, due undernoncancelable operating leases, are as follows: 2004 - $577,000; 2005 -$329,000; 2006 - $283,000 and 2007 - $91,000.

 

We have an employment agreement with our Chief Executive Officer thatmay be terminated upon 60 days written notice by either party.  If we terminate the agreement, we shallcontinue to pay his salary in effect at date of termination for 12 monthsthereafter.  We also have an agreementwith one other officer that provides for severance pay and other remunerationif his employment is terminated without cause or if he should resign followinga change of control.  We also have anagreement with another executive officer that provides for severance pay andother remuneration if his employment is terminated or duties significantlydiminished as a result of a change of control.

 

**NOTE 10 -STOCK OPTION AND BONUS PLANS AND WARRANTS TO PURCHASE COMMON STOCK**

 

In May 1995 and August 1995, our Board of Directors amendedthe April 1993 Incentive Stock Option Plan, (the Plan) for key employeesand reserved an additional 500,000 shares and 250,000 shares, respectively, fora total of 1,250,000 shares of common stock for issuance under the Plan at fairmarket value at the date of grant.  InSeptember 1999, our Board of Directors reserved an additional 1,050,000shares for a total of 2,300,000 shares of common stock for issuance under thePlan at fair market at the date of grant. In April 2001, our Board of Directors reserved an additional300,000 shares for a total of 2,600,000 shares of common stock for issuanceunder the Plan at fair market at the date of grant.  The shareholders have approved all of these amendments.  The options expire five to ten years fromthe date of grant and generally vest over a two-year or four-year period.  If an individual ceases employment, he/shehas one month to exercise vested options granted prior to June 8, 1994 or90 days for vested options granted on or after June 8, 1994.  Options granted in excess of the $100,000annual IRS limitations become non-qualified. In April of 2003, this planexpired and the shareholders of the company did not approve a new plan. TheBoard of Directors at their discretion can grant non-qualified options toeligible employees.  In 2003, the Boardof Directors did grant 1,000,000 non-qualified options, which are included inthe stock option table below.

 

In fiscal 1996, our Board of Directors and our shareholders approvedthe Stock Option Plan for outside directors and reserved 300,000 shares ofcommon stock for issuance under the Plan. In April 2001, our Board of Directors reserved an additional150,000 shares for a total of 450,000 shares of common stock for issuance underthe Plan, which was approved by our shareholders.  Each person who becomes an outside director will automatically begranted an option to purchase 10,000 shares. In addition, each outside director will also automatically be granted anoption to purchase 10,000 shares immediately upon each reelection as adirector, or on the anniversary of the prior year’s grant in any year in whichthere is no meeting of the stockholders at which directors are elected.  The period within which an option must beexercised will be the earlier of (1) ten years from the date of the grant, or(2) the date which is one year after the director ceases to be a director forany reason, provided that if

 

F-19

----

 

a director voluntarily declines to stand for re-election after the ageof 60, he shall not be required to exercise his options within one year afterhe ceases to be a director and shall continue to vest in his options after heceases to be a director.  The exerciseprice for each option will be the fair market value of the stock on the date ofgrant, and each option will generally vest over a two-year period at 50 percentper year.

 

We have also reserved a total of 9,563,077shares of common stock forissuance upon conversion of the Notes described in Note 6.  As of December 31, 2003, 2,660,081shares of stock have been issued from this reserve pursuant to the conversionfeatures of the Notes described in Note 6.

 

We have also reserved 150,000 shares of common stock for the grant ofnon-qualified stock options for outside directors, consultants, advisors andemployees.

 

F-20

----

 

Shares subject to options under these were as follows:

 
| **Options**                           |   | **Shares** |   | **Exercise  Price Range** |   | **Weighted  Average  Exercise  Price Per  Share** |   |
|---------------------------------------|--------|------------|--------|---------------------------|--------|---------------------------------------------------|--------|
|                                  |   |       |   |                      |   |                                              |   |
| Outstanding at December 31, 2000 |   | 2,157,598  |   | $1.00 to $11.25           |   | $                                                 | 3.66   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Granted                               |   | 432,500    |   | $2.55 to $3.38            |   | $                                                 | 2.93   |   |
| Exercised                             |   | (87,510    | )      | $1.00 to $1.94            |   | $                                                 | 1.20   |   |
| Expired                               |   | (152,673   | )      | $1.13 to $11.25           |   | $                                                 | 6.04   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Outstanding at December 31, 2001 |   | 2,349,915  |   | $1.00 to $11.25           |   | $                                                 | 3.44   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Granted                               |   | 633,109    |   | $0.69 to $3.55            |   | $                                                 | 2.07   |   |
| Exercised                             |   | (49,176    | )      | $1.00 to $2.62            |   | $                                                 | 1.66   |   |
| Expired                               |   | (245,097   | )      | $1.94 to $11.25           |   | $                                                 | 4.98   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Outstanding at December 31, 2002 |   | 2,688,751  |   | $0.69 to $11.25           |   | $                                                 | 3.01   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Granted                               |   | 1,060,000  |   | $0.90 to $1.27            |   | $                                                 | 0.97   |   |
| Exercised                             |   | (150,000   | )      | $1.22                     |   | $                                                 | 1.22   |   |
| Expired                               |   | (999,633   | )      | $0.69 to $11.25           |   | $                                                 | 3.01   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Outstanding at December 31, 2003 |   | 2,599,118  |   | $0.69 to 11.25            |   | $                                                 | 2.27   |   |
|                                  |   |       |   |                      |   |                                              |   |
| Exercisable at December 31, 2003 |   | 1,389,868  |   | $0.69 to 11.25            |   | $                                                 | 2.94   |   |

 

Options outstanding at December 31, 2003 had exercise pricesranging from $0.69 to $11.25 per share as summarized in the following table:

 

| **Range of  Exercise****Prices** |   | **Number  Outstanding  at Dec. 31,****2003** | ** ** | **Weighted  Average  Remaining****Life** | ** ** | **Weighted  Average  Exercise****Price Per  Share** | ** ** | **Number  Exercisable  at Dec. 31,****2003** | ** ** |
|----------------------------------|--------|----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|
| $0.69 to $1.56                   |   | 1,247,235                                    |       | 9.5 years                                |       | $                                                   | 0.95       |                                         | 331,235    |   |
| $1.84 to $2.95                   |   | 669,133                                      |       | 5.0 years                                |       | $                                                   | 2.23       |                                         | 554,383    |   |
| $3.19 to $4.30                   |   | 410,000                                      |       | 6.0 years                                |       | $                                                   | 3.45       |                                         | 273,750    |   |
| $5.44 to $7.75                   |   | 242,750                                      |       | 7.0 years                                |       | $                                                   | 6.55       |                                         | 205,500    |   |
| $9.25 to $11.25                  |   | 30,000                                       |       | 7.0 years                                |       | $                                                   | 9.92       |                                         | 25,000     |   |
| $0.69 to $11.25                  |   | 2,599,118                                    |       | 7.5 years                                |       | $                                                   | 2.27       |                                         | 1,389,868  |   |

 

At December 31, 2003 and 2002, 117,000 and 220,516 shares,respectively, were available for future grants under the terms of these plans.

 

In February 1996, the Board of Directors adopted the EmployeeStock Purchase Plan and reserved 300,000 shares of common stock for issuanceunder the Plan.  Eligible employees canelect under the Plan to contribute between two percent and ten percent of theirbase pay each plan year (June 1 - May 31) to purchase shares

 

F-21

----

 

of common stock at a price per share equal to 85 percent of marketvalue on the first day of the plan year or the last day of the plan year, whicheveris lower.  Employee contributions arededucted from their regular salary or wages. The maximum number of shares that can be purchased by an employee in anyplan year is 1,000 shares.  For the yearended December 31, 2003, 8,000 shares were issued under the plan at aprice of $0.37.  For the year endedDecember 31, 2002, 28,551 shares were issued under the plan at pricesranging from $2.59 to $2.68 at a weighted average price of $2.68.  For the year ended December 31, 2001,36,881 shares were issued under the plan at prices ranging from $2.50 to $2.91,at a weighted average price of $2.89. Approximately 122,900 shares remain reserved for future issuances.

 

**NOTE 11 -SEGMENT, GEOGRAPHIC, CUSTOMER INFORMATION AND CONCENTRATION OF CREDIT RISK**

 

We operate in one industry segment supplying automated equipment testhandlers to the semiconductor industry. Net sales to customers located in the three geographic regions in whichwe operate are summarized as follows (in thousands):

 
|          |   | **Years  Ended**   |   |
|---------------|--------|--------------------|--------|
|          |   | **Dec. 31,  2003** |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   |
|          |   |               |   |   |   |   |   |
| United States |   | $                  | 3,725  |   | $ | 3,538 |   | $ | 11,628 |   |
| Asia          |   | 6,989              |   | 7,527 |   | 12,082 |   |
| Europe        |   | 409                |   | 1,146 |   | 1,696 |   |
|          |   | $                  | 11,123 |   | $ | 12,211 |   | $ | 25,406 |   |

 

Although our primary manufacturing facility is located in Penang,Malaysia, we do not hold a material amount of long-lived assets outside of theUnited States.  Of our inventoryreflected on the Company balance sheet as of December 31, 2003, $3.1million was located in our facility in Penang, Malaysia.

 

During the year ended December 31, 2003 our top ten customersaccounted for approximately 86% of net sales with three customers accountingfor approximately 50% of net sales and one customer accounting forapproximately 32% of net sales.  Duringthe year ended December 31, 2002, our top ten customers accounted forapproximately 77% of net sales with three customers accounting forapproximately 40% of net sales and one customer accounting for approximately16% of net sales and another customer accounted for approximately 15% of ournet sales.  During the year endedDecember 31, 2001, three customers accounted for approximately 41% of netsales.  As of December 31, 2003,one customer accounted for 23% of our total net accounts receivable.

 

**NOTE 12 – SUBSEQUENTEVENT**

 

On March 9, 2004 we completed a $5.0million secured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note.  $750,000of the secured working capital line of credit can be converted to shares of ourcommon stock by the lender under certain market conditions and at a price of$1.92 per share.  The $2.0 millionlong-term convertible note is convertible to shares of our common stock at aprice of $1.79.  Inconnection with the execution of this credit facility, we issued to the lendera seven-year warrant to purchase 400,000 shares of our common stock at exerciseprices ranging from $2.30 to $2.88.  Ourpresent secured lending relationship was terminated as a result of this transaction.  This credit facility is secured by all theassets of the Company.

 

F-22

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned; thereunto duly authorized, in theCity of St. Paul, State of Minnesota, on March 15, 2004.

 
|   | MICRO COMPONENT TECHNOLOGY, INC.    |
|--------|-------------------------------------|
|   |                                |
|   | By:                                 | /s/ Roger E. Gower |   |
|   | Roger E. Gower                      |   |
|   | President, Chief Executive Officer, |   |
|   | Chairman of the Board and Director  |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant in the capacities indicated on March 15, 2004.

 
| **Signature**           |   | **Capacity**                             |
|-------------------------|--------|------------------------------------------|
|                    |   |                                     |
| /s/Roger E. Gower       |   | President, Chief Executive Officer,      |
| Roger E. Gower          |   | Chairman of the Board and Director       |
|                    |   |                                     |
|                    |   |                                     |
| /s/Thomas P. Maun       |   | Vice President of Finance/               |
| Thomas P. Maun          |   | Administration, Chief Financial Officer, |
|                    |   | Treasurer                                |
|                    |   |                                     |
| /s/Donald J. Kramer     |   | Director                                 |
| Donald J. Kramer        |   |                                     |
|                    |   |                                     |
| /s/David M. Sugishita   |   | Director                                 |
| David M. Sugishita      |   |                                     |
|                    |   |                                     |
| /s/Donald R. VanLuvanee |   | Director                                 |
| Donald R. VanLuvanee    |   |                                     |
|                    |   |                                     |
| /s/Patrick Verderico    |   | Director                                 |
| Patrick Verderico       |   |                                     |
|                    |   |                                     |
| /s/Dr. Sheldon Buckler  |   | Director                                 |
| Dr. Sheldon Buckler     |   |                                     |

 

F-23

----