SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) |
For the quarterly period ended September 24, 2005
OR
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) |
For the transition period from to
Commission File No. 0-22384
MICRO COMPONENT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-0985960 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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2340 West County Road C, St. Paul, MN 55113-2528 | ||
(Address of principal executive offices) | ||
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(651) 697-4000 | ||
(Registrant’s telephone number) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
Yes ý No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares outstanding of the Registrant’s Common Stock, as of November 4, 2005, was 26,215,388.
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
TABLE OF CONTENTS
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| NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
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2
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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| September 24, |
| December 31, |
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| 2005 |
| 2004 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 346 |
| $ | 166 |
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Accounts receivable, less allowance for doubtful accounts of $215 and $215, respectively |
| 1,552 |
| 2,035 |
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Inventories |
| 2,541 |
| 3,057 |
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Other |
| 148 |
| 189 |
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Total current assets |
| 4,587 |
| 5,447 |
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Property, plant and equipment, net |
| 169 |
| 270 |
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Debt issuance costs, net |
| 329 |
| 371 |
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Other assets |
| 20 |
| 34 |
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Total assets |
| $ | 5,105 |
| $ | 6,122 |
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Liabilities and Stockholders’ Deficit |
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Current liabilities: |
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Current portion of long-term debt, net of discount of $212 and $0 |
| $ | 1,341 |
| $ | 67 |
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Line of credit, net of discounts of $51 and $78 |
| 1,778 |
| 1,583 |
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Accounts payable |
| 359 |
| 967 |
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Accrued compensation |
| 360 |
| 430 |
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Accrued interest |
| 133 |
| 56 |
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Accrued warranty |
| 165 |
| 162 |
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Customer prepayments and unearned service revenue |
| 212 |
| 237 |
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Other accrued liabilities |
| 154 |
| 208 |
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Total current liabilities |
| 4,502 |
| 3,710 |
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Long-term portion of lease payable |
| 271 |
| — |
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Long-term convertible notes, net of discount of $392 and $208 |
| 2,325 |
| 1,458 |
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10% senior subordinated convertible debt |
| 3,630 |
| 3,630 |
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Stockholders’ deficit: |
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Preferred stock, $.01 par value, 1,000,000 authorized, none issued and outstanding |
| — |
| — |
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Common stock, $.01 par value, 55,000,000 authorized, 26,215,388 and 25,566,511 issued, respectively |
| 262 |
| 256 |
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Additional paid-in capital |
| 97,670 |
| 97,022 |
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Cumulative other comprehensive loss |
| (69 | ) | (69 | ) | ||
Accumulated deficit |
| (103,486 | ) | (99,885 | ) | ||
Total stockholders’ deficit |
| (5,623 | ) | (2,676 | ) | ||
Total liabilities and stockholders’ deficit |
| $ | 5,105 |
| $ | 6,122 |
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See notes to unaudited condensed consolidated financial statements
3
MICRO COMPONENT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 24, |
| Sept. 25, |
| Sept. 24, |
| Sept. 25, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Net sales |
| $ | 1,758 |
| $ | 3,859 |
| $ | 5,040 |
| $ | 12,351 |
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Cost of sales |
| 984 |
| 1,902 |
| 2,910 |
| 5,892 |
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Gross profit |
| 774 |
| 1,957 |
| 2,130 |
| 6,459 |
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Operating expenses: |
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Selling, general and administrative |
| 945 |
| 1,442 |
| 3,221 |
| 4,053 |
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Research and development |
| 435 |
| 788 |
| 1,514 |
| 2,111 |
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Restructuring charge |
| 40 |
| — |
| 106 |
| — |
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Total operating expenses |
| 1,420 |
| 2,230 |
| 4,841 |
| 6,164 |
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Income (loss) from operations |
| (646 | ) | (273 | ) | (2,711 | ) | 295 |
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Interest income |
| 2 |
| 1 |
| 10 |
| 4 |
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Loss on sale of assets |
| — |
| — |
| — |
| (14 | ) | ||||
Interest expense and other, net |
| (348 | ) | (204 | ) | (900 | ) | (576 | ) | ||||
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Total interest and other |
| (346 | ) | (203 | ) | (890 | ) | (586 | ) | ||||
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Net loss |
| $ | (992 | ) | $ | (476 | ) | $ | (3,601 | ) | $ | (291 | ) |
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Net loss per share: |
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Basic |
| $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
Diluted |
| $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
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Weighted average common and equivalent shares outstanding: |
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Basic |
| 26,187 |
| 25,237 |
| 25,776 |
| 24,908 |
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Diluted |
| 26,187 |
| 25,237 |
| 25,776 |
| 24,908 |
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See notes to unaudited condensed consolidated financial statements
4
MICRO COMPONENT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Nine Months Ended |
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| Sept. 24, |
| Sept. 25, |
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| 2005 |
| 2004 |
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Cash flows from operating activities: |
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Net loss |
| $ | (3,601 | ) | $ | (291 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
| 470 |
| 530 |
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Loss on sales and write-offs of property |
| — |
| 14 |
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Changes in assets and liabilities: |
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Accounts receivable |
| 483 |
| (1,545 | ) | ||
Inventories |
| 452 |
| (191 | ) | ||
Other assets |
| 63 |
| (102 | ) | ||
Accounts payable |
| (233 | ) | (216 | ) | ||
Other accrued liabilities |
| 76 |
| (1,096 | ) | ||
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Net cash used in operating activities |
| (2,290 | ) | (2,897 | ) | ||
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Cash flows from investing activities: |
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Additions to property, plant and equipment |
| (12 | ) | (131 | ) | ||
Proceeds from disposition of property |
| — |
| — |
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Net cash used in investing activities |
| (12 | ) | (131 | ) | ||
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Cash flows from financing activities: |
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Payments of long-term debt |
| (67 | ) | (67 | ) | ||
Repayment of bank line of credit |
| — |
| (348 | ) | ||
Proceeds from institutional line of credit |
| 169 |
| 1,170 |
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Issuance of long-term convertible note, net of debt issue costs |
| 2,396 |
| 1,657 |
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Proceeds from issuance of stock |
| — |
| 16 |
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Stock issuance costs |
| (16 | ) | (58 | ) | ||
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Net cash provided by financing activities |
| 2,482 |
| 2,370 |
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Net increase (decrease) in cash and cash equivalents |
| 180 |
| (658 | ) | ||
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Cash and cash equivalents at beginning of period |
| 166 |
| 1,078 |
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Cash and cash equivalents at end of period |
| $ | 346 |
| $ | 420 |
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Supplemental cash flow information: |
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Non-cash financing activities: |
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Stock issued in lieu of interest |
| $ | 146 |
| $ | 496 |
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Stock issued in conversion of 10% senior subordinated convertible debt |
| — |
| 3,710 |
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Cash paid for interest |
| $ | 358 |
| $ | 82 |
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See notes to unaudited condensed consolidated financial statements
5
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the parent company and our subsidiaries after elimination of all significant intercompany balances and transactions. All significant subsidiaries are 100% owned.
The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (generally accepted accounting principles) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management all adjustments, including normal recurring adjustments, necessary for a fair presentation of the interim periods presented have been included. The interim results are not necessarily indicative of the operating results expected for the full fiscal year ending on December 31, 2005.
Our consolidated financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Report of the Independent Registered Public Accounting Firm on the financial statements of the Company as of and for the fiscal year ended December 31, 2004 included in Form 10-K contained an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As of September 24, 2005 the Company had an accumulated deficit of $103.5 million and incurred a net loss of $1.0 million and $3.6 million for the three-month and nine-month periods ended September 24, 2005, respectively. As of September 24, 2005, the Company had cash and cash equivalents of $0.3 million, working capital of $0.1 million, a current ratio of 1.02, total assets of $5.1 million and total liabilities of $10.7 million. Our ability to generate cash and operating income is dependent on the realization of additional restructuring efforts, our responsiveness to further negative impacts resulting from downturns in the semiconductor capital equipment market and increasing our customer base to expand the penetration of our product technology.
As discussed in Note 5, on January 28, 2005, we completed an amendment to the financing agreement with the institutional lender whereby our payments under the long-term convertible note have been deferred for one year, resulting in $800,000 of principal payments being rescheduled to begin on February 1, 2006. These payments were previously scheduled to be paid in 2005. The maturity date of the long-tem convertible
6
note has also been extended for one year from March 2007 to March 2008. As part of this amendment, the fixed conversion prices related to both the $3.0 million secured working capital line of credit and the $2.0 million long-term convertible note were reduced to $0.60 and $0.56, respectively. On February 25, 2005, we completed a new restructuring agreement with our 10% Senior Convertible Noteholders. Under the agreement, the Noteholders representing $2.9 million in debt, or 80% of the debt existing as of December 31, 2004, have agreed to continue to accept stock in lieu of cash for their interest payments for the remaining term of the notes through December 2006. As part of this agreement, the conversion price of the underlying notes has been reduced from $1.00 per share to $0.85 per share for the remaining term of the notes through December 2006. This results in approximately $290,000 of interest expense to be incurred in 2005 to be satisfied through the issuance of shares of our common stock. On April 29, 2005, we completed a financing transaction with the institutional lender in which we borrowed an additional $2,500,000. The agreement provides for monthly interest payments at a rate equal to prime plus 1.75%. Beginning six months after the closing, we are required to make monthly payments equal to 1/30th of the principal amount until three years after the closing, at which time the entire remaining principal and accrued interest is due and payable in full. The loan is convertible into shares of the Company’s common stock at a price of $0.23 per share. The Company also issued the lender an option to purchase 2,556,651 shares of common stock for an exercise price of $.01 per share. The Company received net proceeds of approximately $2.4 million at the closing.
We estimate that we may need to raise additional capital through debt or equity offerings, further modify our existing credit agreements, sell assets, make significant structural cost reductions or take a combination of these actions. We are actively pursing these activities; however, there is no assurance that we will be successful in any of these activities. If we are unsuccessful in obtaining sufficient financing, further restructuring our existing credit agreements, or completing further restructuring initiatives, our operations and financial condition will be materially negatively impacted and we could be required to take actions that could harm our business, including potentially ceasing certain or all of our operations.
Interim unaudited financial results should be read in conjunction with the audited financial statements included in the SEC Report on Form 10-K, for the period ended December 31, 2004.
2. EARNINGS PER SHARE
Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of common shares potentially issuable upon the exercise of stock options, the 10% Senior Subordinated Convertible Notes and other convertible notes outstanding. The following table reconciles the denominators used in computing basic and diluted earnings per share:
7
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 24, |
| Sept. 25, |
| Sept. 24, |
| Sept. 25, |
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(in thousands) |
| 2005 (1) |
| 2004(1) |
| 2005(1) |
| 2004(1) |
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Weighted average common shares outstanding |
| 26,187 |
| 25,237 |
| 25,776 |
| 24,908 |
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Effect of dilutive stock options and warrants |
| — |
| — |
| — |
| — |
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| 26,187 |
| 25,237 |
| 25,776 |
| 24,908 |
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(1) We reported a loss for the period indicated. No adjustments were made for the effect of stock options and warrants, which totaled 5,359,398 and 3,566,817 shares at September 24, 2005 and September 25,2004, respectively, as the effect is antidilutive.
3. COMPREHENSIVE NET INCOME OR LOSS
Certain revenues, expenses, gains, and losses recognized during the period are included in comprehensive loss, regardless of whether they are considered to be results of operations of the period. During the three-month and nine-month periods ended September 24, 2005 and September 25, 2004, total comprehensive loss equaled net loss as reported on the Consolidated Statements of Operations.
4. BALANCE SHEET INFORMATION
Major components of net inventories were as follows (in thousands):
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| Sept. 24, |
| December 31, |
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| 2005 |
| 2004 |
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Raw materials |
| $ | 1,073 |
| $ | 2,079 |
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Work-in-process |
| 984 |
| 765 |
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Finished goods |
| 484 |
| 213 |
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| $ | 2,541 |
| $ | 3,057 |
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We provide a standard thirteen month warranty program for our equipment products. We record provisions for warranty claims for these products based upon historical claim performance. The following table provides the expense recorded and charges against our reserves for the nine-months ended September 24, 2005 (in thousands):
Accrued warranty balance at December 31, 2004 |
| $ | 162 |
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Provision |
| 62 |
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Warranty claims |
| (59 | ) | |
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Accrued warranty balance at September 24, 2005 |
| $ | 165 |
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5. FINANCING TRANSACTIONS
On March 9, 2004 we completed a $5.0 million secured financing transaction with an institutional lender. Under the terms of the three-year agreement, we put in place a $3.0 million secured working capital line of credit and a $2.0 million long-term convertible note. $750,000 of the secured working capital line of credit can be converted to shares of our common stock by the lender under certain market conditions and initially at a price of $1.92 per share. The $2.0 million long-term convertible note is convertible to shares of our common stock initially at a price of $1.79. In connection with the execution of this credit facility, we issued to the lender a seven-year warrant to purchase 400,000 shares of our common stock at exercise prices ranging from $2.30 to $2.88. The fair value of the warrant was determined using the Black-Scholes option-pricing model. This resulted in a value of $391,000, which was recorded as an increase to additional paid-in- capital and a discount to the working capital line of credit and long-term convertible note. This discount is amortized to interest expense over the three-year agreement. Our then existing secured lending relationship was terminated as a result of this transaction. This credit facility is secured by all the assets of the Company. On January 28, 2005, we completed an amendment to the financing agreement with the institutional lender whereby our payments under the long-term convertible note have been deferred for one year, resulting in $800,000 of principal payments being rescheduled to begin on February 1, 2006. These payments were previously scheduled to be paid in 2005. The maturity date of the long-term convertible note has also been extended for one year from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to both the $3.0 million secured working capital line of credit and the $2.0 long-term convertible note were reduced to $0.60 and $0.56, respectively. Additionally, we issued the lender a seven-year warrant to purchase 150,000 shares of common stock at a price of $0.67. The fair value of the warrant was determined using the Black-Scholes option-pricing model. This resulted in a value of $51,000, which was recorded as an increase to additional paid-in-capital and a discount to the long-term convertible note. The aforementioned restructuring amendment was not a troubled debt restructuring under SFAS 15 (as interpreted by EITF 02-04) or a substantial modification as defined by EITF 96-19; therefore no extinguishment gain or loss was recognized in our financial statements.
On April 29, 2005, we completed a financing transaction with the institutional lender in which we borrowed an additional $2,500,000. The agreement provides for monthly interest payments at a rate equal to prime plus 1.75%. Beginning six months after the closing, we are required to make monthly payments equal to 1/30th of the principal amount until three years after the closing, at which time the entire remaining principal and accrued interest is due and payable in full. The loan is convertible into shares of the Company’s common stock at a price of $0.23 per share. The Company received net proceeds of approximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option to purchase 2,556,651 shares at $0.01 per share. The fair value of the option was determined using the Black-Scholes option-pricing model. This resulted in a value of $473,000, which was recorded as in increase to additional paid-in-capital and a discount to the long-term convertible note. This discount is amortized to interest expense over the three-year agreement. The issuance was exempt from registration under Rule 506 under the Securities Act of 1933, because all of the noteholders were accredited, there was no general solicitation, and the shares were subject to restrictions on transfer.
9
On February 25, 2005, we completed a second amendment to the agreement with the holders of our 10% Senior Subordinated Convertible Notes, wherein holders of 80% of the remaining Notes, representing $2.9 million, agreed to continue to accept stock in payment of interest for the remaining four interest payments through December 24, 2006. As part of this amendment, we agreed to reduce the Note conversion price to $0.85 per share, and use our best efforts to register the shares with the SEC. The aforementioned restructuring amendment was not a troubled debt restructuring under SFAS 15 (as interpreted by EITF 02-04) or a substantial modification as defined by EITF 96-19; therefore no extinguishment gain or loss was recognized in our financial statements.
During the third quarter of 2005, we issued 648,874 shares of our common stock to the holders of our 10% Senior Subordinated Convertible Notes (“the Notes”) in payment of interest due on June 30, 2005. The issuance was exempt from registration under Rule 506 under the Securities Act of 1933, because all of the noteholders were accredited, there was no general solicitation, and the shares were subject to restrictions on transfer.
During the first quarter of 2004, we issued 228,618 shares of our common stock to the holders of our 10% Senior Subordinated Convertible Notes (“the Notes”) in payment of interest due on December 31, 2003. The issuance was exempt from registration under Rule 506 under the Securities Act of 1933, because all of the noteholders were accredited, there was no general solicitation, and the shares were subject to restrictions on transfer.
During the first quarter of 2004, we issued a total of 3,721,532 shares of our common stock to holders of the Notes pursuant to conversion of their Notes at $1.00 per share including accrued interest due at the time of conversion. The issuance was exempt from registration under Rule 506 under the Securities Act of 1933, because all of the noteholders were accredited, there was no general solicitation, and the shares were subject to restrictions on transfer.
6. RESTRUCTURING CHARGES
During the second quarter of 2005, in response to the continuing downturn in the semiconductor capital equipment market, we reduced our workforce across all functional areas by approximately 7% resulting in a restructuring charge of $66,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of 7 employees across all functional areas.
During the third quarter of 2005, in connection with our restructuring activities, we reduced our workforce within manufacturing and sales by approximately 2% resulting in a restructuring charge of $40,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of two employees.
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7. STOCK BASED COMPENSATION
We account for stock-based transactions under SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, we have elected to continue following the guidance of APB Opinion No. 25 (as interpreted by FIN 44) for measurement and recognition of stock-based transactions with employees and non-employee directors. Because stock options have been granted at exercise prices at least equal to the fair market value of the stock at the grant date, no compensation cost has been recognized for stock options issued to employees and non-employee directors under the stock option plans. Stock-based transactions with non-employees are accounted for in accordance with SFAS No. 123 and related interpretations.
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides required additional disclosures about the method of accounting for stock-based employee compensation. The Company adopted the annual disclosure provision of SFAS No. 148 during the year ended December 31, 2003. The Company chose to not adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation, pursuant to SFAS No. 148.
If compensation cost for our stock option and employee stock purchase plans 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 net loss and net loss per share would have been as follows:
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| Three Months Ended |
| Nine Months Ended |
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|
| Sept. 24, |
| Sept. 25, |
| Sept. 24, |
| Sept. 25, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Net income (loss): |
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As reported |
| $ | (992 | ) | $ | (476 | ) | $ | (3,601 | ) | $ | (291 | ) |
Fair value compensation expense |
| (20 | ) | (219 | ) | (184 | ) | (658 | ) | ||||
Pro forma |
| $ | (1,012 | ) | $ | (695 | ) | $ | (3,785 | ) | $ | (949 | ) |
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Net income (loss) per share – basic and diluted: |
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As reported |
| $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.01 | ) |
Fair value compensation expense |
| — |
| (0.01 | ) | (0.01 | ) | (0.03 | ) | ||||
Pro forma |
| $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.15 | ) | $ | (0.04 | ) |
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Stock based compensation: |
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As reported |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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Fair value compensation expense |
| (20 | ) | (219 | ) | (184 | ) | (658 | ) | ||||
Pro forma |
| $ | (20 | ) | $ | (219 | ) | $ | (184 | ) | $ | (658 | ) |
The fair value of options granted under the stock options for the three and nine-months ended September 24, 2005 and September 25, 2004 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions.
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| Quarters Ended |
| Nine Months Ended |
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| Sept. 24, |
| Sept. 25, |
| Sept. 24, |
| Sept. 25, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Dividend yield |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expected volatility |
| 117.06 | % | 93.53 | % | 94.31 | % | 93.53 | % | ||||
Risk-free interest rate |
| 3.93 | % | 3.41 | % | 3.89 | % | 3.41 | % | ||||
Expected life of options |
| 3.5 years |
| 3.5 years |
| 3.5 years |
| 3.5 years |
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Fair value per share of options granted |
| $ | 0.13 |
| $ | 0.87 |
| $ | 0.21 |
| $ | 0.87 |
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8. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 154, Accounting Changes and Error Corrections. In June 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The Company does not expect the adoption of SFAS No. 154 to have a material effect on its financial statements.
SFAS No. 153, Exchanges of Nonmonetary Assets. In December 2004, FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. APB No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be applied prospectively. We do not expect the adoption of SFAS No. 153 to have a material effect on our financial statements.
SFAS No. 123 (revised 2004), Share-Based Payment. In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based
12
payment transactions. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Beginning with our quarterly period that begins January 1, 2006, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. We do not expect the adoption of SFAS No. 123R to have a material effect on our financial statements.
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of our results of operations and financial condition should be read together with the other financial information and condensed consolidated financial statements included in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this document.
Overview
We supply equipment automation solutions for the global semiconductor test and assembly manufacturing market. Our solutions include automated test handlers, factory automation software and our new integrated Smart Solutions equipment product line. We believe that our products can significantly 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.
The demand for our products and services is dependent upon growth in the semiconductor industry and the increasing automation needs of semiconductor manufacturers and independent test and assembly facilities. In the fourth quarter of 2000, the semiconductor industry went into a sharp downturn, which intensified and continued through the majority of 2003, resulting in a significant adverse impact on our business. In late 2003, worldwide semiconductor bookings began showing signs of stabilization and demand for our products increased during this period and continued through the first half of 2004. However, in the third quarter of 2004 the markets again retracted, impacting our financial results through the end of 2004 and continuing into 2005. At this juncture, the return to sustained market growth cannot be predicted in the short term. As we have disclosed in our Forms 10-K for the years ended December 31, 2004, 2003 and 2002, and each of our Forms 10-Q for the years 2005, 2004 and 2003, a continued or renewed market downturn might result in significant losses, charges for inventory revaluation, asset impairment or restructuring charges. Consequently, in response to these changing market conditions, in addition to the actions taken prior to 2004, we took the following additional steps in 2004 and 2005:
• On March 9, 2004 we completed a $5.0 million secured financing transaction with an institutional lender. Under the terms of the three-year agreement, we put in place a $3.0 million secured working capital line of credit and a $2.0 million long-term convertible note. $750,000 of the secured working capital line of credit can be converted to shares of our common stock by the lender under certain market conditions and initially at a price of $1.92 per share. The $2.0 million long-term convertible note is convertible to shares of our common stock initially at a price of $1.79. In connection with the execution of this credit facility, we issued to the lender a seven-year warrant to purchase 400,000 shares of our common stock at exercise prices ranging from $2.30 to $2.88. The secured lending relationship at the time was terminated as a result of this transaction. This credit facility is secured by all the assets of the Company. On January 28, 2005, we completed an amendment
14
to the financing agreement with the institutional lender whereby our payments under the long-term convertible note have been deferred for one year, resulting in $800,000 of principal payments being rescheduled to begin on February 1, 2006. These payments were previously scheduled to be paid in 2005. The maturity date of the long-term convertible note has also been extended for one year from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to both the $3.0 million secured working capital line of credit and the $2.0 long-term convertible note were reduced to $0.60 and $0.56, respectively. Additionally, we issued the lender a seven-year warrant to purchase 150,000 shares of common stock at a price of $0.67. The fair value of the warrant was determined using the Black-Scholes option-pricing model. This resulted in a value of $51,000, which was recorded as in increase to additional paid-in-capital and a discount to the long-term convertible note. On April 29, 2005, we completed a financing transaction with the institutional lender in which we borrowed an additional $2,500,000. The agreement provides for monthly interest payments at a rate equal to prime plus 1.75%. Beginning six months after the closing, we are required to make monthly payments equal to 1/30th of the principal amount until three years after the closing, at which time the entire remaining principal and accrued interest is due and payable in full. The loan is convertible into shares of the Company’s common stock at a price of $.23 per share. The Company received net proceeds of approximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option to purchase 2,556,651 shares at $0.01 per share. The fair value of the option was determined using the Black-Scholes option-pricing model. This resulted in a value of $473,000, which was recorded as in increase to additional paid-in-capital and a discount to the long-term convertible note. This discount is amortized to interest expense over the three-year agreement.
• During the fourth quarter of 2004, we reduced our manufacturing workforce by 11% at the time, resulting in a restructuring charge of $35,000. This charge reflected severance and other benefit costs associated with the reduction. This workforce reduction affected a total of 12 employees all within the manufacturing area.
• On February 25, 2005, we completed a second amendment to the agreement with the holders of our 10% Senior Subordinated Convertible Notes, wherein holders of 80% of the remaining Notes, representing $2.9 million, agreed to continue to accept stock in payment of interest for the remaining four interest payments through December 24, 2006. As part of this amendment, we agreed to reduce the Note conversion price to $0.85 per share, and use our best efforts to register the shares with the SEC.
• During the second quarter of 2005, we further reduced our workforce by 7% at the time, resulting in a restructuring charge of $66,000. This charge reflected severance and other benefit costs associated with the reduction. This workforce reduction affected a total of 7 employees all within the manufacturing area.
• During the third quarter of 2005, in connection with our restructuring activities, we reduced our workforce manufacturing and sales by approximately 2% resulting in a restructuring charge of $40,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of two employees.
15
Most industry forecasts are presently predicting that capacity-driven purchases of capital equipment are expected to improve over the next six-month period. However, the level of improvement and the ability for the market to sustain an improvement continues to be uncertain. Therefore, we will continue to monitor the market and examine opportunities to further reduce our costs through further consolidation of operations, limiting capital expenditures, monitoring inventory purchases and additional strategic restructuring initiatives. Certain of these types of actions have the potential for further charges in future periods. The impact of a continuing contraction of the semiconductor capital equipment market has the potential to have a material adverse effect on our financial condition, results of operations, and cash flows.
Critical Accounting Policies
Revenue Recognition
Under Staff Accounting Bulletin 104 (“SAB 104”), we recognize revenue upon shipment, as our terms are FOB shipping point, for established equipment products that have previously satisfied existing customer performance specifications and that provide for full payment tied to shipment. Revenue for products that have not previously satisfied customer performance specifications or from sales where all or a portion of customer payment is based upon acceptance are only recognized upon customer acceptance. As such, in periods of increasing shipments, revenues will be deferred if the shipments are for new customers, new products or the payment terms are tied to acceptance criteria. Consequently, if these conditions exist, we may report revenue levels that are not reflective of actual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially could recognize revenues related to shipments made in prior periods. If these conditions exist, we may report revenue levels that are greater than actual shipments.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on specific identification of our accounts receivable. This involves a degree of judgment based on discussion with our internal sales and marketing groups, our customer base and the examination of the financial stability of our customers. There can be no assurance that our estimates will match actual amounts ultimately written off. During periods of downturn in the market for semiconductor capital equipment or economic recession, a greater degree of risk exists concerning the ultimate collectability of our accounts receivable due to the impact that these conditions might have on our customer base.
Valuation of Inventories
Our inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. We maintain a standard costing system for our inventories. Assumptions with respect to direct labor utilization, standard direct and indirect cost rates, vendor pricing and utilization of factory capacities are formulated in the development of our standard costing system. Sudden or continuing changes in the semiconductor capital equipment market affecting our shipments can result in significant production variances from our standard
16
rates. These variances directly impact our gross profit performance and may cause variability in gross profits results from reporting period-to-reporting period. Our labor and overhead rates are set for production rates that match typical market conditions. Production variances are charged to cost of sales each quarter as incurred. Material standards are based upon normal purchase volumes. Purchase price variances are charged to costs of sales each quarter as incurred.
Provisions to reduce inventories to the lower of cost or market are made based on a review of excess and obsolete inventories through an examination of historical component consumption, current market demands and shifting product technology. Significant assumptions with respect to market trends and customer product acceptance are utilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capital equipment market may cause us to record additional inventory revaluation charges in future periods. No write-off provision was made to our inventories for the quarter and nine-month periods ended September 24, 2005. Pursuant to SAB Topic 5-BB, inventory revaluations establish a new cost basis for inventory. Included in our gross margins dollars for the quarters ended September 24, 2005 and September 25, 2004, were zero and $419,000, respectively, resulting from sales of products that had been previously written down to lower of cost or market. Included in our gross margins dollars for the nine-months ended September 24, 2005 and September 25, 2004, were $61,000 and $1.4 million respectively, resulting from sales of products that had been previously written down to lower of cost or market. The reduction in sales of products that were previously written down to lower of cost or market for the three month and nine month periods ending September 24, 2005 as compared to the prior year periods, is directly related to our overall decline in sales.
Accrued Warranty
We provide a standard thirteen-month warranty program for our equipment products. We record provisions for warranty claims for these products based upon historical claim performance. This approach has been applied since the inception of the warranty program and involves a degree of subjectivity in that historical performance is used to estimate future warranty claims. There can be no assurance that our estimates will match the actual amount of future warranty claims.
Results of Operations for the Three Months Ended September 24, 2005 and September 25, 2004
Net sales for the three months ended September 24, 2005, decreased $2.1 million or 54.4% to $1.8 million compared to $3.9 million for the three months ended September 25, 2004. Product acceptance requirements related to product and customer had no impact on net sales, as there were no timing differences associated with revenue recognition rules. The decline in sales is directly attributable to the recent retraction in the semiconductor capital equipment market. This decline impacted our sales across all of our product lines.
Gross profit for the third quarter of 2005 decreased by $1.2 million to $0.8 million or 44.0% of net sales, from $2.0 million, or 50.7% of net sales, for the comparable period in the prior year. The decrease in gross margin in the current year period is directly attributable to the decline in sales, resulting in fixed costs being spread over smaller sales volumes. We expect the
17
continuing contraction of the market for semiconductor capital equipment to continue to negatively impact our gross margin contribution in future periods.
Selling, general and administrative expense in the third quarter of 2005 was $0.9 million, or 53.8% of net sales, compared to $1.4 million, or 37.4% of net sales for the third quarter of 2004. The increase in expense as a percentage of sales is a result of the reduced net sales levels. The reduction in dollar spending is a result of cost reduction measures completed in 2004 and the reduction of certain variable expenses related to sales.
Research and development expense for the third quarter of 2005 was $0.4 million, or 24.7% of net sales compared to $0.8 million, or 20.4% of net sales in the third quarter of 2004. The increase in expense as a percentage of sales is a result of the reduction in net sales. The reduction in dollar spending is a result of cost reduction measures completed in 2004.
The restructuring charge in the current year quarter totaled $40,000 or 2.2% of net sales. This charge resulted from reductions of our workforce within maunfacturing and sales in the third quarter of 2005. This workforce reduction affected two employees.
Interest income for the third quarter of 2005 was $2,000 compared to $1,000 in the third quarter of 2004. The increase in interest income is due to additional funds available for investment compared to the prior year. Interest expense and other totaled $348,000 or 19.8% of net sales for the third quarter of 2005 compared to $204,000 or 5.3% of net sales in the prior year’s quarter. The interest expense increase resulted from increases in the underlying interest percentage, increases in average debt levels and increases in amortization costs associated with debt discounts.
Net loss for the quarter ended September 24, 2005 was $1.0 million or $0.04 per share, as compared to a net loss of $0.5 million, or $0.02 per share in the prior year period.
Results of Operations for the Nine Months Ended September 24, 2005 and September 25, 2004
Net sales for the nine months ended September 24, 2005 decreased $7.3 million or 59.2% to $5.0 million compared to $12.3 million for the nine months ended September 25, 2004. Product acceptance requirements related to product and customer mix had no impact on net sales, as there were no timing differences associated with revenue recognition rules. The decline in sales is directly attributable to the recent retraction in the semiconductor capital equipment market. This decline impacted our sales across all of our product lines.
Gross profit for the first nine months of 2005 decreased by $4.4 million to $2.1 million, or 42.3% of net sales, from $6.5 million, or 52.3% of net sales, for the comparable period in the prior year. The decrease in gross margin in the current year period is directly attributable to the decline in sales, resulting in fixed costs being spread over smaller sales volumes. We expect the continuing contraction of the market for semiconductor capital equipment to continue to negatively impact our gross margin contribution in future periods.
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Selling, general and administrative expense for the first nine months of 2005 was $3.2 million or 63.9% of net sales, compared to $4.1 million, or 32.8% of net sales for the first nine months of 2004. The increase in expense as a percentage of sales is a result of the reduced net sales levels. The reduction in dollar spending is a result of cost reduction measures completed in 2004 and the reduction of certain variable expenses related to sales.
Research and development expense for the first nine months of 2005 was $1.5 million, or 30.0% of net sales compared to $2.1 million, or 17.1% of net sales for the first nine months of 2004. The increase in expense as a percentage of sales is a result of the reduction in net sales. The reduction in dollar spending is a result of cost reduction measures completed in 2004.
The restructuring charge for the nine-months ended September 24, 2005 totaled $106,000 or 2.1% of net sales. This charge resulted from reductions of our workforce across all functional areas in the second and third quarters of 2005. This workforce reduction affected nine employees, across all functional areas.
Interest income for the first nine months of 2005 was $10,000 compared to $4,000 for the comparable period in the prior year. The increase in interest income is due to additional funds available for investment compared to the prior year. Interest expense and other totaled $900,000 or 17.9% of net sales for the first nine months of 2005 compared to $576,000 or 4.7% of net sales for the comparable period in the prior year. The interest expense increase resulted from increases in the underlying interest percentage, increases in the average debt levels and increases in amortization costs associated with debt discounts.
We incurred a $14,000 loss or 0.1% of sales in the first nine months of 2004 from the disposition of certain assets resulting from the restructuring of our leases throughout 2004.
Net loss for the nine-month period ended September 24, 2005 was $3.6 million or $0.14 per share, as compared to a net loss of $291,000, or $0.01 per share in the prior year period.
Liquidity and Capital Resources
The net loss was the primary use of cash in the first nine months of 2005. The increase in accounts receivable and reduction of other accrued liabilites were the primary uses of cash in the first nine months of 2004. Cash used in operations was $2.3 million for the first nine months of 2005 and $2.9 million in the comparable prior year period.
Capital expenditures were $12,000 for the first nine months of 2005 compared to $131,000 in the comparable prior year period. The capital spending in the current year period was primarily in the area of information technology equipment. The prior year spending was primarily in the area of technology equipment and facility costs related to our Penang, Malaysia operations.
On March 9, 2004 we completed a $5.0 million secured financing transaction with an institutional lender. Under the terms of the three-year agreement, we put in place a $3.0 million secured working capital line of credit and a $2.0 million long-term convertible note. On January 28, 2005, we completed an amendment to the financing agreement with the lender whereby our payments under the long-term convertible notes have been deferred for one year, resulting in
19
$800,000 of principal payments being rescheduled to begin on February 1, 2006. These payments were previously scheduled to be paid in 2005. The maturity date of the long-term convertible note has also been extended for one year from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to both the $3.0 million secured working capital line of credit and the $2.0 long-term convertible note were reduced to $0.60 and $0.56, respectively. On April 29, 2005, we completed an financing transaction with the institutional lender in which we borrowed an additional $2,500,000. The agreement provides for monthly interest payments at a rate equal to prime plus 1.75%. Beginning six months after the closing, we are required to make monthly payments equal to 1/30th of the principal amount until three years after the closing, at which time the entire remaining principal and accrued interest is due and payable in full. The loan is convertible into shares of the Company’s common stock at a price of $.23 per share. The Company received net proceeds of approximately $2.4 million at the closing. In connection with this transaction, we issued the lender an option to purchase 2,556,651 shares at $0.01 per share.
On February 25, 2005, we completed a new restructuring agreement with our 10% Senior Convertible Noteholders. Under the agreement, the Noteholders representing $2.9 million in debt, or 80% of the debt existing as of December 31, 2004, have agreed to continue to accept stock in lieu of cash for their interest payments for the remaining term of the notes through December 2006. As part of this agreement, the conversion price of the underlying notes has been reduced from $1.00 per share to $0.85 per share for the remaining term of the notes through December 2006. This results in approximately $145,000 of interest expense scheduled to be paid in 2005 in cash to be satisfied through the issuance of shares of our common stock. During the first quarter of 2004, $3.7 million of the Notes were converted to equity under the prior agreement resulting in the issuance of 3,710,000 shares of our common stock to the noteholders.
On April 11, 2005, judgment was entered against the Company in Superior Court of California in the amount of $379,000 plus legal and court costs for a total amount of $547,000 in a lawsuit brought by a prior landlord. The Company has reached an agreement with the landlord that will allow the Company to pay the judgment over a 30-month period for a total amount of $443,000 plus interest at 10% per annum.
We estimate that we may need to raise additional capital through debt or equity offerings, further modify our existing credit agreements, sell assets, make significant structural cost reductions or take a combination of these actions. We are actively pursing these activities; however, there is no assurance that we will be successful in these activities. If we are unsuccessful in obtaining sufficient financing, restructuring our existing credit agreements, or completing further restructuring initiatives, our operations and financial condition could be materially negatively impacted and we could be required to take actions that will harm our business, including potentially ceasing certain or all of our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically had little impact on us. Inflation
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has not been a significant factor in our operations in any of the periods presented, and it is not expected to affect operations in the future. At September 24, 2005, our 10% senior subordinated convertible debt carries interest at a fixed rate of 10%. Our debt associated with both our bank line of credit and long-term convertible notes carries interest at prime plus 1.75% or 8.50% at September 24, 2005. There is no material market risk relating to our long-term debt.
IMPACT OF ACCOUNTING STANDARDS
In June 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The Company does not expect the adoption of SFAS No. 154 to have a material effect on its financial statements.
In December 2004, FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. APB No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be applied prospectively. We do not expect the adoption of SFAS No. 153 to have a material effect on our financial statements.
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Beginning with our quarterly period that begins January 1, 2006, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. We do not expect the adoption of SFAS No. 123R to have a material effect on our financial statements.
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RISK FACTORS
Except for the historical information contained herein, certain of the matters discussed in this report are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” involve certain risks and uncertainties, including, but not limited to, the following: (1) our ability to continue as a “going concern” is uncertain. The Report of the Independent Registered Public Accounting Firm on the financial statements of the Company as of and for the fiscal year ended December 31, 2004 included in Form 10-K contained an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern; (2) the continuing of the renewed downturn in the semiconductor market which often has a disproportionately negative impact on manufacturers of semiconductor capital equipment, and which could cause us to incur significant cash losses decreasing our cash and expose us to potential further charges for restructuring, excess and obsolete inventory and/or impairment of assets; (3) the market for our products is highly competitive throughout the world, primarily from manufacturers in the United States, Europe and Asia, and many of our competitors are considerably larger and have considerably greater financial resources than we do which may allow them to develop superior or lower priced products; (4) rapid changes in technology and in tester and handler products, which we must respond to successfully in order for our products to avoid becoming noncompetitive or obsolete; (5) customer acceptance of our new products, including the strip-based Tapestry handling systems and Smart Solutions products, and other singulated device handler products in which we have invested significant amounts of inventory; (6) possible loss of any of our key customers, who account for a substantial percentage of our business; (7) the possible adverse impact of competition in markets which are highly competitive; (8) the possible adverse impact of economic or political changes in markets we serve; and (9) other factors detailed from time to time in our SEC reports, including but not limited to the discussion in the Management’s Discussion & Analysis included in Form 10-K for the year ended December 31, 2004.
We expect losses and negative cash flows to continue at least through the remainder of 2005, which may require us to obtain additional capital or pursue other strategic alternatives including the restructuring of our existing line of credit and other certain internal expense reduction initiatives. We are actively pursing these activities; however, there is no assurance that we will be successful in these activities. Further, if future financing requirements are satisfied through the issuance of equity or debt instruments, shareholders may experience additional dilution in terms of their percentage of ownership of our securities. In the event that the we are unable to obtain additional capital, restructure our existing lines of credit and / or successfully realize the benefits of our restructuring initiatives, our operations and financial condition could be materially negatively impacted and we could be required to take actions that may harm our business, including potentially ceasing certain or all of our operations.
All forecasts and projections in this report are “forward-looking statements,” and are based on our current expectations of our near-term results, based on current information available pertaining to us, including risk factors discussed above. Actual results could differ materially.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are effective.
Changes in internal controls.
There have been no changes in internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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PART II. OTHER INFORMATION
On April 11, 2005, judgment was entered against the Company in Superior Court of California in the amount of $379,000 plus legal and court costs for a total amount of $547,000 in a lawsuit brought by a prior landlord. The Company has reached an agreement with the landlord that will allow the Company to pay the judgment over a 30-month period for a total amount of $443,000 plus interest at 10% per annum.
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds
During the third quarter of 2005, we issued 648,874 shares of our common stock to the holders of our 10% Senior Subordinated Convertible Notes (“the Notes”) in payment of interest due on June 30, 2005. The issuance was exempt from registration under Rule 506 under the Securities Act of 1933, because all of the noteholders were accredited, there was no general solicitation, and the shares were subject to restrictions on transfer.
Item 6. Exhibits
10.0 |
| Employment agreement with Jesse P. DeGennaro (filed herewith). |
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31.1 |
| Certification of Chief Executive Officer (filed herewith). |
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31.2 |
| Certification of Chief Financial Officer (filed herewith). |
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32 |
| Section 1350 Certification (filed herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Micro Component Technology, Inc. |
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| Registrant | |||||
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Dated: | November 4, 2005 | By: | /s/ Roger E. Gower |
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| Roger E. Gower | |||||
| President and Chief Executive Officer | |||||
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| And | ||||
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Dated: | November 4, 2005 | By: | /s/ Thomas P. Maun |
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| Thomas P. Maun | |||||
| Chief Financial Officer | |||||
| Chief Accounting Officer | |||||
25