SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended July 1, 2006 | ||
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OR | ||
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| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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.) |
2340 West County Road C, St. Paul, MN 55113-2528
(Address of principal executive offices)
(651) 697-4000
(Registrant’s telephone number)
Indicate by check 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the Registrant’s Common Stock, as of August 10, 2006 was 29,212,041.
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. AND SUBSIDIARIES
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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| July 1, |
| December 31, |
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| 2006 |
| 2005 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 1,425 |
| $ | 77 |
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Accounts receivable, less allowance for doubtful accounts of $127 and $148, respectively |
| 2,315 |
| 1,661 |
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Inventories |
| 2,608 |
| 2,194 |
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Other |
| 216 |
| 169 |
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Total current assets |
| 6,564 |
| 4,101 |
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Property, plant and equipment, net |
| 115 |
| 148 |
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Debt issuance costs, net of accumulated amortization of $1,297 and $1,005, respectively |
| 332 |
| 276 |
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Other assets |
| 16 |
| 21 |
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Total assets |
| $ | 7,027 |
| $ | 4,546 |
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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 discounts of $68 and $0, respectively |
| $ | 4,017 |
| $ | 133 |
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Bank line of credit, net of discounts of $0 and $42, respectively |
| 3,590 |
| 2,630 |
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Accounts payable |
| 829 |
| 425 |
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Accrued compensation |
| 376 |
| 382 |
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Accrued interest |
| 253 |
| 234 |
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Accrued warranty |
| 108 |
| 153 |
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Customer prepayments and unearned service revenue |
| 610 |
| 152 |
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Other accrued liabilities |
| 203 |
| 180 |
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Total current liabilities |
| 9,986 |
| 4,289 |
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Long-term debt, net of discounts of $956 and 545, respectively |
| 4,053 |
| 3,683 |
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10% senior subordinated convertible debt |
| — |
| 3,630 |
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Total liabilities |
| 14,039 |
| 11,602 |
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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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| — |
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Common stock, $.01 par value, 55,000,000 authorized, 27,550,638 and 26,215,388 issued, respectively |
| 276 |
| 262 |
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Additional paid-in capital |
| 98,776 |
| 97,670 |
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Accumulated deficit |
| (106,064 | ) | (104,988 | ) | ||
Total stockholders’ deficit |
| (7,012 | ) | (7,056 | ) | ||
Total liabilities and stockholders’ deficit |
| $ | 7,027 |
| $ | 4,546 |
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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 |
| Six Months Ended |
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| July 1, |
| June 25, |
| July 1, |
| June 25, |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Net sales |
| $ | 3,676 |
| $ | 1,322 |
| $ | 6,051 |
| $ | 3,282 |
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Cost of sales |
| 1,619 |
| 869 |
| 2,799 |
| 1,926 |
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Gross profit |
| 2,057 |
| 453 |
| 3,252 |
| 1,356 |
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Operating expenses: |
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Selling, general and administrative |
| 1,038 |
| 1,145 |
| 1,985 |
| 2,276 |
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Research and development |
| 525 |
| 491 |
| 1,043 |
| 1,079 |
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Restructuring charge |
| — |
| 66 |
| — |
| 66 |
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Total operating expenses |
| 1,563 |
| 1,702 |
| 3,028 |
| 3,421 |
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Income (loss) from operations |
| 494 |
| (1,249 | ) | 224 |
| (2,065 | ) | ||||
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Interest income |
| 3 |
| 7 |
| 5 |
| 8 |
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Interest expense and other, net |
| (476 | ) | (314 | ) | (1,291 | ) | (552 | ) | ||||
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Total interest and other |
| (473 | ) | (307 | ) | (1,286 | ) | (544 | ) | ||||
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Net income (loss) before income tax |
| 21 |
| (1,556 | ) | (1,062 | ) | (2,609 | ) | ||||
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Income tax expense |
| (14 | ) | — |
| (14 | ) | — |
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Net income (loss) |
| $ | 7 |
| $ | (1,556 | ) | $ | (1,076 | ) | $ | (2,609 | ) |
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Net income (loss) per share: |
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Basic |
| $ | 0.00 |
| $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.10 | ) |
Diluted |
| $ | 0.00 |
| $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.10 | ) |
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Weighted average common and equivalent shares outstanding: |
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Basic |
| 27,490 |
| 25,567 |
| 27,357 |
| 25,567 |
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Diluted |
| 27,490 |
| 25,567 |
| 27,357 |
| 25,567 |
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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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| Six Months Ended |
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| July 1, |
| June 25, |
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| 2006 |
| 2005 |
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Cash flows from operating activities: |
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Net loss |
| $ | (1,076 | ) | $ | (2,609 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
| 719 |
| 317 |
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Changes in assets and liabilities: |
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Accounts receivable |
| (654 | ) | 883 |
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Inventories |
| (414 | ) | 147 |
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Other assets |
| (42 | ) | 6 |
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Accounts payable |
| 404 |
| (299 | ) | ||
Other accrued liabilities |
| 598 |
| 6 |
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Net cash used in operating activities |
| (465 | ) | (1,549 | ) | ||
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Cash flows from investing activities: |
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Purchases of property, plant, and equipment |
| (11 | ) | (12 | ) | ||
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Net cash used in investing activities |
| (11 | ) | (12 | ) | ||
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Cash flows from financing activities: |
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Repayment of long term note |
| (4000 | ) | (67 | ) | ||
Proceeds on long term note, net of discounts |
| 4,924 |
| — |
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Proceeds on institutional line of credit, net of discounts |
| 850 |
| 398 |
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Issuance of long-term convertible note, net of debt issue costs |
| — |
| 2,396 |
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Proceeds from issuance of stock, net of issuance costs |
| 50 |
| (16 | ) | ||
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Net cash provided by financing activities |
| 1,824 |
| 2,711 |
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Net increase in cash and cash equivalents |
| 1,348 |
| 1,150 |
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Cash and cash equivalents at beginning of period |
| 77 |
| 166 |
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Cash and cash equivalents at end of period |
| $ | 1,425 |
| $ | 1,316 |
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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 |
| $ | 149 |
| $ | — |
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Stock issued in conversion of 10% senior subordinated convertible debt |
| 100 |
| — |
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Cash paid for interest |
| $ | 492 |
| $ | 93 |
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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
Basis of Presentation
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, 2006.
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, 2005 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 July 1, 2006, the Company had an accumulated deficit of $106.1 million and incurred a net loss of $1.1 million for the six-month period ended July 1, 2006. As of July 1, 2006, the Company had cash and cash equivalents of $1.4 million, working capital of negative $3.4 million, a current ratio of negative 0.59, total assets of $7.0 million and total liabilities of $14.0 million. Our ability to generate cash and operating income is dependent on increasing our customer base to expand the penetration of our product technology and the realization of our lower operating expense targets.
As discussed in Note 4, on February 17, 2006, we restructured the financing with Laurus, and increased the total maximum secured indebtedness with Laurus to $9.25 million from $7.0 million. The restructured financing now includes a $5.25 million term note. Interest is payable
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monthly on the term note at the prime rate plus 2.5%. Beginning 360 days after closing, we are required to make monthly payments equal to 1/60th of the 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 note is non-convertible. In addition to the $5.25 million note, the working capital line of credit was increased from $3.0 million to $4.0 million, and made non-convertible. The note is payable in full on March 8, 2008. Interest is payable monthly on the note at the prime rate plus 2.5%. The existing $1.2 million over-advance in excess of the borrowing base on the working capital line of credit was extended until April 30, 2007. However, commencing on December 1, 2006, the over-advance is to be reduced by $200,000 each month. The Company also issued Laurus a 10-year option to purchase 2,500,000 shares at an exercise price of $.01 per share. The shares issuable upon exercise of the option have standard registration rights. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements has been reduced to $0.56 per share.
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, 2005.
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, warrants and the 10% Senior Subordinated Convertible Notes outstanding. The following table reconciles the denominators used in computing basic and diluted earnings per share:
| Three Months Ended |
| Six Months Ended |
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| July 1, |
| June 25, |
| July 1, |
| June 25, |
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(in thousands) |
| 2006 |
| 2005 (1) |
| 2006 (1) |
| 2005 (1) |
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Weighted average common shares outstanding |
| 27,490 |
| 25,567 |
| 27,357 |
| 25,567 |
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Effect of dilutive stock options and warrants |
| — |
| — |
| — |
| — |
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| 27,490 |
| 25,567 |
| 27,357 |
| 25,567 |
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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 represented 7,159,898 and 5,391,898 shares at July 1, 2006 and June 25, 2005, respectively, as the effect is antidilutive.
3. BALANCE SHEET INFORMATION
Major components of inventories were as follows (in thousands):
| July 1, |
| December 31, |
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| 2006 |
| 2005 |
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Raw materials |
| $ | 1,932 |
| $ | 1,783 |
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Work-in-process |
| 654 |
| 394 |
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Finished goods |
| 22 |
| 17 |
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| $ | 2,608 |
| $ | 2,194 |
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In accordance with accounting principles generally accepted in the United States of America, we value our inventories at the lower of cost or market.
The following table provides the inventory reserves for the quarter ended July 1, 2006.
Inventory reserve balance at December 31, 2005 |
| $ | 7,401 |
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Release of inventory reserve on sale of goods |
| — |
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Release of inventory reserve on scrap of goods |
| (101 | ) | |
Additional inventory reserve |
| — |
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Inventory reserve balance at July 1, 2006 |
| $ | 7,300 |
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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 quarter ended July 1, 2006.
Accrued warranty balance at December 31, 2005 |
| $ | 153 |
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Provision |
| 7 |
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Warranty claims |
| (52 | ) | |
Accrued warranty balance at July 1, 2006 |
| $ | 108 |
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4. FINANCING TRANSACTIONS
On March 9, 2004, we completed a $5.0 million financing transaction with an institutional lender, Laurus Master Fund, Ltd. (“Laurus”), secured by all of the assets of the Company. The financing included a $3.0 million working capital line of credit and a $2.0 million long-term note. The notes were partially convertible into shares of our common stock. In connection with the transaction, we issued to Laurus a seven-year warrant to purchase 400,000 shares of common stock at exercise prices ranging from $2.30 to $2.88 per share. The secured loan in existence at that time with a prior lender was terminated.
On January 28, 2005, we completed an amendment to the financing agreement with Laurus to defer payments on the long-term convertible note. As part of this amendment, the conversion prices on both notes were reduced. We also issued Laurus at that time a seven-year warrant to purchase 150,000 shares of common stock at $.67 per share.
On April 29, 2005, we completed another financing transaction with Laurus in which we borrowed an additional $2.5 million, and which was convertible into shares of common stock. We also issued Laurus at that time an option to purchase 2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.
On February 17, 2006, we restructured the financing with Laurus, and increased the total maximum secured indebtedness with Laurus to $9.25 million. The restructured financing now includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. Beginning 360 days after closing, we are required to make monthly payments equal to 1/60th of the principal amount until three years after the closing, at which time the entire
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remaining principal and accrued interest is due and payable in full. The note is non-convertible. In addition to the $5.25 million note, the working capital line of credit was increased from $3.0 million to $4.0 million, and made non-convertible. The note is payable in full on March 8, 2008. Interest is payable monthly on the note at the prime rate plus 2.5%. The existing $1.2 million over-advance in excess of the borrowing base on the working capital line of credit was extended until April 30, 2007. However, commencing on December 1, 2006, the over-advance is to be reduced by $200,000 each month. The Company also issued Laurus a 10-year option to purchase 2,500,000 shares at an exercise price of $.01 per share. The shares issuable upon exercise of the option have standard registration rights. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements has been reduced to $0.56 per share.
5. STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R “Share-Based Payment”, on January 1, 2006. This statement requires us to recognize the cost of employee and director services received in exchange for the stock options it has awarded. Under SFAS 123R, we are required to recognize compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. We have elected to adopt SFAS 123R on a modified prospective basis; accordingly the financial statements for periods prior to January 1, 2006 do not include stock-based compensation costs calculated under the fair value method. As a result of the adoption of SFAS 123R, we incurred a compensation expense of $4,000 for the three months and six months ended July 1, 2006.
If compensation cost for our stock option and employee stock purchase plans had been accounted for in accordance with SFAS 123R, the three and six month periods ended June 25, 2005 would have been as follows:
| Three |
| Six |
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| Months Ended |
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| June 25, 2005 |
| June 25, 2005 |
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Net income (loss): |
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As reported |
| $ | (1,556 | ) | $ | (2,609 | ) |
Fair value compensation expense |
| (8 | ) | (164 | ) | ||
Pro forma |
| $ | (1,564 | ) | $ | (2,773 | ) |
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Net income (loss) per share – basic and diluted: |
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As reported |
| $ | (0.06 | ) | $ | (0.10 | ) |
Fair value compensation expense |
| — |
| (0.01 | ) | ||
Pro forma |
| $ | (0.06 | ) | $ | (0.11 | ) |
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Stock based compensation: |
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As reported |
| $ | — |
| $ | — |
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Fair value compensation expense |
| (8 | ) | (164 | ) | ||
Pro forma |
| $ | (8 | ) | $ | (164 | ) |
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The fair value of options granted under the stock options for the three months and six months ended July 1, 2006 and June 25, 2005 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions.
| Three Months Ended |
| Six Months Ended |
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| July 1, |
| June 25, |
| July1, |
| June 25, |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Dividend yield |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expected volatility |
| 91.89 | % | 111.15 | % | 91.89 | % | 89.70 | % | ||||
Risk-free interest rate |
| 4.99 | % | 3.75 | % | 4.99 | % | 3.88 | % | ||||
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 |
| $ | 0.32 |
| $ | 0.20 |
| $ | 0.32 |
| $ | 0.22 |
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6. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 154, Accounting Changes and Error Corrections. In June 2005, FASB issued 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. 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 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. As discussed in Note 5, we implemented SFAS No. 123R on January 1, 2006. We do not expect the adoption of SFAS No. 123R to have a material effect on our financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about the semiconductor capital equipment industry, and our beliefs and assumptions. We intend words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described elsewhere in this report on Form 10-Q and our report on Form 10-K for the year ended December 31, 2005. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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.
Beginning in 1999 and continuing into 2000, we broadened our strategy from that of a test handler manufacturer to becoming a provider of comprehensive equipment automation solutions for the back-end of the semiconductor manufacturing process. First, we developed and introduced in February 1999 our Tapestry strip handler. Tapestry combines strip handling capability with robotics, machine vision technology and critical software, enabling the testing and tracking of semiconductor devices in strip form and the generation of critical process data throughout the test process. Second, in June 1999 we acquired the Infinity Systems division of Fico. Infinity Systems has been involved in the development of factory automation software for the semiconductor manufacturing industry. Infinity Systems’ software expertise was integral to the development of our integrated Smart Solutions equipment product line, introduced in May 2000. Together with a third party tester, our Smart Solutions equipment products including our Tapestry handler enable complete automation of the test, laser mark, mark inspect and other processes of the back end.
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 continued through 2005, and began to improve in 2006. 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 if
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required, 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 renewed 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 SAB 101, 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. Consequently, if these conditions exist, we may report revenue levels that are greater than actual shipments. During the quarter ended July 1, 2006, we have $437,000 deferred revenue in excess of costs under the SAB 101 revenue recognition rule.
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. No provisions were recorded for the quarter ended July 1, 2006.
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 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.
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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-down of our inventories occurred for the quarter ended July 1, 2006.
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 July 1, 2006 and June 25, 2005
Net sales for the three months ended July 1, 2006 increased by $2.4 million or 178% to $3.7 million compared to $1.3 million for the three months ended June 25, 2005. Sales have steadily increased over the last five quarters due to a recent upturn in the capital equipment market. The Strip Test and Mark product line enjoyed the largest percentage increase.
Gross margin for the three months ended July 1, 2006 increased by $1.6 million to $2.1 million or 56% of net sales from $0.5 million or 34% of net sales for the comparable period in the prior year. The increase in gross margin in the current year period is directly attributable to the increase in sales resulting in fixed costs being spread over a larger sales volume.
Total operating expense declined by $139,000 or 8% from $1.7 million to $1.6 million. Selling, general and administrative expenses for the three months ended July 1, 2006 were $1.0 million or 28% of net sales compared to $1.1 million or 87% of net sales for the three months ended June 25, 2005. Research and development expenses for the second quarter of 2006 were $525,000 or 14% of net sales compared to $491,000 or 37% of net sales in the second quarter of 2005. The decrease in operating expense is a direct result from the restructuring that occurred in prior year period.
The net income for the three months ended July 1, 2006 was $7,000 or $0.0 per basic and fully-diluted share compared to net loss for the three months ended June 25, 2005 of $1.6 million or $0.06 per basic and fully-diluted share.
Results of Operations for the Six Months Ended July 1, 2006 and June 25, 2005
Net sales for the six months ended July 1, 2005 increased $2.8 million or 84% to $6.0 million compared to $3.3 million for the six months ended June 25, 2005. This increase is a result of an upturn in the capital equipment market. Sales increases were experienced across all of our product lines.
Gross margins for the first six months of 2006 increased by $1.9 million to $3.3 million, or 54% of net sales, from $1.4 million, or 41% of net sales, for the comparable period in the prior year.
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This increase is directly attributable to the increase in the net sales resulting in fixed cost being spread over higher volumes.
Total operating expense for the first six months of 2006 declined by $393,000 or 11% from $3.4 million to $3.0 million. Selling, general and administrative expense for the first six months of 2006 was $2.0 million or 33% of net sales, compared to $2.3 million, or 69% of net sales for the first six months of 2005. Research and development expense for the first six months of 2006 was $1.0 million, or 17% of net sales compared to $1.1 million, or 33% of net sales for the first six months of 2005. The decrease in expense as a percentage of sales is a result of the increase in net sales. In addition, we are benefiting from the restructuring charge that occurred in prior year period.
The net loss for the first six months of 2006 was $1.1 million or $0.04 per share compared to net loss of $2.6 million or $0.10 per share in the comparable prior year period. Included in the first six months’ net loss are write-offs of $414,000 that relate to prior year’s debt issuance cost and FAS 123 discounts from the Laurus refinancing that occurred in the first quarter of this year.
Liquidity and Capital Resources
Cash used in operations was $465,000 in the six months ended July 1, 2006 as compared to $1,549,000 in the six months ended June 25, 2005. Accounts receivables increased from year-end to $2.3 million from $1.7 million. Inventory finished at $2.6 million, which consists of $9.9 million of gross inventories and $7.3 million of reserves. Capital expenditures were $11,000 for the six months ended of 2006 compared to $12,000 in the six months ended of 2005.
We ended the quarter with $1,425,000 in cash and cash equivalents up from $77,000 at the end of 2005 year and cash availability from our credit line of $400,000. Working capital finished at a negative $3.4 million compared to a negative $188,000 at the end of 2005 year. The negative working capital position is due to the Laurus $5.25 million term note, the over-advance of $1.2 million in the credit facility, and the 10% senior subordinated convertible debt coming into classification from long term to short term, as this debt is due within the upcoming 12 months.
On February 17, 2006, we restructured the financing with Laurus, and increased the total maximum secured indebtedness with Laurus to $9.25 million. The restructured financing now includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. Beginning 360 days after closing, we are required to make monthly payments equal to 1/60th of the 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 note is non-convertible. In addition to the $5.25 million note, the working capital line of credit was increased from $3.0 million to $4.0 million, and made non-convertible. The note is payable in full on March 8, 2008. Interest is payable monthly on the note at the prime rate plus 2.5%. The existing $1.2 million over-advance in excess of the borrowing base on the working capital line of credit was extended until April 30, 2007. However, commencing on December 1, 2006, the over-advance is to be reduced by $200,000 each month. The Company also issued Laurus a 10-year option to purchase 2,500,000 shares at an exercise price of $.01 per share. The shares issuable upon exercise of the option have standard registration rights. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements has been reduced to $0.56 per share.
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IMPACT OF ACCOUNTING STANDARDS
SFAS No. 154, Accounting Changes and Error Corrections. In June 2005, FASB issued 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. 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 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. On January 1, 2006, we implemented SFAS No. 123R. We do not expect the adoption of SFAS No. 123R to have a material effect on our financial statements.
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 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 July 1, 2006, our 10% senior subordinated convertible debt carries interest at a fixed rate of 10%. Our debt associated with both our line of credit and long-term convertible note carries interest at prime plus 2.5% or 10.75% at July 1, 2006. There is no material market risk relating to our long-term debt.
ITEM 4. CONTROLS AND PROCEDURES
(a) 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 the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
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(b) Changes in internal controls over financial reporting.
During the course of the audit of our consolidated financial statements for December 31, 2005, our independent registered public accounting firm, Virchow, Krause & Company, LLP (Virchow Krause), advised management and the Audit Committee that our internal controls had allowed an error in the inventory reserve calculation due to inconsistent treatment of work in process items from 2004 to 2005. Based on Virchow Krause’s recommendation, management decided that an increase in the inventory reserve of approximately $525,000 was required as of December 31, 2005, to reflect a revaluation of excess inventory and adjustments to inventory consumption rates. The inventory reserve error had no effect on reported results for any of the individual quarters in 2005. As a result of this experience, during the first quarter, we revised and expanded our procedures for valuations of excess inventory and estimates of inventory consumption rates, and the related internal controls, to involve greater analysis of historical and projected usage of inventory as well as other data.
In addition, Virchow Krause recommended changes to certain other of the Company’s controls and procedures, none of which had any impact on the audited financial statements for 2005 or prior years. As of the end of second quarter of 2006, management implemented changes to these controls and procedures.
There have been no additional changes in our internal control over financial reporting during the second quarter of 2006 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 4. Submission Of Matters To A Vote Of Security Holders
On June 22, 2006, the Company held its annual meeting of shareholders. At the meeting, the following actions were taken:
Election of Directors
The following persons were elected directors of the Company to serve for a term of one year:
Roger Gower |
| Donald Kramer |
| David M. Sugishita |
Donald R VanLuvanee |
| Patrick Verderico |
|
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The vote summaries are as follows:
Director Name |
| Affirmed |
| Withheld |
|
Roger E. Gower |
| 25,971,292 |
| 531,387 |
|
Donald J. Kramer |
| 25,972,272 |
| 530,407 |
|
David M. Sugishita |
| 25,971,292 |
| 531,387 |
|
Donald R. VanLuvanee |
| 25,972,292 |
| 530,387 |
|
Patrick Verderico |
| 25,969,395 |
| 533,284 |
|
Approval of Amendment to Stock Option Plan for Outside Directors
To amend the Stock Option Plan for Outside Directors by extending the duration of the Plan from February 15, 2006 to February 15, 2016.
For |
| 8,597,408 |
Against |
| 1,087,530 |
Abstain |
| 150,416 |
Item 6. Exhibits
31.1 Certification of Chief Executive Officer (filed herewith).
31.2 Certification of Chief Financial Officer (filed herewith).
32 Section 1350 Certification (filed herewith).
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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: August 10, 2006 | 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: August 10, 2006 | By: | /s/ BachThuy T. Vo |
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| BachThuy T. Vo | |||
| Interim Chief Financial Officer | |||
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