SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) |
For the quarterly period ended June 30, 2007
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.) |
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 14, 2007 was 37,236,889.
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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| June 30, |
| December 31, |
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| 2007 |
| 2006 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 435 |
| $ | 200 |
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Accounts receivable, less allowance for doubtful accounts of $122 and $126, respectively |
| 2,755 |
| 2,816 |
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Inventories |
| 3,138 |
| 2,016 |
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Other |
| 158 |
| 169 |
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Total current assets |
| 6,486 |
| 5,201 |
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Property, plant and equipment, net |
| 95 |
| 91 |
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Debt issuance costs, net of accumulated amortization of $1,449 and $1,383, respectively |
| 236 |
| 246 |
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Other assets |
| 36 |
| 18 |
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Total assets |
| $ | 6,853 |
| $ | 5,556 |
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Liabilities and Stockholders’ Deficit |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 2,069 |
| $ | 228 |
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Bank line of credit |
| 3,930 |
| 3,906 |
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Accounts payable |
| 1,312 |
| 440 |
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Accrued compensation |
| 487 |
| 413 |
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Accrued interest |
| 162 |
| 144 |
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Accrued warranty |
| 122 |
| 101 |
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Customer prepayments and unearned service revenue |
| 251 |
| 382 |
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Other accrued liabilities |
| 351 |
| 251 |
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Total current liabilities |
| 8,684 |
| 5,865 |
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Long-term debt, net of discounts of $1,605 and $836, respectively |
| 3,295 |
| 5,506 |
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Total liabilities |
| 11,979 |
| 11,371 |
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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, 100,000,000 authorized, 36,665,322 and 36,665,322 issued, respectively |
| 367 |
| 367 |
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Additional paid-in capital |
| 103,587 |
| 102,459 |
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Accumulated deficit |
| (109,080 | ) | (108,641 | ) | ||
Total stockholders’ deficit |
| (5,126 | ) | (5,815 | ) | ||
Total liabilities and stockholders’ deficit |
| $ | 6,853 |
| $ | 5,556 |
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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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| June 30, |
| July 1, |
| June 30, |
| July 1, |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Net sales |
| $ | 3,960 |
| $ | 3,676 |
| $ | 7,337 |
| $ | 6,051 |
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Cost of sales |
| 1,875 |
| 1,619 |
| 3,479 |
| 2,799 |
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Gross profit |
| 2,085 |
| 2,057 |
| 3,858 |
| 3,252 |
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Operating expenses: |
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Selling, general and administrative |
| 1,121 |
| 1,038 |
| 2,226 |
| 1,985 |
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Research and development |
| 484 |
| 525 |
| 984 |
| 1,043 |
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Restructuring charge |
| 137 |
| — |
| 137 |
| — |
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Total operating expenses |
| 1,742 |
| 1,563 |
| 3,347 |
| 3,028 |
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Income from operations |
| 343 |
| 494 |
| 511 |
| 224 |
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Interest income |
| 2 |
| 3 |
| 5 |
| 5 |
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Interest expense |
| (289 | ) | (320 | ) | (563 | ) | (598 | ) | ||||
Amortization of Warrant Discounts and other, net |
| (319 | ) | (156 | ) | (375 | ) | (693 | ) | ||||
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Total interest and other |
| (606 | ) | (473 | ) | (933 | ) | (1,286 | ) | ||||
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Net income (loss) before income tax |
| (263 | ) | 21 |
| (422 | ) | (1,062 | ) | ||||
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Income tax expense |
| (17 | ) | (14 | ) | (17 | ) | (14 | ) | ||||
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Net income (loss) |
| $ | (280 | ) | $ | 7 |
| $ | (439 | ) | $ | (1,076 | ) |
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Net income (loss) per share: |
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Basic |
| $ | (0.01 | ) | $ | 0.00 |
| $ | (0.01 | ) | $ | (0.04 | ) |
Diluted |
| $ | (0.01 | ) | $ | 0.00 |
| $ | (0.01 | ) | $ | (0.04 | ) |
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Weighted average common and equivalent shares outstanding: |
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Basic |
| 36,665 |
| 27,490 |
| 36,665 |
| 27,357 |
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Diluted |
| 36,665 |
| 27,490 |
| 36,665 |
| 27,357 |
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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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| June 30, |
| July 1, |
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| 2007 |
| 2006 |
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Cash flows from operating activities: |
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Net loss |
| $ | (439 | ) | $ | (1,076 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
| 497 |
| 719 |
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Changes in assets and liabilities: |
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Accounts receivable |
| 61 |
| (654 | ) | ||
Inventories |
| (1,122 | ) | (414 | ) | ||
Other assets |
| (7 | ) | (42 | ) | ||
Accounts payable |
| 872 |
| 404 |
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Other accrued liabilities |
| 83 |
| 598 |
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Net cash used in operating activities |
| (55 | ) | (465 | ) | ||
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Cash flows from investing activities: |
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Purchases of property, plant, and equipment |
| (50 | ) | (11 | ) | ||
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Net cash used in investing activities |
| (50 | ) | (11 | ) | ||
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Cash flows from financing activities: |
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Repayment of long term note |
| — |
| (4,000 | ) | ||
Proceeds on long term note, net of discounts |
| 297 |
| 4,924 |
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Proceeds on institutional line of credit, net of discounts |
| 47 |
| 850 |
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Proceeds from issuance of stock, net of issuance costs |
| (4 | ) | 50 |
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Net cash provided by financing activities |
| 340 |
| 1,824 |
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Net increase in cash and cash equivalents |
| 235 |
| 1,348 |
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Cash and cash equivalents at beginning of period |
| 200 |
| 77 |
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Cash and cash equivalents at end of period |
| $ | 435 |
| $ | 1,425 |
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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 |
| $ | 545 |
| $ | 492 |
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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, 2007.
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, 2006 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 June 30, 2007, the Company had an accumulated deficit of $109.1 million and incurred a net loss of $439,000 for the six-month period ended June 30, 2007. As of June 30, 2007, the Company had cash and cash equivalents of $435,000, working capital of negative $2.2 million, a current ratio of 0.75, total assets of $6.9 million and total liabilities of $12.0 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 March 29, 2007, we again restructured the financing with Laurus Master Fund, Ltd. (“Laurus”), and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. The note is non-convertible. Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In
6
addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
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, 2006.
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 convertible term note 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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| June 30, |
| July 1, |
| June 30, |
| July 1, |
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(in thousands) |
| 2007 (1) |
| 2006 (1) |
| 2007 (1) |
| 2006 (1) |
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Weighted average common shares outstanding |
| 36,665 |
| 27,490 |
| 36,665 |
| 27,357 |
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Effect of dilutive stock options and warrants |
| — |
| — |
| — |
| — |
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| 36,665 |
| 27,490 |
| 36,665 |
| 27,357 |
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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 11,935,398 and 7,159,898 shares at June 30, 2007 and July 1, 2006, respectively, as the effect is antidilutive.
3. BALANCE SHEET INFORMATION
Major components of inventories were as follows (in thousands):
| June 30, |
| December 31, |
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| 2007 |
| 2006 |
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Raw materials |
| $ | 1,802 |
| $ | 1,314 |
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Work-in-process |
| 849 |
| 377 |
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Finished goods |
| 487 |
| 325 |
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| $ | 3,138 |
| $ | 2,016 |
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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.
7
The following table provides the inventory reserves for the quarter ended June 30, 2007.
Inventory reserve balance at December 31, 2006 |
| $ | 5,613 |
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Release of inventory reserve on sale of goods |
| — |
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Release of inventory reserve on scrap of goods |
| (676 | ) | |
Additional/(Reduction) in inventory reserve |
| (290 | ) | |
Inventory reserve balance at June 30, 2007 |
| $ | 4,647 |
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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 June 30, 2007.
Accrued warranty balance at December 31, 2006 |
| $ | 101 |
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Provision |
| 65 |
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Warranty claims |
| (44 | ) | |
Accrued warranty balance at June 30, 2007 |
| $ | 122 |
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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 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.
On March 29, 2007, we again restructured the financing with Laurus, and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. The note is non-convertible.
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Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
There is currently $1.2 million in principal amount of the 10% Senior Subordinated Convertible Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.50 per share. Interest is payable monthly at the rate of 10% and the principal is payable in full on March 31, 2008.
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. Compensation expense for the three months and six months ended June 30, 2007 was $10,000.
The fair value of options granted under the stock options for the three months and six months ended June 30, 2007 and July 1, 2006 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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| June 30, |
| July 1, |
| June 30, |
| July 1, |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Dividend yield |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expected volatility |
| 93.45 | % | 91.89 | % | 88.54 | % | 91.89 | % | ||||
Risk-free interest rate |
| 4.84 | % | 4.99 | % | 4.54 | % | 4.99 | % | ||||
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 |
| $ | 0.18 |
| $ | 0.32 |
| $ | 0.16 |
| $ | 0.32 |
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9
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006; therefore, the Company will adopt the new requirements for fiscal 2007. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which is effective for interim and annual reporting periods beginning after November 15, 2007. This statement provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future transactions. The Company has not yet assessed the impact of this Statement on the Company’s financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The company has not yet assessed the impact of this Statement on the Company’s financial statements.
10
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
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, 2006. 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. 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.We will continue to monitor the
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market and if 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.
Critical Accounting Policies
Revenue Recognition
Under 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. Consequently, if these conditions exist, we may report revenue levels that are greater than actual shipments. During the quarter ended June 30, 2007, we had $201,000 of deferred revenue in excess of costs under the SAB 104 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 June 30, 2007.
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 June 30, 2007.
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 June 30, 2007 and July 1, 2006
Net sales for the three months ended June 30, 2007 increased by $284,000 or 8% to $4.0 million compared to $3.7 million for the three months ended July 1, 2006. The Strip Test and Mark product line enjoyed the largest percentage increase.
Gross margin for the three months ended June 30, 2007 was $2.1 million or 53% of net sales compared to $2.1 million or 56% of net sales for the comparable period in the prior year
Total operating expense increased by $179,000 or 11% from $1.6 million to $1.7 million over the prior year. Selling, general and administrative expenses for the three months ended June 30, 2007 were $1.1 million or 28% of net sales compared to $1.0 million or 28% of net sales for the three months ended July 1, 2006. Research and development expenses for the second quarter of 2007 were $484,000 or 12% of net sales compared to $525,000 or 14% of net sales in the second quarter of 2006. In addition, on June 29, 2007, we restructured our Penang, Malaysia manufacturing operation. The restructuring plan included the reduction of our lease facility from 54,000 square feet to 10,000 square feet, a workforce reduction of approximately 28 positions in our Malaysian manufacturing operation, and outsourcing manufacturing of certain fabricated parts. We recorded a total restructuring charge of $137,000 for the second quarter of 2007, primarily for future cash expenditures for termination benefits and related costs. Cash payments are expected to be completed by third quarter 2007.
The net loss for the three months ended June 30, 2007 was $280,000 or $0.01 per basic and fully-diluted share compared to net income for the three months ended July 1, 2006 of $7,000 or $0.0 per basic and fully-diluted share.
Results of Operations for the Six Months Ended June 30, 2007 and July 1, 2006
Net sales for the six months ended June 30, 2007 increased $1.3 million or 21% to $7.3 million compared to $6.0 million for the six months ended July 1, 2006. This increase is a result of a modest improvement in the capital equipment market. Sales increases were experienced across all of our product lines.
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Gross margins for the first six months of 2007 increased by $606,000 to $3.9 million, or 52.6% of net sales, from $3.3 million, or 53.7% of net sales, for the comparable period in the prior year.
Total operating expense for the first six months of 2007 increased by $319,000 or 10.6% from $3.0 million to $3.3 million. Selling, general and administrative expense for the first six months of 2007 was $2.2 million or 30.4% of net sales, compared to $2.0 million, or 32.8% of net sales for the first six months of 2006. Substantially all of these increases were planned, and included $108,000 of increased selling and marketing expenses over the prior year’s period due primarily to additional commissions and travel expenses, and $133,000 of increased general and administrative expenses over the prior year’s period due primarily to additional consulting and legal fees for corporate development projects and refinancing of the Laurus debt. Research and development expense for the first six months of 2007 was $1.0 million, or 13.4% of net sales compared to $1.0 million, or 17.2% of net sales for the first six months of 2006. The decrease in expense as a percentage of sales is a result of the increase in net sales. In addition, on June 29, 2007, we restructured our Penang, Malaysia manufacturing operation. The restructuring plan included the reduction of our lease facility from 54,000 square feet to 10,000 square feet, a workforce reduction of approximately 28 positions in our Malaysian manufacturing operation, and outsourcing manufacturing of certain fabricated parts. We recorded a total restructuring charge of $137,000 for the second quarter of 2007, primarily for future cash expenditures for termination benefits and related costs. Cash payments are expected to be completed by third quarter 2007.
The net loss for the first six months of 2007 was $439,000 or $0.01 per share compared to net loss of $1.1 million or $0.04 per share in the comparable prior year period. Included in the prior year’s net loss were write-offs of $414,000 that relate to prior year’s debt issuance cost and FAS 123 discounts from the Laurus financing. Without this write-off, net loss for the second quarter 2006 year-to-date would have been $662,000 or $0.02 per basic and fully-diluted share.
Liquidity and Capital Resources
Cash used in operations was $55,000 in the six months ended June 30, 2007 as compared to $465,000 in the six months ended July 1, 2006. Accounts payable increased $872,000 from year-end to $1.3 million from $440,000, primarily due to inventory purchases. Inventory finished at $3.1 million, which consists of $7.8 million of gross inventories and $4.7 million of reserves. Capital expenditures were $50,000 for the first six months of 2007 compared to $11,000 in the first six months of 2006.
We ended the quarter with $435,000 in cash and cash equivalents up from $200,000 at the end of 2006. Working capital finished at a negative $2.2 million compared to negative $664,000 at the end of 2006. The negative working capital position is primarily due to the Laurus $5.25 million term note, the $1.0 million term note, and the convertible term note coming into classification from long term to short term, as this debt is due within the upcoming 12 months.
On March 29, 2007, we again restructured the financing with Laurus, and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. The note is non-convertible. Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate
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plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
There is currently $1.2 million in principal amount of the 10% Senior Subordinated Convertible Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.50 per share. Interest is payable monthly at the rate of 10% and the principal is payable in full on March 31, 2008.
A material portion of the principal and interest due from the Company to Laurus on the existing financing agreements becomes due and payable in March of 2008. In the event that we are unable to repay or refinance our debt in March of 2008, Laurus could potentially take a number of actions as secured creditor which would have a material negative impact on the Company and its shareholders, including foreclosure, a forced sale of all or part of the Company, and/or liquidation. 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.
IMPACT OF ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006; therefore, the Company will adopt the new requirements for fiscal 2007. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which is effective for interim and annual reporting periods beginning after November 15, 2007. This statement provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future transactions. The Company has not yet assessed the impact of this Statement on the Company’s financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
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SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The company has not yet assessed the impact of this Statement on the Company’s 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. A 1% increase in interest rates would increase our interest expense by $100,000 per year. Our short term revolving line of credit and long-term convertible debt carried interest at the prime rate plus 2.5%. 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.
(b) Changes in internal controls over financial reporting.
No changes in the Company’s internal control over financial reporting occurred during the second quarter of 2007 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
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MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Set forth below is a discussion of the significant risk factors applicable to the Company. Additional risk factors may develop in the future.
Our ability to continue as a “going concern” is uncertain.
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 Company has suffered recurring losses from operations and has a stockholders’ deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. As of June 30, 2007, we had cash and cash equivalents of $435,000, assets totaling $6.9 million, liabilities totaling $12.0 million, and incurred losses from continuing operations of $439,000 for the first six months of 2007. We expect to continue to expend cash and incur operating losses at the current net sales levels, but to a lesser extent than the twelve months ended December 31, 2006 as certain operating expenses are expected to decline from 2006 levels. 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.
A material portion of the principal and interest due from the Company to Laurus on the existing financing agreements becomes due and payable in March of 2008. In the event that we are unable to repay or refinance our debt in March of 2008, Laurus could potentially take a number of actions as secured creditor which would have a material negative impact on the Company and its shareholders, including foreclosure, a forced sale of all or part of the Company, and/or liquidation. 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.
The success of our new products depends upon customer acceptance of both the testing of semiconductor devices in strip form and the automation of the back-end of the semiconductor manufacturing process.
Several of our new products, including our Tapestry strip handler and other Smart Solutions products, are used to test and process semiconductor devices in strip form. Assembly of semiconductor devices in strip form is the standard industry practice. However, we cannot assure you that testing of semiconductor devices in strip form will become widely accepted by the industry. Until recently, most semiconductor manufacturers believed it was necessary to test semiconductors after they were cut from the strips because they believed the act of cutting the strips containing the semiconductor devices, referred to as singulation, could result in damage or contamination to the semiconductor devices and, as a consequence, make the prior test results unreliable.
We introduced our Tapestry handling system in February 1999. In May 2000, we introduced other Smart Solutions products, which provide additional process capability for handling and testing semiconductor devices in strip form. In July of 2003, we introduced our Tapestry SC, a second-generation system. In July of 2004, we introduced our Tapestry SC SmartMark, a second-generation system. Our new products are attractive to customers only if the customers can see the value of automating the test and assembly
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portions of their semiconductor manufacturing operations. Although semiconductor manufacturers have automated the wafer fabrication portion of their operation, or the front-end of the semiconductor manufacturing process, very few semiconductor manufacturers have invested a significant amount of capital to automate the test and assembly portions of their operations. We are introducing new products for technologies, which may not be accepted on a wide-scale basis by the industry. If either the testing of semiconductor devices in strip form or wide-scale automation of the back-end is not accepted by the industry, our net sales likely will suffer.
Downturns in semiconductor industry business cycles could have a negative impact on our operating results.
Our business depends heavily upon capital expenditures by semiconductor manufacturers. The semiconductor industry is highly cyclical, with periods of capacity shortage and periods of excess capacity. In periods of excess capacity, the industry sharply cuts purchases of capital equipment, such as our products. Thus, a semiconductor industry downturn or slowdown substantially reduces our revenues and operating results and could hurt our financial condition. In the fourth quarter of 2000, the semiconductor capital equipment industry went into a severe downturn and continued through 2005. In 2006, there was a slight upturn in the market, but the depressed market over the prior six years has negatively affected our operations and financial condition.
We have offered automation solutions and, unless we effectively market our company as a provider of automation solutions, our expected financial results will suffer.
We offer equipment automation solutions and software development services. These solutions and services require different marketing techniques and involve a more extensive decision-making process by customers than for our traditional handler products. We need to successfully market our automation products using different sales methods than we have previously used.
We acquired an automation software business in June 1999 and introduced our first suite of products to provide an automation solution for the testing portion of semiconductor manufacturing in May 2000. The sales from these operations make up less than 1%, 1% and 3% of net sales for the years ended December 31, 2006, 2005 and 2004, respectively. Our future success is dependent upon being able to successfully market our automation products. If we are not successful in effectively marketing ourselves as an equipment automation solutions provider to the semiconductor industry, our results of operations and financial condition will suffer.
We invest heavily in research and development efforts and our financial results depend upon the success of these efforts.
We have spent, and expect to continue to spend, a significant amount of time and resources developing new products and refining existing products and systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of new systems.
Our ability to introduce and market new products successfully is subject to a wide variety of challenges during this development cycle, such as design defects or changing market requirements that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to
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purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales needed to recoup our research and development expenditures.
Our operating results often have large changes from period to period, which may result in a decrease in our stock price.
Our quarterly and annual operating results are affected by a wide variety of factors that could adversely affect sales or operating results or lead to significant variability in our operating results. A variety of factors could cause this variability, including the following:
· the cyclical nature of the semiconductor industry;
· delays in, or cancellation of, significant system purchases by customers;
· delays in the development, introduction and production of our products;
· changes in the mix of our products and their gross margins;
· new product introductions by competitors and competitive pricing pressures;
· the time required for us to adjust our operating expenses to respond to changes in sales and market conditions;
· the timing of any future acquisitions and their effect on our financial results;
· component shortages resulting in manufacturing delays; and
· pressure by customers to reduce prices, shorten delivery times and extend payment terms.
We cannot predict the impact of these and other factors on our sales or operating results in any future period. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Because of this difficulty in predicting future performance, our operating results may fall below expectations of security analysts or investors in some future periods. Our failure to meet these expectations would likely adversely affect the market price of our common stock.
Our stock price is volatile and it may drop unexpectedly.
Stock prices of companies in the semiconductor equipment industry, including ours, can swing dramatically with little relationship to operating performance. Factors, which could cause our stock price to change, include:
· changes in the market’s view of the semiconductor industry in general;
· changes in our quarterly operating results for the reasons set out in the previous risk factors for other reasons;
· changes in our reported financial results based on accounting pronouncements;
· changes in research analysts’ expectations for us or our industry or failure to meet research analysts’ estimates;
· changes in the general economic conditions or developments in the semiconductor industry which affect investors confidence;
· announcements by us or our competitors of technological innovations or new or enhanced products and;
Additional factors, which may impact our results, include:
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· we depend upon a few customers for the majority of our revenues and a reduction in their orders could adversely affect us;
· our operating results would be harmed if one of our key suppliers fails to deliver components for our products;
· the loss of any of our key personnel could harm our business;
· our markets are very competitive and demand for our products may decrease if additional competitors enter our markets;
· our dependence upon international sales involves significant risk;
· the possible adverse impact of economic or political changes in the market we serve;
· our inability to obtain financing to fund continuing or expanding operations;
Fluctuations or decreases in the trading price of our common stock may adversely affect the ability to trade our shares. In addition, these fluctuations could adversely affect our ability to raise capital through future equity financing.
Item 4. Submission Of Matters To A Vote Of Security Holders
On June 21, 2007, 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 | David M. Sugishita |
Donald R VanLuvanee | Patrick Verderico |
The vote summaries are as follows:
Director Name |
| Affirmed |
| Withheld |
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Roger E. Gower |
| 34,203,708 |
| 665,685 |
|
David M. Sugishita |
| 34,203,458 |
| 665,935 |
|
Donald R. VanLuvanee |
| 34,203,458 |
| 665,935 |
|
Patrick Verderico |
| 34,201,497 |
| 667,896 |
|
Approval of Amendment to the Article of Incorporation
To amend the Article of Incorporation by increasing the number of shares of Common Stock authorized for issuance by the Company from 55,000,000 shares to 100,000,000 shares.
For |
| 32,855,876 |
|
Against |
| 1,937,793 |
|
Abstain |
| 75,724 |
|
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Approval of Amendment to Stock Option Plan for Outside Directors
To amend the Stock Option Plan for Outside Directors by increasing the number of shares reserved for issuance under the Plan from 570,000 to 670,000 shares.
For |
| 12,210,332 |
|
Against |
| 1,674,176 |
|
Abstain |
| 137,623 |
|
Broker Non-Vote |
| 20,847,262 |
|
Approval of Amendment to 2004 Incentive Stock Plan
To amend the 2004 Incentive Stock Plan by increasing the number of shares reserved for issuance under the Plan from 880,000 to 1,880,000 shares.
For |
| 11,707,157 |
|
Against |
| 2,183,251 |
|
Abstain |
| 131,723 |
|
Broker Non-Vote |
| 20,847,262 |
|
Appointment of Olsen Thielen & Co. Ltd. as the independent registered public accounting firm
To appoint Olsen Thielen & Co. Ltd. as the independent registered public accounting firm for the current year.
For |
| 34,642,288 |
|
Against |
| 85,727 |
|
Abstain |
| 141,378 |
|
Item 6. Exhibits
10.1 | Offer Letter to Bruce Ficks, Chief Financial Officer of the Company (filed herewith). |
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10.2 | Contract Manufacturing Agreement between Company and Greatech Integration(M) Sdn Bhd (filed herewith). |
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10.3 | Lease agreement between Company and AT Engineering Sdn Bhd (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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MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
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.
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| Micro Component Technology, Inc. |
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| Registrant | |||
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Dated: | August 14, 2007 |
| By: | /s/ Roger E. Gower | |
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| Roger E. Gower | ||
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| President and Chief Executive Officer | ||
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| And | ||
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Dated: | August 14, 2007 |
| By: | /s/ Bruce Ficks | |
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| Bruce Ficks | ||
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| Chief Financial Officer | ||
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10.1 | Offer Letter to Bruce Ficks, Chief Financial Officer of the Company (filed herewith). |
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10.2 | Contract Manufacturing Agreement between Company and Greatech Integration(M) Sdn Bhd (filed herewith). |
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10.3 | Lease agreement between Company and AT Engineering Sdn Bhd (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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