ITEM 1. Business
General
Unless the context otherwise requires, references in this Report on Form 10-K to “MCT”, “ We”, “Us”, “Registrant” and the “Company” refer to Micro Component Technology, Inc. and its consolidated subsidiaries. MCT was incorporated in Minnesota on June 20, 1972, was reorganized as a Delaware corporation on June 28, 1983 and reorganized as a Minnesota corporation on November 6, 1996. MCT has three wholly owned active operating subsidiaries, Micro Component Technology Asia Pte. Ltd., (“MCT Asia”), MCT Asia (Penang) Sdn. Bhd., (“Penang”), and MCT Philippines, Inc. (“Philippines”). Our principal executive offices are located at 2340 West County Road C, St. Paul, Minnesota 55113 and our telephone number at that location is (651) 697-4000.
Our trademarks used in this Form 10-K are: MCT, Infinity Systems, Aseco, Tapestry® , Smart Solutions, SmartMark®, SmartSort®, SmartTrak®, Isocut, MCT 5100, MCT 7632, S-170 and S-130. All other trademarks or trade names referred to in this Form 10-K are the property of their respective owners.
Background
On December 24, 2001, we issued $10.0 million of 10% Senior Subordinated Convertible Notes due in 2006 to a group of accredited investors. These Notes are convertible into MCT common stock. The conversion price was initially $2.60 per share. The Notes are redeemable by MCT at any time after January 3, 2004 as long as the market price of our common stock equals or exceeds 150% of the conversion price. Proceeds of the Notes, net of debt issuance costs, totaled $9.2 million. Holders of the Notes have standard registration rights if they convert the Notes to common stock.
On March 7, 2003 and March 26, 2003, pursuant to a private equity placement with a group of accredited investors, we issued a total of 3,166,869 shares of common stock, which resulted in net proceeds to us of approximately $1.1 million. Stock issuance costs associated with this offering totaled approximately $241,000. As part of this offering, we also issued warrants to purchase 253,350 shares of common stock that have a term of five years with an exercise price of $0.43 per share.
On June 30, 2003, we completed the restructuring of $9.29 million, or 92.9%, of our 10% Senior Subordinated Convertible Notes, wherein the participating noteholders agreed to accept stock in lieu of cash for the next four semi-annual interest payment dates beginning June 30, 2003 through December 31, 2004, and we agreed to reduce the conversion price to $1.00 per share. On February 25, 2005, we completed a second amendment to the agreement with the holders of our 10% Senior Subordinated Convertible Notes, wherein holders of 80% of the remaining Notes, representing $2.9 million, agreed to continue to accept stock in payment of interest for the remaining
four interest payments through December 24, 2006. The conversion price was then reduced to $0.85 per share.
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 for 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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was at that time reduced to $0.61 per share.
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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
On August 28, 2006, the Company sent the holders of the Company’s 10% Senior Subordinated Convertible Notes an Offer to Reduce Note Conversion Price, in which the Company offered to reduce the conversion price of the Notes to $0.29 per share if the holders agreed to convert their Notes by August 31, 2006. Effective August 31, 2006, holders of $2.1 million in principal amount of the Notes (62%) accepted the offer and agreed to convert their Notes, and the Company issued 7,795,223 shares of common stock to those holders. As of December 24, 2006, an additional $65,000 in principal amount of the Notes was satisfied by cash payments by the Company at a discount. There is currently $1.2 million in principal amount of the Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.56 per share, and is due and payable in full on March 31, 2008.
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 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.
As part of the refinancing, Laurus required that the Company grant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, as incentive for him to remain with the Company. On March 20, 2007, the
Compensation Committee of the Company approved the grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000 shares of common stock at a price of $0.26 per share, the closing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of 10 years.
Introduction
We are a leading supplier of integrated automation solutions for the global semiconductor test and assembly industry. We offer complete and comprehensive equipment automation solutions for the test, laser mark and mark inspect processes for the back-end of the semiconductor manufacturing process that significantly improve our customers’ productivity, yield and throughput. Our solutions include our series of integrated Smart Solutions, automated test handlers, factory automation software and equipment integration services. Our customers include many leading semiconductor companies such as Microchip Technologies, Analog Devices, National Semiconductor, Phillips Semiconductor, Cypress Semiconductor and ST Microelectronics and many of the leading back-end contract test and assembly companies including Amkor and NS Electronics Bangkok. We believe we have one of the world’s largest installed bases of handlers used to test semiconductor devices.
Semiconductor devices are becoming more complex and are characterized by shrinking semiconductor device sizes, miniaturized packaging, increased circuitry and larger wafer sizes. These trends have led manufacturers to seek new tools and new solutions to meet their demanding requirements. We believe that our complete offering of equipment automation products and services allows manufacturers to effectively address evolving process technologies and packaging formats, such as QFN (quad flat packages with no external leads) and miniaturized packaging.
Beginning in 1999, we broadened our strategy from that of a test handler manufacturer to also become a provider of comprehensive equipment automation solutions for the back-end of the semiconductor manufacturing process. Consistent with this new strategy, we completed two acquisitions. Our acquisition of Infinity Systems in June 1999, a company involved in the development of factory automation software, was integral to the development of our integrated equipment Smart Solutions product suite. In January 2000, we completed our acquisition of Aseco Corp, which provided us with increased machine vision and robotics engineering technology critical to the handling of strips and wafers.
Industry Overview
The semiconductor device industry had grown tremendously over the ten-year period ending in the year 2000. This growth had been driven by traditional semiconductor markets like personal computers and data processing, and more recently by the proliferation of semiconductor devices in telecommunications, wireless communications, and consumer electronics, as well as Internet infrastructure equipment. However, the semiconductor capital equipment market, in which we compete, has historically been subject to cyclical periods of high growth and contraction. In the fourth quarter of 2000, the semiconductor industry went into a sharp downturn, which intensified and continued through the majority of 2003, resulting in a significant adverse impact on our business. In late 2003, worldwide semiconductor bookings began showing signs of stabilization and demand for our products increased during this period and continued through the first half of 2004. However, in the third quarter of 2004 the markets again retracted, impacting our financial results through the end of 2004 and continuing through 2006. At this juncture, the return to sustained market growth cannot be predicted in the short term.
The process of semiconductor manufacturing is one of the most complicated and logistically challenging manufacturing processes in the world. An advanced semiconductor device can travel thousands of miles and undergo as many as 500 production steps before completion. The semiconductor device manufacturing process is traditionally divided into two parts: the front-end, which includes wafer fabrication from raw materials to a finished wafer; and the back-end, which includes semiconductor device assembly, test, and packaging. Front-end and back-end manufacturing facilities are expected to run 24 hours a day, 7 days a week, to provide the productivity needed to meet the requirements of the market.
Initially, semiconductor manufacturers concentrated their efforts on improving the more expensive front-end wafer fabrication process. They improved the front-end by first automating the individual production tools and more recently by integrating the various production tools through factory automation software. Tool automation was significant because it replaced most human handling of the wafers with robotics, resulting in dramatically increased yields. Factory automation software is significantly improving productivity, yield and throughput in the front-end by utilizing powerful production scheduling, materials handling and process tool control software.
Automation and process improvement of back-end tools and facilities has severely lagged the front-end. Over the last several years, manufacturers began to seek automation and process solutions for the back-end production process. This is because, historically, the cost of back-end assembly and test processes was only a small portion of the total semiconductor device cost and traditional processes were able to provide adequate throughput. Today the cost of back-end assembly and test per semiconductor device often equals or exceeds the wafer fabrication cost per semiconductor device. We believe that as manufacturers seek to raise the standards of yield, productivity, throughput and cost reduction in the back-end, the growth rate of the newly developing back-end automation market could increase rapidly.
Traditional Semiconductor Manufacturing Process
Semiconductor devices arrive for test in strip or wafer format, with each strip or wafer containing multiple individual devices. Until recently, most semiconductor manufacturers believed it was necessary to test individual semiconductor devices after they were singulated, or cut from the strip or wafer. However, as semiconductor device and package sizes have shrunk, they have become extremely difficult to handle individually. For example, manufacturers’ chip scale packages, or CSPs, are nearly the same size as the die they package. Traditional handling tools do not have the precision to adequately address the various semiconductor device size and chip-scale packaging technologies demanded by manufacturers. As a result, handling tools designed for singulated processes have become a bottleneck to throughput.
Manufacturers now acknowledge that post-test singulation can be done, in certain package formats, without damage to the device. This understanding permits manufacturers to process, handle, and test multiple devices while still in strip or wafer format. Strip handling increases process flexibility by permitting the handling and testing of a variety of packages, substrates and semiconductor device sizes. In addition, strip handling significantly increases throughput by reducing the number of process steps and by allowing the tester to easily test multiple semiconductor devices in parallel. We believe that as manufacturers seek to increase productivity, yield and throughput, they will increasingly adopt strip test processing. Consequently, we believe strip test processing technology will be critical to any back-end automation strategy and will facilitate re-tooling of many back end processes.
In implementing broader automation strategies in the back-end, manufacturers face other significant challenges besides the development of strip processing tools. For example, production tools in the back-end historically have not communicated well with one another, if at all, and the transitions between production steps have not been integrated. This lack of communication and integration has prevented back-end manufacturers from realizing many of the benefits of factory automation and has prevented the collection of critical process data.
Our Solution
We seek to provide our customers comprehensive equipment automation solutions for their test and assembly processes. By deploying our products and services, our customers are able to improve their production yields, factory throughput, tool productivity and utilization while reducing product cost. The key components of our solution are:
· Tapestry series automated strip handler,
· Smart Solutions integrated equipment product series,
· Infinity Systems factory automation software and equipment integration services, and
· Line of traditional test handlers for singulated processes.
Our solution provides the following benefits to our customers:
Flexibility to address new form factors, including wafers and strips. We believe that our Tapestry series of handlers are among the first handlers capable of processing semiconductor devices in strip or wafer formats. Tapestry provides increased flexibility, permitting the handling and testing of a variety of packages, substrates and semiconductor device types. Depending on the application, we believe that our Tapestry handler’s throughput capability is three to ten times greater than existing singulated handling options available today.
Ability to collect critical process data. Our Smart Solutions equipment products utilize our factory automation software to provide both the hardware and software necessary to accurately track important yield events in the test and assembly portion of the back-end process. We use state-of-the-art technology including machine vision to accurately track all semiconductor devices as they travel through the test and assembly processes. This machine vision technology is not only critical to the precise positioning of strips, but also enables our software to generate critical process data. This information, together with yield information obtained in the assembly process and the front-end facility, can provide real-time data on the entire semiconductor manufacturing process for each wafer, giving manufacturers the information they need to improve their processes and increase their yields.
Deployment of integrated, comprehensive solutions. Our suite of equipment automation tools, software products and services addresses the varied automation needs of individual back-end manufacturing facilities. Our factory automation software has the ability to integrate production tools from various manufacturers into one total solution. This allows our customers to fulfill a significant portion of their test and assembly automation needs through a single supplier, thereby simplifying training, maintenance, capacity expansion and supplier accountability.
Worldwide service and support engineering. We provide worldwide service and support engineering to our customers as part of the purchase of all of our products, which includes comprehensive installation support. As our products have expanded to offer greater functionality, we have provided application engineering support so that our customers can take advantage of these advances to improve their processes.
Strategy
Our objective is to be the leading supplier for the newly developing market of automated solutions for the semiconductor test and assembly market. Key elements of our strategy include:
Providing comprehensive automated solutions. Today, we provide equipment automation solutions for the test and assembly portion of the semiconductor manufacturing process, including test, laser mark, mark inspect, and other processes. In addition, we are expanding our automation solutions to include equipment integration solutions compatible with products from a greater number of other equipment manufacturers such as trim, form and singulation system providers. We have enhanced the software component of our automation solutions by adding data analysis and report generating capabilities to increase our customer’s ability to improve their manufacturing process. In the future we plan to expand the Smart Solution suite of products to handle other processes within the semiconductor test and assembly area.
Capitalizing on emerging chip scale packaging, or CSP, process development. Our Smart Solutions and Tapestry products already meet initial chip scale package process requirements through strip handling. However, the vast numbers of new chip scale packages, recently introduced, have imposed additional requirements on semiconductor test and assembly processes, including the ability to perform multi-pass testing and stacked die testing. As a leader in providing equipment automation solutions that address chip scale packaging technologies, we are continuing development of next-generation handling and equipment automation solutions for advanced semiconductor device packaging.
Strengthening key customer relationships. Our customers include many of the world’s leading providers of semiconductor devices as well as major third-party test and assembly companies. We expect that our customers
will look to us to help resolve their process as well as automation problems throughout the back-end. As we solve our customers’ diverse needs, we will deepen our present customer relationships and also build our knowledge base so that we can develop similar relationships with others in the semiconductor manufacturing industry.
Leveraging our strong sales and service capability. We predominantly sell our products through our direct sales force and have established sales and service offices in the world’s major centers of semiconductor manufacturing including Penang, Malaysia, Singapore and in the Philippines. In addition to our sales and service engineers, we have several applications engineers in key customer support locations. We have placed software engineers in several Asian locations to directly support Infinity Systems’ pursuit of factory automation software sales.
Continuing to develop and support existing singulated test handling solutions and products. We believe that we have one of the largest installed bases of traditional test handlers in the world. We intend to support our customers who use singulated test handling with new product introductions for specialty applications.
Products
Automation Products
Smart Solutions. Our Smart Solutions equipment suite of products, once integrated with a tester, are designed to automate the entire test process from the point where the semiconductor devices have been packaged, through test, laser mark, inspection, singulation and sort, to the point of shipment to the customer. Our Smart Solutions product family offers semiconductor manufacturers greater flexibility, yield and throughput. These products are designed to meet the back-end semiconductor manufacturer’s demand for greater production efficiency, lower cost of test and manufacturing flexibility. The following table sets forth our key automation product offerings by category, date introduced and application.
Our Smart Solutions equipment product family was introduced to meet the anticipated evolution of back-end manufacturing from singulated handling to strip processing through the final stages of assembly and electrical test. Additionally, our Smart Solutions products are designed with electronic strip mapping capability as a cornerstone. As high-density semiconductor strips with tiny chip scale packages become the standard, electronic strip mapping addresses the problem of manually tracking individual semiconductor devices within the strip. The new Smart Solutions systems provide customers enhanced performance in either stand-alone or integrated assembly lines. The current average selling price for Smart Solutions products vary from $300,000 for a single module and can approach approximately $1.0 million for a fully configured system that includes all of the components.
Tapestry SC, introduced in July 2003, is our next generation system for semiconductor devices that are in strip format. The system is targeted to meet the growing need for lower cost of ownership, greater flexibility, easier use, increased process control, faster set-up and changeover times. The Tapestry SC has several optional features
and can be targeted at several different applications with the potential to add additional options and / or capability at a later time. The Tapestry SC is compatible and complementary to the Tapestry PH-1.
Tapestry, our strip handling system introduced in February 1999, is the flagship of the Smart Solution product family. Tapestry is a versatile, high volume, parallel test handling and thermal conditioning system for semiconductor devices that are in strip format. Thermal conditioning is required to ensure that a semiconductor device can operate normally in a wide range of temperatures. Tapestry can condition devices at temperatures ranging from -40 degrees centigrade to +130 degrees centigrade. The system is capable of handling fine pitch chip scale packages as well as traditional leaded semiconductor devices in strip format. Using standard industry interfaces, the system is designed to function as a stand-alone system, or can be integrated into an in-line process with our other Smart Solution products or equipment of other manufacturers.
SmartMark SC, introduced in September 2004, is our next generation high-speed laser marker for integration with strip handling or for marking strips with 2D codes. This system takes advantage of the same base system that is used with our Tapestry SC, allowing for lower costs of production and a common platform of spare parts for our customers, thus lowering overall customer costs.
Our suite of Smart Solution equipment products includes additional modules to assist companies in automating the back-end of the semiconductor manufacturing process using the new strip format. These include the input/output devices for both slotted and stacked magazines used with strips.
Automation Software. Infinity Systems Software Solutions provide highly sophisticated systems integration services to the semiconductor test and assembly industry. Infinity Systems’ solutions assist customers in creating either new manufacturing environments or implementing new methods and control systems in existing ones. These installations allow previously isolated stand-alone equipment to exchange information with other equipment and provide for remote monitoring and control of these systems. Our engineering experience, efficient software development process, strong project management and our understanding of semiconductor handling systems allow us to assist customers in specifying equipment behavior and software interfaces as a proactive component of the design and procurement process.
Singulated Handling Products
We also provide more traditional singulated handling products utilizing gravity-feed technology. As a result of our shift in product strategy to strip-based solutions, we will build our singulated products only when a sales order exists and if technology permits. We continue to support these products for our installed base of systems for consumable and spare parts.
Other Products and Services
We provide service and spare parts for all of our current and many of our discontinued products. We have also done significant business in support services for a semiconductor device tester that is still widely used but that was last manufactured by us in 1993.
Research and Development
As an important element of our business strategy, we work closely with our customers to develop new products and enhancements of existing products to meet the evolving needs of the test and assembly market, particularly with respect to emerging semiconductor devices, while striving to provide the lowest cost of test. These efforts, historically focused on test handler products, have resulted in the successful introduction of several new product platforms, including our Tapestry family of products including the PH1, SC (ambient and elevated temperature versions) strip testing and associated handling modules, and our SmartMark and SmartMark SC products.
Although we rely primarily on our internal engineering capabilities to develop new products and enhance existing products, we also utilize contract services to enhance our technical capabilities or temporarily expand our resources. In addition, we work closely with several manufacturers of products that are incorporated into our products or are complementary to our products when we believe a higher quality, lower cost product would result.
An ongoing goal of our research and development activities is to reduce the time required to develop new products and bring them to market. As the back-end process becomes increasingly automated and complex, the development of improved software for our products becomes increasingly important.
Our research and development expenses were $2.0 million, $2.0 million, and $2.8 million in the years ended December 31, 2006, 2005 and 2004, respectively. Our combined resources totaled 20 employees and contractors in research and development, or approximately 21% of our entire workforce, at December 31, 2006. We expect research and development expenses to remain fairly flat in 2007 relative to 2006 levels, subject to mandated increases due to customer requirements for system related products.
Customers
Our customers include many of the leading manufacturers of semiconductor devices, as well as test and assembly companies, in the United States, Europe and Asia. In recent years, our significant customers have shifted from the major semiconductor manufacturers to test and assembly companies, corresponding to the increased utilization of test and assembly companies by the major semiconductor manufacturers. Analog Devices, Carsem Semi, and Microchip Technologies accounted for 48%, 10% and 9% of our net sales, respectively, in the year ended December 31, 2006. Microchip Technologies, Maxim Tech, and Kestronics accounted for 33%, 11% and 10% of our net sales, respectively, in the year ended December 31, 2005. Analog Devices, Microchip Technologies and Amkor Technology, Inc. accounted for 28%, 20% and 19% of our net sales, respectively, in the year ended December 31, 2004.
Our customers tend to limit the number of qualified equipment vendors they purchase from in order to gain the efficiencies of standardization across their production process. We therefore expend substantial efforts to maintain our relationships with our existing major customers to increase the likelihood that they will continue to select our products for their future generations of semiconductor devices.
Marketing, Sales and Worldwide Support
We market our products primarily to semiconductor manufacturers and third party test and assembly companies through our own sales force and in selected markets through independent sales representatives and distributors. Our automation solutions, however, are marketed directly by our employees to the key personnel at customers and potential customers who are in charge of capital equipment for the entire back-end. These sales frequently involve major decisions by the customer as to the configuration and operation of its entire back-end operation. Consequently, the sales cycle for Smart Solutions products may be longer than for our traditional handler products as the average order amount is generally larger.
We augment our sales efforts with direct customer support/service engineers and application engineers based in the field. These engineers are specialists in our product portfolio and partner with our customers to help determine product requirements. Our service engineers install our equipment and train the customers’ operators and maintenance technicians on the proper use and care of our equipment. Our application engineers help identify emerging markets for new products.
We established a presence in Asia more than 20 years ago, where we operate through our subsidiaries with offices in Singapore and Penang, Malaysia. To supplement the region’s sales and service coverage, we use sales representative companies and distributors in Korea, Taiwan and China. We also established an office in the Philippines to provide better sales and service support and the establishment of a software development group. We have stationed service engineers in Singapore, Malaysia, Thailand and the Philippines for rapid response to customer needs in Asia.
Manufacturing and Suppliers
In 2002, we began the transition of our manufacturing operations from our St. Paul, Minnesota facility to Penang, Malaysia. This was completed in early 2003. It is our belief that our Malaysian operations will provide cost savings as well as an increased presence in our prime sales geographical area. We combine proprietary software and components developed in our facilities with components and subassemblies obtained from outside suppliers. We have established relationships with suppliers in Malaysia which allow us to out-source manufacturing of our components to a number of different suppliers. We do not maintain any long-term supply agreements with any of our key suppliers.
Competition
The semiconductor device testing and assembly equipment industry is highly competitive, and the market for our automation products and services is expected to become more competitive. We face substantial competition throughout the world primarily from manufacturers in Asia, the United States, Europe and Japan. The companies that we are aware of that currently offer a production grade strip handling solution comparable to our Tapestry products are Fico BV, ASM International, Electroglas, Tesec, Rasco, Multitest and Cohu, Inc., whose products were introduced between 1995 and 2006.
The principal elements of competition in our markets include throughput capability, quality, reliability, price, product performance, customer service and support, financial strength, versatility and the ability to deliver on schedule. Although we believe that we compete favorably with respect to each of these factors, new product introductions by our competitors could cause a decline in sales or loss of market acceptance of our existing products. If competitors introduce more technologically advanced products, the demand for our similar products would likely be reduced.
Intellectual Property Rights
We attempt to protect the proprietary aspects of our products with patents, trademarks and copyrights, as well as contractual and other trade secret protection strategies.
We frequently review our inventions and discoveries to attempt to determine which inventions will provide substantial differentiation between our products and those of our competitors. We currently have four U.S. patents issued and active. In certain cases, we may also choose to keep an invention or process confidential as trade secrets, in lieu of making public disclosure through the patenting process. Key employees are required to enter into nondisclosure and invention assignment agreements, and customers, vendors and other third parties also must agree to nondisclosure restrictions prior to disclosure of our trade secrets or other confidential or proprietary information.
We have developed and are using trademarks, slogans and other commercial symbols to advertise and sell our products, a number of which have been registered with the U.S. Patent and Trademark Office. Our proprietary computer programs are protected under federal copyright law as unpublished original works. We also maintain the secrecy of our software source codes through licensing and other restrictions.
The intellectual property position of any manufacturer, including us, is subject to uncertainties and may involve complex legal and factual issues. Allowed claims for our existing or future patents issued may be challenged, invalidated or circumvented, and any rights granted by those patents may not provide us with adequate protection. Additionally, it may be possible for competitors or customers to copy aspects of our products or to obtain information that we may regard as a trade secret. Litigation may be necessary in the future to enforce our patents and other intellectual property rights or to defend us against claims of infringement.
Backlog
At December 31, 2006, our backlog of unfilled orders for which a purchase order number has been assigned by the customer and for which a delivery schedule has been specified was $2.8 million. At December 31, 2005, our backlog was $1.9 million. A significant portion of the backlog at December 31, 2006, is expected to be shipped in the first two quarters of 2007. Since a large majority of the shipments made in a given quarter are usually made during the latter part of the quarter, and since a significant portion of shipments in a given quarter are booked during that same quarter, backlog as of a date in the middle of the quarter will typically be greater than backlog at quarter end. All orders are subject to cancellation by the customer with limited charges. Our backlog at a particular date is not necessarily indicative of actual sales for that or any succeeding period and does not reflect the effects of the SEC’s Staff Accounting Bulletin No. 101, amended by Staff Accounting Bulletin 104 (SAB 104) discussed in our revenue recognition policy in Note 1 of Notes to Consolidated Financial Statements included elsewhere herein.
Employees
At December 31, 2006, we had a total of 91 employees in the following areas: 35 in manufacturing, 19 in engineering and research and development, 19 in sales, marketing, application engineering and service, and 18 in administration. Our workforce remained relatively stable during 2006. Many of our employees are highly skilled, and we believe our future success will depend in large part on our ability to attract and retain similar employees. None of our employees are covered by a collective bargaining agreement, and we have experienced no work stoppages. We consider our relationship with our employees to be good.
Seasonality in Quarterly Operating Results
During each quarter, we customarily sell a relatively small number of systems that carry a high average selling price. Although we believe our sales are not seasonal in nature, a small change in the number of products ordered and/or shipped and accepted in a quarter can have a significant impact on results of operations for that particular quarter. Moreover, production difficulties could delay shipments. Accordingly, our operating results may vary significantly from quarter to quarter and could be adversely affected for a particular quarter if shipments and customer acceptances for that quarter were lower than anticipated. Our quarterly operating results may also be affected by, among other factors, the timing of new product introductions, fluctuations in the semiconductor market and the actions of competitors.
Financial Information about Foreign and Domestic Operations and Export Sales
We operate in three geographic areas. Summarized data for our operations are included in Note 9 of Notes to Consolidated Financial Statements, included elsewhere herein.
ITEM 1A.
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 December 31, 2006, we had cash and cash equivalents of $200,000, assets totaling $5.6 million, liabilities totaling $11.4 million, and incurred losses from continuing operations of $3.7 million for the year then ended. 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 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 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:
· 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 2.
ITEM 2. Properties We occupy approximately 24,029 square feet of leased space in St. Paul, Minnesota, for our principal executive offices and research and product development activities. This lease expires on April 30, 2012 with a one-time option to terminate the lease on April 30, 2010 with a termination fee of two months gross rent. We occupy approximately 54,000 square feet of leased space in Penang, Malaysia, which is utilized as a manufacturing center. This lease expires in 2007. As of December 31, 2006 we notified our landlord of our intent to lease on a month to month basis. We occupy approximately 1,300 square feet of leased space in the Philippines in support of our applications engineering and software development activities. This lease expires in 2008. We believe that our current and committed facilities are adequate to support our activities for at least the next twelve months.
ITEM 3.
ITEM 3. Legal Proceedings
This item is not applicable.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders during the quarter ended December 31, 2006.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the OTC Bulletin Board under the symbol MCTI. The following table sets forth, for the periods indicated, the high and low closing sale prices per share of our common stock, as reported
by the OTC Bulletin Board. The share prices represent prices established between broker-dealers and therefore do not reflect prices of actual transactions.
The approximate number of holders of record of our common stock as of December 31, 2006 was 313.
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our business.
Under the Note Purchase Agreement associated with the issuance of the 10% Senior Subordinated Convertible Notes and the Security Agreement associated with our Revolving Line of Credit and Term Note (each discussed in Note 5 in Notes to Consolidated Financial Statements contained elsewhere herein) we are prohibited from paying dividends.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the Company’s Common Stock for the five fiscal years beginning December 31, 2001 and ending December 31, 2006, with the cumulative total return on the NASDAQ Stock Market-U.S. Index and the Philadelphia Exchange Semiconductor Sector Index (“SOXX”) over the same period (assuming the investment of $100 in the Company’s Stock, the NASDAQ Stock Market-U.S. Index and the SOXX Index on December 31, 2001 and the reinvestment of all dividends).
ITEM 6.
ITEM 6. Selected Consolidated Financial Data
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 but with a slight upturn in 2006. At this juncture, the return to sustained market growth cannot be predicted in the short term. As we have disclosed in our Form 10-K for the year ended December 31, 2005 and 2004 and each of our Forms 10-Q for the first three quarters of 2006 and 2005, a continued or renewed market downturn might result in significant losses, charges for inventory revaluation, or asset impairment or restructuring charges. In response to these negative market conditions a number of restructuring steps were taken in 2003, 2004 and 2005, as described below. No restructuring actions were taken in 2006.
Workforce and Facility Cost Reductions
During the second quarter of 2005, in response to the continuing downturn in the semiconductor capital equipment market, we reduced our workforce across all functional areas by approximately 7% resulting in a restructuring charge of $66,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of seven employees across all functional areas.
During the third quarter of 2005, in connection with our restructuring activities, we reduced our workforce within manufacturing and sales by approximately 2% resulting in a restructuring charge of $40,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of two employees.
During the fourth quarter of 2004, we reduced our manufacturing workforce by 11% at the time, resulting in a restructuring charge of $35,000. This charge reflected severance and other benefit costs associated with the reduction. This workforce reduction affected a total of 12 employees all within the manufacturing area.
During the first quarter of 2003, in response to the continued and prolonged downturn in the semiconductor capital equipment industry, we reduced our workforce across all functional areas by approximately 24% at the time, resulting in a restructuring charge of $19,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of 26 employees across all functional areas.
During the second quarter of 2003, we completed the restructuring of our master lease for our St. Paul, MN facility, resulting in a restructuring charge of $227,000, which included write-offs of $41,000 related to leasehold improvements in the vacated space which provided no future economic benefit to us. Additionally, we further reduced our workforce across all functional areas by approximately 4% at the time, resulting in a restructuring charge of $20,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of four employees across all functional areas.
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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
On August 28, 2006, the Company sent the holders of the Company’s 10% Senior Subordinated Convertible Notes an Offer to Reduce Note Conversion Price, in which the Company offered to reduce the conversion price of the Notes to $0.29 per share if the holders agreed to convert their Notes by August 31, 2006. Effective August 31, 2006, holders of $2.1 million in principal amount of the Notes (62%) accepted the offer and agreed to convert their Notes, and the Company issued 7,795,223 shares of common stock to those holders. As of December 24, 2006, an additional $65,000 in principal amount of the Notes was satisfied by cash payments by the Company at a discount. There is currently $1.2 million in principal amount of the Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.56 per share, and is due and payable in full on March 31, 2008.
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 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.
As part of the refinancing, Laurus required that the Company grant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, as incentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approved the grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000 shares of common stock at a price of $0.26 per share, the closing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of 10 years.
Most industry forecasts are presently predicting that capacity-driven purchases of capital equipment are expected to improve in 2007. 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 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 continuing contraction of the semiconductor capital equipment market has the potential to have a material adverse effect on our financial condition, results of operations, and cash flows.
Critical Accounting Policies
Revenue Recognition
Under 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 year ended December 31, 2006, revenue recorded approximated shipments.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on specific identification of our accounts receivable. This involves a degree of judgment based on discussion with our internal sales and marketing groups, our customer base and the examination of the financial stability of our customers. There can be no assurance that our estimates will match actual amounts ultimately written off. During periods of downturn in the market for semiconductor capital equipment or economic recession, a greater degree of risk exists concerning the ultimate collectibility of our accounts receivable due to the impact that these conditions might have on our customer base. For the year ended December 31, 2006, no provisions were recorded and we charged approximately $22,000 against the allowance for accounts receivable that we deemed to be uncollectible.
Valuation of Inventories
Our inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. We 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.
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. For the years ended December 31, 2006 and 2005, we recorded additional inventory reserve of $170,000 and $525,000. No writedown of our inventories occurred for the year ended December 31, 2004.
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
The following table sets forth, for the periods indicated, certain items in our statements of operations as a percentage of net sales:
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Net Sales. Net sales for the year ended December 31, 2006 increased $5.1 million or 72.8% to $12.2 million, compared to net sales of $7.1 million for the prior year. This increase is a result of an upturn in the capital equipment market. Sales increases were experienced across all of our product lines. Sales of our Tapestry and Smart Solutions strip-based products increased $5.2 million or 161% over the prior year period, while sales of singulated device handler products also increased $0.1 million or 6% from the prior year period. Sales of our Tapestry and Smart Solutions strip-based product made up 70.0% of our net sales for the year ended December 31, 2006 compared to 46.0% in the prior year period.
Net sales to Asia comprised approximately 84.1% of our net sales for the year ended December 31, 2006. Net sales to customers in the United States represented approximately 13.0% and net sales to customers in Europe represented approximately 2.9% for year ended December 31, 2006. Comparatively, net sales to customers in Asia comprised approximately 78.5% of our net sales for the year ended December 31, 2005. Net sales to
customers in the United States represented approximately 17.1% and net sales to customers in Europe represented approximately 4.4% for year ended December 31, 2005.
Gross Profit. Gross profit increased $3.3 million to $5.9 million or 48.1% of net sales from $2.5 million or 35.8% of net sales, for the comparable period in the prior year. The increase in gross margin is directly related to the increase in sales volume resulting in fixed costs being spread over higher sales volumes, partially offset by recording of $171,000 of additional inventory reserve and $250,000 of scrap inventory. For the year ended December 31, 2005, we recorded an additional inventory reserve of $525,000.
Selling, General and Administrative Expense. Selling, general and administrative expense in 2006 was $4.1 million, or 33.5% of net sales compared to $4.2 million, or 59.6% of net sales in the prior year. The expenses for 2006 remained flat compared to the prior year due to the results of restructuring efforts that have been completed during 2003, 2004, and 2005. Although the expenses remain the same, the percentage to net sales is lower than the prior year due to expenses being spread over higher net sales. Selling, general and administrative expense is expected to remain fairly flat in 2007.
Research and Development Expense. Research and development expense was $2.0 million in 2006 and 2005. As a percentage of sales, research and development expense in 2006 was 16.7% of net sales compared to 28.0% of net sales in 2005. The decrease in percent of sales over the prior year is directly related to the spread of expenses over a higher net sales amount. We expect research and development expenses to increase slightly in 2007 due to the anticipation of new product development projects, subject to impacts resulting from market requirements.
Restructuring Charge. There were no restructuring charges in 2006. However, in 2005, due to the continuing retraction of the semiconductor capital equipment market, we reduced our workforce across all functional areas by approximately 7% in the second quarter and 2% in the third quarter. The restructuring charge totaled $107,000 or 1.5% of net sales in 2005. This charge reflected severance and other benefit costs associated with the reduction. This workforce reduction affected a total of 9 employees.
Other Income (Expense). Interest income for the year ended December 31, 2006 was $11,000 compared to $13,000 for the comparable period in the prior year. This decrease resulted from lower balances in investment in interest-bearing cash and cash equivalents. Interest expense and other totaled $3.4 million or 27.8% of net sales in the current year, compared to $1.3 million or 18.9% of net sales for the comparable period in the prior year. Included in interest expense and other are non-cash expenses of $1.8 million, of which $0.4 million relates to the Laurus refinancing of prior debt issuance expense, that occurred in February and $1.4 million of conversion expense relating to conversion from debt to equity of $2.1 million in subordinated notes payable.
Income Tax Provision. During both 2006 and 2005, we incurred minimal tax liabilities. We have recorded valuation allowances against all benefits associated with net operating loss carry forwards due to uncertainty regarding their ultimate utilization.
Net Loss. Net loss for the year ended December 31, 2006 was $3.7 million, or $0.12 per basic and diluted share, as compared to net loss of $5.1 million, or $ 0.20 per basic and diluted share for the comparable prior year period.
Year Ended December 31, 2005 versus Year Ended December 31, 2004
Net Sales. Net sales for the year ended December 31, 2005 decreased $7.5 million or 51.6% to $7.1 million, compared to net sales of $14.6 million for the prior year. Current year product sales continued to be severely impacted by the continued downturn in the semiconductor capital equipment market. Sales of our Tapestry and Smart Solutions strip-based products decreased $4.9 million or 60.0% over the prior year period, while sales of singulated device handler products also decreased $2.4 million or 53.5% from the prior year period. Sales of our Tapestry and Smart Solutions strip-based product made up 46.0% of our net sales for the year ended December 31, 2005
compared to 54.6% in the prior year period. If the market continues to be in this downturn, net sales would be adversely impacted in future periods.
Net sales to Asia comprised approximately 78.5% of our net sales for the year ended December 31, 2005. Net sales to customers in the United States represented approximately 17.1% and net sales to customers in Europe represented approximately 4.4% for year ended December 31, 2005. Comparatively, net sales to customers in Asia comprised approximately 72.8% of our net sales for the year ended December 31, 2004. Net sales to customers in the United States represented approximately 19.0% and net sales to customers in Europe represented approximately 8.2% for year ended December 31, 2004.
Gross Profit. Gross profit decreased $4.8 million to $2.5 million or 35.8% of net sales from $7.3 million or 50.1% of net sales, for the comparable period in the prior year. The decrease in gross margin is directly related to the $525,000 additional inventory reserve recorded at the end of the year along with the decline in sales, resulting in fixed costs being spread over smaller sales volumes. Additionally, for the year ended December 31, 2004, we benefited from approximately $1.5 million in gross margin dollars resulting from sales of products that had been previously written down to lower of cost or market. However, a continued contraction of the market for semiconductor capital equipment as well as changes in sales mix would negatively impact our gross margin contribution in future periods.
Selling, General and Administrative Expense. Selling, general and administrative expense in 2005 was $4.2 million, or 59.6% of net sales compared to $5.6 million, or 38.2% of net sales in the prior year. The decrease in expense for the current year is a result of restructuring efforts that have been completed during 2003, 2004, and 2005. Although the expenses have been reduced, the percentage to net sales is higher than the prior year due to expenses being spread over lower net sales. Selling, general and administrative expense is expected to remain fairly flat in 2006 from 2005 due to expense cutting measures and the continuing retraction in the semiconductor capital equipment market.
Research and Development Expense. Research and development expense in 2005 was $2.0 million, or 28.0% of net sales compared to $2.4 million, or 19.5% of net sales in 2004. The decrease in expense for the current year is a direct result of certain development activities that have been completed during the year. The increase in percent of sales over prior year is directly related to the spread of expenses over a lower net sales amount. We expect research and development expenses to be slightly higher in 2006 due to the anticipation of new product development projects, subject to impacts resulting from market requirements.
Restructuring Charge. Due to the continuing retraction of the semiconductor capital equipment market in 2005, we reduced our workforce across all functional areas by approximately 7% in the second quarter and 2% in the third quarter. The restructuring charge totaled $107,000 or 1.5% of net sales for the current year period. This charge reflected severance and other benefit costs associated with the reduction. This workforce reduction affected a total of 9 employees.
Other Income (Expense). Interest income for the year ended December 31, 2005 was $13,000 compared to $6,000 for the comparable period in the prior year. This increase resulted from a slight rate increase in investment in interest-bearing cash and cash equivalents. Interest expense and other totaled $1.3 million or 18.9% of net sales in the current year, compared to $0.9 million or 5.9% of net sales for the comparable period in the prior year. The increase in interest expense and other relates to the write-off of cumulative translation adjustment of $69,000 and higher average debt levels due to additional financing with an institutional lender.
Income Tax Provision. During both 2005 and 2004, we incurred minimal tax liabilities. We have recorded valuation allowances against all benefits associated with net operating loss carry forwards due to uncertainty regarding their ultimate utilization.
Net Loss. Net loss for the year ended December 31, 2005 was $5.1 million, or $0.20 per basic and diluted share, as compared to net loss of $2.0 million, or $ 0.08 per basic and diluted share for the comparable prior year period.
Quarterly Results
The following tables present selected unaudited quarterly operating results for the eight fiscal quarters ended December 31, 2006, as well as the data expressed as a percentage of net sales. We believe that all necessary adjustments have been included to present fairly the quarterly information when read in conjunction with our consolidated financial statements. The operating results for any quarter are not necessarily indicative of the results for any subsequent period.
(1) The sum of income (loss) per share for the fiscal quarters may differ from annual loss per share due to the required method of computing weighted average number of shares in the respective periods.
Liquidity and Capital Resources
The net loss and increases in accounts receivable, partially offset by other accrued liabilities, were the primary uses of cash in 2006. The net loss and decreases in accounts payable were the primary uses of cash in 2005. The net loss and decreases in accounts payable and other accrued liabilities were the primary uses of cash in 2004. Cash used in operations was $3.2 million, $3.2 million and $3.4 million in 2006, 2005 and 2004, respectively.
We record provisions for doubtful accounts based on specific identification of our accounts receivable. As a result of this examination, no provisions were recorded for the year ended December 31, 2006; however, we wrote off approximately $22,000 for the year ended December 31, 2006 and $113,000 for the year ended December 31, 2005, which we deemed uncollectible. We recorded no provisions for doubtful accounts for the years ended December 31, 2005 and December 31, 2004, respectively.
Capital expenditures totaled $36,000, $35,000 and $149,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Capital purchases for all periods have been primarily for production and computer equipment and for leasehold improvements. As of December 31, 2006, we had approximately $0.74 million in committed purchase orders outstanding with our vendors and budgeted capital expenditures for 2007 is approximately $0.1 million.
On March 9, 2004 we completed a $5.0 million secured financing transaction with an institutional lender, Laurus Master Fund Ltd. Under the terms of the three-year agreement, we put in place a $3.0 million secured working capital line of credit and a $2.0 long-term convertible note. In connection with the execution of this credit facility, we issued to the lender a seven-year warrant to purchase 400,000 shares of our common stock at exercise prices ranging from $2.30 to $2.88. Our existing secured lending relationship was terminated as a result of this transaction. This credit facility is secured by all the assets of the Company.
On January 28, 2005, we completed an amendment to the financing agreement with 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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
On August 28, 2006, the Company sent the holders of the Company’s 10% Senior Subordinated Convertible Notes an Offer to Reduce Note Conversion Price, in which the Company offered to reduce the conversion price of the Notes to $0.29 per share if the holders agreed to convert their Notes by August 31, 2006. Effective August 31, 2006, holders of $2.1 million in principal amount of the Notes (62%) accepted the offer and agreed to convert their Notes, and the Company issued 7,795,223 shares of common stock to those holders. As of December 24, 2006, an additional $65,000 in principal amount of the Notes was satisfied by cash payments by the Company at a discount. There is currently $1.2 million in principal amount of the Notes outstanding, represented
by one Note now held by Laurus. The Note has a conversion price of $.56 per share, and is due and payable in full on March 31, 2008.
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 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.
As part of the refinancing, Laurus required that the Company grant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, as incentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approved the grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000 shares of common stock at a price of $0.26 per share, the closing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of 10 years.
Our contractual obligations are as follows (in thousands):
For the years ended December 31, 2006, we issued 150,000 shares of common stock through the exercise of employee stock options and our stock purchase plan. For the year ended December 31, 2005, no common shares were exercised through employee stock options, warrants and our stock purchase plan. For the year ended December 31, 2004, we issued approximately 0.1 million shares of common stock through the exercise of employee stock options and our stock purchase plan, which provided approximately $21,000 in cash to us.
We believe that these transactions in combination with our existing line of credit will provide the cash necessary to meet our operating, working capital and capital resource obligations through all of 2007.
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.
Federal Tax Matters
We paid only nominal federal and state income taxes in the years ended December 31, 2006, 2005 and 2004. At December 31, 2006, we had federal net operating loss carryforwards for tax reporting purposes of approximately $99.7 million.
ITEM 7A
ITEM 7A . 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.
Impact of New 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 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.
ITEM 8.
ITEM 8. Consolidated Financial Statements and Supplementary Data
See Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2006. The financial information by quarter is included in Item 7 of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On December 8, 2005, the Registrant’s independent public accountants, Virchow, Krause & Company, LLP (“Virchow Krause”), formally notified the Registrant that it will resign, effective with the completion of the audit for the fiscal year ending December 31, 2005.
Also on December 8, 2005, the Board of Directors, pursuant to the recommendation of the Audit Committee, approved the retention of Olsen, Thielen & Co. Ltd. (“Olsen Thielen”), as the Registrant’s independent public accountants for the fiscal year ending December 31, 2006.
The audit report of Virchow Krause on the financial statements of the Company for the year ended December 31, 2005 contains an explanatory paragraph that raises substantial doubt about the Registrant’s ability to continue as a going concern. The audit reports of Virchow Krause on the financial statements of the Registrant for the last two fiscal years ended December 31, 2005, did not contain any other adverse opinion or disclaimer of opinion, nor were those opinions otherwise qualified or modified as to audit scope or accounting principles. During the Registrant’s two most recent fiscal years ended December 31, 2005, and during the subsequent interim period preceding the resignation of Virchow Krause, there was no disagreement between the Registrant and Virchow Krause on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Virchow Krause’s satisfaction, would have caused Virchow Krause to make reference to the subject matter of the disagreement in connection with its reports. During the Registrant’s two most recent fiscal years and the subsequent interim period through December 8, 2005, there were no reportable events, as that term is defined by Item 304 of Regulation S-K.
No consultations occurred between the Registrant and Olsen Thielen during the two most recent fiscal years ended December 31, 2005, and during the subsequent interim period preceding the resignation of Virchow Krause, regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrant’s financial statements, or (2) any matter that was the subject of a disagreement or a reportable event.
ITEM 9A.
ITEM 9A. 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 fourth quarter of 2006 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
This item is not applicable.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers, and Corporate Governance
The information required by this item is incorporated by reference from the Proxy Statement to be filed no later than 120 days following our December 31, 2006 year-end.
ITEM 11.
ITEM 11. Executive Compensation
The information required under this item is hereby incorporated by reference from the Proxy Statement.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is hereby incorporated by reference from the Proxy Statement.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required under this item is hereby incorporated by reference from the Proxy Statement.
ITEM 14.
ITEM 14. Principal Accountant Fee and Services
The information required under this item is hereby incorporated by reference from the Proxy Statement.
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Consolidated Financial Statements
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006, and December 31, 2005
Consolidated Statements of Operations for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Notes to Consolidated Financial Statements
Signatures and Certificates
(a)3. Exhibits
3A. Bylaws of MCT. (7)
3B. Articles of Incorporation of MCT. (7)
3C. Articles of Amendment dated March 14, 2002 (11).
4. Specimen Certificate of Common stock. (1)
10A. Form of Non-Competition Agreement between MCT and certain senior executive officers. (1)
10B. Stock Purchase Agreement and Commission Agreement between MCT and Cardine & Levy, dated September 25, 1995. (3)
10C. Employment Agreement with Roger E. Gower dated March 28, 1995. (2)
10D. Employment Agreement with Dennis L. Nelson dated May 30, 1996. (5)
10E. Stock Option Plan for Outside Directors as amended through April 10, 2001. (10)
10F. Incentive Stock Option Plan as amended through April 10, 2001. (10)
10G. 2004 Incentive Stock Plan. (16)
10H. Former Aseco Corp. 1986 Incentive Stock Option Plan. (9)
10I. Former Aseco Corp. 1993 Omnibus Stock Plan. (9)
10J. Former Aseco Corp. 1993 Non-Employee Director Stock Option Plan. (9)
10K. Lease for MCT’s corporate headquarters dated October 16, 1996. (6)
10L. Lease for space in Marlborough, Massachusetts dated April 13, 1993. (8)
10M. Employee Stock Purchase Plan. (4)
10U. Warrant Purchase Agreement dated July 11, 1992. (1)
10V. Second Common Stock Warrant Purchase Agreement dated August 10, 1993. (1)
10W. Form of 10% Senior Subordinated Convertible Note. (11)
10X. Agreement for Payment of Interest with Stock, effective June 30, 2003. (12)
10Y Accounts Receivable Financing Agreement with Silicon Valley Bank (13)
10Z Security Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10AA Securities Purchase Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10BB Secured Convertible Minimum Borrowing Note with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10CC Secured Revolving Note with Laurus Master Fund, Ltd dated March 9, 2004. (15)
10DD Secured Convertible Term Note with Laurus Master Fund, Ltd dated March 9, 2004. (15)
10EE Minimum Borrowing Note Registration Rights Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10FF Registration Rights Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10GG Common Stock Purchase Warrant with Laurus Master Fund, Ltd. dated March 9, 2004. (15)
10HH Amendment No. 1 by and between Micro Component Technology, Inc. and Laurus Master Fund, Ltd. dated January 28, 2005 to Secured Convertible Term Note, Secured Revolving Note, Registration Rights Agreement and Minimum Borrowing Note Registration Rights Agreement. (Schedules omitted) (17)
10II Common Stock Purchase Warrant with Laurus Master Fund, Ltd. dated January 28, 2005. (17)
10JJ Second Agreement for Payment of Interest with Stock, effective January 31, 2005 (18).
10KK Security and Purchase Agreement with Laurus Master Fund, Ltd. effective February 17, 2006 (19).
10LL Secured Non-Convertible Revolving Note with Laurus Master Fund, Ltd. effective February 17, 2006 (19).
10MM Secured Non-Convertible Term Note with Laurus Master Fund, Ltd. effective February 17, 2006 (19).
10NN Offer to Reduce Note Conversion Price to 10% Senior Subordinate Convertible Notes dated August 28, 2006 (20).
10OO Consulting agreement made between Micro Component Technology, Inc. and a member of the Board of Directors, Pat Verderico dated October 18, 2006 (21).
10PP Employee Stock Option Agreement dated March 20, 2007(22).
10QQ Securities Purchase Agreement with Laurus Master Fund, Ltd. effective March 29, 2007 (23).
10RR Amendment to the Secured Non-Convertible Revolving Note with Laurus Master Fund, Ltd. effective March 29, 2007 (23).
10SS Secured Term Note with Laurus Master Fund, Ltd. effective March 29, 2007 (23).
10TT Common Stock Purchase Warrant with Laurus Master Fund, Ltd. effective March 29, 2007 (23).
10UU Restricted Account Agreement with Laurus Master Fund, Ltd. dated March 29, 2007 (23).
10VV Restricted Account Side Letter with Laurus Master Fund, Ltd. dated March 29, 2007 (23).
21. Revised Listing of Subsidiaries of Micro Component Technology, Inc. (11).
23.1 Consent of Olsen Thielen & Co. Ltd. (filed herewith).
23.2 Consent of Virchow, Krause & Company, LLP (filed herewith).
31.1 Certification of Chief Executive Officer (filed herewith).
31.2 Certification of Chief Financial Officer (filed herewith).
32.0 Section 1350 Certification (filed herewith).
(1) Incorporated by reference to the exhibits to the registration statement on Form S-1 filed by MCT on August 24, 1993, as amended, SEC File Number 33-67846.
(2) Incorporated by reference to the report on Form 10-Q filed by MCT for the quarter ended March 25, 1995, SEC File No. 0-22384.
(3) Incorporated by reference to the report on Form 10-Q filed by MCT for the quarter ended September 30, 1995, SEC File No. 0-22384.
(4) Incorporated by reference to the exhibits to the Post-Effective Amendment to Registration Statement on Form S-8 filed by MCT on July 15, 1996, as amended, SEC File No. 33-85766.
(5) Incorporated by reference to the exhibits to the report on Form 10-K filed by MCT for the fiscal year ended June 29, 1996, SEC File No. 0-22384.
(6) Incorporated by reference to the report on Form 10-Q filed by MCT for the quarter ended September 28, 1996, SEC File No. 0-22384.
(7) Incorporated by reference to the exhibits to the Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed by MCT on November 18, 1996, SEC File No. 33-98940.
(8) Incorporated by reference to the Registration Statement on Form S-1, as amended, filed by Aseco Corporation on January 29, 1993, SEC File No. 33-57644.
(9) Incorporated by reference to the exhibits to the Registration Statement on Form S-8 filed by MCT on January 31, 2000, SEC File No. 333-95765.
(10) Incorporated by reference to the definitive proxy materials for the 2001 Annual Stockholders Meeting, filed April 30, 2001.
(11) Incorporated by reference to the report on Form 10-K filed by MCT for the period ended December 31, 2001, SEC File No. 0-22384.
(12) Incorporated by reference to the report on Form 10-Q filed by MCT for the quarterly period ended June 28, 2003, SEC File No. 0-22384.
(13) Incorporated by reference to the report on Form 10-Q filed by MCT for the quarterly period ended September 27, 2003, SEC File No. 0-22384.
(14) Incorporated by reference to the report on Form 10-K filed by MCT for the period ended December 31, 2002, SEC File No. 0-22384.
(15) Incorporated by reference to the report on Form 10-K filed by MCT for the period ended December 31, 2003, SEC File No. 0-22384.
(16) Incorporated by reference to the exhibits to the Registration Statement on Form S-8 filed by MCT on July 16, 2004, SEC File No. 333-117407.
(17) Incorporated by reference to the report on Form 8-K filed by MCT on February 3, 2005.
(18) Incorporated by reference to the report on Form 8-K filed by MCT on February 24, 2005.
(19) Incorporated by reference to the report on Form 8-K filed by MCT on February 25, 2006.
(20) Incorporated by reference to the report on Form 8-K filed by MCT on September 7, 2006.
(21) Incorporated by reference to the report on Form 8-K filed by MCT on October 18, 2006.
(22) Incorporated by reference to the report on Form 8-K filed by MCT on March 23, 2007.
(23) Incorporated by reference to the report on Form 8-K filed by MCT on April 2, 2007.
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006, and December 31, 2005
Consolidated Statements of Operations for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, December 31, 2005, and December 31, 2004
Notes to Consolidated Financial Statements
Signatures and Certifications
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee, Stockholders and Board of Directors of
Micro Component Technology, Inc. and Subsidiaries
St. Paul, MN
We have audited the accompanying consolidated balance sheet of Micro Component Technology, Inc. and Subsidiaries as of December 31, 2006 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Micro Component Technology, Inc. and Subsidiaries as of December 31, 2006 and the results of their operations and their cash flows for the year ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the company has suffered recurring losses from operations and has a stockholders’ deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Olsen, Thielen & Co. Ltd.
St. Paul, Minnesota
March 30, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
Micro Component Technology, Inc. and Subsidiaries
St. Paul, MN
We have audited the accompanying consolidated balance sheet of Micro Component Technology, Inc. and Subsidiaries as of December 31, 2005, and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Micro Component Technology, Inc. and Subsidiaries as of December 31, 2005 and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the company has suffered recurring losses from operations and has a stockholders’ deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Virchow, Krause & Company, LLP
Minneapolis, Minnesota
February 3, 2006
(except for Note 12, as to which the date is February 17, 2006)
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements.
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See Notes to Consolidated Financial Statements.
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands, except share data)
See Notes to Consolidated Financial Statements.
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See Notes to Consolidated Financial Statements.
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
We design, manufacture, market and service automated test handling equipment for the semiconductor industry. Our handlers are designed to handle most semiconductor or integrated circuit device packages currently in production. We operate in one business segment in three geographic locations.
A network of offices and representatives supports our customers across North America, Europe and Asia. Our company was formed in 1972 and is headquartered in St. Paul, Minnesota.
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.
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 December 31, 2006, we had cash and cash equivalents of $200,000, working capital of negative $0.7 million, assets totaling $5.6 million, liabilities totaling $11.4 million and an accumulated deficit of $108.6 million. 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.
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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
On August 28, 2006, the Company sent the holders of the Company’s 10% Senior Subordinated Convertible Notes an Offer to Reduce Note Conversion Price, in which the Company offered to reduce the conversion price of the Notes to $0.29 per share if the holders agreed to convert their Notes by August 31, 2006. Effective August 31, 2006, holders of $2.1 million in principal amount of the Notes (62%) accepted the offer and agreed to convert their Notes, and the Company issued 7,795,223 shares of common stock to those holders. As of December 24, 2006, an additional $65,000 in principal amount of the Notes was satisfied by cash payments by the Company at a discount. There is currently $1.2 million in principal amount of the Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.56 per share, and is due and payable in full on March 31, 2008.
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 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.
As part of the refinancing, Laurus required that the Company grant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, as incentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approved the grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000 shares of common stock at a price of $0.26 per share, the closing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of 10 years.
The Company believes that the combination of reduced spending, increasing our customer base to further enable the penetration of our product technology, and the amendment of our existing credit facility contained elsewhere herein, will provide the cash necessary to meet our operating, working capital and capital resource obligations through all of 2007.
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods might differ from those estimates.
Revenue Recognition
Under SAB 104, our revenue is recognized upon shipment, as our terms are FOB shipping point, for established 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. The related inventory costs are offset against the deferred revenue and reported as “deferred revenue in excess of costs incurred” in the consolidated balance sheet. Product warranty and installation costs are accrued in the period sales are recognized. Installation services are considered to be perfunctory as defined under SAB 104 and average less than 5% of the contract price. Revenue related to spare parts is recognized upon shipment. Revenue related to maintenance and service contracts are deferred and amortized to earnings on a straight-line basis over the life of the service contract. Custom integration software revenue is recognized on a project basis with milestone acceptance provisions. Shipping and handling costs are billed to the customer and included in the net revenue with the cost of shipment and handling charged to cost of goods sold.
Research and Development Expenses
Research and development expenses for new product development are charged to expense as incurred.
Financial Instruments
The carrying amounts for all financial instruments approximates fair value. The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturity of these instruments. The fair value of capital lease obligations, note payable and long-term debt approximates the carrying amounts based upon the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. We place our temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.
Accounts Receivable
We review customers’ credit history before extending unsecured credit and establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and other information. Invoice terms can vary from net 30 days, to percentage amounts of the total customer purchase order tied to acceptance criteria. The Company does not accrue interest on past due accounts receivable. The Company writes off receivables when they are deemed uncollectible after all collection attempts have failed. Accounts receivable are shown net of an allowance for doubtful accounts of $126,000 and $148,000 at December 31, 2006 and 2005, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. Provisions to reduce inventories to the lower of cost or market are made based on a review of excess and obsolete inventories, estimates of future sales, examination of historical consumption rates and the related value of component parts.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets for financial reporting and accelerated methods for tax purposes. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term for financial reporting purposes. Estimated lives used in computing book depreciation are as follows:
Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets for potential impairment. We consider projected future operating results, cash flows, trends, and other circumstances in making such estimates and
evaluations. When the carrying value of any long-lived asset exceeds its projected undiscounted cash flows, impairment is recognized to reduce the carrying value to its fair market value.
Product Warranty
At the time the product is sold, estimated costs of warranty obligations to customers are charged to expense and a related accrual is established.
Income Taxes
We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes are recorded based on differences in the bases of assets and liabilities between the financial statements and the tax returns as well as from loss carryforwards. The valuation allowance for deferred income tax benefits is determined by us based upon the expectation of whether the benefits are more likely than not to be realized.
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 year ended December 31, 2006.
If compensation cost for our stock option and employee stock purchase plans had been accounted for in accordance with SFAS 123R, our net loss and net loss per share would have been as follows:
In December of 2004, the Compensation Committee of the Board of Directors approved the acceleration of the vesting of all of the then outstanding options under all plans. At the time of this approval all option exercise prices exceeded the public market price of the underlying common shares. This action resulted in 1,029,500 shares being accelerated with respect to their original vesting dates. This acceleration resulted in an additional $737,000 of net compensation expense being included in the above tables for the year ended December 31, 2004.
The fair value of options granted under the stock option and employee stock purchase plans for the years ended December 31, 2006, 2005, and 2004 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:
Foreign Currency Translation
Assets and liabilities of the foreign subsidiary are translated to U.S. dollars at year-end rates, and the statements of operations are translated at average exchange rates during the year. Translation adjustments arising from the translation of the foreign affiliates’ net assets into U.S. dollars were recorded in cumulative other comprehensive income until 1999. During 1999, the foreign subsidiary’s functional currency changed to the U.S. dollar due principally to a significant shift in the amount of activity denominated in U.S. dollars versus the local currency. All translation adjustments are now recorded in the consolidated statements of operations. For the year ended December 31, 2006, there are no cumulative translation adjustments. For the year ended December 31, 2005, we wrote-off cumulative translation adjustments of $69,000.
New 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 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.
NOTE 2 - LOSS PER COMMON SHARE
Loss per common share is computed in accordance with SFAS No. 128, Earnings Per Share. Basic loss per share is 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 outstanding and the conversion of convertible debt. The following table reconciles the denominators used in computing basic and diluted loss per share for the periods reported (in thousands):
(1) We reported a loss for the period. No adjustment was made for the effect of stock options, warrants or convertible debt as the effect was anti-dilutive. Stock options and warrants outstanding totaled 5,915,398 shares at December 31, 2006, 5,013,398 shares at December 31, 2005 and 3,358,058 shares at December 31, 2004.
NOTE 3 - RESTRUCTURING CHARGES
The restructuring charges described below were incurred and paid within the years as set forth below.
2005 Restructuring Charges
During the second quarter of 2005, in response to the continuing downturn in the semiconductor capital equipment market, we reduced our workforce across all functional areas by approximately 7% resulting in a restructuring charge of $66,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of seven employees across all functional areas.
During the third quarter of 2005, in connection with our restructuring activities, we reduced our workforce within manufacturing and sales by approximately 2% resulting in a restructuring charge of $40,000. This charge reflected severance and other benefit costs associated with this reduction. This workforce reduction affected a total of two employees.
2004 Restructuring Charges
During the fourth quarter, in response to a second half 2004 market contraction, we reduced our workforce by approximately 11% at the time, resulting in a restructuring charge of $35,000. This charge reflected severance and benefit costs associated with this reduction. This work force reduction affected a total of 12 employees principally with the manufacturing function.
NOTE 4 - BALANCE SHEET INFORMATION
The allowance for doubtful accounts receivable was as follows (in thousands):
Provisions are charged to selling, general and administrative expense.
Major components of inventories were as follows (in thousands):
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 years ended December 31, 2006 and 2005.
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 years ended December 31, 2006 and 2005.
Property, plant and equipment were as follows (in thousands):
NOTE 5 - LONG-TERM DEBT Long-term debt and financing obligations were as follows (in thousands):
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. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
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 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.
As part of the refinancing, Laurus required that the Company grant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, as incentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approved the grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000 shares of common stock at a price of $0.26 per share, the closing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of 10 years.
In December 2001, we issued $10.0 million of 10% Senior Subordinated Convertible Notes due in 2006 to a group of accredited investors. These Notes were initially convertible into our common stock at a conversion price equal to $2.60 per share. The Notes are redeemable by us at any time after January 3, 2004 as long as the market price of our common stock equals or exceeds 150% of the conversion price. Proceeds from the Notes, net of debt issuance costs, totaled $9.2 million. Holders of the Notes have standard registration rights if they convert the Notes to common stock. The Note Purchase Agreement between us and the holders of the Notes contains certain affirmative and negative covenants. Among other things, these covenants prohibit us from paying dividends to our shareholders or incurring more than $5.0 million of indebtedness that is senior to, or ranks the same as the Notes. The covenants also require us to comply with applicable laws and regulations, maintain a market for our common stock, and provide the Note holders with copies of our SEC reports and certain other information. There are no financial covenants related to these Notes. On June 30, 2003, we completed the restructuring of $9.29 million, or 92.9%, of our 10% Senior Subordinated Convertible Notes, wherein the participating noteholders agreed to accept stock in lieu of cash for the next four semi-annual interest payment dates beginning June 30, 2003 through December 31, 2004, and the conversion price for the Notes was reduced to $1.00 per share. On February 25, 2005, we completed a second amendment to the agreement with the holders of our 10% Senior Subordinated Convertible Notes, wherein holders of 80% of the remaining Notes, representing $2.9 million, agreed to continue to accept stock in payment of interest for the remaining four interest payments through December 24, 2006. As part of this amendment, we agreed to reduce the Note conversion price to $0.85 per share, and use our best efforts to register the shares with the SEC. On April 29, 2005, we completed another financing transaction with Laurus. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was at that time reduced to $0.61 per share. On August 28, 2006, the Company sent the holders of the Company’s 10% Senior Subordinated Convertible Notes an Offer to Reduce Note Conversion Price, in which the Company offered to reduce the conversion price of the Notes to $0.29 per share if the holders agreed to convert their Notes by August 31, 2006. Effective August 31,
2006, holders of $2.1 million in principal amount of the Notes (62%) accepted the offer and agreed to convert their Notes, and the Company issued 7,795,223 shares of common stock to those holders.
During the year ended December 31, 2004, principal in the amount of $3.71 million and interest in the amount of $642,000 were converted into 4,364,260 shares of common stock. During the year ended December 31, 2003, principal in the amount of $2.66 million and interest in the amount of $553,000 were converted into 3,667,911 shares of common stock. There was no beneficial conversion of the Notes payable into common stock as defined in EITF 00-27 of “Application of Issue No. 98-5 to Certain Convertible Instruments.”
As of December 24, 2006, an additional $65,000 in principal amount of the Notes was satisfied by cash payments by the Company at a discount. There is currently $1.2 million in principal amount of the Notes outstanding, represented by one Note now held by Laurus. The Note has a conversion price of $.56 per share, and is due and payable in full on March 31, 2008.
On April 11, 2005, judgment was entered against the Company in Superior Court of California in the amount of $379,000 plus legal and court costs for a total amount of $547,000 in a lawsuit brought by a prior landlord. The Company has reached an agreement with the landlord that will allow the Company to pay the judgment over a 30-month period for a total amount of $443,000 plus interest at 10% per annum.
Payments due under debt obligations, including additional amounts borrowed subsequent to year-end are as follows: 2007 - $228,000, 2008 - $2,105,000; 2009 - $4,375,000; and 2010 - $0.
NOTE 6 - INCOME TAXES
The Company incurred losses for the years ended December 31, 2006, 2005, and 2004, respectively, and recorded no provision for income taxes.
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense recorded in the consolidated financial statements was as follows:
As of December 31, 2006, we had federal net operating loss (NOL) carryforwards totaling approximately $99.7 million and tax credit carryforwards of approximately $117,000 which can be used to reduce future taxable income. Such tax loss and tax credit carryforwards begin to expire in 2012. Changes in the ownership of the Company have placed limitations on the annual usage of these NOLs. Future changes in ownership may place additional limitations on these losses.
The components of the deferred tax asset is as follows:
The Company has recorded a full valuation allowance against the asset because, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
We lease certain facilities and equipment under various operating leases. We occupy approximately 24,029 square feet of leased space in St. Paul, Minnesota, for our principal executive offices and research and product development activities. This lease expires on April 30, 2012 with a one-time option to terminate the lease on April 30, 2010 with a termination fee of two months gross rent. We occupy approximately 54,000 square feet of leased space in Penang, Malaysia, which is utilized as a manufacturing center for our mature products. This lease expires in June 2007. As of December 31, 2006 we notified our landlord of our intent to lease on a month to month basis.
Total rent expense charged to operations, primarily for facilities and equipment, was $582,000, $615,000 and $814,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The future minimum rental payments at December 31, 2006, due under noncancelable operating leases, are as follows: 2007 - $377,000; 2008 - $191,000; 2009 - $178,000; 2010 - $180,000; 2011 - $182,000 and $61,000 thereafter.
We have an employment agreement with our Chief Executive Officer that may be terminated upon 60 days written notice by either party. If we terminate the agreement, we shall continue to pay his salary in effect at date of termination for 12 months thereafter. We also have an agreement with another executive officer that provides for severance pay and other remuneration if his employment is terminated or duties significantly diminished as a result of a change of control.
NOTE 8 - STOCK OPTION AND BONUS PLANS AND WARRANTS TO PURCHASE COMMON STOCK
The Board of Directors previously reserved a total of 2,600,000 shares of common stock under the 1993 Incentive Stock Options Plan for key employees. This plan expired in April 2003 except for outstanding options. In June of 2004, the Board of Directors and shareholders approved the 2004 Incentive Stock Plan and the reservation of 880,000 shares. Options under the two plans expire five to ten years from the date of grant and generally vest over a two-year or four-year period. If an individual ceases employment, he/she has 90 days to exercise vested options. Options granted in excess of the $100,000 annual IRS limitations become non-qualified. The Compensation Committee of the Board of Directors at their discretion can grant non-qualified options and restricted stock to eligible employees. In 2004 and 2003, the Board of Directors granted 155,000 and 1,000,000, respectively, non-qualified options, which are included in the stock option table below.
In fiscal 1996, our Board of Directors and our shareholders approved the Stock Option Plan for Outside Directors. A total of 570,000 shares have been reserved for issuance under the plan. Each person who becomes an outside director will automatically be granted an option to purchase 10,000 shares. In addition, each outside director will also automatically be granted an option to purchase 10,000 shares immediately upon each reelection as a director, or on the anniversary of the prior year’s grant in any year in which there is no meeting of the stockholders
at which directors are elected. The period within which an option must be exercised will be the earlier of (1) ten years from the date of the grant, or (2) the date which is one year after the director ceases to be a director for any reason, provided that if a director voluntarily declines to stand for re-election after the age of 60, he shall not be required to exercise his options within one year after he ceases to be a director and shall continue to vest in his options after he ceases to be a director. The exercise price for each option will be the fair market value of the stock on the date of grant, and each option will generally vest over a two-year period at 50 percent per year.
We have also reserved 150,000 shares of common stock for the grant of non-qualified stock options for outside directors, consultants, advisors and employees.
Shares subject to options under these plans were as follows:
Options outstanding at December 31, 2006 had exercise prices ranging from $0.16 to $11.25 per share as summarized in the following table:
At December 31, 2006 and 2005, 725,000 and 765,000 shares, respectively, were available for future grants under the terms of these plans. In December of 2004, the Compensation Committee of the Board of Directors approved the acceleration of the vesting of all of the then outstanding options under all plans. At the time of this approval all option exercise prices exceeded the public market price of the underlying common shares. This action resulted in 1,029,500 shares being accelerated with respect to their original vesting dates.
In February 1996, the Board of Directors adopted the Employee Stock Purchase Plan and reserved 300,000 shares of common stock for issuance under the Plan. Eligible employees can elect under the Plan to contribute between two percent and ten percent of their base pay each plan year (June 1 - May 31) to purchase shares of common stock at a price per share equal to 85 percent of market value on the first day of the plan year or the last day of the plan year, whichever is lower. Employee contributions are deducted from their regular salary or wages. The maximum number of shares that can be purchased by an employee in any plan year is 1,000 shares. For the years ended December 31, 2006, 2005, and 2004, no shares were issued under the plan. For the year ended December 31, 2003, 8,000 shares were issued under the plan at a price of $0.37. For the year ended December 31, 2002, 28,551 shares were issued under the plan at prices ranging from $2.59 to $2.68 at a weighted average price of $2.68. Approximately 122,900 shares remain reserved for future issuances.
Under the Note Purchase Agreement associated with the issuance of the 10% Senior Subordinated Convertible Notes and the Security Agreement associated with our Revolving Line of Credit and Term Note (each discussed in Note 5 in Notes to Consolidated Financial Statements contained elsewhere herein) we are prohibited from paying dividends.
NOTE 9 - SEGMENT, GEOGRAPHIC, CUSTOMER INFORMATION AND CONCENTRATION OF CREDIT RISK
We operate in one industry segment supplying automated equipment test handlers to the semiconductor industry. Net sales to customers located in the three geographic regions in which we operate are summarized as follows (in thousands):
Although our primary manufacturing facility is located in Penang, Malaysia, we do not hold a material amount of long-lived assets outside of the United States. Of our inventory reflected on the Company balance sheet as of December 31, 2006, $1.8 million was located in our facility in Penang, Malaysia.
During the year ended December 31, 2006 our top ten customers accounted for approximately 95% of net sales with three customers accounting for approximately 67.2% and one customer accounting for approximately 47.8% of net sales. During the year ended December 31, 2005 our top ten customers accounted for approximately 92% of net sales with three customers accounting for approximately 53.3% of net sales and one customer accounting for approximately 33% of net sales. During the year ended December 31, 2004 our top ten customers accounted for approximately 93% of net sales with three customers accounting for approximately 65% of net sales and one customer accounting for approximately 26% of net sales. As of December 31, 2006, one customer accounted for 66.2% of our total net accounts receivable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of St. Paul, State of Minnesota, on April 2, 2007.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 2, 2007.
Signature
Capacity
/s/Roger E. Gower
President, Chief Executive Officer,
Roger E. Gower
Chairman of the Board and Director
/s/BachThuy T. Vo
Interim Chief Financial Officer
BachThuy T. Vo
/s/Donald J. Kramer
Director
Donald J. Kramer
/s/David M. Sugishita
Director
David M. Sugishita
/s/Donald R. VanLuvanee
Director
Donald R. VanLuvanee
/s/Patrick Verderico
Director
Patrick Verderico