FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000.February 28, 2001.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 333-28987.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 KATO TERRACE
FREMONT, CA 94539
- -------------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(510) 623-9400
- ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES X NO
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding
at November 30, 2000February 28, 2001 was 7,125,016.7,104,588.
1
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2000FEBRUARY 28, 2001
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
November 30, 2000February 28, 2001 and May 31, 2000 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and sixnine months ended November 30, 2000February 28, 2001 and
1999.February 29, 2000. . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
sixnine months ended November 30, 2000February 28, 2001 and
1999.February 29, 2000. . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 89
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 1820
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 20
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 1920
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 1920
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021
2
PART I. FINANCIAL STATEMENTS
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)thousands)
November 30,February 28, May 31,
20002001 2000
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $10,826$12,662 $ 8,323
Short-term investments. . . . . . . . . . . . . 5,3435,763 7,365
Accounts receivable . . . . . . . . . . . . . . 7,8886,822 6,294
Inventories . . . . . . . . . . . . . . . . . . 10,0749,758 11,183
Prepaid expenses and other. . . . . . . . . . . 3,5143,168 3,277
----------- -----------
Total current assets . . . . . . . . . . . . 37,64538,173 36,442
Property and equipment, net . . . . . . . . . . . 2,3692,236 2,613
Long-term investments . . . . . . . . . . . . . . 736516 580
Other assets, net . . . . . . . . . . . . . . . . 1,1461,113 1,094
----------- -----------
Total assets . . . . . . . . . . . . . . . . $41,896$42,038 $40,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt. . . . . $ 138-- $ 143
Accounts payable. . . . . . . . . . . . . . . . 2,2312,188 2,989
Accrued expenses. . . . . . . . . . . . . . . . 3,6364,080 2,873
Deferred revenue. . . . . . . . . . . . . . . . 6351 37
----------- -----------
Total current liabilities . . . . . . . . . . 6,0686,319 6,042
Long-term bank debt, net of current portion . . . 183-- 297
Deferred revenue. . . . . . . . . . . . . . . . . 3944 39
Deferred lease commitment . . . . . . . . . . . . 140122 46
----------- -----------
Total liabilities . . . . . . . . . . . . . . 6,4306,485 6,424
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 7,1257,105 shares and
6,906 shares at November 30, 2000February 28, 2001 and
May 31, 2000, respectively . . . . . . . . . 7071 69
Additional paid-in capital . . . . . . . . . . 36,20636,090 35,332
Accumulated deficit . . . . . . . . . . . . . . (2,286)(2,144) (2,660)
Net unrealized lossgain (loss) on investments.investments . . . . . . (13)31 (13)
Cumulative translation adjustment . . . . . . . 1,4891,505 1,577
----------- -----------
Total shareholders' equity . . . . . . . . . 35,46635,553 34,305
----------- -----------
Total liabilities and shareholders' equity. . $41,896$42,038 $40,729
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended SixNine Months Ended
November 30, November 30,
---------------------- --------------------
February 28, February 29, February 28, February 29,
2001 2000 19992001 2000 1999
---------- ---------- --------- ----------
Net sales. . . . . . . . . . . . . . . . . . . $ 8,9867,818 $ 6,294 $17,555 $10,6506,644 $25,373 $17,294
Cost of sales. . . . . . . . . . . . . . . . . 5,572 4,957 10,892 8,1645,114 4,368 16,006 12,532
---------- ---------- --------- ----------
Gross profit . . . . . . . . . . . . . . . . . 3,414 1,337 6,663 2,4862,704 2,276 9,367 4,762
---------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,884 2,112 3,902 3,9471,757 1,927 5,659 5,874
Research and development . . . . . . . . . . 1,348 1,334 2,600 2,6541,266 1,308 3,866 3,962
Research and development cost
reimbursement - DARPA. . . . . . . . . . . (300) (268) (300) (516)(350) (600) (866)
---------- ---------- --------- ----------
Total operating expenses . . . . . . . . 2,932 3,178 6,202 6,0852,723 2,885 8,925 8,970
---------- ---------- --------- ----------
Income (loss) from operations. . . . . . . . . 482 (1,841) 461 (3,599)(19) (609) 442 (4,208)
Interest income . . . . . . . . . . . . . . . 230 264 463 540276 234 739 774
Interest expense . . . . . . . . . . . . . . . (1) (3) (3) (6) (6)(7) (9)
Other income (expense), net . . . . . . . . . (74) 325 (74) 666(16) (409) (90) 257
---------- ---------- --------- ----------
Income (loss) before income taxes. . . . . . . 635 (1,255) 844 (2,399)240 (787) 1,084 (3,186)
Income tax expense (benefit) . . . . . . . . . 337 (519) 470 (895)98 (109) 568 (1,004)
---------- ---------- --------- ----------
Net income (loss). . . . . . . . . . . . . . . $ 298142 $ (736)(678) $ 374 $(1,504)516 $(2,182)
---------- ---------- --------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments income (expense). . . .. . . . . . . . . (39) (216) (88) (496)16 231 (72) (35)
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . (5) 7 0 (1)44 50 44 47
---------- ---------- --------- ----------
Comprehensive income (loss). . . . . . . . . . $ 254202 $ (945)(397) $ 286 $(2,001)488 $(2,170)
========== ========== ========= ==========
Net income (loss) per share (basic). . . . . . $ 0.040.02 $ (0.11)(0.10) $ 0.050.07 $ (0.22)(0.32)
Net income (loss) per share (diluted). . . . . $ 0.040.02 $ (0.11)(0.10) $ 0.050.07 $ (0.22)(0.32)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,078 6,799 7,021 6,7857,138 6,795 7,060 6,788
Diluted. . . . . . . . . . . . . . . . . . . 7,251 6,799 7,244 6,7857,186 6,795 7,205 6,788
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SixNine Months Ended
November 30,
----------------------
February 28, February 29,
2001 2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 374 $ (1,504)516 $(2,182)
Adjustments to reconcile net income (loss) to net cash
providedProvided by (used in) operating activities:
Provision for doubtful accounts. . . . . . . . . . . (4) (16)(11) 36
Depreciation and amortization. . . . . . . . . . . . 322 423482 594
Deferred income taxes. . . . . . . . . . . . . . . . 93 (12)89 16
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . (1,646) 159(616) (3,822)
Inventories . . . . . . . . . . . . . . . . . . . 1,030 (1,013)1,316 (578)
Prepaid expenses and other. . . . . . . . . . . . 18 (164)
Accounts payable. . . . . . . . . . . . . . . . . (668) 753(485) 1,169
Accrued expenses and deferred revenue . . . . . . 857 (468)1,274 (1,024)
Deferred lease commitment . . . . . . . . . . . . 55 --
Prepaid expenses and other. . . . . . . . . . . . (332) (810)81 18
---------- ----------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . . . . 81 (2,488)2,664 (5,937)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments.investments . . . . . . . . . . . . 2,022 6351,602 4,063
Sale (purchase) of long-term investments.investments . . . . . . . (156) 2,220. . . . . . 108 2,149
Acquisition of property and equipment . . . . . . . . . (40) (287)(71) (993)
Increase in other assets. . . . . . . . . . . . . . . . (56) (228)(27) (211)
---------- ----------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . 1,770 2,3401,612 5,008
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease principal payments . . (73) (94)(431) (132)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 884 1701,187 260
Repurchase of common stockstock. . . . . . . . . . . . . . . (67) (50)(427) (135)
---------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . 744 26329 (7)
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . (92) 52(266) 29
---------- ----------
Net increase (decrease) in cash and
cash equivalents.equivalents . . . . . . . . . . . . . . . . 2,503 (70)4,339 (907)
Cash and cash equivalents, beginning of period. . . . . 8,323 5,336
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $10,826$12,662 $ 5,2664,429
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 2000FEBRUARY 28, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, in accordance with the
instructions to Form 10-Q and therefore does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company"). All significant intercompany balances have been eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the consolidated financial position and
results of operations as of and for such periods indicated. These
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 2000. Results for the interim periods presented herein are not
necessarily indicative of results which may be reported for any other interim
period or for the entire fiscal year.
6
2. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding, when diluted,dilutive, during each period using the
treasury stock method.
Three Months Ended SixNine Months Ended
November 30, November 30,
--------------------- ------------------------------------------- --------------------
February 28, February 29, February 28, February 29,
2001 2000 19992001 2000 1999
---------- ---------- ------------------- ----------
(in thousands, except per share amounts)
(unaudited)
Basic EPS:
Net income (loss). . . . . . . . . . $ 298142 $ (736)(678) $ 374 $(1,504)516 $(2,182)
========== ========== ========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . 7,078 6,799 7,021 6,785. 7,138 6,795 7,060 6,788
========== ========== ========== ==========
Net income (loss) per share (basic). . $ 0.040.02 $(0.10) $ (0.11)0.07 $ 0.05 $ (0.22)(0.32)
========== ========== ========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . 7,078 6,799 7,021 6,785. 7,138 6,795 7,060 6,788
Options . . . . . . . . . . . . . . 173. 48 -- 223145 --
---------- ---------- ------------------- ----------
Total Shares . . . . . . . . . . . . 7,251 6,799 7,244 6,785. 7,186 6,795 7,205 6,788
========== ========== ========== ==========
Net income (loss) per share (diluted). $ 0.040.02 $(0.10) $ (0.11)0.07 $ 0.05 $ (0.22)(0.32)
========== ========== ========== ==========
3. INVENTORIES
Inventories are comprised of the following (in thousands):
November 30,February 28, May 31,
20002001 2000
(unaudited)
----------- -----------
Raw materials and sub-assemblies $ 3,8904,300 $ 4,164
Work in process 5,8784,895 6,299
Finished goods 306563 720
----------- -----------
$10,074$ 9,758 $11,183
=========== ===========
7
4. SEGMENT INFORMATION:
FOREIGN OPERATIONS:
The Company develops, manufactures and sells systems to semiconductor
manufacturers and operates in one operating segment. The following presents
information about the Company's operations in different geographic areas (in
thousands):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28, 2001:
Net sales...................... $6,647 $1,575 $355 $(759) $7,818
Portion of U.S. net sales
from export sales............ 3,758 -- -- -- 3,758
Income (loss) from operations.. (51) 36 (54) 50 (19)
Identifiable assets............ 48,197 3,009 909 (10,077) 42,038
Long-lived assets.............. 1,813 377 46 -- 2,236
Nine months ended February 28, 2001:
Net sales...................... $22,750 $3,731 $1,600 $(2,708) $25,373
Portion of U.S. net sales
from export sales............ 14,200 -- -- -- 14,200
Income (loss) from operations.. 432 (161) 175 (4) 442
Identifiable assets............ 48,197 3,009 909 (10,077) 42,038
Long-lived assets.............. 1,813 377 46 -- 2,236
2000:
Net sales...................... $21,622 $3,248 $2,332 $(2,697) $24,505
Portion of U.S. net sales
from export sales............ 15,090 -- -- -- 15,090
Income (loss) from operations.. (4,501) (840) 53 95 (5,193)
Identifiable assets............ 45,292 3,267 912 (10,029) 39,442
Long-lived assets.............. 2,074 474 65 -- 2,613
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments
including standalone instruments, as forward currency exchange contracts and
interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of the transaction. We are required to adopt
SFAS 133 in the first quarter of our fiscal year 2002. We are in process of
evaluating the effect of SFAS 133 on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Staff Accounting Bulletin was amended in June 2000
to delay the implementation date to the fourth quarter of fiscal year 2001.
We are currently evaluating SAB 101 and its effects on the Company's revenue
recognition policies and practices.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation of No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of Accounting Principles
Board ("APB") Opinion No. 25. Among other issues, this interpretation
clarifies the definition of employees for purposes of applying APB Opinion No.
25, the criteria for determining whether a plan qualifies as a non-
compensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effect of applying this
interpretation is recognized on a prospective basis from July 1, 2000. The
Company adopted the provisions of FIN 44 as of the required effective dates.
The adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included herein. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a
result of certain factors set forth under "Factors That May Affect Future
Results of Operations."
8
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of net sales for the periods
indicated.
Three Months Ended SixNine Months Ended
November 30, November 30,
---------------------- --------------------
February 28, February 29, February 28, February 29,
2001 2000 19992001 2000 1999
---------- ---------- --------- ----------
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 62.0 78.8 62.0 76.765.4 65.7 63.1 72.5
---------- ---------- --------- ------------------
Gross profit . . . . . . . . . . . . . . . . . 38.0 21.2 38.0 23.334.6 34.3 36.9 27.5
---------- ---------- --------- ------------------
Operating expenses:
Selling, general and administrative. . . . . 21.0 33.6 22.2 37.122.5 29.0 22.3 33.9
Research and development . . . . . . . . . . 15.0 21.2 14.8 24.916.2 19.7 15.2 22.9
Research and development cost
reimbursement - DARPA. . . . . . . . . . . (3.3) (4.3) (1.7) (4.9)(3.9) (5.2) (2.3) (5.0)
---------- ---------- --------- ------------------
Total operating expenses . . . . . . . . 32.6 50.5 35.3 57.134.8 43.5 35.2 51.8
---------- ---------- --------- ------------------
Income (loss) from operations. . . . . . . . . 5.4 (29.3) 2.6 (33.8)(0.2) (9.2) 1.7 (24.3)
Interest income . . . . . . . . . . . . . . . 2.6 4.2 2.6 5.13.5 3.5 2.9 4.5
Interest expense . . . . . . . . . . . . . . . -- -- -- (0.1)
Other income (expense), net . . . . . . . . . (0.8) 5.2(0.2) (6.1) (0.4) 6.31.5
---------- ---------- --------- ------------------
Income (loss) before income taxes. . . . . . . 7.1 (19.9) 4.8 (22.5)3.1 (11.8) 4.2 (18.4)
Income tax expense (benefit) . . . . . . . . . 3.8 (8.2) 2.7 (8.4)1.3 (1.6) 2.2 (5.8)
---------- ---------- --------- ------------------
Net income (loss). . . . . . . . . . . . . . . 3.31.8 % (11.7)(10.2)% 2.12.0 % (14.1)(12.6)%
========== ========== ========= ==================
THREE MONTHS ENDED NOVEMBER 30, 2000FEBRUARY 28, 2001 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 1999FEBRUARY
29, 2000
NET SALES. Net sales consist primarily of sales of systems, die carriers,
test fixtures, upgrades and spare parts and revenues from service contracts.
Revenue for all products except royalties is recognized upon shipment of
product provided no significant obligations remain and collectability is
probable. Provision for the estimated future cost of warranty and
installation is recorded at the time the products are shipped. Actual
warranty and installation costs incurred have not materially differed from
those provided. Royalty revenue related to PTB licensing income is recognized
when paid by the licensees.licensee. This income is recorded in net sales. Net sales
increased to $9.0$7.8 million in the three months ended November 30, 2000February 28, 2001 from
$6.3$6.6 million in the three months ended November 30, 1999,February 29, 2000, an increase of
42.8%17.7%. The increase in net sales resulted primarily from increasedan increase in
shipments of dynamic burn-in products of approximately $4.9$1.8 million, partially
offset by a decrease in shipments of MTXDie products of approximately $2.3 million.$524,000.
The Company anticipates that net sales in the thirdfourth quarter of fiscal 2001
will be at about the same level as, or slightly down significantly from the net sales in the secondthird quarter of fiscal 2001.
9
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit increased to $3.4$2.7 million
in the three months ended November 30, 2000February 28, 2001 from $1.3$2.3 million in the three
months ended November 30, 1999,February 29, 2000, an increase of 155.3%18.8%. Gross profit margin
increased to 38.0%34.6% in the three monthsmonth ended November 30, 2000February 28, 2001 from 21.2%34.3% in
the three monthsmonth ended November 30, 1999.February 29, 2000. The increase in gross profit margin
was primarily the result of decreased provisionsa decrease in the provision for warranty and inventory
reserves, and lower material costs as a percentage of sales primarily as a
result of a change in product mix. The Company anticipates that gross marginpartially offset by an increase in the third quarter of fiscal 2001 will increase compared with the third
quarter of fiscal 2000.
9
provision for warranty.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses decreased to $1.8 million in the three months ended February 28, 2001
from $1.9 million in the three months ended November 30,February 29, 2000,
from $2.1 million in the three months ended November 30, 1999, a decrease of
10.8%8.8%. The decrease in SG&A expenses was primarily due to decreasesa decrease in
product support expenses. As a percentage of net sales, SG&A expenses
decreased to 21.0%22.5% in the three months ended November 30, 2000February 28, 2001 from 33.6%29.0% in
the three months ended November 30, 1999,February 29, 2000, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
were unchanged at $1.3 million in the three months ended November 30, 2000February 28, 2001 and
in the three months ended November 30, 1999.February 29, 2000. As a percentage of net sales,
R&D expenses decreased to 15.0%16.2% in the three months ended November 30, 2000February 28, 2001
from 21.2%19.7% in the three months ended November 30, 1999,February 29, 2000, reflecting higher net
sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("R&D - DARPA") is a credit
representing reimbursements by Defense Advanced Research Projects Agency
("DARPA"), a U.S. government agency, of costs incurred in the Company's wafer-
level burn-in development project. R&D - DARPA increaseddecreased to $300,000 in the
three months ended November 30, 2000February 28, 2001 from $268,000$350,000 in the three months ended
November 30, 1999, an increaseFebruary 29, 2000, a decrease of 11.9%14.3%. Payments by DARPA depend on
satisfaction of development milestones, and the level of payments may vary
significantly from quarter to quarter. As of November 30, 2000, an additional
milestone was completed, invoiced, and approved, but had not yet been paid by
DARPA. Subsequent to November 30, 2000, that invoice, in the amount of
$300,000, was paid in full. The two final milestones of this
agreement with
invoice amounts of $200,000 and $100,000, respectively, were completed, approved and paid during the third quarter of fiscal 2001. It
is not expected that there will be any additional R&D - DARPA credits recorded
for this project after the third quarter of fiscal 2001. There can be no
assurance that thethis development project will result in any marketable
products.
INTEREST INCOME. Interest income decreasedincreased to $230,000$276,000 in the three
months ended November 30, 2000February 28, 2001 from $264,000$234,000 in the three months ended
November 30, 1999,February 29, 2000, an increase of 17.9%. The increase in interest income was
primarily related to a higher average rate of return on investments.
INTEREST EXPENSE. Interest expense decreased to $1,000 in the three
months ended February 28, 2001 from $3,000 in the three months ended February
29, 2000, a decrease of 12.9%66.7%. The decrease in interest incomeexpense was primarily
related to a lower level of cash and investments.
INTEREST EXPENSE. Interest expense was unchanged at $3,000 in the three
months ended November 30, 2000 and in the three months ended November 30,
1999.outstanding debt.
OTHER INCOME (EXPENSE), NET. Other expense, net was $74,000$16,000 in the three
months ended November 30, 2000,February 28, 2001, compared with other income,expense, net of $325,000$409,000
in the three months ended November 30, 1999,February 29, 2000, primarily due to foreign currency
exchange losses recorded by the Company and its subsidiaries in the three
months ended November 30, 2000 versus foreign currency exchange gains recordedFebruary 28, 2001 being lower than in the three months ended
November 30, 1999.February 29, 2000.
10
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $337,000$98,000 in the three
months ended November 30, 2000,February 28, 2001, compared with income tax benefit of $519,000$109,000
in the three months ended November 30, 1999.February 29, 2000. The income tax expense in the
three months ended November 30, 2000February 28, 2001 was primarily due to the tax expense
recorded as a result of income earned in the Company's U.S. operations. The
income tax benefit in the three months ended November 30,
1999February 29, 2000 was primarily
due to the tax benefit recorded as a result of losses incurred in the
Company's U.S. operations. Such tax benefit will be carried back to previous
fiscal years in which the Company paid taxes when its U.S. operations were
profitable. The Company's Japanese subsidiary experienced significant
cumulative losses since fiscal 1993, and thus generated certain
10
net operating
losses available to offset future taxes payable in Japan. As a result of the
subsidiary's cumulative operating losses, a valuation allowance has been
established for the full amount of the subsidiary's net deferred tax assets.
The income tax rate did not approximate the statutory tax rates of the
jurisdictions in which the Company operates primarily because no tax benefit
is being recorded for losses in the Company's Japanese subsidiary.
SIXNINE MONTHS ENDED NOVEMBER 30, 2000FEBRUARY 28, 2001 COMPARED TO SIXNINE MONTHS ENDED NOVEMBER 30,
1999FEBRUARY 29,
2000
NET SALES. Net sales increased to $17.6$25.4 million in the sixnine months ended
November 30, 2000February 28, 2001 from $10.7$17.3 million in the sixnine months ended November 30,
1999,February 29,
2000, an increase of 64.8%46.7%. The increase in net sales resulted primarily from
increasedan increase in shipments of dynamic burn-in products of approximately $10.6$12.4
million, partially offset by a decrease in shipments of MTX products of
approximately $4.0$4.1 million.
GROSS PROFIT. Gross profit increased to $6.7$9.4 million in the sixnine months
ended November 30, 2000February 28, 2001 from $2.5$4.8 million in the sixnine months ended November 30,
1999,February
29, 2000, an increase of 168.0%96.7%. Gross profit margin increased to 38.0%36.9% in the
sixnine months ended November 30, 2000February 28, 2001 from 23.3%27.5% in the sixnine months ended
November
30, 1999.February 29, 2000. The increase in gross profit margin was primarily the
result of a change in product mix, resulting in lower material costs as a
percentage of net sales, and decreased provisionsa decrease in provision for warranty and inventory reserves.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were unchanged at $3.9decreased to $5.7
million in the sixnine months ended November 30, 2000 andFebruary 28, 2001 from $5.9 million in the
sixnine months ended November 30, 1999.February 29, 2000, a decrease of 3.7%. The decrease in SG&A
expenses was primarily due to decreases in product support expenses and
commissions paid to outside sales representatives of $209,000 and $175,000,
respectively, partially offset by an increase in employment-related expenses
of $168,000. As a percentage of net sales, SG&A expenses decreased to 22.2%22.3%
in the sixnine months ended November 30, 2000February 28, 2001 from 37.1%33.9% in the sixnine months ended
November 30, 1999,February 29, 2000, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.6$3.9 million in the
sixnine months ended November 30, 2000February 28, 2001 from $2.7$4.0 million in the sixnine months ended
November 30, 1999,February 29, 2000, a decrease of 2.0%2.4%. The decrease in R&D expenses was
primarily due to a decrease in engineering project material expenses. As a
percentage of net sales, R&D expenses decreased to 14.8%15.2% in the sixnine months
ended November 30, 2000February 28, 2001 from 24.9%22.9% in the sixnine months ended November 30, 1999,February 29, 2000,
reflecting higher net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA
decreased to $300,000$600,000 in the sixnine months ended November 30, 2000February 28, 2001 from $516,000$866,000
in the sixnine months ended November 30, 1999,February 29, 2000, a decrease of 41.9%30.7%. Payments by
DARPA depend on satisfaction of development milestones, and the level of
payments may vary significantly from quarter to quarter.
INTEREST INCOME. Interest income decreased to $463,000$739,000 in the sixnine months
ended November 30, 2000February 28, 2001 from $540,000$774,000 in the sixnine months ended November 30,
1999,February 29,
2000, a decrease of 14.3%4.5%. The decrease in interest income was primarily
related to a lower level of cash and investments, partially offset by a higher
average rate of return on investments.
11
INTEREST EXPENSE. Interest expense was unchanged at $6,000decreased to $7,000 in the sixnine months
ended November 30, 2000 andFebruary 28, 2001 from $9,000 in the sixnine months ended November 30, 1999.February 29,
2000, a decrease of 22.2%. The decrease in interest expense was primarily
related to a lower level of outstanding debt.
OTHER INCOME (EXPENSE), NET. Other expense, net was $74,000$90,000 in the sixnine
months ended November 30, 2000,February 28, 2001, compared with other income, net of $666,000$257,000 in
the sixnine months ended November 30, 1999,February 29, 2000, primarily due to foreign currency
exchange losses recorded by the Company and its subsidiaries in the sixnine
months ended November 30, 2000February 28, 2001 versus foreign currency exchange gains recorded in the
sixnine months ended November 30, 1999.February 29, 2000.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $470,000$568,000 in the sixnine
months ended November 30, 2000,February 28, 2001, compared with income tax benefit of $895,000$1.0
million in the sixnine months ended November 30, 1999.February 29, 2000. The income tax expense in
the sixnine months ended November 30, 2000February 28, 2001 was primarily due to the tax expense
recorded as a result of income earned in the Company's U.S. operations. The
income tax 11
benefit in the sixnine months ended November 30, 1999February 29, 2000 was primarily
due to the tax benefit recorded as a result of losses incurred in the
Company's U.S. operations. Such tax benefit will be carried back to previous
fiscal years in which the Company paid taxes when its U.S. operations were
profitable. The income tax rate did not approximate the statutory tax rates
of the jurisdictions in which the Company operates primarily because no tax benefit is
being recorded for losses in the Company's Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's August 1997 initial public offering, resulting in net
proceeds to the Company of approximately $26.8 million. As of November 30,
2000,February 28,
2001, the Company had $16.2$18.4 million in cash and short-term investments.
Net cash provided by operating activities was approximately $81,000$2.7 million
for the sixnine months ended November 30, 2000,February 28, 2001 and net cash used in operating
activities was approximately $2.5$5.9 million for the sixnine months ended November
30, 1999.February
29, 2000. For the sixnine months ended November 30, 2000,February 28, 2001, net cash provided by
operating activities was due primarily to a decrease in inventoryinventories of $1.0$1.3
million and an increase in accrued expenses and deferred revenue of $857,000, and
the net income of $374,000, partially offset by increases in accounts
receivable of $1.6 million and accounts payable of $668,000.$1.3
million. For the sixnine months ended November 30, 1999,February 29, 2000, net cash used in
operating activities was due primarily to an increase in accounts receivable
of $3.8 million and the net loss of $1.5 million and increases in inventory of $1.0
million and in prepaid expenses and other of $810,000, partially offset by an
increase in accounts payable of $753,000.$2.2 million.
Net cash provided by investing activities was approximately $1.8$1.6 million
and $2.3$5.0 million for the sixnine months ended November 30,February 28, 2001 and February 29,
2000, and November 30,
1999, respectively. The cash provided by investing activities during the sixnine
months ended November 30, 2000February 28, 2001 was primarily due to the sale of short-term
investments. The cash provided by investing activities during the sixnine months
ended November 30, 1999February 29, 2000 was primarily due to the sale of both long-termshort-term and
short-termlong-term investments.
Financing activities provided cash of approximately $744,000$329,000 in the sixnine
months ended November 30, 2000February 28, 2001 and $26,000used cash of $7,000 in the sixnine months
ended November
30, 1999.February 29, 2000. The cash provided by financing activities during the
sixnine months ended November 30, 2000February 28, 2001 was primarily due to the proceeds from issuance of
common stock and exercise of stock options. The cash provided by financing
activities during the six months ended November 30, 1999 was primarily due to
the proceeds from
issuance of common stock and exercise of stock options, partially offset by
the long-term debt principal payments and the Company's repurchase of 88,800
of its outstanding common shares.shares at an average price of $4.80. The cash used
by financing activities during the nine months ended February 29, 2000 was
primarily due to the long-term debt principal payments and the Company's
repurchase of 28,200 of its outstanding common shares at an average price of
$4.80, partially offset by the proceeds from issuance of common stock and
exercise of stock options.
12
As of November 30, 2000,February 28, 2001, the Company had working capital of $31.6$31.9 million,
compared with $30.4 million as of May 31, 2000. Working capital consists of
cash and cash equivalents, short-term investments, accounts receivable,
inventory and other current assets, less current liabilities. The increase in
working capital was primarily due to an increase in accounts receivable,cash and short-term
investments, a decrease in accounts payable and an increase in cash and short-term
investments,accounts
receivable, partially offset by a decrease in inventories and an increase in
accrued expenses.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. Through November 30, 2000,February 28, 2001, the Company has repurchased
323,000400,500 shares at an average price of $4.17.
12
$4.26.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with
anticipated cash provided by operations are adequate to meet its working
capital and capital equipment requirements through fiscal 2001.2002. After fiscal
2001,2002, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required, or, if available, that
such financing can be obtained on terms satisfactory to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Special Note Regarding Forward Looking Statements
This reportQuarterly Report on Form 10-Q (this "Report") contains forward-lookingforward-
looking statements within the meaning of the Securities ActSection 21E of 1933, as amended and the Securities
Exchange Act of 1934, as amended. The Company's future results of operations could
vary significantly from the results anticipated by1934. Discussions containing such forward-looking statements
as a result of various factors, including those set forth as
follows and elsewheremay be found in this quarterly report on Form 10-Q.section, as well as within this Report generally. In
addition, when used in this Report, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to a number of risks and
uncertainties.
Consequently, such forward-looking statements should be regarded solely as
our current plans, estimates and beliefs. We do not undertake, and
specifically decline, any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. The Company's future operating results will
depend upon a variety of factors, including the timing of significant orders,
the mix of products sold, changes in pricing by the Company, its competitors,
customers or suppliers, market acceptance of new products and enhanced
versions of the Company's products, capital spending patterns by customers,
the Company's ability to produce systems and products in volume and meet
customer requirements. The Company's gross margins have varied and will
13
continue to vary based on a variety of factors, including the mix of products
sold, sales volume, and the amount of products sold under volume purchase
arrangements, which tend to have lower selling prices. Accordingly, past
performance may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in selling price from
approximately $100,000 to $1.0 million. As a result, the loss or deferral of
a limited number of system sales could have a material adverse effect on the
Company's net sales and operating results in a particular period. A delay or
reduction in shipments near the end of a particular quarter, due, for example,
to unanticipated shipment reschedulings, cancellations or deferrals by
customers, customer credit issues, unexpected manufacturing difficulties
experienced by the Company, or delays in deliveries by suppliers, could cause
net sales in a particular quarter to fall significantly below the Company's
expectations.
RECENT OPERATING LOSSES. The Company incurred operating losses of $5.2
million and $4.6 million in fiscal 2000 and 1999, respectively. The Company
also incurred operating losses of $2.1, $4.2 and $2.4 million in fiscal 1995,
1994 and 1993, respectively. The Company operated profitably from fiscal 1996
to 1998, due to increased net sales that were substantially the result of
sales of new products, particularly sales of MTX systems to Siemens (the
semiconductor group of Siemens is now known as Infineon). In fiscal 1998, the
Company began to feel the industry slowdown due to uncertainties caused
primarily by the financial crisis in Asia and DRAM overcapacity and recorded
an operating loss in fiscal 1999 and 2000. TheGiven the current adverse market
conditions, and the Company's lack of visibility related to the timing of any
potential business rebound, the Company anticipates that net sales in the
thirdfourth quarter of fiscal 2001 will be at about the same level as,
or slightly down significantly from the net sales in the
secondthird quarter of fiscal 2001. Although the Company returned to profitability
in the first twothree quarters of
13
fiscal 2001 and the Company's goal is to remain profitable in the third
quarter of fiscal 2001, there can be no assurance that the
Company's net sales
will continue to rebound or that the Company will remain profitable in the remaining quartersquarter of fiscal 2001 or in
later years.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element of the
Company's strategy is to capture an increasing share of the memory test
equipment market through sales of the MTX massively parallel test system. The
MTX is designed to perform both burn-in and many of the final test functions
currently performed by high-cost memory testers and the market for MTX systems
is still in the early stages of development. The Company's strategy depends,
in part, upon its ability to persuade potential customers that the MTX system
can successfully perform a significant portion of such final test functions
and that transferring such tests to MTX systems will reduce their overall
capital and test costs. There can be no assurance that the Company's strategy
will be successful. The failure of the MTX system to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and operating results.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. The Company's DiePak strategy depends upon increased industry
acceptance of bare die as an alternative to packaged die as well as acceptance
of the Company's DiePak products. The failure of the bare die market to
expand or of the DiePak carrier to achieve broad market acceptance would have
a material adverse effect on the Company's business, financial condition and
operating results.
CUSTOMER CONCENTRATION. Sales to the Company's five largest customers
accounted for approximately 64.3%, 62.7% and 75.2% of its net sales in fiscal
2000, 1999 and 1998, respectively. Sales to the Company's five largest
customers accounted for approximately 62.7%70.4% of its net sales in the sixnine
months ended November 30, 2000.February 28, 2001. During fiscal 2000, Texas Instruments,
Formosa Advanced Technologies Co. Ltd. and First International Computer Inc.
accounted for 22.8%, 19.2% and 13.5% of the Company's net sales, respectively.
During fiscal 1999, Infineon (formerly the semiconductor group of Siemens),
14
Texas Instruments and Motorola accounted for 21.9%, 18.1% and 11.9% of the
Company's net sales, respectively. During fiscal 1998, Infineon and Motorola
accounted for 47.0% and 12.8% of the Company's net sales, respectively. No
other customers represented more than 10% of the Company's net sales for
fiscal 2000, 1999 and 1998. The loss of or reduction or delay in orders from
a significant customer, or a delay in collecting or failure to collect
accounts receivable from a significant customer could adversely affect the
Company's business, financial condition and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems. The
market for burn-in systems is mature and estimated to be less than $100
million per year. There can be no assurance that the market for burn-in
systems will grow, and sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involves a significant commitment of capital. The
loss of individual orders due to the lengthy sales and evaluation cycle, or
delays in the sale of even a limited number of systems could have a material
adverse effect on the Company's business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 73.3%,
72.7% and 70.5% of the Company's net sales for fiscal 2000, 1999 and 1998,
respectively, were attributable to sales to customers for delivery outside of
the United States. A substantial portion of the Company's sales has been in
Asia. In recent years, turmoil in the Asian financial markets resulted, and
may result in the future, in dramatic currency devaluations, stock market
14
declines, restriction of available credit and general financial weakness. In
addition, DRAM prices have fallen dramatically and will likely do so again in
the future. The Company believes that many international semiconductor
manufacturers limited capital spending (including the purchase of MTXs) in
fiscal 1999, and that the uncertainty of the DRAMsemiconductor market may cause someis causing
most manufacturers to again delay capital spending plans. Such developments
could have a material adverse affect on the Company's business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
that satisfy market demand. Any such failure would materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced significant delays from time to time in the
introduction of, and technical and manufacturing difficulties with, certain of
its products and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new products, and
there can be no assurance that the Company will not encounter such
difficulties in the future. The Company's inability to complete product
development, or to manufacture and ship products in volume and in time to meet
customer requirements would materially adversely affect the Company's
business, financial condition and results of operations.
UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In
1994, the Company entered into a cost-sharing agreement with DARPA, a U.S.
government agency, under which DARPA wasis providing co-funding for the
development of wafer-level burn-in and test equipment. The contract providedprovides
for potential payments by DARPA totaling up to $6.5 million. The Company had
completed certain development milestones and received DARPA payment of $5.9$6.5
million through November 30, 2000. As of November 30, 2000, an additional milestone
was completed, invoiced,February 28, 2001. This contract is considered complete and
approved, but had not yet been paid by DARPA.
Subsequent to November 30, 2000, that invoice, in the amount of $300,000, was
paid in full. The two final milestones of this agreement, with invoice
amounts of $200,000 and $100,000, respectively, were completed, approved and
paid during the third quarter of fiscal 2001. It15
it is not expected that there will be any additional R&D - DARPA credits
related to this project recorded after the third quarter of fiscal 2001.
There can be no assurance that the development project will result in any
marketable products.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants. New
product introductions by the Company's competitors or by new market entrants
could cause a decline in sales or loss of market acceptance of the Company's
existing products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices that could
adversely affect the Company's business, financial condition and operating
results. Competing suppliers of burn-in and functional test systems include
Ando Corporation, Japan Engineering Company and Reliability Incorporated. In
addition, suppliers of memory test equipment, including Advantest Corporation
and Teradyne, Inc., may seek to offer competitive parallel test systems in the
future. The Company's MAX dynamic and ATX monitored and dynamic burn-in
systems increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers. Also, the MAX
dynamic burn-in system faces severe competition from manufacturers of
monitored burn-in systems. The Company's
DiePakrDiePak products face significant competition. The Company believes that
several companies, including Yamaichi and Texas Instruments, have developed or
are developing products that compete with the Company's DiePak products. The
DiePak products also face severe competition from other alternative test
solutions. The Company's test fixture products face numerous competitors.
The Company has granted royalty-bearing licenses to two companies to make
Performance Test Boards ("PTBs") for use
15
with its MTX systems. Sales of PTBs
by licensees result in royalties to the Company but reduce the Company's own
sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The semiconductor and semiconductor
equipment industries in general, and the market for DRAMs and other memories
in particular, historically have been highly volatile and have experienced
periodic downturns and slowdowns. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1998, 1999 and 2000. A large portion of the Company's net sales is
attributable to a few customers and therefore a reduction in purchases by one
or more customers could materially adversely affect the Company's financial
results. Semiconductor equipment companies may experience a significant rate
of cancellations and reschedulings of purchase orders, as was the case in the
industry in late 1995, early 1996, and 1998. The Company is seeingcontinues to see a
slowdownreduction in spending by a number of the Company's customers, a trend which has been
noted previously by other companies in the semiconductor equipment industry.customers. Some of the
Company's customers have delayed their placement ofshipments and a small number have canceled
existing orders. New
orders for the MTX massively parallel memory tester may be delayed because of
the excess production capacity of DRAMs, which is currently being reported byCertain semiconductor manufacturers and industry analysts.analysts
expect that this trend will continue at least through calendar year 2001.
There can be no assurance that the Company will not be materially adversely
affected by future cancellations and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company's MTX, MAX and ATX systems contain several components, including
environmental chambers, power supplies and certain ICs, which are currently
supplied by only one or a limited number of suppliers. The DiePak products
include an interconnect substrate which has primarily been supplied by Nitto
Denko Corporation. The Company has qualified an alternate supplier for the
DiePak substrate. In the event that any significant subcontractor or single
source supplier was to become unable or unwilling to continue to manufacture
subassemblies, components or parts in required volumes, the Company would have
to identify and qualify acceptable replacements. The process of qualifying
subcontractors and suppliers could be lengthy, and no assurance can be given
that any additional sources would be available to the Company on a timely
basis.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and may continue to be, extremely volatile. The
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in the Company's operating results,
16
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide economy
could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and
the market for small capitalization and high technology stocks in particular,
has experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company is
unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its Chief
Executive Officer, as well as other executive officers and key employees. The
loss of the services of any of its executive officers or a group of key
employees could have a material adverse effect on the Company's business,
financial condition and operating results. The Company's future success will
16
depend in significant part upon its ability to attract and retain highly
skilled technical, management, sales and marketing personnel. Competition for
such personnel in the semiconductor equipment industry is intense, and there
can be no assurance that the Company will be successful in attracting or
retaining such personnel. The Company's inability to attract and retain the
executive management and other key personnel it requires could have a material
adverse effect on the Company's business, financial condition and operating
results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. Litigation may be necessary to enforce or determine the
validity and scope of the Company's proprietary rights, and there can be no
assurance that the Company's intellectual property rights, if challenged, will
be upheld as valid. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
17
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain of the statements and subject areas contained herein in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are not based on historical or current facts deal with or may
be impacted by potential future circumstances and developments. Such
statements and the discussion of such subject areas involve, and are therefore
qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's
actual future experience involving any one or more of such subject areas. The
Company has attempted to identify, in context, certain of the factors that it
currently believes may cause actual future experience and results to differ
from current expectations regarding the relevant statement or subject area.
The Company's operations and results may be subject to the effect of other
risks and uncertainties in addition to the relevant qualifying factors
17
identified herein, including but not limited to, cyclicality and seasonality
in the industries to which the Company sells its products, the impact of
competitive products and pricing, extraordinary fluctuations in the pricing
and supply of the Company's raw materials, volatility of commodities markets,
unanticipated developments in the areas of environmental compliance and other
risks and uncertainties identified from time to time in the Company's reports
filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market RisksQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company has no holdings of derivative financial or
commodity instruments at November 30, 2000.February 28, 2001.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To somewhat reduce these
risks, the Company invests excess cash in a managed portfolio of corporate and
government bond instruments with maturities of 18 months or less. The Company
does not use any financial instruments for speculative or trading purposes.
The Company hashad long-term debt that carriescarried fixed interest rates.rates but all debt
was paid off during the third quarter of fiscal 2001. Fluctuations in
interest rates would not have a material effect on the Company's financial
position, results of operations and cash flows.
A majority of the Company's revenue and capital spending is transacted in
U.S. dollars. The Company, however, enters into transactions in other
currencies, primarily Japanese yen. Substantially all sales to Japanese
customers are denominated in Japanese yen. Since the price is determined at
the time a purchase order is accepted, the Company is exposed to the risks of
fluctuations in the yen-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent that the Company's Japanese subsidiary incurs yen-
denominated expenses. To date, the Company has not invested in instruments
designed to hedge currency risks. In addition, the Company's Japanese
subsidiary typically carries debt or other obligations due to the Company that
may be denominated in either yen or dollars. Since the Japanese subsidiary's
financial statements are based in yen and the Company's financial statements
18
are based in dollars, the Japanese subsidiary and the Company recognize
foreign exchange gain or loss in any period in which the value of the yen
rises or falls in relation to the dollar. A 10% decrease in the value of the
yen as compared with the dollar would potentially result in an additional net
loss of approximately $182,000.$210,000.
19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following information is provided as an amendment to the initial
report on Form 10-K "Use of Proceeds from the IPO," regarding the use of
proceeds from the sale of securities under the Company's Registration
Statement Form S-1 (333-28987), which was declared effective on August 18,
1997. From the effective date of the Registration Statement, the net proceeds
have been used for the following purposes:
Purchase and installation of machinery and equipment $ 2,479,2742,510,274
Repayment of indebtedness 4,455,179
Working capital 18,677,82019,866,544
Temporary investments, including cash and cash equivalents 1,220,024--
------------
Total $26,832,297
============
18
Pursuant to a Preferred Shares Rights Agreement between Aehr Test Systems
and U.S. Stock Transfer Corporation, as Rights Agent, entered into as of March
5, 2001, the Company's Board of Directors declared a dividend of one right to
purchase one one-thousandth of a share of the Company's Series A Participating
Preferred Stock for each outstanding share of Common Stock, no par value, of
the Company. The dividend is payable on April 2, 2001, to shareholders of
record as of the close of business on that date. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share
of Series A Preferred at an exercise price of $35.00, subject to adjustment.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on October 24, 2000.
There were issued and outstanding on September 8, 2000, the record date,
7,015,078 shares of Common Stock. There were present at said meeting in
person and by proxy Shareholders of the Company who were holders of 6,488,274
shares of Common Stock entitled to vote thereat, constituting a quorum. At
the Annual Meeting, the following votes were cast for the proposals indicated:
Proposal One: Election of Directors of the Company.
NOMINEE VOTES FOR VOTES WITHHELD
Rhea J. Posedel 6,107,568 380,706
William W.R. Elder 6,109,274 379,000
Mukesh Patel 6,109,274 379,000
Mario M. Rosati 6,108,074 380,200
Proposal Two: Amendment to the 1996 Stock Option Plan to increase the number
of shares issuable thereunder by 300,000 shares.
VOTES
FOR 4,865,759
AGAINST 1,610,438
ABSTAIN 12,077
Proposal Three: Ratification of Appointment of PricewaterhouseCoopers LLP as
the Company's Independent Public Accountants for fiscal 2001.
VOTES
FOR 6,471,054
AGAINST 13,470
ABSTAIN 3,750
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data ScheduleExhibits
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
(b) No reportsReport on Form 8-K
wereThe Company filed bya Form 8-K on March 5, 2001 reporting that on March 5,
2001, the Company duringissued a press release announcing that the quarter ended November 30, 2000.
19Board of
Directors of the Company had approved the adoption of a Preferred Shares
Rights Agreement. The Company filed a Form 8-K on March 28, 2001 reporting
certain immaterial changes in the Preferred Shares Rights Agreement dated
March 5, 2001.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: January 12,April 13, 2001 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: January 12,April 13, 2001 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
2021
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
10.1 Preferred Shares Rights Agreement, dated as of March 5, 2001,
between Aehr Test Systems and U.S. Stock Transfer
Corporation, including the Certificate of Determination, the
Form of Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B, and C, respectively. (This is
incorporated by reference to Exhibit 4.1 to Aehr Test Systems'
Form 8-K filed March 28, 2001).
22