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 February 28,August 31, 2002.
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: 000-22893.
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 February 28,August 31, 2002 was 7,167,189.7,183,786.
1
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28,AUGUST 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28,August 31, 2002 and May 31, 20012002 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28,August 31, 2002 and 2001. . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
ninethree months ended February 28,August 31, 2002 and 20012001. . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 910
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 19
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 2120
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 2120
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 2120
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 2120
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 2120
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 2120
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2221
2
PART I. FINANCIAL STATEMENTS
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
February 28,August 31, May 31,
2002 20012002
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 7,001 $10,3918,020 $ 7,485
Short-term investments. . . . . . . . . . . . . 3,551 3,7644,856 8,003
Accounts receivable . . . . . . . . . . . . . . 5,009 5,7513,546 3,132
Inventories . . . . . . . . . . . . . . . . . . 8,610 10,1258,921 8,633
Prepaid expenses and other. . . . . . . . . . . 3,593 3,3212,327 2,373
----------- -----------
Total current assets . . . . . . . . . . . . 27,764 33,35227,670 29,626
Property and equipment, net . . . . . . . . . . . 2,457 2,1032,205 2,356
Long-term investments . . . . . . . . . . . . . . 3,578 2,267701 --
Other assets, net . . . . . . . . . . . . . . . . 1,896 1,8701,859 1,836
----------- -----------
Total assets . . . . . . . . . . . . . . . . $35,695 $39,592$32,435 $33,818
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 549809 $ 1,213874
Accrued expenses. . . . . . . . . . . . . . . . 1,220 3,3361,995 2,260
Deferred revenue. . . . . . . . . . . . . . . . 646 51399 540
----------- -----------
Total current liabilities . . . . . . . . . . 2,415 4,6003,203 3,674
Deferred revenue. . . . . . . . . . . . . . . . . 39 3935 35
Deferred lease commitment . . . . . . . . . . . . 206 146240 224
----------- -----------
Total liabilities . . . . . . . . . . . . . . 2,660 4,7853,478 3,933
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 7,1677,184 shares and
7,1167,184 shares at February 28,August 31, 2002 and
May 31, 2001,2002, respectively. . . . . . . . . . 72 7172
Additional paid-in capital. . . . . . . . . . . 36,332 36,134
Notes receivable from shareholders.36,384 36,387
Net unrealized gain on investments. . . . . . . -- (84)
Accumulated other comprehensive income.3 2
Cumulative translation adjustment . . . . 1,577 1,487. . . 1,453 1,492
Accumulated deficit . . . . . . . . . . . . . . (4,946) (2,801)(8,955) (8,068)
----------- -----------
Total shareholders' equity . . . . . . . . . 33,035 34,80728,957 29,885
----------- -----------
Total liabilities and shareholders' equity. . $35,695 $39,592$32,435 $33,818
=========== ===========
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
Nine Months Ended
February 28 February 28
--------------------- --------------------August 31,
----------------------
2002 2001
2002 2001
--------- --------- --------- ------------------ ----------
Net sales. . . . . . . . . . . . . . . . . . . $3,419 $9,008 $ 9,046 $26,672$3,508 $2,805
Cost of sales. . . . . . . . . . . . . . . . . 1,801 4,938 4,612 15,830
--------- --------- -------- --------1,949 1,410
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 1,618 4,070 4,434 10,842
--------- --------- -------- --------1,559 1,395
---------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,683 1,744 4,814 5,6461,711 1,631
Research and development . . . . . . . . . . 961 966
1,266 2,931 3,866
Research and development cost
reimbursement - DARPA. . . . . . . . . . . -- (300) -- (600)
--------- --------- -------- ------------------ ----------
Total operating expenses . . . . . . . . 2,649 2,710 7,745 8,912
--------- --------- -------- --------
Income (loss)2,672 2,597
---------- ----------
Loss from operations.operations . . . . . . . . (1,031) 1,360 (3,311) 1,930. . . . . (1,113) (1,202)
Interest incomeincome. . . . . . . . . . . . . . . . 110 276 423 739
Interest expense83 168
Other income, net . . . . . . . . . . . . . . 104 101
---------- ----------
Loss before income taxes . . . . . . . . . . . (926) (933)
Income tax benefit . . . . . . . . . . . . . . (39) (299)
---------- ----------
Net loss . . . . . . . . . . . . . . . -- (1) -- (7). . . . (887) (634)
---------- ----------
Other expense,comprehensive loss, net of tax:
Foreign currency translation
adjustments income (expense) . . . . . . . (39) 10
Unrealized holding gains arising
during period. . . . . . . . . . . . . . . (91) (16) (92) (90)
--------- --------- -------- --------
Income (loss) before income taxes. . . . . . . (1,012) 1,619 (2,980) 2,572
Income tax expense (benefit) . . . . . . . . . (275) 594 (835) 1,103
--------- --------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle . . . . . . . (737) 1,025 (2,145) 1,469
Cumulative effect of change in accounting
principle - net of tax . . . . . . . . . . . -- -- -- (1,629)
--------- --------- -------- --------
Net income (loss).1 5
---------- ----------
Comprehensive loss . . . . . . . . . . . . . . $ (737) $1,025 $(2,145)(925) $ (160)
--------- --------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments income (expense). . . .. . . . 54 16 82 (72)
Unrealized holding gains (losses). . . . . . (18) 44 8 44
--------- --------- -------- --------
Comprehensive income (loss)(619)
========== ==========
Net loss per share (basic) . . . . . . . . . . $ (701) $1,085 $(2,055) $ (188)
========= ========= ======== ========$(0.12) $(0.09)
Net income (loss)loss per share (basic)(diluted) . . . . . . $(0.10) $ 0.14 $ (0.30) $ (0.02)
Net income (loss) per share (diluted). . . . . $(0.10) $ 0.14 $ (0.30) $ (0.02)$(0.12) $(0.09)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,169 7,138 7,140 7,0607,184 7,123
Diluted. . . . . . . . . . . . . . . . . . . 7,169 7,186 7,140 7,0607,184 7,123
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
NineThree Months Ended
February 28,August 31,
----------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss...................................... $(2,145) $ (160)(887) $ (634)
Adjustments to reconcile net loss to net
cash provided by (used in) provided by operating
activities:
Cumulative effect of change in
accounting principle...................... -- 1,629
Provision for doubtful accounts............. 90 (11)30 (18)
Depreciation and amortization............... 470 482163 361
Deferred income taxes....................... 9 89-- (4)
Changes in operating assets and liabilities:
Accounts receivable....................... 652 (1,915)(431) 2,590
Inventories............................... 1,457 1,140(274) 211
Accounts payable.......................... (664) (499)(164) (463)
Accrued expenses and deferred revenue..... (1,521) 1,810(413) (781)
Deferred lease commitment................. 60 8116 22
Other current assets...................... (281) 1849 (231)
---------- ----------
Net cash provided by (used in)
provided by
operating activities.................. (1,873) 2,664(1,911) 1,053
---------- ----------
Cash flows from investing activities:
(Increase) decrease in investments.......... (1,090) 1,710short-
term investments.......................... 3,147 (2,089)
(Increase) decrease in long-
term investments.......................... (700) 531
Additions to property and equipment......... (766) (71)(1) (229)
Increase in other assets.................... (26) (27)(19) (61)
---------- ----------
Net cash provided by (used in)
provided by
investing activities.................. (1,882) 1,6122,427 (1,848)
---------- ----------
Cash flows from financing activities:
Long-term debt and capital lease
principal payments........................ -- (431)
Proceeds from issuance of common stock
and exercise of stock options............. 340 1,187
Repayment of notes from shareholders........ 84 -- 52
Repurchase of common stock.................. (141) (427)(3) (4)
---------- ----------
Net cash provided by (used in)
financing activities.................. 283 329(3) 48
---------- ----------
Effect of exchange rates on cash................ 82 (266)22 34
---------- ----------
Net increase (decrease) increase in cash and
cash equivalents...................... (3,390) 4,339535 (713)
Cash and cash equivalents, beginning of period.. 7,485 10,391 8,323
---------- ----------
Cash and cash equivalents, end of period........ $ 7,001 $12,662$8,020 $9,678
========== ==========
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 FEBRUARY 28,AUGUST 31, 2002
(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, 2001.2002. 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 dilutive,diluted, during each period using the
treasury stock method.
Three Months Ended
Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------August 31,
---------- ----------
2002 2001
2002 2001
--------- --------- --------- ------------------- ----------
(in thousands, except per share amounts)
(unaudited)
Income (loss)Net loss available to common shareholders before cumulative effect
of change in accounting principle:shareholders:
Numerator: Income (loss) before
cumulative effect of change in
accounting principle......................Net loss................................ $ (737) $1,025 $(2,145) $1,469
--------- --------- --------- ---------(887) $ (634)
---------- ----------
Denominator for basic income (loss)loss per share:
Weighted-average shares outstanding ...... 7,169 7,138 7,140 7,060
--------- --------- --------- ---------............. 7,184 7,123
---------- ----------
Shares used in basic per share calculation.. 7,169 7,138 7,140 7,060calculation......... 7,184 7,123
Effect of dilutive securities:
Employee stock options..................options......................... -- 48 --
145
--------- --------- --------- ------------------- ----------
Denominator for diluted income (loss)loss per share............. 7,184 7,123
---------- ----------
Basic loss per share............................... 7,169 7,186 7,140 7,205
--------- --------- --------- ---------
Basic income (loss)$(0.12) $(0.09)
========== ==========
Diluted loss per share before
cumulative effect of change in
accounting principle...................... $(0.10) $ 0.14 $ (0.30) $ 0.21
========= ========= ========= =========
Diluted income (loss) per share before
cumulative effect of change in
accounting principle...................... $(0.10) $ 0.14 $ (0.30) $ 0.20
========= ========= ========= =========
Net income (loss) available to common shareholders:
Numerator: Net income (loss)................ $ (737) $1,025 $(2,145) $ (160)
--------- --------- --------- ---------
Denominator for basic net income (loss) per share:
Weighted-average shares outstanding ...... 7,169 7,138 7,140 7,060
--------- --------- --------- ---------
Shares used in basic per share calculation.. 7,169 7,138 7,140 7,060
Effect of dilutive securities:
Employee stock options.................. -- 48 -- --
--------- --------- --------- ---------
Denominator for diluted net income (loss)
per share............................... 7,169 7,186 7,140 7,060
--------- --------- --------- ---------
Basic net income (loss) per share........... $(0.10) $ 0.14 $ (0.30) $(0.02)
========= ========= ========= =========
Diluted net income (loss) per share......... $(0.10) $ 0.14 $ (0.30) $(0.02)
========= ========= ========= =========share............................. $(0.12) $(0.09)
========== ==========
7
3. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28,August 31, May 31,
2002 20012002
(unaudited)
----------- -----------
Raw materials and sub-assemblies $4,638 $ 4,479subassemblies $4,601 $4,825
Work in process 3,800 4,7794,096 3,698
Finished goods 172 867224 110
----------- -----------
$8,610 $10,125$8,921 $8,633
=========== ===========
4. SEGMENT INFORMATION:
The Company operates in one industry segment. The Company is engaged in
the design, manufacture, marketing and servicing of test and burn-in equipment
used in the semiconductor manufacturing industry.
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):
7
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28,August 31, 2002:
Net sales...................... $ 3,2613,357 $ 88 $ 99242 $ (29)(179) $ 3,4193,508
Portion of U.S. net sales
from export sales............ 1,8632,579 -- -- -- 1,8632,579
Income (loss) from operations.. (832) (195) (36) 32 (1,031)(911) (165) (94) 57 (1,113)
Identifiable assets............ 43,687 1,018 650 (9,660) 35,69540,497 1,192 473 (9,727) 32,435
Long-lived assets.............. 2,158 279 201,911 280 14 -- 2,457
Nine months2,205
Fiscal year ended February 28,May 31, 2002:
Net sales...................... $11,458 $ 8,317659 $ 389930 $ 585 $ (245) $ 9,046(479) $12,568
Portion of U.S. net sales
from export sales............ 4,5816,775 -- -- -- 4,5816,775
Income (loss) from operations.. (2,873) (602) 68 96 (3,311)(3,974) (737) 49 159 (4,503)
Identifiable assets............ 43,687 1,018 650 (9,660) 35,69541,286 1,324 485 (9,277) 33,818
Long-lived assets.............. 2,158 279 202,062 275 19 -- 2,457
Fiscal year2,356
Three months ended MayAugust 31, 2001:
Net sales...................... $28,176 $4,048 $1,730 $(2,915) $31,039$ 2,421 $ 126 $ 301 $ (43) $ 2,805
Portion of U.S. net sales
from export sales............ 15,9341,201 -- -- -- 15,9341,201
Income (loss) from operations.. 1,864 (410) (33) 51 1,472(1,110) (233) 81 60 (1,202)
Identifiable assets............ 46,397 2,206 863 (9,874) 39,59244,560 1,803 869 (9,574) 37,658
Long-lived assets.............. 1,740 328 351,623 326 31 -- 2,1031,980
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method.GOODWILL
The Company has adopted the provisions of SFAS 141
as of the required effective date. The adoption of the SFAS 141 did not have
any effect on the Company's financial position or results of operations.
8
In July 21, 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," effective June 1, 2002. In accordance with SFAS 142, the Company
ceased the amortization of goodwill as of June 1, 2002. Net goodwill at
August 31, 2002 and May 31, 2002 was $274,000.
The following table summarizes the impact of adopting SFAS 142 on the net
loss and net loss per share as adjusted to exclude amortization of goodwill
for the quarter ended August 31, 2002 and August 31, 2001 as reported in the
accompanying Condensed Consolidated Financial Statements (in thousands, except
per share amounts):
THREE MONTHS ENDED
-------------------------
AUGUST 31, AUGUST 31,
In Thousands (Unaudited) 2002 2001
------------------------ ----------- -----------
Reported net loss $ (887) $ (634)
Goodwill amortization -- 12
------- -------
Adjusted net loss $ (887) $ (622)
------- -------
Basic and diluted net loss
per share:
Reported net loss $(0.12) $(0.09)
Goodwill amortization -- --
Adjusted net loss per share $(0.12) $(0.09)
8
In accordance with the provisions of SFAS 142, the Company will perform an
initial test of goodwill impairment before November 30, 2002. Additionally,
and in accordance with SFAS 142, goodwill will be subject to an annual
impairment test. The Company does not believe goodwill is impaired as of June
1, 2002, the initial date of adopting SFAS 142, and August 31, 2002.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Exit or Disposal Activities". SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities that are currently accounted for under Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 will be
effective for exit or disposal activities that are initiated after December
31, 2002 but early application is encouraged. The provisions of EITF Issue
No. 94-3 shall continue to apply for an exit activity initiated under an exit
plan that met the criteria of EITF Issue No. 94-3 prior to the adoption of
SFAS 146. Adopting the provisions of SFAS 146 will change, on a prospective
basis, the timing of when restructuring charges are recorded from a commitment
date approach to when the liability is incurred.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-lived Assets". The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of, " and to develop a single accounting model, based on the
framework established by SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. Although SFAS 144
supersedes SFAS 121, it retains some fundamental provisions of SFAS 121. The
initial adoption of SFAS 144 on June 1, 2002 did not have a material impact on
the Company's financial position or results of operations.
On July 21, 2001, the FASB issued SFAS 142 which is effective for fiscal
years beginning after December 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives
of existing recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for impairment of existing
goodwill and other intangibles. The Company is currently assessing, but has not yet determined,adopted the impact
SFAS 142 will have on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-lived Assets". The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of," and to develop a single accounting model, based on the
framework established by SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. Although SFAS 144
supersedes SFAS 121, it retains some fundamental provisions of
SFAS 121. SFAS
144 is142 effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. The
Company expects that the initial application of SFAS 144 will not have a
material impact on its financial statements.June 1, 2002 (see Note 5).
9
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
Condensed Financial Statements and the related notes that appear elsewhere in
this document.
This document contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements. All statements
other than statements of historical fact are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues or
other financial items; any statements of the plans, strategies and objectives
of management for future operations; any statements concerning proposed new
products, services or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statement of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include the ability of the Company to retain and
motivate key employees; the timely development, production and acceptance of
products and services and their feature sets; the challenge of managing asset
levels, including inventory; the flow of products into third-party
distribution channels; the difficulty of keeping expense growth at modest
levels while increasing revenues; and other risks that are described from time
to time in the Company's Securities and Exchange Commission reports, including
but not limited to the annual report on Form 10-K for the fiscal year ended
May 31, 20012002 and subsequently filed reports. The Company assumes no
obligation and does not intend to update these forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States.States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect
9
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to
customer programs and incentives, product returns, bad debts, inventories,
investments, intangible assets, income taxes, financing operations, warranty
obligations, long-term service contracts, and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
The Company's revenue recognition policy is significant because our
revenue is
a key component of ourthe results of operations. The Company's revenue consists
primarily of sales of systems, die carriers, test fixtures, upgrades, software
and spare parts and revenues from service contracts. The Company recognizes
revenue upon shipment and defers recognition of revenue for any amounts
subject to acceptance until such acceptance occurs. The amount of revenue
deferred is the greater of the fair value of the undelivered element or the
contractual agreed to amounts. Royalty revenue related to Performance Test
Boards licensing income is recognized when paid by the licensee. This income
is recorded in net sales. Provisions for the estimated future cost of
warranty isand installation are recorded at the time the products are shipped.
10
In addition, ourthe Company's revenue recognition determines the timing of
certain expenses, such as commissions and royalties. We followThe Company follows very
specific and detailed guidelines in measuring revenue in accordance with
SABSecurities and Exchange Commission Staff Accounting Bulletin No. 101; however,
certain judgments affect the application of ourthe revenue policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause ourthe operating results to vary significantly
from quarter to quarter and could result in future operating losses. The
Company's revenue recognition policy is further affected by estimated
reductions to revenue for special pricing agreements, price protection,
promotions and other volume-based incentives. If market conditions were to
decline, the Company may take actions to increase customer incentive offerings
possibly resulting in an incremental reduction of revenue at the time the
incentive is offered. The Company maintains allowances for doubtful accounts
for estimated losses resulting from the inability of its customers to make
required payments. If the financial conditionconditions of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from the Company's
estimates, revisions to the estimated warranty liability would be required.
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
10
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would
not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Condensed
Consolidated Statements of Operations as a percentage of net sales for the
periods indicated.
11
Three Months Ended
Nine Months Ended
February 28, February 28,
---------------------- --------------------
2002 2001August 31,
---------------------
2002 2001
---------- ----------
--------- ----------
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0% 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 52.7 54.8 51.0 59.455.6 50.3
---------- ---------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 47.3 45.2 49.0 40.644.4 49.7
---------- ---------- --------- --------
Operating expenses:
Selling, general and administrative. . . . . 49.2 19.4 53.2 21.248.8 58.1
Research and development . . . . . . . . 27.4 34.4
---------- ----------
Total operating expenses . . 28.3 14.1 32.4 14.5
Research and development cost
reimbursement - DARPA.. . 76.2 92.5
---------- ----------
Loss from operations . . . . . . . . . . -- (3.4) -- (2.3)
---------- ---------- --------- --------
Total operating expenses . . . . . . . . 77.5 30.1 85.6 33.4
---------- ---------- --------- --------
Income (loss) from operations. . . . . . . . . (30.2) 15.1 (36.6) 7.2(31.8) (42.8)
Interest incomeincome. . . . . . . . . . . . . . . . 3.2 3.1 4.7 2.7
Interest expense2.4 5.9
Other income, net. . . . . . . . . . . . . . . . -- -- -- --
Other3.0 3.6
---------- ----------
Loss before income (expense), nettaxes . . . . . . . . . (2.6) (0.2) (1.0) (0.3)
---------- ---------- --------- --------
Income (loss) before income taxes. . . . . . . (29.6) 18.0 (32.9) 9.6(26.4) (33.3)
Income tax expense (benefit) . . . . . . . . . (8.0) 6.6 (9.2) 4.1
---------- ---------- --------- --------
Income (loss) before cumulative effect of
change in accounting principle . . . . . . . (21.6) 11.4 (23.7) 5.5
Cumulative effect of change in accounting
principle - net of tax . . . . . . . . . . . -- -- -- (6.1)
---------- ---------- --------- --------
Net income (loss)benefit . . . . . . . . . . . . (1.1) (10.7)
---------- ----------
Net loss. . . . (21.6). . . . . . . .. . . . . . (25.3)% 11.4% (23.7)% (0.6)(22.6)%
========== ========== ========= ========
THREE MONTHS ENDED FEBRUARY 28,AUGUST 31, 2002 COMPARED TO THREE MONTHS ENDED FEBRUARY
28,AUGUST 31,
2001
NET SALES. Net sales decreasedconsist primarily of sales of systems, die carriers,
test fixtures, upgrades, software and spare parts and revenues from service
contracts. Net sales increased to $3.4$3.5 million in the three months ended
February 28,August 31, 2002 from $9.0$2.8 million in the three months ended February 28,August 31, 2001,
a decreasean increase of 62.0%25.1%. The decreaseincrease in net sales resulted primarily from
decreaseincreases in sales of dynamic burn-in products of approximately $5.6 million.
The Company anticipates that$561,000.
GROSS PROFIT. Gross profit consists of net sales in the fourth quarterless cost of fiscal 2002
may be less than the net sales of the third fiscal quarter.
GROSS PROFIT.sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. The gross profit 11
decreasedincreased to $1.6
million in the three months ended February 28,August 31, 2002 from $4.1$1.4 million in the
three months ended February 28,August 31, 2001, a decreasean increase of 60.2%11.8%. The grossGross profit margin
increaseddecreased to 47.3%44.4% in the three monthmonths ended February
28,August 31, 2002 from 45.2%49.7% in the
three monthmonths ended February 28,August 31, 2001. The increasedecrease in the gross profit margin was
primarily the result of a change in product mix, particularly a decrease in
upgrades and an increase in systems sold, resulting in higher material costs
as a percentage of net sales, and an increase in provision for warranty reserves, partially offset by a higher proportion of sales of
lower margin MTX products.inventory
reserves.
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 were unchanged atincreased to $1.7 million in the three months ended February 28,August 31, 2002
andfrom $1.6 million in the three months ended February 28, 2001.August 31, 2001, an increase of
4.9%. The increase in SG&A expenses was primarily due to an increase in
commissions to outside sales representatives. As a percentage of net sales,
SG&A expenses increaseddecreased to 49.2%48.8% in the three months ended February 28,August 31, 2002
from 19.4%58.1% in the three months ended February 28,August 31, 2001, reflecting lowerhigher 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
12
materials and supplies, and professional consulting expenses. R&D expenses
decreased to $1.0 million$961,000 in the three months ended February 28,August 31, 2002 from $1.3 million$966,000
in the three months ended February 28,August 31, 2001, a decrease of 23.7%0.5%.
The decrease in R&D expenses was primarily due to decreases in employment
related expenses of $146,000 and facilities expenses of $69,000 primarily as a
result of the change in the internal allocation basis. As a
percentage of net sales, R&D expenses increaseddecreased to 28.3%27.4% in the three months
ended February 28,August 31, 2002 from 14.1%34.4% in the three months ended February 28,August 31, 2001,
reflecting lowerhigher net sales. RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("The Company anticipates that R&D - DARPA") is a credit
representing reimbursements by Defense Advanced Research Projects Agency
("DARPA"), a U.S. government agency, of costs incurredexpenses in the
Company's wafer-
level burn-in development project. R&D - DARPA was $0 insecond quarter of fiscal 2003 will increase compared to those of the three months
ended February 28, 2002, compared with R&D - DARPAfirst
quarter of $300,000 in the three
months ended February 28, 2001. Payments by DARPA depended on satisfaction of
development milestones, and the level of payments varied significantly from
quarter to quarter. The two final milestones of this agreement were approved
and paid during fiscal 2001. It is not expected that there will be any
additional R&D - DARPA credits recorded for this project after fiscal 2001.2003.
INTEREST INCOME. Interest income decreased to $110,000$83,000 in the three months
ended February 28,August 31, 2002 from $276,000$168,000 in the three months ended February 28,August 31, 2001,
a decrease of 60.1%50.6%. The decrease in interest income was primarily related to
a lower average rate of return on investments and a lower level of cash and
investments.
OTHER INCOME, (EXPENSE), NET. Other expense,income, net increased to $91,000$104,000 in the three
months ended February 28,August 31, 2002, from $16,000$101,000 in the three months ended February 28,August
31, 2001, an increase of 468.8%3.0%.
The increase in other
expense, net was primarily dueINCOME TAX BENEFIT. Income tax benefit decreased to an increase in foreign currency exchange
losses recorded by the Company and its subsidiaries$39,000 in the three
months ended February 28,August 31, 2002, compared with those recordedfrom $299,000 in the three months ended February 28, 2001.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $275,000 in the
three months ended February 28, 2002, compared with income tax expense of
$594,000 in the three months ended February 28,August
31, 2001. The income tax benefit in the three months ended February 28,August 31, 2002
was primarily due to the tax benefit recorded as a result of losses incurred
in the Company's U.S.
operations.German subsidiary. The income tax expensebenefit in the three
months ended February 28,August 31, 2001 was primarily due to the tax expensebenefit recorded as
a result of income
earnedlosses 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.
12
operations were profitable or carried forward to future fiscal years in which
the Company pays taxes when its U.S. operations are profitable. The Company's
Japanese subsidiary has experienced significant cumulative losses since fiscal
1993, and thus generated certain 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 Company's
effective 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.
NINE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2001
NET SALES. Net sales decreased to $9.0 million in the nine months ended
February 28, 2002 from $26.7 million in the nine months ended February 28,
2001, a decrease of 66.1%. The decrease in net sales resulted primarily from
decreases in sales of dynamic burn-in products of approximately $13.8 million
and MTX products of approximately $3.6 million.
GROSS PROFIT. The gross profit decreased to $4.4 million in the nine
months ended February 28, 2002 from $10.8 million in the nine months ended
February 28, 2001, a decrease of 59.1%. The gross profit margin increased to
49.0% in the nine months ended February 28, 2002 from 40.6% in the nine months
ended February 28, 2001. The increase in the gross profit margin was
primarily the result of a change in product mix, particularly an increase in
the proportion of revenue from higher margin upgrades and maintenance
contracts, resulting in lower material costs as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $4.8
million in the nine months ended February 28, 2002 from $5.6 million in the
nine months ended February 28, 2001, a decrease of 14.7%. The decrease in
SG&A expenses was primarily due to decreases in employment related expenses
and product support expenses of $347,000 and $287,000, respectively. As a
percentage of net sales, SG&A expenses increased to 53.2% in the nine months
ended February 28, 2002 from 21.2% in the nine months ended February 28, 2001,
reflecting lower net sales.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.9 million in the
nine months ended February 28, 2002 from $3.9 million in the nine months ended
February 28, 2001, a decrease of 24.2%. The decrease in R&D expenses was
primarily due to decreases in employment related expenses of $433,000 and
facilities expenses of $189,000 primarily as a result of the change in the
internal allocation basis. As a percentage of net sales, R&D expenses
increased to 32.4% in the nine months ended February 28, 2002 from 14.5% in
the nine months ended February 28, 2001, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA was $0
in the nine months ended February 28, 2002, compared with R&D - DARPA of
$600,000 in the nine months ended February 28, 2001. Payments by DARPA
depended on satisfaction of development milestones, and the level of payments
varied significantly from quarter to quarter. The two final milestones of
this agreement were approved and paid during fiscal 2001. It is not expected
that there will be any additional R&D - DARPA credits recorded for this
project after fiscal 2001.
INTEREST INCOME. Interest income decreased to $423,000 in the nine months
ended February 28, 2002 from $739,000 in the nine months ended February 28,
2001, a decrease of 42.8%. The decrease in interest income was primarily
related to a lower average rate of return on investments and a lower level of
cash and investments.
OTHER INCOME (EXPENSE), NET. Other expense, net increased to $92,000 in
the nine months ended February 28, 2002, from $90,000 in the nine months ended
February 28, 2001, an increase of 2.2%.
13
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $835,000 in the nine
months ended February 28, 2002, compared with income tax expense of $1.1
million in the nine months ended February 28, 2001. The income tax benefit in
the nine months ended February 28, 2002 was primarily due to the tax benefit
recorded as a result of losses incurred ineither the Company's U.S. operations. The
income tax expense in the nine months ended February 28, 2001 was primarily
due to the tax expense recorded as a result of income earned in the Company's
U.S. operations. Such tax benefit will be carried back to previous fiscal
years in which the Company paid taxes whenoperations or its U.S. operations were profitable
or carried forward to future fiscal years in which the Company pays taxes when
its U.S. operations are profitable. The Company's effective 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 August 31,
2002, the Company had $12.9 million in cash and short-term investments.
Net cash used in operating activities was approximately $1.9 million for
the ninethree months ended February 28,August 31, 2002, and net cash provided by operating
activities was approximately $2.7$1.1 million for the ninethree months ended February
28,August
31, 2001. For the ninethree months ended February 28,August 31, 2002, net cash used in
operating activities was due primarily to the net loss of $2.1 million$887,000, an
increase in accounts receivable of $431,000 and a decrease in accrued expenses
and deferred revenue of $1.5 million, partially
offset by a decrease in inventories of $1.5 million.$413,000. For the ninethree months ended February 28,August 31, 2001,
net cash provided by operating activities was due primarily to income before cumulative effect of change in accounting principle
of $1.5 million, depreciation expense of $482,000, an increase in accrued
expenses and deferred revenue and a decrease in inventories, partially offset
by an increase in accounts receivable and a decrease in
accounts payable.receivable of $2.6 million, partially offset by net loss and
decreases in accounts payable and accrued expenses.
Net cash provided by investing activities was approximately $2.4 million
for the three months ended August 31, 2002, and net cash used in investing
activities was approximately $1.9$1.8 million for the ninethree months ended February 28, 2002 and net cash provided by investing
activities was approximately $1.6 million for the nine months ended February
28,August
31, 2001. The cash used in investing activities during the nine months ended
February 28, 2002 was primarily due to the purchase of long-term investments.
TheNet cash provided by investing activities during the ninethree months
ended February 28, 2001August 31, 2002 was primarily due to the sale of short-term investments,
partially offset by the purchase of long-term investments. Net cash used in
investing activities during the three months ended August 31, 2001 was
primarily due to the purchase of short-term investments.
Financing activities used cash of approximately $3,000 in the three months
ended August 31, 2002 and provided cash of approximately $283,000$48,000 in the ninethree
months ended February 28, 2002 and $329,000August 31, 2001. Net cash used in financing activities during
the ninethree months ended February
28, 2001.August 31, 2002 was due to the Company's repurchase of
700 of its outstanding common shares at an average price of $3.75. Net cash
provided by financing activities during the ninethree months ended February 28, 2002August 31, 2001
was primarily due to the proceeds from issuance of common stock and exercise
of stock options.
Net cash provided by financing
activities during the nine months ended February 28, 2001 was primarily due to
the proceeds from issuance of common stock and exercise of stock options,
partially offset by long-term debt and capital lease principal payments and
repurchase of common stock.13
As of February 28,August 31, 2002, the Company had working capital of $25.3$24.5 million,
compared with $28.8$26.0 million as of May 31, 2001.2002. Working capital consists of
cash and cash equivalents, short-term investments,cash deposits, accounts receivable,
inventory and other current assets, less current liabilities.
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 February 28,August 31, 2002, the Company hashad repurchased 446,000446,700
shares at an average price of $4.23. 14
Shares repurchased by the Company are
cancelled.
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 2003. After fiscal
2003, 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 Quarterly Report on Form 10-Q (this "Report") contains forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Discussions containing such forward-looking statements
may be found in this 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
the Company'sour current plans, estimates and beliefs. The CompanyWe 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
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.
14
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 purchase price from
approximately $200,000 to over $1.0 million.$800,000. 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.
15
RECENT OPERATING LOSSES. The Company incurred operating losses of $4.5
million, $5.2 million and $4.6 million in fiscal 2002, 2000 and 1999,
respectively. The Company also incurred operating losses of $2.1, $4.2 and $2.4 millionoperated profitably in fiscal 1995,
19942001 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. In fiscal 1998, the
Company began to feel an industry slowdown due to uncertainties caused
primarily by the financial crisis in Asia and DRAM overcapacity and recorded
operating losses in fiscal 1999 and 2000. AlthoughBeginning in the second half of
fiscal 2001, the Company operated
profitablyexperienced a sharp and severe industry downturn and
recorded an operating loss in fiscal 2001, a dramatic downturn in2002. Given that the semiconductor
equipment industry began in fiscal 2001, resulting inmarket is down more sharply and severely than the Company recording
significantly lower revenues and operating losses in the first three quarters
of fiscal 2002. The Company anticipates that the net sales for the fourth
quarter of fiscal 2002 may be less than the net sales in the third quarter of
fiscal 2002. Therehad
anticipated, there can be no assurance that the CompanyCompany's net sales and
operating results will not continue to be profitablefurther impacted by this prolonged
downturn in fiscal 2003 or in later fiscal years.the semiconductor equipment market and global economy.
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. 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. 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 MARKET ACCEPTANCE OF FOX SYSTEM. Another element of the
Company's strategy is to capture an increasing share of the test equipment
market through sales of the FOX wafer-level burn-in and test system. The recently introduced FOX
is a new system is designed to simultaneously burn-in and functionally test all
of the die on a wafer, and the market for FOX systems is in the very early
stages of development. The FOX system was introduced in July 2001, and no shipments
have yet been made. The Company's strategy depends, in part, upon its ability
to persuade potential customers that the FOX system can successfully contact
and functionally test all of the die on a wafer simultaneously, and that this
method of testing is cost-effective for the customer. There can be no
assurance that the Company's strategy will be successful. The failure of the
FOX system to achieve market acceptance would have a material adverse effect
on the Company's future business.
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 58.8%61.7%, 64.3%58.8% and 62.7%64.3% of its net sales in fiscal
2002, 2001 2000 and 1999,2000, respectively. Sales to the Company's five largest
customers accounted for approximately 73.3%78.7% of its net sales in the ninethree
15
months ended February 28,August 31, 2002. During fiscal 2002, Texas Instruments, Formosa
Advanced Technologies Co. Ltd. and ASE Test, Inc. accounted for 22.3%, 17.1%
and 11.1% of the Company's net sales, respectively. During fiscal 2001, Texas
Instruments and Formosa Advanced Technologies Co. Ltd. accounted for 25.2% and
12.7% of the Company's net sales, respectively. 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),
Texas Instruments and Motorola accounted for 21.9%, 18.1% and 11.9% of the
Company's net sales, respectively. No other customers represented more than 10% of the Company's
net sales for fiscal 2002, 2001 2000 and 1999.2000. 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
16
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 60.6%62.7%,
73.3%60.6% and 72.7%73.3% of the Company's net sales for fiscal 2002, 2001 2000 and 1999,2000,
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. Turmoil in the Asian financial markets has resulted, and may result in
the future, in dramatic currency devaluations, stock market declines,
restriction of available credit and general financial weakness. In addition,
DRAM prices have sometimes fallen dramatically, are currently doing so, 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 years 1999, 2001 and fiscal 2002, and that the
uncertainty of the DRAM marketand other IC markets may cause some manufacturers in
the future to continue toagain delay capital spending plans. Such developments could
have a material adverse effect 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.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants. New
16
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 and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe
17
competition, especially from local, low cost manufacturers and from systems
manufacturers that offer higher power dissipation per device under test.
Also, the FOX full wafer contact system is expected to face competition from
larger systems manufacturers that have sufficientmore advanced technological know-how
and a broader range of manufacturing capability.resources. The Company's DiePak products
could face significant competition. The Company believes that several
companies have developed or are developing other products which are intended
to enable burn-in and test of bare die. 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 several companies to make Performance Test Boards ("PTBs") for use
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 memoriesadvanced
technology logic ICs 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 1999, 2000 2001 and 2002. A large portion of the Company's net sales
are 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, 1998, 2001 and 2001.2002. 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, ATX and FOX systems and DiePak carriers contain several
components, including environmental chambers, power supplies, wafer
contactors, signal distribution substrates and certain ICs, which are
currently supplied by only one or a limited number of suppliers. The DiePak products include an interconnect
substrate which is currently being supplied by one supplier, but the Company
is evaluating alternate suppliers 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. Any delay,
interruption or termination of a supplier relationship could have a material
adverse effect on the Company's business, financial condition and operating
results.
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,
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
17
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
18
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
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
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,
18
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
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
19
Instruments." The Company has no holdings of derivative financial or
commodity instruments at February 28,August 31, 2002.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. 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. 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 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
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 $161,000.
20$176,000.
Item 4. Controls and Procedures
a. Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
along with the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
b. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out this evaluation.
19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The ExhibitExhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
(b) Report on Form 8-K
The Company filed aNo reports on Form 8-K on February 7, 2002 reporting that a letter
towere filed by the Company's shareholders of record was sent on or about February 7,Company during the quarter ended
August 31, 2002.
2120
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: April 12,October 15, 2002 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 12,October 15, 2002 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
21
CERTIFICATION
I, Rhea J. Posedel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ RHEA J. POSEDEL
---------------------------
Rhea J. Posedel
Chief Executive Officer
22
CERTIFICATION
I, Gary L. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ GARY L. LARSON
---------------------------
Gary L. Larson
Chief Financial Officer
23
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- ------------
10.1 Letter to Shareholders. (This is incorporated by reference to
Exhibit 20 to Aehr Test Systems' Form 8-K filed February 7,
2002).
2399.1 Certification Statement of Chief Executive Officer.
99.2 Certification Statement of Chief Financial Officer.
24