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, 1999.
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)
1667 PLYMOUTH STREET
MOUNTAIN VIEW, CA 94043
- -------------------------------------- --------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(650) 691-9400
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
(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, 1999 was 6,851,530.6,779,368.
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28,AUGUST 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28,August 31, 1999 and May 31, 1998.1999 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28,August 31, 1999 and 1998 . . . . . . . . . . . . . . .1998. . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
ninethree months ended February 28,August 31, 1999 and 19981998. . . . . . . 5
Notes to Condensed Consolidated Financial StatementsStatements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of OperationsOperations. . . . . . . . . . . . . . . . 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 16
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 2017
ITEM 6. Exhibits and Reports on Form 8-K.8-K . . . . . . . . . . . . . . 20. 17
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2118
2
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
February 28,August 31, May 31,
1999 19981999
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 5,9153,541 $ 6,7485,336
Short-term investments. . . . . . . . . . . . . . 15,528 16,57916,998 14,847
Accounts receivable . . . . . . . . . . . . . . . 6,133 7,1823,993 3,533
Inventories . . . . . . . . . . . . . . . . . . . 10,136 11,9429,488 9,221
Prepaid expenses and other. . . . . . . . . . . . 1,715 1,4072,668 2,197
----------- -----------
Total current assets . . . . . . . . . . . . . 39,427 43,85836,688 35,134
Property and equipment, net.net . . . . . . . . . . . . 2,187 1,5411,835 1,936
Long-term investments.investments . . . . . . . . . . . . . . . 928 9041,459 3,235
Other assets, net.net . . . . . . . . . . . . . . . . . 733 8021,149 882
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $43,275 $47,105$41,131 $41,187
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . .bank debt. . . . . $ 168155 $ 86152
Accounts payable. . . . . . . . . . . . . . . . . 1,304 2,0842,566 1,005
Accrued expenses. . . . . . . . . . . . . . . . . 2,626 4,4922,017 2,440
Deferred revenue. . . . . . . . . . . . . . . . . 871 311300 521
----------- -----------
Total current liabilities.liabilities . . . . . . . . . . 4,969 6,9735,038 4,118
Long-term bank debt, net of current portion.portion . . . . . . 432 113
Deferred lease commitment. . . . . . . . . . . . . . -- 55397 391
----------- -----------
Total liabilities.liabilities . . . . . . . . . . . . . . 5,401 7,1415,435 4,509
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 6,8526,779 shares and
6,9176,756 shares at February 28,August 31, 1999 and
May 31, 1998,1999, respectively . . . . . . . . . . 69 6968 68
Additional paid-in capital . . . . . . . . . . . 35,204 35,46734,880 34,806
Retained earnings . . . . . . . . . . . . . . . 717 2,275
Net unrealized loss on investments(823) (55)
Accumulated other comprehensive income . . . . . . . (3) --
Cumulative translation adjustment . . . . . . . . 1,887 2,1531,571 1,859
----------- -----------
Total shareholders' equity . . . . . . . . . . 37,874 39,96435,696 36,678
----------- -----------
Total liabilities and shareholders' equityequity. . . $43,275 $47,105$41,131 $41,187
=========== ===========
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,
--------------------- ---------------------
1999 1998August 31,
-----------------------
1999 1998
---------- ----------
---------- ----------
Net sales. . . . . . . . . . . . . . $4,414 $11,567 $15,030 $34,980. . . . . $ 4,356 $ 5,430
Cost of sales. . . . . . . . . . . . 3,120 6,907 10,061 21,134
---------- ----------. . . . . 3,207 3,286
---------- ----------
Gross profit . . . . . . . . . . . . 1,294 4,660 4,969 13,846
---------- ----------. . . . . 1,149 2,144
---------- ----------
Operating expenses:
Selling, general and administrative 1,745 2,271 5,390 6,733
Research and developmentadministrative. . . . . . 1,178 1,202 3,718 3,5721,835 1,822
Research and development cost
reimbursement - DARPA . . . . . (319) (128) (891) (599)
---------- ---------- ---------- ----------
Total operating expenses . 2,604 3,345 8,217 9,706
---------- ---------- ---------- ----------
Income (loss) from operations . . . (1,310) 1,315 (3,248) 4,140
Interest income, net . . . . . . . . 270 349 902 577
Other income (expense), net . . . . 138 (7) 401 (224)
---------- ---------- ---------- ----------
Income (loss) before income taxes. . (902) 1,657 (1,945) 4,493
Income tax expense (benefit) . . . . (195) 826 (387) 2,140
---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . (707) 831 (1,558) 2,353
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation
adjustments (expense) . . . . . (63) (10) (266) 14
Unrealized holding losses arising
during period1,320 1,189
Research and development cost
reimbursement - DARPA. . . . . . . . . . (80) -- (3) --. (248) (250)
---------- ----------
---------- ----------
Comprehensive income (loss)Total operating expenses . . . . $ (850) $ 821 $(1,827) $ 2,367
========== ========== ========== ==========
Net income (loss) per share (basic) $(0.10) $ 0.12 $ (0.23) $ 0.38
Net income (loss) per share (diluted) $(0.10) $ 0.12 $ (0.23) $ 0.36
Shares used in per share calculation:
Basic. . . . 2,907 2,761
---------- ----------
Loss from operations . . . . . . . . . . . . . (1,758) (617)
Interest income. . . . . . . . . . . . . . . 6,842 6,839 6,884 6,134
Diluted. 276 315
Interest expense . . . . . . . . . . . . . 6,842 7,154 6,884 6,607. . (3) (3)
Other income (expense), net . . . . . . . . . 341 (54)
---------- ----------
Loss before income taxes . . . . . . . . . . . (1,144) (359)
Income tax benefit . . . . . . . . . . . . . . (376) --
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . $ (768) $ (359)
---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments (expense). . . . . . . . . . . (280) 15
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . (8) 6
---------- ----------
Comprehensive loss . . . . . . . . . . . . . . $ (1,056) $ (338)
========== ==========
Net income (loss) per share (basic). . . . . . $ (0.11) $ (0.05)
Net income (loss) per share (diluted). . . . . $ (0.11) $ (0.05)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 6,771 6,920
Diluted. . . . . . . . . . . . . . . . . . . 6,771 6,920
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)
NineThree Months Ended
February 28,August 31,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)loss . . . . . . . . . . . . . . . . . . $(1,558). . . . . $ 2,353(768) $ (359)
Adjustments to reconcile net income (loss)loss to net cash
provided by (used in)used in operating activities:
Provision for doubtful accounts. . . . . . . . . . . (104) 242
Loss (gain)(17) (126)
Gain on disposition of fixed assetsproperty and equipment. . . . . . (4) 13-- (3)
Depreciation and amortization. . . . . . . . . . . . 403 372255 112
Deferred income taxes. . . . . . . . . . . . . . . . (42) --38 (14)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . 1,260 (4,105)(373) 1,707
Inventories . . . . . . . . . . . . . . . . . . . 1,737 (264)(182) 83
Accounts payable. . . . . . . . . . . . . . . . . (1,304) (43)1,117 60
Accrued expenses and deferred revenue . . . . . . (1,333) 1,944(660) (1,350)
Deferred lease commitment . . . . . . . . . . . . (55) (123)-- (41)
Other assets and liabilities. . . . . . . . . . . (258) (202)(503) (100)
---------- ----------
Net cash provided by (used in)used in operating activities . . . . . . . . . . . . . . . . . (1,258) 187(1,093) (31)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments . . . . . . . 1,051 (9,326)
Purchase(2,151) 304
Sale (purchase) of long-term investments . . . . . . . . . . (27) (2,553)1,768 (224)
Acquisition of property and equipment . . . . . . . . . (816) (251)(124) (123)
Decrease (increase) in other assets . . . . . . . . . . 91 (134)(258) 150
---------- ----------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . 299 (12,264)(765) 107
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable -- banks. . . . . . . . . . . -- (4,326)
Borrowings under long-term debt . . . . . . . . . . . . 447 71-- 50
Long-term debt and capital lease principal payments . . (102) (84)(47) (32)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 217 27,077
Repurchase of common stock. . . . . . . . . . . . . . . (480) --74 25
---------- ----------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . 82 22,73827 43
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . 44 (17)36 18
---------- ----------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . (833) 10,644(1,795) 137
Cash and cash equivalents, beginning of period. . . . . 5,336 6,748 1,176
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $ 5,915 $11,8203,541 $ 6,885
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28,AUGUST 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying 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, 1998.1999. 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, during each period using the
treasury stock method.
Three Months Ended
Nine Months Ended
February 28, February 28,
---------------------August 31,
---------------------
1999 1998 1999 1998
---------- ----------
---------- ----------
(in thousands, except per share amounts)
(unaudited)
Basic EPS:
Net income (loss)loss . . . . . . . . . . . . . . $ (707)(768) $ 831 $(1,558) $2,353
========== ==========(359)
========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,842 6,839 6,884 6,134
========== ==========6,771 6,920
========== ==========
Net income (loss)loss per share (basic) $(0.10) $0.12 $ (0.23) $0.38
========== ==========. . . . . $(0.11) $(0.05)
========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,842 6,839 6,884 6,1346,771 6,920
Options . . . . . . . . . . . . . . -- 315 -- 473
---------- ----------
---------- ----------
Total Shares . . . . . . . . . . . . 6,842 7,154 6,884 6,607
========== ==========6,771 6,920
========== ==========
Net income (loss)loss per share (diluted) $(0.10) $0.12 $ (0.23) $0.36
========== ==========. . . . $(0.11) $(0.05)
========== ==========
3. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28,August 31, May 31,
1999 19981999
(unaudited)
----------- -----------
Raw materials and sub-assemblies $ 5,4914,837 $ 5,6884,931
Work in process 3,922 5,1734,189 3,876
Finished goods 723 1,081462 414
----------- -----------
$10,136 $11,942$ 9,488 $ 9,221
=========== ===========
7
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."
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
Nine Months Ended
February 28, February 28,August 31,
--------------------- ---------------------
1999 1998
1999 1998
---------- ----------
---------- ----------
Net sales. . . . . . . . . . . . . . 100.0 % 100.0 %. . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . 70.7 59.7 66.9 60.4
---------- ----------. . . 73.6 60.5
---------- ----------
Gross profit . . . . . . . . . . . . 29.3 40.3 33.1 39.6
---------- ----------. . . 26.4 39.5
---------- ----------
Operating expenses:
Selling, general and administrative 39.5 19.6 35.9 19.3administrative. . . 42.1 33.6
Research and development . . . . . 26.7 10.4 24.7 10.2. . . 30.3 21.9
Research and development cost
reimbursement - DARPA . . . . . (7.2) (1.1) (5.9) (1.7)
---------- ----------. . . (5.7) (4.6)
---------- ----------
Total operating expenses . 59.0 28.9 54.7 27.8
---------- ---------- ---------- ----------
Income (loss) from operations . . . (29.7) 11.4 (21.6) 11.8
Interest income, net . . . . . . . . 6.1 3.0 6.0 1.6
Other income (expense), net . . . . 3.2 (0.1) 2.7 (0.6)66.7 50.9
---------- ----------
---------- ----------
Income (loss) before income taxes. . (20.4) 14.3 (12.9) 12.8
Income tax expense (benefit) . . . . (4.4) 7.1 (2.5) 6.1
---------- ---------- ---------- ----------
Net income (loss)Loss from operations . . . . . . . . . . (16.0). (40.3) (11.4)
Interest income. . . . . . . . . . . . . . 6.3 5.8
Interest expense . . . . . . . . . . . . . -- --
Other income (expense), net . . . . . . . 7.8 (1.0)
---------- ----------
Loss before income taxes . . . . . . . . . (26.2) (6.6)
Income tax benefit . . . . . . . . . . . . (8.6) --
---------- ----------
Net loss . . . . . . . . . . . . . . . . . (17.6)% 7.2 (6.6)% (10.4)% 6.7 %
========== ==========
========== ==========
8
THREE MONTHS ENDED FEBRUARY 28,AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY
28,AUGUST 31,
1998
NET SALES. Net sales consist primarily of sales of systems, die carriers,
test fixtures, upgrades and spare parts and revenues from service contracts.
The Company recognizes revenue upon shipment of product. Net sales decreased
to $4.4 million in the three months ended February 28,August 31, 1999 from $11.6$5.4 million in
the three months ended February 28,August 31, 1998, a decrease of 61.8%19.8%. The decrease in
net sales in the three months ended February 28, 1999 resulted primarily from reduced shipments of MTXdynamic burn-in
products. The Company anticipates that net sales in the fourthsecond quarter of
fiscal 19992000 will decreaseincrease compared with the fourthsecond quarter of fiscal 1998.1999.
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
8
costs, and overhead from operations. Gross profit decreased to $1.3$1.1 million
in the three months ended February 28,August 31, 1999 from $4.7$2.1 million in the three
months ended February 28,August 31, 1998, a decrease of 72.2%46.4%. The decrease in gross
profit was primarily due to the decrease in net sales.sales and lower gross profit
margin. Gross profit margin decreased to 29.3%26.4% in the three months ended
February 28,August 31, 1999 from 40.3%39.5% in the three months ended February 28,August 31, 1998. The
decrease in gross profit margin was primarily due to a change in the product mix towardresult of competitive
pricing pressures on MTX products with somewhat
higher material costs and excess production capacity and manufacturing
overhead expenses spreading overof the lower shipment levels, partially offset by
decreases in provisions for warranty and inventory reserves.volume of net sales. The
Company anticipates that gross profit and gross profit margin in the fourthsecond quarter of fiscal
19992000 will decrease compared with the fourthsecond quarter of fiscal 1998.1999.
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 $1.7were unchanged at $1.8 million in the three months ended February 28,August 31,
1999 from $2.3 millionand in the three months ended February 28, 1998, a decrease of
23.2%. The decrease in SG&A expenses was primarily due to decreases in
employment related expenses, commissions paid to outside sales
representatives, and a reduction in provision for doubtful accounts.August 31, 1998. As a percentage of net
sales, SG&A expenses increased to 39.5%42.1% in the three months ended February 28,August 31,
1999 from 19.6%33.6% in the three months ended February 28,August 31, 1998, reflecting lower
net sales. The Company anticipates that SG&A expenses in the second quarter
of fiscal 2000 will increase compared with the first quarter of fiscal 2000.
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 atincreased to $1.3 million in the three months ended August 31, 1999 from $1.2
million in the three months ended February 28, 1999 and
the three months ended February 28, 1998.August 31, 1998, an increase of 11.0%. The
increase in R&D expenses was primarily due to an increase in engineering
project material expenses. As a percentage of net sales, R&D expenses
increased to 26.7%30.3% in the three months ended February 28,August 31, 1999 from 10.4%21.9% in the
three months ended February 28,August 31, 1998, primarily reflecting lower net sales. 9
The
Company anticipates that R&D expenses in the second quarter of fiscal 2000
will increase compared with the first quarter of fiscal 2000.
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 $319,000$248,000 in the
three months ended February 28,August 31, 1999 from $128,000$250,000 in the three months ended
February 28,August 31, 1998, an increasea decrease of 149.2%0.8%. Payments by DARPA depend on satisfaction
of development milestones, and the level of payments may vary significantly
from quarter to quarter. As of February 28,August 31, 1999, there were no unpaid DARPA invoices.outstanding
payments due from DARPA.
INTEREST INCOME. Interest income decreased to $270,000$276,000 in the three
months ended February 28,August 31, 1999 from $349,000$315,000 in the three months ended February 28,August
31, 1998, a decrease of 22.6%12.4%. The decrease in interest income was related to
a lower level of cash and investments and a lower rate of return on
investments.
INTEREST EXPENSE. Interest expense was unchanged at $3,000 in the three
months ended February 28,August 31, 1999 compared with the three months ended
February 28,and August 31, 1998, was primarily due to a lower level of investment.respectively.
OTHER INCOME (EXPENSE), NET. Other income, net was $138,000$341,000 in the three
months ended February 28,August 31, 1999, compared with other expense, net of $7,000$54,000 in
the three months ended February 28,August 31, 1998. The increase in other income, net in
the three months ended February 28,August 31, 1999 compared with other expense, net in the
three months ended February 28,August 31, 1998 was primarily due to an increase in
currency exchange gains recorded by the Company and its subsidiaries.
INCOME TAX EXPENSE (BENEFIT).BENEFIT. Income tax benefit was $195,000$376,000 in the three months
ended February 28,August 31, 1999, compared with income tax expense of
$826,000nil in the three months ended February 28,August 31,
1998. The income tax benefit in the three months ended August 31, 1999 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
9
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 net operating
losses available to offset future taxes payable.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 because no tax provision was recorded for the operating results of the
Company's Japanese subsidiary in either the three months ended February 28,
1999 or the three months ended February 28, 1998.
NINE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
1998
NET SALES. Net sales decreased to $15.0 million in the nine months ended
February 28, 1999 from $35.0 million in the nine months ended February 28,
1998, a decrease of 57.0%. The decrease in net sales resulted primarily from
reduced shipments of MTX products.
GROSS PROFIT. Gross profit decreased to $5.0 million in the nine months
ended February 28, 1999 from $13.8 million in the nine months ended February
28, 1998, a decrease of 64.1%. The decrease in gross profit was primarily due
to the decrease in net sales. Gross profit margin decreased to 33.1% in the
nine months ended February 28, 1999 from 39.6% in the nine months ended
February 28, 1998. The decrease in gross profit margin was primarily due to
excess production capacity and manufacturing overhead expenses spreading over
lower shipment levels, and a change in the product mix toward products with
somewhat higher material costs, partially offset by reductions in provisions
for warranty and inventory reserves.
10
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $5.4
million in the nine months ended February 28, 1999 from $6.7 million in the
nine months ended February 28, 1998, a decrease of 19.9%. The decrease in
SG&A expenses was primarily due to a decrease in commissions paid to outside
sales representatives, a decrease in employment related expenses, and a
reduction in provision for doubtful accounts, partially offset by an increase
in product support expenses. As a percentage of net sales, SG&A expenses
increased to 35.9% in the nine months ended February 28, 1999 from 19.3% in
the nine months ended February 28, 1998, reflecting lower net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $3.7 million in the
nine months ended February 28, 1999 from $3.6 million in the nine months ended
February 28, 1998, an increase of 4.1%. The increase in R&D expenses was
primarily due to increases in professional consulting and employment related
expenses. As a percentage of net sales, R&D expenses increased to 24.7% in
the nine months ended February 28, 1999 from 10.2% in the nine months ended
February 28, 1998, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA
increased to $891,000 in the nine months ended February 28, 1999 from $599,000
in the nine months ended February 28, 1998, an increase of 48.7%. 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 increased to $902,000 in the nine months
ended February 28, 1999 from $577,000 in the nine months ended February 28,
1998, an increase of 56.3%. Interest income in the nine months ended February
28, 1999 was primarily due to investment income from the proceeds obtained
from the initial public offering in August 1997. Interest income in the nine
months ended February 28, 1998 was also primarily due to investment income
from the proceeds obtained from the initial public offering in August 1997,
partially offset by interest expense of the short term domestic debt which was
subsequently repaid.
OTHER INCOME (EXPENSE), NET. Other income, net was $401,000 in the nine
months ended February 28, 1999, compared with other expense, net of $224,000
in the nine months ended February 28, 1998. The increase in other income, net
was primarily due to currency exchange gains recorded in the nine months ended
February 28, 1999 compared with currency exchange losses recorded in the nine
months ended February 28, 1998.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $387,000 in the nine
months ended February 28, 1999, compared with income tax expense of $2.1
million in the nine months ended February 28, 1998. The income tax rate did
not approximate the statutory tax rates of the jurisdictions in which the
Company operates primarily because no tax benefit wasis 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 February 28,August 31,
1999, the Company had $21.4$20.5 million in cash and short-term investments.
11
Net cash used in operating activities was approximately $1.3$1.1 million and
$31,000 for the ninethree months ended February 28,August 31, 1999 and net cash provided by operating
activities was $187,000 forAugust 31, 1998,
respectively. For the ninethree months ended February 28, 1998. For the
nine months ended February 28,August 31, 1999, net cash used in
operating activities was due primarily to the net loss of $1.6 million,$768,000 and a
decrease in accrued expenses and deferred revenue of $1.3 million and a decrease$660,000, partially
offset by an increase in accounts payable of $1.3 million, partially offset by a decrease in inventory of $1.7 million and
a decrease in accounts receivable of $1.3$1.1 million. For the ninethree
months ended February 28,August 31, 1998, net cash provided byused in operating activities was due
primarily to net income of $2.4 million and increasesa decrease in accrued expenses and deferred revenue of $1.9$1.4
million and the net loss of $359,000, partially offset by an increasea decrease in
accounts receivable of $4.1$1.7 million.
Net cash used in investing activities was approximately $765,000 for the
three months ended August 31, 1999, and net cash provided by investing
activities was approximately $299,000$107,000 for the ninethree months ended February 28, 1999, and net cash used in investing
activities was $12.3 million for the nine months ended February 28,August 31, 1998. The cash
used in investing activities during the ninethree months ended February 28,
1998August 31, 1999 was
primarily due to the short-termtiming of short and long-term investments made with
proceeds frommaturing and
being reinvested during the initial public offering in August 1997.period.
Financing activities provided cash of approximately $82,000$27,000 in the ninethree
months ended February 28,August 31, 1999 and $22.7 million$43,000 in the ninethree months ended February 28,August 31,
1998. The cash provided by financing activities during the ninethree months ended
February 28,August 31, 1999 was primarily due to the increase in long-term
debtproceeds from issuance of the Company's subsidiary in Japancommon
stock and proceeds from exercise of stock options, partially offset by the Company's repurchase of 129,500 of its
outstanding common shares at an average price of $3.71.long-term debt
principal payments. The cash provided by financing activities during the
ninethree months ended February 28,August 31, 1998 was primarily attributabledue to the Company's initial public offering in August
1997. In March 1999,borrowings under
long-term debt and the Company repurchased an additional 147,500 shares at
an average priceproceeds from issuance of $4.30.common stock and exercise of
stock options, partially offset by the long-term debt principal payments.
As of February 28,August 31, 1999, the Company had working capital of $34.5$31.7 million,
compared with $36.9$31.0 million as of May 31, 1998.1999. Working capital consists of
cash and cash equivalents, short-term cash deposits, accounts receivable,
inventory and other current assets, less current liabilities. The decreaseincrease in
working capital was primarily due to increases in short-term investments,
other current assets and accounts receivable, partially offset by a decrease
in inventory,cash and cash equivalents and an increase in accounts receivablepayable.
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 short-term investments, partially offset by decreases in
accrued expensescorporate needs, and accounts payable.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 August 31, 1999, the Company has repurchased 283,500
shares at an average price of $4.03.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
10
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 2000. After fiscal
2000, 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.
12
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report on Form 10-Q contains forward lookingforward-looking statements within the
meaning of the Securities Act 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 by such forward-looking
statements as a result of various factors, including those set forth as
follows and elsewhere in this quarterly report on Form 10-Q.
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, and
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.
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 over $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. Requested shipment delays by certain customers have negatively
impacted the Company's net sales in fiscal 1999.
RECENT OPERATING LOSSES. The Company incurred an operating loss of $4.6
million in fiscal 1999. The Company also incurred operating losses of $2.4,$2.1,
$4.2 and $2.1$2.4 million in fiscal 1993,1995, 1994 and 1995,1993, respectively. Although
theThe
Company operated profitably duringfrom fiscal 1996 1997 andto 1998, due to increased net
sales in those yearsthat were substantially the result of sales of new products,
particularly sales of MTX systems to Siemens.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. The Company
incurred operating losses in the first three quarters of fiscal 1999overcapacity and anticipates incurringrecorded an operating loss in fiscal
1999 and the fourthfirst quarter of fiscal 1999.2000. The Company expects to record a
net loss in the second quarter of fiscal 2000. There can be no assurance that
the industryCompany's net sales will soon rebound soon or that the Company will be able tosoon return
to profitability soon.profitability.
11
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. 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 final test
functions and that transferring such tests to MTX systems will reduce their
overall capital and test costs. The Company has experienced a decline in
shipments of MTX products in the first nine months of fiscal 1999 compared with fiscal 1998. Although
the same periodCompany received new production orders for MTX systems in the first
quarter of fiscal 2000, there can be no assurance that the previous fiscal year.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.
13
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 65.4%62.7%, 75.2%, and 69.2% of its net sales in the
first nine months of fiscal
1999, in fiscal 1998 and 1997, respectively. Siemens and Texas InstrumentsSales to the Company's five largest
customers accounted for 25.5% and 21.3%approximately 82.4% of its net sales in the first ninethree
months ofended August 31, 1999. During fiscal 1999, respectively. During fiscal 1998 and 1997, SiemensInfineon
(formerly the semiconductor group of Siemens) accounted for 21.9%, 47.0% and
55.7% of the Company's net sales, respectively. During fiscal 1999 and 1998,
Motorola Inc. accounted for 11.9% and 12.8% of the Company's net sales,
respectively. During fiscal 1999, Texas Instruments accounted for 18.1% of
net sales. No other customers represented more than 10% of the Company's net
sales for any of such periods.fiscal 1999, 1998 or 1997. 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,
as was the case in 1998.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 involveinvolves 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 70.5%72.7%,
92.5%70.5% and 90.4%92.5% of the Company's net sales for fiscal 1999, 1998 1997 and 1996,1997,
respectively, were attributable to sales to customers for delivery outside of
the United States. A substantial portion of the Company's sales havehas been in
Asia. TurmoilIn recent years, turmoil in the Asian financial markets 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 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
calendar 1998,fiscal 1999, and that the uncertainty of the DRAM market may cause some
manufacturers to further delay capital spending plans. Such developments
could have a material adverse affect on the Company's business, financial
condition and results of operations.
1412
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, products 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 is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The Company has
completed certain development milestones and received DARPA payment of $5.6
million through February 28,August 31, 1999. Payments by DARPA depend on satisfaction of
development milestones, and DARPA has the right to terminate project funding
at any time. If DARPA funding were discontinued and the Company continued the
project, the Company's operating results would be adversely affected. There
also 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 which 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 DiePak products face significant
competition. Texas Instruments Incorporated sells a temporary, reusable bare
die carrier, and the Company believes that several other companies have
developed or are developing other such 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 a
royalty-bearing license to one company 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.
15
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 the
first three quarters of fiscal
1998 and 1999. 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
13
cancellations and reschedulings of purchase orders, as was the case in the
industry in late 1995, early 1996, and 1998. There can be no assurance that
the Company will not be materially adversely affected by future cancellations
and reschedulings.
YEAR 2000. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has recognized the Year 2000 problem and has taken steps to
mitigate the situation. The Company's in-house information technology system
consists primarily of hardware and software purchased from outside parties.
The Company has completed vendor-provided upgrades of vendor-developed
software. Although the upgrades are claimed by the vendors to be Year 2000
compliant, the Company is testing the hardware and software for Year 2000
compliance and believes the tests will be complete by mid-1999.install vendor-provided software patches if necessary.
The Company is also testing the internally developed software and hardware
which is included in the products sold to customers. SuchThe Company expects such
assessments and modifications to existing software and conversion to new
software are expected
towill be completed by mid-1999.November 30, 1999. If, however, such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has had limited communications with its suppliers to determine
the extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issue. The failure of one or more of these
third parties to be Year 2000 compliant could result in a material adverse
effect on the Company's business, operating results and financial position.
The Company plans to makeis making inquiries to certain of the key third party suppliers to
assess their Year 2000 readiness, and expects that this process will be on-goingon-
going through the end of 1999. There, however,However, there can be no assurance that the
systems or subsystems of other companies on which the Company's systems rely
will be timely converted, or that a failure to convert by another company, or
a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.
The Company expects that costs to address the Year 2000 issue, directly or
indirectly, will total approximately $150,000, the majority of which will bewas spent
in the current fiscal year,1998 and 1999, with the remainder being spent during fiscal
2000. Costs include salary and related expenses, hardware and software costs,
consulting and miscellaneous expenses. To date, the Company has incurred
expenses of approximately $70,000$120,000 related to the assessment of and
preliminary efforts in dealing with the Year 2000 issue.
16
A most reasonably likely worst case Year 2000 scenario would be a
temporary interruption in production or shipping resulting from unanticipated
problems encountered in the information systems of the Company, or of any of
the significant third parties with whom the Company does business. The
pervasiveness of the Year 2000 issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while the information system and other systems are repaired
and that such interruptions would have a minor effect on the Company's
operations.
The costs of the planned Year 2000 modifications, and the dates by which
the Company expects to complete them, are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. There can be, however, no assurance
that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
14
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
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 ishas primarily been supplied only by Nitto
Denko Corporation. There can be no assurance that Nitto Denko will be able to
supply components within an acceptable timeframe andis currently manufacturing DiePak substrates,
but it has notified the Company does not have
formal written supply agreements with Nitto Denko.of its intention to stop manufacturing these
substrates. The Company is currently qualifying an alternate supplier for the
DiePak substrate. In the event that any significant subcontractor or single
source supplier werewas 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,
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.
17
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 President
and 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
15
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.
18
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,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
19Item 3. Quantitative 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 August 31, 1999.
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 has long-term debt that carries fixed interest rates.
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 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
16
yen as compared with the dollar would potentially result in an additional net
loss of approximately $320,000.
PART II - OTHER INFORMATION
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 $ 1,143,2741,206,274
Repayment of indebtedness 4,455,179
Working capital 1,628,8441,463,844
Temporary investments, including cash and cash equivalents 19,605,00019,707,000
------------
Total $26,832,297
============
All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons owning
ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates
of the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company
during the quarter ended February 28,August 31, 1999.
2017
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 13,October 14, 1999 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: April 13,October 14, 1999 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
2118