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 August 31, 2001.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 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 August 31, 2001 was 7,128,811.
1
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2001
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
August 31, 2001 and May 31, 2001 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months ended August 31, 2001 and 2000. . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 2001 and 2000. . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 19
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 19
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 19
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 19
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
PART I. FINANCIAL STATEMENTS
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
August 31, May 31,
2001 2001
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 9,678 $10,391
Short-term investments. . . . . . . . . . . . . 5,853 3,764
Accounts receivable . . . . . . . . . . . . . . 3,196 5,751
Inventories . . . . . . . . . . . . . . . . . . 9,730 10,125
Prepaid expenses and other. . . . . . . . . . . 3,544 3,321
----------- -----------
Total current assets . . . . . . . . . . . . 32,001 33,352
Property and equipment, net . . . . . . . . . . . 1,980 2,103
Long-term investments . . . . . . . . . . . . . . 1,743 2,267
Other assets, net . . . . . . . . . . . . . . . . 1,934 1,870
----------- -----------
Total assets . . . . . . . . . . . . . . . . $37,658 $39,592
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 591 $ 1,213
Accrued expenses. . . . . . . . . . . . . . . . 2,571 3,336
Deferred revenue. . . . . . . . . . . . . . . . 51 51
----------- -----------
Total current liabilities . . . . . . . . . . 3,213 4,600
Deferred revenue. . . . . . . . . . . . . . . . . 39 39
Deferred lease commitment . . . . . . . . . . . . 168 146
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,420 4,785
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 7,129 shares and
7,116 shares at August 31, 2001 and
May 31, 2001, respectively. . . . . . . . . . 71 71
Additional paid-in capital. . . . . . . . . . . 36,182 36,134
Notes receivable from shareholders. . . . . . . (84) (84)
Net unrealized gain on investments. . . . . . . 26 19
Cumulative translation adjustment . . . . . . . 1,478 1,468
Accumulated deficit . . . . . . . . . . . . . . (3,435) (2,801)
----------- -----------
Total shareholders' equity . . . . . . . . . 34,238 34,807
----------- -----------
Total liabilities and shareholders' equity. . $37,658 $39,592
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
August 31,
----------------------
2001 2000
---------- ----------
Net sales. . . . . . . . . . . . . . . . . . . $ 2,805 $ 8,706
Cost of sales. . . . . . . . . . . . . . . . . 1,410 5,320
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 1,395 3,386
---------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,631 2,018
Research and development . . . . . . . . . . 966 1,252
---------- ----------
Total operating expenses . . . . . . . . 2,597 3,270
---------- ----------
Income (loss) from operations. . . . . . . . . (1,202) 116
Interest income. . . . . . . . . . . . . . . . 168 233
Interest expense . . . . . . . . . . . . . . . -- (3)
Other income, net . . . . . . . . . . . . . . 101 --
---------- ----------
Income (loss) before income taxes. . . . . . . (933) 346
Income tax expense (benefit) . . . . . . . . . (299) 182
---------- ----------
Income (loss) before cumulative effect of
change in accounting principle . . . . . . . (634) 164
Cumulative effect of change in accounting
principle - net of tax . . . . . . . . . . . -- (1,629)
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . (634) (1,465)
---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments income (expense) . . . . . . . 10 (49)
Unrealized holding gains arising
during period. . . . . . . . . . . . . . . 5 5
---------- ----------
Comprehensive loss . . . . . . . . . . . . . . $ (619) $(1,509)
========== ==========
Net loss per share (basic) . . . . . . . . . . $ (0.09) $ (0.21)
Net loss per share (diluted) . . . . . . . . . $ (0.09) $ (0.21)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,123 6,964
Diluted. . . . . . . . . . . . . . . . . . . 7,123 6,964
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)
Three Months Ended
August 31,
----------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss...................................... $ (634) $(1,465)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Cumulative effect of change in
accounting principle...................... -- 1,629
Provision for doubtful accounts............. (18) 23
Depreciation and amortization............... 361 154
Deferred income taxes....................... (4) 96
Changes in operating assets and liabilities:
Accounts receivable....................... 2,590 (1,493)
Inventories............................... 211 661
Accounts payable.......................... (463) (1,322)
Accrued expenses and deferred revenue..... (781) 425
Deferred lease commitment................. 22 27
Other current assets...................... (231) (5)
---------- ----------
Net cash provided by (used in)
operating activities.................. 1,053 (1,270)
---------- ----------
Cash flows from investing activities:
(Increase) decrease in short-
term investments.......................... (2,089) 1,883
Decrease in long-term investments........... 531 585
Additions to property and equipment......... (229) (17)
Increase in other assets.................... (61) (65)
---------- ----------
Net cash provided by (used in)
investing activities.................. (1,848) 2,386
---------- ----------
Cash flows from financing activities:
Long-term debt and capital lease
principal payments........................ -- (37)
Proceeds from issuance of common stock
and exercise of stock options............. 52 429
Repurchase of common stock.................. (4) --
---------- ----------
Net cash provided by
financing activities.................. 48 392
---------- ----------
Effect of exchange rates on cash................ 34 (113)
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (713) 1,395
Cash and cash equivalents, beginning of period.. 10,391 8,323
---------- ----------
Cash and cash equivalents, end of period........ $9,678 $9,718
========== ==========
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 AUGUST 31, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, in accordance with the
instructions to Form 10-Q and therefore does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company"). All significant intercompany balances have been eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the consolidated financial position and
results of operations as of and for such periods indicated. These
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 2001. 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
August 31,
---------- ----------
2001 2000
---------- ----------
(in thousands, except per share amounts)
(unaudited)
Income (loss) available to common
shareholders before cumulative effect
of change in accounting principle:
Numerator: Income (loss) before
cumulative effect of change in
accounting principle............................. $ (634) $ 164
---------- ----------
Denominator for basic income (loss) per share:
Weighted-average shares outstanding ............. 7,123 6,964
---------- ----------
Shares used in basic per share calculation......... 7,123 6,964
Effect of dilutive securities:
Employee stock options......................... -- 272
---------- ----------
Denominator for diluted income (loss)
per share...................................... 7,123 7,236
---------- ----------
Basic income (loss) per share before
cumulative effect of change in
accounting principle............................. $(0.09) $ 0.02
========== ==========
Diluted income (loss) per share before
cumulative effect of change in
accounting principle............................. $(0.09) $ 0.02
========== ==========
Net loss available to common shareholders:
Numerator: Net loss................................ $ (634) $(1,465)
---------- ----------
Denominator for basic loss per share:
Weighted-average shares outstanding ............. 7,123 6,964
---------- ----------
Shares used in basic per share calculation......... 7,123 6,964
Effect of dilutive securities:
Employee stock options......................... -- --
---------- ----------
Denominator for diluted loss per share............. 7,123 6,964
---------- ----------
Basic loss per share............................... $(0.09) $ (0.21)
========== ==========
Diluted loss per share............................. $(0.09) $ (0.21)
========== ==========
7
3. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, May 31,
2001 2001
(unaudited)
----------- -----------
Raw materials and subassemblies $4,378 $ 4,479
Work in process 4,986 4,779
Finished goods 366 867
----------- -----------
$9,730 $10,125
=========== ===========
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):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended August 31, 2001:
Net sales...................... $ 2,421 $ 126 $ 301 $ (43) $ 2,805
Portion of U.S. net sales
from export sales............ 1,201 -- -- -- 1,201
Income (loss) from operations.. (1,110) (233) 81 60 (1,202)
Identifiable assets............ 44,560 1,803 869 (9,574) 37,658
Long-lived assets.............. 1,623 326 31 -- 1,980
2001:
Net sales...................... $28,176 $4,048 $1,730 $(2,915) $31,039
Portion of U.S. net sales
from export sales............ 15,934 -- -- -- 15,934
Income (loss) from operations.. 1,864 (410) (33) 51 1,472
Identifiable assets............ 46,397 2,206 863 (9,874) 39,592
Long-lived assets.............. 1,740 328 35 -- 2,103
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFA" 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments
including standalone instruments, as forward currency exchange contracts and
8
interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of the transaction. The Company adopted the
provisions of SFAS 133 as of the required effective date. The adoption of the
SFAS 133 did not have a material effect on the Company's financial position or
results of operations.
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. The Company 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.
In July 21, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets," 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, the impact SFAS 142 will have on its financial statements.
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
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 may 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." The forward-looking statements contained herein are
made as of the date hereof, and the Company assumes no obligation to update
such forward-looking statements or to update reasons actual results could
differ materially from those anticipated in such forward-looking statements.
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
August 31,
---------------------
2001 2000
---------- ----------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 50.3 61.1
---------- ----------
Gross profit . . . . . . . . . . . . . . . 49.7 38.9
---------- ----------
Operating expenses:
Selling, general and administrative. . . 58.1 23.2
Research and development . . . . . . . . 34.4 14.4
---------- ----------
Total operating expenses . . . . 92.5 37.6
---------- ----------
Income (loss) from operations. . . . . . . (42.8) 1.3
Interest income. . . . . . . . . . . . . . 5.9 2.7
Interest expense . . . . . . . . . . . . . -- --
Other income net . . . . . . . . . . . . . 3.6 --
---------- ----------
Income (loss) before income taxes. . . . . (33.3) 4.0
Income tax expense (benefit) . . . . . . . (10.7) 2.1
---------- ----------
Income (loss) before cumulative effect of
change in accounting principle . . . . . (22.6) 1.9
Cumulative effect of change in accounting
principle - net of tax . . . . . . . . . -- (18.7)
---------- ----------
Net loss. . . . . . . . . . . .. . . . . . (22.6)% (16.8)%
========== ==========
THREE MONTHS ENDED AUGUST 31, 2001 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2000
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 and defers recognition of revenue
10
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 is recorded at the time the products are shipped. Net
sales decreased to $2.8 million in the three months ended August 31, 2001 from
$8.7 million in the three months ended August 31, 2000, a decrease of 67.8%.
The decrease in net sales resulted primarily from decreases in sales of
dynamic burn-in products of approximately $3.8 million and MTX products of
approximately $2.0 million. The Company anticipates that operating results in
the second quarter of fiscal 2002 will be similar to the operating results in
the first quarter of fiscal 2002.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit decreased to $1.4 million
in the three months ended August 31, 2001 from $3.4 million in the three
months ended August 31, 2000, a decrease of 58.8%. Gross profit margin
increased to 49.7% in the three months ended August 31, 2001 from 38.9% in the
three months ended August 31, 2000. The increase in gross profit margin was
primarily the result of a change in product mix, particularly an increase in
upgrades and a decrease in systems sold, resulting in lower material costs as
a percentage of net sales.
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 $1.6 million in the three months ended August 31, 2001
from $2.0 million in the three months ended August 31, 2000, a decrease of
19.2%. The decrease in SG&A expenses was primarily due to decreases in
product support expenses and employment related expenses of $146,000 and
$95,000, respectively. As a percentage of net sales, SG&A expenses increased
to 58.1% in the three months ended August 31, 2001 from 23.2% in the three
months ended August 31, 2000, reflecting lower net sales.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
decreased to $966,000 in the three months ended August 31, 2001 from $1.3
million in the three months ended August 31, 2000, a decrease of 22.8%. The
decrease in R&D expenses was primarily due to decreases in employment related
expenses, facilities expenses and project material expenses of $85,000,
$52,000 and $31,000, respectively. As a percentage of net sales, R&D expenses
increased to 34.4% in the three months ended August 31, 2001 from 14.4% in the
three months ended August 31, 2000, reflecting lower net sales.
INTEREST INCOME. Interest income decreased to $168,000 in the three
months ended August 31, 2001 from $233,000 in the three months ended August
31, 2000, a decrease of 27.9%. The decrease in interest income was primarily
related to a lower average rate of return on investments.
INTEREST EXPENSE. Interest expense was nil in the three months ended
August 31, 2001, compared with interest expense of $3,000 in the three months
ended August 31, 2000, primarily the result of the full repayment of
outstanding debt in the fourth quarter of fiscal 2001.
OTHER INCOME (EXPENSE), NET. Other income, net was $101,000 in the three
months ended August 31, 2001, compared with other income, net of nil in the
three months ended August 31, 2000, primarily due to equity income recorded in
the three months ended August 31, 2001 related to the Company's 25% ownership
in ESA Electronics PTE Ltd.
11
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $299,000 in the
three months ended August 31, 2001, compared with income tax expense of
$182,000 in the three months ended August 31, 2000. The income tax benefit in
the three months ended August 31, 2001 was primarily due to the tax benefit
recorded as a result of losses incurred in the Company's U.S. operations. The
income tax expense in the three months ended August 31, 2000 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 when its U.S. operations were 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.
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,
2001, the Company had $15.5 million in cash and short-term investments.
Net cash provided by operating activities was approximately $1.1 million
for the three months ended August 31, 2001, and net cash used in operating
activities was approximately $1.3 million for the three months ended August
31, 2000. For the three months ended August 31, 2001, net cash provided by
operating activities was due primarily to a decrease in accounts receivable of
$2.6 million, partially offset by net loss and decreases in accounts payable
and accrued expenses. For the three months ended August 31, 2000, net cash
used in operating activities was due primarily to an increase in accounts
receivable of $1.5 million and a decrease in accounts payable of $1.3 million,
partially offset by a decrease in inventory of $661,000 and an increase in
accrued expenses and deferred revenue of $425,000.
Net cash used in investing activities was approximately $1.8 million for
the three months ended August 31, 2001, and net cash provided by investing
activities was approximately $2.4 million for the three months ended August
31, 2000. Net cash used in investing activities during the three months ended
August 31, 2001 was primarily due to the purchase of short-term investments.
Net cash provided by investing activities during the three months ended August
31, 2000 was primarily due to the sales of short-term and long-term
investments.
Financing activities provided cash of approximately $48,000 in the three
months ended August 31, 2001 and $392,000 in the three months ended August 31,
2000. Net cash provided by financing activities during the three month
periods ended August 31, 2001 and August 31, 2000 was primarily due to the
proceeds from issuance of common stock and exercise of stock options.
As of August 31, 2001, the Company had working capital of $28.8 million,
compared with $28.8 million as of May 31, 2001. Working capital consists of
cash and cash equivalents, short-term 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
12
working capital. Through September 24, 2001, the Company had repurchased
434,600 shares at an average price of $4.24. 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 2002. After fiscal
2002, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required, or if available, that
such financing can be obtained on terms satisfactory to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Special Note Regarding Forward Looking Statements
This 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
our current plans, estimates and beliefs. We do not undertake, and
specifically decline, any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. The Company's future operating results will
depend upon a variety of factors, including the timing of significant orders,
the mix of products sold, changes in pricing by the Company, its competitors,
customers or suppliers, market acceptance of new products and enhanced
versions of the Company's products, capital spending patterns by customers,
the Company's ability to produce systems and products in volume and meet
customer requirements. The Company's gross margins have varied and will
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 purchase price from
approximately $200,000 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
13
by suppliers, could cause net sales in a particular quarter to fall
significantly below the Company's expectations.
RECENT OPERATING LOSSES. The Company incurred operating losses of $5.2
million and $4.6 million in fiscal 2000 and 1999, respectively. The Company
also incurred operating losses of $2.1, $4.2 and $2.4 million in fiscal 1995,
1994 and 1993, respectively. The Company operated profitably from fiscal 1996
to 1998, due to increased net sales that were substantially the result of
sales of new products, particularly sales of MTX systems. 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. Although the Company operated
profitably in fiscal 2001, a dramatic downturn in the semiconductor equipment
industry began in fiscal 2001, resulting in the Company recording
significantly lower revenues and operating loss in the first quarter of fiscal
2002. Given the Company's lack of visibility, due to the continued industry
downturn, the Company anticipates that the operating results for the second
quarter of fiscal 2002 will be similar to those of the first quarter of fiscal
2002.
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 FOX
is a new system 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 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%, 64.3% and 62.7% of its net sales in fiscal
2001, 2000 and 1999, respectively. Sales to the Company's five largest
customers accounted for approximately 81.0% of its net sales in the three
months ended August 31, 2001. 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
14
10% of the Company's net sales for fiscal 2001, 2000 and 1999. The loss of or
reduction or delay in orders from a significant customer, or a delay in
collecting or failure to collect accounts receivable from a significant
customer could adversely affect the Company's business, financial condition
and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems. The
market for burn-in systems is mature and estimated to be less than $100
million per year. There can be no assurance that the market for burn-in
systems will grow, and sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involves a significant commitment of capital. The
loss of individual orders due to the lengthy sales and evaluation cycle, or
delays in the sale of even a limited number of systems could have a material
adverse effect on the Company's business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 60.6%,
73.3% and 72.7% of the Company's net sales for fiscal 2001, 2000 and 1999,
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 1999, 2001 and early fiscal 2002, and that the
uncertainty of the DRAM market may cause some manufacturers in the future to
again 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
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
15
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
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 sufficient technological know-how and
manufacturing capability. The Company's DiePak products 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 memories
in particular, historically have been highly volatile and have experienced
periodic downturns and slowdowns. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1999, 2000, 2001 and early 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 and 2001. There can
be no assurance that the Company will not be materially adversely affected by
future cancellations and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company's MTX, MAX, ATX and FOX systems 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
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
16
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company is
unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its Chief
Executive Officer, as well as other executive officers and key employees. The
loss of the services of any of its executive officers or a group of key
employees could have a material adverse effect on the Company's business,
financial condition and operating results. The Company's future success will
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,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
17
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain of the statements and subject areas contained herein in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are not based on historical or current facts deal with or may
be impacted by potential future circumstances and developments. Such
statements and the discussion of such subject areas involve, and are therefore
qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's
actual future experience involving any one or more of such subject areas. The
Company has attempted to identify, in context, certain of the factors that it
currently believes may cause actual future experience and results to differ
from current expectations regarding the relevant statement or subject area.
The Company's operations and results may be subject to the effect of other
risks and uncertainties in addition to the relevant qualifying factors
identified herein, including but not limited to, cyclicality and seasonality
in the industries to which the Company sells its products, the impact of
competitive products and pricing, extraordinary fluctuations in the pricing
and supply of the Company's raw materials, volatility of commodities markets,
unanticipated developments in the areas of environmental compliance and other
risks and uncertainties identified from time to time in the Company's reports
filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market 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, 2001.
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 $174,000.
18
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) No reports on Form 8-K were filed by the Company
during the quarter ended August 31, 2001.
19
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: October 12, 2001 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: October 12, 2001 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
20