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, 2006.
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
--- ---
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
1
Number of shares of Common Stock, $0.01 par value, outstanding
at March 31, 2006 was 7,561,286.
2
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2006
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2006 and May 31, 2005 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 2006 and 2005. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2006 and 2005 . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 18
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 23
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 23
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3
PART I. FINANCIAL STATEMENTS
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
February 28, May 31,
2006 2005
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 7,755 $ 4,952
Short-term investments. . . . . . . . . . . . . 2,200 3,813
Accounts receivable, net of allowances for
doubtful accounts of $41 and $80 at
February 28, 2006 and May 31, 2005,
respectively . . . . . . . . . . . . . . . . 2,851 2,537
Inventories . . . . . . . . . . . . . . . . . . 7,821 7,140
Prepaid expenses and other. . . . . . . . . . . 354 585
----------- -----------
Total current assets . . . . . . . . . . . . 20,981 19,027
Property and equipment, net . . . . . . . . . . . 1,028 1,232
Long-term investments . . . . . . . . . . . . . . -- 409
Goodwill. . . . . . . . . . . . . . . . . . . . . 274 274
Other assets, net . . . . . . . . . . . . . . . . 522 527
----------- -----------
Total assets . . . . . . . . . . . . . . . . $22,805 $21,469
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 1,316 $ 1,050
Accrued expenses. . . . . . . . . . . . . . . . 2,119 1,943
Deferred revenue. . . . . . . . . . . . . . . . 1,331 692
----------- -----------
Total current liabilities . . . . . . . . . . 4,766 3,685
Accrued lease commitment. . . . . . . . . . . . . 318 332
----------- -----------
Total liabilities . . . . . . . . . . . . . . 5,084 4,017
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 7,508 shares and
7,482 shares at February 28, 2006 and
May 31, 2005, respectively. . . . . . . . . . 75 75
Additional paid-in capital. . . . . . . . . . . 37,639 37,568
Accumulated other comprehensive income. . . . . 1,166 1,250
Accumulated deficit . . . . . . . . . . . . . . (21,159) (21,441)
----------- -----------
Total shareholders' equity . . . . . . . . . 17,721 17,452
----------- -----------
Total liabilities and shareholders' equity. . $22,805 $21,469
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- --------------------
2006 2005 2006 2005
--------- --------- -------- --------
Net sales. . . . . . . . . . . . . . . . . . . $6,318 $2,084 $16,781 $12,810
Cost of sales. . . . . . . . . . . . . . . . . 3,780 1,281 9,350 9,452
--------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . 2,538 803 7,431 3,358
--------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . . . . 1,328 1,265 4,322 3,812
Research and development . . . . . . . . . . 1,015 868 3,055 2,885
--------- --------- -------- --------
Total operating expenses . . . . . . . . 2,343 2,133 7,377 6,697
--------- --------- -------- --------
Income (loss) from operations . . . . . . . . 195 (1,330) 54 (3,339)
Interest income . . . . . . . . . . . . . . . 77 40 157 96
Other income, net . . . . . . . . . . . . . . 102 13 116 209
--------- --------- -------- --------
Income (loss) before income taxes . . . . . . 374 (1,277) 327 (3,034)
Income tax expense (benefit) . . . . . . . . . 14 (54) 45 112
--------- --------- -------- --------
Net income (loss) . . . . . . . . . . . . . . $ 360 $(1,223) $ 282 $(3,146)
========= ========= ======== ========
Net income (loss) per share (basic) . . . . . $ 0.05 $ (0.16) $ 0.04 $ (0.42)
Net income (loss) per share (diluted) . . . . $ 0.05 $ (0.16) $ 0.04 $ (0.42)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,508 7,426 7,495 7,410
Diluted. . . . . . . . . . . . . . . . . . . 7,550 7,426 7,507 7,410
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
February 28,
----------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss)............................. $ 282 $(3,146)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for doubtful accounts............. (38) (8)
Depreciation and amortization............... 280 244
Loss on disposal of property and equipment.. 64 --
Changes in operating assets and liabilities:
Accounts receivable....................... (295) 1,428
Inventories............................... (712) 623
Accounts payable.......................... 296 (1,553)
Accrued expenses and deferred revenue..... 875 78
Accrued lease commitment ................. (14) 6
Prepaid expenses and other................ 227 (56)
---------- ----------
Net cash provided by (used in)
operating activities.................. 965 (2,384)
---------- ----------
Cash flows from investing activities:
Purchase of investments..................... (7,190) (9,518)
Net proceeds from sales and
maturity of investments................... 9,212 12,587
Purchase of property and equipment ......... (91) (181)
---------- ----------
Net cash provided by
investing activities.................. 1,931 2,888
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 71 88
---------- ----------
Net cash provided by
financing activities.................. 71 88
---------- ----------
Effect of exchange rates on cash................ (164) 35
---------- ----------
Net increase in cash and
cash equivalents...................... 2,803 627
Cash and cash equivalents, beginning of period.. 4,952 4,041
---------- ----------
Cash and cash equivalents, end of period........ $ 7,755 $ 4,668
========== ==========
Supplementary disclosure of non-cash item:
Transfer of inventory to property and equipment. $ 231 --
========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 2006
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") 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 accounting principles generally accepted in the United States
of America.
In the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the condensed consolidated financial position and results
of operations as of and for such periods indicated. These condensed
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, 2005. 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.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company," "we," "us," and "our"). All significant intercompany balances
have been eliminated in consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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.
REVISION IN CLASSIFICATION OF CERTAIN SECURITIES. During the third
quarter of fiscal 2005, the Company concluded that it was appropriate to
classify auction rate securities as short-term investments. Previously, such
investments had been classified as cash and cash equivalents. The Company has
made corresponding revisions to the accompanying statements of cash flows to
reflect the purchases and proceeds from sales of the auction rate securities
as investing activities. These revisions resulted in a net increase in cash
provided by investing activities of $900,000 in the nine months ended February
28, 2005. These revisions had no impact on previously reported results of
operations, operating cash flows or working capital of the Company.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). Under APB 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's shares and the exercise price of the option. Stock-based
compensation for consultants or other third parties are accounted for in
7
accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services."
For purposes of pro forma disclosures, the estimated fair value of the
stock options and grants under the Company's Employee Stock Purchase Plan are
amortized to expense over the vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2006 2005 2006 2005
--------- --------- --------- ---------
(unaudited)
Net income (loss), as reported:............. $ 360 $(1,223) $ 282 $(3,146)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects......................... (203) (190) (611) (588)
--------- --------- --------- ---------
Pro forma net income (loss)................. $ 157 $ (1,413) $ (329) $(3,734)
========= ========= ========= =========
Net income (loss) per share:
Basic, as reported.......................... $ 0.05 $ (0.16) $ 0.04 $ (0.42)
========= ========= ========= =========
Basic, pro forma............................ $ 0.02 $ (0.19) $ (0.04) $ (0.50)
========= ========= ========= =========
Diluted, as reported........................ $ 0.05 $ (0.16) $ 0.04 $ (0.42)
========= ========= ========= =========
Diluted, pro forma.......................... $ 0.02 $ (0.19) $ (0.04) $ (0.50)
========= ========= ========= =========
The above pro forma effects on net income (loss) may not be representative
of the effects on net income (loss) for future years as option grants
typically vest over several years and additional options are generally granted
each year.
The fair value of each option and stock purchase plan grant has been
estimated on the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions:
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2006 2005 2006 2005
--------- --------- --------- ---------
Risk-free Interest Rate .............. 4.44% 3.69% 4.22% 3.60%
Expected Life......................... 5 years 5 years 5 years 5 years
Volatility............................ 75% 85% 75% 85%
Dividend Yield........................ -- -- -- --
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), is now effective for public companies for
annual reporting periods beginning after June 15, 2005 (the first quarter of
fiscal 2007 for the Company). The impact of SFAS 123R on the Company in
fiscal 2007 and beyond will depend upon various factors, among them being the
Company's future compensation strategy. The pro forma compensation costs
presented in the table above and in prior filings for the Company have been
calculated using the Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future years. As of the
date of this filing, no decisions have been made as to the selection of an
option pricing model and a transition method for adoption. The Company
expects that the adoption of SFAS 123R will have an adverse impact on the
Company's consolidated statements of operations.
8
3. EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares (common stock options) outstanding, when
dilutive, during each period using the treasury stock method.
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands, except per share amounts)
(unaudited)
Net income (loss) available to common
shareholders:
Numerator: Net income (loss)................ $ 360 $ (1,223) $ 282 $ (3,146)
--------- --------- --------- ---------
Denominator for basic net income (loss) per
share:
Weighted-average shares outstanding ...... 7,508 7,426 7,495 7,410
--------- --------- --------- ---------
Shares used in basic per share calculation.. 7,508 7,426 7,495 7,410
Effect of dilutive securities:
Employee stock options.................. 42 -- 12 --
--------- --------- --------- ---------
Denominator for diluted net income (loss)
per share............................... 7,550 7,426 7,507 7,410
--------- --------- --------- ---------
Basic net income (loss) per share........... $ 0.05 $ (0.16) $ 0.04 $ (0.42)
========= ========= ========= =========
Diluted net income (loss) per share......... $ 0.05 $ (0.16) $ 0.04 $ (0.42)
========= ========= ========= =========
Stock options to purchase 1,389,478 and 1,285,523 shares of common stock
were outstanding on February 28, 2006 and 2005, respectively. Stock options
to purchase 1,180,787 shares and 1,199,890 shares were not included in the
computation of diluted net income per share in the three and nine months ended
February 28, 2006, because the inclusion of such shares would be anti-
dilutive. Stock options to purchase 1,285,523 shares of common stock were not
included in the computation of diluted net loss per share in fiscal 2005
because the inclusion of such shares would be anti-dilutive.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2006 2005
----------- -----------
(unaudited)
Raw materials and sub-assemblies $3,081 $2,939
Work in process 3,029 3,694
Finished goods 1,711 507
----------- -----------
$7,821 $7,140
=========== ===========
5. SEGMENT INFORMATION
The Company operates in one reportable segment; the design, manufacture
and marketing of advanced test and burn-in products to the semiconductor
manufacturing industry.
The following presents information about the Company's operations in
different geographic areas (in thousands, unaudited):
9
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28, 2006:
Net sales...................... $ 5,747 $ 550 $ 556 $ (535) $ 6,318
Portion of U.S. net sales
from export sales............ 4,119 -- -- -- 4,119
Income (loss) from operations.. 190 (39) 43 1 195
Identifiable assets............ 31,249 1,773 988 (11,205) 22,805
Property and equipment, net.... 859 139 30 -- 1,028
Nine months ended February 28, 2006:
Net sales...................... $15,054 $2,110 $1,135 $(1,518) $16,781
Portion of U.S. net sales
from export sales............ 12,059 -- -- -- 12,059
Income(loss) from operations... -- (36) 86 4 54
Identifiable assets............ 31,249 1,773 988 (11,205) 22,805
Property and equipment, net.... 859 139 30 -- 1,028
Three months ended February 28, 2005:
Net sales...................... $ 2,020 $ 277 $ 272 $ (485) $ 2,084
Portion of U.S. net sales
from export sales............ 732 -- -- -- 732
Loss from operations .......... (1,038) (139) (58) (95) (1,330)
Identifiable assets............ 30,761 1,191 1,340 (10,871) 22,421
Property and equipment, net.... 913 292 37 -- 1,242
Nine months ended February 28, 2005:
Net sales...................... $11,517 $ 751 $1,672 $(1,130) $12,810
Portion of U.S. net sales
from export sales............ 9,136 -- -- -- 9,136
Income (loss) from operations.. (3,167) (377) 276 (71) (3,339)
Identifiable assets............ 30,761 1,191 1,340 (10,871) 22,421
Property and equipment, net.... 913 292 37 -- 1,242
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.
6. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time the products are shipped. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from the Company's
estimates, revisions to the estimated warranty liability would be required.
Following is a summary of changes in the Company's liability for product
warranties during the three months and nine months ended February 28, 2006 and
2005:
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands, unaudited)
Balance at the beginning of the period . . . $119 $103 $213 $146
Accruals for warranties issued
during the period . . . . . . . . . . . . 92 43 148 129
Reversals of warranties issued
during the period . . . . . . . . . . . . -- -- (52) --
Settlement made during the period
(in cash or in kind) . . . . . . . . . . . (88) (44) (186) (173)
--------- --------- --------- ---------
Balance at the end of the period . . . . . . $123 $102 $123 $102
======= ======= ======= =======
10
7. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss), net of tax are comprised of the following :
Three Months Ended Nine Months Ended
February 28 February 28
--------------------- --------------------
2006 2005 2006 2005
--------- ---------- --------- --------
(in thousands, unaudited)
Net income (loss) . . . . . . . . . . . . . . $ 360 $(1,223) $ 282 $(3,146)
Foreign currency translation
adjustments expense. . . . . . . . . . . . . (27) (23) (91) (83)
Unrealized holding gains (losses) arising
during period . . . . . . . . . . . . . . . 3 1 7 (5)
--------- --------- -------- --------
Comprehensive income (loss) . . . . . . . . . $ 336 $(1,245) $ 198 $(3,234)
========= ========= ======== ========
8. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs
- - an Amendment of ARB No. 43, Chapter 4". This statement clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) to require them to be recognized as
current-period charges and to require the allocation of fixed production
overhead to inventory based on the normal capacity of a production facility.
This statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this statement is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Non-monetary Assets - An Amendment of APB
Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates the exception from fair
value measurement for non-monetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary
Transactions," and replaces it with the exception for exchanges that do not
have commercial substance. SFAS 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
fiscal periods beginning after June 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2007, beginning on June 1, 2006.
The Company does not expect it to have a material financial statement impact.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which
requires the measurement of all share-based payments to employees, including
grants of stock options, using a fair-value-based method and the recording of
such expense in the consolidated statements of operations. The accounting
provisions of SFAS 123(R) were originally effective for all reporting periods
beginning after June 15, 2005. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement
recognition. See "Stock-Based Compensation" above for the pro forma net income
(loss) and net income (loss) per share amounts, as if the Company had used a
fair-value-based method similar to the methods required under SFAS 123(R) to
measure compensation expense for employee stock incentive awards.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 107, providing supplemental implementation
guidance for SFAS 123R. In April 2005, the SEC approved a rule that delayed
the effective date of SFAS 123(R) to the first annual reporting period
beginning after June 15, 2005. Although the Company has not yet determined
whether the adoption of SFAS 123(R) will result in amounts that are similar to
the current pro forma disclosures under SFAS 123, it is evaluating the
11
requirements under SFAS 123(R) and SAB No. 107 and expects the adoption to
have a significant adverse impact on the Company's consolidated statements of
operations and net income (loss) per share. SFAS 123(R) will be effective for
the Company beginning with the first quarter of fiscal 2007.
In May 2005, the FASB issued Statement of Financial Accounting Standards
154, "Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle, and applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions. This statement requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The Company does not
expect the adoption of this statement will have a material impact on our
results of operations or financial condition.
In November 2005, the FASB issued FASB Staff Position FAS 115-1 and
FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" ("FSP FAS 115-1"), which provides guidance on
determining when investments in certain debt and equity securities are
considered impaired, whether that impairment is other-than-temporary, and on
measuring such impairment loss. FSP FAS 115-1 also includes accounting
considerations subsequent to the recognition of an other-than temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. FSP FAS 115-1 is
required to be applied to reporting periods beginning after December 15, 2005.
The Company is required to adopt FSP FAS 115-1 in the first quarter of fiscal
2007. The Company does not expect the adoption of this statement will have a
material impact on our results of operations or financial condition.
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 condensed
consolidated financial statements and the related notes that appear elsewhere
in this document and with our Annual Report on Form 10-K for the fiscal year
ended May 31, 2005 and the consolidated financial statements and notes
thereto.
In addition to historical information, this report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934. These statements
typically may be identified by the use of forward-looking words or phrases
such as "believe," "expect," "intend," "anticipate," "should," "planned,"
"estimated," and "potential," among others and include, but are not limited
to, statements concerning our expectations regarding our operations, business,
strategies, prospects, revenues, expenses, costs and resources. These
forward-looking statements are subject to certain risks and uncertainties that
could cause our actual results to differ materially from those the anticipated
results or other expectations reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in this report and other factors beyond our
control, and in particular, the risks discussed below and under the heading
"Factors that May Affect Future Results of Operations" and those discussed in
other documents we file with the Securities and Exchange Commission. All
forward-looking statements included in this document are based on our current
expectations, and we undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Given these
12
risks and uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to customer programs and incentives,
product returns, bad debts, inventories, investments, intangible assets,
income taxes, financing operations, warranty obligations, long-term service
contracts, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a discussion of the
critical accounting policies, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies" in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2005.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's condensed
consolidated statements of operations as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
February 28, February 28,
---------------------- --------------------
2006 2005 2006 2005
---------- ---------- --------- ----------
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 59.8 61.5 55.7 73.8
---------- ---------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 40.2 38.5 44.3 26.2
---------- ---------- --------- --------
Operating expenses:
Selling, general and administrative. . . . . 21.0 60.7 25.8 29.8
Research and development . . . . . . . . . . 16.1 41.7 18.2 22.5
---------- ---------- --------- --------
Total operating expenses . . . . . . . . 37.1 102.4 44.0 52.3
---------- ---------- --------- --------
Income (loss) from operations . . . . . . . . 3.1 (63.9) 0.3 (26.1)
Interest income . . . . . . . . . . . . . . . 1.2 2.0 1.0 0.8
Other income, net . . . . . . . . . . . . . . 1.6 0.6 0.7 1.6
---------- ---------- --------- --------
Income (loss) before income taxes . . . . . . 5.9 (61.3) 2.0 (23.7)
Income tax expense (benefit) . . . . . . . . . 0.2 (2.6) 0.3 0.9
---------- ---------- --------- --------
Net income (loss) . . . . . . . . . . . . . . 5.7 % (58.7)% 1.7 % (24.6)%
========== ========== ========= ========
THREE MONTHS ENDED FEBRUARY 28, 2006 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 2005
NET SALES. Net sales increased to $6.3 million in the three months ended
February 28, 2006 from $2.1 million in the three months ended February 28,
2005, an increase of 203.2%. The increase in net sales in the three months
ended February 28, 2006 resulted primarily from increases in net sales of the
13
Company's MTX products and dynamic burn-in products. Net sales of the
Company's MTX products for the three months ended February 28, 2006 were $3.5
million, and increased approximately $3.1 million from the three months ended
February 28, 2005. Net sales of the Company's dynamic burn-in products for
the three months ended February 28, 2006 were $2.7 million, and increased
approximately $1.4 million from the three months ended February 28, 2005. The
Company anticipates that net sales in the fourth quarter of fiscal 2006 will
increase when compared to those of the third quarter of fiscal 2006.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit increased to $2.5 million
in the three months ended February 28, 2006 from $803,000 in the three months
ended February 28, 2005, an increase of 216.1%. Gross profit margin increased
to 40.2% in the three months ended February 28, 2006 from 38.5% in the three
months ended February 28, 2005. The increase in gross profit margin from last
year was related to manufacturing efficiencies resulting from increased
production levels, partially offset by a change in product mix resulting in
higher 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, commission expenses to independent sales representatives, product
promotion and other professional services. SG&A expenses of $1.3 million in
the three months ended February 28, 2006 were flat compared to the three
months ended February 28, 2005. As a percentage of net sales, SG&A expenses
decreased to 21.0% in the three months ended February 28, 2006 from 60.7% in
the three months ended February 28, 2005, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $1.0 million in the three months ended February 28, 2006 from
$868,000 in the three months ended February 28, 2005, an increase of 16.9%.
This increase was primarily due to an increase in employment related expenses.
As a percentage of net sales, R&D expenses decreased to 16.1% in the three
months ended February 28, 2006 from 41.7% in the three months ended February
28, 2005, reflecting higher net sales.
INTEREST INCOME. Interest income increased to $77,000 in the three months
ended February 28, 2006 from $40,000 in the three months ended February 28,
2005. The increase was primarily the result of higher interest rates earned
on invested amounts.
OTHER INCOME, NET. Other income, net increased to $102,000 in the three
months ended February 28, 2006 from $13,000 in the three months ended February
28, 2005. The increase in other income, net was primarily due to a dividend
paid by a firm in which the Company holds a minority ownership position.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $14,000 in the three
months ended February 28, 2006 and income tax benefit was $54,000 in the three
months ended February 28, 2005. The income tax expense in the three months
ended February 28, 2006 and the income tax benefit in the three months ended
February 28, 2005 were related primarily to the income or loss earned in the
Company's German subsidiary. The Company's U.S. operations and its Japanese
subsidiary have experienced significant cumulative losses and thus generated
certain net operating losses available to offset future taxes payable in the
U.S. and Japan. As a result of the cumulative operating losses in the
Company's U.S. operations and its Japanese subsidiary, a valuation allowance
was established for the full amount of its net deferred tax assets for both
its U.S. operations and its Japanese subsidiary.
14
NINE MONTHS ENDED FEBRUARY 28, 2006 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2005
NET SALES. Net sales increased to $16.8 million in the nine months ended
February 28, 2006 from $12.8 million in the nine months ended February 28,
2005, an increase of 31.0%. The increase in net sales in the nine months
ended February 28, 2006 resulted primarily from increases in net sales of the
Company's dynamic burn-in products, partially offset by a decrease in net
sales of the Company's MTX products. Net sales of the Company's dynamic burn-
in products for the nine months ended February 28, 2006 were $10.7 million,
and increased approximately $4.6 million from the nine months ended February
28, 2005. Net sales of the Company's MTX products for the nine months ended
February 28, 2006 were $5.7 million, and decreased approximately $331,000 from
the nine months ended February 28, 2005.
GROSS PROFIT. Gross profit increased to $7.4 million in the nine months
ended February 28, 2006 from $3.4 million in the nine months ended February
28, 2005, an increase of 121.3%. Gross profit margin increased to 44.3% in
the nine months ended February 28, 2006 from 26.2% in the nine months ended
February 28, 2005. The increase in gross profit margin was primarily due to a
change in product mix, resulting in lower material costs as a percentage of
net sales and a decrease in net sales of $2.8 million in MTX pass-through
products, which have a very low gross profit margin. Beginning in January
2004, the Company received turnkey MTX system orders from a single customer,
which included certain very low margin products not typically sold directly by
the Company which are used in conjunction with the Company's systems. At the
customer's request, these products were included as part of the order. These
products were priced at or near the Company's cost and are referred to here as
"MTX pass-through" products. There was a reduction in net sales of MTX pass-
through products of $2.8 million from the nine months ended February 28, 2005
to the nine months ended February 28, 2006. Since the Company does not
typically accept orders for pass-through products, it has requested that,
going forward, the customer purchases these pass-through products directly
through the vendors that currently manufacture such products. The customer
has already ordered some of these products directly from the vendors. The
customer has not advised the Company of its intent to purchase any additional
pass-through products from the Company.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $4.3
million in the nine months ended February 28, 2006 from $3.8 million in the
nine months ended February 28, 2005, an increase of 13.4%. The increase in
SG&A expenses was primarily due to an increase in employment related expenses
of approximately $175,000 and independent sales representatives commission
expenses of approximately $152,000. As a percentage of net sales, SG&A
expenses decreased to 25.8% in the nine months ended February 28, 2006 from
29.8% in the nine months ended February 28, 2005, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses were increased to $3.1 million in
the nine months ended February 28, 2006 from $2.9 million in the nine months
ended February 28, 2005. This increase was primarily due to an increase in
employment related expenses. As a percentage of net sales, R&D expenses
decreased to 18.2% in the nine months ended February 28, 2006 from 22.5% in
the nine months ended February 28, 2005, reflecting higher net sales.
INTEREST INCOME. Interest income increased to $157,000 in the nine months
ended February 28, 2006 from $96,000 in the nine months ended February 28,
2005, an increase of 63.5%. The increase was primarily the result of higher
interest rates earned on invested amounts.
OTHER INCOME, NET. Other income, net decreased to $116,000 in the nine
months ended February 28, 2006 from $209,000 in the nine months ended February
28, 2005. The decrease in other income, net was primarily due to a decrease
in foreign currency exchange gains of approximately $185,000 recorded by the
Company and its subsidiaries, offset partially by a dividend of $119,000 paid
by a firm in which the Company holds a minority ownership position.
15
INCOME TAX EXPENSE. Income tax expense decreased to $45,000 in the nine
months ended February 28, 2006, from $112,000 in the nine months ended
February 28, 2005. The income tax expense in the nine months ended February
28, 2006 and in the nine months ended February 28, 2005 related primarily to
the tax expense recorded as a result of income earned in the Company's German
subsidiary. The Company's U.S. operations and its Japanese subsidiary have
experienced significant cumulative losses and thus generated certain net
operating losses available to offset future taxes payable in the U.S. and
Japan. As a result of the cumulative operating losses in the Company's U.S.
operations and its Japanese subsidiary, a valuation allowance was established
for the full amount of its net deferred tax assets for both its U.S.
operations and its Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $965,000 for the nine months
ended February 28, 2006 and net cash used in operating activities was
approximately $2.4 million for the nine months ended February 28, 2005. For
the nine months ended February 28, 2006, net cash provided by operating
activities was primarily due to an increase in accrued expenses and deferred
revenues of $875,000. This increase was primarily related to an increase in
deferred revenue. For the nine months ended February 28, 2005, net cash used
in operating activities was due primarily to the net loss and a decrease in
accounts payable, partially offset by decreases in accounts receivable and
inventories.
Net cash provided by investing activities was approximately $1.9 million
for the nine months ended February 28, 2006 and approximately $2.9 million for
the nine months ended February 28, 2005. The net cash provided by investing
activities during the nine months ended February 28, 2006 and February 28,
2005 was primarily due to the net proceeds from sales and maturity of
investments, partially offset by the purchase of investments.
Financing activities provided cash of approximately $71,000 in the nine
months ended February 28, 2006 and $88,000 in the nine months ended February
28, 2005. Net cash provided by financing activities during the nine months
ended February 28, 2006 and 2005 was due to proceeds from issuance of common
stock and exercise of stock options.
As of February 28, 2006, the Company had working capital of $16.2 million.
Working capital consists of cash and cash equivalents, short-term investments,
accounts receivable, inventory and other current assets, less current
liabilities.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital.
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
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
16
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 cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through fiscal year 2007. After fiscal year
2007, 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing
arrangements and has not established any special purpose entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
There have been no material changes in the composition, magnitude or other
key characteristics of the Company's contractual obligations or other
commitments as disclosed in the Company's Form 10-K for the year ended May 31,
2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs
- - an Amendment of ARB No. 43, Chapter 4". This statement clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) to require them to be recognized as
current-period charges and to require the allocation of fixed production
overhead to inventory based on the normal capacity of a production facility.
This statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this statement is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Non-monetary Assets - An Amendment of APB
Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates the exception from fair
value measurement for non-monetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary
Transactions," and replaces it with the exception for exchanges that do not
have commercial substance. SFAS 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
fiscal periods beginning after June 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2007, beginning on June 1, 2006.
The Company does not expect it to have a material financial statement impact.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which
requires the measurement of all share-based payments to employees, including
grants of stock options, using a fair-value-based method and the recording of
such expense in the consolidated statements of operations. The accounting
provisions of SFAS 123(R) were originally effective for all reporting periods
beginning after June 15, 2005. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement
recognition. See "Stock-Based Compensation" above for the pro forma net income
17
(loss) and net income (loss) per share amounts, as if the Company had used a
fair-value-based method similar to the methods required under SFAS 123(R) to
measure compensation expense for employee stock incentive awards.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 107, providing supplemental implementation
guidance for SFAS 123R. In April 2005, the SEC approved a rule that delayed
the effective date of SFAS 123(R) to the first annual reporting period
beginning after June 15, 2005. Although the Company has not yet determined
whether the adoption of SFAS 123(R) will result in amounts that are similar to
the current pro forma disclosures under SFAS 123, it is evaluating the
requirements under SFAS 123(R) and SAB No. 107 and expects the adoption to
have a significant adverse impact on the Company's consolidated statements of
operations and net income (loss) per share. SFAS 123(R) will be effective for
the Company beginning with the first quarter of fiscal 2007.
In May 2005, the FASB issued Statement of Financial Accounting Standards
154, "Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle, and applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions. This statement requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The Company does not
expect the adoption of this statement will have a material impact on our
results of operations or financial condition.
In November 2005, the FASB issued FASB Staff Position FAS 115-1 and
FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" ("FSP FAS 115-1"), which provides guidance on
determining when investments in certain debt and equity securities are
considered impaired, whether that impairment is other-than-temporary, and on
measuring such impairment loss. FSP FAS 115-1 also includes accounting
considerations subsequent to the recognition of an other-than temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. FSP FAS 115-1 is
required to be applied to reporting periods beginning after December 15, 2005.
The Company is required to adopt FSP FAS 115-1 in the first quarter of fiscal
2007. The Company does not expect the adoption of this statement will have a
material impact on our results of operations or financial condition.
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 had no holdings of derivative financial or
commodity instruments at February 28, 2006.
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.
18
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-U.S. 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 expenses
payable in Yen. 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 U.S. dollars. Since the Japanese subsidiary's
financial statements are based in Yen and the Company's financial statements
are based in U.S. 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 U.S. dollar. A 10% decrease in the value of
the Yen as compared with the U.S. dollar would not be expected to result in a
significant change in the net income or loss.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There was no
change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in
other documents we file with the Securities and Exchange Commission, including
without limitation our most recently filed Form 10-K as amended, are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements in this Quarterly
Report on Form 10-Q. We believe that these risks and uncertainties are the
principal material risks facing the Company as of the date of this Form 10-Q.
In the future, we may become subject to additional risks that are not
currently known to us. If any of these risks actually occur, our business,
financial condition and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline, and you could
lose all or part of the value of your investment.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers accounting for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five largest
customers accounted for approximately 73.1%, 70.5% and 73.0% of its net sales
in fiscal 2005, 2004 and 2003, respectively. Sales to the Company's five
largest customers accounted for approximately 86.8% of its net sales in the
nine months ended February 28, 2006. During fiscal 2005, Spansion Inc.
(formerly FASL LLC.) and Texas Instruments Incorporated accounted for 43.1%
and 16.9% of the Company's net sales, respectively. During fiscal 2004, Texas
Instruments Incorporated and FASL LLC. accounted for 33.8% and 17.8% of the
Company's net sales, respectively. During fiscal 2003, Texas Instruments
Incorporated and First International Computer, Inc. accounted for 45.3% and
10.7% of the Company's net sales, respectively. No other customers
represented more than 10% of the Company's net sales for any of such periods.
The Company expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net sales for the
foreseeable future. In addition, sales to particular customers may fluctuate
significantly from quarter to quarter. The loss of or reduction or delay in
an order or 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.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 81.2%,
84.5% and 73.0% of the Company's net sales for fiscal 2005, 2004 and 2003,
respectively, were attributable to sales to customers for delivery outside of
the United States. Approximately 79.7% of the Company's net sales in the nine
months ended February 28, 2006 were attributable to sales for customers for
delivery outside the United States. The Company operates sales, service and
limited manufacturing organizations in Japan and Germany and a sales and
support organization in Taiwan. The Company expects that sales of products
for delivery outside of the United States will continue to represent a
substantial portion of its future revenues. The future performance of the
Company will depend, in significant part, upon its ability to continue to
compete in foreign markets which in turn will depend, in part, upon a
continuation of current trade relations between the United States and foreign
countries in which semiconductor manufacturers or assemblers have operations.
A change toward more protectionist trade legislation in either the United
States or such foreign countries, such as a change in the current tariff
structures, export compliance or other trade policies, could adversely affect
the Company's ability to sell its products in foreign markets. In addition,
the Company is subject to other risks associated with doing business
20
internationally, including longer receivable collection periods and greater
difficulty in accounts receivable collection, the burden of complying with a
variety of foreign laws, difficulty in staffing and managing global
operations, risks of civil disturbance or other events which may limit or
disrupt markets, international exchange restrictions, changing political
conditions and monetary policies of foreign governments.
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, flash and
other memory device prices in Asia have on occasion declined dramatically, and
will likely do so again in the future. These developments may affect the
Company in several ways. The Company believes that many international
semiconductor manufacturers limited their capital spending (including the
purchase of MTXs) in fiscal years 2003 and 2002, and that the uncertainty of
the memory market may cause some manufacturers in the future to again delay
capital spending plans. The economic conditions in Asia may also affect the
ability of the Company's customers to meet their payment obligations,
resulting in cancellations or deferrals of existing orders and the limitation
of additional orders. In addition, Asian governments have subsidized some
portion of fabrication construction. Financial turmoil may reduce these
governments' willingness to continue such subsidies. Such developments could
have a material and adverse effect on the Company's business, financial
condition and results of operations.
Because a substantial portion of the Company's net sales is from sales of
products for delivery outside the United States, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Approximately 87.2%, 4.4% and 8.4% of the Company's net sales for
fiscal 2005 were denominated in U.S. Dollars, Japanese Yen and Euros.
Although a large percentage of sales to European customers is denominated in
U.S. Dollars, 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-U.S. Dollar
exchange rate during the lengthy period from the date a purchase order is
received until payment is made. This exchange rate risk is partially offset
to the extent the Company's Japanese subsidiary incurs expenses payable in
Yen. 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 U.S. Dollars.
A substantial portion of the world's manufacturers of memory devices are
in Korea, Japan, Taiwan and China and growth in the Company's net sales
depends in large part upon its ability to penetrate these markets. Both the
Korean and Japanese markets are difficult for foreign companies to penetrate.
The Company has served the Japanese market through its Japanese subsidiary,
which has experienced limited success and has incurred operating losses in
recent years. Sales into Korea have not been significant in recent years.
Taiwan and China represent an increasingly important portion of the memory
manufacturer market. The Company established a support organization in Taiwan
in fiscal 2001 and subsequently added a sales function. The lack of local
manufacturing may impede the Company's efforts to develop the Japanese,
Korean, Taiwanese and Chinese markets. There can be no assurance that the
Company's efforts in Japan, Korea, Taiwan or China will be successful or that
the Company will be able to achieve and sustain significant sales to, or be
able to successfully compete in, these markets.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors will continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
21
continuing consolidation in the semiconductor equipment industry, and
potential future consolidation, could adversely affect the ability of smaller
companies, such as the Company, to compete with larger, integrated
competitors. 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. The Company believes that to remain competitive it must
invest significant financial resources in new product development and expand
its customer service and support worldwide. There can be no assurance that
the Company will be able to compete successfully in the future.
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, delivery lead-time, flexibility,
automation, cost of ownership, reliability, throughput and customer service.
In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have greater
financial, engineering, manufacturing and marketing resources than the
Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the MTX system faces
intense competition from burn-in system suppliers and traditional memory
tester suppliers. The market for burn-in systems is highly fragmented, with
many domestic and international suppliers. Some users, such as independent
test labs, build their own burn-in systems, and some other users, particularly
large Japanese IC manufacturers, acquire burn-in systems from captive or
affiliated suppliers. Competing suppliers of burn-in and functional test
systems include Advantest Corporation, Reliability Incorporated and Dong-Il
Corporation.
The Company's MAX monitored and dynamic burn-in systems have faced and are
expected to continue to face, increasingly severe competition, especially from
several regional, low cost manufacturers and from systems manufacturers that
offer higher power dissipation per device under test.
The Company's FOX full wafer contact system is expected to face
competition from larger systems manufacturers that have sufficient
technological know-how and manufacturing capability. Competing suppliers of
full wafer contact systems include Matsushita Electric Industrial Co., Ltd.
and Delta V Instruments, Incorporated.
The Company expects that its DiePak products will face significant
competition. The Company believes that several companies have developed or
are developing products which are intended to enable burn-in and test of bare
die. As the bare die market develops, the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply. Competing suppliers of DiePak products include Yamaichi
Electronics Co., Ltd.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the burn-in board ("BIB") market, and as a
result, many small companies design and manufacture BIBs, including BIBs for
use with the Company's MAX system. The Company's strategy is to provide only
certain high performance BIBs, and the Company generally does not compete to
supply low cost, low performance BIBs. The Company has a partnership with
Pycon, Inc. whereby Pycon, Inc. designs, manufactures and sells the BIBs and
the Company provides Pycon, Inc. with system know-how. Both companies jointly
market and sell the BIBs and performance test boards ("PTBs"). There can be
no assurance that the partnership will be successful. The Company has granted
royalty-bearing licenses to several companies to make PTBs and BIBs for use
with the Company's systems, in order to assure customers a second source of
22
supply, and the Company may grant additional licenses as well. Sales of PTBs
and BIBs by licensees result in royalties to the Company but reduce the
Company's own sales of PTBs and BIBs.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price
and performance characteristics. 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 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. The Company believes that to remain
competitive it must invest significant financial resources in new product
development and expand its customer service and support worldwide. There can
be no assurance that the Company will be able to compete successfully in the
future.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX, and FOX systems
and DiePak carriers contain several components, including environmental
chambers, power supplies, wafer and die contactors, signal distribution
substrates and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The Company's reliance on subcontractors and
single source suppliers involves a number of significant risks, including the
loss of control over the manufacturing process, the potential absence of
adequate capacity and reduced control over delivery schedules, manufacturing
yields, quality and costs. 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 and adverse effect on the
Company's business, financial condition and operating results.
Item 2. UNREGISTERED SALES OF EQUITY 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
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
23
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, 2006 /s/ RHEA J. POSEDEL
---------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 13, 2006 /s/ GARY L. LARSON
----------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
24
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- ------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
25