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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required).
For the fiscal year ended May 31, 2002
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
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 (IRS Employer Identification Number)
incorporation or organization)
400 KATO TERRACE, FREMONT, CA 94539
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates of the Registrant, based upon the
closing price of $4.199 on July 31, 2002, as reported on the Nasdaq National
Market, was approximately $24,524,000. For purposes of this disclosure,
shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock (other than such persons of whom the
Registrant became aware only through the filing of a Schedule 13G filed with
the Securities and Exchange Commission) and shares held by officers and
directors of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding at July 31, 2002 was 7,183,786.
Documents Incorporated By Reference
Certain information required by Items 10, 11, 12 and 13 of this report on
Form 10-K is incorporated by reference from the Registrant's proxy statement
for the Annual Meeting of Shareholders to be held on October 17, 2002 (the
"Proxy Statement"), which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year
ended May 31, 2002.
AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Business ............................................... 3
Item 2. Properties ............................................ 10
Item 3. Legal Proceedings ...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters .................................. 11
Item 6. Selected Financial Data ................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................ 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risks ......................................... 27
Item 8. Financial Statements and Supplementary Data ............ 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 46
PART III
Item 10. Directors and Executive Officers of the Registrant ..... 47
Item 11. Executive Compensation ................................. 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................... 47
Item 13. Certain Relationships and Related Transactions ......... 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................. 48
Signatures ............................................. 50
2
This Annual Report on Form 10-K contains forward-looking statements with
respect to Aehr Test Systems ("Aehr Test" or the "Company") which involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements due to a number
of factors, including those described herein and the documents incorporated
herein by reference, and those factors described in Part II, Item 7 under
"Factors that May Affect Future Results of Operations."
PART I
Item 1. Business
THE COMPANY
Founded in 1977, Aehr Test Systems (a California Corporation) develops,
manufactures and sells systems which are designed to reduce the cost of
testing DRAMs and other memory devices, perform reliability screening or
burn-in of complex logic and memory devices, and enable integrated circuit
(IC) manufacturers to perform test and burn-in of bare die. Leveraging its
expertise as a long-time leading provider of burn-in equipment, with over
2,000 systems installed worldwide, the Company has developed and introduced
several innovative product families, including the MTX, MAX and FOXTM systems,
and the DiePakr carrier. The MTX system is a massively parallel test system
designed to reduce the cost of memory testing by performing both test and
burn-in on thousands of devices simultaneously. The MAX system can
effectively burn-in and functionally test sophisticated devices, such as
digital signal processors, microprocessors, microcontrollers and systems-on-
a-chip. The FOX system is a full wafer contact burn-in and parallel test
system designed to make contact with all pads of a wafer simultaneously, thus
enabling full wafer burn-in and parallel test. The DiePak carrier is a
reusable, temporary package that enables IC manufacturers to perform cost-
effective final test and burn-in of bare die.
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process and defects
or weaknesses that may result in the failure of an IC may be introduced at
any process step. Failures may occur immediately or at any time during the
operating life of an IC, sometimes after several months of normal use.
Semiconductor manufacturers rely on testing and reliability screening to
detect failures that occur during the manufacturing process.
Testing and reliability screening involves multiple steps. The first set
of tests is typically performed before the processed semiconductor wafer is
cut into individual die, in order to avoid the cost of packaging defective
die into their plastic or ceramic packages. After the die are packaged and
before they undergo reliability screening, a short test is typically
performed in order to detect packaging defects. Most leading-edge
microprocessors, microcontrollers, digital signal processors, and memory ICs
then undergo an extensive reliability screening and stress testing procedure
known as "burn-in." The burn-in process screens for early failures by
operating the IC at elevated voltages and temperatures, usually at 125
degrees Celsius (257 degrees Fahrenheit), for periods typically ranging from
8 to 48 hours. A burn-in system can process thousands of ICs simultaneously.
After burn-in, the ICs undergo a final test process using automatic test
equipment ("testers"). Traditional memory testers can test up to 128 ICs
simultaneously and perform a variety of tests at multiple temperatures.
PRODUCTS
The Company manufactures and markets massively parallel test systems,
dynamic and monitored burn-in systems, full wafer contact systems, die
carriers, test fixtures and related accessories.
All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and
price are most important, or for reliability engineering and quality
assurance applications, where performance and flexibility, such as extended
temperature ranges, are essential.
DYNAMIC AND MONITORED BURN-IN SYSTEMS
The MAX system is designed for dynamic burn-in of memory and logic
devices. The production version holds 64 burn-in boards ("BIBs"), each of
which may hold 350 or more devices, resulting in a system capacity of 22,400
or more devices. The MAX system's 48-channel pin electronics and ability to
run stored test patterns also allow it to be used for many logic and memory
devices. The pin electronics are designed to provide precisely-controlled
voltages and signals to the devices on the BIBs and to protect them from
damage during the burn-in process. The MAX system features multi-tasking
Windows 2000-based software which includes lot tracking and reporting
software that are needed for production
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and military applications. The MAX3 system, introduced in fiscal 1999,
increases the pin electronics to 96 channels, and handles the latest low
voltage ICs. The MAX3 also has extended stored test program capability for
more complete exercise and output monitoring of complex logic devices such as
digital signal processors. The output monitor feature allows the MAX3 to
perform functional test of devices that contain built-in self-test (BIST) or
JTAG scan features. The MAX4 system was introduced in 2001. The MAX4
further extends the capabilities of the MAX3. Like the MAX3, it offers 96
channels and output monitoring. The MAX4 is targeted at devices which
require better voltage accuracy and higher current. It can provide up to 200
amps of current per BIB position.
The ATX system is designed for dynamic and monitored burn-in of high pin-
count VLSI devices, including microprocessors, microcontrollers, application-
specific ICs ("ASICs"), and certain memory devices. The ATX system uses much
of the same software as the MAX system. Its 256-channel pin electronics
configuration allows it to handle complex logic devices, and its ability to
burn-in different device types in each of the system's 32 BIB positions is
useful for quality assurance applications. The Windows 2000-based ATX2,
introduced in fiscal 1999, includes a high current feature to allow the
system to burn-in more devices, plus an extended pattern generation
capability.
MASSIVELY PARALLEL TEST SYSTEM
The MTX massively parallel test system is designed to reduce the cost of
memory test by processing thousands of memory devices simultaneously,
including DRAMs, Double Data Rate SDRAMs, SDRAMs, Rambus DRAMs, SRAMs and
most application-specific memories. The MTX system can perform a significant
number of tests usually performed by traditional memory testers, including
pattern sensitivity tests, functional tests, data retention tests and refresh
tests. The Company estimates that transferring these tests from traditional
memory testers to the MTX system can reduce by up to 70% the time that a
memory device must be tested by a traditional memory tester, thereby reducing
the required number of memory testers and, consequently, reducing capital and
operating costs.
The MTX system consists of several subsystems: pattern generation and
test electronics, control software, network interface and environmental
chamber. The MTX system has an algorithmic test pattern generator which
allows it to duplicate most of the tests performed by a traditional memory
tester. Pin electronics at each performance test board ("PTB") position are
designed to provide accurate signals to the memory ICs being tested and
detect whether a device is failing the test. An optional enhanced fault
collection capability allows the MTX to identify which cells in a memory IC
are failing, resulting in information for engineering characterization of new
device types.
Devices being tested are placed on PTBs and loaded into environmental
chambers which typically operate at temperatures from 25 degrees Celsius (77
degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit)
(optional chambers can produce temperatures as low as -55 degrees Celsius (-
67 degrees Fahrenheit)). A single PTB can hold up to 336 Rambus DRAMs or 256
DDR SDRAMs, and a production chamber holds 30 PTBs, resulting in up to 10,080
Rambus or 7,680 SDRAMs being tested in a single system.
FULL WAFER CONTACT SYSTEM
The FOX full wafer contact burn-in and parallel test system, introduced
in July 2001, is designed to make contact with all pads of a wafer
simultaneously, thus enabling full wafer burn-in and parallel test of ICs.
One of the key features of the FOX system is the patent-pending cartridge
system. This unique design is intended to accommodate a wide range of
contactor technologies. Wafer-level burn-in and test enables lower cost
production of Known-Good Die (KGD) for multichip modules and systems-in-a-
package.
DIEPAK CARRIERS
The Company's DiePak product line includes a family of reusable,
temporary die carriers and associated sockets which enable the test and burn-
in of bare die using the same test and burn-in systems used for packaged ICs.
DiePak carriers offer cost-effective solutions for providing known good die
for most types of ICs, including memory, microcontroller and microprocessor
devices. The DiePak carrier was introduced in fiscal 1995.
The DiePak carrier consists of an interconnect substrate, which provides
electrical connection between the die pads and the socket contacts, and a
mechanical support system. The substrate is customized for each IC product.
The DiePak carrier comes in 108, 172 and 320 pin versions to handle ICs
ranging from low pin-count memories to high pin-count microprocessors. The
DiePak carrier and socket feature a small footprint which reduces test and
burn-in cost because more devices may be processed simultaneously on a test
fixture.
4
TEST FIXTURES
The Company manufactures and sells custom designed test fixtures
including performance test boards for use with the MTX massively parallel
test system, burn-in boards for its dynamic and monitored burn-in systems and
test contactors for use with the FOX full wafer contact burn-in and parallel
test system. Additionally, the Company has a partnership with Pycon Inc. for
the manufacture and direct sale of BIBs and PTBs. PTBs and BIBs hold the
devices undergoing test or burn-in and electrically connect the devices under
test to the system electronics. The capacity of each PTB or BIB depends on
the type of device being tested or burned-in, ranging from several hundred in
memory production to as few as eight for high pin-count complex ASIC devices.
PTBs and BIBs are sold both with new Aehr Test systems and for use with the
Company's installed base of systems. Due to the advanced test requirements
of the MTX system, PTBs are substantially more complex than BIBs. The
Company has patented certain features of the PTB and FOX test fixtures and to
date has licensed several other companies to supply PTBs.
CUSTOMERS
The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies.
Sales to the Company's five largest customers accounted for approximately
61.7%, 58.8% and 64.3% of its net sales in fiscal 2002, 2001 and 2000,
respectively. During fiscal 2002, Texas Instruments, Formosa Advanced
Technologies Co. Ltd. and ASE Test, Inc. accounted for 22.3%, 17.1% and 11.1%
of the Company's net sales, respectively. During fiscal 2001, Texas
Instruments and Formosa Advanced Technologies Co. Ltd. accounted for 25.2%
and 12.7% of the Company's net sales, respectively. During fiscal 2000,
Texas Instruments, Formosa Advanced Technologies Co. Ltd. and First
International Computer Inc. accounted for 22.8%, 19.2% and 13.5% of the
Company's net sales, respectively. 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 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.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan
and Germany, a sales and support operation in Taiwan, and has established a
network of distributors and sales representatives in certain key parts of the
world.
The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training, and documentation. The Company has both
applications engineering and field service personnel located at the corporate
headquarters in Fremont, California and at the Company's subsidiaries in
Japan, Germany and Taiwan. The Company's distributors provide applications
and field service support in other parts of the world. The Company
customarily provides a warranty on its products. The Company offers service
contracts on its systems directly and through its subsidiaries, distributors,
and representatives.
BACKLOG
As of May 31, 2002 and 2001, the Company's backlog was $3.9 million and
$2.3 million, respectively. The increase in backlog was primarily the result
of the receipt of an order for the Company's wafer-level tester development
project. The Company's backlog consists of product orders for which
confirmed purchase orders have been received and which are scheduled for
shipment within 12 months. At May 31, 2002, the Company's backlog also
consisted of product development orders totaling $1.8 million, for which
confirmed purchase orders have been received and which are scheduled to be
completed prior to August 31, 2003. Most orders are subject to rescheduling
or cancellation by the customer with limited penalties. Because of the
possibility of customer changes in delivery schedules or cancellations and
potential delays in product shipments or development projects, the Company's
backlog as of a particular date may not be indicative of net sales for any
succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research and
5
development expenses during fiscal 2002, 2001 and 2000 were approximately
$4.0 million, $5.0 million and $5.4 million, respectively.
The Company conducts ongoing research and development to develop new
products and to support and enhance existing product lines. The Company is
currently developing capability and performance enhancements to the MTX, MAX,
ATX and FOX systems for future generation ICs. The Company is also
developing DiePak carriers to accommodate additional types of devices.
Building upon the expertise gained in the development of its existing
products, the Company has recently developed the FOX system for performing
test and burn-in of entire processed wafers, rather than individual die or
packaged parts. This wafer-level burn-in and test project was financed by
the Company and the Defense Advanced Research Projects Agency ("DARPA") under
a cost-sharing agreement entered into in 1994. In January 2001, the Company
completed this $6.5 million multi-year research and development agreement
with DARPA.
MANUFACTURING
The Company assembles its products from components and parts manufactured
by others, including environmental chambers, power supplies, metal
fabrications, printed circuit assemblies, integrated circuits, burn-in
sockets and interconnect substrates. Final assembly and test are performed
within the Company's facilities. The Company's strategy is to use in-house
manufacturing only when necessary to protect a proprietary process or if a
significant improvement in quality, cost or lead time can be achieved. The
Company's principal manufacturing facility is located in Fremont, California.
The Company's Tokyo, Japan facility provides limited manufacturing and
product customization.
The Company relies on subcontractors to manufacture many of the
components or subassemblies used in its products. The Company's MTX, MAX,
ATX and FOX systems and DiePak carriers contain several components, including
environmental chambers, power supplies, wafer contactors, signal distribution
substrates and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The 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 adverse effect on the Company's
business, financial condition and operating results.
COMPETITION
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability 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 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 Asian IC manufacturers, acquire burn-in systems from captive or
affiliated suppliers. Competing suppliers of burn-in and functional test
systems include Ando Corporation, Japan Engineering Company and Reliability
Incorporated. In addition, suppliers of memory test equipment including
Advantest Corporation and Teradyne, Inc. may seek to offer competitive
parallel test systems in the future.
The Company's MAX and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers and from systems
manufacturers that offer higher power dissipation per device under test
(DUT).
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 system include Tokyo Electron Limited and Matsushita
Electric Industrial Co., Ltd.
6
The Company expects its DiePak products will 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. 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.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide higher
performance BIBs, and the Company generally does not compete to supply lower
cost, low performance BIBs. The Company also has a partnership with Pycon
Inc. for the manufacture and direct sale of BIBs and PTBs. Both companies
will jointly market and sell the BIBs and PTBs. The Company has granted
royalty-bearing licenses to several companies to make PTBs for use with its
MTX systems, in order to assure customers of a second source of supply, and
the Company may license others as well. Sales of PTBs by licensees result in
royalties to the Company but reduce the Company's own sales of PTBs.
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.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secret and copyright
protection, rather than on patents, to maintain its competitive position.
The Company's proprietary software is copyrighted and licensed to the
Company's customers. The Company currently holds eight issued United States
patents and has several additional United States patent applications and
foreign patent applications pending. The Company currently has one United
States trademark registration. One issued patent covers the method used to
connect the PTBs with the MTX system.
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. Further, there can be no assurance
that claims allowed on any patent issued to the Company will be sufficiently
broad to protect the Company's technology, that any patent will issue from
any pending application or that foreign intellectual property laws will
protect the Company's intellectual property. 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. In addition,
there can be no assurance that any of the patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company.
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. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggest the Company may be
interested in acquiring a license from such third parties. 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.
EMPLOYEES
As of July 31, 2002, the Company, its two foreign subsidiaries and one
branch office employed 94 persons full-time, of whom 27 were engaged in
research, development, and related engineering, 27 in manufacturing, 26 in
marketing, sales, and customer support, and 14 in general administration and
finance. In addition, the Company from time to time
7
employs a number of part-time employees and contractors, particularly in
manufacturing. The Company's success is in part dependent on its ability to
attract and retain highly skilled workers, who are in high demand. None of
the Company's employees is represented by a union and the Company has never
experienced a work stoppage. Management considers its relations with its
employees to be good.
GEOGRAPHIC AREAS
The Company operates in several geographic areas. Selected financial
information is included in Part II, Item 8, Note 12 "Segment Information" and
certain risks related to such operations are discussed in Part II, Item 7,
under the heading "Dependence on International Sales and Operations."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors of the Company are elected annually. The executive
officers of the Company serve with no specific term of office. The executive
officers and directors of the Company are as follows:
Name of Executive Officer Age Positions with the Company
- -------------------------- ---- -----------------------------------
Rhea J. Posedel............ 60 Chief Executive Officer and
Chairman of the Board of Directors
Carl J. Meurell............ 42 President and Chief Operating Officer
Gary L. Larson............. 52 Vice President of Finance and Chief
Financial Officer
Carl N. Buck............... 50 Vice President of Contactor Business Group
David S. Hendrickson....... 45 Vice President of Engineering
Christopher S. Noe......... 46 Vice President of Sales
Kunio Sano................. 46 President, Aehr Test Systems Japan K.K.
Robert R. Anderson (1)..... 64 Director
William W. R. Elder (1)(2). 63 Director
Mukesh Patel (1)........... 44 Director
Mario M. Rosati (2)........ 56 Director and Secretary
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
RHEA J. POSEDEL is a founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors since its inception
in 1977. From the Company's inception through May 2000, Mr. Posedel also
served as President. Prior to founding the Company, Mr. Posedel held various
project engineering and engineering managerial positions at Lockheed Martin
Corporation (formerly "Lockheed Missile & Space Corporation"), Ampex
Corporation, and Cohu, Inc. He received a B.S. in Electrical Engineering
from the University of California, Berkeley, an M.S. in Electrical
Engineering from San Jose State University and an M.B.A. from Golden Gate
University.
CARL J. MEURELL joined the Company as Vice President of Worldwide Sales
in March 1999 and was elected President and Chief Operating Officer in June
2000. From May 1996 to March 1999, Mr. Meurell served as Vice
8
President and General Manager of the test and repair division of Photon
Dynamics, a supplier of test inspection and repair systems for the flat panel
display industry. From April 1995 to May 1996, he served as a director at
Megatest, a division of Teradyne, Inc. From October 1993 to April 1995, he
served as Vice President and General Manager of Catapult Software Training,
an IBM company. From December 1980 to October 1993, he held various sales
management positions at Megatest. Mr. Meurell received an A.S. in Electrical
Engineering Technology, with distinction, from Pennsylvania State University,
a B.S. in Electronic Engineering, magna cum laude, from the University of
Massachusetts and an M.B.A. from Union College.
GARY L. LARSON joined the Company in April 1991 as Chief Financial
Officer and was elected Vice President of Finance in February 1992. From
1986 to 1990, he served as Chief Financial Officer, and from 1988 to 1990
also as President and Chief Operating Officer, of Nanometrics Incorporated, a
manufacturer of measurement and inspection equipment for the semiconductor
industry. Mr. Larson received a B.S. in Mathematics/Finance from Harvey Mudd
College.
CARL N. BUCK joined the Company as a Product Marketing Manager in 1983
and held various positions until he was elected Vice President of Engineering
in November 1992, Vice President of Research and Development Engineering in
November 1996, Vice President of Marketing in September 1997 and Vice
President of Contactor Business Group in May 2002. From 1978 to 1983, Mr.
Buck served as Product Marketing Manager at Intel Corporation, an integrated
circuit and microprocessor company. Mr. Buck received a B.S.E.E. from
Princeton University, an M.S. in Electrical Engineering from the University
of Maryland and an M.B.A. from Stanford University.
DAVID S. HENDRICKSON joined the Company as Vice President of Engineering
in October 2000. From 1999 to 2000, Mr. Hendrickson served as Platform
General Manager, and from 1998 to 1999 as Engineering Director and Software
Director, of Siemens Medical (formerly Acuson Corporation), a medical
ultrasound products company. From 1990 to 1995, Mr. Hendrickson served as
Director of Engineering and Director of Software of Teradyne Inc. (formerly
Megatest Corporation), a manufacturer of semiconductor capital equipment.
Mr. Hendrickson received a B.S. in Computer Science from Illinois Institute
of Technology.
CHRISTOPHER S. NOE joined the Company as Vice President of Sales in April
2001. From 1999 to 2001, Mr. Noe served as Vice President of Sales at
Kinetix Test Systems, a manufacturer of semiconductor testing equipment.
From 1997 to 1999, he served as Vice President of Semiconductor Test Products
at Comdisco Electronics Group, a lessor of semiconductor equipment. From
1995 to 1997, Mr. Noe served as Major Account Manager, and from 1992 to 1995
as Director of Service, at Teradyne Inc., a manufacturer of semiconductor
capital equipment. Mr. Noe received a B.S. in Electronic Technology from
California Polytechnic State University.
KUNIO SANO joined the Company as Vice President, Aehr Test Systems Japan
K.K., the Company's subsidiary in Japan, in June 1998 and was elected
President, Aehr Test Systems Japan K.K. in January 2001. From 1991 to 1998,
he served as Manager of Development Engineering Department at Tokyo Electron
Yamanashi Limited, a leading worldwide semiconductor equipment manufacturer.
Mr. Sano received a B.S.E.E. from Sagami Institute of Technology in Kanagawa,
Japan.
ROBERT R. ANDERSON was appointed to the Company's Board of Directors in
October 2000. Mr. Anderson is a private investor. From January 1994 to
January 2001, he was Chairman of Silicon Valley Research, Inc., a
semiconductor design automation software company, and its Chief Executive
Officer from December 1996 to August 1998, and from April 1994 to July 1995.
He also served as Chairman of Yield Dynamics, Inc., a private semiconductor
process control software company, from October 1998 to October 2000, and as
Chief Executive Officer from October 1998 to April 2001. Mr. Anderson co-
founded KLA Instruments Corporation, now KLA-Tencor Corporation, a supplier
of semiconductor process control systems, in 1975 and served in various
capacities including Chief Operating Officer, Chief Financial Officer, Vice
Chairman and Chairman before he retired from that company in 1994. Mr.
Anderson is a director of MKS Instruments, Inc., Metron Technology N.V. and
Trikon Technologies, Inc. He also serves as a director for two private
development stage companies, and as a trustee of Bentley College.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr.
Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a
semiconductor company, from his founding of Genus in 1981 to September 1996,
and has been serving in that same position again since April 1998. Dr. Elder
has been a director of Genus since its inception. Dr. Elder holds a B.S.I.E.
and an honorary Doctorate Degree from the University of Paisley in Scotland.
MUKESH PATEL was appointed to the Company's Board of Directors in June
1999. Mr. Patel co-founded SMART Modular Technologies, Inc., where he served
on its Board of Directors since its inception and he acted in various
executive capacities from 1989 to 1999. Mr. Patel holds a B.S. degree in
Engineering with emphasis on digital
9
electronics from Bombay University, India. Mr. Patel is a director of
Sparkolor Corp., Nazomi Communications Inc., and Parama Networks.
MARIO M. ROSATI has been a director of the Company since 1977. He is a
member of the law firm Wilson Sonsini Goodrich & Rosati, Professional
Corporation which he joined in 1971. Mr. Rosati is a graduate of Boalt Hall,
University of California at Berkeley. Mr. Rosati is a director of Genus,
Inc., interWAVE Communications International, Ltd., Sanmina Corporation,
Symyx Technologies, Inc., The Management Network Group, Inc., and Vivus Inc.,
as well as several privately-held companies.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Rhea J. Posedel, the only inside director of the Company, does not
receive any cash compensation for his services as a member of the Board of
Directors. Each outside director receives (1) an annual retainer of $5,000,
(2) $1,000 for each regular board meeting he attends, and (3) $500 for each
committee meeting he attends if not held in conjunction with a regular board
meeting, in addition to being reimbursed for certain expenses incurred in
attending Board and committee meetings. An inside director is a director who
is a regular employee of the Company, whereas an outside director is not an
employee of the Company. Directors are eligible to participate in the
Company's stock option plans. In fiscal 2000, outside directors William
Elder, Mario Rosati, David Torresdal and Mukesh Patel were each granted
options to purchase 5,000 shares at $5.06 per share and an additional option
to purchase 15,000 shares at $3.88 per share was granted to Mukesh Patel. In
fiscal 2001, outside directors William Elder, Mario Rosati and Mukesh Patel
were each granted options to purchase 5,000 shares at $6.25 per share,
additional options to purchase 20,000 shares at $4.00 per share were each
granted to William Elder and Mario Rosati, and an option to purchase 15,000
shares at $6.00 was granted to outside director Robert Anderson. In fiscal
2002, outside directors William Elder, Mario Rosati, Mukesh Patel and Robert
Anderson were each granted options to purchase 5,000 shares at $3.85 per
share.
The Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the Board of
Directors regarding executive compensation matters, including decisions
relating to salary and bonus and grants of stock options. The Audit
Committee approves the appointment of the Company's independent accountants,
reviews the results and scope of annual audits and other accounting related
services, and reviews and evaluates the Company's internal control functions.
Item 2. Properties
The Company's principal administrative and production facilities are
located in Fremont, California, in a 51,289 square foot building. The lease
on this building expires in December 2009; the Company has an option to
extend the lease of its headquarters building for an additional five year
period at rates to be determined. The Company's Japan facility is located in
Tokyo in a 4,294 square foot building under a lease which expires in 2004.
The Company leases a sales and support office on a month-to-month basis in
Utting, Germany. The Company leases a sales and support office in Hsinchu,
Taiwan under a lease which expires in 2004. The Company's and its
subsidiaries' annual rental payments currently aggregate approximately
$730,000. The Company believes that alternate facilities would be available
if needed.
Item 3. Legal Proceedings
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. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggestions that the Company may
be interested in acquiring a license from such third parties. 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.
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Company's Common Stock has been publicly traded on the Nasdaq
National Market under the symbol "AEHR" since the Company's initial public
offering ("IPO") on August 15, 1997. The initial public offering price was
$12.00 per share. The following table sets forth, for the periods indicated,
the high and low sale prices for the Common Stock on such market.
High Low
--------- ---------
Fiscal 2002:
First quarter ended August 31, 2001................ $4.95 $4.00
Second quarter ended November 30, 2001............. 4.20 3.53
Third quarter ended February 28, 2002.............. 4.55 3.30
Fourth quarter ended May 31, 2002.................. 5.95 4.05
Fiscal 2001:
First quarter ended August 31, 2000................ $8.00 $5.50
Second quarter ended November 30, 2000............. 7.50 4.50
Third quarter ended February 28, 2001.............. 6.25 3.50
Fourth quarter ended May 31, 2001.................. 4.75 3.18
At August 7, 2002, the Company had 140 holders of record of its Common
Stock. The Company estimates the number of beneficial owners of the
Company's Common Stock at August 7, 2002 to be 1,005.
The market price of the Company's Common Stock has been volatile. For a
discussion of the factors affecting the Company's stock price, see "Factors
that may affect future results of operations -- possible volatility of stock
price."
The Company has not paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
11
Item 6. Selected Financial Data (in thousands except per share data):
Fiscal Year Ended May 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $12,568 $31,039 $24,505 $18,146 $40,805
Cost of sales................................. 6,488 17,923 17,267 12,201 24,359
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 6,080 13,116 7,238 5,945 16,446
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,547 7,262 7,930 6,892 8,618
Research and development.................... 4,036 4,982 5,367 4,918 4,529
Research and development cost
reimbursement--DARPA ..................... - (600) (866) (1,233) (900)
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 10,583 11,644 12,431 10,577 12,247
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (4,503) 1,472 (5,193) (4,632) 4,199
Interest income............................... 520 971 985 1,199 1,048
Interest expense.............................. - (7) (11) (15) (144)
Other income (expense), net................... (43) 98 498 441 (364)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............. (4,026) 2,534 (3,721) (3,007) 4,739
Income tax expense (benefit).................. 1,241 1,046 (1,116) (677) 2,334
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle........... (5,267) 1,488 (2,605) (2,330) 2,405
Cumulative effect of change in accounting
principle - net of tax...................... - (1,629) - - -
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $(5,267) $ (141) $(2,605) $(2,330) $ 2,405
========== ========== ========== ========== ==========
Income (loss) per share before cumulative
effect of change in accounting principle:
Basic....................................... $ (0.74) $ 0.21 $ (0.38) $ (0.34) $ 0.38
Diluted..................................... $ (0.74) $ 0.21 $ (0.38) $ (0.34) $ 0.36
Net income (loss) per share:
Basic....................................... $ (0.74) $ (0.02) $ (0.38) $ (0.34) $ 0.38
Diluted..................................... $ (0.74) $ (0.02) $ (0.38) $ (0.34) $ 0.36
Shares used in per share calculation
Basic....................................... 7,151 7,074 6,813 6,854 6,327
Diluted..................................... 7,151 7,179 6,813 6,854 6,761
The following are unaudited pro forma amounts with the change in accounting
principle related to revenue recognition applied retroactively to fiscal
years prior to 2001:
May 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Net sales..................................... $12,568 $31,039 $22,580 $17,532 *
Net income (loss)............................. (5,267) 1,488 (3,837) (2,723) *
Net income (loss) per share:
Basic....................................... $ (0.74) $ 0.21 $ (0.56) $ (0.40) *
Diluted..................................... $ (0.74) $ 0.21 $ (0.56) $ (0.40) *
May 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents..................... $ 7,485 $10,391 $ 8,323 $ 5,336 $ 6,748
Working capital............................... 25,952 28,752 30,400 31,016 36,885
Total assets.................................. 33,818 39,592 40,729 41,187 47,105
Long-term obligations, less current portion... 259 185 382 391 168
Total shareholders' equity.................... 29,885 34,807 34,305 36,678 39,964
Note: In fiscal 2001, the Company changed its accounting method for
recognizing revenue to comply with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101").
* Data are not available to provide pro forma information for this year.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and the related notes included elsewhere in this Annual Report on
Form 10-K.
This Management's Discussion and Analysis section and other parts of this
Annual Report on Form 10-K contain forward-looking statements that involve
risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of earnings, revenues or other financial items; any statements of
the plans, strategies and objectives of management for future operations; any
statements concerning proposed new products, services or developments; any
statements regarding future economic conditions or performance; any
statements of belief; and any statement of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above
include the ability of the Company to retain and motivate key employees; the
timely development, production and acceptance of products and services and
their feature sets; the challenge of managing asset levels, including
inventory; the flow of products into third-party distribution channels; the
difficulty of keeping expense growth at modest levels while increasing
revenues; and other risks that are described from time to time in the
Company's Securities and Exchange Commission reports, including but not
limited to this annual report on Form 10-K for the fiscal year ended May 31,
2002 and subsequently filed reports. The Company assumes no obligation and
does not intend to update these forward-looking statements.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and
test equipment for the semiconductor industry. Since its inception, the
Company has sold more than 2,000 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide. The Company's principal products currently are the MTX massively
parallel test system, the MAX and ATX burn-in systems, the FOX full wafer
contact burn-in and parallel test system, the DiePak carrier and test
fixtures.
The Company's net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. The Company's selling arrangements may include contractual
customer acceptance provisions and installation of the product occurs after
shipment and transfer of title. As a result, effective June 1, 2000, to
comply with the provisions of SAB 101, the Company recognizes revenue upon
shipment and defers recognition of revenue for any amounts subject to
acceptance until such acceptance occurs. The amount of revenue deferred is
the greater of the fair value of the undelivered element or the contractual
agreed to amounts. Prior to June 1, 2000, revenue for all products except
royalties was recognized upon shipment of product provided no significant
obligations remained and collectability was assured. Provisions for the
estimated future cost of warranty and installation are recorded at the time
the products are shipped.
A substantial portion of the Company's net sales is derived from the sale
of products for overseas markets. Consequently, 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. Although most sales to European customers are denominated in
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-dollar
exchange rate during the lengthy period from purchase order to ultimate
payment. The length of time between receipt of order and ultimate payment
typically ranges from six to twelve months. The exchange rate risk is
partially offset to the extent the Company's Japanese subsidiary incurs yen-
denominated expenses. To date, the Company has not invested in instruments
designed to hedge currency risks, but it may do so in the future. 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
financial statements of the Japanese subsidiary are based in yen and the
Company's financial statements are based in dollars, the Japanese subsidiary
and the Company recognize income or loss in any period in which the value of
the yen rises or falls in relation to the dollar.
In accordance with SFAS 86, the Company capitalizes its systems software
development costs incurred after a system achieves technological feasibility
and before first commercial shipment. Such costs typically represent a small
portion of total research and development costs. No system software
development costs were capitalized or amortized in fiscal 2002, 2001 and
2000.
13
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States 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
on-going basis, the Company evaluates its estimates, including those related
to customer programs and incentives, product returns, bad debts, inventories,
investments, intangible assets, income taxes, financing operations, warranty
obligations, long-term service contracts, and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
The Company's revenue recognition policy is significant because revenue
is a key component of the results of operations. The Company's revenue
consists 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 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 and installation are recorded at the time the products are shipped.
In addition, the Company's revenue recognition determines the timing of
certain expenses, such as commissions and royalties. The Company follows
very specific and detailed guidelines in measuring revenue in accordance with
SAB 101; however, certain judgments affect the application of the revenue
policy. Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause the operating results to
vary significantly from quarter to quarter and could result in future
operating losses. The Company's revenue recognition policy is further
affected by estimated reductions to revenue for special pricing agreements,
price protection, promotions and other volume-based incentives. If market
conditions were to decline, the Company may take actions to increase customer
incentive offerings possibly resulting in an incremental reduction of revenue
at the time the incentive is offered. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial conditions of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from the Company's
estimates, revisions to the estimated warranty liability would be required.
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company
14
determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to income in the period such determination was made.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated.
Year Ended May 31,
----------------------------
2002 2001 2000
--------- --------- --------
Net sales ................................ 100.0 % 100.0 % 100.0 %
Cost of sales ............................ 51.6 57.7 70.5
--------- --------- --------
Gross profit ............................. 48.4 42.3 29.5
Operating expenses:
Selling, general and administrative..... 52.1 23.4 32.3
Research and development................ 32.1 16.1 21.9
Research and development cost
reimbursement--DARPA.................. -- (1.9) (3.5)
--------- --------- --------
Total operating expenses.............. 84.2 37.6 50.7
--------- --------- --------
Income (loss) from operations......... (35.8) 4.7 (21.2)
Interest income........................... 4.1 3.1 4.0
Interest expense.......................... -- (0.0) (0.0)
Other income (expense), net............... (0.3) 0.3 2.0
--------- --------- --------
Income (loss) before income taxes..... (32.0) 8.1 (15.2)
Income tax expense (benefit).............. 9.9 3.4 (4.6)
--------- --------- --------
Income (loss) before cumulative effect
of change in accounting principle....... (41.9) 4.7 (10.6)
Cumulative effect of change in accounting
principle - net of tax.................. -- (5.2) --
--------- --------- --------
Net loss.................................. (41.9)% (0.5)% (10.6)%
========= ========= ========
FISCAL YEAR ENDED MAY 31, 2002 COMPARED TO FISCAL YEAR ENDED MAY 31, 2001
NET SALES. Net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. Net sales decreased to $12.6 million in the fiscal year ended May
31, 2002 from $31.0 million in the fiscal year ended May 31, 2001, a decrease
of 59.5%. The decrease in net sales in fiscal 2002 was primarily the result
of reduced capital spending by the Company's customers, as a result of the
continuing semiconductor industry downturn, which resulted in decreases in
sales of dynamic burn-in products of approximately $15.1 million and MTX
products of approximately of $3.7 million.
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 $6.1 million
in the fiscal year ended May 31, 2002 from $13.1 million in the fiscal year
ended May 31, 2001, a decrease of 53.6%. Gross profit margin increased to
48.4% in the fiscal year ended May 31, 2002 from 42.3% in the fiscal year
ended May 31, 2001. The increase in gross profit margin was primarily the
result of a change in product mix, resulting in lower material costs as a
percentage of net sales, partially offset by an increase in manufacturing
overhead as a percentage of sales, resulting from a lower level of net sales.
15
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 $6.5 million in the fiscal year ended May 31, 2002 from
$7.3 million in the fiscal year ended May 31, 2001, a decrease of 9.8%. The
decrease in SG&A expenses was primarily due to decreases in employment
related expenses and product support expenses of $261,000 and $226,000,
respectively. As a percentage of net sales, SG&A expenses increased to 52.1%
in the fiscal year ended May 31, 2002 from 23.4% in the fiscal year ended May
31, 2001, 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 $4.0 million in the fiscal year ended May 31, 2002 from $5.0
million in the fiscal year ended May 31, 2001, a decrease of 19.0%. The
decrease in R&D expenses was primarily due to decreases in employment related
expenses of $352,000 and facilities expenses of $230,000. As a percentage of
net sales, R&D expenses increased to 32.1% in the fiscal year ended May 31,
2002 from 16.1% in the fiscal year ended May 31, 2001, reflecting lower net
sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("R&D - DARPA") is a credit
representing reimbursements by DARPA of costs incurred in the Company's
wafer-level burn-in development project. R&D - DARPA was nil in the fiscal
year ended May 31, 2002, compared to $600,000 in the fiscal year ended May
31, 2001. Payments by DARPA depended on satisfaction of development
milestones, and the level of payments varied significantly from fiscal year
to fiscal year. The two final milestones of this agreement were approved and
paid during fiscal 2001. It is not expected that there will be any
additional R&D - DARPA credits recorded for this project after fiscal 2001.
In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA provided co-funding for the
development of wafer-level burn-in and test equipment. The contract provided
for potential payments by DARPA totaling up to $6.5 million. The agreement
provided that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for
government purposes and (iii) DARPA can require the Company to license the
inventions to third parties on reasonable terms if the Company fails to
adequately commercialize the inventions. DARPA payments are reflected as
credits to research and development expenses.
INTEREST INCOME. Interest income decreased to $520,000 in the fiscal
year ended May 31, 2002 from $971,000 in the fiscal year ended May 31, 2001,
a decrease of 46.4%. The decrease in interest income was primarily related
to a lower average rate of return on investments and a lower level of cash
and investments.
INTEREST EXPENSE. Interest expense was nil in the fiscal year ended May
31, 2002, compared with interest expense of $7,000 in the fiscal year ended
May 31, 2001, primarily the result of the full repayment of outstanding debt
in the fourth quarter of fiscal 2001.
OTHER INCOME (EXPENSE), NET. Other expense, net was $43,000 in the
fiscal year ended May 31, 2002, compared with other income, net of $98,000 in
the fiscal year ended May 31, 2001. The decrease in other income (expense),
net was primarily due to the recognition of less income recorded in the
fiscal year ended May 31, 2002 related to the Company's 25% interest in ESA
Electronics PTE Ltd.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $1.2 million in the
fiscal year ended May 31, 2002, compared with income tax expense of $1.0
million in the fiscal year ended May 31, 2001. The income tax expense in the
fiscal year ended May 31, 2002 was primarily due to a non-cash charge of $2.5
million recorded in the fourth quarter associated with increasing the
valuation allowance against deferred tax assets. SFAS 109 requires the
Company to evaluate the uncertainty of utilizing the deferred tax assets.
The income tax expense in the fiscal year ended May 31, 2001 was primarily
due to the tax expense recorded as a result of income earned in the Company's
U.S. operations. 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 U.S. operation and its Japanese subsidiary.
FISCAL YEAR ENDED MAY 31, 2001 COMPARED TO FISCAL YEAR ENDED MAY 31, 2000
NET SALES. Net sales increased to $31.0 million in the fiscal year ended
May 31, 2001 from $24.5 million in the fiscal year ended May 31, 2000, an
increase of 26.7%. Net sales of $31.0 million in fiscal 2001 reflect the
Company's adoption of SAB 101, discussed below in "Accounting Change", which
resulted in a net increase in recognized revenue in fiscal 2001 of $1.9
million. In addition, the increase in net sales in fiscal 2001 resulted from
an increase in sales of
16
dynamic burn-in products of approximately $10.1 million, partially offset by
decreases in sales of MTX products of approximately $5.0 million and DiePak
products of approximately $528,000.
GROSS PROFIT. Gross profit increased to $13.1 million in the fiscal year
ended May 31, 2001 from $7.2 million in the fiscal year ended May 31, 2000,
an increase of 81.2%. Gross profit margin increased to 42.3% in the fiscal
year ended May 31, 2001 from 29.5% in the fiscal year ended May 31, 2000.
The increase in gross profit margin was primarily the result of a change in
product mix, resulting in lower material costs as a percentage of net sales,
and a decrease in provision for inventory reserves, partially offset by an
increase in the provision for warranty.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased to $7.3 million in the fiscal year ended May 31, 2001 from
$7.9 million in the fiscal year ended May 31, 2000, a decrease of 8.4%. The
decrease in SG&A expenses was primarily due to a decrease in product support
expenses. As a percentage of net sales, SG&A expenses decreased to 23.4% in
the fiscal year ended May 31, 2001 from 32.3% in the fiscal year ended May
31, 2000, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to
$5.0 million in the fiscal year ended May 31, 2001 from $5.4 million in the
fiscal year ended May 31, 2000, a decrease of 7.2%. The decrease in R&D
expenses was primarily due to a decrease in project material expenses. As a
percentage of net sales, R&D expenses decreased to 16.1% in the fiscal year
ended May 31, 2001 from 21.9% in the fiscal year ended May 31, 2000,
reflecting higher net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA decreased to $600,000 in the fiscal
year ended May 31, 2001 from $866,000 in the fiscal year ended May 31, 2000,
a decrease of 30.7%. Payments by DARPA depended on satisfaction of
development milestones, and the level of payments varied significantly from
fiscal year to fiscal year. The two final milestones of this agreement were
approved and paid during fiscal 2001.
INTEREST INCOME. Interest income decreased to $971,000 in the fiscal
year ended May 31, 2001 from $985,000 in the fiscal year ended May 31, 2000,
a decrease of 1.4%.
INTEREST EXPENSE. Interest expense decreased to $7,000 in the fiscal
year ended May 31, 2001 from $11,000 in the fiscal year ended May 31, 2000, a
decrease of 36.4%. The decrease in interest expense was primarily the result
of a lower level of outstanding debt in fiscal 2001.
OTHER INCOME (EXPENSE), NET. Other income, net decreased to $98,000 in
the fiscal year ended May 31, 2001, from $498,000 in the fiscal year ended
May 31, 2000 a decrease of 80.3%. The decrease in other income, net was
primarily due to foreign currency exchange losses recorded by the Company and
its subsidiaries in the fiscal year ended May 31, 2001 versus foreign
currency exchange gains recorded in the fiscal year ended May 31, 2000.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $1.0 million in the
fiscal year ended May 31, 2001, compared with income tax benefit of $1.1
million in the fiscal year ended May 31, 2000. The income tax expense in the
fiscal year ended May 31, 2001 was primarily due to the tax expense recorded
as a result of income earned in the Company's U.S. operations. The income
tax benefit in the fiscal year ended May 31, 2000 was primarily due to the
tax benefit recorded as a result of losses incurred in the Company's U.S.
operations.
ACCOUNTING CHANGE
In May 2001, the Company changed its accounting method for recognizing
revenue on sales with an effective date of June 1, 2000. The Company's
selling arrangements may include contractual customer acceptance provisions
and installation of the product occurs after shipment and transfer of title.
As a result, effective June 1, 2000, to comply with the provisions of SAB
101, the Company recognizes revenue upon shipment and defers recognition of
revenue for any amounts subject to acceptance until such acceptance occurs.
The amount of revenue deferred is the greater of the fair value of the
undelivered element or the contractual agreed to amounts. Prior to June 1,
2000, revenue for all products except royalties was recognized upon shipment
of product provided no significant obligations remained and collectability
was assured. Provisions for the estimated future cost of warranty and
installation were recorded at the time the products were shipped. As a
result of this change, the Company recorded a non-recurring charge of $1.6
million for the cumulative effect of a change in accounting principle due to
the adoption of SAB 101. This amount represents contracts subject to
acceptance and the fair value of installation on systems that shipped prior
to fiscal 2001, but did not receive final customer acceptance or were not
installed until after fiscal 2000, net of tax.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been generated from the
Company's August 1997 initial public offering, which resulted in net proceeds
to the Company of approximately $26.8 million. As of May 31, 2002, the
Company had $15.5 million in cash and short-term investments.
Net cash used in operating activities was approximately $226,000 for the
fiscal year ended May 31, 2002, and net cash provided by operating activities
was $1.0 million for the fiscal year ended May 31, 2001. For the fiscal year
ended May 31, 2002, net cash used in operating activities was due primarily
to the net loss of $5.3 million, partially offset by decreases in accounts
receivable of $2.7 million, deferred income taxes of $1.6 million and
inventory of $1.5 million. For the fiscal year ended May 31, 2001, net cash
provided by operating activities was due to net income before cumulative
effect of change in accounting principle of $1.5 million, non-cash
depreciation expense of $651,000, a decrease in inventories and an increase
in accrued expenses and deferred revenue, offset by an increase in accounts
receivable and a decrease in accounts payable.
Net cash used in investing activities was approximately $3.0 million for
the fiscal year ended May 31, 2002, and net cash provided by investing
activities was approximately $1.0 million for the fiscal year ended May 31,
2001. Net cash used in investing activities for the fiscal year ended May
31, 2002 was primarily due to the purchase of short-term investments,
partially offset by the sale of long-term investments. Net cash provided by
investing activities during the fiscal year ended May 31, 2001 was primarily
due to the sale of short-term investments, partially offset by the purchase
of long-term investments.
Financing activities provided cash of approximately $338,000 in the
fiscal year ended May 31, 2002 and $301,000 in the fiscal year ended May 31,
2001. Net cash provided by financing activities for the fiscal year ended
May 31, 2002 was primarily due to proceeds from issuance of common stock and
exercise of stock options, partially offset by the Company's repurchase of
35,500 of its outstanding common shares at an average price of $3.98. Net
cash provided by financing activities for the fiscal year ended May 31, 2001
was primarily due to proceeds from issuance of common stock and exercise of
stock options, partially offset by the Company's repurchase of 98,800 of its
outstanding common shares at an average price of $4.71 and principal
repayments of the Company's long-term debt and capital lease obligation.
As of May 31, 2002, the Company had working capital of $26.0 million,
compared with $28.8 million as of May 31, 2001. 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. As of May 31, 2002, the Company had repurchased 446,000
shares at an average price of $4.23. Shares repurchased by the Company are
cancelled.
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.
Minimum annual rentals payments under operating leases in each of the
next five fiscal years and thereafter are as follows (in thousands):
Payments Due by Period
---------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
--------- ------ ------ ------ ------ ------ ------------
Operating Leases............. $5,944 $726 $740 $752 $765 $791 $2,170
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.
18
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 2003. After fiscal 2003,
depending on its rate of growth and profitability, the Company may require
additional equity or debt financing to meet its working capital requirements
or capital equipment needs. There can be no assurance that additional
financing will be available when required, or if available, that such
financing can be obtained on terms satisfactory to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. 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 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 expects that the initial application of SFAS 142 will not have a
material impact on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-lived Assets". The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of, " and to develop a single accounting model, based on the
framework established by SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. Although SFAS 144
supersedes SFAS 121, it retains some fundamental provisions of SFAS 121.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company expects that the initial application of SFAS 144 will not
have a material impact on its financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Exit or Disposal Activities". SFAS 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for under
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is
not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002 but early application is encouraged.
The provisions of EITF Issue No. 94-3 shall continue to apply for an exit
activity initiated under an exit plan that met the criteria of EITF Issue No.
94-3 prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146
will change, on a prospective basis, the timing of when restructuring charges
are recorded from a commitment date approach to when the liability is
incurred.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934. Discussions containing such forward-looking statements may be found
in this section, as well as within this Report generally. In addition, when
used in this Report, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to a number of risks and
uncertainties.
Consequently, such forward-looking statements should be regarded solely
as the Company's current plans, estimates and beliefs. The Company does not
undertake, and specifically declines, 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.
19
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. During fiscal 2002 and 2001, quarterly net
sales have been as low as $2.8 million and as high as $9.0 million, and gross
margins for quarterly sales have fluctuated between 37.8% and 52.1%. 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, the
length of sales cycles for the Company's products, timing of new product
announcements and releases by the Company and its competitors, market
acceptance of new products and enhanced versions of the Company's products,
capital spending patterns by customers, manufacturing inefficiencies
associated with new product introductions by the Company, the Company's
ability to produce systems and products in volume and meet customer
requirements, product returns and customer acceptance of product shipments,
volatility in the Company's targeted markets, political and economic
instability, natural disasters, regulatory changes, possible disruptions
caused by expanding existing facilities or moving into new facilities,
expenses associated with acquisitions and alliances, and various competitive
factors, including price-based competition and competition from vendors
employing other technologies. 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. All customer purchase orders are subject to cancellation or
rescheduling by the customer with limited penalties, and, therefore, backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period. From time to time, cancellations and rescheduling of
customer orders have occurred, and delays by the Company's suppliers in
providing components or subassemblies to the Company have caused delays in
the Company's shipments of its own products. There can be no assurance that
the Company will not be materially adversely affected by future cancellations
and rescheduling. A substantial portion of net sales typically are realized
near the end of each quarter. A delay or reduction in shipments near the end
of a particular quarter, due, for example, to unanticipated shipment
rescheduling, cancellations or deferrals by customers, customer credit
issues, unexpected manufacturing difficulties experienced by the Company, or
delays in deliveries by suppliers, could cause net sales in a particular
quarter to fall significantly below the Company's expectations. As the
Company incurs expenses in anticipation of future sales levels, the Company's
results of operations may be adversely affected if such sales levels are not
achieved.
RECENT OPERATING LOSSES. The Company incurred operating losses of $4.5
million, $5.2 million and $4.6 million in fiscal 2002, 2000 and 1999,
respectively. The Company operated profitably in fiscal 2001 and 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. Beginning in the second half of
fiscal 2001, the Company has experienced a sharp and severe industry downturn
and recorded an operating loss in fiscal 2002. The Company anticipates that
operating loss in the first quarter of fiscal 2003 will be somewhat similar
to the operating loss in the fourth quarter of fiscal 2002. Given that the
semiconductor equipment market is down more sharply and severely than the
Company had anticipated, there can be no assurance that the Company's net
sales and operating results will not continue to be further impacted by this
prolonged downturn in the semiconductor equipment market and global economy.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element of
the Company's strategy is to capture an increasing share of the memory test
equipment market through sales of the MTX massively parallel test system.
The MTX is designed to perform both burn-in and many of the final test
functions currently performed by high-cost memory testers. The Company's
strategy depends, in part, upon its ability to persuade potential customers
that the MTX system can successfully perform a significant portion of such
final test functions and that transferring such tests to MTX systems will
reduce their overall capital and test costs. There can be no assurance that
the Company's strategy will be successful. The failure of the MTX system to
achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and operating results.
Market acceptance of the MTX system is subject to a number of risks.
Through the end of fiscal 2002, several companies purchased evaluation units
of the MTX system, but only three customers have purchased production
quantities. There are no long-term volume purchase commitments with any of
these customers. There can be no assurance that these customers will
continue to purchase MTX systems for their production facilities. Since most
potential customers have successfully relied on memory testers for many years
and their personnel understand the use and maintenance of such systems, the
Company anticipates that they may be reluctant to change their procedures in
order to transfer test functions to the MTX system. Before a customer will
transfer test functions to the MTX, the test
20
programs must be translated for use with the MTX and lengthy correlation
tests must be performed. Correlation testing may take up to six months or
more. Furthermore, MTX system sales are expected to be primarily limited to
new facilities and to existing facilities being upgraded to accommodate new
product generations, such as the transition to new memory technologies, such
as Rambus or Double Data Rate DRAMs. Construction of new facilities and
upgrades of existing facilities have in some cases been delayed or canceled
during this semiconductor industry downturn. Other companies have purchased
MTX systems which are being used only in quality assurance and engineering
applications. Market acceptance of the MTX system may also be affected by a
reluctance of IC manufacturers to rely on relatively small suppliers such as
the Company.
The Company's future sales and operating results are also partially
dependent on its sales of performance test boards for use with the MTX
system. Sales of PTBs by the Company and its licensees will depend upon the
number of MTX systems operated by customers.
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
system is newly designed to simultaneously burn-in and functionally test all
of the die on a wafer, and the market for FOX systems is in the very early
stages of development. The FOX system was introduced in July 2001, and no
shipments have yet been made. The Company's strategy depends, in part, upon
its ability to persuade potential customers that the FOX system can
successfully contact and functionally test all of the die on a wafer
simultaneously, and that this method of testing is cost-effective for the
customer. There can be no assurance that the Company's strategy will be
successful. The failure of the FOX system to achieve market acceptance would
have a material adverse effect on the Company's future business.
Market acceptance of the FOX system is subject to a number of risks. The
Company must complete development of the FOX system and the manufacturing
processes used to build it. Before a customer will incorporate the FOX
system in a production line, lengthy qualification and correlation tests must
be performed. The Company anticipates that potential customers may be
reluctant to change their procedures in order to transfer burn-in and test
functions to the FOX system. Initial purchases are expected to be limited to
systems used for these qualifications and for engineering studies. Market
acceptance of the FOX system also may be affected by a reluctance of IC
manufacturers to rely on relatively small suppliers such as the Company. As
is common with new complex products incorporating leading-edge technologies,
the Company may encounter reliability, design and manufacturing issues as it
begins volume production and initial installations of FOX systems at customer
sites. While the Company places a high priority on addressing these issues
as they arise, there can be no assurance that they can be resolved to the
customer's satisfaction or that the resolution of such problems will not
cause the Company to incur significant development costs or warranty expenses
or to lose significant sales opportunities.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. Another element of the Company's strategy is to capture an
increasing share of the bare die burn-in and test product market through
sales of its DiePak carrier products. The Company developed the DiePak
carrier to enable burn-in and test of bare die in order to supply known good
die ("KGD") for use in applications such as multichip modules. 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. There can be no assurance that the Company's strategy will be
successful. The market for carriers to produce KGD has not expanded as
rapidly as expected. 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.
The emergence of the bare die market and broad acceptance of the DiePak
carrier are subject to a number of risks. The Company believes that the
growth of the bare die market depends largely on the relative cost and
benefits to the manufacturers of PCs and other electronic products of using
bare die rather than alternative IC packaging methods. There can be no
assurance that electronic manufacturers will perceive that the benefits of
KGD justify its potentially higher cost, and acceptance of KGD for many
applications may therefore be limited. In addition, electronics
manufacturers must change their manufacturing processes in order to use KGD,
but electronics manufacturers typically have substantial investments in
existing manufacturing technology and have historically been slow in
transitioning to new technologies. There can be no assurance that the bare
die market will emerge and grow as the Company anticipates, that the DiePak
carrier will achieve commercial acceptance, or that the Company will not
experience difficulties in ramping up production to meet any increased demand
for DiePak products that may develop.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers account for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five
largest customers accounted for approximately 61.7%, 58.8% and 64.3% of its
net sales in fiscal 2002, 2001 and 2000, respectively. During fiscal 2002,
21
Texas Instruments, Formosa Advanced Technologies Co. Ltd. and ASE Test, Inc.
accounted for 22.3%, 17.1% and 11.1% of the Company's net sales,
respectively. During fiscal 2001, Texas Instruments and Formosa Advanced
Technologies Co. Ltd. accounted for 25.2% and 12.7% of the Company's net
sales, respectively. During fiscal 2000, Texas Instruments, Formosa Advanced
Technologies Co. Ltd. and First International Computer Inc. accounted for
22.8%, 19.2% and 13.5% of the Company's net sales, respectively. 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 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 dynamic burn-in
systems. The market for burn-in systems is mature and estimated to be
approximately $100 million per year. In general, process control
improvements in the semiconductor industry have tended to reduce burn-in
times. In addition, as a given IC product generation matures and yields
increase, the required burn-in time may be reduced or eliminated. IC
manufacturers, which historically have been the Company's primary customer
base, increasingly outsource test and burn-in to independent test labs which
often build their own systems. 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 involve a significant commitment of capital. In
view of the significant investment or strategic issues that may be involved
in a decision to purchase MTX and FOX systems or DiePak carriers, the Company
may experience delays following initial qualification of the Company's
systems as a result of delays in a customer's approval process. Furthermore,
the approval process for MTX and FOX system and DiePak carrier sales may
require lengthy qualification and correlation testing. For this and other
reasons, the Company's systems typically have a lengthy sales cycle during
which the Company may expend substantial funds and management effort in
securing a sale. Lengthy sales cycles subject the Company to a number of
significant risks, including inventory obsolescence and fluctuations in
operating results, over which the Company has little or no control. 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 62.7%,
60.6% and 73.3% of the Company's net sales for fiscal 2002, 2001 and 2000,
respectively, were attributable to sales to customers for delivery outside of
the United States. The Company maintains a sales, service, product
engineering and manufacturing organization in Japan, a sales and service
organization in 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 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 prices
have sometimes fallen dramatically, are currently doing so, and will likely
do so again in the future. These developments may affect the Company in
several ways. Currency devaluations may make dollar-denominated goods such
as those of the Company relatively more expensive for Asian clients. The
Company believes that many international semiconductor manufacturers limited
capital spending (including the purchase of MTXs) in fiscal years 1999, 2001
and 2002, and that the uncertainty of the DRAM market may cause some
manufacturers in the future to again delay capital spending plans. These
circumstances 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 fab construction. Financial
turmoil may reduce these governments' willingness to continue such subsidies.
Such
22
developments could have a material adverse affect 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 90.0%, 4.6% and 5.4% of the Company's net sales for
fiscal 2002 were denominated in U.S. Dollars, Japanese Yen and Euro,
respectively. Although a large percentage of sales to European customers is
denominated in 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-dollar exchange rate during the lengthy period from purchase order to
ultimate payment. This exchange rate risk is partially offset to the extent
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 financial statements of the Japanese subsidiary are based
in yen and the financial statements of the Company are based in dollars, the
Japanese subsidiary and the Company recognize currency exchange gain or loss
in any period in which the value of the yen rises or falls in relation to the
dollar. The Company experienced currency exchange losses of $23,000 and
$238,000 in fiscal 2002 and 2001, respectively. The Company recorded a
currency exchange gain of $371,000 in fiscal 2000.
A substantial portion of the world's manufacturers of memory devices are
in Korea, Japan and Taiwan and growth in the Company's net sales depends in
large part upon its ability to penetrate the Korean and Japanese 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 incurred operating
losses in recent years. Sales into Korea have not been significant in recent
years. In fiscal 2001, the Company signed an agreement with a new Korean
distributor. Taiwan represents 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 Korean
and Taiwanese markets. There can be no assurance that the Company's efforts
in Japan, Korea or Taiwan will be successful or that the Company will be able
to achieve and sustain significant sales to, or be able to successfully
compete in, the Japanese, Korean or Taiwanese markets.
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. The Company's success in developing new and
enhanced products depends upon a variety of factors, including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. Because new
product development commitments must be made well in advance of sales, new
product decisions must anticipate both future demand and the technology that
will be available to supply that demand. Furthermore, introductions of new
and complex products typically involve a period in which design, engineering
and reliability issues are identified and addressed by the Company and its
suppliers. This process in the past required and in the future is likely to
require the Company to incur unreimbursed engineering expenses, and from time
to time to experience warranty claims or product returns. 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.
Because of the complexity of the Company's products, significant delays
can occur between a product's introduction and the commencement of volume
production of such product. The Company has experienced significant delays
from time to time in the introduction of, and technical and manufacturing
difficulties with, certain of its products and may experience delays and
technical and manufacturing difficulties in future introductions or volume
production of new products, and there can be no assurance that the Company
will not encounter such difficulties in the future. The Company's inability
to complete product development, products or to manufacture and ship products
in volume and in time to meet customer requirements would materially
adversely affect the Company's business, financial condition and results of
operations.
As is common with new complex and software-intensive products, the
Company encountered reliability, design and manufacturing issues as it began
volume production and initial installations of certain products at customer
sites. The Company places a high priority on addressing these issues as they
arise. Certain of these issues in the past have been related to components
and subsystems supplied to the Company by third parties which have in some
cases limited the ability of the Company to address such issues promptly.
When the Company is in an early stage of the life cycle of one
23
of its products, there can be no assurance that reliability, design and
manufacturing issues will not be discovered in the future or that such
issues, if they arise, can be resolved to the customers' satisfaction or that
the resolution of such problems will not cause the Company to incur
significant development costs or warranty expenses or to lose significant
sales opportunities.
Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for the Company's products. For example,
the introduction of viable wafer-level burn-in and test systems, improvements
in built-in self test ("BIST") technology, and improvements in conventional
test systems, such as reduced cost or increased throughput, may significantly
reduce or eliminate the market for one or more of the Company's products.
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 to continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
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, flexibility, automation, cost of
ownership, reliability, throughput, product availability 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 Ando Corporation, Japan Engineering Company
and Reliability Incorporated. In addition, suppliers of memory test
equipment including Advantest Corporation and Teradyne, Inc. may seek to
offer competitive parallel test systems in the future.
The Company's MAX and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers and from systems
manufacturers that offer higher power dissipation per DUT.
The Company's FOX full wafer contact system is expected to face
competition from larger systems manufacturers that have more advanced
technological know-how and a broader range of manufacturing resources.
Competing suppliers of full wafer contact system include Tokyo Electron
Limited and Matsushita Electric Industrial Co., Ltd.
The Company's DiePak products could face significant competition. The
Company believes that several companies have developed or are developing
other products which are intended to enable burn-in and test of bare die. 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.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many small
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide 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 will design, manufacture and sell the BIBs and the Company will
provide Pycon with system know-how. Both companies will jointly market and
sell the BIBs and 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 for use with its MTX systems, in order to assure
customers of a second source of supply, and the Company may license others as
well. Sales of PTBs by licensees result in royalties to the Company but
reduce the Company's own sales of PTBs.
24
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.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The Company's operating results depend
primarily upon the capital expenditures of semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. 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, which
have had a severe negative effect on the semiconductor industry's demand for
semiconductor capital equipment, including test and burn-in systems
manufactured and marketed by the Company. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1999, 2000, and 2002. In addition, the purchasing patterns of the Company's
customers are also highly cyclical because most customers purchase the
Company's products for use in new production facilities or for upgrading
existing test lines for the introduction of next generation products.
Construction of new facilities and upgrades of existing facilities have in
some cases been delayed or canceled during the most recent semiconductor
industry downturn. 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. There can be no assurance that the semiconductor industry will grow
in the future at the same rates it has grown historically. Any downturn or
slowdown in the semiconductor industry would have a material adverse effect
on the Company's business, financial condition and operating results. In
addition, the need to maintain investment in research and development and to
maintain customer service and support will limit the Company's ability to
reduce its expenses in response to any such downturn or slowdown period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing
companies that are the customers of semiconductor equipment companies
frequently revise, postpone and cancel capital facility expansion plans. In
such cases, semiconductor equipment companies may experience a significant
rate of cancellations and reschedulings of purchase orders, as was the case
in the industry in late 1995, early 1996, 1998, 2001 and 2002. There can be
no assurance that the Company will not be materially adversely affected by
future cancellations and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX, ATX and FOX
systems and DiePak carriers contain several components, including
environmental chambers, power supplies, wafer contactors, signal distribution
substrates and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The 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 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, announcement of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights
and changes in the Company's relationships with customers and suppliers 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
25
in particular, has experienced extreme price fluctuations which have often
been unrelated to the operating performance of affected companies. Such
fluctuations could adversely affect the market price of the Company's Common
Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain
on the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company
is unable to manage the expansion of its operations effectively, the
Company's business, financial condition and operating results will be
materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its Chief
Executive Officer, as well as other executive officers and key employees.
The Company does not maintain key person life insurance for its benefit on
any of its personnel, and none of the Company's employees is subject to a
non-competition agreement with the Company. 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. There is a limited number of personnel with the
requisite skills to serve in these positions, and it has become increasingly
difficult for the Company to hire such 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. Further, there can be no assurance that claims allowed on any
patent issued to the Company will be sufficiently broad to protect the
Company's technology, that any patent will issue from any pending application
or that foreign intellectual property laws will protect the Company's
intellectual property. 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. In addition, there can be no assurance that
any of the patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company.
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. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggestions that the Company may
be interested in acquiring a license from such third parties. 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.
26
Item 7a. 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 May 31, 2002.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The Company invests
excess cash in a managed portfolio of corporate and government bond
instruments with maturities of 18 months or less. The Company does not use
any financial instruments for speculative or trading purposes. Fluctuations
in interest rates would not have a material effect on the Company's financial
position, results of operations and cash flows.
A majority of the Company's revenue and capital spending is transacted in
U.S. dollars. The Company, however, enters into transactions in other
currencies, primarily Japanese Yen. Substantially all sales to Japanese
customers are denominated in yen. Since the price is determined at the time
a purchase order is accepted, the Company is exposed to the risks of
fluctuations in the yen-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent that the Company's Japanese subsidiary incurs yen-
denominated expenses. To date, the Company has not invested in instruments
designed to hedge currency risks. In addition, the Company's Japanese
subsidiary typically carries debt or other obligations due to the Company
that may be denominated in either yen or dollars. Since the Japanese
subsidiary's financial statements are based in yen and the Company's
financial statements are based in dollars, the Japanese subsidiary and the
Company recognize foreign exchange gain or loss in any period in which the
value of the yen rises or falls in relation to the dollar. A 10% decrease in
the value of the yen as compared with the dollar would potentially result in
an additional net loss of approximately $176,000.
27
Item 8. Financial Statements and Supplementary Data
INDEX
Consolidated Financial Statements of Aehr Test Systems
Report of Independent Accountants................................... 29
Consolidated Balance Sheets at May 31, 2002 and 2001................ 30
Consolidated Statements of Operations for the years
ended May 31, 2002, 2001 and 2000................................. 31
Consolidated Statements of Shareholders' Equity and
Accumulated Other Comprehensive Income for the years
ended May 31, 2002, 2001 and 2000................................. 32
Consolidated Statements of Cash Flows for the years ended
May 31, 2002, 2001 and 2000....................................... 33
Notes to Consolidated Financial Statements.......................... 34
Selected Quarterly Consolidated Financial Data (Unaudited).......... 45
Financial Statement Schedule
Schedule for the years ended May 31, 2002, 2001, 2000
Schedule II Valuation and Qualifying Accounts........................ 46
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or in the Notes thereto.
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Aehr Test Systems:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Aehr Test Systems and its subsidiaries at May 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the
three years in the period ended May 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements,
effective June 1, 2000, the Company changed its method of recognizing revenue
to comply with Securities and Exchange Commission Staff Accounting Bulletin
No. 101.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 23, 2002
29
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
May 31,
-------------------------
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 7,485 $10,391
Short-term investments ............................. 8,003 3,764
Accounts receivable, net of allowance for doubtful
accounts of $71 and $135 at May 31, 2002 and
2001, respectively ............................... 3,132 5,751
Inventories ........................................ 8,633 10,125
Deferred income taxes............................... -- 1,613
Prepaid expenses and other ......................... 2,373 1,708
---------- ----------
Total current assets ........................... 29,626 33,352
Property and equipment, net .......................... 2,356 2,103
Long-term investments ................................ -- 2,267
Other assets, net .................................... 1,836 1,870
---------- ----------
Total assets ................................... $33,818 $39,592
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 874 $ 1,213
Accrued expenses ................................... 2,260 3,336
Deferred revenue ................................... 540 51
---------- ----------
Total current liabilities ...................... 3,674 4,600
Deferred revenue ..................................... 35 39
Deferred lease commitment ............................ 224 146
---------- ----------
Total liabilities .............................. 3,933 4,785
---------- ----------
Commitments (Note 6).
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none ..................... -- --
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 7,184 shares and 7,116
shares at May 31, 2002 and 2001, respectively .. 72 71
Additional paid-in capital ......................... 36,387 36,134
Note receivable from shareholders .................. -- (84)
Accumulated other comprehensive income ........... 1,494 1,487
Accumulated deficit ................................ (8,068) (2,801)
---------- ----------
Total shareholders' equity ..................... 29,885 34,807
---------- ----------
Total liabilities and shareholders' equity ..... $33,818 $39,592
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
30
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended May 31,
--------------------------------
2002 2001 2000
---------- ---------- ----------
Net sales..................................... $12,568 $31,039 $24,505
Cost of sales................................. 6,488 17,923 17,267
---------- ---------- ----------
Gross profit.................................. 6,080 13,116 7,238
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,547 7,262 7,930
Research and development.................... 4,036 4,982 5,367
Research and development cost
reimbursement--DARPA ..................... -- (600) (866)
---------- ---------- ----------
Total operating expenses.................. 10,583 11,644 12,431
---------- ---------- ----------
Income (loss) from operations................. (4,503) 1,472 (5,193)
Interest income............................... 520 971 985
Interest expense.............................. -- (7) (11)
Other income (expense), net................... (43) 98 498
---------- ---------- ----------
Income (loss) before income taxes ............ (4,026) 2,534 (3,721)
Income tax expense (benefit).................. 1,241 1,046 (1,116)
---------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle........... (5,267) 1,488 (2,605)
Cumulative effect of change in accounting
principle - net of tax...................... -- (1,629) --
---------- ---------- ----------
Net loss...................................... (5,267) (141) (2,605)
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
income (expense).......................... 24 (109) (343)
Unrealized holding gains (losses) arising
during the year........................... (17) 32 48
---------- ---------- ----------
Comprehensive loss............................ $(5,260) $ (218) $(2,900)
========== ========== ==========
Income (loss) per share before cumulative effect
of change in accounting principle:
Basic....................................... $ (0.74) $ 0.21 $ (0.38)
Diluted..................................... $ (0.74) $ 0.21 $ (0.38)
Net loss per share
Basic....................................... $ (0.74) $ (0.02) $ (0.38)
Diluted..................................... $ (0.74) $ (0.02) $ (0.38)
Shares used in per share calculation
Basic....................................... 7,151 7,074 6,813
Diluted..................................... 7,151 7,179 6,813
The accompanying notes are an integral part of these consolidated
financial statements.
31
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(IN THOUSANDS)
Accumulated Other
Comprehensive Income
Notes --------------------- Retained
Common Stock Additional Receivable Unrealized Cumulative Earnings
----------------- Paid-in From Investment Translation (Accumulated
Shares Amount Capital Shareholders Loss Adjustment Deficit) Total
------- ------- ------- ---------- -------- --------- --------- -------
Balances, May 31, 1999........ 6,756 $68 $34,806 -- $(61) $1,920 $ (55) $36,678
Issuance of common stock
under employee plans...... 178 1 662 -- -- -- -- 663
Repurchase of common stock.. (28) -- (136) -- -- -- -- (136)
Net loss.................... -- -- -- -- -- -- (2,605) (2,605)
Net unrealized gain on
investments............... -- -- -- -- 48 -- -- 48
Foreign currency
translation adjustment.... -- -- -- -- -- (343) -- (343)
-------
Comprehensive loss.......... (2,900)
------- ------- ------- ------- ------- ------- ------- -------
Balances, May 31, 2000 6,906 69 35,332 -- (13) 1,577 (2,660) 34,305
Issuance of common stock
under employee plans...... 308 2 1,270 -- -- -- -- 1,272
Repurchase of common stock.. (98) -- (468) -- -- -- -- (468)
Note receivable from
shareholders.............. -- -- -- $(84) -- -- -- (84)
Net loss.................... -- -- -- -- -- -- (141) (141)
Net unrealized gain on
investments............... -- -- -- -- 32 -- -- 32
Foreign currency
translation adjustment.... -- -- -- -- -- (109) -- (109)
-------
Comprehensive loss.......... (218)
------- ------- ------- ------- ------- ------- ------- -------
Balances, May 31, 2001 7,116 71 36,134 (84) 19 1,468 (2,801) 34,807
Issuance of common stock
under employee plans...... 104 1 394 -- -- -- -- 395
Repurchase of common stock.. (36) -- (141) -- -- -- -- (141)
Note receivable from
shareholders.............. -- -- -- 84 -- -- -- 84
Net loss.................... -- -- -- -- -- -- (5,267) (5,267)
Net unrealized loss on
investments............... -- -- -- -- (17) -- -- (17)
Foreign currency
translation adjustment.... -- -- -- -- -- 24 -- 24
-------
Comprehensive loss.......... (5,260)
------- ------- ------- ------- ------- ------- ------- -------
Balances, May 31, 2002 7,184 $72 $36,387 $ -- $ 2 $1,492 $(8,068) $29,885
The accompanying notes are an integral part of these consolidated
financial statements.
32
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net loss...................................... $(5,267) $ (141) $(2,605)
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............. (64) (23) 27
Loss on disposition of
property and equipment.................... 79 34 6
Depreciation and amortization............... 662 651 703
Deferred income taxes....................... 1,613 -- --
Changes in operating assets and liabilities:
Accounts receivable....................... 2,687 (2,098) (2,791)
Inventories............................... 1,497 1,090 (1,891)
Accounts payable.......................... (289) (1,514) 1,564
Accrued expenses and deferred revenue..... (559) 1,409 (46)
Deferred lease commitment................. 78 100 85
Other current assets...................... (663) (126) (1,008)
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. (226) 1,011 (5,956)
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-
term investments.......................... (4,239) 3,601 7,482
(Increase) decrease in long-
term investments.......................... 2,250 (1,655) 2,703
Additions to property and equipment......... (954) (122) (1,357)
(Increase) decrease in other assets......... (19) (787) (274)
--------- --------- ---------
Net cash provided by (used in)
investing activities.................. (2,962) 1,037 8,554
--------- --------- ---------
Cash flows from financing activities:
Long-term debt and capital lease
principal payments........................ -- (419) (170)
Proceeds from issuance of common stock
and exercise of stock options............. 395 1,272 662
Repayment (Issuance) of notes
from (to) shareholders.................... 84 (84) --
Repurchase of common stock.................. (141) (468) (136)
--------- --------- ---------
Net cash provided by
financing activities.................. 338 301 356
--------- --------- ---------
Effect of exchange rates on cash................ (56) (281) 33
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents...................... (2,906) 2,068 2,987
Cash and cash equivalents, beginning of year.... 10,391 8,323 5,336
--------- --------- ---------
Cash and cash equivalents, end of year.......... $ 7,485 $10,391 $ 8,323
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................. $-- $ 4 $10
Income taxes ............................. $43 $28 $38
The accompanying notes are an integral part of these consolidated
financial statements.
33
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems ("Company") was incorporated in California in June 1977
and primarily designs, engineers and manufactures test and burn-in equipment
used in the semiconductor industry. The Company's principal products are the
MTX massively parallel test system, the MAX and ATX burn-in systems, the FOX
full wafer contact system, test fixtures and the DiePak carrier.
CONSOLIDATION:
The financial statements include the accounts of the Company, its wholly
owned foreign sales corporation ("FSC") and both its wholly owned and
majority owned foreign subsidiaries. Intercompany accounts and transactions
have been eliminated. The Company's 25% interest in ESA Electronics PTE Ltd.
("ESA"), a Singapore company, is accounted for under the equity method.
Equity income recorded related to ESA totaled $46,000, $275,000 and $76,000
in fiscal years 2002, 2001 and 2000, respectively. The Company has another
investment which is accounted for at cost.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. Dollars from Japanese Yen, Euros and New Taiwan Dollars
using the exchange rate in effect at the balance sheet date. Additionally,
their revenues and expenses are translated using exchange rates approximating
average rates prevailing during the fiscal year. Translation adjustments
that arise from translating their financial statements from their local
currencies to U.S. Dollars are accumulated and reflected as a separate
component of shareholders' equity and comprehensive income (loss).
Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred.
USE OF 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 could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS:
Cash equivalents consist of money market instruments, commercial paper
and other highly liquid investments purchased with an original maturity of
three months or less. All investments are classified as available-for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses, net of tax, if any, included as a component of
shareholders' equity. Included in cash and cash equivalents is a $50,000
certificate of deposit held by a financial institution representing a
security deposit for the Company's manufacturing and office space lease in
the United States of America.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers
in North America, the Far East, and Europe. As of May 31, 2002,
approximately 23%, 65% and 12% of accounts receivable are from customers
located in the United States, the Far East and Europe, respectively. As of
May 31, 2001, approximately 31%, 64% and 5% of accounts receivable are from
customers located in the United States, the Far East and Europe,
respectively. Two customers accounted for 38% and 16% of accounts receivable
at May 31, 2002, and four customers accounted for 25%, 16%, 11% and 11% of
accounts receivable at May 31, 2001. Three customers accounted for 22%, 17%
and 11% of net sales in fiscal 2002, respectively and two customers accounted
for 25% and 13% of net sales in fiscal 2001, respectively. Three customers
accounted for 23%, 19% and 14% of net sales in fiscal 2000, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company also maintains allowances
for potential credit losses and such losses have been within management's
expectations. The Company uses letter of credit terms for some of its
international customers.
34
Primarily all of the Company's cash, cash equivalents and short-term cash
deposits are deposited with major banks in the United States, Japan and
Taiwan. The Company invests its excess cash in money market funds and short-
term cash deposits. The money market funds and short-term cash deposits bear
the risk associated with each fund. The money market funds have variable
interest rates, and the short-term cash deposits have fixed rates. The
Company has not experienced any losses on its money market funds or short-
term cash deposits.
INVENTORIES:
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation
and amortization. Leasehold improvements are amortized over the lesser of
their estimated useful lives or the term of the related lease. Furniture,
fixtures, machinery and equipment are depreciated on a straight-line basis
over their estimated useful lives. The ranges of estimated useful lives for
furniture, fixtures, machinery and equipment are as follows:
Leasehold improvements................................ life of the lease
Furniture and fixtures................................ 2 to 15 years
Machinery and equipment............................... 4 to 11 years
Test equipment........................................ 4 to 11 years
GOODWILL:
Cost in excess of the fair value of net assets of acquired companies of
$956,000 is being amortized on a straight-line basis over 24.5 years and is
included in other assets, net of accumulated amortization of $682,000 and
$634,000 at May 31, 2002 and 2001, respectively.
REVENUE RECOGNITION:
The Company's selling arrangements may include contractual customer
acceptance provisions and installation of the product occurs after shipment
and transfer of title. As a result, effective June 1, 2000, to comply with
the provisions of SAB 101, the Company recognizes revenue upon shipment and
defers recognition of revenue for any amounts subject to acceptance until
such acceptance occurs. The amount of revenue deferred is the greater of the
fair value of the undelivered element or the contractual agreed to amounts.
Royalty revenue related to Performance Test Boards licensing income is
recognized when paid by the licensee. This income is recorded in net sales.
Provisions for the estimated future cost of warranty is recorded at the time
the products are shipped. Prior to June 1, 2000, revenue for all products
except royalties was recognized upon shipment of product provided no
significant obligations remained and collectability was assured and
provisions for the estimated future cost of warranty and installation were
recorded at the time the products were shipped.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems
are charged to operations as incurred.
Costs incurred in the development of software programs for the Company's
products are charged to operations as incurred until technological
feasibility of the software has been established. Generally, technological
feasibility is established when the software module performs its primary
functions described in its original specifications, contains features
required for it to be usable in a production environment, is completely
documented and the related hardware portion of the product is complete.
After technological feasibility is established, any additional costs are
capitalized. Capitalized costs are amortized over the estimated life of the
related software product using the greater of the units of sales or straight-
line methods over ten years. No system software development costs were
capitalized or amortized in fiscal 2002, 2001 and 2000.
During 1994, the Company entered into a cost-sharing research agreement
with the Defense Advanced Research Projects Agency ("DARPA"), a U.S.
government agency, under which DARPA provided co-funding up to a maximum
amount of $6.5 million during fiscal 1994 through September 2000 for the
development of a new product that would allow for burn-in and test at the
wafer level. Payments from DARPA were received upon DARPA's approval of the
35
achievement by the Company of milestones as outlined in the contract. The
Company recognized such reimbursements as a reduction to research and
development expenses in an amount equal to actual reimbursable project costs
incurred. In January 2001, the Company completed this $6.5 million multi-
year research and development agreement with DARPA. At May 31, 2002 and May
31, 2001, no outstanding payments were due from DARPA.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate fair value due
to their short maturities.
The Company's investments are composed primarily of government and
corporate fixed income securities, certificates of deposit and commercial
paper. Long-term investments mature after one year but less than two years.
While it is the Company's general intent to hold such securities until
maturity, management will occasionally sell particular securities for cash
flow purposes. Therefore, the Company's investments are classified as
available-for-sale and are carried at fair value. Through May 31, 2002, no
material losses had been experienced on such investments.
Unrealized gains and losses on available-for-sale investments, net of
tax, are computed on the basis of specific identification and are included in
shareholders' equity. Realized gains, realized losses, and declines in
value, judged to be other-than-temporary, are included in other income. The
cost of securities sold is based on the specific identification method and
interest earned is included in other income.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying
value of assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying value to determine if a write-down is required.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
STOCK-BASED COMPENSATION:
The Company accounts for its employee stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and presents disclosures required
by Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation."
EARNINGS PER SHARE ("EPS") DISCLOSURES:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," and all
prior periods have been restated accordingly. Basic EPS is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon exercise of stock options for all
periods.
COMPREHENSIVE LOSS:
The Company has adopted Statement of Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components in the financial
statements. Unrealized gains (losses) on available-for-sale securities and
foreign currency translation adjustments are included in the Company's
components of comprehensive income (loss), which are excluded from net income
(loss).
36
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
Year Ended May 31,
--------------------------------
2002 2001 2000
---------- ---------- ----------
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...................... $(5,267) $ 1,488 $(2,605)
---------- ---------- ----------
Denominator for basic income (loss) per share:
Weighted-average shares outstanding ...... 7,151 7,074 6,813
---------- ---------- ----------
Shares used in basic per share calculation.. 7,151 7,074 6,813
Effect of dilutive securities:
Employee stock options.................. -- 105 --
---------- ---------- ----------
Denominator for diluted income (loss)
per share............................... 7,151 7,179 6,813
---------- ---------- ----------
Basic income (loss) per share before
cumulative effect of change in
accounting principle...................... $(0.74) $ 0.21 $(0.38)
========= ========= =========
Diluted income (loss) per share before
cumulative effect of change in
accounting principle...................... $(0.74) $ 0.21 $(0.38)
========= ========= =========
Net loss available to common shareholders:
Numerator: Net loss......................... $(5,267) $ (141) $(2,605)
---------- ---------- ----------
Denominator for basic loss per share:
Weighted-average shares outstanding ...... 7,151 7,074 6,813
---------- ---------- ----------
Shares used in basic per share calculation.. 7,151 7,074 6,813
Effect of dilutive securities:
Employee stock options.................. -- -- --
---------- ---------- ----------
Denominator for diluted loss per share...... 7,151 7,074 6,813
---------- ---------- ----------
Basic loss per share........................ $(0.74) $(0.02) $(0.38)
========= ========= =========
Diluted loss per share...................... $(0.74) $(0.02) $(0.38)
========= ========= =========
Weighted average stock options to purchase 241,000, 528,000 and 651,000
shares of common stock were outstanding in fiscal 2002, 2001 and 2000,
respectively, but were not included in the computation of diluted loss per
share because the inclusion of such shares would be anti-dilutive.
37
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. 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 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 expects that the initial application of SFAS 142 will not have a
material impact on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-lived Assets". The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of, " and to develop a single accounting model, based on the
framework established by SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. Although SFAS 144
supersedes SFAS 121, it retains some fundamental provisions of SFAS 121.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company expects that the initial application of SFAS 144 will not
have a material impact on its financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Exit or Disposal Activities". SFAS 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for under
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is
not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002 but early application is encouraged.
The provisions of EITF Issue No. 94-3 shall continue to apply for an exit
activity initiated under an exit plan that met the criteria of EITF Issue No.
94-3 prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146
will change, on a prospective basis, the timing of when restructuring charges
are recorded from a commitment date approach to when the liability is
incurred.
2. ACCOUNTING CHANGE - REVENUE RECOGNITION:
In May 2001, the Company changed its accounting method for recognizing
revenue on sales with an effective date of June 1, 2000. The Company's
selling arrangements may include contractual customer acceptance provisions
and installation of the product occurs after shipment and transfer of title.
As a result, effective June 1, 2000, to comply with the provisions of SAB
101, the Company recognizes revenue upon shipment and defers recognition of
revenue for any amounts subject to acceptance until such acceptance occurs.
The amount of revenue deferred is the greater of the fair value of the
undelivered element or the contractual agreed to amounts. Prior to June 1,
2000, revenue for all products except royalties was recognized upon shipment
of product provided no significant obligations remained and collectability
was assured. Provisions for the estimated future cost of warranty and
installation were recorded at the time the products were shipped.
The cumulative effect on prior years of the change in accounting method
was a charge of $1.6 million or $0.23 per basic and diluted share recorded in
fiscal 2001.
38
3. INVENTORIES:
Inventories are comprised of the following (in thousands):
May 31,
-------------------------
2002 2001
------------ ------------
Raw materials and subassemblies......... $4,825 $ 4,479
Work in process......................... 3,698 4,779
Finished goods.......................... 110 867
------------ ------------
$8,633 $10,125
============ ============
4. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
May 31,
-------------------------
2002 2001
------------ ------------
Leasehold improvements.................. $1,227 $1,418
Furniture and fixtures.................. 2,659 3,037
Machinery and equipment................. 3,113 3,253
Test equipment.......................... 1,888 2,189
------------ ------------
8,887 9,897
Less: Accumulated depreciation
and amortization...................... (6,531) (7,794)
------------ ------------
$2,356 $2,103
============ ============
5. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
May 31,
-------------------------
2002 2001
------------ ------------
Payroll related......................... $ 523 $ 557
Commissions and bonuses................. 455 843
Taxes Payable........................... 443 436
Warranty................................ 141 479
Other................................... 698 1,021
------------ ------------
$2,260 $3,336
============ ============
6. COMMITMENTS:
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.
Minimum annual rentals payments under operating leases in each of the
next five fiscal years and thereafter are as follows (in thousands):
39
2003.................................... $726
2004.................................... 740
2005.................................... 752
2006.................................... 765
2007.................................... 791
Thereafter.............................. 2,170
Rental expense for the years ended May 31, 2002, 2001 and 2000 was
approximately $802,000, $977,000 and $1,275,000, respectively.
At May 31, 2002, the Company has a $50,000 certificate of deposit held by
a financial institution representing a security deposit for its United States
manufacturing and office space lease.
7. CAPITAL STOCK:
PREFERRED STOCK:
The Board of Directors is authorized to determine the rights of the
preferred shareholders.
STOCK OPTIONS:
The Company has reserved 1,502,167 shares of common stock for issuance to
employees and consultants under its 1996 stock option plan. The plan
provides that qualified options be granted at an exercise price equal to the
fair market value at the date of grant, as determined by the Board of
Directors (85% of fair market value in the case of non-statutory options and
purchase rights and 110% of fair market value in certain circumstances).
Options generally expire within seven years from date of grant. Most options
become exercisable in increments over a four-year period from the date of
grant. Options to purchase approximately 601,083 shares were exercisable at
May 31, 2002.
Activity under the Company's stock option plans was as follows (in
thousands, except per share data):
Outstanding Options
----------------------------------------
Weighted
Number Average
Available of Exercise
Shares Shares Price
------------ ------------ ------------
(in thousands, except per share data)
Balances, May 31, 1999............... 215 921 $5.38
Additional shares reserved. 300 --
Options granted.................... (369) 369 $4.83
Options terminated................. 171 (171) $6.12
Options exercised.................. -- (140) $3.93
1986 Plan expiration............... (32) -- --
------------ ------------ ------------
Balances, May 31, 2000............... 285 979 $5.23
Additional shares reserved......... 300 --
Options granted.................... (652) 652 $5.54
Options terminated................. 275 (275) $5.86
Options exercised.................. -- (252) $4.13
1986 Plan expiration............... (96) --
------------ ------------ ------------
Balances, May 31, 2001............... 112 1,104 $5.51
Additional shares reserved......... 300 --
Options granted.................... (177) 177 $4.46
Options terminated................. 113 (113) $6.03
Options exercised.................. -- (14) $3.88
------------ ------------ ------------
Balances, May 31, 2002............... 348 1,154 $5.32
============ ============
40
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such
plans in accordance with APB No. 25 and related Interpretations.
Year Ended May 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except per share data)
Net loss -- as reported...................... $(5,267) $ (141) $(2,605)
Net loss -- pro forma........................ $(6,511) $(1,363) $(3,133)
Net loss per share -- as reported:
Basic...................................... $ (0.74) $ (0.02) $ (0.38)
Diluted.................................... $ (0.74) $ (0.02) $ (0.38)
Net loss per share -- pro forma:
Basic...................................... $ (0.91) $ (0.19) $ (0.46)
Diluted.................................... $ (0.91) $ (0.19) $ (0.46)
The above pro forma effects on 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 grant has been estimated on the date of
grant using the Black-Scholes option pricing model and the following weighted
average assumptions:
Year Ended May 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Risk-free Interest Rates............. 4.40% 4.56% 6.25%
Expected Life........................ 5 years 5 years 5 years
Volatility........................... 0.84 1.015 0.70
Dividend Yield....................... -- -- --
The pro forma weighted average expected life was calculated based on the
exercise behavior. The pro forma weighted average fair value of those
options granted in 2002, 2001 and 2000 was $2.55, $4.30 and $5.23,
respectively.
The following table summarizes information with respect to stock options
at May 31, 2002:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices May 31, 2002 Life (Years) Price May 31, 2002 Price
- -------------------- ------------ ----------- ---------- ------------ ----------
$3.8500 - $4.2625 251,501 3.89 $3.9996 140,286 $3.9871
$4.4000 - $4.9500 236,944 6.01 $4.5846 57,547 $4.5838
$5.0000 - $6.0000 361,255 3.24 $5.6007 212,930 $5.5721
$6.1250 - $6.7375 242,188 3.36 $6.3314 149,221 $6.3418
$6.7500 -$17.0000 62,000 2.04 $7.8065 41,099 $8.3437
------------ ------------
$3.8500 -$17.0000 1,153,888 3.91 $5.3150 601,083 $5.4882
============ ============
8. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK BONUS PLAN:
The Company has a noncontributory, trusteed employee stock bonus plan for
full-time employees who have completed three consecutive months of service
and for part-time employees who have completed one year of service and have
attained an age of 21. The Company can contribute either shares of the
Company's stock or cash to the plan. The contribution is determined annually
by the Company and cannot exceed 15% of the annual aggregate salaries of
those employees eligible for participation in the plan. Individuals' account
balances vest at a rate of 25% per year commencing upon completion of three
years of service. Non-vested balances, which are forfeited, are allocated to
the
41
remaining employees in the plan. Contributions made to the plan during
fiscal 2002, 2001 and 2000 were $60,000, $225,000 and $60,000, respectively.
401(K) PLAN:
The Company maintains a 401(k) profit-sharing plan for its full-time
employees who have completed three consecutive months of service and for
part-time employees who have completed one year of service and have attained
an age of 21. Each participant in the plan may elect to contribute from 1% to
20% of their annual salary to the plan, subject to certain limitations. The
Company, at its discretion, may make an annual contribution to the plan. The
Company did not make any contributions to the plan during fiscal 2002, 2001
and 2000.
EMPLOYEE STOCK PURCHASE PLAN:
The Company's Board of Directors adopted the 1997 Employee Stock Purchase
Plan in June 1997. A total of 300,000 shares of Common Stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. Each twenty-four month offering period
includes four six month purchase periods. The offering periods generally
begin on the first trading day on or after April 1 and October 1 each year,
except that the first such offering period commenced with the effectiveness
of the Company's initial public offering and ended on the last trading day on
or before March 31, 1999. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's Common Stock at either the first day of an offering
period or the last day of the purchase period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue
at a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the 1997
Employee Stock Purchase Plan. The maximum number of shares a participant may
purchase during a single purchase period is determined by dividing $12,500 by
the fair market value of a share of the Company's Common Stock on the first
day of the then current offering period. To date, 190,506 shares have been
issued under the plan.
9. STOCKHOLDER RIGHTS PLAN:
The Company's Board of Directors adopted a Stockholder Rights Plan on
March 5, 2001, under which a dividend of one right to purchase one one-
thousandth of a share of the Company's Series A Participating Preferred Stock
was distributed for each outstanding share of the Company's Common Stock.
The plan entitles each Right holders to purchase 1/1000th of a share of the
Company's Series A Participating Preferred Stock at an exercise price of
$35.00, subject to adjustment, in certain events, such as a tender offer to
acquire 20% or more of the Company's outstanding common stock. Under some
circumstances, such as a person or group acquires 20% or more of the
Company's common stock prior to redemption of the Rights, the plan entitles
such holders (other than an acquiring party) to purchase the Company's common
stock having a market value at that time of twice the Right's exercise price.
The Rights expire on April 3, 2010.
10. INCOME TAXES:
Domestic and foreign components of pretax income (loss) are as follows
(in thousands):
Year Ended May 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Domestic.......................... $(2,763) $3,145 $(3,282)
Foreign........................... (1,263) (611) (439)
------------ ------------ ------------
$(4,026) $2,534 $(3,721)
============ ============ ============
42
The provision for (benefit from) income taxes consists of the following
(in thousands):
Year Ended May 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Federal income taxes:
Current......................... $ (418) $ 983 $(1,190)
Deferred........................ 1,331 -- --
State income taxes:
Current......................... 20 49 18
Deferred........................ 282 -- --
Foreign income taxes:
Current......................... 26 14 56
------------ ------------ ------------
$1,241 $1,046 $(1,116)
============ ============ ============
The Company's effective tax rate differs from the U.S. federal statutory
tax rate, as follows:
Year Ended May 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
U.S. Federal statutory tax rate... (34.0)% 34.0% (34.0)%
State taxes, net of federal tax
effect.......................... 0.3 1.3 (4.3)
Valuation allowance recorded on
deferred tax assets............. 40.1 -- 1.5
Net operating losses not
benefited....................... 17.7 -- --
Foreign losses not currently
benefited....................... 7.0 8.2 4.1
Other............................. (0.3) (2.2) 2.7
------------ ------------ ------------
Effective tax rate................ 30.8 % 41.3% (30.0)%
============ ============ ============
The components of the net deferred tax asset (liability) are as follows
(in thousands):
May 31,
-------------------------
2002 2001
------------ ------------
Net operating losses..................... $3,085 $1,892
Credit carryforwards..................... 902 421
Inventory reserves....................... 1,641 1,496
Reserves and accruals.................... 268 423
Other.................................... 941 764
------------ ------------
6,837 4,996
Less: Valuation allowance.................. (6,837) (3,383)
------------ ------------
Net deferred tax asset..................... $ -- $1,613
============ ============
In the fourth quarter of fiscal year ended May 31, 2002, a full valuation
allowance was provided for the Company's deferred tax assets as management
cannot conclude, based on available objective evidence, that it is more
likely than not
43
the deferred tax assets will be realized. In the fiscal year ended May 31,
2001, a valuation allowance was provided for the deferred tax assets of the
Japanese subsidiary.
At May 31, 2002, the Company has federal and state net operating loss
carryforwards of approximately $2,738,000 and $623,000, respectively. At May
31, 2002, the Company also has federal and state tax credit carryforwards of
approximately $450,000 and $685,000, respectively. These carryforwards will
expire commencing in 2012. These carryforwards may be subject to certain
limitations on annual utilization in case of a change in ownership, as
defined by tax law.
Foreign net operating loss carryforwards of approximately $4.8 million
are available to reduce future foreign taxable income and expire through 2007
if not utilized.
11. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
Year Ended May 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Foreign exchange gain (loss)...... $(23) $(238) $371
Other, net........................ (20) 336 127
------------ ------------ ------------
$(43) $ 98 $498
============ ============ ============
12. 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
--------- --------- --------- --------- ---------
2002:
Net sales...................... $11,458 $ 659 $ 930 $ (479) $12,568
Portion of U.S. net sales
from export sales............ 6,775 -- -- -- 6,775
Income (loss) from operations.. (3,974) (737) 49 159 (4,503)
Identifiable assets............ 41,286 1,324 485 (9,277) 33,818
Long-lived assets.............. 2,062 275 19 -- 2,356
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
2000:
Net sales...................... $21,622 $3,248 $2,332 $(2,697) $24,505
Portion of U.S. net sales
from export sales............ 15,090 -- -- -- 15,090
Income (loss) from operations.. (4,501) (840) 53 95 (5,193)
Identifiable assets............ 46,579 3,267 912 (10,029) 40,729
Long-lived assets.............. 2,074 474 65 -- 2,613
44
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries and Taiwanese branch office. 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.
SELECTED QUARTERLY DATA (UNAUDITED)
As discussed in Note 1 to the consolidated financial statements, the
Company adopted a change in accounting principle related to SAB 101, Revenue
Recognition in Financial Statements, in the quarter ended May 31, 2001,
retroactive to the beginning of fiscal year 2001. The retroactive
application of this change resulted in a cumulative effect of $1,629,000 in
the first quarter of 2001 as well as a change to the presentation of
historical 2001 quarterly results of operations.
The following table (presented in thousands, except per share data) sets
forth selected unaudited consolidated statements of operations data for each
of the four quarters of the fiscal years ended May 31, 2002 and May 31, 2001.
The unaudited quarterly information has been prepared on the same basis as
the annual information presented elsewhere herein and, in the Company's
opinion, includes all adjustments (consisting only of normal recurring
entries) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period and should be read in
conjunction with the audited consolidated financial statements of the
Company's and the notes thereto included elsewhere herein.
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
2001 2001 2002 2002
--------- --------- --------- ---------
Net sales............................... $2,805 $2,822 $3,419 $ 3,522
Gross profit............................ $1,395 $1,421 $1,618 $ 1,646
Net loss................................ $ (634) $ (774) $ (737) $(3,122)
Net loss per share (basic).............. $(0.09) $(0.11) $(0.10) $ (0.43)
Net loss per share (diluted)............ $(0.09) $(0.11) $(0.10) $ (0.43)
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
2000 2000 2001 2001
(Restated) (Restated) (Restated)
--------- --------- --------- ---------
Net sales............................... $ 8,706 $8,958 $9,008 $4,367
Gross profit............................ $ 3,386 $3,386 $4,070 $2,274
Income before cumulative effect
of change in accounting principle..... $ 164 $ 280 $1,025 $ 19
Cumulative effect of change in
accounting principle.................. $(1,629) $ -- $ -- $ --
Net income (loss)....................... $(1,465) $ 280 $1,025 $ 19
Net income (loss) per share (basic)..... $ (0.21) $ 0.04 $ 0.14 $ 0.00
Net income (loss) per share (diluted)... $ (0.21) $ 0.04 $ 0.14 $ 0.00
The figures for August 31, 2000, November 30, 2000 and February 28, 2001
are restated for the impact of the adoption of SAB 101.
45
AEHR TEST SYSTEMS AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended May 31, 2002, 2001 and 2000
(IN THOUSANDS)
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:
May 31, 2002 $135 $109 $173 $ 71
========== ========== ========== ==========
May 31, 2001 $150 $ -- $ 15 $135
========== ========== ========== ==========
May 31, 2000 $125 $ 33 $ 8 $150
========== ========== ========== ==========
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
46
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal 1 --
Election of Directors" in the Proxy Statement. The information required by
this item relating to executive officers is incorporated by reference to the
information under the caption "Management -- Executive Officers and
Directors" at the end of Part I of this report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners, Directors
and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the
Proxy Statement.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
See Index under Item 8.
2. Financial Statement Schedule
See Index under Item 8.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on February 7, 2002 reporting that a letter
to the Company's shareholders of record was sent on or about February 7,
2002. The Company filed a Form 8-K on May 7, 2002 reporting that a letter to
the Company's shareholders of record was sent on or about May 7, 2002.
(c) Exhibits
The following exhibits are filed as part of or incorporated by reference
into this Report:
Exhibit
No. Description
- ------- -----------------------------------------------------------------
3.1+ Restated Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1++ Form of Common Stock certificate.
10.1+ Amended 1986 Incentive Stock Plan and form of agreement
thereunder.
10.2++ 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.3++ 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4++ Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.
10.5+ Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6+ Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7+ Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.8+ Amendment dated February 26, 1990 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.9+ Stock Purchase Agreement dated September 18, 1985 between
Registrant and certain holders of Common Stock.
10.10+ Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11+ Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
48
10.12+++ Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
10.13++++ Preferred Shares Rights Agreement dated March 5, 2001.
10.14+++++ Form of Change of Control Agreement.
11.1++ Computations of Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 49).
99.1 Certification Statement of Chief Executive Officer.
99.2 Certification Statement of Chief Financial Officer.
- ------------------------
+ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987).
++ Incorporated by reference to the same-numbered exhibit previously filed
with Amendment No.1 to the Company's Registration Statement on Form S-1 filed
July 17, 1997 (File No. 333-28987).
+++ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Form 10-K for the year ended May 31, 1999 filed August 27,
1999 (File No. 333-28987).
++++ Incorporated by reference to the Exhibit No. 4.1 previously filed with
the Company's Current Report on Form 8-K dated March 27, 2001 (File No. 000-
22893).
+++++ Incorporated by reference to the same-numbered exhibit previously
filed with the Company's Form 10-K for the year ended May 31, 2001 filed
August 29, 2001 (File No. 000-22893).
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 28, 2002
AEHR TEST SYSTEMS
By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- ----------------------------------- ---------------
Chief Executive Officer August 28, 2002
and Chairman of the
/s/ RHEA J. POSEDEL Board of Directors
- -------------------------- (Principal Executive Officer)
Rhea J. Posedel
Vice President of Finance August 28, 2002
and Chief Financial Officer
/s/ GARY L. LARSON (Principal Financial and
- -------------------------- Accounting Officer)
Gary L. Larson
/s/ ROBERT R. ANDERSON Director August 28, 2002
- --------------------------
Robert R. Anderson
/s/ WILLIAM W. R. ELDER Director August 28, 2002
- --------------------------
William W. R. Elder
/s/ MUKESH PATEL Director August 28, 2002
- --------------------------
Mukesh Patel
/s/ MARIO M. ROSATI Director August 28, 2002
- --------------------------
Mario M. Rosati
50