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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2003.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 000-22893.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 KATO TERRACE
FREMONT, CA 94539
- -------------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(510) 623-9400
- ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES X NO
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding
at February 28, 2003 was 7,140,301.
1
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2003
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2003 and May 31, 2002 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 2003 and 2002. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2003 and 2002 . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 21
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 22
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 22
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 22
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 22
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
PART I. FINANCIAL STATEMENTS
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
February 28, May 31,
2003 2002
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 6,411 $ 7,485
Short-term investments. . . . . . . . . . . . . 2,631 8,003
Accounts receivable . . . . . . . . . . . . . . 5,568 3,132
Inventories . . . . . . . . . . . . . . . . . . 9,467 8,633
Prepaid expenses and other. . . . . . . . . . . 2,260 2,373
----------- -----------
Total current assets . . . . . . . . . . . . 26,337 29,626
Property and equipment, net . . . . . . . . . . . 1,570 2,356
Long-term investments . . . . . . . . . . . . . . 420 --
Other assets, net . . . . . . . . . . . . . . . . 1,563 1,836
----------- -----------
Total assets . . . . . . . . . . . . . . . . $29,890 $33,818
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 1,179 $ 874
Accrued expenses. . . . . . . . . . . . . . . . 2,324 2,260
Deferred revenue. . . . . . . . . . . . . . . . 142 540
----------- -----------
Total current liabilities . . . . . . . . . . 3,645 3,674
Deferred revenue. . . . . . . . . . . . . . . . . 35 35
Deferred lease commitment . . . . . . . . . . . . 266 224
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,946 3,933
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 7,140 shares and
7,184 shares at February 28, 2003 and
May 31, 2002, respectively. . . . . . . . . . 71 72
Additional paid-in capital. . . . . . . . . . . 36,333 36,387
Accumulated other comprehensive income. . . . . 1,475 1,494
Accumulated deficit . . . . . . . . . . . . . . (11,935) (8,068)
----------- -----------
Total shareholders' equity . . . . . . . . . 25,944 29,885
----------- -----------
Total liabilities and shareholders' equity. . $29,890 $33,818
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
February 28 February 28
--------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- --------
Net sales. . . . . . . . . . . . . . . . . . . $ 4,028 $3,419 $10,464 $ 9,046
Cost of sales. . . . . . . . . . . . . . . . . 2,512 1,801 6,369 4,612
--------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . 1,516 1,618 4,095 4,434
--------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . . . . 1,497 1,683 4,660 4,814
Research and development . . . . . . . . . . 1,100 966 3,295 2,931
--------- --------- -------- --------
Total operating expenses . . . . . . . . 2,597 2,649 7,955 7,745
--------- --------- -------- --------
Loss from operations . . . . . . . . . . . . . (1,081) (1,031) (3,860) (3,311)
Interest income . . . . . . . . . . . . . . . 44 110 185 423
Other income (expense), net. . . . . . . . . . 99 (91) (160) (92)
--------- --------- -------- --------
Loss before income taxes . . . . . . . . . . . (938) (1,012) (3,835) (2,980)
Income tax expense (benefit) . . . . . . . . . 50 (275) 32 (835)
--------- --------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . $ (988) $ (737) $(3,867) $(2,145)
--------- --------- -------- --------
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments income (expense). . . .. . . . (25) 54 (21) 82
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . (5) (18) 2 8
--------- --------- -------- --------
Comprehensive loss . . . . . . . . . . . . . . $(1,018) $ (701) $(3,886) $(2,055)
========= ========= ======== ========
Net loss per share (basic) . . . . . . . . . . $ (0.14) $(0.10) $ (0.54) $ (0.30)
Net loss per share (diluted) . . . . . . . . . $ (0.14) $(0.10) $ (0.54) $ (0.30)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,137 7,169 7,162 7,140
Diluted. . . . . . . . . . . . . . . . . . . 7,137 7,169 7,162 7,140
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
February 28,
----------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss...................................... $(3,867) $(2,145)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Loss on impairment of an investment......... 365 --
Provision for doubtful accounts............. 68 90
Gain on disposition of fixed assets......... (1) --
Depreciation and amortization............... 482 470
Deferred income taxes....................... -- 9
Changes in operating assets and liabilities:
Accounts receivable....................... (2,462) 652
Inventories............................... (289) 1,457
Accounts payable.......................... 187 (664)
Accrued expenses and deferred revenue..... (357) (1,521)
Deferred lease commitment................. 42 60
Other current assets...................... 119 (281)
---------- ----------
Net cash used in
operating activities.................. (5,713) (1,873)
---------- ----------
Cash flows from investing activities:
Decrease in short-term investments.......... 5,372 213
Increase in long-term investments........... (418) (1,303)
Additions to property and equipment......... (208) (766)
Increase in other assets.................... (85) (26)
---------- ----------
Net cash provided by (used in)
investing activities.................. 4,661 (1,882)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 110 340
Repayment of notes from shareholders........ -- 84
Repurchase of common stock.................. (165) (141)
---------- ----------
Net cash provided by (used in)
financing activities.................. (55) 283
---------- ----------
Effect of exchange rates on cash................ 33 82
---------- ----------
Net decrease in cash and
cash equivalents...................... (1,074) (3,390)
Cash and cash equivalents, beginning of period.. 7,485 10,391
---------- ----------
Cash and cash equivalents, end of period........ $ 6,411 $ 7,001
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, in accordance with the
instructions to Form 10-Q and therefore does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company"). All significant intercompany balances have been eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the
unaudited condensed consolidated financial statements for the interim periods
presented reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
position and results of operations as of and for such periods indicated.
These condensed consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 2002. Results for the interim periods presented herein are
not necessarily indicative of results which may be reported for any other
interim period or for the entire fiscal year.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). Under APB 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's shares and the exercise price of the option. Stock-based
compensation for consultants or other third parties are accounted for in
accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services".
6
For purposes of pro forma disclosures, the estimated fair value of the
stock options and grants under the Company's Employee Stock Purchase Plan are
amortized to expense over the vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2003 2002 2003 2002
--------- --------- --------- ---------
(unaudited)
Net loss, as reported:...................... $ (988) $ (737) $(3,867) $(2,145)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects......................... (231) (315) (609) (986)
--------- --------- --------- ---------
Pro forma net loss.......................... $(1,219) $(1,052) $(4,476) $(3,131)
========= ========= ========= =========
Net loss per share:
Basic, as reported.......................... $ (0.14) $ (0.10) $ (0.54) $ (0.30)
========= ========= ========= =========
Basic, pro forma............................ $ (0.17) $ (0.15) $ (0.62) $ (0.44)
========= ========= ========= =========
Diluted, as reported........................ $ (0.14) $ (0.10) $ (0.54) $ (0.30)
========= ========= ========= =========
Diluted, pro forma.......................... $ (0.17) $ (0.15) $ (0.62) $ (0.44)
========= ========= ========= =========
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 and stock purchase plan grant has been
estimated on the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions:
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2003 2002 2003 2002
--------- --------- --------- ---------
Risk-free Interest Rate .............. 2.99% 4.34% 3.25% 4.35%
Expected Life......................... 5 years 5 years 5 years 5 years
Volatility............................ 0.79 0.87 0.79 0.87
Dividend Yield........................ -- -- -- --
7
3. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding, when dilutive, during each period using the
treasury stock method.
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share amounts)
(unaudited)
Net loss available to common shareholders:
Numerator: Net loss......................... $ (988) $ (737) $(3,867) $(2,145)
--------- --------- --------- ---------
Denominator for basic net loss per share:
Weighted-average shares outstanding ...... 7,137 7,169 7,162 7,140
--------- --------- --------- ---------
Shares used in basic per share calculation.. 7,137 7,169 7,162 7,140
Effect of dilutive securities:
Employee stock options.................. -- -- -- --
--------- --------- --------- ---------
Denominator for diluted net loss
per share............................... 7,137 7,169 7,162 7,140
--------- --------- --------- ---------
Basic net loss per share.................... $(0.14) $(0.10) $ (0.54) $ (0.30)
========= ========= ========= =========
Diluted net loss per share.................. $(0.14) $(0.10) $ (0.54) $ (0.30)
========= ========= ========= =========
4. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2003 2002
(unaudited)
----------- -----------
Raw materials and sub-assemblies $3,784 $4,825
Work in process 5,192 3,698
Finished goods 491 110
----------- -----------
$9,467 $8,633
=========== ===========
5. 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):
8
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28, 2003:
Net sales...................... $ 3,667 $ 171 $ 508 $ (318) $ 4,028
Portion of U.S. net sales
from export sales............ 3,110 -- -- -- 3,110
Income (loss) from operations.. (1,067) (134) 113 7 (1,081)
Identifiable assets............ 38,265 982 752 (10,109) 29,890
Long-lived assets.............. 1,290 262 18 -- 1,570
Nine months ended February 28, 2003:
Net sales...................... $ 9,660 $ 399 $ 1,159 $ (754) $10,464
Portion of U.S. net sales
from export sales............ 7,929 -- -- -- 7,929
Income (loss) from operations.. (3,638) (416) 66 128 (3,860)
Identifiable assets............ 38,265 982 752 (10,109) 29,890
Long-lived assets.............. 1,290 262 18 -- 1,570
Fiscal year ended May 31, 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
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
6. GOODWILL
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," effective June 1, 2002. In accordance with SFAS 142, the Company
ceased the amortization of goodwill as of June 1, 2002. Net goodwill at
February 28, 2003 and May 31, 2002 was $274,000.
The following table summarizes the impact of adopting SFAS 142 on the net
loss and net loss per share as adjusted to exclude amortization of goodwill
for the three months and nine months ended February 28, 2003 and February 28,
2002 as reported in the accompanying Condensed Consolidated Financial
Statements (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
February 28, February 28,
--------- --------- --------- ---------
2003 2002 2003 2002
--------- --------- --------- ---------
Reported net loss $ (988) $ (737) $(3,867) $(2,145)
Goodwill amortization -- 12 -- 36
------- ------- --------- ---------
Adjusted net loss $ (988) $ (725) $(3,867) $(2,109)
------- ------- --------- ---------
Basic and diluted net loss
per share:
Reported net loss per share $(0.14) $(0.10) $ (0.54) $ (0.30)
Goodwill amortization -- -- -- --
Adjusted net loss per share $(0.14) $(0.10) $ (0.54) $ (0.30)
In accordance with the provisions of SFAS 142, the Company performed an
initial test of goodwill impairment. The test showed no impairment of the
Company's goodwill as of June 1, 2002, the initial date of adopting SFAS 142.
In accordance with SFAS 142, goodwill will be subject to an annual impairment
test.
9
7. PRODUCT WARRANTIES
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.
Three months Nine months
ended ended
--------------------------
February 28, 2003
------------ -----------
(in thousands)
(unaudited)
Balance at the beginning of the period $52 $109
Accruals for warranties issued during the period 63 66
Accruals related to pre-existing warranties
(including changes in estimates) -- --
Settlements made during the period
(in cash or in kind) (44) (104)
----------- -----------
Balance at the end of the period $71 $ 71
=========== ===========
8. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". FIN 45 requires that a liability be recorded in the guarantor's
balance sheet upon issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued, including a
reconciliation of changes in the entity's product warranty liabilities. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Management does not
expect the adoption of FIN 45 to have a material impact on the Company's
financial position or results of operations. The Company has adopted the
disclosure provisions of FIN 45 relating to product warranty effective the
quarter ended February 28, 2003 (see Note 7 of the Notes to Condensed
Consolidated Financial Statements).
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables". EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Management does not expect the adoption of EITF Issue
No. 00-21 to have a material impact on the Company's financial position or
results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation,
Transition and Disclosure". SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS 148 also requires that
disclosures of the pro forma effect of using the fair value method of
10
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS 148 are effective for fiscal years ended after
December 15, 2002. The interim disclosure requirements are effective for
interim periods ending after December 15, 2002. The Company has adopted the
disclosure requirements of SFAS 148 as of February 28, 2003 (see Note 2 of the
Notes to Condensed Consolidated Financial Statements).
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51". FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period beginning after June
15, 2003. Management is still assessing the impact of FIN 46 on the Company's
financial position and results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related notes that appear elsewhere
in this document.
This document contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements. All statements
other than statements of historical fact are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues or
other financial items; any statements of the plans, strategies and objectives
of management for future operations; any statements concerning proposed new
products, services or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statement of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include the ability of the Company to retain and
motivate key employees; the timely development, production and acceptance of
products and services and their feature sets; the challenge of managing asset
levels, including inventory; the flow of products into third-party
distribution channels; the difficulty of keeping expense growth at modest
levels while increasing revenues; and other risks that are described from time
to time in the Company's Securities and Exchange Commission reports, including
but not limited to the annual report on Form 10-K for the fiscal year ended
May 31, 2002 and subsequently filed reports. The Company assumes no
obligation and does not intend to update these forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, investments,
11
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, software
and spare parts and revenues from service contracts. The Company recognizes
revenue upon shipment and defers recognition of revenue for any amounts
subject to acceptance until such acceptance occurs. The amount of revenue
deferred is the greater of the fair value of the undelivered element or the
contractual agreed to amounts. Royalty revenue related to Performance Test
Boards licensing income is recognized when paid by the licensee. This income
is recorded in net sales. Provisions for the estimated future cost of
warranty 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
Securities and Exchange Commission Staff Accounting Bulletin No. 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.
12
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.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Condensed
Consolidated Statements of Operations as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
February 28, February 28,
---------------------- --------------------
2003 2002 2003 2002
---------- ---------- --------- ----------
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 62.4 52.7 60.9 51.0
---------- ---------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 37.6 47.3 39.1 49.0
---------- ---------- --------- --------
Operating expenses:
Selling, general and administrative. . . . . 37.2 49.2 44.5 53.2
Research and development . . . . . . . . . . 27.3 28.3 31.5 32.4
---------- ---------- --------- --------
Total operating expenses . . . . . . . . 64.5 77.5 76.0 85.6
---------- ---------- --------- --------
Loss from operations . . . . . . . . . . . . . (26.9) (30.2) (36.9) (36.6)
Interest income . . . . . . . . . . . . . . . 1.1 3.2 1.7 4.7
Other income (expense), net . . . . . . . . . 2.5 (2.6) (1.5) (1.0)
---------- ---------- --------- --------
Loss before income taxes . . . . . . . . . . . (23.3) (29.6) (36.7) (32.9)
Income tax expense (benefit) . . . . . . . . . 1.2 (8.0) 0.3 (9.2)
---------- ---------- --------- --------
Net loss . . . . . . . . . . . . . . . . . . . (24.5)% (21.6)% (37.0)% (23.7)%
========== ========== ========= ========
THREE MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 2002
NET SALES. Net sales increased to $4.0 million in the three months ended
February 28, 2003 from $3.4 million in the three months ended February 28,
2002, an increase of 17.8%. The increase in net sales resulted primarily from
increases in sales of dynamic burn-in products of approximately $1.5 million
and non-recurring engineering revenue of $750,000 related to the development
of a wafer-level burn-in and test system, partially offset by decreases in
sales of MTX products of approximately $1.5 million.
GROSS PROFIT. Cost of sales consists primarily of the cost of materials,
assembly and test costs, and overhead from operations. Gross profit decreased
to $1.5 million in the three months ended February 28, 2003 from $1.6 million
in the three months ended February 28, 2002, a decrease of 6.3%. The gross
profit margin decreased to 37.6% in the three months ended February 28, 2003
from 47.3% in the three months ended February 28, 2002. The decrease in gross
profit margin was primarily the result of an increase in systems sold under
extremely competitive pricing pressures, resulting in relatively lower gross
margins for those sales, and an increase in provision for inventory reserves,
partially offset by the recognition of $750,000 in net sales related to
completion of a milestone for the full wafer contact system development
contract which had a relatively high gross margin.
13
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses decreased to $1.5 million in the three months ended February 28, 2003
from $1.7 million in the three months ended February 28, 2002, a decrease of
11.1%. The decrease in SG&A expenses was primarily due to decreases in the
provision for bad debt reserve and commissions to outside sales
representatives of approximately $79,000 and $32,000, respectively.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $1.1 million in the three months ended February 28, 2003 from
$1.0 million in the three months ended February 28, 2002, an increase of
13.9%. The increase in R&D expenses was primarily due to an increase in
project material expenses.
INTEREST INCOME. Interest income decreased to $44,000 in the three months
ended February 28, 2003 from $110,000 in the three months ended February 28,
2002, a decrease of 60.0%. The decrease in interest income was primarily
related to a lower average rate of return on investments.
OTHER INCOME (EXPENSE), NET. Other income, net was $99,000 in the three
months ended February 28, 2003, compared with other expense, net of $91,000 in
the three months ended February 28, 2002. The increase in other income
(expense), net was primarily due to foreign currency exchange gains recorded
by the Company and its subsidiaries in the three months ended February 28,
2003 versus foreign currency exchange losses recorded in the three months
ended February 28, 2002.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $50,000 in the three
months ended February 28, 2003, compared with income tax benefit of $275,000
in the three months ended February 28, 2002. The income tax expense in the
three months ended February 28, 2003 was primarily due to the tax expense
recorded as a result of income earned in the Company's German subsidiary. The
income tax benefit in the three months ended February 28, 2002 was primarily
due to the tax benefit recorded as a result of losses incurred in the
Company's U.S. operations. The Company's U.S. operations and its Japanese
subsidiary have experienced significant cumulative losses and thus generated
certain net operating losses available to offset future taxes payable in the
U.S. and Japan. As a result of the cumulative operating losses in the
Company's U.S. operations and its Japanese subsidiary, a valuation allowance
was established for the full amount of its U.S. operations and the Japanese
subsidiary's net deferred tax assets in the fourth quarter of fiscal 2002.
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 either the Company's U.S.
operations or its Japanese subsidiary.
NINE MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2002
NET SALES. Net sales increased to $10.5 million in the nine months ended
February 28, 2003 from $9.0 million in the nine months ended February 28,
2002, an increase of 15.7%. The increase in net sales resulted primarily from
an increase in sales of dynamic burn-in products.
GROSS PROFIT. Gross profit decreased to $4.1 million in the nine months
ended February 28, 2003 from $4.4 million in the nine months ended February
28, 2002, a decrease of 7.6%. The gross profit margin decreased to 39.1% in
the nine months ended February 28, 2003 from 49.0% in the nine months ended
February 28, 2002. The decrease in gross profit margin was primarily the
result of a change in product mix, particularly a decrease in upgrades and an
14
increase in systems sold, resulting in higher material costs as a percentage
of net sales, and increases in provisions for inventory reserves and warranty,
partially offset by the recognition of $750,000 related to completion of a
milestone for the full wafer contact system development contract which had a
relatively high gross margin.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $4.7
million in the nine months ended February 28, 2003 from $4.8 million in the
nine months ended February 28, 2002, a decrease of 3.2%. The decrease in SG&A
expenses was primarily due to a decrease in employment related expenses.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $3.3 million in the
nine months ended February 28, 2003 from $2.9 million in the nine months ended
February 28, 2002, an increase of 12.4%. The increase in R&D expenses was
primarily due to an increase in employment related expenses.
INTEREST INCOME. Interest income decreased to $185,000 in the nine months
ended February 28, 2003 from $423,000 in the nine months ended February 28,
2002, a decrease of 56.3%. The decrease in interest income was primarily
related to a lower average rate of return on investments.
OTHER INCOME (EXPENSE), NET. Other expense, net increased to $160,000 in
the nine months ended February 28, 2003, from $92,000 in the nine months ended
February 28, 2002, an increase of 73.9%. The increase in other expense, net
was primarily due to a non-cash impairment of $365,000 of an investment to
reflect the then current market conditions affecting the investment's
valuation, partially offset by an increase in foreign currency exchange gains
of approximately $284,000.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $32,000 in the nine
months ended February 28, 2003, compared with income tax benefit of $835,000
in the nine months ended February 28, 2002. The income tax expense in the
nine months ended February 28, 2003 was primarily due to the tax expense
recorded as a result of income earned in the Company's German subsidiary. The
income tax benefit in the nine months ended February 28, 2002 was primarily
due to the tax benefit recorded as a result of losses incurred in the
Company's U.S. operations. The Company's U.S. operations and its Japanese
subsidiary have experienced significant cumulative losses and thus generated
certain net operating losses available to offset future taxes payable in the
U.S. and Japan. As a result of the cumulative operating losses in the
Company's U.S. operations and its Japanese subsidiary, a valuation allowance
was established for the full amount of its U.S. operations and the Japanese
subsidiary's net deferred tax assets in the fourth quarter of fiscal 2002.
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 either the Company's U.S.
operations or its Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $5.7 million for
the nine months ended February 28, 2003 and $1.9 million for the nine months
ended February 28, 2002. For the nine months ended February 28, 2003, net
cash used in operating activities was due primarily to the net loss of $3.9
million and an increase in accounts receivable of $2.5 million due primarily
to increased sales to foreign customers. For the nine months ended February
28, 2002, net cash used in operating activities was due primarily to the net
loss of $2.1 million and a decrease in accrued expenses and deferred revenue
of $1.5 million, partially offset by a decrease in inventories of $1.5
million.
Net cash provided by investing activities was approximately $4.7 million
for the nine months ended February 28, 2003 and net cash used in investing
activities was approximately $1.9 million for the nine months ended February
28, 2002. The cash provided by investing activities during the nine months
15
ended February 28, 2003 was primarily due to the sale of short-term
investments. The cash used in investing activities during the nine months
ended February 28, 2002 was primarily due to the purchase of long-term
investments.
Financing activities used cash of approximately $55,000 in the nine months
ended February 28, 2003 and provided cash of approximately $283,000 in the
nine months ended February 28, 2002. Net cash used in financing activities
during the nine months ended February 28, 2003 was primarily due to the
Company's repurchase of 70,300 of its outstanding common shares at an average
price of $2.35, partially offset by proceeds from issuance of common stock and
exercise of stock options. Net cash provided by financing activities during
the nine months ended February 28, 2002 was primarily due to the proceeds from
issuance of common stock and exercise of stock options.
As of February 28, 2003, the Company had working capital of $22.7 million,
compared with $26.0 million as of May 31, 2002. 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. Through February 28, 2003, the Company has repurchased
516,300 shares at an average price of $3.97.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with
anticipated cash provided by operations are adequate to meet its working
capital and capital equipment requirements through fiscal 2004. After fiscal
2004, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required, or, if available, that
such financing can be obtained on terms satisfactory to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q (this "Report") contains forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Discussions containing such forward-looking statements
may be found in this section, as well as within this Report generally. In
addition, when used in this Report, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to a number of risks and
uncertainties.
Consequently, such forward-looking statements should be regarded solely as
our current plans, estimates and beliefs. We do not undertake, and
specifically decline, any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
16
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. The Company's future operating results will
depend upon a variety of factors, including the timing of significant orders,
the mix of products sold, changes in pricing by the Company, its competitors,
customers or suppliers, market acceptance of new products and enhanced
versions of the Company's products, capital spending patterns by customers,
the Company's ability to produce systems and products in volume and meet
customer requirements. The Company's gross margins have varied and will
continue to vary based on a variety of factors, including the mix of products
sold, sales volume, and the amount of products sold under volume purchase
arrangements, which tend to have lower selling prices. Accordingly, past
performance may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in purchase price from
approximately $200,000 to over $800,000. As a result, the loss or deferral of
a limited number of system sales could have a material adverse effect on the
Company's net sales and operating results in a particular period. A delay or
reduction in shipments near the end of a particular quarter, due, for example,
to unanticipated shipment reschedulings, cancellations or deferrals by
customers, customer credit issues, unexpected manufacturing difficulties
experienced by the Company, or delays in deliveries by suppliers, could cause
net sales in a particular quarter to fall significantly below the Company's
expectations.
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 experienced a sharp and severe industry downturn and
recorded an operating loss in fiscal 2002. With the positive momentum that
the Company has seen in order flow, the Company anticipates that operating
loss in the fourth quarter of fiscal 2003 will be reduced somewhat when
compared with that of the quarter ended February 28, 2003. However, 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 FOX SYSTEM. A principal element of the
Company's strategy is to capture an increasing share of the test equipment
market through sales of the FOX wafer-level burn-in and test system. The FOX
is a new system designed to simultaneously burn-in and functionally test all
of the die on a wafer, and the market for FOX systems is in the very early
stages of development. The FOX was introduced in July 2001, and no shipments
have yet been made. The Company's strategy depends, in part, upon its ability
to persuade potential customers that the FOX system can successfully contact
and functionally test all of the die on a wafer simultaneously, and that this
method of testing is cost-effective for the customer. There can be no
assurance that the Company's strategy will be successful. The failure of the
FOX system to achieve market acceptance would have a material adverse effect
on the Company's future business.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. Another 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
17
currently performed by high-cost memory testers. The Company's strategy
depends, in part, upon its ability to persuade potential customers that the
MTX system can successfully perform a significant portion of such final test
functions and that transferring such tests to MTX systems will reduce their
overall capital and test costs. The failure of the MTX system to achieve
market acceptance would have a material adverse effect on the Company's
business, financial condition and operating results.
CUSTOMER CONCENTRATION. 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. Sales to the Company's five largest
customers accounted for approximately 70.9% of its net sales in the nine
months ended February 28, 2003. 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 fiscal 2002, 2001 and 2000. The loss of or
reduction or delay in orders from a significant customer, or a delay in
collecting or failure to collect accounts receivable from a significant
customer could adversely affect the Company's business, financial condition
and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems. The
market for burn-in systems is mature and estimated to be less than $100
million per year. There can be no assurance that the market for burn-in
systems will grow, and sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involves a significant commitment of capital. The
loss of individual orders due to the lengthy sales and evaluation cycle, or
delays in the sale of even a limited number of systems could have a material
adverse effect on the Company's business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 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. A substantial portion of the Company's sales has been in
Asia. Turmoil in the Asian financial markets has resulted, and may result in
the future, in dramatic currency devaluations, stock market declines,
restriction of available credit and general financial weakness. In addition,
DRAM prices have sometimes fallen dramatically, are currently doing so, and
will likely do so again in the future. The Company believes that many
international semiconductor manufacturers limited capital spending (including
the purchase of MTXs) in fiscal years 1999, 2001 and 2002, and that the
uncertainty of the DRAM and other IC markets may cause some manufacturers in
the future to again delay capital spending plans. Such developments would
have a material adverse effect on the Company's business, financial condition
and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
that satisfy market demand. Any such failure would materially adversely
18
affect the Company's business, financial condition and results of operations.
The Company has experienced significant delays from time to time in the
introduction of, and technical and manufacturing difficulties with, certain of
its products and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new products, and
there can be no assurance that the Company will not encounter such
difficulties in the future. The Company's inability to complete product
development, or to manufacture and ship products in volume and in time to meet
customer requirements would materially adversely affect the Company's
business, financial condition and results of operations.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants. New
product introductions by the Company's competitors or by new market entrants
could cause a decline in sales or loss of market acceptance of the Company's
existing products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices that could
adversely affect the Company's business, financial condition and operating
results. Competing suppliers of burn-in and functional test systems include
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.
Also, the 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. The Company's test fixture
products face numerous competitors. The Company has granted royalty-bearing
licenses to several companies to make Performance Test Boards ("PTBs") for use
with its MTX systems. Sales of PTBs by licensees result in royalties to the
Company but reduce the Company's own sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The semiconductor and semiconductor
equipment industries in general, and the market for DRAMs and advanced
technology logic ICs in particular, historically have been highly volatile and
have experienced periodic downturns and slowdowns. These downturns and
slowdowns have adversely affected the Company's operating results in the past
and in fiscal 1999, 2000 and 2002. A large portion of the Company's net sales
are attributable to a few customers and therefore a reduction in purchases by
one or more customers could materially adversely affect the Company's
financial results. Semiconductor equipment companies may experience a
significant rate of cancellations and reschedulings of purchase orders, as was
the case in the industry in 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'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. 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
19
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in the Company's operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide economy
could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and
the market for small capitalization and high technology stocks in particular,
has experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company is
unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its Chief
Executive Officer, as well as other executive officers and key employees. The
loss of the services of any of its executive officers or a group of key
employees could have a material adverse effect on the Company's business,
financial condition and operating results. The Company's future success will
depend in significant part upon its ability to attract and retain highly
skilled technical, management, sales and marketing personnel. Competition for
such personnel in the semiconductor equipment industry is intense, and there
can be no assurance that the Company will be successful in attracting or
retaining such personnel. The Company's inability to attract and retain the
executive management and other key personnel it requires could have a material
adverse effect on the Company's business, financial condition and operating
results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. Litigation may be necessary to enforce or determine the
validity and scope of the Company's proprietary rights, and there can be no
assurance that the Company's intellectual property rights, if challenged, will
be upheld as valid. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
20
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company has no holdings of derivative financial or
commodity instruments at February 28, 2003.
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 $185,000.
Item 4. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
along with the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
b. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out this evaluation.
21
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
(b) Report on Form 8-K
The Company filed a Form 8-K on January 7, 2003 reporting that an investor
profile and a product page to investors were distributed during a conference
on January 7, 2003.
The Company filed a Form 8-K on January 24, 2003 reporting that a letter
to the Company's shareholders of record was sent on or about January 24, 2003.
The letter included condensed consolidated statements of operations for the
three months and six months ended November 30, 2002 and November 30, 2001 and
condensed consolidated balance sheets as of November 30, 2002 and May 31,
2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: April 11, 2003 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 11, 2003 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
23
CERTIFICATION
I, Rhea J. Posedel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 11, 2003
/s/ RHEA J. POSEDEL
---------------------------
Rhea J. Posedel
Chief Executive Officer
24
CERTIFICATION
I, Gary L. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 11, 2003
/s/ GARY L. LARSON
---------------------------
Gary L. Larson
Chief Financial Officer
25
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- ------------
19.1 Letter to Shareholders. (This is incorporated by reference to
Exhibit 20 to Aehr Test Systems' Form 8-K filed January 24,
2003).
99.1 Investor Profile and Product Page. (This is incorporated by
reference to Exhibit 20 to Aehr Test Systems' Form 8-K filed
January 7, 2003).
99.2 Certification Statement of Chief Executive Officer.
99.3 Certification Statement of Chief Financial Officer.
26