Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 September 30, 2003 was 7,185,799.
1
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2003
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
August 31, 2003 and May 31, 2002 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three months ended August 31, 2003 and 2002. . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 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. . . . . . . . . . . . . . . . 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 20
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 21
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 21
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 21
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
PART I. FINANCIAL STATEMENTS
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
August 31, May 31,
2003 2003
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 6,104 $ 8,362
Short-term investments. . . . . . . . . . . . . 4,965 2,429
Accounts receivable . . . . . . . . . . . . . . 3,106 2,889
Inventories . . . . . . . . . . . . . . . . . . 8,493 9,247
Prepaid expenses and other. . . . . . . . . . . 494 1,640
----------- -----------
Total current assets . . . . . . . . . . . . 23,162 24,567
Property and equipment, net . . . . . . . . . . . 1,450 1,515
Long-term investments . . . . . . . . . . . . . . 1,331 607
Goodwill, net . . . . . . . . . . . . . . . . . . 274 274
Other assets, net . . . . . . . . . . . . . . . . 1,264 1,284
----------- -----------
Total assets . . . . . . . . . . . . . . . . $27,481 $28,247
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 751 $ 748
Accrued expenses. . . . . . . . . . . . . . . . 1,843 1,739
Deferred revenue. . . . . . . . . . . . . . . . 114 106
----------- -----------
Total current liabilities . . . . . . . . . . 2,708 2,593
Deferred revenue. . . . . . . . . . . . . . . . . 30 30
Accrued lease commitment. . . . . . . . . . . . . 289 279
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,027 2,902
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 7,157 shares and
7,157 shares at August 31, 2003 and
May 31, 2003 respectively . . . . . . . . . . 72 72
Additional paid-in capital. . . . . . . . . . . 36,364 36,364
Accumulated other comprehensive income. . . . . 1,438 1,521
Accumulated deficit . . . . . . . . . . . . . . (13,420) (12,612)
----------- -----------
Total shareholders' equity . . . . . . . . . 24,454 25,345
----------- -----------
Total liabilities and shareholders' equity. . $27,481 $28,247
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
August 31,
----------------------
2003 2002
---------- ----------
Net sales. . . . . . . . . . . . . . . . . . . $4,169 $3,508
Cost of sales. . . . . . . . . . . . . . . . . 2,543 1,949
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 1,626 1,559
---------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,514 1,711
Research and development . . . . . . . . . . 1,219 961
---------- ----------
Total operating expenses . . . . . . . . 2,733 2,672
---------- ----------
Loss from operations . . . . . . . . . . . . . (1,107) (1,113)
Interest income. . . . . . . . . . . . . . . . 236 83
Other income, net . . . . . . . . . . . . . . 63 104
---------- ----------
Loss before income taxes . . . . . . . . . . . (808) (926)
Income tax benefit . . . . . . . . . . . . . . -- (39)
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . (808) (887)
---------- ----------
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments . . . .. . . . . . . . . . . . (64) (39)
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . (19) 1
---------- ----------
Comprehensive loss . . . . . . . . . . . . . . $ (891) $ (925)
========== ==========
Net loss per share (basic) . . . . . . . . . . $(0.11) $(0.12)
Net loss per share (diluted) . . . . . . . . . $(0.11) $(0.12)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 7,157 7,184
Diluted. . . . . . . . . . . . . . . . . . . 7,157 7,184
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
August 31,
----------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss...................................... $ (808) $ (887)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. (13) 30
Depreciation and amortization............... 110 163
Changes in operating assets and liabilities:
Accounts receivable....................... (228) (431)
Inventories............................... 756 (274)
Accounts payable.......................... (30) (164)
Accrued expenses and deferred revenue..... 122 (413)
Accrued lease commitment.................. 10 16
Other current assets...................... 1,145 49
---------- ----------
Net cash provided by (used in)
operating activities.................. 1,064 (1,911)
---------- ----------
Cash flows from investing activities:
Net (increase) decrease in short-
term investments.......................... (2,536) 3,147
Net increase in long-term
investments............................... (743) (700)
Additions to property and equipment......... (41) (1)
(Increase) decrease in other assets......... 22 (19)
---------- ----------
Net cash provided by (used in)
investing activities.................. (3,298) 2,427
---------- ----------
Cash flows from financing activities:
Repurchase of common stock.................. -- (3)
---------- ----------
Net cash used in
financing activities.................. -- (3)
---------- ----------
Effect of exchange rates on cash................ (24) 22
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (2,258) 535
Cash and cash equivalents, beginning of period.. 8,362 7,485
---------- ----------
Cash and cash equivalents, end of period........ $6,104 $8,020
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 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," "we," "us," and "our"). 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, 2003. 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
August 31,
--------- ---------
2003 2002
--------- ---------
(unaudited)
Net loss, as reported:...................... $ (808) $ (887)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects......................... (156) (251)
--------- ---------
Pro forma net loss.......................... $ (964) $(1,138)
========= =========
Net loss per share:
Basic, as reported.......................... $(0.11) $ (0.12)
========= =========
Basic, pro forma............................ $(0.13) $ (0.16)
========= =========
Diluted, as reported........................ $(0.11) $ (0.12)
========= =========
Diluted, pro forma.......................... $(0.13) $ (0.16)
========= =========
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
August 31,
--------- ---------
2003 2002
--------- ---------
Risk-free Interest Rate .................... 2.84% 3.76%
Expected Life............................... 5 years 5 years
Volatility.................................. 82% 79%
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
August 31,
---------- ----------
2003 2002
---------- ----------
(in thousands, except per share amounts)
(unaudited)
Net loss available to common shareholders:
Numerator: Net loss................................ $ (808) $ (887)
---------- ----------
Denominator for basic loss per share:
Weighted-average shares outstanding ............. 7,157 7,184
---------- ----------
Shares used in basic loss per share calculation.... 7,157 7,184
Effect of dilutive securities:
Employee stock options......................... -- --
---------- ----------
Denominator for diluted loss per share............. 7,157 7,184
---------- ----------
Basic loss per share............................... $(0.11) $(0.12)
========== ==========
Diluted loss per share............................. $(0.11) $(0.12)
========== ==========
Stock options to purchase 1,309,000 and 1,283,000 shares of common stock
were outstanding on August 31, 2003 and August 31, 2002, respectively, but
were not included in the computation of diluted loss per share because the
inclusion of such shares would be anti-dilutive.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, May 31,
2003 2003
(unaudited)
----------- -----------
Raw materials and sub-assemblies $4,228 $3,845
Work in process 4,014 4,694
Finished goods 251 708
----------- -----------
$8,493 $9,247
=========== ===========
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 August 31, 2003:
Net sales...................... $ 3,603 $ 341 $ 573 $ (348) $ 4,169
Portion of U.S. net sales
from export sales............ 2,529 -- -- -- 2,529
Income (loss) from operations.. (1,122) (52) 63 4 (1,107)
Identifiable assets............ 35,454 778 936 (9,687) 27,481
Long-lived assets.............. 1,178 259 13 -- 1,450
Fiscal year ended May 31, 2003:
Net sales...................... $13,977 $ 661 $ 1,365 $ (911) $15,092
Portion of U.S. net sales
from export sales............ 9,885 -- -- -- 9,885
Income (loss) from operations.. (4,445) (478) 57 142 (4,724)
Identifiable assets............ 36,903 959 773 (10,388) 28,247
Long-lived assets.............. 1,239 259 17 -- 1,515
Three months ended August 31, 2002:
Net sales...................... $ 3,357 $ 88 $ 242 $ (179) $ 3,508
Portion of U.S. net sales
from export sales............ 2,579 -- -- -- 2,579
Income (loss) from operations.. (911) (165) (94) 57 (1,113)
Identifiable assets............ 40,497 1,192 473 (9,727) 32,435
Long-lived assets.............. 1,911 280 14 -- 2,205
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
August 31, 2003 and May 31, 2003 was $274,000.
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 the provisions of SFAS 142, the Company performed an annual
goodwill impairment test on May 31, 2003 and it showed no impairment of the
Company's goodwill as of that date.
7. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time the products are shipped. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from the Company's
estimates, revisions to the estimated warranty liability would be required.
9
Three months
ended
-------------
August 31,
2003
------------
(in thousands)
(unaudited)
Balance at the beginning of the period $111
Accruals for warranties issued during the period 124
Accruals related to pre-existing warranties
(including changes in estimates) --
Settlements made during the period
(in cash or in kind) (94)
-----------
Balance at the end of the period $141
===========
8. RECENT ACCOUNTING PRONOUNCEMENTS
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 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. The provisions of FIN 46 must be applied for periods after
December 15, 2003. The adoption of FIN 46 did not have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No.150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes
standards for classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. SFAS 150 requires
financial instruments within its scope be classified as a liability (or an
asset in some circumstances). Many of those financial instruments were
previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003. For financial
instruments created before and still existing as of the issuance of this
statement, a cumulative effect of change in accounting principle shall be
reported upon implementation in the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have a material impact on the
Company's financial position or 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.
10
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other parts of this Form 10-Q contains forward-
looking statements that involve risks and uncertainties. These statements
typically may be identified by the use of forward-looking words or phrases
such as "believe," "expect," "intend," "anticipate," "should," "planned,"
"estimated," and "potential," among others. All forward-looking statements
included in this document are based on our current expectations, and we assume
no obligation to update any of these forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for these
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause actual results and
experience to differ materially from the anticipated results or other
expectations expressed in these forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of our businesses include but are not limited to those factors that
might be described from time to time in periodic filings with the Securities
and Exchange Commission and include those set forth in this Quarterly Report
on Form 10-Q as "Factors that May Affect Future Results of Operations," as
well as other factors beyond our control.
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,
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.
REVENUE RECOGNITION
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 licensing income from
Performance Test Boards ("PTBs") is recognized when paid by the licensee.
This income is recorded in net sales.
In addition, the Company's revenue recognition policy 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
11
affected by estimated reductions to revenue for special pricing agreements,
price protection, promotions and other volume-based incentives. If market
conditions decline, the Company may take actions to increase customer
incentive offerings possibly resulting in an incremental reduction of revenue
or increase in cost 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 deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
WARRANTY OBLIGATIONS
The Company records 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. The Company's estimate of warranty
reserve is based on management assessment of future warranty obligations and
on historical warranty obligations. 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.
INVENTORY OBSOLESCENCE
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory by an amount 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.
INVESTMENT IMPAIRMENT
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.
DEFERRED TAX ASSETS
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 determines that it will 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 will increase income in the period such
determination is made. Likewise, should the Company 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 will be charged to income in
the period such determination is 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.
12
Three Months Ended
August 31,
---------------------
2003 2002
---------- ----------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 61.0 55.6
---------- ----------
Gross profit . . . . . . . . . . . . . . . 39.0 44.4
---------- ----------
Operating expenses:
Selling, general and administrative. . . 36.3 48.8
Research and development . . . . . . . . 29.2 27.4
---------- ----------
Total operating expenses . . . . 65.5 76.2
---------- ----------
Loss from operations . . . . . . . . . . . (26.5) (31.8)
Interest income. . . . . . . . . . . . . . 5.6 2.4
Other income, net. . . . . . . . . . . . . 1.5 3.0
---------- ----------
Loss before income taxes . . . . . . . . . (19.4) (26.4)
Income tax benefit . . . . . . . . . . . . -- (1.1)
---------- ----------
Net loss. . . . . . . . . . . .. . . . . . (19.4)% (25.3)%
========== ==========
THREE MONTHS ENDED AUGUST 31, 2003 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2002
NET SALES. Net sales increased to $4.2 million in the three months ended
August 31, 2003 from $3.5 million in the three months ended August 31, 2002,
an increase of 18.8%. The increase in net sales resulted primarily from
increases in sales of the Company's MTX products of approximately $511,000.
GROSS PROFIT. Cost of sales consists primarily of the cost of materials,
assembly and test costs, and overhead from operations. Gross profit was
unchanged at $1.6 million in the three months ended August 31, 2003 when
compared to the three months ended August 31, 2002. The gross profit margin
decreased to 39.0% in the three months ended August 31, 2003 from 44.4% in the
three months ended August 31, 2002. The decrease in gross profit margin was
primarily the result of certain higher margin system sales recorded in the
three months ended August 31, 2002.
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 August 31, 2003
from $1.7 million in the three months ended August 31, 2002, a decrease of
11.5%. The decrease in SG&A expenses was primarily due to decreases in
commissions accrued to outside sales representatives of approximately $106,000
and the provision for bad debt reserve of approximately $64,000. The Company
anticipates that SG&A expenses in the second quarter of fiscal 2004 will be
similar to those of the first quarter of fiscal 2004.
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 $1.2 million in the three months ended August 31, 2003 from
$961,000 in the three months ended August 31, 2002, an increase of 26.8%. The
increase in R&D expenses was primarily due to an increase in project material
13
expenses related to the development of the Company's FOX product line. The
Company anticipates that R&D expenses in the second quarter of fiscal 2004 may
be down somewhat when compared to those of the first quarter of fiscal 2004.
INTEREST INCOME. Interest income increased to $236,000 in the three
months ended August 31, 2003 from $83,000 in the three months ended August 31,
2002, an increase of 184.3%. The increase in interest income was primarily
related to interest income received in the first quarter of 2004 in connection
with income tax refunds relating to prior years. The Company anticipates that
interest income in the second quarter of fiscal 2004 will be approximately
$200,000 less than that of the first quarter of fiscal 2004.
OTHER INCOME (EXPENSE), NET. Other income, net decreased to $63,000 in
the three months ended August 31, 2003 from $104,000 in the three months ended
August 31, 2002. The decrease in other income, net was primarily due to a
decrease in foreign currency exchange gains recorded by the Company and its
subsidiaries in the three months ended August 31, 2003, compared with those
recorded in the three months ended August 31, 2002.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was nil in the three
months ended August 31, 2003 and income tax benefit was $39,000 in the three
months ended August 31, 2002. The income tax benefit in the three months
ended August 31, 2002 was primarily due to the tax benefit recorded by the
Company as a result of losses incurred in the Company's German subsidiary.
The Company's U.S. operations and its Japanese subsidiary have experienced
significant cumulative losses and thus generated certain net operating losses
available to offset future taxes payable in the U.S. and Japan. As a result
of the cumulative operating losses in the Company's U.S. operations and its
Japanese subsidiary, a valuation allowance was established for the full amount
of its 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 was recorded for losses in
either the Company's U.S. operations or its Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $1.1 million
for the three months ended August 31, 2003, and net cash used in operating
activities was approximately $1.9 million for the three months ended August
31, 2002. For the three months ended August 31, 2003, net cash provided by
operating activities was due primarily to a decrease in other current assets
related to the receipt of income tax refunds of $1.2 million. For the three
months ended August 31, 2002, net cash used in operating activities was due
primarily to the net loss of $887,000, an increase in accounts receivable of
$431,000 and a decrease in accrued expenses and deferred revenue of $413,000.
Net cash used in investing activities was approximately $3.3 million for
the three months ended August 31, 2003 and net cash provided by investing
activities was approximately $2.4 million for the three months ended August
31, 2002. The cash used in investing activities during the three months ended
August 31, 2003 was primarily due to the purchase of short-term and long-term
investments. The cash provided by investing activities during the three
months ended August 31, 2002 was primarily due to the sale of short-term
investments.
Financing activities neither used nor provided cash in the three months
ended August 31, 2003. Financing activities used cash of approximately $3,000
in the three months ended August 31, 2002. Net cash used in financing
activities during the three months ended August 31, 2002 was due to the
Company's repurchase of 700 of its outstanding common shares at an average
price of $3.75 per share.
As of August 31, 2003, the Company had working capital of $20.5 million,
compared with $22.0 million as of May 31, 2003. Working capital consists of
14
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 August 31, 2003, the Company had repurchased 523,700
shares at an average price of $3.95 per share.
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 calendar year 2004. After
calendar year 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing
arrangements as of August 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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. The provisions of FIN 46 must be applied for periods after
December 15, 2003. The adoption of FIN 46 did not have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No.150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes
standards for classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. SFAS 150 requires
financial instruments within its scope be classified as a liability (or an
asset in some circumstances). Many of those financial instruments were
previously classified as equity. SFAS 150 is effective for financial
15
instruments entered into or modified after May 31, 2003. For financial
instruments created before and still existing as of the issuance of this
statement, a cumulative effect of change in accounting principle shall be
reported upon implementation in the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have a material impact on the
Company's financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in
other documents we file with the Securities and Exchange Commission are risks
and uncertainties that could cause actual results to differ materially from
the results contemplated by the forward-looking statements in this Quarterly
Report on Form 10-Q. We believe that these risks and uncertainties are the
principal material risks facing the Company as of the date of this Form 10-Q.
In the future, we may become subject to additional risks that are not
currently known to us. If any of these risks actually occur, our business,
financial condition and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline, and you could
lose all or part of the value of your investment.
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, and the number 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 million per system. 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, customer
cancellations or deferrals, 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 loss from operations of
$4.7 million, $4.5 million and $5.2 million in fiscal 2003, 2002 and 2000,
respectively. The Company reported operating income 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
therefore, recorded operating losses in fiscal 1999 and 2000. Beginning in
the second half of fiscal 2001, the Company experienced the result of a sharp
and severe industry downturn and recorded an operating losses in fiscal 2002
and 2003. 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. Failure to
become profitable may depress the market price of the Company's common stock
and its ability to raise capital, if necessary.
DEPENDENCE ON MARKET ACCEPTANCE OF FOX SYSTEM. One element of the
Company's business 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
16
test all of the die on a wafer. The market for the FOX systems is in the very
early stages of development. The FOX system was introduced in July 2001. 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
significant market acceptance would have a material adverse effect on the
Company's future operating results and long-term prospects. The Company's
stock price may also decline.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principle element of the
Company's business strategy is to capture an increasing share of the memory
test equipment market through sales of the MTX massively parallel test system.
The MTX system 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.
CUSTOMER CONCENTRATION. Sales to the Company's five largest customers
accounted for approximately 73.0%, 61.7% and 58.8% of its net sales in fiscal
2003, 2002 and 2001, respectively. Sales to the Company's five largest
customers accounted for approximately 74.2% of its net sales in the three
months ended August 31, 2003. During fiscal 2003, Texas Instruments
Incorporated and First International Computer, Inc. accounted for 45.3% and
10.7% of the Company's net sales, respectively. 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.
No other customers represented more than 10% of the Company's net sales for
any of such periods. 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 $120 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 involve 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 73.0%,
62.7% and 60.6% of the Company's net sales for fiscal 2003, 2002 and 2001,
respectively, were attributable to sales to customers 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
in Asia have on occasion declined dramatically, and will likely do so again in
17
the future. These developments may affect the Company in several ways. The
Company believes that many international semiconductor manufacturers limited
their capital spending (including the purchase of MTXs) in fiscal years 2001,
2002 and 2003, and that the uncertainty of the DRAM market may cause some
manufacturers in the future to again delay capital spending plans. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
that satisfy market demand. Any such failure would materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced significant delays from time to time in the
introduction of, and technical and manufacturing difficulties with, certain of
its products and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new products.
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 integrated circuit, or
IC. 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 PTBs for use with the Company's
MTX systems. Sales of PTBs by licensees result in royalties to the Company
but reduce the Company's own sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The semiconductor and semiconductor
equipment industries in general, and the market for DRAMs and other memory
devices 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. 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 2001, 2002 and 2003.
Future cancellations and reschedulings could adversely affect the Company's
business, financial condition and results of operation.
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 and die
18
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
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. Further,
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; ABILITY TO ATTRACT AND RETAIN SKILLED
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 will limit its ability to expand its business and would
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. These competitors would then be able to offer services and
develop, manufacture and sell products, which compete directly with the
Company's services and products. In that case, the Company's revenues and
operating results could decline.
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
19
property. The laws of some foreign countries do not protect proprietary
rights to the same extent as the laws of the U.S., and many companies have
encountered significant problems in protecting their proprietary rights in
these foreign countries. These problems can be caused by, for example, a lack
of rules and processes allowing for meaningfully defending intellectual
property rights. If the Company does not adequately protect its intellectual
property, competitors may be able to practice the Company's technologies and
erode the Company's competitive advantage, and the Company's business and
operating results could be harmed.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company had no holdings of derivative financial or
commodity instruments at August 31, 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-U.S. Dollar exchange rate during the lengthy period
from purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent that the Company's Japanese subsidiary incurs expenses
payable in Yen. To date, the Company has not invested in instruments designed
to hedge currency risks. In addition, the Company's Japanese subsidiary
typically carries debt or other obligations due to the Company that may be
denominated in either Yen or U.S. Dollars. Since the Japanese subsidiary's
financial statements are based in Yen and the Company's financial statements
20
are based in U.S. Dollars, the Japanese subsidiary and the Company recognize
foreign exchange gain or loss in any period in which the value of the Yen
rises or falls in relation to the U.S. Dollar. A 10% decrease in the value of
the Yen as compared with the U.S. Dollar would potentially result in an
additional net loss of approximately $164,000.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There was no
change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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 July 22, 2003 reporting that the Company
issued a press release announcing financial results for its fourth quarter and
fiscal 2003 on July 22, 2003. The press release included condensed
consolidated statements of operations for the three months and fiscal year
ended May 31, 2003 and May 31, 2002 and condensed consolidated balance sheets
as of May 31, 2003 and May 31, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: October 14, 2003 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: October 14, 2003 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
22
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- ------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Press Release dated July 22, 2003. (This is incorporated by
reference to Exhibit 99.1 to Aehr Test Systems' Form 8-K filed
July 22, 2003).
23