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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended May 31, 2004
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 (IRS Employer Identification Number)
incorporation or organization)
400 KATO TERRACE, FREMONT, CA 94539
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates of the Registrant, based upon the
closing price of $3.60 on July 30, 2004, as reported on the Nasdaq National
Market, was approximately $21,725,000. For purposes of this disclosure,
shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock (other than such persons of whom the
Registrant became aware only through the filing of a Schedule 13G filed with
the Securities and Exchange Commission) and shares held by officers and
directors of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding at July 31, 2004 was 7,393,109.
Documents Incorporated By Reference
Certain information required by Items 10, 11, 12, 13 and 14 of this
report on Form 10-K is incorporated by reference from the Registrant's proxy
statement for the Annual Meeting of Shareholders to be held on October 19,
2004 (the "Proxy Statement"), which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's
fiscal year ended May 31, 2004.
AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2004
TABLE OF CONTENTS
PART I
Item 1. Business ............................................... 3
Item 2. Properties ............................................ 11
Item 3. Legal Proceedings ...................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters .................................. 11
Item 6. Selected Financial Data ................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risks ......................................... 27
Item 8. Financial Statements and Supplementary Data ............ 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 47
Item 9a. Controls and Procedures ................................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant ..... 47
Item 11. Executive Compensation ................................. 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................... 47
Item 13. Certain Relationships and Related Transactions ......... 48
Item 14. Principal Independent Registered Public Accounting
Firm's Fees and Services ............................. 48
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................. 48
Signatures ............................................. 50
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This Annual Report on Form 10-K contains forward-looking statements with
respect to Aehr Test Systems ("Aehr Test" the "Company", "we", "us", and
"our") which involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements due to a number of factors, including those described herein and
the documents incorporated herein by reference, and those factors described
in Part II, Item 7 under "Factors that May Affect Future Results of
Operations." 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 Annual Report on Form 10-K as "Factors that
May Affect Future Results of Operations," as well as other factors beyond our
control.
PART I
Item 1. Business
THE COMPANY
Aehr Test develops, manufactures and sells systems which are designed to
reduce the cost of testing dynamic random access memory ("DRAM") and other
memory devices, perform reliability screening or burn-in of complex logic and
memory devices, simultaneously perform burn-in and parallel testing of
devices while they are still in wafer form, and enable integrated circuit
("IC") manufacturers to perform test and burn-in of bare die. Leveraging its
expertise as a long-time leading provider of burn-in equipment, with over
2,000 systems installed worldwide, the Company has developed and introduced
several innovative product families, including the MTX, MAX and FOX(TM)
systems, and the DiePak(R) carrier. The MTX system is a massively parallel
test system designed to reduce the cost of memory testing by performing both
test and burn-in on thousands of devices simultaneously. The MAX system can
effectively burn-in and functionally test sophisticated devices, such as
digital signal processors, microprocessors, microcontrollers and systems-on-
a-chip. The FOX system is a full wafer contact burn-in and parallel test
system designed to make contact with all pads of a wafer simultaneously, thus
enabling full wafer burn-in and parallel test. The DiePak carrier is a
reusable, temporary package that enables IC manufacturers to perform cost-
effective final test and burn-in of bare die.
Aehr Test, was incorporated in the state of California on May 25, 1977.
The Company's headquarters and mailing address is 400 Kato Terrace, Fremont,
California, and the telephone number at that location is (510) 623-9400. The
Company's common stock trades on the Nasdaq SmallCap National Market under
the symbol "AEHR." The Company's website is www.aehr.com. The public may
read and copy materials filed with the Securities and Exchange Commission
("SEC"), including the Company's periodic and current reports on Form 10-K,
Form 10-Q and Form 8-K, at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington DC 20549. Information about the SEC's Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. All
reports and information electronically filed by Aehr Test with the SEC may
also be obtained on the SEC's website (http://www.sec.gov).
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process and defects
or weaknesses that may result in the failure of an IC may be introduced at
any process step. Failures may occur immediately or at any time during the
operating life of an IC, sometimes after several months of normal use.
Semiconductor manufacturers rely on testing and reliability screening to
detect failures that occur during the manufacturing process.
Testing and reliability screening involves multiple steps. The first set
of tests is typically performed by IC manufacturers before the processed
semiconductor wafer is cut into individual die, to avoid the cost of
packaging defective die into their plastic or ceramic packages. After the
die are packaged and before they undergo reliability screening, a short test
is typically performed to detect packaging defects. Most leading-edge
microprocessors, microcontrollers, digital signal processors, and memory ICs
then undergo an extensive reliability screening and stress testing procedure
known as "burn-in." The burn-in process screens for early failures by
operating the IC at elevated voltages and temperatures, usually at 150
degrees Celsius (302 degrees Fahrenheit), for periods typically ranging from
8 to 48 hours. A burn-in system can process thousands of ICs simultaneously.
After burn-in, the ICs undergo a final test process using automatic test
equipment ("testers"). Traditional memory testers can test up to 128 ICs
simultaneously and perform a variety of tests at multiple temperatures.
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PRODUCTS
The Company manufactures and markets massively parallel test systems,
dynamic and monitored burn-in systems, full wafer contact systems, die
carriers, test fixtures and related accessories.
All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and
price are most important, or for reliability engineering and quality
assurance applications, where performance and flexibility, such as extended
temperature ranges, are essential.
DYNAMIC AND MONITORED BURN-IN SYSTEMS
The MAX system is designed for dynamic burn-in of memory and logic
devices. The production version of the MAX2 system holds 64 burn-in boards
("BIBs"), each of which may hold up to 350 or more devices, resulting in a
system capacity of up to 22,400 or more devices. The MAX3 system features
multi-tasking Windows 2000-based software which includes lot tracking and
reporting software that are needed for production and military applications.
The MAX3 system, introduced in fiscal 1999, has 96 channels, and handles the
latest low voltage ICs. The MAX3 also has extended stored test program
capability for more complete exercise and output monitoring of complex logic
devices such as digital signal processors. The output monitor feature allows
the MAX3 to perform functional tests of devices and it also supports built-in
self-test ("BIST") or other scan features. The MAX4 system was introduced in
2001. Like the MAX3, it offers 96 channels and output monitoring; however,
the MAX4 further extends the capabilities of the MAX3. The MAX4 is targeted
at devices which require better voltage accuracy and higher current. It can
provide up to 227 amps of current per BIB position.
The ATX system is designed for dynamic and monitored burn-in of high pin-
count logic devices, including microprocessors, microcontrollers,
application-specific ICs ("ASICs"), and certain memory devices. The ATX
system uses much of the same software as the MAX system. Its 256-channel pin
electronics configuration allows it to handle complex logic devices, and its
ability to burn-in different device types in each of the system's 32 BIB
positions is useful for quality assurance applications. The Windows 2000-
based ATX2, introduced in fiscal 1999, includes a high current feature to
allow the system to burn-in more devices, plus an extended pattern generation
capability. The ATX3 system, introduced in 2002, is targeted at devices
which require greater voltage accuracy and lower voltages. This dynamic and
monitored burn-in systems product category accounted for approximately 45%,
56% and 49% of the Company's net sales in fiscal 2004, 2003 and 2002,
respectively.
MASSIVELY PARALLEL TEST SYSTEM
The MTX massively parallel test system is designed to reduce the cost of
memory testing by processing thousands of memory devices simultaneously,
including DRAMs, Double Data Rate SDRAMs, DDR II SDRAMs, SDRAMs, Rambus
DRAMs, SRAMs and flash memories. The MTX system can perform a significant
number of tests usually performed by traditional memory testers, including
pattern sensitivity tests, functional tests, data retention tests and refresh
tests. The Company estimates that transferring these tests from traditional
memory testers to the MTX system can reduce by up to 70% the time that a
memory device must be tested by a traditional memory tester, thereby reducing
the required number of memory testers and, consequently, reducing capital and
operating costs.
The MTX system consists of several subsystems: pattern generation and
test electronics, control software, network interface and environmental
chamber. The MTX system has an algorithmic test pattern generator which
allows it to duplicate most of the tests performed by a traditional memory
tester. Pin electronics at each performance test board ("PTB") position are
designed to provide accurate signals to the memory ICs being tested and
detect whether a device is failing the test. An optional enhanced fault
collection capability allows the MTX to identify which cells in a memory IC
are failing, resulting in information for engineering characterization of new
device types.
Devices being tested are placed on PTBs and loaded into environmental
chambers which typically operate at temperatures from 25 degrees Celsius (77
degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit)
(optional chambers can produce temperatures as low as -55 degrees Celsius (-
67 degrees Fahrenheit)). A single PTB can hold up to 416 DDR SDRAMs, and a
production chamber holds 30 PTBs, resulting in up to 12,480 DDR SDRAMs being
tested in a single system. This massively parallel test system product
category accounted for approximately 18%, 16% and 20% of the Company's net
sales in fiscal 2004, 2003 and 2002, respectively.
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FULL WAFER CONTACT SYSTEM
The FOX full wafer contact burn-in and parallel test system, introduced
in July 2001, is designed to make contact with all pads of a wafer
simultaneously, thus enabling full wafer burn-in and parallel test of ICs.
One of the key features of the FOX system is the patented WaferPak(TM)
cartridge system. This unique design is intended to accommodate a wide range
of contactor technologies. Wafer-level burn-in and test enables lower cost
production of Known-Good Die ("KGD") for multichip modules and systems-in-a-
package.
DIEPAK CARRIERS
The Company's DiePak product line includes a family of reusable,
temporary die carriers and associated sockets which enable the test and burn-
in of bare die using the same test and burn-in systems used for packaged ICs.
DiePak carriers offer cost-effective solutions for providing KGD for most
types of ICs, including memory, microcontroller and microprocessor devices.
The DiePak carrier was introduced in fiscal 1995. The DiePak carrier
consists of an interconnect substrate, which provides an electrical
connection between the die pads and the socket contacts, and a mechanical
support system. The substrate is customized for each IC product. The DiePak
carrier comes in several different versions, designed to handle ICs ranging
from 54 pin-count memories up to 320 pin-count microprocessors. A new lower
cost 54/66 pin DiePak solution was introduced in July 2004.
TEST FIXTURES
The Company manufactures and sells, and licenses others to manufacture
and sell, custom-designed test fixtures for its systems. The test fixtures
include PTBs for use with the MTX massively parallel test system, BIBs for
the MAX and ATX dynamic and monitored burn-in systems, and test contactors
for the FOX full-wafer contact burn-in and parallel test system. These test
fixtures hold the devices undergoing test or burn-in and electrically connect
the devices under test to the system electronics. The capacity of each test
fixture depends on the type of device being tested or burned-in, ranging from
several hundred in memory production to as few as eight for high pin-count
complex ASIC or microprocessor devices. Test fixtures are sold both with new
Aehr Test systems and for use with the Company's installed base of systems.
Due to the challenge of making contact with and testing all the die on a
semiconductor wafer, the FOX test contactors are the most complex of the test
fixtures. In turn, PTBs are substantially more complex than BIBs, due to the
advanced test requirements of the MTX system. The Company has received
patents or applied for patents on certain features of the PTB, FOX and MAX4
test fixtures. The Company has licensed or authorized several other
companies to provide PTBs and MAX4 BIBs, and has a partnership with Pycon,
Inc. for manufacturing PTBs and BIBs, from which the Company receives
royalties. This test fixtures product category accounted for approximately
16% of the Company's net sales in fiscal 2004.
CUSTOMERS
The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies.
Sales to the Company's five largest customers accounted for approximately
70.5%, 73.0% and 61.7% of its net sales in fiscal 2004, 2003 and 2002,
respectively. During fiscal 2004, Texas Instruments Incorporated and FASL
LLC. accounted for 33.8% and 17.8% of the Company's net sales, respectively.
During fiscal 2003, Texas Instruments Incorporated and First International
Computer, Inc. accounted for 45.3% and 10.7% of the Company's net sales,
respectively. During fiscal 2002, Texas Instruments Incorporated, 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. No other customers
represented more than 10% of the Company's net sales for any of these
periods. The Company expects that sales of its products to a limited number
of customers will continue to account for a high percentage of net sales for
the foreseeable future. In addition, sales to particular customers may
fluctuate significantly from quarter to quarter. The loss of or reduction or
delay in orders from a significant customer, or a delay in collecting or
failure to collect accounts receivable from a significant customer could
adversely affect the Company's business, financial condition and operating
results.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan,
Germany and Taiwan, and has established a network of distributors and sales
representatives in certain key parts of the world.
The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training, and documentation. The Company has both
applications engineering and field service personnel located at the corporate
headquarters in Fremont, California and at
5
the Company's subsidiaries in Japan, Germany and Taiwan. The Company's
distributors provide applications and field service support in other parts of
the world. The Company customarily provides a warranty on its products. The
Company offers service contracts on its systems directly and through its
subsidiaries, distributors, and representatives.
BACKLOG
As of May 31, 2004 and 2003, the Company's backlog was $7.9 million and
$5.1 million, respectively. The increase in backlog was primarily the result
of an increase in orders of the Company's MTX massively parallel test
products. The Company's backlog consists of product orders for which
confirmed purchase orders have been received and which are scheduled for
shipment within 12 months. At May 31, 2004, the Company's backlog also
consisted of product development orders and a prototype system totaling $1.4
million, which is consistent with the backlog at May 31, 2003. Most orders
are subject to rescheduling or cancellation by the customer with limited
penalties. Because of the possibility of customer changes in delivery
schedules or cancellations and potential delays in product shipments or
development projects, the Company's backlog as of a particular date may not
be indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research and development expenses during fiscal 2004, 2003 and 2002 were
approximately $4.6 million, $4.5 million and $4.0 million, respectively.
The Company conducts ongoing research and development to design new
products and to support and enhance existing product lines. The Company is
currently developing capability and performance enhancements to the MTX, MAX,
ATX and FOX systems for future generation ICs. The Company is also
developing DiePak carriers to accommodate additional types of devices.
Building upon the expertise gained in the development of its existing
products, the Company has recently developed the FOX system for performing
test and burn-in of entire processed wafers, rather than individual die or
packaged parts. This wafer-level burn-in and test development project was
financed by the Company and the Defense Advanced Research Projects Agency
("DARPA") under a cost-sharing agreement entered into in 1994. In January
2001, the Company completed this $6.5 million multi-year research and
development project with DARPA.
MANUFACTURING
The Company assembles its products from components and parts manufactured
by others, including environmental chambers, power supplies, metal
fabrications, printed circuit assemblies, ICs, burn-in sockets and
interconnect substrates. Final assembly and testing are performed within the
Company's facilities. The Company's strategy is to use in-house
manufacturing only when necessary to protect a proprietary process or if a
significant improvement in quality, cost or lead time can be achieved. The
Company's principal manufacturing facility is located in Fremont, California.
The Company's Tokyo, Japan and Utting, Germany facilities provide limited
manufacturing and product customization.
The Company relies on subcontractors to manufacture many of the
components or subassemblies used in its products. The Company's MTX, MAX,
ATX and FOX systems and DiePak carriers contain several components, including
environmental chambers, power supplies, wafer contactors, signal distribution
substrates and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The Company's reliance on subcontractors and
single source suppliers involves a number of significant risks, including the
loss of control over the manufacturing process, the potential absence of
adequate capacity and reduced control over delivery schedules, manufacturing
yields, quality and costs. In the event that any significant subcontractor
or single source supplier becomes unable or unwilling to continue to
manufacture subassemblies, components or parts in required volumes, the
Company will have to identify and qualify acceptable replacements. The
process of qualifying subcontractors and suppliers could be lengthy, and no
assurance can be given that any additional sources would be available to the
Company on a timely basis. Any delay, interruption or termination of a
supplier relationship could have a material adverse effect on the Company's
business, financial condition and operating results.
COMPETITION
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability and customer
service. In each of the markets it serves, the Company faces competition
6
from established competitors and potential new entrants, many of which have
greater financial, engineering, manufacturing and marketing resources than
the Company.
The MTX system faces intense competition from burn-in system suppliers
and traditional memory tester suppliers because the Company's MTX system
performs burn-in and many of the functional tests performed by memory
testers. The market for burn-in systems is highly fragmented, with many
domestic and international suppliers. Some users of such systems, such as
independent test labs, build their own burn-in systems, while others,
particularly large IC manufacturers in Asia, acquire burn-in systems from
captive or affiliated suppliers. Competing suppliers of burn-in and
functional test systems include Japan Engineering Company, Reliability
Incorporated and Dong-Il Corporation. 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 have
faced and are expected to continue to face, increasingly severe competition,
especially from local, low cost manufacturers and from systems manufacturers
that offer higher power dissipation per device under test.
The Company's FOX full wafer contact system is expected to face
competition from larger systems manufacturers that have sufficient
technological know-how and manufacturing capability. Competing suppliers of
full wafer contact systems include Tokyo Electron Limited, Matsushita
Electric Industrial Co., Ltd. and Delta V Instruments, Incorporated.
The Company expects its DiePak products will face significant
competition. The Company believes that several companies have developed or
are developing products which are intended to enable burn-in and test of bare
die. As the bare die market develops, the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply. Competing suppliers of DiePak products include Yamaichi
Electronics Co., Ltd.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company has a partnership with Pycon,
Inc. for the manufacture and direct sale of BIBs and PTBs, whereby both
companies jointly market and sell the BIBs and PTBs, and Pycon, Inc. pays a
royalty to the Company on the BIBs and PTBs that it sells. The Company has
granted royalty-bearing licenses to several companies to make PTBs for use
with the Company's MTX systems, in order to assure customers of a second
source of supply, and the Company may grant additional licenses as well.
Sales of PTBs by licensees result in royalties to the Company.
The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products with
improved price and performance characteristics. New product introductions by
the Company's competitors or by new market entrants could cause a decline in
sales or loss of market acceptance of the Company's products. Increased
competitive pressure could also lead to intensified price-based competition,
resulting in lower prices which could adversely affect the Company's
business, financial condition and operating results. The Company believes
that to remain competitive it must invest significant financial resources in
new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secrets and copyright
protection, rather than on patents, to maintain its competitive position.
The Company's proprietary software is copyrighted and licensed to the
Company's customers. The Company currently holds twelve issued United States
patents with expiration date ranges from 2012 to 2021 and has several
additional United States patent applications and foreign patent applications
pending. One issued patent covers the method used to connect the PTBs with
the MTX system. The Company currently has one United States trademark
registration.
The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. Although
the Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that
these measures will be adequate or that competitors will not be able to
develop similar technology independently. Further, there can be no assurance
that claims allowed on any patent issued to the Company will be sufficiently
broad to protect the Company's technology, that any patent will issue from
any pending application or that foreign intellectual property laws will
protect the Company's intellectual property. Litigation may be necessary to
enforce or determine the validity and scope of the Company's
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proprietary rights, and there can be no assurance that the Company's
intellectual property rights, if challenged, will be upheld as valid. Any
such litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on the Company's business, financial
condition and operating results, regardless of the outcome of the litigation.
In addition, there can be no assurance that any of the patents issued to the
Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
Also, there can be no assurance that the Company will have the financial
resources to defend the patents from infringement or claims of invalidity.
There are currently no pending claims against the Company regarding
infringement of any patents or other intellectual property rights of others.
However, the Company may receive, in the future, communications from third
parties asserting intellectual property claims against the Company. Such
claims could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggest the Company may be
interested in acquiring a license from such third parties. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
EMPLOYEES
As of July 31, 2004, the Company, its two foreign subsidiaries and one
branch office employed 88 persons collectively, on a full-time basis, of whom
25 were engaged in research, development, and related engineering, 23 were
engaged in manufacturing, 28 were engaged in marketing, sales, and customer
support, and 12 were engaged in general administration and finance functions.
In addition, the Company from time to time employs a number of part-time
employees and contractors, particularly in manufacturing. The Company's
success is in part dependent on its ability to attract and retain highly
skilled workers, who are in high demand. None of the Company's employees are
represented by a union and the Company has never experienced a work stoppage.
Management considers its relations with its employees to be good.
GEOGRAPHIC AREAS
The Company operates in several geographic areas. Selected financial
information is included in Part II, Item 8, Note 13 "Segment Information" and
certain risks related to such operations are discussed in Part II, Item 7,
under the heading "Dependence on International Sales and Operations."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors of the Company are elected annually. The executive
officers of the Company serve with no specific term of office. The executive
officers and directors of the Company are as follows:
Name of Executive Officer Age Positions with the Company
- -------------------------- ---- -----------------------------------
Rhea J. Posedel............ 62 Chief Executive Officer and
Chairman of the Board of Directors
Gary L. Larson............. 54 Vice President of Finance and Chief
Financial Officer
Carl N. Buck............... 52 Vice President of Contactor Business Group
David S. Hendrickson....... 47 Vice President of Engineering
Gregory M. Perkins......... 50 Vice President of Worldwide Sales
and Service
Kunio Sano................. 48 President, Aehr Test Systems Japan K.K.
Robert R. Anderson (1)..... 66 Director
William W. R. Elder (1)(2). 65 Director
Mukesh Patel (1)........... 46 Director
Mario M. Rosati (2)........ 58 Director and Secretary
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
RHEA J. POSEDEL is a founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors since its inception
in 1977. From the Company's inception through May 2000, Mr. Posedel also
served as President. Prior to founding the Company, Mr. Posedel held various
project engineering and engineering managerial positions at Lockheed Martin
Corporation (formerly Lockheed Missile & Space Corporation), Ampex
Corporation, and Cohu, Inc. He received a B.S. in Electrical Engineering
from the University of California, Berkeley, an M.S. in Electrical
Engineering from San Jose State University and an M.B.A. from Golden Gate
University.
GARY L. LARSON joined the Company in April 1991 as Chief Financial
Officer and was elected Vice President of Finance in February 1992. From
1986 to 1990, he served as Chief Financial Officer, and from 1988 to 1990
also as President and Chief Operating Officer, of Nanometrics Incorporated, a
manufacturer of measurement and inspection equipment for the semiconductor
industry. Mr. Larson received a B.S. in Mathematics/Finance from Harvey Mudd
College.
CARL N. BUCK joined the Company as a Product Marketing Manager in 1983
and held various positions until he was elected Vice President of Engineering
in November 1992, Vice President of Research and Development Engineering in
November 1996, Vice President of Marketing in September 1997 and Vice
President of Contactor Business Group in May 2002. From 1978 to 1983, Mr.
Buck served as Product Marketing Manager at Intel Corporation, an integrated
circuit and microprocessor company. Mr. Buck received a B.S.E.E. from
Princeton University, an M.S. in Electrical Engineering from the University
of Maryland and an M.B.A. from Stanford University.
DAVID S. HENDRICKSON joined the Company as Vice President of Engineering
in October 2000. From 1999 to 2000, Mr. Hendrickson served as Platform
General Manager, and from 1998 to 1999 as Engineering Director and Software
Director, of Siemens Medical (formerly Acuson Corporation), a medical
ultrasound products company. From 1990 to 1995, Mr. Hendrickson served as
Director of Engineering and Director of Software of Teradyne Inc. (formerly
9
Megatest Corporation), a manufacturer of semiconductor capital equipment.
Mr. Hendrickson received a B.S. in Computer Science from Illinois Institute
of Technology.
GREGORY M. PERKINS joined the Company as Vice President of Worldwide
Sales and Service in June 2004. From 2001 to 2003, Mr. Perkins served as
Vice President of North America Customer Operations and then Vice President
of North American and European Sales, for Electroglas Corporation, a producer
of semiconductor wafer probers. From 1999 to 2001, he served as Vice
President of Sales at Advantest America, Inc., a semiconductor tester
company, and from 1997 to 1999 as Vice President of Worldwide Sales and Field
Operations at LTX Corporation, a semiconductor tester company. From 1978 to
1997, Mr. Perkins held multiple management positions over 19 years with
General Electric Company including Senior Vice President of Marketing and
Business Development for GE Capital Computer Leasing. Mr. Perkins received a
B.S. in Environmental Health Technologies from Quinnipiac University.
KUNIO SANO joined the Company as Vice President, Aehr Test Systems Japan
K.K., the Company's subsidiary in Japan, in June 1998 and was elected
President, Aehr Test Systems Japan K.K. in January 2001. From 1991 to 1998,
he served as Manager of Development Engineering Department at Tokyo Electron
Yamanashi Limited, a leading worldwide semiconductor equipment manufacturer.
Mr. Sano received a B.S.E.E. from Sagami Institute of Technology in Kanagawa,
Japan.
ROBERT R. ANDERSON was appointed to the Company's Board of Directors in
October 2000. Mr. Anderson is a private investor. From January 1994 to
January 2001, he was Chairman of Silicon Valley Research, Inc., a
semiconductor design automation software company, and its Chief Executive
Officer from December 1996 to August 1998, and from April 1994 to July 1995.
He also served as Chairman of Yield Dynamics, Inc., a private semiconductor
process control software company, from October 1998 to October 2000, and as
Chief Executive Officer from October 1998 to April 2001. Mr. Anderson co-
founded KLA Instruments Corporation, now KLA-Tencor Corporation, a supplier
of semiconductor process control systems, in 1975 and served in various
capacities including Chief Operating Officer, Chief Financial Officer, Vice
Chairman and Chairman before he retired from that company in 1994. Mr.
Anderson is a director of MKS Instruments, Inc., Metron Technology N.V. and
Trikon Technologies, Inc. He also serves as a director for two private
development stage companies.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr.
Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a
semiconductor company, from his founding of Genus in 1981 to September 1996,
and has been serving in that same position again since April 1998. Dr. Elder
has been a director of Genus since its inception. Dr. Elder also serves as a
Board Member of Trikon Technologies in the United Kingdom. Dr. Elder holds a
B.S.I.E. and an honorary Doctorate Degree from the University of Paisley in
Scotland.
MUKESH PATEL was appointed to the Company's Board of Directors in June
1999. Mr. Patel is a leading entrepreneur in the Silicon Valley who founded
Sparkolor Corporation, acquired by Intel Corporation in late 2002, and co-
founded SMART Modular Technologies, Inc., a billion dollar company, acquired
by Solectron Corporation in late 1999. Mr. Patel holds a B.S. degree in
Engineering with an emphasis in digital electronics from Bombay University,
India. Mr. Patel also serves as a Board member for SMART Modular
Technologies, Inc., Nazomi Communications Inc. and Parama Networks.
MARIO M. ROSATI has been a director of the Company since 1977. He is a
member of the law firm Wilson Sonsini Goodrich & Rosati, Professional
Corporation which he joined in 1971. Mr. Rosati is a graduate of Boalt Hall,
University of California at Berkeley. Mr. Rosati is a director of Genus,
Inc., Sanmina Corporation, Symyx Technologies, Inc., Inc., and Vivus Inc., as
well as several privately-held companies.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Rhea J. Posedel, the only inside director of the Company, does not
receive any cash compensation for his services as a member of the Board of
Directors. Each outside director receives (1) an annual retainer of $10,000,
(2) $1,250 for each regular board meeting he attends, and (3) $750 for each
committee meeting he attends if not held in conjunction with a regular board
meeting, in addition to being reimbursed for certain expenses incurred in
attending Board and committee meetings. Prior to each annual meeting of
shareholders, each outside director may elect to receive an additional stock
option grant in lieu of any cash payments throughout the year. An inside
director is a director who is a regular employee of the Company, whereas an
outside director is not an employee of the Company. Directors are eligible
to participate in the Company's stock option plans. In fiscal 2002, outside
directors Robert Anderson, William Elder, Mukesh Patel and Mario Rosati were
each granted options to purchase 5,000 shares at $3.85 per share. In fiscal
2003, outside directors Robert Anderson, William Elder, Mukesh Patel and
Mario Rosati were each granted options to purchase 5,000 shares at $2.70 per
share. In fiscal 2004, outside directors Robert Anderson, William Elder,
Mukesh Patel and Mario Rosati were each granted options to purchase 5,000
shares at $3.79 per share. Additionally, Robert Anderson and Mukesh Patel
were
10
each granted 9,499 shares at $3.79 per share pursuant to an agreement to take
these shares of stock in lieu of cash payments throughout the fiscal year.
The Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the Board of
Directors regarding executive compensation matters, including decisions
relating to salary and bonus and grants of stock options. The Audit
Committee approves the appointment of the Company's independent auditors,
reviews the results and scope of annual audits and other accounting related
services, and reviews and evaluates the Company's internal control functions.
The information required by this item relating to the audit committee
expert is incorporated by reference to the section entitled "Audit Committee"
of the Proxy Statement.
The information required by this item relating to Code of Ethics is
incorporated by reference to the section entitled "Code of Ethics" of the
Proxy Statement.
Item 2. Properties
The Company's principal administrative and production facilities are
located in Fremont, California, in a 51,289 square foot building. The lease
on this building expires in December 2009; the Company has an option to
extend the lease of its headquarters building for an additional five year
period at rates to be determined. The Company's Japan facility is located in
Tokyo in a 4,294 square foot building under a lease which expires in 2004.
The Company leases a sales and support office on a month-to-month basis in
Utting, Germany. The Company leases a sales and support office in Hsinchu,
Taiwan under a lease which expires in 2005. The Company's and its
subsidiaries' annual rental payments currently aggregate approximately
$855,000. The Company continues to evaluate its global operations and
restructure its facilities and operations to bring its capacity in line with
demand and to provide cost efficient services for its customers. In prior
years, through this process, the Company has moved from certain facilities
that exceeded the capacity required to satisfy its needs. The Company
believes that its existing facilities are adequate to meet its reasonably
foreseeable requirements. The Company regularly evaluates its expected future
facilities requirements and believes that alternate facilities would be
available if needed.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Company's Common Stock has been publicly traded on the Nasdaq
National Market under the symbol "AEHR" since the Company's initial public
offering ("IPO") on August 15, 1997. The initial public offering price was
$12.00 per share. The following table sets forth, for the periods indicated,
the high and low sale prices for the Common Stock on such market.
High Low
--------- ---------
Fiscal 2004:
First quarter ended August 31, 2003................ $4.25 $2.61
Second quarter ended November 30, 2003............. 4.66 3.40
Third quarter ended February 29, 2004.............. 6.91 3.04
Fourth quarter ended May 31, 2004.................. 5.15 3.17
Fiscal 2003:
First quarter ended August 31, 2002................ $5.90 $3.70
Second quarter ended November 30, 2002............. 5.30 1.85
Third quarter ended February 28, 2003.............. 3.10 1.74
Fourth quarter ended May 31, 2003.................. 3.20 1.76
11
At August 6, 2004, the Company had 121 holders of record of its Common
Stock. The Company estimates the number of beneficial owners of the
Company's Common Stock at August 6, 2004 to be 966.
The market price of the Company's Common Stock has been volatile. For a
discussion of the factors affecting the Company's stock price, see "Factors
that may affect future results of operations -- possible volatility of stock
price."
The Company has not paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial
Owners, Directors and Management" of the Proxy Statement and Part III, Item
12 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data (in thousands except per share data):
Fiscal Year Ended May 31,
------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales..................................... $15,800 $15,092 $12,568 $31,039 $24,505
Cost of sales................................. 10,092 9,354 6,488 17,923 17,267
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 5,708 5,738 6,080 13,116 7,238
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 5,572 5,919 6,547 7,262 7,930
Research and development.................... 4,645 4,543 4,036 4,982 5,367
Research and development cost
reimbursement--DARPA ..................... - - - (600) (866)
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 10,217 10,462 10,583 11,644 12,431
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (4,509) (4,724) (4,503) 1,472 (5,193)
Interest income............................... 333 252 520 971 985
Interest expense.............................. - - - (7) (11)
Other income (expense), net................... 293 (146) (43) 98 498
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............. (3,883) (4,618) (4,026) 2,534 (3,721)
Income tax expense (benefit).................. 76 (74) 1,241 1,046 (1,116)
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle........... (3,959) (4,544) (5,267) 1,488 (2,605)
Cumulative effect of change in accounting
principle - net of tax...................... - - - (1,629) -
---------- ---------- ---------- ---------- ----------
Net loss...................................... $(3,959) $(4,544) $(5,267) $ (141) $(2,605)
========== ========== ========== ========== ==========
Income (loss) per share before cumulative
effect of change in accounting principle:
Basic....................................... $ (0.55) $ (0.63) $ (0.74) $ 0.21 $(0.38)
Diluted..................................... $ (0.55) $ (0.63) $ (0.74) $ 0.21 $(0.38)
Net loss per share:
Basic....................................... $ (0.55) $ (0.63) $ (0.74) $ (0.02) $(0.38)
Diluted..................................... $ (0.55) $ (0.63) $ (0.74) $ (0.02) $(0.38)
Shares used in per share calculation
Basic....................................... 7,248 7,161 7,151 7,074 6,813
Diluted..................................... 7,248 7,161 7,151 7,179 6,813
The following are unaudited pro forma amounts with the change in accounting
principle related to revenue recognition applied retroactively to the fiscal
year prior to 2001:
May 31,
------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Net sales..................................... $15,800 $15,092 $12,568 $31,039 $22,580
Net income (loss)............................. (3,959) (4,544) (5,267) 1,488 (3,837)
Net income (loss) per share:
Basic....................................... $ (0.55) $ (0.63) $ (0.74) $ 0.21 $ (0.56)
Diluted..................................... $ (0.55) $ (0.63) $ (0.74) $ 0.21 $ (0.56)
12
May 31,
------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents..................... $ 4,641 $ 8,362 $ 7,485 $10,391 $ 8,323
Working capital............................... 18,944 21,974 25,952 28,752 30,400
Total assets.................................. 26,812 28,247 33,818 39,592 40,729
Long-term obligations, less current portion... 333 309 259 185 382
Total shareholders' equity.................... 22,204 25,345 29,885 34,807 34,305
Note: In fiscal 2001, the Company changed its accounting method for
recognizing revenue to comply with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"). Additional information required by
this item is discussed in Part II, Item 7, under the heading "Revenue
Recognition."
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and the related notes included elsewhere in this Annual Report on
Form 10-K.
This Management's Discussion and Analysis section and other parts of this
Annual Report on Form 10-K contain forward-looking statements that involve
risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements. 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 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 Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for such 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 such forward-looking statements. The risks, uncertainties and
assumptions referred to above include, but are not limited to, 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; marketing efforts; levels of
competition; the difficulty of keeping expense growth at modest levels while
increasing revenues; operating and capital requirements; and other risks that
are described from time to time in the Company's Securities and Exchange
Commission reports, including but not limited to this annual report on Form
10-K for the fiscal year ended May 31, 2004 and subsequently filed reports.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and
test equipment for the semiconductor industry. Since its inception, the
Company has sold more than 2,000 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide. The Company's principal products currently are the MTX massively
parallel test system, the MAX and ATX burn-in systems, the FOX full wafer
contact burn-in and parallel test system, the DiePak carrier and test
fixtures.
The Company's net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. The Company's selling arrangements may include contractual
customer acceptance provisions and installation of the product occurs after
shipment and transfer of title. As a result, effective June 1, 2000, to
comply with the provisions of SAB 101, the Company recognizes revenue upon
shipment and defers recognition of revenue for any amounts subject to
acceptance until such acceptance occurs. The amount of revenue deferred is
the greater of the fair value of the undelivered element or the contractual
agreed to amounts. Prior to June 1, 2000, revenue for all products except
royalties was recognized upon shipment of product, provided that no
significant obligations remained and collectibility was assured. Provisions
for the estimated future cost of warranty and installation are recorded at
the time the products are shipped.
A substantial portion of the Company's net sales is derived from the sale
of products for overseas markets. Consequently, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
13
Company's products compared to products sold by local companies in such
markets. Although most sales to European customers are denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in
Yen. Since the price is determined at the time a purchase order is accepted,
the Company is exposed to the risks of fluctuations in the Yen-U.S. Dollar
exchange rate during the lengthy period from purchase order to ultimate
payment. The length of time between receipt of order and ultimate payment
typically ranges from six to twelve months. The exchange rate risk is
partially offset to the extent the Company's Japanese subsidiary incurs
expenses payable in Yen. To date, the Company has not invested in
instruments designed to hedge currency risks, but it may do so in the future.
The Company's Japanese subsidiary typically carries debt or other obligations
due to the Company that may be denominated in either Yen or U.S. Dollars.
Since the financial statements of the Japanese subsidiary are based in Yen
and the Company's financial statements are based in U.S. Dollars, the
Japanese subsidiary and the Company recognize income or loss in any period in
which the value of the Yen rises or falls in relation to the U.S. Dollar.
In accordance with SFAS 86, the Company capitalizes its systems software
development costs incurred after a system achieves technological feasibility
and before first commercial shipment. Such costs typically represent a small
portion of total research and development costs. No system software
development costs were capitalized or amortized in fiscal 2004, 2003 and
2002.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related
to customer programs and incentives, product returns, bad debts, inventories,
investments, intangible assets, income taxes, financing operations, warranty
obligations, long-term service contracts, and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
The Company's revenue recognition policy is critical 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 of products or services rendered 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 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 104; 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 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 provides and records the estimated cost of product warranties
at the time 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
14
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 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 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 would be charged to income in
the period such determination is made.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated.
Year Ended May 31,
----------------------------
2004 2003 2002
--------- --------- --------
Net sales ................................ 100.0 % 100.0 % 100.0 %
Cost of sales ............................ 63.9 62.0 51.6
--------- --------- --------
Gross profit ............................. 36.1 38.0 48.4
Operating expenses:
Selling, general and administrative..... 35.3 39.2 52.1
Research and development................ 29.4 30.1 32.1
--------- --------- --------
Total operating expenses.............. 64.7 69.3 84.2
--------- --------- --------
Loss from operations.................. (28.6) (31.3) (35.8)
Interest income........................... 2.1 1.7 4.1
Other income (expense), net............... 1.9 (1.0) (0.3)
--------- --------- --------
Loss before income taxes.............. (24.6) (30.6) (32.0)
Income tax expense (benefit).............. 0.5 (0.5) 9.9
--------- --------- --------
Net loss.................................. (25.1)% (30.1)% (41.9)%
========= ========= ========
15
FISCAL YEAR ENDED MAY 31, 2004 COMPARED TO FISCAL YEAR ENDED MAY 31, 2003
NET SALES. Net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. Net sales increased to $15.8 million in the fiscal year ended May
31, 2004 from $15.1 million in the fiscal year ended May 31, 2003, an
increase of 4.7%. The increase in net sales in fiscal 2004 resulted
primarily from an increase in sales of MTX and related products.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit remained unchanged at $5.7
million in the fiscal year ended May 31, 2004 and in the fiscal year ended
May 31, 2003. Gross profit margin decreased to 36.1% in the fiscal year
ended May 31, 2004 from 38.0% in the fiscal year ended May 31, 2003. The
decrease in gross profit margin was primarily the result of an increase in
net sales related to a turnkey project which has a lower gross profit margin
because it includes a significant pass-through component.
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 $5.6 million in the fiscal year ended May 31, 2004 from
$5.9 million in the fiscal year ended May 31, 2003, a decrease of 5.9%. As a
percentage of net sales, SG&A expenses decreased to 35.3% in the fiscal year
ended May 31, 2004 from 39.2% in the fiscal year ended May 31, 2003. The
decrease in SG&A expenses was primarily due to a decrease in the commissions
accrued to outside sales representatives of approximately $215,000. The
decrease in commissions to outside sales representatives in the fiscal year
ended May 31, 2004 was primarily due to a lower level of commissionable sales
to territories in which sales representatives are utilized.
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 $4.6 million in the fiscal year ended May 31, 2004 from $4.5
million in the fiscal year ended May 31, 2003, an increase of 2.2%. The
increase in R&D expenses was primarily due to an increase in employment
related expenses. As a percentage of net sales, R&D expenses decreased to
29.4% in the fiscal year ended May 31, 2004 from 30.1% in the fiscal year
ended May 31, 2003, reflecting higher net sales.
INTEREST INCOME. Interest income increased to $333,000 in the fiscal
year ended May 31, 2004 from $252,000 in the fiscal year ended May 31, 2003,
an increase of 32.1%. The increase in interest income was primarily related
to interest income received in the first quarter of fiscal 2004 in connection
with income tax refunds relating to prior years.
OTHER INCOME (EXPENSE), NET. Other income, net was $293,000 in the
fiscal year ended May 31, 2004, compared with other expense, net of $146,000
in the fiscal year ended May 31, 2003. The increase in other income
(expense), net was primarily due to the profit generated from the sale of a
portion of the Company's shareholdings in ESA Electronics Pte Ltd., a
Singapore company, in the fiscal year ended May 31, 2004. In the fiscal
year ended May 31, 2003, there was a non-cash impairment charge of $365,000
of an investment to record an other-than-temporary decline in the fair value
of the investment.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $76,000 in the
fiscal year ended May 31, 2004, compared with income tax benefit of $74,000
in the fiscal year ended May 31, 2003. The income tax expense in the fiscal
year ended May 31, 2004 related primarily to the tax expense recorded as a
result of income earned in the Company's German subsidiary. The income tax
benefit in the fiscal year ended May 31, 2003 was primarily related to
foreign 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 net deferred tax assets in the
fourth quarter of fiscal 2002 for both its U.S. operations and its Japanese
subsidiary. 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.
FISCAL YEAR ENDED MAY 31, 2003 COMPARED TO FISCAL YEAR ENDED MAY 31, 2002
NET SALES. Net sales increased to $15.1 million in the fiscal year ended
May 31, 2003 from $12.6 million in the fiscal year ended May 31, 2002, an
increase of 20.1%. The increase in net sales in fiscal 2003 resulted
primarily from an increase in sales of dynamic burn-in products.
16
GROSS PROFIT. Gross profit decreased to $5.7 million in the fiscal year
ended May 31, 2003 from $6.1 million in the fiscal year ended May 31, 2002, a
decrease of 5.6%. Gross profit margin decreased to 38.0% in the fiscal year
ended May 31, 2003 from 48.4% in the fiscal year ended May 31, 2002. The
decrease in gross profit margin was primarily the result of a change in
product mix, particularly a decrease in upgrades and an increase in systems
sold, resulting in higher material costs as a percentage of net sales, and an
increase in provision for inventory reserves.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $5.9
million in the fiscal year ended May 31, 2003 from $6.5 million in the fiscal
year ended May 31, 2002, a decrease of 9.6%. The decrease in SG&A expenses
was primarily due to a decrease in employment related expenses as a result of
headcount reduction. As a percentage of net sales, SG&A expenses decreased
to 39.2% in the fiscal year ended May 31, 2003 from 52.1% in the fiscal year
ended May 31, 2002, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.5 million in the
fiscal year ended May 31, 2003 from $4.0 million in the fiscal year ended May
31, 2002, an increase of 12.6%. The increase in R&D expenses was primarily
due to an increase in project material expenses. As a percentage of net
sales, R&D expenses decreased to 30.1% in the fiscal year ended May 31, 2003
from 32.1% in the fiscal year ended May 31, 2002, reflecting higher net
sales.
INTEREST INCOME. Interest income decreased to $252,000 in the fiscal
year ended May 31, 2003 from $520,000 in the fiscal year ended May 31, 2002,
a decrease of 51.5%. 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 $146,000 in
the fiscal year ended May 31, 2003, from $43,000 in the fiscal year ended May
31, 2002. The increase in other expense, net was primarily due to a non-cash
impairment charge of $365,000 of an investment to record an other-than-
temporary decline in the fair value of the investment, partially offset by
increases in foreign currency exchange gains of approximately $93,000 and
equity income recorded related to the Company's then 25% ownership in ESA
Electronics Pte Ltd. of approximately $39,000.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $74,000 in the
fiscal year ended May 31, 2003, compared with income tax expense of $1.2
million in the fiscal year ended May 31, 2002. The income tax benefit in the
fiscal year ended May 31, 2003 was primarily related to foreign operations.
The income tax expense in the fiscal year ended May 31, 2002 was primarily
due to a non-cash charge of $2.5 million recorded in the fourth quarter of
fiscal 2002 associated with recording a full valuation allowance against the
Company's deferred tax assets. SFAS 109 requires the Company to evaluate the
uncertainty of utilizing the deferred tax assets. The Company's effective
income tax rate did not approximate the statutory tax rates of the
jurisdictions in which the Company operates primarily because no tax benefit
is being recorded for losses in the Company's U.S. operation and its Japanese
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been generated from the
Company's August 1997 initial public offering, which resulted in net proceeds
to the Company of approximately $26.8 million. As of May 31, 2004, the
Company had $10.5 million in cash and short-term investments.
Net cash used in operating activities was approximately $800,000 for the
fiscal year ended May 31, 2004 and $3.8 million for the fiscal year ended May
31, 2003. For the fiscal year ended May 31, 2004, net cash used in operating
activities was primarily due to the net loss of $4.0 million and an increase
in accounts receivable of $1.3 million, partially offset by decreases in
inventories of $1.3 million and other current assets related to the receipt
of income tax refunds of $1.2 million. For the fiscal year ended May 31,
2003, net cash used in operating activities was due primarily to the net loss
of $4.5 million, partially offset by a decrease in other current assets of
$739,000 due primarily from income taxes refunded.
Net cash used in investing activities was approximately $3.9 million for the
fiscal year ended May 31, 2004 and net cash provided by investing activities
was approximately $4.6 million for the fiscal year ended May 31, 2003. Net
cash used in investing activities for the fiscal year ended May 31, 2004 was
primarily due to the purchase of short-term investments of $3.5 million. Net
cash provided by investing activities during the fiscal year ended May 31,
2003 was primarily due to the sale of short-term investments of $5.6 million,
partially offset by the purchase of long-term investments of $607,000.
Financing activities provided cash of approximately $960,000 in the
fiscal year ended May 31, 2004 and used cash of approximately $23,000 in the
fiscal year ended May 31, 2003. Net cash provided by financing activities
for the fiscal year ended May 31, 2004 was primarily due to proceeds from
issuance of common stock and exercise of stock options. Net
17
cash used in financing activities during the fiscal year ended May 31, 2003
was primarily due to the Company's repurchase of 77,700 of its outstanding
common shares at an average price of $2.34, partially offset by proceeds from
issuance of common stock and exercise of stock options.
As of May 31, 2004, the Company had working capital of $18.9 million.
Working capital consists of cash and cash equivalents, short-term investments,
accounts receivable, inventory and other current assets, less current
liabilities.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. As of May 31, 2004, the Company had repurchased 523,700
shares at an average price of $3.95. Shares repurchased by the Company are
cancelled.
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
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 cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through calendar year 2005. After calendar
year 2005, 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 FINANCING
The Company has not entered into any off-balance sheet financing
arrangements and has not established any special purpose entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
Financial Accounting Standards Board Interpretation No. 45 ("FIN 45"),
"Guarantor's Requirements for Guarantees, including Indirect Indebtedness of
Others" requires the Company to disclose obligations under certain
guarantees. The following table provides a summary of such arrangements, or
contractual obligations.
Payments Due by Period (in thousands)
- ---------------------------------------------------------
Less than 1-3 3-5 5
Total 1 year years years years
--------- ----------- ----------- ----------- -----------
Operating Leases............. $4,563 $ 823 $1,570 $1,666 $504
Purchases(1)................. 346 346 -- -- --
--------- ----------- ----------- ----------- -----------
Total........................ $4,909 $1,169 $1,570 $1,666 $504
(1) Shown above are the Company's binding purchase obligations. The large
majority of the Company's purchase orders are cancelable by either party,
which if canceled may result in a negotiation with the vendor to determine if
there shall be any restocking or cancellation fees payable to the vendor.
In the normal course of business to facilitate sales of its products, the
Company indemnifies other parties, including customers, with respect to
certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These agreements may
limit the time period within which an indemnification claim can be made and
the amount of the claim.
18
In addition, the Company has entered into indemnification agreements with its
officers and directors, and the Company's bylaws contain similar
indemnification obligations to the Company's agents.
It is not possible to determine the maximum potential amount under these
indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in
each particular agreement. To date, payments made by the Company under these
agreements have not had a material impact on the Company's operating results
or financial position.
RELATED PARTY TRANSACTIONS
The Company has entered into transactions with ESA Electronics Pte Ltd.
("ESA") in which the Company owned 12.5% of interest at May 31, 2004. ESA
purchased goods from the Company of approximately $105,000, $163,000 and
$711,000 during fiscal 2004, 2003 and 2002, respectively. In addition, the
Company purchased goods from ESA of approximately $1.0 million in fiscal 2004
and none in fiscal 2003 and 2002. At May 31, 2004, the Company had amounts
payable to ESA of approximately $935,000 and none at May 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
are required to be applied to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21
did not have a material impact on the Company's financial position or results
of operations.
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46(R) ("FIN 46(R)"), a revision of FASB
Interpretation No. 46 ("FIN 46"). FIN 46(R) requires that if an entity is
the primary beneficiary of a variable interest entity, the assets,
liabilities, and results of operations of the variable interest entity should
be included in the consolidated financial statements of the entity. FIN
46(R) delays the implementation date for certain interests created or
acquired prior to January 31, 2003, until the first interim or annual period
ending after March 15, 2004. The adoption of FIN 46 (R) did not have any
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 was required
to 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.
In March 2004, the FASB approved EITF Issue 03-6 "Participating
Securities and the Two-Class Method under SFAS 128". EITF Issue 03-6
supersedes the guidance in Topic No. D-95, "Effect of Participating
Convertible Securities on the Computation of Basic Earnings per Share", and
requires the use of the two-class method of participating securities. The
two-class method is an earnings allocation formula that determines earnings
per share for each class of common stock and participating security according
to dividends declared (or accumulated) and participation rights in
undistributed earnings. In addition, EITF Issue 03-6 addresses other forms
of participating securities, including options, warrants, forwards and other
contracts to issue an entity's common stock, with the exception of stock-
based compensation (unvested options and restricted stock) subject to the
provisions of APB No. 25 and SFAS No. 123. EITF Issue 03-6 is effective for
reporting periods beginning after March 31, 2004 and should be applied by
restating previously reported earnings per share. As of May 31, 2004, we do
not have any securities issued and outstanding subject to this pronouncement.
Therefore, the adoption of EITF Issue 03-6 did not have any impact on the
disclosure of earnings per share.
19
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
You should carefully consider the risks described below before making an
investment decision. The Company believes that the risks and uncertainties
described below are the principal material risks facing Aehr Test as of the
date of this Form 10-K. In the future, the Company may become subject to
additional risks that are not currently known to the Company. If any of the
following risks actually occur, the Company's business, financial condition
and operating results could be seriously harmed. As a result, the trading
price of the Company's 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. During fiscal 2004, 2003 and 2002, quarterly
net sales have been as low as $2.8 million and as high as $5.9 million, and
gross margins for quarterly sales have fluctuated between 32.9% and 50.4%.
The Company's future operating results will depend upon a variety of factors,
including sales volume, the timing of significant orders, the mix of products
sold, changes in pricing by the Company, its competitors, customers or
suppliers, the length of sales cycles for the Company's products, timing of
new product announcements and releases by the Company and its competitors,
market acceptance of new products and enhanced versions of the Company's
products, capital spending patterns by customers, manufacturing
inefficiencies associated with new product introductions by the Company, the
Company's ability to produce systems and products in volume and meet customer
requirements, product returns and customer acceptance of product shipments,
volatility in the Company's targeted markets, political and economic
instability, natural disasters, regulatory changes, possible disruptions
caused by expanding existing facilities or moving into new facilities,
expenses associated with acquisitions and alliances, and various competitive
factors, including price-based competition, competition from vendors
employing other technologies, and the amount of products sold under volume
purchase arrangements, which tend to have lower selling prices. Accordingly,
past performance may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in purchase price from
approximately $200,000 to over $1 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. All customer purchase orders are subject to cancellation or
rescheduling by the customer with limited penalties, and, therefore, backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period. From time to time, cancellations and rescheduling of
customer orders have occurred, and delays by the Company's suppliers in
providing components or subassemblies to the Company have caused delays in
the Company's shipments of its own products. There can be no assurance that
the Company will not be materially adversely affected by future cancellations
and rescheduling. A substantial portion of net sales typically are realized
near the end of each quarter. A delay or reduction in shipments near the end
of a particular quarter, due, for example, to unanticipated shipment
rescheduling, cancellations or deferrals by customers, customer credit
issues, unexpected manufacturing difficulties experienced by the Company, or
delays in deliveries by suppliers, could cause net sales in a particular
quarter to fall significantly below the Company's expectations. As the
Company incurs expenses in anticipation of future sales levels, the Company's
results of operations may be adversely affected if such sales levels are not
achieved.
RECENT OPERATING LOSSES. The Company incurred loss from operations of
$4.5 million, $4.7 million and $4.5 million in fiscal 2004, 2003 and 2002,
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. Although the Company reported operating income in fiscal 2001 as a
whole, beginning in the second half of fiscal 2001, the Company experienced
the result of a sharp and severe industry downturn and recorded operating
losses in fiscal 2002, 2003 and 2004. 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 its FOX wafer-level burn-in and test
system. The FOX system is newly designed to simultaneously burn-in and
functionally test all of the die on a wafer. 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
20
of the FOX system to achieve 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.
Market acceptance of the FOX system is subject to a number of risks. The
Company must complete development of the FOX system and the manufacturing
processes used to build it. Before a customer will incorporate the FOX
system into a production line, lengthy qualification and correlation tests
must be performed. The Company anticipates that potential customers may be
reluctant to change their procedures in order to transfer burn-in and test
functions to the FOX system. Initial purchases are expected to be limited to
systems used for these qualifications and for engineering studies. Market
acceptance of the FOX system also may be affected by a reluctance of IC
manufacturers to rely on relatively small suppliers such as the Company. As
is common with new complex products incorporating leading-edge technologies,
the Company may encounter reliability, design and manufacturing issues as it
begins volume production and initial installations of FOX systems at customer
sites. While the Company places a high priority on addressing these issues
as they arise, there can be no assurance that they can be resolved to the
customer's satisfaction or that the resolution of such problems will not
cause the Company to incur significant development costs or warranty expenses
or to lose significant sales opportunities.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal 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 is designed to perform both burn-in and many of the final
test functions currently performed by high-cost memory testers. The
Company's strategy depends, in part, upon its ability to persuade potential
customers that the MTX system can successfully perform a significant portion
of such final test functions and that transferring such tests to MTX systems
will reduce their overall capital and test costs. There can be no assurance
that the Company's strategy will be successful. The failure of the MTX
system to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and operating results.
Market acceptance of the MTX system is subject to a number of risks.
Through the end of fiscal 2004, several companies purchased evaluation units
of the MTX system, but only four customers have purchased production
quantities. There are no long-term volume purchase commitments with any of
these customers. There can be no assurance that these customers will
continue to purchase MTX systems for their production facilities. Since most
potential customers have successfully relied on memory testers for many years
and their personnel understand the use and maintenance of such systems, the
Company anticipates that they may be reluctant to change their procedures in
order to transfer test functions to the MTX system. Before a customer will
transfer test functions to the MTX, the test programs must be translated for
use with the MTX system and lengthy correlation tests must be performed.
Correlation testing may take up to six months or more. Furthermore, MTX
system sales are expected to be primarily limited to new facilities and to
existing facilities being upgraded to accommodate new product generations,
such as the transition to new memory technologies, including the Double Data
Rate DRAMs, DDR II DRAMs and newer generation flash memories. Construction
of new facilities and upgrades of existing facilities have in some cases been
delayed or canceled during periodic semiconductor industry downturns. Other
companies have purchased MTX systems which are being used only in quality
assurance and engineering applications. Market acceptance of the MTX system
may also be affected by a reluctance of IC manufacturers to rely on
relatively small suppliers such as the Company.
The Company's future sales and operating results are also partially
dependent on sales of performance test boards for use with the MTX system.
Sales of PTBs by the Company and its licensees will depend upon the number of
MTX systems operated by customers.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers accounting for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five
largest customers accounted for approximately 70.5%, 73.0% and 61.7% of its
net sales in fiscal 2004, 2003 and 2002, respectively. During fiscal 2004,
Texas Instruments Incorporated and FASL LLC. accounted for 33.8% and 17.8% of
the Company's net sales, respectively. During fiscal 2003, Texas Instruments
Incorporated and First International Computer, Inc. accounted for 45.3% and
10.7% of the Company's net sales, respectively. During fiscal 2002, Texas
Instruments Incorporated, 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. No other customers represented more than 10% of the Company's
net sales for any of such periods. The Company expects that sales of its
products to a limited number of customers will continue to account for a high
percentage of net sales for the foreseeable future. In addition, sales to
particular customers may fluctuate significantly from quarter to quarter.
The loss of or reduction or delay in orders from a significant customer, or a
delay in collecting or failure to collect accounts receivable from a
significant customer could adversely affect the Company's business, financial
condition and operating results.
21
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 management believes that the market for burn-in systems is
mature and does not expect to have significant long-term growth. In general,
process control improvements in the semiconductor industry have tended to
reduce burn-in times. In addition, as a given IC product generation matures
and yields increase, the required burn-in time may be reduced or eliminated.
IC manufacturers, which historically have been the Company's primary customer
base, increasingly outsource test and burn-in to independent test labs which
often build their own systems. There can be no assurance that the market for
burn-in systems will grow, and sales of the Company's burn-in products could
decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involve a significant commitment of capital. In
addition, the approval process for MTX and FOX system and DiePak carrier
sales may require lengthy qualification and correlation testing. In view of
the significant investment or strategic issues that may be involved in a
decision to purchase MTX and FOX systems or DiePak carriers, the Company may
experience delays following initial qualification of the Company's systems as
a result of delays in a customer's approval process. For these reasons, the
Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a
sale. Lengthy sales cycles subject the Company to a number of significant
risks, including inventory obsolescence and fluctuations in operating
results, over which the Company has little or no control. The loss of
individual orders due to the lengthy sales and evaluation cycle, or delays in
the sale of even a limited number of systems could have a material adverse
effect on the Company's business, operating results and financial condition
and, in particular, could contribute to significant fluctuations in operating
results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 84.5%,
73.0% and 62.7% of the Company's net sales for fiscal 2004, 2003 and 2002,
respectively, were attributable to sales to customers for delivery outside of
the United States. The Company operates sales, service and limited
manufacturing organizations in Japan and Germany and a sales and support
organization in Taiwan. The Company expects that sales of products for
delivery outside of the United States will continue to represent a
substantial portion of its future revenues. The future performance of the
Company will depend, in significant part, upon its ability to continue to
compete in foreign markets which in turn will depend, in part, upon a
continuation of current trade relations between the United States and foreign
countries in which semiconductor manufacturers or assemblers have operations.
A change toward more protectionist trade legislation in either the United
States or such foreign countries, such as a change in the current tariff
structures, export compliance or other trade policies, could adversely affect
the Company's ability to sell its products in foreign markets. In addition,
the Company is subject to other risks associated with doing business
internationally, including longer receivable collection periods and greater
difficulty in accounts receivable collection, the burden of complying with a
variety of foreign laws, difficulty in staffing and managing global
operations, risks of civil disturbance or other events which may limit or
disrupt markets, international exchange restrictions, changing political
conditions and monetary policies of foreign governments.
A substantial portion of the Company's sales has been in Asia. Turmoil
in the Asian financial markets has resulted, and may result in the future, in
dramatic currency devaluations, stock market declines, restriction of
available credit and general financial weakness. In addition, DRAM prices in
Asia have on occasion declined dramatically, and will likely do so again in
the future. These developments may affect the Company in several ways. The
Company believes that many international semiconductor manufacturers limited
their capital spending (including the purchase of MTXs) in fiscal years 2003
and 2002, and that the uncertainty of the DRAM market may cause some
manufacturers in the future to again delay capital spending plans. The
economic conditions in Asia may also affect the ability of the Company's
customers to meet their payment obligations, resulting in cancellations or
deferrals of existing orders and the limitation of additional orders. In
addition, Asian governments have subsidized some portion of fabrication
construction. Financial turmoil may reduce these governments' willingness to
continue such subsidies. Such developments could have a material adverse
affect on the Company's business, financial condition and results of
operations.
Because a substantial portion of the Company's net sales is from sales of
products for delivery outside the United States, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Approximately 78.7%, 14.2% and 7.1% of the Company's net sales for
fiscal 2004 were denominated in U.S. Dollars, Japanese Yen and Euros.
Although a large percentage of sales to European customers is denominated in
U.S. Dollars, substantially all sales to Japanese customers are denominated
in Yen. Since the price is determined at the time a purchase order is
accepted, the Company is exposed to the risks of fluctuations in the Yen-U.S.
Dollar exchange rate during the lengthy period from the date a purchase order
is received until payment is made. This exchange rate risk is partially
offset to the extent the Company's Japanese subsidiary incurs expenses
payable in Yen. To date, the Company has not invested in instruments
designed to hedge currency risks. In addition, the Company's Japanese
subsidiary typically carries debt or other obligations due to the
22
Company that may be denominated in either Yen or U.S. Dollars. Since the
financial statements of the Japanese subsidiary are based in Yen and the
financial statements of the Company are based in U.S. Dollars, the Japanese
subsidiary and the Company recognize currency exchange gain or loss in any
period in which the value of the Yen rises or falls in relation to the U.S.
Dollar. The Company recorded currency exchange gains of $141,000 and $70,000
in fiscal 2004 and 2003, respectively. The Company experienced a currency
exchange loss of $23,000 in fiscal 2002.
A substantial portion of the world's manufacturers of memory devices are
in Korea, Japan, Taiwan and China and growth in the Company's net sales
depends in large part upon its ability to penetrate these markets. Both the
Korean and Japanese markets are difficult for foreign companies to penetrate.
The Company has served the Japanese market through its Japanese subsidiary,
which has experienced limited success and has incurred operating losses in
recent years. Sales into Korea have not been significant in recent years.
Taiwan and China represent an increasingly important portion of the memory
manufacturer market. The Company established a support organization in
Taiwan in fiscal 2001 and subsequently added a sales function. The lack of
local manufacturing may impede the Company's efforts to develop the Japanese,
Korean, Taiwanese and Chinese markets. There can be no assurance that the
Company's efforts in Japan, Korea, Taiwan or China will be successful or that
the Company will be able to achieve and sustain significant sales to, or be
able to successfully compete in, these markets.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a
timely and cost-effective basis. The Company's success in developing new and
enhanced products depends upon a variety of factors, including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. Because new
product development commitments must be made well in advance of sales, new
product decisions must anticipate both future demand and the technology that
will be available to supply that demand. Furthermore, introductions of new
and complex products typically involve a period in which design, engineering
and reliability issues are identified and addressed by the Company and its
suppliers. This process in the past required and in the future is likely to
require the Company to incur unreimbursed engineering expenses, and from time
to time to experience warranty claims or product returns. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products that satisfy market demand. Any
such failure would materially and adversely affect the Company's business,
financial condition and results of operations.
Because of the complexity of the Company's products, significant delays
can occur between a product's introduction and the commencement of volume
production of such product. The Company has experienced, from time to time,
significant delays 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 new 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.
As is common with new complex and software-intensive products, the
Company has encountered reliability, design and manufacturing issues as it
began volume production and initial installations of certain products at
customer sites. The Company places a high priority on addressing these
issues as they arise. Certain of these issues in the past have been related
to components and subsystems supplied to the Company by third parties which
have in some cases limited the ability of the Company to address such issues
promptly. In the early stages of product development, there can be no
assurance that reliability, design and manufacturing issues will not be
discovered or, that if such issues arise, they can be resolved to the
customers' satisfaction or that the resolution of such problems will not
cause the Company to incur significant development costs or warranty expenses
or to lose significant sales opportunities.
Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for the Company's products. For example,
the introduction of viable wafer-level burn-in and test systems, improvements
in BIST technology, and improvements in conventional test systems, such as
reduced cost or increased throughput, may significantly reduce or eliminate
the market for one or more of the Company's products. If the Company is not
able to improve its products or develop new products or technologies quickly
enough to maintain a competitive position in its markets, the Company may not
be able to grow its business.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors to continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
23
continuing consolidation in the semiconductor equipment industry, and
potential future consolidation, could adversely affect the ability of smaller
companies, such as the Company, to compete with larger, integrated
competitors. New product introductions by the Company's competitors or by
new market entrants could cause a decline in sales or loss of market
acceptance of the Company's existing products. Increased competitive
pressure could also lead to intensified price-based competition, resulting in
lower prices which could adversely affect the Company's business, financial
condition and operating results. The Company believes that to remain
competitive it must invest significant financial resources in new product
development and expand its customer service and support worldwide. There can
be no assurance that the Company will be able to compete successfully in the
future.
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, delivery lead-time, flexibility,
automation, cost of ownership, reliability, throughput and customer service.
In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have
greater financial, engineering, manufacturing and marketing resources than
the Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the MTX system
faces intense competition from burn-in system suppliers and traditional
memory tester suppliers. The market for burn-in systems is highly
fragmented, with many domestic and international suppliers. Some users, such
as independent test labs, build their own burn-in systems, and some other
users, particularly large Japanese IC manufacturers, acquire burn-in systems
from captive or affiliated suppliers. Competing suppliers of burn-in and
functional test systems include Japan Engineering Company, Reliability
Incorporated and Dong-Il Corporation. 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 IC.
The Company's FOX full wafer contact system is expected to face
competition from larger systems manufacturers that have more advanced
technological know-how and a broader range of manufacturing resources.
Competing suppliers of full wafer contact system include Tokyo Electron
Limited, Matsushita Electric Industrial Co., Ltd. and Delta V Instruments,
Incorporated.
The Company's DiePak products face significant competition. The Company
believes that several companies have developed or are developing other
products which are intended to enable burn-in and test of bare die. As the
bare die market develops, the Company expects that other competitors will
emerge. The DiePak products also face severe competition from other
alternative test solutions. The Company expects that the primary competitive
factors in this market will be cost, performance, reliability and assured
supply. Competing suppliers of DiePak products include Yamaichi Electronics
Co., Ltd.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many small
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide only
certain high performance BIBs, and the Company generally does not compete to
supply low cost, low performance BIBs. The Company has a partnership with
Pycon, Inc. whereby Pycon, Inc. designs, manufactures and sells the BIBs and
the Company provides Pycon, Inc. with system know-how. Both companies
jointly market and sell the BIBs and PTBs. There can be no assurance that
the partnership will be successful. The Company has granted royalty-bearing
licenses to several companies to make PTBs for use with the Company's MTX
systems, in order to assure customers a second source of supply, and the
Company may grant additional licenses as well. Sales of PTBs by licensees
result in royalties to the Company but reduce the Company's own sales of
PTBs.
The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products with
improved price and performance characteristics. New product introductions by
the Company's competitors or by new market entrants could cause a decline in
sales or loss of market acceptance of the Company's products. Increased
competitive pressure could also lead to intensified price-based competition,
resulting in lower prices which could adversely affect the Company's
business, financial condition and operating results. The Company believes
that to remain competitive it must invest significant financial resources in
new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
24
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The Company's operating results depend
primarily upon the capital expenditures of semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide, which in turn depend on the current and anticipated market demand
for ICs and products utilizing ICs. 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, which have had severe negative
effects on the semiconductor industry's demand for semiconductor capital
equipment, including test and burn-in systems manufactured and marketed by
the Company. These downturns and slowdowns have adversely affected the
Company's operating results in the past. In addition, the purchasing
patterns of the Company's customers are also highly cyclical because most
customers purchase the Company's products for use in new production
facilities or for upgrading existing test lines for the introduction of next
generation products. Construction of new facilities and upgrades of existing
facilities have in some cases been delayed or canceled during the most recent
semiconductor industry downturn. A large portion of the Company's net sales
are attributable to a few customers and therefore a reduction in purchases by
one or more customers could materially adversely affect the Company's
financial results. There can be no assurance that the semiconductor industry
will grow in the future at the same rates as it has grown historically. Any
downturn or slowdown in the semiconductor industry would have a material
adverse effect on the Company's business, financial condition and operating
results. In addition, the need to maintain investment in research and
development and to maintain customer service and support will limit the
Company's ability to reduce its expenses in response to any such downturn or
slowdown period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing
companies that are the customers of semiconductor equipment companies
frequently revise, postpone and cancel capital facility expansion plans. In
such cases, semiconductor equipment companies may experience a significant
rate of cancellations and reschedulings of purchase orders. There can be no
assurance that the Company will not be materially adversely affected by
future cancellations and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX, ATX and FOX
systems and DiePak carriers contain several components, including
environmental chambers, power supplies, wafer and die contactors, signal
distribution substrates and certain ICs, which are currently supplied by only
one or a limited number of suppliers. The Company's reliance on
subcontractors and single source suppliers involves a number of significant
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. In the event that any
significant subcontractor or single source supplier was to become unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, the Company would have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could
be lengthy, and no assurance can be given that any additional sources would
be available to the Company on a timely basis. Any delay, interruption or
termination of a supplier relationship could have a material adverse effect
on the Company's business, financial condition and operating results.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and may continue to be, extremely volatile. The
Company believes that factors such as announcements of developments related
to the Company's business, fluctuations in the Company's operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide
economy, announcement of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights
and changes in the Company's relationships with customers and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for
small capitalization and high technology stocks 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.
25
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 Company does not maintain
key person life insurance for its benefit on any of its personnel, and none
of the Company's employees is subject to a non-competition agreement with the
Company. The loss of the services of any of its executive officers or a
group of key employees could have a material adverse effect on the Company's
business, financial condition and operating results. The Company's future
success will depend in significant part upon its ability to attract and
retain highly skilled technical, management, sales and marketing personnel.
There is a limited number of personnel with the requisite skills to serve in
these positions, and it has become increasingly difficult for the Company to
hire such personnel. Competition for such personnel in the semiconductor
equipment industry is intense, and there can be no assurance that the Company
will be successful in attracting or retaining such personnel. The Company's
inability to attract and retain the executive management and other key
personnel it requires 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
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.
Litigation may be necessary to enforce or determine the validity and
scope of the Company's proprietary rights, and there can be no assurance that
the Company's intellectual property rights, if challenged, will be upheld as
valid. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and operating results, regardless of the outcome of the
litigation. In addition, there can be no assurance that any of the patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide competitive advantages to the
Company. The Company will be able to protect its proprietary rights from
unauthorized use by third parties only to the extent that the Company's
proprietary technologies are covered by valid and enforceable patents or are
effectively maintained trade secrets.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggestions that the Company may
be interested in acquiring a license from such third parties. There can be
no assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
26
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company had no holdings of derivative financial or
commodity instruments at May 31, 2004.
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 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 $310,000.
27
Item 8. Financial Statements and Supplementary Data
INDEX
Consolidated Financial Statements of Aehr Test Systems
Report of Independent Registered Public Accounting Firm ............ 29
Consolidated Balance Sheets at May 31, 2004 and 2003................ 30
Consolidated Statements of Operations for the years
ended May 31, 2004, 2003 and 2002................................. 31
Consolidated Statements of Shareholders' Equity and
Accumulated Other Comprehensive Income for the years
ended May 31, 2004, 2003 and 2002................................. 32
Consolidated Statements of Cash Flows for the years ended
May 31, 2004, 2003 and 2002....................................... 33
Notes to Consolidated Financial Statements.......................... 34
Selected Quarterly Consolidated Financial Data (Unaudited).......... 46
Financial Statement Schedule
Schedule for the years ended May 31, 2004, 2003, 2002
Schedule II Valuation and Qualifying Accounts........................ 47
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or in the Notes thereto.
28
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Aehr Test Systems:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, consolidated statements of
shareholder's equity and accumulated other comprehensive income, and
consolidated statements of cash flows present fairly, in all material
respects, the financial position of Aehr Test Systems and its subsidiaries at
May 31, 2004 and May 31, 2003, and the results of their operations and their
cash flows for each of the three years in the period ended May 31, 2004 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15 (a) (2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 30, 2004
29
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
May 31,
-------------------------
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 4,641 $ 8,362
Short-term investments ............................. 5,892 2,429
Accounts receivable, net of allowance for doubtful
accounts of $92 and $87 at May 31, 2004 and
2003, respectively ............................... 4,205 2,889
Inventories ........................................ 7,989 9,247
Refundable income taxes............................. -- 1,248
Prepaid expenses and other ......................... 492 392
---------- ----------
Total current assets ........................... 23,219 24,567
Property and equipment, net .......................... 1,289 1,515
Long-term investments ................................ 1,292 607
Other assets, net .................................... 1,012 1,558
---------- ----------
Total assets ................................... $26,812 $28,247
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 1,838 $ 748
Accrued expenses ................................... 2,100 1,739
Deferred revenue ................................... 337 106
---------- ----------
Total current liabilities ...................... 4,275 2,593
Deferred revenue ..................................... 26 30
Accrued lease commitment ............................. 307 279
---------- ----------
Total liabilities .............................. 4,608 2,902
---------- ----------
Commitments and contingencies (Note 7).
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none ..................... -- --
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 7,389 shares and 7,157
shares at May 31, 2004 and 2003, respectively .. 74 72
Additional paid-in capital ......................... 37,322 36,364
Accumulated other comprehensive income ........... 1,379 1,521
Accumulated deficit ................................ (16,571) (12,612)
---------- ----------
Total shareholders' equity ..................... 22,204 25,345
---------- ----------
Total liabilities and shareholders' equity ..... $26,812 $28,247
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
30
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended May 31,
--------------------------------
2004 2003 2002
---------- ---------- ----------
Net sales..................................... $15,800 $15,092 $12,568
Cost of sales................................. 10,092 9,354 6,488
---------- ---------- ----------
Gross profit.................................. 5,708 5,738 6,080
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 5,572 5,919 6,547
Research and development.................... 4,645 4,543 4,036
---------- ---------- ----------
Total operating expenses.................. 10,217 10,462 10,583
---------- ---------- ----------
Loss from operations.......................... (4,509) (4,724) (4,503)
Interest income............................... 333 252 520
Other income (expense), net................... 293 (146) (43)
---------- ---------- ----------
Loss before income taxes...................... (3,883) (4,618) (4,026)
Income tax expense (benefit).................. 76 (74) 1,241
---------- ---------- ----------
Net loss...................................... (3,959) (4,544) (5,267)
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
income (expense).......................... (126) 27 24
Unrealized holding losses arising
during the year........................... (16) -- (17)
---------- ---------- ----------
Comprehensive loss............................ $(4,101) $(4,517) $(5,260)
========== ========== ==========
Net loss per share
Basic....................................... $ (0.55) $ (0.63) $ (0.74)
Diluted..................................... $ (0.55) $ (0.63) $ (0.74)
Shares used in per share calculation
Basic....................................... 7,248 7,161 7,151
Diluted..................................... 7,248 7,161 7,151
The accompanying notes are an integral part of these consolidated
financial statements.
31
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(IN THOUSANDS)
Accumulated Other
Comprehensive Income
Notes ---------------------
Common Stock Additional Receivable Unrealized Cumulative
----------------- Paid-in From Investment Translation Accumulated
Shares Amount Capital Shareholders Gain(Loss) Adjustment Deficit Total
------- ------- ------- ---------- -------- --------- ---------- -------
Balances, May 31, 2001 7,116 71 36,134 (84) 19 1,468 (2,801) 34,807
Issuance of common stock
under employee plans...... 104 1 394 -- -- -- -- 395
Repurchase of common stock.. (36) -- (141) -- -- -- -- (141)
Note receivable from
shareholders.............. -- -- -- 84 -- -- -- 84
Net loss.................... -- -- -- -- -- -- (5,267) (5,267)
Net unrealized loss on
investments............... -- -- -- -- (17) -- -- (17)
Foreign currency
translation adjustment.... -- -- -- -- -- 24 -- 24
-------
Comprehensive loss.......... (5,260)
------- ------- ------- ------- ------- ------- -------- -------
Balances, May 31, 2002 7,184 72 36,387 -- 2 1,492 (8,068) 29,885
Issuance of common stock
under employee plans...... 51 -- 159 -- -- -- -- 159
Repurchase of common stock.. (78) -- (182) -- -- -- -- (182)
Net loss.................... -- -- -- -- -- -- (4,544) (4,544)
Foreign currency
translation adjustment.... -- -- -- -- -- 27 -- 27
-------
Comprehensive loss.......... (4,517)
------- ------- ------- ------- ------- ------- -------- -------
Balances, May 31, 2003 7,157 $72 $36,364 $ -- $ 2 $1,519 $(12,612) $25,345
Issuance of common stock
under employee plans...... 232 2 958 -- -- -- -- 960
Net loss.................... -- -- -- -- -- -- (3,959) (3,959)
Net unrealized loss on
investments............... -- -- -- -- (16) -- -- (16)
Foreign currency
translation adjustment.... -- -- -- -- -- (126) -- (126)
-------
Comprehensive loss.......... (4,101)
------- ------- ------- ------- ------- ------- -------- -------
Balances, May 31, 2004 7,389 $74 $37,322 $ -- $(14) $1,393 $(16,571) $22,204
======= ======= ======= ======= ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
32
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net loss...................................... $(3,959) $(4,544) $(5,267)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on impairment of an investment......... 134 365 --
Provision for doubtful accounts............. 5 15 (64)
Loss on disposition of
property and equipment.................... 21 -- 79
Depreciation and amortization............... 384 582 662
Deferred income taxes....................... -- -- 1,613
Changes in operating assets and liabilities:
Accounts receivable....................... (1,274) 268 2,687
Inventories............................... 1,278 (64) 1,497
Accounts payable.......................... 852 (246) (289)
Accrued expenses and deferred revenue..... 582 (985) (559)
Accrued lease commitment.................. 28 55 78
Other current assets...................... 1,149 739 (663)
--------- --------- ---------
Net cash used in
operating activities.................. (800) (3,815) (226)
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-
term investments.......................... (3,463) 5,574 (4,239)
(Increase) decrease in long-
term investments.......................... (701) (607) 2,250
Additions to property and equipment......... (159) (261) (954)
(Increase) decrease in other assets......... 416 (87) (19)
--------- --------- ---------
Net cash (used in) provided by
investing activities.................. (3,907) 4,619 (2,962)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 960 159 395
Repayment of notes from shareholders........ -- -- 84
Repurchase of common stock.................. -- (182) (141)
--------- --------- ---------
Net cash provided by (used in)
financing activities.................. 960 (23) 338
--------- --------- ---------
Effect of exchange rates on cash................ 26 96 (56)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents...................... (3,721) 877 (2,906)
Cash and cash equivalents, beginning of year.... 8,362 7,485 10,391
--------- --------- ---------
Cash and cash equivalents, end of year.......... $ 4,641 $ 8,362 $ 7,485
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes ............................. $17 $40 $43
The accompanying notes are an integral part of these consolidated
financial statements.
33
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems ("Company") was incorporated in California in June 1977
and primarily designs, engineers and manufactures test and burn-in equipment
used in the semiconductor industry. The Company's principal products are the
MTX massively parallel test system, the MAX and ATX burn-in systems, the FOX
full wafer contact system, test fixtures and the DiePak carrier.
CONSOLIDATION:
The financial statements include the accounts of the Company and both its
wholly-owned and majority-owned foreign subsidiaries. Intercompany accounts
and transactions have been eliminated. The Company's 12.5% interest in ESA
Electronics Pte Ltd. ("ESA"), a Singapore company, is accounted for under the
cost method.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. Dollars from Japanese Yen, Euros and New Taiwan Dollars
using the exchange rate in effect at the balance sheet date. Additionally,
their revenues and expenses are translated using exchange rates approximating
average rates prevailing during the fiscal year. Translation adjustments
that arise from translating their financial statements from their local
currencies to U.S. Dollars are accumulated and reflected as a separate
component of shareholders' equity and comprehensive income (loss).
Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS:
Cash equivalents consist of money market instruments, commercial paper
and other highly liquid investments purchased with an original maturity of
three months or less. Investments not classified as cash equivalents are
classified as available-for-sale. Investments in available-for-sale
securities are reported at fair value with unrealized gains and losses, net
of tax, if any, included as a component of shareholders' equity.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers
in North America, the Far East, and Europe. As of May 31, 2004,
approximately 10%, 86% and 4% of accounts receivable are from customers
located in the United States, the Far East and Europe, respectively. As of
May 31, 2003, approximately 16%, 81% and 3% of accounts receivable are from
customers located in the United States, the Far East and Europe,
respectively. Two customers accounted for 48% and 30% of accounts receivable
at May 31, 2004, and three customers accounted for 38%, 35% and 14% of
accounts receivable at May 31, 2003. Two customers accounted for 34% and 18%
of net sales in fiscal 2004, respectively and two customers accounted for 45%
and 11% of net sales in fiscal 2003, respectively. Three customers accounted
for 22%, 17% and 11% of net sales in fiscal 2002, respectively. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company also maintains allowances for potential
credit losses and such losses have been within management's expectations.
The Company uses letter of credit terms for some of its international
customers.
Primarily all of the Company's cash, cash equivalents, short-term cash
deposits and long-term investments are deposited with major financial
institutions in the United States, Japan, Germany and Taiwan. The Company
invests its excess cash in money market funds and short-term cash
34
deposits. The money market funds and short-term cash deposits bear the risk
associated with each fund. The money market funds have variable interest
rates, and the short-term cash deposits have fixed rates. The Company's
long-term investments consist of interest bearing securities with maturities
of 18 months or less. The Company has not experienced any losses on its
money market funds, short-term cash deposits, or long-term investments.
STRATEGIC INVESTMENTS:
The Company invests in debt and equity of private companies as part of
its business strategy. These investments are carried at cost and are
included in "Other Assets" in the consolidated balance sheets. If the
Company determines that an other-than-temporary decline exists in the fair
value of an investment, the Company writes down the investment to its fair
value and records the related write-down as an investment loss in "Other
Income (Expense)" in its consolidated statement of operations. For the years
ended May 31, 2004 and May 31, 2003, the Company wrote-down one of its
strategic investments by $134,000 and $365,000, respectively. At May 31,
2004 and 2003, the carrying value of the strategic investments was $586,000
and $1.1 million, respectively.
INVENTORIES:
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation
and amortization. Leasehold improvements are amortized over the lesser of
their estimated useful lives or the term of the related lease. Furniture,
fixtures, machinery and equipment are depreciated on a straight-line basis
over their estimated useful lives. The ranges of estimated useful lives for
furniture, fixtures, machinery and equipment are as follows:
Furniture and fixtures.......................... 2 to 15 years
Machinery and equipment......................... 4 to 11 years
Test equipment.................................. 4 to 11 years
GOODWILL:
The Company 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 included in "Other
Assets" in the consolidated balance sheets at May 31, 2004 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 indicated 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, 2004 and it
indicated no impairment of the Company's goodwill as of that date.
REVENUE RECOGNITION:
The Company's selling arrangements may include contractual customer
acceptance provisions and installation of the product occurs after shipment
and transfer of title. As a result, effective June 1, 2000, to comply with
the provisions of SAB 101, the Company recognizes revenue upon shipment of
products or services rendered 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 contractually agreed to amounts. Royalty revenue related to
Performance Test Boards licensing income is recognized when paid by the
licensee. This income is recorded in net sales. Provisions for the
estimated future cost of warranty is recorded at the time the products are
shipped. Prior to June 1, 2000, revenue for all products except royalties
was recognized upon shipment of product provided no significant obligations
remained and collectibility was assured.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems
are charged to operations as incurred.
Costs incurred in the development of software programs for the Company's
products are charged to operations as incurred until technological
feasibility of the software has been established. Generally, technological
feasibility is
35
established when the software module performs its primary functions described
in its original specifications, contains features required for it to be
usable in a production environment, is completely documented and the related
hardware portion of the product is complete. After technological feasibility
is established, any additional costs are capitalized. Capitalized costs are
amortized over the estimated life of the related software product using the
greater of the units of sales or straight-line methods over ten years. No
system software development costs were capitalized or amortized in fiscal
2004, 2003 and 2002.
During 1994, the Company entered into a cost-sharing research agreement
with the Defense Advanced Research Projects Agency ("DARPA"), a U.S.
government agency, under which DARPA provided co-funding up to a maximum
amount of $6.5 million during fiscal 1994 through September 2000 for the
development of a new product that would allow for burn-in and test at the
wafer level. Payments from DARPA were received upon DARPA's approval of the
achievement by the Company of milestones as outlined in the contract. The
Company recognized such reimbursements as a reduction to research and
development expenses in an amount equal to actual reimbursable project costs
incurred. In January 2001, the Company completed this $6.5 million multi-
year research and development agreement with DARPA. At May 31, 2004, May 31,
2003 and May 31, 2002, no outstanding payments were due from DARPA.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, long-term
investments, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short maturities.
The Company's investments are composed primarily of government and
corporate fixed income securities, certificates of deposit and commercial
paper. Long-term investments mature after one year but less than two years.
While it is the Company's general intent to hold such securities until
maturity, management will occasionally sell certain securities for cash flow
purposes. Therefore, the Company's investments are classified as available-
for-sale and are carried at fair value. Through May 31, 2004, no material
losses had been experienced on such investments.
Unrealized gains and losses on available-for-sale investments, net of
tax, are computed on the basis of specific identification and are reported as
other comprehensive income (loss) and included in shareholders' equity.
Realized gains, realized losses, and declines in value, judged to be other-
than-temporary, are included in other income (expense), net. The cost of
securities sold is based on the specific identification method and interest
earned is included in other income (expense), net.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying
value of assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying value to determine if a write-down is required.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
STOCK-BASED COMPENSATION:
The Company accounts for 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 is 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".
36
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such
plans in accordance with APB No. 25 and related interpretations.
Year Ended May 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
(in thousands, except per share data)
Net loss -- as reported........................ $(3,959) $(4,544) $(5,267)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects................ -- -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects. (597) (816) (1,244)
---------- ---------- ----------
Net loss -- pro forma.......................... $(4,556) $(5,360) $(6,511)
========== ========== ==========
Net loss per share -- as reported:
Basic........................................ $ (0.55) $ (0.63) $ (0.74)
Diluted...................................... $ (0.55) $ (0.63) $ (0.74)
Net loss per share -- pro forma:
Basic........................................ $ (0.63) $ (0.75) $ (0.91)
Diluted...................................... $ (0.63) $ (0.75) $ (0.91)
The above pro forma effects on loss may not be representative of the
effects on net income (loss) for future years as option grants typically vest
over several years and additional options are generally granted each year.
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model and the following weighted
average assumptions:
Year Ended May 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Risk-free Interest Rates............. 3.12% 3.12% 4.40%
Expected Life........................ 5 years 5 years 5 years
Volatility........................... 82% 81% 84%
Dividend Yield....................... -- -- --
The weighted average expected life was calculated based on the exercise
behavior. The weighted average fair value of those options granted in 2004,
2003 and 2002 was $3.16, $2.45 and $2.55, respectively.
EARNINGS PER SHARE ("EPS") DISCLOSURES:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." Basic EPS
is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed giving effect to all dilutive potential common shares that
were outstanding during the period. Dilutive potential common shares consist
of the incremental common shares issuable upon exercise of stock options for
all periods.
37
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
Year Ended May 31,
--------------------------------
2004 2003 2002
---------- ---------- ----------
Net loss available to common shareholders:
Numerator: Net loss......................... $(3,959) $(4,544) $(5,267)
---------- ---------- ----------
Denominator for basic loss per share:
Weighted-average shares outstanding ...... 7,248 7,161 7,151
Effect of dilutive securities:
Employee stock options.................. -- -- --
---------- ---------- ----------
Denominator for diluted loss per share...... 7,248 7,161 7,151
---------- ---------- ----------
Basic loss per share........................ $(0.55) $(0.63) $(0.74)
========= ========= =========
Diluted loss per share...................... $(0.55) $(0.63) $(0.74)
========= ========= =========
Stock options to purchase 1,096,000, 1,214,000 and 1,154,000 shares of
common stock were outstanding in fiscal 2004, 2003 and 2002, respectively,
but were not included in the computation of diluted loss per share because
the inclusion of such shares would be anti-dilutive.
COMPREHENSIVE LOSS:
The Company has adopted Statement of Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components in the financial
statements. Unrealized gains (losses) on available-for-sale securities and
foreign currency translation adjustments are included in the Company's
components of comprehensive income (loss), which are excluded from net income
(loss).
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
are required to be applied to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21
did not have a material impact on the Company's financial position or results
of operations.
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46(R) ("FIN 46(R)"), a revision of FASB
Interpretation No. 46 ("FIN 46"). FIN 46(R) requires that if an entity is
the primary beneficiary of a variable interest entity, the assets,
liabilities, and results of operations of the variable interest entity should
be included in the consolidated financial statements of the entity. FIN
46(R) delays the implementation date for certain interests created or
acquired prior to January 31, 2003, until the first interim or annual period
ending after March 15, 2004. The adoption of FIN 46 (R) did not have any
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 was required
to be reported upon
38
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.
In March 2004, the FASB approved EITF Issue 03-6 "Participating
Securities and the Two-Class Method under SFAS 128". EITF Issue 03-6
supersedes the guidance in Topic No. D-95, "Effect of Participating
Convertible Securities on the Computation of Basic Earnings per Share", and
requires the use of the two-class method of participating securities. The
two-class method is an earnings allocation formula that determines earnings
per share for each class of common stock and participating security according
to dividends declared (or accumulated) and participation rights in
undistributed earnings. In addition, EITF Issue 03-6 addresses other forms
of participating securities, including options, warrants, forwards and other
contracts to issue an entity's common stock, with the exception of stock-
based compensation (unvested options and restricted stock) subject to the
provisions of APB No. 25 and SFAS No. 123. EITF Issue 03-6 is effective for
reporting periods beginning after March 31, 2004 and should be applied by
restating previously reported earnings per share. As of May 31, 2004, we do
not have any securities issued and outstanding subject to this pronouncement.
Therefore, the adoption of EITF Issue 03-6 did not have any impact on the
disclosure of earnings per share.
2. INVENTORIES:
Inventories are comprised of the following (in thousands):
May 31,
-------------------------
2004 2003
------------ ------------
Raw materials and subassemblies......... $3,250 $3,845
Work in process......................... 4,623 4,694
Finished goods.......................... 116 708
------------ ------------
$7,989 $9,247
============ ============
3. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
May 31,
-------------------------
2004 2003
------------ ------------
Leasehold improvements.................. $1,094 $1,094
Furniture and fixtures.................. 2,658 2,633
Machinery and equipment................. 2,272 2,381
Test equipment.......................... 1,952 1,890
------------ ------------
7,976 7,998
Less: Accumulated depreciation
and amortization...................... (6,687) (6,483)
------------ ------------
$1,289 $1,515
============ ============
4. GOODWILL:
The Company 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 May 31, 2004
and May 31, 2003 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 fiscal years ended May 31, 2004, May 31, 2003 and May 31, 2002 as
reported in the accompanying Consolidated Financial Statements (in thousands,
except per share amounts):
39
Year Ended
May 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Reported net loss...................... $(3,959) $(4,544) $(5,267)
Goodwill amortization.................. -- -- 48
------- ------- ------
Adjusted net loss...................... $(3,959) $(4,544) $(5,219)
------- ------- ------
Basic and diluted net loss per share:
Reported net loss per share............ $ (0.55) $ (0.63) $ (0.74)
Goodwill amortization.................. -- -- 0.01
Adjusted net loss per share............ $ (0.55) $ (0.63) $ (0.73)
In accordance with the provisions of SFAS 142, the Company performed an
initial test of goodwill impairment. The test indicated 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, 2004 and it indicated no
impairment of the Company's goodwill as of that date.
5. 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.
Year ended
May 31,
-------------------------
2004 2003
------------ ------------
(in thousands)
Balance at the beginning of the year............ $111 $141
Accruals for warranties issued during the year.. 202 153
Accruals related to pre-existing warranties
(including changes in estimates)............... -- --
Settlements made during the year
(in cash or in kind)........................... (167) (183)
------------ ------------
Balance at the end of the year.................. $146 $111
============ ============
6. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
May 31,
-------------------------
2004 2003
------------ ------------
Commissions and bonuses................. $ 392 $ 444
Taxes Payable........................... 443 443
Payroll related......................... 554 404
Warranty................................ 146 111
Other................................... 565 337
------------ ------------
$2,100 $1,739
============ ============
40
7. COMMITMENTS AND CONTINGENCIES:
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
Minimum annual rentals payments under operating leases in each of the
next five fiscal years and thereafter are as follows (in thousands):
2005.................................... $823
2006.................................... 779
2007.................................... 791
2008.................................... 819
2009.................................... 847
Thereafter.............................. 504
Rental expense for the years ended May 31, 2004, 2003 and 2002 was
approximately $855,000, $887,000 and $943,000, respectively.
At May 31, 2004, the Company had a $50,000 certificate of deposit held by
a financial institution representing a security deposit for its United States
manufacturing and office space lease.
In the normal course of business to facilitate sales of its products, the
Company indemnifies other parties, including customers, with respect to
certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These agreements may
limit the time within which an indemnification claim can be made and the
amount of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and the Company's
bylaws contain similar indemnification obligations to the Company's agents.
It is not possible to determine the maximum potential amount under these
indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in
each particular agreement. To date, payments made by the Company under these
agreements have not had a material impact on the Company's operating results
or financial position.
8. CAPITAL STOCK:
PREFERRED STOCK:
The Board of Directors is authorized to determine the rights of the
preferred shareholders.
STOCK OPTIONS:
The Company has reserved 1,721,869 shares of common stock for issuance to
employees and consultants under its 1996 stock option plan. The plan
provides that qualified options be granted at an exercise price equal to the
fair market value at the date of grant, as determined by the Board of
Directors (85% of fair market value in the case of non-statutory options and
purchase rights and 110% of fair market value in certain circumstances).
Options generally expire within seven years from date of grant. Most options
become exercisable in increments over a four-year period from the date of
grant. Options to purchase approximately 783,375, 805,883 and 601,083 shares
were exercisable at May 31, 2004, May 31, 2003 and May 31, 2002,
respectively.
41
Activity under the Company's stock option plans was as follows (in
thousands, except per share data):
Outstanding Options
----------------------------------------
Weighted
Number Average
Available of Exercise
Shares Shares Price
------------ ------------ ------------
Balances, May 31, 2001............... 112 1,104 $5.51
Additional shares reserved......... 300 --
Options granted.................... (177) 177 $4.46
Options terminated................. 113 (113) $6.03
Options exercised.................. -- (14) $3.88
------------ ------------ ------------
Balances, May 31, 2002............... 348 1,154 $5.32
Additional shares reserved......... -- --
Options granted.................... (198) 198 $3.86
Options terminated................. 138 (138) $5.56
Options exercised.................. -- -- --
------------ ------------ ------------
Balances, May 31, 2003............... 288 1,214 $5.05
Additional shares reserved......... 400 --
Options granted.................... (201) 201 $3.16
Options terminated................. 139 (139) $5.50
Options exercised.................. -- (180) $4.79
------------ ------------ ------------
Balances, May 31, 2004............... 626 1,096 $4.69
============ ============
The following table summarizes information with respect to stock options
at May 31, 2004:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices May 31, 2004 Life (Years) Price May 31, 2004 Price
- -------------------- ------------ ----------- ---------- ------------ ----------
$2.49 - $3.35 184,306 5.93 $2.89 60,089 $2.83
$3.79 - $4.06 260,624 4.08 $3.95 176,996 $3.93
$4.08 - $4.50 182,735 3.99 $4.41 125,852 $4.40
$4.51 - $6.00 265,563 2.29 $5.56 238,093 $5.63
$6.25 - $6.75 202,500 2.09 $6.40 182,345 $6.42
------------ ------------
$2.49 - $6.75 1,095,728 3.58 $4.69 783,375 $5.02
============ ============
9. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK BONUS PLAN:
The Company has a noncontributory, trusteed employee stock bonus plan for
full-time employees who have completed three consecutive months of service
and for part-time employees who have completed one year of service and have
attained an age of 21. The Company can contribute either shares of the
Company's stock or cash to the plan. The contribution is determined annually
by the Company and cannot exceed 15% of the annual aggregate salaries of
those employees eligible for participation in the plan. Individuals' account
balances vest at a rate of 25% per year commencing upon completion of three
years of service. Non-vested balances, which are forfeited, are allocated to
the remaining employees in the plan. Contributions made to the plan during
fiscal 2004, 2003 and 2002 were $60,000, $60,000 and $60,000, respectively.
42
401(K) PLAN:
The Company maintains a defined contribution savings plan (the "401(k)
Plan") to provide retirement income to all qualified employees of the
Company. The 401(k) Plan is intended to be qualified under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan is funded by
voluntary pre-tax contributions from employees. Contributions are invested,
as directed by the participant, in investment funds available under the
401(k) Plan. The Company is not required to make, and did not make during
fiscal 2004, 2003 and 2002, any contributions to the Plan.
EMPLOYEE STOCK PURCHASE PLAN:
The Company's Board of Directors adopted the 1997 Employee Stock Purchase
Plan in June 1997. A total of 400,000 shares of Common Stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. Each twenty-four month offering period
includes four six month purchase periods. The offering periods generally
begin on the first trading day on or after April 1 and October 1 each year,
except that the first such offering period commenced with the effectiveness
of the Company's initial public offering and ended on the last trading day on
or before March 31, 1999. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's Common Stock at either the first day of an offering
period or the last day of the purchase period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue
at a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the 1997
Employee Stock Purchase Plan. The maximum number of shares a participant may
purchase during a single purchase period is determined by dividing $12,500 by
the fair market value of a share of the Company's Common Stock on the first
day of the then current offering period. To date, 282,166 shares have been
issued under the plan.
10. STOCKHOLDER RIGHTS PLAN:
The Company's Board of Directors adopted a Stockholder Rights Plan on
March 5, 2001, under which a dividend of one right to purchase one one-
thousandth of a share of the Company's Series A Participating Preferred Stock
was distributed for each outstanding share of the Company's Common Stock.
The plan entitles each Right holders to purchase 1/1000th of a share of the
Company's Series A Participating Preferred Stock at an exercise price of
$35.00, subject to adjustment, in certain events, such as a tender offer to
acquire 20% or more of the Company's outstanding common stock. Under some
circumstances, such as if a person or group acquires 20% or more of the
Company's common stock prior to redemption of the Rights, the plan entitles
such holders (other than an acquiring party) to purchase the Company's common
stock having a market value at that time of twice the Right's exercise price.
The Rights expire on April 3, 2010.
11. INCOME TAXES:
Domestic and foreign components of pretax income (loss) are as follows
(in thousands):
Year Ended May 31,
--------------------------------------
2004 2003 2002
------------ ------------ ------------
Domestic.......................... $(4,194) $(4,257) $(2,763)
Foreign........................... 311 (361) (1,263)
------------ ------------ ------------
$(3,883) $(4,618) $(4,026)
============ ============ ============
43
The provision for (benefit from) income taxes consists of the following
(in thousands):
Year Ended May 31,
--------------------------------------
2004 2003 2002
------------ ------------ ------------
Federal income taxes:
Current......................... $ -- $ -- $ (418)
Deferred........................ -- -- 1,331
State income taxes:
Current......................... 20 20 20
Deferred........................ -- -- 282
Foreign income taxes:
Current......................... 56 (94) 26
------------ ------------ ------------
$ 76 $ (74) $1,241
============ ============ ============
The Company's effective tax rate differs from the U.S. federal statutory
tax rate, as follows:
Year Ended May 31,
--------------------------------------
2004 2003 2002
------------ ------------ ------------
U.S. Federal statutory tax rate... (34.0)% (34.0)% (34.0)%
State taxes, net of federal tax
effect.......................... 0.5 0.3 0.3
Other............................. (1.2) 1.4 5.9
Income from equity investment..... (2.8) 0.6 (0.4)
Net operating losses not
benefited....................... 39.3 30.1 59.0
------------ ------------ ------------
Effective tax rate................ 1.8 % (1.6)% 30.8 %
============ ============ ============
The components of the net deferred tax asset (liability) are as follows
(in thousands):
May 31,
-------------------------
2004 2003
------------ ------------
Net operating losses..................... $4,653 $4,545
Credit carryforwards..................... 1,276 1,091
Inventory reserves....................... 2,050 1,903
Reserves and accruals.................... 443 313
Other.................................... 1,354 1,113
------------ ------------
9,776 8,965
Less: Valuation allowance.................. (9,776) (8,965)
------------ ------------
Net deferred tax asset..................... $ -- $ --
============ ============
In the year ended May 31, 2004, a full valuation allowance has been
provided for the Company's deferred tax assets as management cannot conclude,
based on available objective evidence, that it is more likely than not the
deferred tax assets will be realized.
At May 31, 2004, the Company has federal and state net operating loss
carryforwards of approximately $10.4 million and $1.1 million, respectively.
At May 31, 2004, the Company also has federal and state tax credit
carryforwards of
44
approximately $480,000 and $1.0 million, respectively. These carryforwards
will expire commencing in 2012. These carryforwards may be subject to
certain limitations on annual utilization in case of a change in ownership,
as defined by tax law.
Foreign net operating loss carryforwards of approximately $2.3 million
are available to reduce future foreign taxable income. Some of the foreign
net operating losses will begin to expire beginning 2005 through 2009.
12. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
Year Ended May 31,
--------------------------------------
2004 2003 2002
------------ ------------ ------------
Foreign exchange gain (loss)...... $ 141 $ 70 $ (23)
Loss on impairment of
an investment .................. (134) (365) --
Income from equity investment..... -- 85 46
Income from a sale of investment.. 320 -- --
Other, net........................ (34) 64 (66)
------------ ------------ ------------
$ 293 $(146) $ (43)
============ ============ ============
13. SEGMENT INFORMATION:
The Company operates in one industry segment. The Company is engaged in
the design, manufacture, marketing and servicing of test and burn-in
equipment used in the semiconductor manufacturing industry.
The Company develops, manufactures and sells systems to semiconductor
manufacturers and operates in one operating segment. The following presents
information about the Company's operations in different geographic areas (in
thousands):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
2004:
Net sales...................... $13,473 $2,701 $1,827 $ (2,201) $15,800
Portion of U.S. net sales
from export sales............ 11,031 -- -- -- 11,031
Income (loss) from operations.. (4,725) 129 97 (10) (4,509)
Identifiable assets............ 34,811 2,372 745 (11,116) 26,812
Long-lived assets.............. 1,023 253 13 -- 1,289
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
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 and Taiwanese branch office. Substantially all of the
sales of the subsidiaries are made to unaffiliated Japanese or European
customers. Net
45
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.
14. RELATED PARTY TRANSACTIONS:
The Company has entered into transactions with ESA Electronics Pte Ltd.
("ESA") in which the Company owned 12.5% of interest at May 31, 2004. ESA
purchased goods from the Company of approximately $105,000, $163,000 and
$711,000 during fiscal 2004, 2003 and 2002, respectively. In addition, the
Company purchased goods from ESA of approximately $1.0 million in fiscal 2004
and none in fiscal 2003 and 2002. At May 31, 2004, the Company had amounts
payable to ESA of approximately $935,000 and none at May 31, 2003.
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following table (presented in thousands, except per share data) sets
forth selected unaudited consolidated statements of operations data for each
of the four quarters of the fiscal years ended May 31, 2004 and May 31, 2003.
The unaudited quarterly information has been prepared on the same basis as
the annual information presented elsewhere herein and, in the Company's
opinion, includes all adjustments (consisting only of normal recurring
entries) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period and should be read in
conjunction with the audited consolidated financial statements of the
Company's and the notes thereto included elsewhere herein.
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 29, May 31,
2003 2003 2004 2004
--------- --------- --------- ---------
Net sales............................... $4,169 $3,593 $ 2,166 $5,872
Gross profit............................ $1,626 $1,342 $ 810 $1,930
Net loss................................ $ (808) $ (949) $(1,717) $ (484)
Net loss per share (basic).............. $(0.11) $(0.13) $ (0.24) $(0.07)
Net loss per share (diluted)............ $(0.11) $(0.13) $ (0.24) $(0.07)
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
2002 2002 2003 2003
--------- --------- --------- ---------
Net sales............................... $3,508 $ 2,928 $4,028 $4,628
Gross profit............................ $1,559 $ 1,020 $1,516 $1,643
Net loss................................ $ (887) $(1,992) $ (988) $ (677)
Net loss per share (basic).............. $(0.12) $ (0.28) $(0.14) $(0.09)
Net loss per share (diluted)............ $(0.12) $ (0.28) $(0.14) $ (0.09)
46
AEHR TEST SYSTEMS AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended May 31, 2004, 2003 and 2002
(IN THOUSANDS)
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions* of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:
May 31, 2004 $ 87 $ 45 $ 40 $ 92
========== ========== ========== ==========
May 31, 2003 $ 71 $104 $ 88 $ 87
========== ========== ========== ==========
May 31, 2002 $135 $109 $173 $ 71
========== ========== ========== ==========
* Deductions include write-offs of uncollectible accounts and collections of
amounts previously reserved.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9a. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. Based upon that evaluation, the Chief Executive Officer and the 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 Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There was no
significant change in our internal control over financial reporting that
occurred during the period covered by this Annual Report on Form 10-K that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal 1 --
Election of Directors" in the Proxy Statement. The information required by
this item relating to executive officers is incorporated by reference to the
information under the caption "Management -- Executive Officers and
Directors" at the end of Part I of this report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners, Directors
and Management" of the Proxy Statement.
47
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the
Proxy Statement.
Item 14. Principal Independent Registered Public Accounting Firm's Fees and
Services
The information required by this item is incorporated by reference to the
section entitled "Principal Independent Registered Public Accounting Firm's
Fees and Services" of the Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
See Index under Item 8.
2. Financial Statement Schedule
See Index under Item 8.
3. Exhibits
See Item 15(c) below.
(b) Reports on Form 8-K.
On July 22, 2003, the Company furnished a current report on Form 8-K,
attaching a press release announcing financial results for the fourth fiscal
quarter and fiscal year ended May 31, 2003 and certain other information.
The Form 8-K included the Company's unaudited financial statements for the
fourth fiscal quarter ended May 31, 2003 and audited financial statements for
the fiscal year ended May 31, 2003. On September 24, 2003, the Company
furnished a current report on Form 8-K, attaching a press release announcing
financial results for the first fiscal quarter ended August 31, 2003 and
certain other information. The Form 8-K included the Company's unaudited
financial statements for the first fiscal quarter ended August 31, 2003. On
January 7, 2004, the Company furnished a current report on Form 8-K,
attaching a press release announcing financial results for the second fiscal
quarter ended November 30, 2003 and certain other information. The Form 8-K
included the Company's unaudited financial statements for the second fiscal
quarter ended November 30, 2003. On March 25, 2004, the Company furnished a
current report on Form 8-K, attaching a press release announcing financial
results for the third fiscal quarter ended February 29, 2004 and certain
other information. The Form 8-K included the Company's unaudited financial
statements for the third fiscal quarter ended February 29, 2004.
(c) Exhibits
The following exhibits are filed as part of or incorporated by reference
into this Report:
Exhibit
No. Description
- ------- -----------------------------------------------------------------
3.1+ Restated Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1++ Form of Common Stock certificate.
10.1+ Amended 1986 Incentive Stock Plan and form of agreement
thereunder.
10.2++ 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
48
10.3++ 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4++ Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.
10.5+ Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6+ Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7+ Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.8+ Amendment dated February 26, 1990 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.9+ Stock Purchase Agreement dated September 18, 1985 between
Registrant and certain holders of Common Stock.
10.10+ Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11+ Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
10.12+++ Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
10.13++++ Preferred Shares Rights Agreement dated March 5, 2001.
10.14+++++ Form of Change of Control Agreement.
11.1++ Computations of Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Company.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney (see page 50).
31.1 Certification Statement of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification Statement of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------
+ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987).
++ Incorporated by reference to the same-numbered exhibit previously filed
with Amendment No.1 to the Company's Registration Statement on Form S-1 filed
July 17, 1997 (File No. 333-28987).
+++ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Form 10-K for the year ended May 31, 1999 filed August 27,
1999 (File No. 333-28987).
++++ Incorporated by reference to the Exhibit No. 4.1 previously filed with
the Company's Current Report on Form 8-K dated March 27, 2001 (File No. 000-
22893).
+++++ Incorporated by reference to the same-numbered exhibit previously
filed with the Company's Form 10-K for the year ended May 31, 2001 filed
August 29, 2001 (File No. 000-22893).
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 30, 2004
AEHR TEST SYSTEMS
By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- ----------------------------------- ---------------
Chief Executive Officer August 30, 2004
and Chairman of the
/s/ RHEA J. POSEDEL Board of Directors
- -------------------------- (Principal Executive Officer)
Rhea J. Posedel
Vice President of Finance August 30, 2004
and Chief Financial Officer
/s/ GARY L. LARSON (Principal Financial and
- -------------------------- Accounting Officer)
Gary L. Larson
/s/ ROBERT R. ANDERSON Director August 30, 2004
- --------------------------
Robert R. Anderson
/s/ WILLIAM W. R. ELDER Director August 30, 2004
- --------------------------
William W. R. Elder
/s/ MUKESH PATEL Director August 30, 2004
- --------------------------
Mukesh Patel
/s/ MARIO M. ROSATI Director August 30, 2004
- --------------------------
Mario M. Rosati
50