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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2005.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 000-22893.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 KATO TERRACE
FREMONT, CA 94539
- -------------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(510) 623-9400
- ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES X NO
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding
at March 31, 2005 was 7,447,491.
1
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2005
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2005 and May 31, 2004 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 2005
and February 29, 2004 . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2005
and February 29, 2004. . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 21
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 22
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
PART I. FINANCIAL STATEMENTS
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
February 28, May 31,
2005 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 4,668 $ 4,041
Short-term investments. . . . . . . . . . . . . 3,991 6,492
Accounts receivable . . . . . . . . . . . . . . 2,838 4,205
Inventories . . . . . . . . . . . . . . . . . . 7,393 7,989
Prepaid expenses and other. . . . . . . . . . . 510 492
----------- -----------
Total current assets . . . . . . . . . . . . 19,400 23,219
Property and equipment, net . . . . . . . . . . . 1,242 1,289
Long-term investments . . . . . . . . . . . . . . 719 1,292
Goodwill. . . . . . . . . . . . . . . . . . . . . 274 274
Other assets, net . . . . . . . . . . . . . . . . 786 738
----------- -----------
Total assets . . . . . . . . . . . . . . . . $22,421 $26,812
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 479 $ 1,838
Accrued expenses. . . . . . . . . . . . . . . . 2,013 2,100
Deferred revenue. . . . . . . . . . . . . . . . 532 337
----------- -----------
Total current liabilities . . . . . . . . . . 3,024 4,275
Accrued lease commitment. . . . . . . . . . . . . 339 333
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,363 4,608
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 7,426 shares and
7,389 shares at February 28, 2005 and
May 31, 2004, respectively. . . . . . . . . . 74 74
Additional paid-in capital. . . . . . . . . . . 37,410 37,322
Accumulated other comprehensive income. . . . . 1,291 1,379
Accumulated deficit . . . . . . . . . . . . . . (19,717) (16,571)
----------- -----------
Total shareholders' equity . . . . . . . . . 19,058 22,204
----------- -----------
Total liabilities and shareholders' equity. . $22,421 $26,812
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------- --------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- --------- --------
Net sales. . . . . . . . . . . . . . . . . . . $ 2,084 $ 2,166 $12,810 $ 9,928
Cost of sales. . . . . . . . . . . . . . . . . 1,281 1,356 9,452 6,150
--------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . 803 810 3,358 3,778
--------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . . . . 1,265 1,414 3,812 4,197
Research and development . . . . . . . . . . 868 1,134 2,885 3,492
--------- --------- -------- --------
Total operating expenses . . . . . . . . 2,133 2,548 6,697 7,689
--------- --------- -------- --------
Loss from operations . . . . . . . . . . . . . (1,330) (1,738) (3,339) (3,911)
Interest income . . . . . . . . . . . . . . . 40 36 96 306
Other income, net. . . . . . . . . . . . . . . 13 13 209 174
--------- --------- -------- --------
Loss before income taxes . . . . . . . . . . . (1,277) (1,689) (3,034) (3,431)
Income tax expense (benefit) . . . . . . . . . (54) 28 112 43
--------- --------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . $(1,223) $(1,717) $(3,146) $(3,474)
========= ========= ======== ========
Net loss per share (basic and diluted) . . . . $ (0.16) $ (0.24) $ (0.42) $ (0.48)
Shares used in per share calculation:
Basic and diluted. . . . . . . . . . . . . . 7,426 7,270 7,410 7,203
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
----------------------
February 28, February 29,
2005 2004
---------- ----------
Cash flows from operating activities:
Net loss...................................... $(3,146) $(3,474)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. (8) (35)
Gain on disposition of fixed assets......... -- (3)
Depreciation and amortization............... 244 305
Changes in operating assets and liabilities:
Accounts receivable....................... 1,428 1,499
Inventories............................... 623 966
Accounts payable.......................... (1,553) (171)
Accrued expenses.......................... (117) 341
Deferred revenue.......................... 195 224
Accrued lease commitment.................. 6 24
Other assets.............................. (56) 1,176
---------- ----------
Net cash provided by (used in)
operating activities.................. (2,384) 852
---------- ----------
Cash flows from investing activities:
Purchase of investments..................... (9,518) (16,636)
Net proceeds from sales and
maturity of investments................... 12,587 13,039
Additions to property and equipment......... (181) (103)
Decrease in other assets.................... -- 37
---------- ----------
Net cash provided by (used in)
investing activities.................. 2,888 (3,663)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 88 906
---------- ----------
Net cash provided by
financing activities.................. 88 906
---------- ----------
Effect of exchange rates on cash................ 35 53
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... 627 (1,852)
Cash and cash equivalents, beginning of period.. 4,041 6,212
---------- ----------
Cash and cash equivalents, end of period........ $ 4,668 $ 4,360
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and therefore
does not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
accordance with generally accepted accounting principles.
In the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the consolidated financial position and results of
operations as of and for such periods indicated. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 2004. Results
for the interim periods presented herein are not necessarily indicative of
results which may be reported for any other interim period or for the entire
fiscal year.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company," "we," "us," and "our"). All significant intercompany balances
have been eliminated in consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
REVISION IN CLASSIFICATION OF CERTAIN SECURITIES. In connection with
preparation of these financial statements, we concluded that it was
appropriate to classify our auction rate securities as short-term investments.
Previously, such investments had been classified as cash and cash equivalents.
Accordingly, the Company has revised the classification to exclude from cash
and cash equivalents $900,000 and $600,000 at February 28, 2005 and May 31,
2004, respectively, and to include such amounts as short-term investments. In
addition, the Company has made corresponding revisions to the accompanying
statements of cash flows to reflect the purchases and proceeds from sales of
the auction rate securities as investing activities. These revisions resulted
in a net increase in cash used in investing activities of $900,000 during the
nine months ended February 28, 2005, $800,000 in fiscal year 2004 and $200,000
in the nine months ended February 29, 2004. These revisions had no impact on
previously reported results of operations, operating cash flows or working
capital of the Company.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
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 ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS 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
6
grant, between the fair value of the Company's shares and the exercise price
of the option. Stock-based compensation for consultants or other third
parties are accounted for in accordance with SFAS 123 and Emerging Issues Task
Force ("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services".
For purposes of pro forma disclosures, the estimated fair value of the
stock options and grants under the Company's Employee Stock Purchase Plan are
amortized to expense over the vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss, as reported:...................... $(1,223) $(1,717) $(3,146) $(3,474)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects......................... (190) (87) (588) (408)
--------- --------- --------- ---------
Pro forma net loss.......................... $(1,413) $(1,804) $(3,734) $(3,882)
========= ========= ========= =========
Net loss per share:
Basic and diluted, as reported.............. $ (0.16) $ (0.24) $ (0.42) $ (0.48)
========= ========= ========= =========
Basic and diluted, pro forma................ $ (0.19) $ (0.25) $ (0.50) $ (0.54)
========= ========= ========= =========
The above pro forma effects on loss may not be representative of the
effects on net income (loss) for future years as option grants typically vest
over several years and additional options are generally granted each year.
The fair value of each option and stock purchase plan grant has been
estimated on the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions:
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Risk-free Interest Rate .............. 3.69% 3.15% 3.60% 3.04%
Expected Life......................... 5 years 5 years 5 years 5 years
Volatility............................ 0.85 0.81 0.85 0.81
Dividend Yield........................ -- -- -- --
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in the
consolidated financial statements. That cost will be measured based on the
grant-date fair value of the equity or liability instruments issued.
SFAS 123R is effective for public companies at the beginning of the first
interim or annual period beginning after June 15, 2005 (the second quarter of
fiscal 2006 for the Company). The impact of SFAS 123R on the Company in
fiscal 2006 and beyond will depend upon various factors, among them being the
Company's future compensation strategy. The pro forma compensation costs
presented in the table above and in prior filings for the Company have been
calculated using the Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future years. As of the
date of this filing, no decisions have been made as to the selection of an
option pricing model and a transition method for adoption. The Company
expects that the adoption of SFAS 123R will have an adverse impact on the
Company's consolidated statements of operations.
7
3. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options) outstanding, when dilutive, during each period using the treasury
stock method.
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Net loss available to common shareholders:
Numerator: Net loss......................... $(1,223) $(1,717) $(3,146) $(3,474)
--------- --------- --------- ---------
Denominator for basic net loss per share:
Weighted-average shares outstanding ...... 7,426 7,270 7,410 7,203
--------- --------- --------- ---------
Shares used in basic per share calculation.. 7,426 7,270 7,410 7,203
Effect of dilutive securities:
Employee stock options.................. -- -- -- --
--------- --------- --------- ---------
Denominator for diluted net loss
per share............................... 7,426 7,270 7,410 7,203
--------- --------- --------- ---------
Basic and diluted net loss per share........ $(0.16) $ (0.24) $ (0.42) $ (0.48)
========= ========= ========= =========
Stock options to purchase 1,285,523 and 1,117,092 shares of common stock
were outstanding on February 28, 2005 and February 29, 2004, respectively, but
were not included in the computation of diluted loss per share because the
inclusion of such shares would be anti-dilutive.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2005 2004
----------- -----------
Raw materials and sub-assemblies $2,812 $3,250
Work in process 4,526 4,623
Finished goods 55 116
----------- -----------
$7,393 $7,989
=========== ===========
5. SEGMENT INFORMATION
The Company considers itself to be in one reportable segment pursuant to
SFAS 131. As the Company's business is completely focused on one industry
segment, the designing, manufacturing and marketing of advanced test and burn-
in products to the semiconductor manufacturing industry, management believes
that the Company has only one reportable segment. The Company's net sales and
profits are generated through the sale and service of products for this one
segment.
The following presents information about the Company's operations in
different geographic areas (in thousands):
8
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28, 2005:
Net sales...................... $ 2,020 $ 277 $ 272 $ (485) $ 2,084
Portion of U.S. net sales
from export sales............ 732 -- -- -- 732
Loss from operations........... (1,038) (139) (58) (95) (1,330)
Identifiable assets............ 30,761 1,191 1,340 (10,871) 22,421
Property and equipment, net.... 913 292 37 -- 1,242
Nine months ended February 28, 2005:
Net sales...................... $11,517 $ 751 $1,672 $(1,130) $12,810
Portion of U.S. net sales
from export sales............ 9,136 -- -- -- 9,136
Income (loss) from operations.. (3,167) (377) 276 (71) (3,339)
Identifiable assets............ 30,761 1,191 1,340 (10,871) 22,421
Property and equipment, net.... 913 292 37 -- 1,242
Three months ended February 29, 2004:
Net sales...................... $ 2,007 $ 223 $ 568 $ (632) $ 2,166
Portion of U.S. net sales
from export sales............ 1,538 -- -- -- 1,538
Income (loss) from operations.. (1,661) (84) 27 (20) (1,738)
Identifiable assets............ 34,020 1,144 1,249 (10,164) 26,249
Property and equipment, net.... 1,057 269 11 -- 1,337
Nine months ended February 29, 2004:
Net sales...................... $ 8,532 $ 837 $1,642 $(1,083) $ 9,928
Portion of U.S. net sales
from export sales............ 6,530 -- -- -- 6,530
Income (loss) from operations.. (3,841) (201) 147 (16) (3,911)
Identifiable assets............ 34,020 1,144 1,249 (10,164) 26,249
Property and equipment, net.... 1,057 269 11 -- 1,337
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area. Many net sales
made in the United States were delivered to locations outside of the United
States.
6. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time the products are shipped. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure
rates, material usage or service delivery costs differ from the Company's
estimates, revisions to the estimated warranty liability would be required.
Following is a summary of changes in the Company's liability for product
warranties during the three months and nine months ended February 28, 2005 and
February 29, 2004 (in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Balance at the beginning of the period $103 $112 $146 $111
Accruals for warranties issued
during the period 43 19 129 152
Settlement made during the period
(in cash or in kind) (44) (14) (173) (146)
--------- --------- --------- ---------
Balance at the end of the period $102 $117 $102 $117
======= ======= ======= =======
9
7. COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . $(1,223) $(1,717) $(3,146) $(3,474)
Foreign currency translation
adjustments income (expense). . . . . . . . . (23) 8 (83) (114)
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . . 1 10 (5) --
--------- --------- -------- --------
Comprehensive loss . . . . . . . . . . . . . . $(1,245) $(1,699) $(3,234) $(3,588)
========= ========= ======== ========
8. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4". This statement clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) to require them to be recognized as current-period
charges and to require the allocation of fixed production overhead to
inventory based on the normal capacity of a production facility. This
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this statement is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-
Based Payment" ("SFAS 123R"), which is a revision SFAS 123 and supersedes APB
25. Generally, the approach in SFAS 123R is similar to the approach described
in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their grant-date fair values. Pro forma disclosure
is no longer an alternative. This statement is effective as of the beginning
of the first interim or annual reporting period that begins after June 15,
2005. The Company will apply SFAS 123 beginning in the Company's second
quarter of fiscal 2006. We are currently evaluating the impact of adopting
this statement on our financial position and results of operations. The
impact on our financial statements will be dependent on the transition method,
the option pricing model used to compute fair value and the inputs to that
model such as volatility and expected life. The pro forma disclosures of the
impact of SFAS 123 provided earlier in Note 2 may not be representative of the
impact of adopting this statement. The Company expects that the adoption of
SFAS 123R will have an adverse impact on the Company's consolidated statements
of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This statement amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this standard is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" ("FSP FAS 109-2").
The American Jobs Creation Act introduces a special one-time dividends
received deduction on the repatriation of certain foreign earnings to a U.S.
taxpayer (repatriation provision), provided certain criteria are met. FSP FAS
109-2 provides accounting and disclosure guidance for the repatriation
provision. The deduction is subject to a number of limitations and, as of
10
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not yet been remitted
to the U.S. and cannot reasonably estimate the income tax effect of the
Foreign Earnings Repatriation Provision. The Company has yet to complete its
evaluation of the Foreign Earnings Repatriation Provision within the Act and
plans to complete its evaluation in the first half of fiscal 2006.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related notes that appear elsewhere
in this document.
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. These statements typically
may be identified by the use of forward-looking words or phrases such as
"believe," "expect," "intend," "anticipate," "should," "planned," "estimated,"
and "potential," among others. All forward-looking statements included in
this document are based on our current expectations, and we assume no
obligation to update any of these forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for these
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause actual results and
experience to differ materially from the anticipated results or other
expectations expressed in these forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of our businesses include but are not limited to those factors that
might be described from time to time in periodic filings with the Securities
and Exchange Commission and include those set forth in this Quarterly Report
on Form 10-Q as "Factors that May Affect Future Results of Operations," as
well as other factors beyond our control.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, investments,
intangible assets, income taxes, financing operations, warranty obligations,
long-term service contracts, and contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. In the three months ended February 28, 2005, there have been no
significant changes to the Company's critical accounting policies as described
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies" in the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 2004.
11
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Condensed
Consolidated Statements of Operations as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 61.5 62.6 73.8 61.9
---------- ---------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 38.5 37.4 26.2 38.1
---------- ---------- --------- --------
Operating expenses:
Selling, general and administrative. . . . . 60.7 65.3 29.8 42.3
Research and development . . . . . . . . . . 41.7 52.4 22.5 35.2
---------- ---------- --------- --------
Total operating expenses . . . . . . . . 102.4 117.7 52.3 77.5
---------- ---------- --------- --------
Loss from operations . . . . . . . . . . . . . (63.9) (80.3) (26.1) (39.4)
Interest income . . . . . . . . . . . . . . . 2.0 1.7 0.8 3.1
Other income, net. . . . . . . . . . . . . . . 0.6 0.6 1.6 1.7
---------- ---------- --------- --------
Loss before income taxes . . . . . . . . . . . (61.3) (78.0) (23.7) (34.6)
Income tax expense (benefit) . . . . . . . . . (2.6) 1.3 0.9 0.4
---------- ---------- --------- --------
Net loss . . . . . . . . . . . . . . . . . . . (58.7)% (79.3)% (24.6)% (35.0)%
========== ========== ========= ========
THREE MONTHS ENDED FEBRUARY 28, 2005 COMPARED TO THREE MONTHS ENDED FEBRUARY
29, 2004
NET SALES. Net sales decreased to $2.1 million in the three months ended
February 28, 2005 from $2.2 million in the three months ended February 29,
2004, a decrease of 3.8%. The decrease in net sales resulted primarily from a
decrease in net sales of the Company's dynamic burn-in products, partially
offset by an increase in net sales of the Company's wafer/die level products.
Net sales of the Company's dynamic burn-in products for the three months ended
February 28, 2005 were $1.3 million, and decreased approximately $423,000 from
the three months ended February 29, 2004. Net sales of the Company's MTX
products for the three months ended February 28, 2005 were $332,000, and
decreased approximately $68,000 from the three months ended February 29, 2004.
Net sales of the Company's wafer/die level products for the three months ended
February 28, 2005 were $413,000, and increased approximately $409,000 from the
three months ended February 29, 2004. The increase in net sales of the
Company's wafer/die level products noted above is primarily related to the
completion of a milestone in the wafer-level system development project. The
Company anticipates that net sales in the fourth quarter of fiscal 2005 will
reflect solid growth over those in the third quarter of fiscal 2005.
GROSS PROFIT. Cost of sales consists primarily of materials, assembly and
test costs, and overhead from operations. Gross profit decreased to $803,000
in the three months ended February 28, 2005 from $810,000 in the three months
ended February 29, 2004, a decrease of 0.9%. Gross profit margin increased to
38.5% in the three months ended February 28, 2005 from 37.4% in the three
months ended February 29, 2004.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, commission expenses to independent sales representatives, product
promotion and other professional services. SG&A expenses decreased to $1.3
million in the three months ended February 28, 2005 from $1.4 million in the
three months ended February 29, 2004, a decrease of 10.5%. The decrease in
SG&A expenses was primarily due to a decrease in employment related expenses.
12
As a percentage of net sales, SG&A expenses decreased to 60.7% in the three
months ended February 28, 2005 from 65.3% in the three months ended February
29, 2004.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
decreased to $868,000 in the three months ended February 28, 2005 from $1.1
million in the three months ended February 29, 2004, a decrease of 23.5%. The
decrease in R&D expenses was primarily due to a decrease in project material
expenses, which resulted because the Company's wafer-level burn-in project is
approaching the end of the project development cycle. As a percentage of net
sales, R&D expenses decreased to 41.7% in the three months ended February 28,
2005 from 52.4% in the three months ended February 29, 2004. The Company
anticipates that R&D expenses may increase somewhat over the next two fiscal
quarters as the Company performs wafer-level contactor evaluations for
potential customers.
INTEREST INCOME. Interest income increased to $40,000 in the three months
ended February 28, 2005 from $36,000 in the three months ended February 29,
2004.
OTHER INCOME (EXPENSE), NET. Other income, net was unchanged at $13,000
in the three months ended February 28, 2005 from the three months ended
February 29, 2004.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $54,000 in the three
months ended February 28, 2005 and income tax expense was $28,000 in the three
months ended February 29, 2004. The income tax benefit in the three months
ended February 28, 2005 was related to the tax benefit recorded by the Company
as a result of losses incurred in the Company's German subsidiary. The income
tax expense in the three months ended February 29, 2004 was related primarily
to the tax expense recorded as a result of income earned in the Company's
German subsidiary. The Company's U.S. operations and its Japanese subsidiary
have experienced significant cumulative losses and thus generated certain net
operating losses available to offset future taxes payable in the U.S. and
Japan. As a result of the cumulative operating losses in the Company's U.S.
operations and its Japanese subsidiary, a valuation allowance was established
for the full amount of its net deferred tax assets for both its U.S.
operations and its Japanese subsidiary.
NINE MONTHS ENDED FEBRUARY 28, 2005 COMPARED TO NINE MONTHS ENDED FEBRUARY 29,
2004
NET SALES. Net sales increased to $12.8 million in the nine months ended
February 28, 2005 from $9.9 million in the nine months ended February 29,
2004, an increase of 29.0%. The increase in net sales in the nine months
ended February 28, 2005 resulted primarily from an increase in net sales of
the Company's MTX products, partially offset by a decrease in net sales of the
Company's dynamic burn-in products. Net sales of the Company's MTX products
for the nine months ended February 28, 2005 were $6.1 million, and increased
approximately $5.0 million from the nine months ended February 29, 2004. Net
sales of the Company's dynamic burn-in products for the nine months ended
February 28, 2005 were $6.1 million, and decreased approximately $2.7 million
from the nine months ended February 29, 2004. Net sales of the Company's
wafer/die level products for the nine months ended February 28, 2005 were
$656,000, and increased approximately $558,000 from the nine months ended
February 29, 2004.
GROSS PROFIT. Gross profit decreased to $3.4 million in the nine months
ended February 28, 2005 from $3.8 million in the nine months ended February
29, 2004, a decrease of 11.1%. The gross profit margin decreased to 26.2% in
the nine months ended February 28, 2005 from 38.1% in the nine months ended
February 29, 2004. Beginning in January 2004, the Company received turnkey
system orders from a single customer, which included certain products not
13
typically sold directly by the Company which are used in conjunction with the
Company's systems. At the customer's request, these products were included as
part of the order. These products were priced at or near the Company's cost
and are referred to here as "pass-through" products. The decrease in gross
profit margin was primarily the result of an increase in net sales of $2.8
million related to pass-through products, which have a very low gross profit
margin, as well as a change in product mix, resulting in higher material costs
as a percentage of net sales. Since the Company does not typically accept
orders for pass-through products, it has requested that, going forward, the
customer purchase these pass-through products directly through the vendors
that currently manufacture such products. The customer has already ordered
some of these products directly from the vendors. The customer has not
advised the Company of its intent to purchase any additional pass-through
products from the Company.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $3.8
million in the nine months ended February 28, 2005 from $4.2 million in the
nine months ended February 29, 2004, a decrease of 9.2%. The decrease in SG&A
expenses was primarily due to a decrease in employment related expenses. As a
percentage of net sales, SG&A expenses decreased to 29.8% in the nine months
ended February 28, 2005 from 42.3% in the nine months ended February 29, 2004,
reflecting higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.9 million in the
nine months ended February 28, 2005 from $3.5 million in the nine months ended
February 29, 2004, a decrease of 17.4%. The decrease in R&D expenses was
primarily due to a decrease in project material expenses which resulted
because the Company's wafer-level burn-in project is approaching the end of
the project development cycle. As a percentage of net sales, R&D expenses
decreased to 22.5% in the nine months ended February 28, 2005 from 35.2% in
the nine months ended February 29, 2004, reflecting higher net sales.
INTEREST INCOME. Interest income decreased to $96,000 in the nine months
ended February 28, 2005 from $306,000 in the nine months ended February 29,
2004, a decrease of 68.6%. The interest income received in the nine months
ended February 29, 2004 was primarily related to income tax refunds relating
to prior years. No such tax refund related interest income was received in
the nine months ended February 28, 2005.
OTHER INCOME (EXPENSE), NET. Other income, net increased to $209,000 in
the nine months ended February 28, 2005 from $174,000 in the nine months ended
February 29, 2004.
INCOME TAX EXPENSE (BENEFIT). Income tax expense increased to $112,000 in
the nine months ended February 28, 2005, from $43,000 in the nine months ended
February 29, 2004. The income tax expense in the nine months ended February
28, 2005 and in the nine months ended February 29, 2004 related primarily to
the tax expense recorded as a result of income earned in the Company's German
subsidiary. The Company's U.S. operations and its Japanese subsidiary have
experienced significant cumulative losses and thus generated certain net
operating losses available to offset future taxes payable in the U.S. and
Japan. As a result of the cumulative operating losses in the Company's U.S.
operations and its Japanese subsidiary, a valuation allowance was established
for the full amount of its net deferred tax assets for both its U.S.
operations and its Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $2.3 million for
the nine months ended February 28, 2005, and net cash provided by operating
activities was $852,000 for the nine months ended February 29, 2004. For the
nine months ended February 28, 2005, net cash used in operating activities was
due primarily to the net loss of $3.1 million and a decrease in accounts
payable of $1.6 million because of a reduced level of business activity,
partially offset by decreases in accounts receivable of $1.4 million due
primarily to reduction of net sales and inventories of $623,000 due primarily
14
to reduction of material purchases. For the nine months ended February 29,
2004, net cash provided by operating activities was due primarily to decreases
in accounts receivable of $1.5 million due mainly to reduction of net sales,
other assets related to the receipt of income tax refunds of $1.2 million and
inventories of $1.0 million due primarily to reduction of material purchases,
partially offset by the net loss of $3.5 million.
Net cash provided by investing activities was approximately $2.9 million
for the nine months ended February 28, 2005 and net cash used in investing
activities was approximately $3.7 million for the nine months ended February
29, 2004. The cash provided by investing activities during the nine months
ended February 28, 2005 was primarily due to the net proceeds from sales and
maturity of investments, partially offset by the purchase of investments. The
cash used in investing activities during the nine months ended February 29,
2004 was primarily due to the purchase of investments, partially offset by the
net proceeds from sales and maturity of investments.
Financing activities provided cash of approximately $88,000 in the nine
months ended February 28, 2005 and $906,000 in the nine months ended February
29, 2004. Net cash provided by financing activities during the nine months
ended February 28, 2005 and during the nine months ended February 29, 2004 was
due to proceeds from issuance of common stock and the exercise of stock
options.
As of February 28, 2005, the Company had working capital of $16.4 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 February 28, 2005, the Company had repurchased 523,700
shares at an average price of $3.95 per share. Shares repurchased by the
Company are cancelled.
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 fiscal year 2006. After fiscal year
2006, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required, or, if available, that
such financing can be obtained on terms satisfactory to the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing
arrangements and has not established any special purpose entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
There have been no material changes in the composition, magnitude or other
key characteristics of the Company's contractual obligations or other
15
commitments as disclosed in the Company's Form 10-K for the year ended May 31,
2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4". This statement clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) to require them to be recognized as current-period
charges and to require the allocation of fixed production overhead to
inventory based on the normal capacity of a production facility. This
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this statement is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-
Based Payment" ("SFAS 123R"), which is a revision SFAS 123 and supersedes APB
25. Generally, the approach in SFAS 123R is similar to the approach described
in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their grant-date fair values. Pro forma disclosure
is no longer an alternative. This statement is effective as of the beginning
of the first interim or annual reporting period that begins after June 15,
2005. The Company will apply SFAS 123 beginning in the Company's second
quarter of fiscal 2006. We are currently evaluating the impact of adopting
this statement on our financial position and results of operations. The
impact on our financial statements will be dependent on the transition method,
the option pricing model used to compute fair value and the inputs to that
model such as volatility and expected life. The pro forma disclosures of the
impact of SFAS 123 provided earlier in Note 2 may not be representative of the
impact of adopting this statement. The Company expects that the adoption of
SFAS 123R will have an adverse impact on the Company's consolidated statements
of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This statement amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted. The
adoption of this standard is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" ("FSP FAS 109-2").
The American Jobs Creation Act introduces a special one-time dividends
received deduction on the repatriation of certain foreign earnings to a U.S.
taxpayer (repatriation provision), provided certain criteria are met. FSP FAS
109-2 provides accounting and disclosure guidance for the repatriation
provision. The deduction is subject to a number of limitations and, as of
today, uncertainty remains as to how to interpret numerous provisions in the
Act. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not yet been remitted
to the U.S. and cannot reasonably estimate the income tax effect of the
Foreign Earnings Repatriation Provision. The Company has yet to complete its
evaluation of the Foreign Earnings Repatriation Provision within the Act and
plans to complete its evaluation in the first half of fiscal 2006.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in
other documents we file with the Securities and Exchange Commission are risks
and uncertainties that could cause actual results to differ materially from
16
the results contemplated by the forward-looking statements in this Quarterly
Report on Form 10-Q. We believe that these risks and uncertainties are the
principal material risks facing the Company as of the date of this Form 10-Q.
In the future, we may become subject to additional risks that are not
currently known to us. If any of these risks actually occur, our business,
financial condition and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline, and you could
lose all or part of the value of your investment.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. The Company's future operating results will
depend upon a variety of factors, including the timing of significant orders,
the mix of products sold, changes in pricing by the Company, its competitors,
customers or suppliers, market acceptance of new products and enhanced
versions of the Company's products, capital spending patterns by customers,
the Company's ability to produce systems and products in volume and meet
customer requirements, and the number of products sold under volume purchase
arrangements, which tend to have lower selling prices. Accordingly, past
performance may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in purchase price from
approximately $200,000 to over $1 million per system. As a result, the loss
or deferral of a limited number of system sales could have a material adverse
effect on the Company's net sales and operating results in a particular
period. A delay or reduction in shipments near the end of a particular
quarter, due, for example, to unanticipated shipment reschedulings,
cancellations or deferrals by customers, customer credit issues, unexpected
manufacturing difficulties experienced by the Company, or delays in deliveries
by suppliers, could cause net sales in a particular quarter to fall
significantly below the Company's expectations.
RECENT OPERATING LOSSES. 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 of $4.5 million, $4.7 million and $4.5 million in
fiscal 2002, 2003 and 2004, respectively. 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 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.
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 system is designed to perform both burn-in and many of the final test
functions currently performed by high-cost memory testers. The Company's
strategy depends, in part, upon its ability to persuade potential customers
that the MTX system can successfully perform a significant portion of such
17
final test functions and that transferring such tests to MTX systems will
reduce their overall capital and test costs. There can be no assurance that
the Company's strategy will be successful. The failure of the MTX system to
achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and operating results.
CUSTOMER CONCENTRATION. Sales to the Company's five largest customers
accounted for approximately 70.5%, 73.0% and 61.7% of its net sales in fiscal
2004, 2003 and 2002, respectively. Sales to the Company's five largest
customers accounted for approximately 74.2% of its net sales in the nine
months ended February 28, 2005. During fiscal 2004, Texas Instruments
Incorporated and Spansion 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,
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 loss of or reduction or delay in orders from a significant customer, or a
delay in collecting or failure to collect accounts receivable from a
significant customer could adversely affect the Company's business, financial
condition and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of dynamic burn-in
systems. The Company's management believes that the market for burn-in
systems is mature and does not expect to have significant long-term growth.
There can be no assurance that the market for burn-in systems will grow, and
sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involve a significant commitment of capital. The
loss of individual orders due to the lengthy sales and evaluation cycle, or
delays in the sale of even a limited number of systems could have a material
adverse effect on the Company's business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 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. Approximately 81.4% of the Company's net sales in the nine
months ended February 28, 2005 were attributable to sales to customers for
delivery outside of the United States. A substantial portion of the Company's
sales has been in Asia. Turmoil in the Asian financial markets has previously
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 MTX systems) 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. Such developments could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
18
that satisfy market demand. Any such failure would materially and adversely
affect the Company's business, financial condition and results of operations.
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 and adversely affect the Company's business, financial condition
and results of operations.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants. New
product introductions by the Company's competitors or by new market entrants
could cause a decline in sales or loss of market acceptance of the Company's
existing products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices which could
adversely affect the Company's business, financial condition and operating
results. Competing suppliers of burn-in and functional test systems include
Japan Engineering Company, 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 integrated circuit, or
IC. Also, the FOX full wafer contact system is expected to face competition
from larger systems manufacturers that have more advanced technological know-
how and a broader range of manufacturing resources. The Company's test
fixture products face numerous competitors. The Company has granted royalty-
bearing licenses to several companies to make performance test boards ("PTBs")
for use with the Company's MTX systems. Sales of PTBs by licensees result in
royalties to the Company but reduce the Company's own sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The semiconductor and semiconductor
equipment industries in general, and the market for DRAMs and other memory
devices in particular, historically have been highly volatile and have
experienced periodic downturns and slowdowns. These downturns and slowdowns
have adversely affected the Company's operating results in the past. Most of
the Company's net sales are made with purchase orders and the Company does not
have purchase agreements with most of its customers. In addition, a large
portion of the Company's net sales are attributable to a few customers and
therefore a reduction in purchases by one or more customers could materially
adversely affect the Company's financial results. Semiconductor equipment
companies may experience a significant rate of cancellations and reschedulings
of purchase orders. Future cancellations and reschedulings could adversely
affect the Company's business, financial condition and results of operation.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company's MTX, MAX, ATX and FOX systems and DiePak carriers contain several
components, including environmental chambers, power supplies, wafer and die
contactors, signal distribution substrates and certain ICs, which are
currently supplied by only one or a limited number of suppliers. In the event
that any significant subcontractor or single source supplier was to become
unable or unwilling to continue to manufacture subassemblies, components or
parts in required volumes, the Company would have to identify and qualify
acceptable replacements. The process of qualifying subcontractors and
suppliers could be lengthy, and no assurance can be given that any additional
sources would be available to the Company on a timely basis. Any delay,
interruption or termination of a supplier relationship could have a material
adverse effect on the Company's business, financial condition and operating
results.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock has been, and may continue to be, extremely volatile. The
19
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in the Company's operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide economy
could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and
the market for small capitalization and high technology stocks in particular,
has experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Further,
such expansion will result in a continuing increase in the responsibility
placed upon management personnel and will require development or enhancement
of operational, managerial and financial systems and controls. If the Company
is unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN SKILLED
PERSONNEL. The Company's success depends to a significant extent upon the
continued service of Rhea Posedel, its Chief Executive Officer, as well as
other executive officers and key employees. The loss of the services of any
of its executive officers or a group of key employees could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company's future success will depend in significant part upon
its ability to attract and retain highly skilled technical, management, sales
and marketing personnel. Competition for such personnel in the semiconductor
equipment industry is intense, and there can be no assurance that the Company
will be successful in attracting or retaining such personnel. The Company's
inability to attract and retain the executive management and other key
personnel it requires will limit its ability to expand its business and would
have a material adverse effect on the Company's business, financial condition
and operating results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. These competitors would then be able to offer services and
develop, manufacture and sell products, which compete directly with the
Company's services and products. In that case, the Company's revenues and
operating results could decline.
Further, there can be no assurance that claims allowed on any patent
issued to the Company will be sufficiently broad to protect the Company's
technology, that any patent will issue from any pending application or that
foreign intellectual property laws will protect the Company's intellectual
property. The laws of some foreign countries do not protect proprietary
rights to the same extent as the laws of the U.S., and many companies have
encountered significant problems in protecting their proprietary rights in
these foreign countries. These problems can be caused by, for example, a lack
of rules and processes allowing for meaningfully defending intellectual
property rights. If the Company does not adequately protect its intellectual
property, competitors may be able to practice the Company's technologies and
erode the Company's competitive advantage, and the Company's business and
operating results could be harmed.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. There can be no
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assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company had no holdings of derivative financial or
commodity instruments at February 28, 2005.
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 $201,000.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
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Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There was no
change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
(b) Report on Form 8-K
On January 6, 2005, the Company furnished a current report on Form
8-K, attaching press releases announcing financial results for the second
fiscal quarter ended November 30, 2004 and the receipt of an order for the
Company's MTX model FP+ system and certain other information. The Form 8-K
included the Company's unaudited financial statements for the second fiscal
quarter ended November 30, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: April 14, 2005 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 14, 2005 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
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AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- ------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Press Release dated January 6, 2005. (This is incorporated
by reference to Exhibits 99.1 and 99.2 to Aehr Test Systems'
Form 8-K filed January 6, 2005).
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