-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R2fpfXtOw9z05w6PBETix4I8BDvI68OlYKcU4i7SliDZfRSTxMQp/XXMasBll7EO ThPEZcZslhskYOsfzS1U3w== 0001040470-99-000007.txt : 19990414 0001040470-99-000007.hdr.sgml : 19990414 ACCESSION NUMBER: 0001040470-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEHR TEST SYSTEMS CENTRAL INDEX KEY: 0001040470 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 942424084 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22893 FILM NUMBER: 99592906 BUSINESS ADDRESS: STREET 1: 1667 PLYMOUTH ST CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6506919400 MAIL ADDRESS: STREET 1: 1667 PLYMOUTH ST CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 FORM 10-Q FOR PERIOD ENDED FEBRUARY 28, 1999 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, 1999. 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: 333-28987. 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) 1667 PLYMOUTH STREET MOUNTAIN VIEW, CA 94043 - -------------------------------------- -------------------------------------- (Address of principal (Zip Code) executive offices) (650) 691-9400 - -------------------------------------------------------------------------------- (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 --- --- Number of shares of Common Stock, $0.01 par value, outstanding at February 28, 1999 was 6,851,530. FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 1999 INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of February 28, 1999 and May 31, 1998. . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months and nine months ended February 28, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 1999 and 1998 . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . 8 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 20 ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 20 SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2 PART I. FINANCIAL STATEMENTS AEHR TEST SYSTEMS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (Unaudited)
February 28, May 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . $ 5,915 $ 6,748 Short-term investments. . . . . . . . . . . . . . 15,528 16,579 Accounts receivable . . . . . . . . . . . . . . . 6,133 7,182 Inventories . . . . . . . . . . . . . . . . . . . 10,136 11,942 Prepaid expenses and other. . . . . . . . . . . . 1,715 1,407 ----------- ----------- Total current assets . . . . . . . . . . . . . 39,427 43,858 Property and equipment, net. . . . . . . . . . . . . 2,187 1,541 Long-term investments. . . . . . . . . . . . . . . . 928 904 Other assets, net. . . . . . . . . . . . . . . . . . 733 802 ----------- ----------- Total assets . . . . . . . . . . . . . . . . . $43,275 $47,105 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt . . . . . . . . $ 168 $ 86 Accounts payable. . . . . . . . . . . . . . . . . 1,304 2,084 Accrued expenses. . . . . . . . . . . . . . . . . 2,626 4,492 Deferred revenue. . . . . . . . . . . . . . . . . 871 311 ----------- ----------- Total current liabilities. . . . . . . . . . . 4,969 6,973 Long-term debt, net of current portion. . . . . . . 432 113 Deferred lease commitment. . . . . . . . . . . . . . -- 55 ----------- ----------- Total liabilities. . . . . . . . . . . . . . . 5,401 7,141 ----------- ----------- Shareholders' equity: Common stock, $.01 par value: Issued and outstanding: 6,852 shares and 6,917 shares at February 28, 1999 and May 31, 1998, respectively . . . . . . . . . . 69 69 Additional paid-in capital . . . . . . . . . . . 35,204 35,467 Retained earnings . . . . . . . . . . . . . . . 717 2,275 Net unrealized loss on investments . . . . . . . (3) -- Cumulative translation adjustment . . . . . . . . 1,887 2,153 ----------- ----------- Total shareholders' equity . . . . . . . . . . 37,874 39,964 ----------- ----------- Total liabilities and shareholders' equity . . $43,275 $47,105 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 AEHR TEST SYSTEMS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended February 28, February 28, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales. . . . . . . . . . . . . . $4,414 $11,567 $15,030 $34,980 Cost of sales. . . . . . . . . . . . 3,120 6,907 10,061 21,134 ---------- ---------- ---------- ---------- Gross profit . . . . . . . . . . . . 1,294 4,660 4,969 13,846 ---------- ---------- ---------- ---------- Operating expenses: Selling, general and administrative 1,745 2,271 5,390 6,733 Research and development . . . . . 1,178 1,202 3,718 3,572 Research and development cost reimbursement - DARPA . . . . . (319) (128) (891) (599) ---------- ---------- ---------- ---------- Total operating expenses . 2,604 3,345 8,217 9,706 ---------- ---------- ---------- ---------- Income (loss) from operations . . . (1,310) 1,315 (3,248) 4,140 Interest income, net . . . . . . . . 270 349 902 577 Other income (expense), net . . . . 138 (7) 401 (224) ---------- ---------- ---------- ---------- Income (loss) before income taxes. . (902) 1,657 (1,945) 4,493 Income tax expense (benefit) . . . . (195) 826 (387) 2,140 ---------- ---------- ---------- ---------- Net income (loss). . . . . . . . . . (707) 831 (1,558) 2,353 ---------- ---------- ---------- ---------- Other comprehensive income, net of tax: Foreign currency translation adjustments (expense) . . . . . (63) (10) (266) 14 Unrealized holding losses arising during period . . . . . . . . . (80) -- (3) -- ---------- ---------- ---------- ---------- Comprehensive income (loss) . . . . $ (850) $ 821 $(1,827) $ 2,367 ========== ========== ========== ========== Net income (loss) per share (basic) $(0.10) $ 0.12 $ (0.23) $ 0.38 Net income (loss) per share (diluted) $(0.10) $ 0.12 $ (0.23) $ 0.36 Shares used in per share calculation: Basic . . . . . . . . . . . . . . 6,842 6,839 6,884 6,134 Diluted . . . . . . . . . . . . . 6,842 7,154 6,884 6,607
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AEHR TEST SYSTEMS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended February 28, ---------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . . . . . . . . . $(1,558) $ 2,353 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts. . . . . . . . . . . (104) 242 Loss (gain) on disposition of fixed assets . . . . . (4) 13 Depreciation and amortization. . . . . . . . . . . . 403 372 Deferred income taxes. . . . . . . . . . . . . . . . (42) -- Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . 1,260 (4,105) Inventories . . . . . . . . . . . . . . . . . . . 1,737 (264) Accounts payable. . . . . . . . . . . . . . . . . (1,304) (43) Accrued expenses and deferred revenue . . . . . . (1,333) 1,944 Deferred lease commitment . . . . . . . . . . . . (55) (123) Other assets and liabilities. . . . . . . . . . . (258) (202) ---------- ---------- Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . (1,258) 187 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale (purchase) of short-term investments . . . . . . . 1,051 (9,326) Purchase of long-term investments . . . . . . . . . . (27) (2,553) Acquisition of property and equipment . . . . . . . . . (816) (251) Decrease (increase) in other assets . . . . . . . . . . 91 (134) ---------- ---------- Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . 299 (12,264) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in notes payable -- banks. . . . . . . . . . . -- (4,326) Borrowings under long-term debt . . . . . . . . . . . . 447 71 Long-term debt and capital lease principal payments . . (102) (84) Proceeds from issuance of common stock and exercise of stock options . . . . . . . . . . . . . . 217 27,077 Repurchase of common stock. . . . . . . . . . . . . . . (480) -- ---------- ---------- Net cash provided by financing activities . . . . . . . . . . . . . . . . . 82 22,738 ---------- ---------- Effect of exchange rates on cash. . . . . . . . . . . . 44 (17) ---------- ---------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . (833) 10,644 Cash and cash equivalents, beginning of period. . . . . 6,748 1,176 ---------- ---------- Cash and cash equivalents, end of period. . . . . . . . $ 5,915 $11,820 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AEHR TEST SYSTEMS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial information has been prepared by Aehr Test Systems, without audit, in accordance with the instructions to Form 10-Q and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with generally accepted accounting principles. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company"). All significant intercompany balances have been eliminated in consolidation. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the unaudited consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the consolidated financial position and results of operations as of and for such periods indicated. These 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, 1998. 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. 6 2. EARNINGS PER SHARE EARNINGS PER SHARE. Earnings per share is computed based on the weighted average number of common and common equivalent shares (common stock options and warrants) outstanding, when diluted, during each period using the treasury stock method.
Three Months Ended Nine Months Ended February 28, February 28, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (in thousands, except per share amounts) Basic EPS: Net income (loss). . . . . . . . . . $ (707) $ 831 $(1,558) $2,353 ========== ========== ========== ========== Denominator: Weighted average common shares outstanding . . . . . . . . 6,842 6,839 6,884 6,134 ========== ========== ========== ========== Net income (loss) per share (basic) $(0.10) $0.12 $ (0.23) $0.38 ========== ========== ========== ========== Diluted EPS: Denominator: Weighted average common shares outstanding . . . . . . . . 6,842 6,839 6,884 6,134 Options . . . . . . . . . . . . . . -- 315 -- 473 ---------- ---------- ---------- ---------- Total Shares . . . . . . . . . . . . 6,842 7,154 6,884 6,607 ========== ========== ========== ========== Net income (loss) per share (diluted) $(0.10) $0.12 $ (0.23) $0.36 ========== ========== ========== ==========
3. INVENTORIES Inventories are comprised of the following (in thousands): February 28, May 31, 1999 1998 (unaudited) ----------- ----------- Raw materials and sub-assemblies $ 5,491 $ 5,688 Work in process 3,922 5,173 Finished goods 723 1,081 ----------- ----------- $10,136 $11,942 =========== =========== 7 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 Consolidated Financial Statements and the related Notes thereto included herein. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results of operations could differ materially from those anticipated in such forward-looking statements as a result of certain factors set forth under "Factors That May Affect Future Results of Operations." RESULTS OF OPERATIONS The following table sets forth items in the Company's Consolidated Statements of Operations as a percentage of net sales for the periods indicated.
Three Months Ended Nine Months Ended February 28, February 28, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales. . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales. . . . . . . . . . . . 70.7 59.7 66.9 60.4 ---------- ---------- ---------- ---------- Gross profit . . . . . . . . . . . . 29.3 40.3 33.1 39.6 ---------- ---------- ---------- ---------- Operating expenses: Selling, general and administrative 39.5 19.6 35.9 19.3 Research and development . . . . . 26.7 10.4 24.7 10.2 Research and development cost reimbursement - DARPA . . . . . (7.2) (1.1) (5.9) (1.7) ---------- ---------- ---------- ---------- Total operating expenses . 59.0 28.9 54.7 27.8 ---------- ---------- ---------- ---------- Income (loss) from operations . . . (29.7) 11.4 (21.6) 11.8 Interest income, net . . . . . . . . 6.1 3.0 6.0 1.6 Other income (expense), net . . . . 3.2 (0.1) 2.7 (0.6) ---------- ---------- ---------- ---------- Income (loss) before income taxes. . (20.4) 14.3 (12.9) 12.8 Income tax expense (benefit) . . . . (4.4) 7.1 (2.5) 6.1 ---------- ---------- ---------- ---------- Net income (loss). . . . . . . . . . (16.0)% 7.2 % (10.4)% 6.7 % ========== ========== ========== ==========
8 THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998 NET SALES. Net sales consist 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 product. Net sales decreased to $4.4 million in the three months ended February 28, 1999 from $11.6 million in the three months ended February 28, 1998, a decrease of 61.8%. The decrease in net sales in the three months ended February 28, 1999 resulted primarily from reduced shipments of MTX products. The Company anticipates that net sales in the fourth quarter of fiscal 1999 will decrease compared with the fourth quarter of fiscal 1998. GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test costs, and overhead from operations. Gross profit decreased to $1.3 million in the three months ended February 28, 1999 from $4.7 million in the three months ended February 28, 1998, a decrease of 72.2%. The decrease in gross profit was primarily due to the decrease in net sales. Gross profit margin decreased to 29.3% in the three months ended February 28, 1999 from 40.3% in the three months ended February 28, 1998. The decrease in gross profit margin was primarily due to a change in the product mix toward products with somewhat higher material costs and excess production capacity and manufacturing overhead expenses spreading over lower shipment levels, partially offset by decreases in provisions for warranty and inventory reserves. The Company anticipates that gross profit and gross profit margin in the fourth quarter of fiscal 1999 will decrease compared with the fourth quarter of fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses consist primarily of salaries and related costs of employees, customer support costs, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses decreased to $1.7 million in the three months ended February 28, 1999 from $2.3 million in the three months ended February 28, 1998, a decrease of 23.2%. The decrease in SG&A expenses was primarily due to decreases in employment related expenses, commissions paid to outside sales representatives, and a reduction in provision for doubtful accounts. As a percentage of net sales, SG&A expenses increased to 39.5% in the three months ended February 28, 1999 from 19.6% in the three months ended February 28, 1998, reflecting lower net sales. RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expenses were unchanged at $1.2 million in the three months ended February 28, 1999 and the three months ended February 28, 1998. As a percentage of net sales, R&D expenses increased to 26.7% in the three months ended February 28, 1999 from 10.4% in the three months ended February 28, 1998, reflecting lower net sales. 9 RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and development cost reimbursement - DARPA ("R&D - DARPA") is a credit representing reimbursements by Defense Advanced Research Projects Agency ("DARPA"), a U.S. government agency, of costs incurred in the Company's wafer- level burn-in development project. R&D - DARPA increased to $319,000 in the three months ended February 28, 1999 from $128,000 in the three months ended February 28, 1998, an increase of 149.2%. Payments by DARPA depend on satisfaction of development milestones, and the level of payments may vary significantly from quarter to quarter. As of February 28, 1999, there were no unpaid DARPA invoices. INTEREST INCOME. Interest income decreased to $270,000 in the three months ended February 28, 1999 from $349,000 in the three months ended February 28, 1998, a decrease of 22.6%. The decrease in interest income in the three months ended February 28, 1999 compared with the three months ended February 28, 1998 was primarily due to a lower level of investment. OTHER INCOME (EXPENSE), NET. Other income, net was $138,000 in the three months ended February 28, 1999, compared with other expense, net of $7,000 in the three months ended February 28, 1998. The increase in other income, net in the three months ended February 28, 1999 compared with other expense, net in the three months ended February 28, 1998 was primarily due to an increase in currency exchange gains recorded by the Company and its subsidiaries. INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $195,000 in the three months ended February 28, 1999, compared with income tax expense of $826,000 in the three months ended February 28, 1998. The Company's Japanese subsidiary experienced significant cumulative losses since fiscal 1993, and thus generated certain net operating losses available to offset future taxes payable. As a result of the subsidiary's cumulative operating losses, a valuation allowance has been established for the full amount of the subsidiary's net deferred tax assets. The income tax rate did not approximate the statutory tax rates of the jurisdictions in which the Company operates because no tax provision was recorded for the operating results of the Company's Japanese subsidiary in either the three months ended February 28, 1999 or the three months ended February 28, 1998. NINE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1998 NET SALES. Net sales decreased to $15.0 million in the nine months ended February 28, 1999 from $35.0 million in the nine months ended February 28, 1998, a decrease of 57.0%. The decrease in net sales resulted primarily from reduced shipments of MTX products. GROSS PROFIT. Gross profit decreased to $5.0 million in the nine months ended February 28, 1999 from $13.8 million in the nine months ended February 28, 1998, a decrease of 64.1%. The decrease in gross profit was primarily due to the decrease in net sales. Gross profit margin decreased to 33.1% in the nine months ended February 28, 1999 from 39.6% in the nine months ended February 28, 1998. The decrease in gross profit margin was primarily due to excess production capacity and manufacturing overhead expenses spreading over lower shipment levels, and a change in the product mix toward products with somewhat higher material costs, partially offset by reductions in provisions for warranty and inventory reserves. 10 SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $5.4 million in the nine months ended February 28, 1999 from $6.7 million in the nine months ended February 28, 1998, a decrease of 19.9%. The decrease in SG&A expenses was primarily due to a decrease in commissions paid to outside sales representatives, a decrease in employment related expenses, and a reduction in provision for doubtful accounts, partially offset by an increase in product support expenses. As a percentage of net sales, SG&A expenses increased to 35.9% in the nine months ended February 28, 1999 from 19.3% in the nine months ended February 28, 1998, reflecting lower net sales. RESEARCH AND DEVELOPMENT. R&D expenses increased to $3.7 million in the nine months ended February 28, 1999 from $3.6 million in the nine months ended February 28, 1998, an increase of 4.1%. The increase in R&D expenses was primarily due to increases in professional consulting and employment related expenses. As a percentage of net sales, R&D expenses increased to 24.7% in the nine months ended February 28, 1999 from 10.2% in the nine months ended February 28, 1998, reflecting lower net sales. RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA increased to $891,000 in the nine months ended February 28, 1999 from $599,000 in the nine months ended February 28, 1998, an increase of 48.7%. Payments by DARPA depend on satisfaction of development milestones, and the level of payments may vary significantly from quarter to quarter. INTEREST INCOME. Interest income increased to $902,000 in the nine months ended February 28, 1999 from $577,000 in the nine months ended February 28, 1998, an increase of 56.3%. Interest income in the nine months ended February 28, 1999 was primarily due to investment income from the proceeds obtained from the initial public offering in August 1997. Interest income in the nine months ended February 28, 1998 was also primarily due to investment income from the proceeds obtained from the initial public offering in August 1997, partially offset by interest expense of the short term domestic debt which was subsequently repaid. OTHER INCOME (EXPENSE), NET. Other income, net was $401,000 in the nine months ended February 28, 1999, compared with other expense, net of $224,000 in the nine months ended February 28, 1998. The increase in other income, net was primarily due to currency exchange gains recorded in the nine months ended February 28, 1999 compared with currency exchange losses recorded in the nine months ended February 28, 1998. INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $387,000 in the nine months ended February 28, 1999, compared with income tax expense of $2.1 million in the nine months ended February 28, 1998. The 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 the Company's Japanese subsidiary. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity has been the cash flow generated from the Company's August 1997 initial public offering, resulting in net proceeds to the Company of approximately $26.8 million. As of February 28, 1999, the Company had $21.4 million in cash and short-term investments. 11 Net cash used in operating activities was approximately $1.3 million for the nine months ended February 28, 1999 and net cash provided by operating activities was $187,000 for the nine months ended February 28, 1998. For the nine months ended February 28, 1999, net cash used in operating activities was due primarily to the net loss of $1.6 million, a decrease in accrued expenses and deferred revenue of $1.3 million and a decrease in accounts payable of $1.3 million, partially offset by a decrease in inventory of $1.7 million and a decrease in accounts receivable of $1.3 million. For the nine months ended February 28, 1998, net cash provided by operating activities was due primarily to net income of $2.4 million and increases in accrued expenses and deferred revenue of $1.9 million, partially offset by an increase in accounts receivable of $4.1 million. Net cash provided by investing activities was approximately $299,000 for the nine months ended February 28, 1999, and net cash used in investing activities was $12.3 million for the nine months ended February 28, 1998. The cash used in investing activities during the nine months ended February 28, 1998 was primarily due to the short-term and long-term investments made with proceeds from the initial public offering in August 1997. Financing activities provided cash of approximately $82,000 in the nine months ended February 28, 1999 and $22.7 million in the nine months ended February 28, 1998. The cash provided by financing activities during the nine months ended February 28, 1999 was primarily due to the increase in long-term debt of the Company's subsidiary in Japan and proceeds from exercise of stock options, partially offset by the Company's repurchase of 129,500 of its outstanding common shares at an average price of $3.71. The cash provided by financing activities during the nine months ended February 28, 1998 was primarily attributable to the Company's initial public offering in August 1997. In March 1999, the Company repurchased an additional 147,500 shares at an average price of $4.30. As of February 28, 1999, the Company had working capital of $34.5 million, compared with $36.9 million as of May 31, 1998. Working capital consists of cash and cash equivalents, short-term cash deposits, accounts receivable, inventory and other current assets, less current liabilities. The decrease in working capital was primarily due to a decrease in inventory, accounts receivable and short-term investments, partially offset by decreases in accrued expenses and accounts payable. From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company's business. Any such transactions, if consummated, may use a portion of the Company's working capital or require the issuance of equity. The Company has no present understandings, commitments or agreements with respect to any material acquisitions. The Company anticipates that the existing cash balance together with anticipated cash provided by operations are adequate to meet its working capital and capital equipment requirements through fiscal 2000. After fiscal 2000, 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. 12 FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS This report on Form 10-Q contains forward looking statements within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. The Company's future results of operations could vary significantly from the results anticipated by such forward-looking statements as a result of various factors, including those set forth as follows and elsewhere in this quarterly report on Form 10-Q. 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, market acceptance of new products and enhanced versions of the Company's products, capital spending patterns by customers, and the Company's ability to produce systems and products in volume and meet customer requirements. The Company's gross margins have varied and will continue to vary based on a variety of factors, including the mix of products sold, sales volume, and the amount of products sold under volume purchase arrangements, which tend to have lower selling prices. Accordingly, past performance may not be indicative of future performance. DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company derives a substantial portion of its revenues from the sale of a relatively small number of systems which typically range in selling price from approximately $100,000 to over $1.0 million. As a result, the loss or deferral of a limited number of system sales could have a material adverse effect on the Company's net sales and operating results in a particular period. 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. Requested shipment delays by certain customers have negatively impacted the Company's net sales in fiscal 1999. RECENT OPERATING LOSSES. The Company incurred operating losses of $2.4, $4.2 and $2.1 million in fiscal 1993, 1994 and 1995, respectively. Although the Company operated profitably during fiscal 1996, 1997 and 1998, increased net sales in those years were substantially the result of sales of new products, particularly sales of MTX systems to Siemens. In fiscal 1998, the Company began to feel the industry slowdown due to uncertainties caused primarily by the financial crisis in Asia and DRAM overcapacity. The Company incurred operating losses in the first three quarters of fiscal 1999 and anticipates incurring an operating loss in the fourth quarter of fiscal 1999. There can be no assurance that the industry will rebound soon or that the Company will be able to return to profitability soon. DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. 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 final test functions and that transferring such tests to MTX systems will reduce their overall capital and test costs. The Company has experienced a decline in shipments of MTX products in the first nine months of fiscal 1999 compared with the same period of the previous fiscal year. 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. 13 DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF DIEPAK CARRIER. The Company's DiePak strategy depends upon increased industry acceptance of bare die as an alternative to packaged die as well as acceptance of the Company's DiePak products. The failure of the bare die market to expand or of the DiePak carrier to achieve broad market acceptance would have a material adverse effect on the Company's business, financial condition and operating results. CUSTOMER CONCENTRATION. Sales to the Company's five largest customers accounted for approximately 65.4%, 75.2%, and 69.2% of its net sales in the first nine months of fiscal 1999, in fiscal 1998 and 1997, respectively. Siemens and Texas Instruments accounted for 25.5% and 21.3% of net sales in the first nine months of fiscal 1999, respectively. During fiscal 1998 and 1997, Siemens accounted for 47.0% and 55.7% of the Company's net sales, respectively. During fiscal 1998, Motorola, Inc. accounted for 12.8% of net sales. 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 burn-in systems. The market for burn-in systems is mature and estimated to be less than $100 million per year. There can be no assurance that the market for burn-in systems will grow, and sales of the Company's burn-in products could decline, as was the case in 1998. 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 70.5%, 92.5% and 90.4% of the Company's net sales for fiscal 1998, 1997 and 1996, respectively, were attributable to sales to customers for delivery outside of the United States. A substantial portion of the Company's sales have been in Asia. Turmoil in the Asian financial markets resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and will likely do so again in the future. The Company believes that many international semiconductor manufacturers limited capital spending (including the purchase of MTXs) in calendar 1998, and that the uncertainty of the DRAM market may cause some manufacturers to further delay capital spending plans. Such developments could have a material adverse affect on the Company's business, financial condition and results of operations. 14 RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The semiconductor equipment industry is subject to rapid technological change and new product introductions and enhancements. The Company's ability to remain competitive will depend in part upon its ability to develop new products and to introduce these products at competitive prices and on a timely and cost-effective basis. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products that satisfy market demand. Any such failure would materially adversely affect the Company's business, financial condition and results of operations. The Company has experienced significant delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of its products and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new products, and there can be no assurance that the Company will not encounter such difficulties in the future. The Company's inability to complete product development, products or to manufacture and ship products in volume and in time to meet customer requirements would materially adversely affect the Company's business, financial condition and results of operations. UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In 1994, the Company entered into a cost-sharing agreement with DARPA, a U.S. government agency, under which DARPA is providing co-funding for the development of wafer-level burn-in and test equipment. The contract provides for potential payments by DARPA totaling up to $6.5 million. The Company has completed certain development milestones and received DARPA payment of $5.6 million through February 28, 1999. Payments by DARPA depend on satisfaction of development milestones, and DARPA has the right to terminate project funding at any time. If DARPA funding were discontinued and the Company continued the project, the Company's operating results would be adversely affected. There also can be no assurance that the development project will result in any marketable products. 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. Competing suppliers of burn-in and functional test systems include Ando Corporation, Japan Engineering Company and Reliability Incorporated. In addition, suppliers of memory test equipment including Advantest Corporation and Teradyne, Inc. may seek to offer competitive parallel test systems in the future. The Company's MAX dynamic 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. Also, the MAX dynamic burn-in system faces severe competition from manufacturers of monitored burn-in systems. The Company's DiePak products face significant competition. Texas Instruments Incorporated sells a temporary, reusable bare die carrier, and the Company believes that several other companies have developed or are developing other such products. The Company's test fixture products face numerous competitors. The Company has granted a royalty-bearing license to one company to make Performance Test Boards ("PTBs") for use with its MTX systems. Sales of PTBs by licensees result in royalties to the Company but reduce the Company's own sales of PTBs. 15 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 memories in particular, historically have been highly volatile and have experienced periodic downturns and slowdowns. These downturns and slowdowns have adversely affected the Company's operating results in the past and in the first three quarters of fiscal 1999. A large portion of the Company's net sales are attributable to a few customers and therefore a reduction in purchases by one or more customers could materially adversely affect the Company's financial results. Semiconductor equipment companies may experience a significant rate of cancellations and reschedulings of purchase orders, as was the case in the industry in late 1995, early 1996, and 1998. There can be no assurance that the Company will not be materially adversely affected by future cancellations and reschedulings. YEAR 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has recognized the Year 2000 problem and has taken steps to mitigate the situation. The Company's in-house information technology system consists primarily of hardware and software purchased from outside parties. The Company has completed vendor-provided upgrades of vendor-developed software. Although the upgrades are claimed by the vendors to be Year 2000 compliant, the Company is testing the hardware and software for Year 2000 compliance and believes the tests will be complete by mid-1999. The Company is also testing the internally developed software and hardware which is included in the products sold to customers. Such assessments and modifications to existing software and conversion to new software are expected to be completed by mid-1999. If, however, such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has had limited communications with its suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issue. The failure of one or more of these third parties to be Year 2000 compliant could result in a material adverse effect on the Company's business, operating results and financial position. The Company plans to make inquiries to certain of the key third party suppliers to assess their Year 2000 readiness, and expects that this process will be on-going through the end of 1999. There, however, can be no assurance that the systems or subsystems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company. The Company expects that costs to address the Year 2000 issue, directly or indirectly, will total approximately $150,000, the majority of which will be spent in the current fiscal year, with the remainder being spent during fiscal 2000. Costs include salary and related expenses, hardware and software costs, consulting and miscellaneous expenses. To date, the Company has incurred expenses of approximately $70,000 related to the assessment of and preliminary efforts in dealing with the Year 2000 issue. 16 A most reasonably likely worst case Year 2000 scenario would be a temporary interruption in production or shipping resulting from unanticipated problems encountered in the information systems of the Company, or of any of the significant third parties with whom the Company does business. The pervasiveness of the Year 2000 issue makes it likely that previously unidentified issues will require remediation during the normal course of business. In such a case, the Company anticipates that transactions could be processed manually while the information system and other systems are repaired and that such interruptions would have a minor effect on the Company's operations. The costs of the planned Year 2000 modifications, and the dates by which the Company expects to complete them, are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There can be, however, no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The Company's MTX, MAX and ATX systems contain several components, including environmental chambers, power supplies and certain ICs, which are currently supplied by only one or a limited number of suppliers. The DiePak products include an interconnect substrate which is supplied only by Nitto Denko Corporation. There can be no assurance that Nitto Denko will be able to supply components within an acceptable timeframe and the Company does not have formal written supply agreements with Nitto Denko. In the event that any significant subcontractor or single source supplier were 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. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has been, and may continue to be, extremely volatile. The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's operating results, failure to meet securities analysts' expectations, general conditions in the semiconductor and semiconductor equipment industries and the worldwide economy could cause the price of the Company's Common Stock to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of the Company's Common Stock. 17 MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it must expand its operations. Such expansion will place a significant strain on the Company's administrative, operational and financial resources. Such expansion will result in a continuing increase in the responsibility placed upon management personnel and will require development or enhancement of operational, managerial and financial systems and controls. If the Company is unable to manage the expansion of its operations effectively, the Company's business, financial condition and operating results will be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon the continued service of Rhea Posedel, its President and Chief Executive Officer, as well as other executive officers and key employees. The loss of the services of any of its executive officers or a group of key employees could have a material adverse effect on the Company's business, financial condition and operating results. The Company's future success will depend in significant part upon its ability to attract and retain highly skilled technical, management, sales and marketing personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The Company's inability to attract and retain the executive management and other key personnel it requires could have a material adverse effect on the Company's business, financial condition and operating results. INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability to compete successfully is dependent in part upon its ability to protect its proprietary technology and information. Although the Company attempts to protect its proprietary technology through patents, copyrights, trade secrets and other measures, there can be no assurance that these measures will be adequate or that competitors will not be able to develop similar technology independently. Litigation may be necessary to enforce or determine the validity and scope of the Company's proprietary rights, and there can be no assurance that the Company's intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and operating results, regardless of the outcome of the litigation. There are no pending claims against the Company regarding infringement of any patents or other intellectual property rights of others. However, the Company may receive, in the future, communications from third parties asserting intellectual property claims against the Company. There can be no assurance that any such claim made in the future will not result in litigation, which could involve significant expense to the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that the Company would be able to do so on commercially reasonable terms, or at all. 18 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. 19 PART II - OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following information is provided as an amendment to the initial report on Form 10-K "Use of Proceeds from the IPO," regarding the use of proceeds from the sale of securities under the Company's Registration Statement Form S-1 (333-28987), which was declared effective on August 18, 1997. From the effective date of the Registration Statement, the net proceeds have been used for the following purposes: Purchase and installation of machinery and equipment $ 1,143,274 Repayment of indebtedness 4,455,179 Working capital 1,628,844 Temporary investments, including cash and cash equivalents 19,605,000 ------------ Total $26,832,297 ============ All of the foregoing expenses were direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates of the Company. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed by the Company during the quarter ended February 28, 1999. 20 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 13, 1999 /s/ RHEA J. POSEDEL --------------- Rhea J. Posedel President and Chief Executive Officer Date: April 13, 1999 /s/ GARY L. LARSON -------------- Gary L. Larson Vice President of Finance and Chief Financial Officer 21 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS MAY-31-1999 MAY-31-1998 DEC-01-1998 DEC-01-1997 FEB-28-1999 FEB-28-1998 5,915 11,820 15,528 10,844 6,291 11,629 158 368 10,136 10,626 39,427 45,803 9,243 8,060 7,056 6,454 43,275 50,854 4,969 11,152 0 0 0 0 0 0 69 69 37,805 39,467 43,275 50,854 4,414 11,567 4,414 11,567 3,120 6,907 3,120 6,907 2,604 3,345 138 (7) (270) (349) (902) 1,657 (195) 826 (707) 831 0 0 0 0 0 0 (707) 831 ($0.10) $0.12 ($0.10) $0.12
-----END PRIVACY-ENHANCED MESSAGE-----