-----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, SpL2oSfFz3dE0Xv89NVW8/OdzNlCGZdtX6KBLyPxKO97P02givHGtaHTWGEXH1Wy bbsxJrKnWET7khXLd39HeQ== 0001040470-05-000015.txt : 20050414 0001040470-05-000015.hdr.sgml : 20050414 20050414160044 ACCESSION NUMBER: 0001040470-05-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050414 DATE AS OF CHANGE: 20050414 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 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22893 FILM NUMBER: 05750943 BUSINESS ADDRESS: STREET 1: 400 KATO TERRACE CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: 5106239400 MAIL ADDRESS: STREET 1: 400 KATO TERRACE CITY: FREMONT STATE: CA ZIP: 94539 10-Q 1 q305-e10q.txt FORM 10-Q 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 20 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 21 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. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Aehr Test Systems (Registrant) Date: April 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 23 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). 24 EX-31 3 ex311ceo.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Rhea J. Posedel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2005 /s/ RHEA J. POSEDEL ----------------------- Rhea J. Posedel Chief Executive Officer EX-31 4 ex312cfo.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Gary L. Larson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2005 /s/ GARY L. LARSON --------------------------- Gary L. Larson Chief Financial Officer EX-32 5 ex32ceocfo.txt EXHIBIT 32 Exhibit 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 I, Rhea J. Posedel, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aehr Test Systems on Form 10-Q for the period ended February 28, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aehr Test Systems. By: /s/ RHEA J. POSEDEL ---------------------------------- Rhea J. Posedel Chief Executive Officer I, Gary L. Larson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aehr Test Systems on Form 10-Q for the period ended February 28, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aehr Test Systems. By: /s/ GARY L. LARSON ---------------------------------- Gary L. Larson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----