-----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, GKKBWXFOMfr3axraCqZqSsMXsCanAmmSCcrQwYGlf2foLi/aJLjEZEUB0zQECXU9 e4mxyM5Pvu+b48z3uiYcSA== 0001040470-06-000022.txt : 20060413 0001040470-06-000022.hdr.sgml : 20060413 20060413154141 ACCESSION NUMBER: 0001040470-06-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060413 DATE AS OF CHANGE: 20060413 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: 06758425 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 q306-e10q.txt Q306 10Q DOCUMENT 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, 2006. 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Accelerated filer Non-accelerated filer X --- --- --- Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- 1 Number of shares of Common Stock, $0.01 par value, outstanding at March 31, 2006 was 7,561,286. 2 FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2006 INDEX PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of February 28, 2006 and May 31, 2005 . . . . . . . . . . . 4 Condensed Consolidated Statements of Operations for the three months and nine months ended February 28, 2006 and 2005. 5 Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2006 and 2005 . . . . . . 6 Notes to Condensed Consolidated Financial Statements. . . . . 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 12 ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 18 ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 19 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 23 ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 23 ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3 PART I. FINANCIAL STATEMENTS Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AEHR TEST SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
February 28, May 31, 2006 2005 (Unaudited) ----------- ----------- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . $ 7,755 $ 4,952 Short-term investments. . . . . . . . . . . . . 2,200 3,813 Accounts receivable, net of allowances for doubtful accounts of $41 and $80 at February 28, 2006 and May 31, 2005, respectively . . . . . . . . . . . . . . . . 2,851 2,537 Inventories . . . . . . . . . . . . . . . . . . 7,821 7,140 Prepaid expenses and other. . . . . . . . . . . 354 585 ----------- ----------- Total current assets . . . . . . . . . . . . 20,981 19,027 Property and equipment, net . . . . . . . . . . . 1,028 1,232 Long-term investments . . . . . . . . . . . . . . -- 409 Goodwill. . . . . . . . . . . . . . . . . . . . . 274 274 Other assets, net . . . . . . . . . . . . . . . . 522 527 ----------- ----------- Total assets . . . . . . . . . . . . . . . . $22,805 $21,469 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable. . . . . . . . . . . . . . . . $ 1,316 $ 1,050 Accrued expenses. . . . . . . . . . . . . . . . 2,119 1,943 Deferred revenue. . . . . . . . . . . . . . . . 1,331 692 ----------- ----------- Total current liabilities . . . . . . . . . . 4,766 3,685 Accrued lease commitment. . . . . . . . . . . . . 318 332 ----------- ----------- Total liabilities . . . . . . . . . . . . . . 5,084 4,017 ----------- ----------- Shareholders' equity: Common stock, $0.01 par value: Issued and outstanding: 7,508 shares and 7,482 shares at February 28, 2006 and May 31, 2005, respectively. . . . . . . . . . 75 75 Additional paid-in capital. . . . . . . . . . . 37,639 37,568 Accumulated other comprehensive income. . . . . 1,166 1,250 Accumulated deficit . . . . . . . . . . . . . . (21,159) (21,441) ----------- ----------- Total shareholders' equity . . . . . . . . . 17,721 17,452 ----------- ----------- Total liabilities and shareholders' equity. . $22,805 $21,469 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AEHR TEST SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended February 28, February 28, --------------------- -------------------- 2006 2005 2006 2005 --------- --------- -------- -------- Net sales. . . . . . . . . . . . . . . . . . . $6,318 $2,084 $16,781 $12,810 Cost of sales. . . . . . . . . . . . . . . . . 3,780 1,281 9,350 9,452 --------- --------- -------- -------- Gross profit . . . . . . . . . . . . . . . . . 2,538 803 7,431 3,358 --------- --------- -------- -------- Operating expenses: Selling, general and administrative. . . . . 1,328 1,265 4,322 3,812 Research and development . . . . . . . . . . 1,015 868 3,055 2,885 --------- --------- -------- -------- Total operating expenses . . . . . . . . 2,343 2,133 7,377 6,697 --------- --------- -------- -------- Income (loss) from operations . . . . . . . . 195 (1,330) 54 (3,339) Interest income . . . . . . . . . . . . . . . 77 40 157 96 Other income, net . . . . . . . . . . . . . . 102 13 116 209 --------- --------- -------- -------- Income (loss) before income taxes . . . . . . 374 (1,277) 327 (3,034) Income tax expense (benefit) . . . . . . . . . 14 (54) 45 112 --------- --------- -------- -------- Net income (loss) . . . . . . . . . . . . . . $ 360 $(1,223) $ 282 $(3,146) ========= ========= ======== ======== Net income (loss) per share (basic) . . . . . $ 0.05 $ (0.16) $ 0.04 $ (0.42) Net income (loss) per share (diluted) . . . . $ 0.05 $ (0.16) $ 0.04 $ (0.42) Shares used in per share calculation: Basic. . . . . . . . . . . . . . . . . . . . 7,508 7,426 7,495 7,410 Diluted. . . . . . . . . . . . . . . . . . . 7,550 7,426 7,507 7,410
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AEHR TEST SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended February 28, ---------------------- 2006 2005 ---------- ---------- Cash flows from operating activities: Net income (loss)............................. $ 282 $(3,146) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts............. (38) (8) Depreciation and amortization............... 280 244 Loss on disposal of property and equipment.. 64 -- Changes in operating assets and liabilities: Accounts receivable....................... (295) 1,428 Inventories............................... (712) 623 Accounts payable.......................... 296 (1,553) Accrued expenses and deferred revenue..... 875 78 Accrued lease commitment ................. (14) 6 Prepaid expenses and other................ 227 (56) ---------- ---------- Net cash provided by (used in) operating activities.................. 965 (2,384) ---------- ---------- Cash flows from investing activities: Purchase of investments..................... (7,190) (9,518) Net proceeds from sales and maturity of investments................... 9,212 12,587 Purchase of property and equipment ......... (91) (181) ---------- ---------- Net cash provided by investing activities.................. 1,931 2,888 ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock and exercise of stock options............. 71 88 ---------- ---------- Net cash provided by financing activities.................. 71 88 ---------- ---------- Effect of exchange rates on cash................ (164) 35 ---------- ---------- Net increase in cash and cash equivalents...................... 2,803 627 Cash and cash equivalents, beginning of period.. 4,952 4,041 ---------- ---------- Cash and cash equivalents, end of period........ $ 7,755 $ 4,668 ========== ========== Supplementary disclosure of non-cash item: Transfer of inventory to property and equipment. $ 231 -- ========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 AEHR TEST SYSTEMS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED FEBRUARY 28, 2006 (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 accounting principles generally accepted in the United States of America. 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 condensed 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, 2005. 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 accounting principles generally accepted in the United States of America 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. During the third quarter of fiscal 2005, the Company concluded that it was appropriate to classify auction rate securities as short-term investments. Previously, such investments had been classified as cash and cash equivalents. 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 provided by investing activities of $900,000 in the nine months ended February 28, 2005. 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 provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company's shares and the exercise price of the option. Stock-based compensation for consultants or other third parties are accounted for in 7 accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." 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 28, --------- --------- --------- --------- 2006 2005 2006 2005 --------- --------- --------- --------- (unaudited) Net income (loss), as reported:............. $ 360 $(1,223) $ 282 $(3,146) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects......................... (203) (190) (611) (588) --------- --------- --------- --------- Pro forma net income (loss)................. $ 157 $ (1,413) $ (329) $(3,734) ========= ========= ========= ========= Net income (loss) per share: Basic, as reported.......................... $ 0.05 $ (0.16) $ 0.04 $ (0.42) ========= ========= ========= ========= Basic, pro forma............................ $ 0.02 $ (0.19) $ (0.04) $ (0.50) ========= ========= ========= ========= Diluted, as reported........................ $ 0.05 $ (0.16) $ 0.04 $ (0.42) ========= ========= ========= ========= Diluted, pro forma.......................... $ 0.02 $ (0.19) $ (0.04) $ (0.50) ========= ========= ========= =========
The above pro forma effects on net income (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 28, --------- --------- --------- --------- 2006 2005 2006 2005 --------- --------- --------- --------- Risk-free Interest Rate .............. 4.44% 3.69% 4.22% 3.60% Expected Life......................... 5 years 5 years 5 years 5 years Volatility............................ 75% 85% 75% 85% Dividend Yield........................ -- -- -- --
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), is now effective for public companies for annual reporting periods beginning after June 15, 2005 (the first quarter of fiscal 2007 for the Company). The impact of SFAS 123R on the Company in fiscal 2007 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. 8 3. 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 28, --------- --------- --------- --------- 2006 2005 2006 2005 --------- --------- --------- --------- (in thousands, except per share amounts) (unaudited) Net income (loss) available to common shareholders: Numerator: Net income (loss)................ $ 360 $ (1,223) $ 282 $ (3,146) --------- --------- --------- --------- Denominator for basic net income (loss) per share: Weighted-average shares outstanding ...... 7,508 7,426 7,495 7,410 --------- --------- --------- --------- Shares used in basic per share calculation.. 7,508 7,426 7,495 7,410 Effect of dilutive securities: Employee stock options.................. 42 -- 12 -- --------- --------- --------- --------- Denominator for diluted net income (loss) per share............................... 7,550 7,426 7,507 7,410 --------- --------- --------- --------- Basic net income (loss) per share........... $ 0.05 $ (0.16) $ 0.04 $ (0.42) ========= ========= ========= ========= Diluted net income (loss) per share......... $ 0.05 $ (0.16) $ 0.04 $ (0.42) ========= ========= ========= =========
Stock options to purchase 1,389,478 and 1,285,523 shares of common stock were outstanding on February 28, 2006 and 2005, respectively. Stock options to purchase 1,180,787 shares and 1,199,890 shares were not included in the computation of diluted net income per share in the three and nine months ended February 28, 2006, because the inclusion of such shares would be anti- dilutive. Stock options to purchase 1,285,523 shares of common stock were not included in the computation of diluted net loss per share in fiscal 2005 because the inclusion of such shares would be anti-dilutive. 4. INVENTORIES Inventories are comprised of the following (in thousands):
February 28, May 31, 2006 2005 ----------- ----------- (unaudited) Raw materials and sub-assemblies $3,081 $2,939 Work in process 3,029 3,694 Finished goods 1,711 507 ----------- ----------- $7,821 $7,140 =========== ===========
5. SEGMENT INFORMATION The Company operates in one reportable segment; the design, manufacture and marketing of advanced test and burn-in products to the semiconductor manufacturing industry. The following presents information about the Company's operations in different geographic areas (in thousands, unaudited): 9
United Adjust- States Asia Europe ments Total --------- --------- --------- --------- --------- Three months ended February 28, 2006: Net sales...................... $ 5,747 $ 550 $ 556 $ (535) $ 6,318 Portion of U.S. net sales from export sales............ 4,119 -- -- -- 4,119 Income (loss) from operations.. 190 (39) 43 1 195 Identifiable assets............ 31,249 1,773 988 (11,205) 22,805 Property and equipment, net.... 859 139 30 -- 1,028 Nine months ended February 28, 2006: Net sales...................... $15,054 $2,110 $1,135 $(1,518) $16,781 Portion of U.S. net sales from export sales............ 12,059 -- -- -- 12,059 Income(loss) from operations... -- (36) 86 4 54 Identifiable assets............ 31,249 1,773 988 (11,205) 22,805 Property and equipment, net.... 859 139 30 -- 1,028 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
The Company's foreign operations are primarily those of its Japanese and German subsidiaries. Substantially all of the sales of the subsidiaries are made to unaffiliated Japanese or European customers. Net sales and income (loss) from operations from outside the United States include the operating results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH. Adjustments consist of intercompany eliminations. Identifiable assets are all assets identified with operations in each geographic area. 6. 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, 2006 and 2005:
Three Months Ended Nine Months Ended February 28, February 28, --------- --------- --------- --------- 2006 2005 2006 2005 --------- --------- --------- --------- (in thousands, unaudited) Balance at the beginning of the period . . . $119 $103 $213 $146 Accruals for warranties issued during the period . . . . . . . . . . . . 92 43 148 129 Reversals of warranties issued during the period . . . . . . . . . . . . -- -- (52) -- Settlement made during the period (in cash or in kind) . . . . . . . . . . . (88) (44) (186) (173) --------- --------- --------- --------- Balance at the end of the period . . . . . . $123 $102 $123 $102 ======= ======= ======= =======
10 7. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss), net of tax are comprised of the following :
Three Months Ended Nine Months Ended February 28 February 28 --------------------- -------------------- 2006 2005 2006 2005 --------- ---------- --------- -------- (in thousands, unaudited) Net income (loss) . . . . . . . . . . . . . . $ 360 $(1,223) $ 282 $(3,146) Foreign currency translation adjustments expense. . . . . . . . . . . . . (27) (23) (91) (83) Unrealized holding gains (losses) arising during period . . . . . . . . . . . . . . . 3 1 7 (5) --------- --------- -------- -------- Comprehensive income (loss) . . . . . . . . . $ 336 $(1,245) $ 198 $(3,234) ========= ========= ======== ========
8. RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB")issued Statement of Financial Accounting Standards ("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 Statement of Financial Accounting Standards No. 153, "Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary Transactions," and replaces it with the exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007, beginning on June 1, 2006. The Company does not expect it to have a material financial statement impact. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123(R) were originally effective for all reporting periods beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See "Stock-Based Compensation" above for the pro forma net income (loss) and net income (loss) per share amounts, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123(R) to measure compensation expense for employee stock incentive awards. In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 107, providing supplemental implementation guidance for SFAS 123R. In April 2005, the SEC approved a rule that delayed the effective date of SFAS 123(R) to the first annual reporting period beginning after June 15, 2005. Although the Company has not yet determined whether the adoption of SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is evaluating the 11 requirements under SFAS 123(R) and SAB No. 107 and expects the adoption to have a significant adverse impact on the Company's consolidated statements of operations and net income (loss) per share. SFAS 123(R) will be effective for the Company beginning with the first quarter of fiscal 2007. In May 2005, the FASB issued Statement of Financial Accounting Standards 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement will have a material impact on our results of operations or financial condition. In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP FAS 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The Company is required to adopt FSP FAS 115-1 in the first quarter of fiscal 2007. The Company does not expect the adoption of this statement will have a material impact on our results of operations or financial condition. 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 and with our Annual Report on Form 10-K for the fiscal year ended May 31, 2005 and the consolidated financial statements and notes thereto. In addition to historical information, this report contains forward- looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. 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 and include, but are not limited to, statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those the anticipated results or other expectations reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and other factors beyond our control, and in particular, the risks discussed below and under the heading "Factors that May Affect Future Results of Operations" and those discussed in other documents we file with the Securities and Exchange Commission. All forward-looking statements included in this document are based on our current expectations, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these 12 risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed 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. For a discussion of the critical accounting policies, see "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, 2005. 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 28, ---------------------- -------------------- 2006 2005 2006 2005 ---------- ---------- --------- ---------- Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales. . . . . . . . . . . . . . . . . 59.8 61.5 55.7 73.8 ---------- ---------- --------- -------- Gross profit . . . . . . . . . . . . . . . . . 40.2 38.5 44.3 26.2 ---------- ---------- --------- -------- Operating expenses: Selling, general and administrative. . . . . 21.0 60.7 25.8 29.8 Research and development . . . . . . . . . . 16.1 41.7 18.2 22.5 ---------- ---------- --------- -------- Total operating expenses . . . . . . . . 37.1 102.4 44.0 52.3 ---------- ---------- --------- -------- Income (loss) from operations . . . . . . . . 3.1 (63.9) 0.3 (26.1) Interest income . . . . . . . . . . . . . . . 1.2 2.0 1.0 0.8 Other income, net . . . . . . . . . . . . . . 1.6 0.6 0.7 1.6 ---------- ---------- --------- -------- Income (loss) before income taxes . . . . . . 5.9 (61.3) 2.0 (23.7) Income tax expense (benefit) . . . . . . . . . 0.2 (2.6) 0.3 0.9 ---------- ---------- --------- -------- Net income (loss) . . . . . . . . . . . . . . 5.7 % (58.7)% 1.7 % (24.6)% ========== ========== ========= ========
THREE MONTHS ENDED FEBRUARY 28, 2006 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 2005 NET SALES. Net sales increased to $6.3 million in the three months ended February 28, 2006 from $2.1 million in the three months ended February 28, 2005, an increase of 203.2%. The increase in net sales in the three months ended February 28, 2006 resulted primarily from increases in net sales of the 13 Company's MTX products and dynamic burn-in products. Net sales of the Company's MTX products for the three months ended February 28, 2006 were $3.5 million, and increased approximately $3.1 million from the three months ended February 28, 2005. Net sales of the Company's dynamic burn-in products for the three months ended February 28, 2006 were $2.7 million, and increased approximately $1.4 million from the three months ended February 28, 2005. The Company anticipates that net sales in the fourth quarter of fiscal 2006 will increase when compared to those of the third quarter of fiscal 2006. 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 increased to $2.5 million in the three months ended February 28, 2006 from $803,000 in the three months ended February 28, 2005, an increase of 216.1%. Gross profit margin increased to 40.2% in the three months ended February 28, 2006 from 38.5% in the three months ended February 28, 2005. The increase in gross profit margin from last year was related to manufacturing efficiencies resulting from increased production levels, partially offset by a change in product mix resulting in higher material costs as a percentage of net sales. 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 of $1.3 million in the three months ended February 28, 2006 were flat compared to the three months ended February 28, 2005. As a percentage of net sales, SG&A expenses decreased to 21.0% in the three months ended February 28, 2006 from 60.7% in the three months ended February 28, 2005, reflecting higher 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 increased to $1.0 million in the three months ended February 28, 2006 from $868,000 in the three months ended February 28, 2005, an increase of 16.9%. This increase was primarily due to an increase in employment related expenses. As a percentage of net sales, R&D expenses decreased to 16.1% in the three months ended February 28, 2006 from 41.7% in the three months ended February 28, 2005, reflecting higher net sales. INTEREST INCOME. Interest income increased to $77,000 in the three months ended February 28, 2006 from $40,000 in the three months ended February 28, 2005. The increase was primarily the result of higher interest rates earned on invested amounts. OTHER INCOME, NET. Other income, net increased to $102,000 in the three months ended February 28, 2006 from $13,000 in the three months ended February 28, 2005. The increase in other income, net was primarily due to a dividend paid by a firm in which the Company holds a minority ownership position. INCOME TAX EXPENSE (BENEFIT). Income tax expense was $14,000 in the three months ended February 28, 2006 and income tax benefit was $54,000 in the three months ended February 28, 2005. The income tax expense in the three months ended February 28, 2006 and the income tax benefit in the three months ended February 28, 2005 were related primarily to the income or loss 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. 14 NINE MONTHS ENDED FEBRUARY 28, 2006 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 2005 NET SALES. Net sales increased to $16.8 million in the nine months ended February 28, 2006 from $12.8 million in the nine months ended February 28, 2005, an increase of 31.0%. The increase in net sales in the nine months ended February 28, 2006 resulted primarily from increases in net sales of the Company's dynamic burn-in products, partially offset by a decrease in net sales of the Company's MTX products. Net sales of the Company's dynamic burn- in products for the nine months ended February 28, 2006 were $10.7 million, and increased approximately $4.6 million from the nine months ended February 28, 2005. Net sales of the Company's MTX products for the nine months ended February 28, 2006 were $5.7 million, and decreased approximately $331,000 from the nine months ended February 28, 2005. GROSS PROFIT. Gross profit increased to $7.4 million in the nine months ended February 28, 2006 from $3.4 million in the nine months ended February 28, 2005, an increase of 121.3%. Gross profit margin increased to 44.3% in the nine months ended February 28, 2006 from 26.2% in the nine months ended February 28, 2005. The increase in gross profit margin was primarily due to a change in product mix, resulting in lower material costs as a percentage of net sales and a decrease in net sales of $2.8 million in MTX pass-through products, which have a very low gross profit margin. Beginning in January 2004, the Company received turnkey MTX system orders from a single customer, which included certain very low margin products not 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 "MTX pass-through" products. There was a reduction in net sales of MTX pass- through products of $2.8 million from the nine months ended February 28, 2005 to the nine months ended February 28, 2006. Since the Company does not typically accept orders for pass-through products, it has requested that, going forward, the customer purchases 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 increased to $4.3 million in the nine months ended February 28, 2006 from $3.8 million in the nine months ended February 28, 2005, an increase of 13.4%. The increase in SG&A expenses was primarily due to an increase in employment related expenses of approximately $175,000 and independent sales representatives commission expenses of approximately $152,000. As a percentage of net sales, SG&A expenses decreased to 25.8% in the nine months ended February 28, 2006 from 29.8% in the nine months ended February 28, 2005, reflecting higher net sales. RESEARCH AND DEVELOPMENT. R&D expenses were increased to $3.1 million in the nine months ended February 28, 2006 from $2.9 million in the nine months ended February 28, 2005. This increase was primarily due to an increase in employment related expenses. As a percentage of net sales, R&D expenses decreased to 18.2% in the nine months ended February 28, 2006 from 22.5% in the nine months ended February 28, 2005, reflecting higher net sales. INTEREST INCOME. Interest income increased to $157,000 in the nine months ended February 28, 2006 from $96,000 in the nine months ended February 28, 2005, an increase of 63.5%. The increase was primarily the result of higher interest rates earned on invested amounts. OTHER INCOME, NET. Other income, net decreased to $116,000 in the nine months ended February 28, 2006 from $209,000 in the nine months ended February 28, 2005. The decrease in other income, net was primarily due to a decrease in foreign currency exchange gains of approximately $185,000 recorded by the Company and its subsidiaries, offset partially by a dividend of $119,000 paid by a firm in which the Company holds a minority ownership position. 15 INCOME TAX EXPENSE. Income tax expense decreased to $45,000 in the nine months ended February 28, 2006, from $112,000 in the nine months ended February 28, 2005. The income tax expense in the nine months ended February 28, 2006 and in the nine months ended February 28, 2005 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 provided by operating activities was $965,000 for the nine months ended February 28, 2006 and net cash used in operating activities was approximately $2.4 million for the nine months ended February 28, 2005. For the nine months ended February 28, 2006, net cash provided by operating activities was primarily due to an increase in accrued expenses and deferred revenues of $875,000. This increase was primarily related to an increase in deferred revenue. For the nine months ended February 28, 2005, net cash used in operating activities was due primarily to the net loss and a decrease in accounts payable, partially offset by decreases in accounts receivable and inventories. Net cash provided by investing activities was approximately $1.9 million for the nine months ended February 28, 2006 and approximately $2.9 million for the nine months ended February 28, 2005. The net cash provided by investing activities during the nine months ended February 28, 2006 and February 28, 2005 was primarily due to the net proceeds from sales and maturity of investments, partially offset by the purchase of investments. Financing activities provided cash of approximately $71,000 in the nine months ended February 28, 2006 and $88,000 in the nine months ended February 28, 2005. Net cash provided by financing activities during the nine months ended February 28, 2006 and 2005 was due to proceeds from issuance of common stock and exercise of stock options. As of February 28, 2006, the Company had working capital of $16.2 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. The Company leases most of its manufacturing and office space under operating leases. The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in December 1999 and expires in December 2009. Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance. From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company's business. Any such transactions, if consummated, may use a portion of the Company's 16 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 2007. After fiscal year 2007, 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 commitments as disclosed in the Company's Form 10-K for the year ended May 31, 2005. RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB")issued Statement of Financial Accounting Standards ("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 Statement of Financial Accounting Standards No. 153, "Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary Transactions," and replaces it with the exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007, beginning on June 1, 2006. The Company does not expect it to have a material financial statement impact. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123(R) were originally effective for all reporting periods beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See "Stock-Based Compensation" above for the pro forma net income 17 (loss) and net income (loss) per share amounts, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123(R) to measure compensation expense for employee stock incentive awards. In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 107, providing supplemental implementation guidance for SFAS 123R. In April 2005, the SEC approved a rule that delayed the effective date of SFAS 123(R) to the first annual reporting period beginning after June 15, 2005. Although the Company has not yet determined whether the adoption of SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is evaluating the requirements under SFAS 123(R) and SAB No. 107 and expects the adoption to have a significant adverse impact on the Company's consolidated statements of operations and net income (loss) per share. SFAS 123(R) will be effective for the Company beginning with the first quarter of fiscal 2007. In May 2005, the FASB issued Statement of Financial Accounting Standards 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement will have a material impact on our results of operations or financial condition. In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP FAS 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The Company is required to adopt FSP FAS 115-1 in the first quarter of fiscal 2007. The Company does not expect the adoption of this statement will have a material impact on our results of operations or financial condition. 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, 2006. 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. 18 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 not be expected to result in a significant change in the net income or loss. Item 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 19 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 1A. RISK FACTORS 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, including without limitation our most recently filed Form 10-K as amended, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements in this Quarterly Report on Form 10-Q. We believe that these risks and uncertainties are the principal material risks facing the Company as of the date of this Form 10-Q. In the future, we may become subject to additional risks that are not currently known to us. If any of these risks actually occur, our business, financial condition and operating results could be seriously harmed. As a result, the trading price of our common stock could decline, and you could lose all or part of the value of your investment. CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of semiconductor equipment. Sales to the Company's five largest customers accounted for approximately 73.1%, 70.5% and 73.0% of its net sales in fiscal 2005, 2004 and 2003, respectively. Sales to the Company's five largest customers accounted for approximately 86.8% of its net sales in the nine months ended February 28, 2006. During fiscal 2005, Spansion Inc. (formerly FASL LLC.) and Texas Instruments Incorporated accounted for 43.1% and 16.9% of the Company's net sales, respectively. During fiscal 2004, Texas Instruments Incorporated and FASL LLC. accounted for 33.8% and 17.8% of the Company's net sales, respectively. During fiscal 2003, Texas Instruments Incorporated and First International Computer, Inc. accounted for 45.3% and 10.7% of the Company's net sales, respectively. No other customers represented more than 10% of the Company's net sales for any of such periods. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss of or reduction or delay in an order or 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. DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 81.2%, 84.5% and 73.0% of the Company's net sales for fiscal 2005, 2004 and 2003, respectively, were attributable to sales to customers for delivery outside of the United States. Approximately 79.7% of the Company's net sales in the nine months ended February 28, 2006 were attributable to sales for customers for delivery outside the United States. The Company operates sales, service and limited manufacturing organizations in Japan and Germany and a sales and support organization in Taiwan. The Company expects that sales of products for delivery outside of the United States will continue to represent a substantial portion of its future revenues. The future performance of the Company will depend, in significant part, upon its ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect the Company's ability to sell its products in foreign markets. In addition, the Company is subject to other risks associated with doing business 20 internationally, including longer receivable collection periods and greater difficulty in accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing global operations, risks of civil disturbance or other events which may limit or disrupt markets, international exchange restrictions, changing political conditions and monetary policies of foreign governments. A substantial portion of the Company's sales has been in Asia. Turmoil in the Asian financial markets has resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM, flash and other memory device prices in Asia have on occasion declined dramatically, and will likely do so again in the future. These developments may affect the Company in several ways. The Company believes that many international semiconductor manufacturers limited their capital spending (including the purchase of MTXs) in fiscal years 2003 and 2002, and that the uncertainty of the memory market may cause some manufacturers in the future to again delay capital spending plans. The economic conditions in Asia may also affect the ability of the Company's customers to meet their payment obligations, resulting in cancellations or deferrals of existing orders and the limitation of additional orders. In addition, Asian governments have subsidized some portion of fabrication construction. Financial turmoil may reduce these governments' willingness to continue such subsidies. Such developments could have a material and adverse effect on the Company's business, financial condition and results of operations. Because a substantial portion of the Company's net sales is from sales of products for delivery outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of the Company's products compared to products sold by local companies in such markets. Approximately 87.2%, 4.4% and 8.4% of the Company's net sales for fiscal 2005 were denominated in U.S. Dollars, Japanese Yen and Euros. Although a large percentage of sales to European customers is denominated in U.S. Dollars, substantially all sales to Japanese customers are denominated in Yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the Yen-U.S. Dollar exchange rate during the lengthy period from the date a purchase order is received until payment is made. This exchange rate risk is partially offset to the extent the Company's Japanese subsidiary incurs expenses payable in Yen. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in either Yen or U.S. Dollars. A substantial portion of the world's manufacturers of memory devices are in Korea, Japan, Taiwan and China and growth in the Company's net sales depends in large part upon its ability to penetrate these markets. Both the Korean and Japanese markets are difficult for foreign companies to penetrate. The Company has served the Japanese market through its Japanese subsidiary, which has experienced limited success and has incurred operating losses in recent years. Sales into Korea have not been significant in recent years. Taiwan and China represent an increasingly important portion of the memory manufacturer market. The Company established a support organization in Taiwan in fiscal 2001 and subsequently added a sales function. The lack of local manufacturing may impede the Company's efforts to develop the Japanese, Korean, Taiwanese and Chinese markets. There can be no assurance that the Company's efforts in Japan, Korea, Taiwan or China will be successful or that the Company will be able to achieve and sustain significant sales to, or be able to successfully compete in, these markets. INTENSE COMPETITION. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company. The Company expects its competitors will continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. In addition, 21 continuing consolidation in the semiconductor equipment industry, and potential future consolidation, could adversely affect the ability of smaller companies, such as the Company, to compete with larger, integrated competitors. New product introductions by the Company's competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company's existing products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company's business, financial condition and operating results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future. The semiconductor equipment industry is intensely competitive. Significant competitive factors in the semiconductor equipment market include price, technical capabilities, quality, delivery lead-time, flexibility, automation, cost of ownership, reliability, throughput and customer service. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company. Because the Company's MTX system performs burn-in and many of the functional tests performed by traditional memory testers, the MTX system faces intense competition from burn-in system suppliers and traditional memory tester suppliers. The market for burn-in systems is highly fragmented, with many domestic and international suppliers. Some users, such as independent test labs, build their own burn-in systems, and some other users, particularly large Japanese IC manufacturers, acquire burn-in systems from captive or affiliated suppliers. Competing suppliers of burn-in and functional test systems include Advantest Corporation, Reliability Incorporated and Dong-Il Corporation. The Company's MAX monitored and dynamic burn-in systems have faced and are expected to continue to face, increasingly severe competition, especially from several regional, low cost manufacturers and from systems manufacturers that offer higher power dissipation per device under test. The Company's FOX full wafer contact system is expected to face competition from larger systems manufacturers that have sufficient technological know-how and manufacturing capability. Competing suppliers of full wafer contact systems include Matsushita Electric Industrial Co., Ltd. and Delta V Instruments, Incorporated. The Company expects that its DiePak products will face significant competition. The Company believes that several companies have developed or are developing products which are intended to enable burn-in and test of bare die. As the bare die market develops, the Company expects that other competitors will emerge. The DiePak products also face severe competition from other alternative test solutions. The Company expects that the primary competitive factors in this market will be cost, performance, reliability and assured supply. Competing suppliers of DiePak products include Yamaichi Electronics Co., Ltd. The Company's test fixture products face numerous competitors. There are limited barriers to entry into the burn-in board ("BIB") market, and as a result, many small companies design and manufacture BIBs, including BIBs for use with the Company's MAX system. The Company's strategy is to provide only certain high performance BIBs, and the Company generally does not compete to supply low cost, low performance BIBs. The Company has a partnership with Pycon, Inc. whereby Pycon, Inc. designs, manufactures and sells the BIBs and the Company provides Pycon, Inc. with system know-how. Both companies jointly market and sell the BIBs and performance test boards ("PTBs"). There can be no assurance that the partnership will be successful. The Company has granted royalty-bearing licenses to several companies to make PTBs and BIBs for use with the Company's systems, in order to assure customers a second source of 22 supply, and the Company may grant additional licenses as well. Sales of PTBs and BIBs by licensees result in royalties to the Company but reduce the Company's own sales of PTBs and BIBs. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. New product introductions by the Company's competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company's products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company's business, financial condition and operating results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future. DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies on subcontractors to manufacture many of the components or subassemblies used in its products. The Company's MTX, MAX, and FOX systems and DiePak carriers contain several components, including environmental chambers, power supplies, wafer and die contactors, signal distribution substrates and certain ICs, which are currently supplied by only one or a limited number of suppliers. The Company's reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier was to become unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, the Company would have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be available to the Company on a timely basis. Any delay, interruption or termination of a supplier relationship could have a material and adverse effect on the Company's business, financial condition and operating results. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS The Exhibits listed on the accompanying "Index to Exhibits" are filed as part hereof, or incorporated by reference into, the report. 23 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, 2006 /s/ RHEA J. POSEDEL --------------------------- Rhea J. Posedel Chief Executive Officer and Chairman of the Board of Directors Date: April 13, 2006 /s/ GARY L. LARSON ---------------------------- Gary L. Larson Vice President of Finance and Chief Financial Officer 24 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. 25 EX-31 3 ex311ceo.txt EXHIBIT 31.1 CEO CERTIFICATION 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 13, 2006 /s/ RHEA J. POSEDEL ----------------------- Rhea J. Posedel Chief Executive Officer EX-31 4 ex312cfo.txt EXHIBIT 31.2 CFO CERTIFICATION 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 13, 2006 /s/ GARY L. LARSON --------------------------- Gary L. Larson Chief Financial Officer EX-32 5 ex32ceocfo.txt EXHIBIT 32 CEO & CFO CERTIFICATION 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, 2006 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, 2006 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-----