<PAGE>
3,600,000 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 3,600,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by Aehr Test Systems ("Aehr Test" or the "Company") and 1,100,000
shares are being sold by the Selling Shareholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Shareholders. See
"Principal and Selling Shareholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company's
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "AEHR".
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Per Share..................... $12.00 $0.84 $11.16 $11.16
Total (3)..................... $43,200,000 $3,024,000 $27,900,000 $12,276,000
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting," for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $900,000.
(3) Certain of the Selling Shareholders have granted the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to 540,000
additional shares of Common Stock for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Proceeds to Selling
Shareholders will be $49,680,000, $3,477,600 and $18,302,400, respectively.
See "Underwriting."
-------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of the certificates representing the
shares will be made against payment on or about August 20, 1997 at the office of
Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281.
-------------------
OPPENHEIMER & CO., INC. NEEDHAM & COMPANY, INC.
The date of this Prospectus is August 14, 1997
<PAGE>
FRONT INSIDE COVER
<TABLE>
<S> <C>
TITLE: DiePak
Known Good Die Solutions
TEXT: Aehr Test Systems' DiePak-Registered Trademark- carrier is a reusable,
temporary package designed to enable IC manufacturers to perform
cost-effective final test and burn-in of bare die using the same test
and burn-in systems used for packaged ICs.
[Exploded DIAGRAM of a DiePak test fixture, including textual descriptions of
"Bare Die," "Open DiePak Carrier," "DiePak Socket," "Loaded DiePak Carrier in
Socket" and "Section of a Test Fixture."
[PHOTOGRAPH of a Multichip Module (textually described as "Memory MCM"), two
DiePak Carriers (described as same) and four Bare and Packaged dies (textually
described as "Memory Die," "Memory Package," "Microcontroller Package" and
"Microcontroller Die.")]
CAPTION: IC manufacturers have traditionally packaged their die in plastic or
ceramic packages. By using bare die directly in multichip modules (MCMs),
electronics manufacturers can improve performance and substantially reduce size.
[ARTWORK: Substrate for DiePak.]
[Aehr Test Systems Logo.]
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION, OF A PENALTY BID. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SHARES
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
DiePak-Registered Trademark-, Aehr Test and the Aehr Test Systems logo are
trademarks of the Company. This Prospectus also includes trademarks of companies
other than the Company.
2
<PAGE>
FRONT COVER FOLD-OUT
<TABLE>
<S> <C>
TITLE: MTX Parallel Test Systems
TEXT: Aehr Test Systems' MTX Massively Parallel Test System, which processes thousands
of devices simultaneously, is designed to reduce the cost of memory testing by
performing many of the time-consuming tests traditionally performed by
lower-throughput, higher-cost memory testers.
[PHOTOGRAPH: MTX Parallel Test Systems]
CAPTION: MTX Massively Parallel Test Systems on the Siemens, Dresden production floor.
[PHOTOGRAPH: MTX Performance Test Board installed in an MTX System]
CAPTION: The MTX can hold 30 test fixtures and up to 7,680 memory devices.
[PHOTOGRAPH: DiePak carriers installed in sockets on a test fixture]
CAPTION: MTX test fixtures also can support Aehr Test Systems DiePak carriers.
[FLOW DIAGRAM: Traditional Process Flow]
TEXT IN DIAGRAM: Traditional Process Flow
Device Assembly and Packaging
Pre Burn-in Test
--DC Parametrics Test
--Gross Functional Test
Monitored Burn-in
--Dynamic Stressing
--Long Functional Test
Final Test
--DC Parametrics Test
--AC Parametrics Test
--Speed Sort
--Pattern Sensitivity Test
--High-Speed Functional Test
--Data Retention Test
--Refresh Test
Ship Packaged Devices
[FLOW DIAGRAM: Aehr Test Systems Parallel Test Process Flow]
TEXT IN DIAGRAM: Aehr Test Systems Parallel Test Process Flow
Device Assembly and Packaging
Pre Burn-in Test
--DC Parametrics Test
--AC Parametrics Test
Aehr Test Systems Massively Parallel Test
--Dynamic Stressing
--Long Functional Test
--Pattern Sensitivity Test
--High-speed Functional Test
--Data Retention Test
--Refresh Test
Final Test
--DC Parametrics Test
--AC Parametrics Test
--Speed Sort
Ship Packaged Devices
TEXT: Transferring tests to the MTX system can enable Aehr Test Systems' customers to
reduce the required number of traditional memory testers.
[PHOTOGRAPH: MTX Driver Boards and Pattern Generators installed in MTX system]
CAPTION: MTX driver and pattern generator electronics
[PHOTOGRAPH: MTX operator interface showing typical information display]
CAPTION: The MTX operator interface
[Aehr Test Systems LOGO.]
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE
MATERIAL SET FORTH BELOW AND UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS IN THE PROSPECTUS GENERALLY. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING WITHOUT LIMITATION THE RISK FACTORS SET FORTH BELOW
AND THE MATTERS SET FORTH IN THE PROSPECTUS GENERALLY.
THE COMPANY
Aehr Test develops, manufactures and sells systems which are designed to
reduce the cost of testing Dynamic Random Access Memory ("DRAMs") and other
memory devices, and products which are designed to enable integrated circuit
manufacturers to perform test and burn-in of bare die. Leveraging its expertise
as a long-time leading provider of burn-in equipment, with over 2,000 systems
installed world-wide, the Company has developed and introduced two innovative
product families, the MTX system and the DiePak carrier. The MTX is a massively
parallel test system capable of processing thousands of memory devices
simultaneously. The DiePak carrier is a reusable, temporary package that enables
integrated circuit ("IC") manufacturers to perform cost-effective final test and
burn-in of bare die. The Company also offers systems that perform reliability
screening, or burn-in, of complex logic and memory devices.
The semiconductor industry is intensely competitive. IC manufacturers
compete on the basis of price, performance and increasingly, for applications
such as notebook PCs and portable phones, "form factor" or size. Price
competition is especially severe for high volume ICs such as DRAMs. In 1996, for
example, prices for 16Mb DRAMs fell from approximately $50 to approximately $10
per device. The continuing price competition motivates IC manufacturers to
reduce production costs, including test costs, wherever possible. According to
Dataquest, as of 1997 final test costs represent approximately 8.5% of total
manufacturing costs for 64Mb DRAMs. The competitive factors affecting the
semiconductor industry also have encouraged the emergence of new IC packaging
and interconnect technologies, including the use of unpackaged or "bare" die
mounted directly on a multichip module or printed circuit board. Using bare die
dramatically reduces the form factor of a system's IC components. For example, a
packaged microprocessor is typically four to five times the size of the bare
die, and a packaged memory device is typically twice the size of the bare die.
Using bare die also can improve product performance by increasing system
operating speed and reducing power consumption and potentially could save costs
associated with packaging ICs. The widespread use of bare die has been
restricted by the absence of a cost-effective means of performing final test and
burn-in.
The MTX massively parallel test system is designed to reduce the cost of
memory testing by performing both test and burn-in on thousands of devices
simultaneously, including DRAMs, Synchronous DRAMs ("SDRAMs") and Static Random
Access Memory ("SRAMs"). IC manufacturers can optimize the final test process by
transferring many time-consuming tests to the MTX system and using
lower-throughput, higher-cost memory testers to perform only the high accuracy
test functions for which they are most effective. The Company believes that this
"mix and match" strategy can enable IC manufacturers to reduce the required
number of conventional memory testers and, as a result, substantially reduce
capital and operating costs. Siemens has purchased production quantities of MTX
systems from the Company, and other leading IC manufacturers have purchased
units for evaluation. Sales of MTX systems and related products represented less
than 30% of the Company's total net sales for fiscal 1996 and approximately 60%
of total net sales for fiscal 1997.
The DiePak product line includes the DiePak carriers, which are reusable,
temporary packages that hold bare die, as well as sockets which are used to
connect the carriers to test fixtures for test and burn-in. Using the DiePak
carrier, IC manufacturers can perform final test and burn-in of bare die using
many of the same systems they use for packaged ICs. The DiePak carrier thus can
enable IC manufacturers to supply to their customers "known good die" that meet
the same reliability specifications as packaged die. Motorola, Inc. is using the
DiePak carrier in volume production, and other leading IC manufacturers have
purchased DiePak carriers for
3
<PAGE>
evaluation. Production sales of DiePak products have only recently begun and
have not represented a material amount of total net sales in any fiscal year.
The Company's current burn-in products consist of the MAX and ATX product
families. The Company believes that its burn-in systems provide accurate and
reliable burn-in for complex logic and memory ICs. The Company manufactures and
sells test fixtures, including performance test boards for use with the MTX
system and, burn-in boards for use with burn-in systems. The test fixtures hold
the ICs and provide the electrical interface between the system and the ICs
undergoing burn-in or test.
The Company assembles its products from components and parts manufactured by
others. Final assembly and test are performed at the Company's principal
facility, located in Mountain View, California, and at a Tokyo facility operated
by its Japanese subsidiary. The Company's strategy is to use in-house
manufacturing only when necessary to protect a proprietary process or if a
significant improvement in quality, cost or lead time can be achieved.
The Company markets and sells its products in the United States through a
combination of a direct sales force and independent sales representatives. The
Company markets and sells its products in Japan, Germany, Austria, Switzerland
and the Benelux countries through its subsidiaries' direct sales forces, and in
other countries through a network of independent distributors and sales
representatives.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company........................................ 2,500,000 shares
Selling Shareholders............................... 1,100,000 shares
Common Stock to be outstanding after the Offering.... 6,795,522 shares(1)
Use of proceeds ..................................... Repayment of debt, capital expenditures,
and general corporate purposes, including
working capital and potential
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol........................ AEHR
</TABLE>
- ------------------------
(1) Excludes (i) 1,341,350 shares reserved for issuance under the Company's
stock option plans, of which 759,350 shares were subject to outstanding
options as of May 31, 1997, at a weighted average exercise price of $4.01
per share and (ii) 300,000 shares reserved for issuance under the Company's
1997 Employee Stock Purchase Plan. Subsequent to May 31, 1997, options to
purchase an additional 46,750 shares were granted and are outstanding at an
exercise price of $7.50 per share. See "Management--Stock Plans" and Note 8
of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales...................................................... $ 24,529 $ 23,204 $ 23,257 $ 33,234 $ 42,020
Income (loss) from operations.................................. (2,387) (4,198) (2,080) 2,536 3,684
Income (loss) before income taxes and minority interest in
subsidiary................................................... (2,799) (4,518) (2,166) 1,531 2,542
Income tax expense (benefit)................................... 185 17 10 130 (773)
Net income (loss).............................................. (2,809) (4,250) (1,987) 1,400 3,315
Net income (loss) per share(1)................................. $ (0.68) $ (1.02) $ (0.45) $ 0.31 $ 0.73
Shares used in per share calculations(1)....................... 4,106 4,162 4,442 4,487 4,536
Supplemental net income(2)....................................... $ 3,473
Supplemental net income per share(2)............................. $ 0.73
Shares used in supplemental per share calculation(2)............. 4,766
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents...................................................................... $ 1,176 $ 25,417
Working capital................................................................................ 7,895 34,895
Total assets................................................................................... 24,389 48,630
Long-term obligations, less current portion.................................................... 356 356
Total shareholders' equity..................................................................... 10,070 37,070
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares used in per share calculations
and net income (loss) per share. Net income for fiscal 1997 includes
$1,055,000 of income tax benefit. Without the income tax benefit, net income
per share would have been $0.50 in fiscal 1997.
(2) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for fiscal year 1997 were calculated
assuming that the indebtedness to be repaid with the net proceeds of this
offering had been repaid at the beginning of fiscal 1997 using the proceeds
from the sale of 229,917 shares at an offering price of $12.00 per share.
(3) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby (at an initial public offering price of $12.00 per
share and after deducting the underwriting discount and estimated offering
expenses payable by the Company) and the application of the net proceeds
therefrom, less approximately $2.8 million of short-term borrowings to be
repaid by the Company with the proceeds of this offering ("Offering"). See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND UNDER
"PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS IN THE
PROSPECTUS GENERALLY.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly and annual operating results. During
fiscal 1996 and 1997, quarterly net sales have been as low as $7,601,000 and as
high as $11,718,000, and gross margins for quarterly sales have fluctuated
between 36.7% and 41.7%. 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, the length of sales cycles for the Company's products, timing of new
product announcements and releases by the Company and its competitors, market
acceptance of new products and enhanced versions of the Company's products,
capital spending patterns by customers, timing of completion of Defense Advanced
Research Projects Agency ("DARPA") development milestones, manufacturing
inefficiencies associated with new product introductions by the Company, the
Company's ability to produce systems and products in volume and meet customer
requirements, product returns and customer acceptance of product shipments,
volatility in the Company's targeted markets, political and economic
instability, natural disasters, regulatory changes, possible disruptions caused
by expanding existing facilities or moving into new facilities, expenses
associated with acquisitions and alliances, and various competitive factors,
including price-based competition and competition from vendors employing other
technologies. The Company's gross margins have varied and will continue to vary
based on a variety of factors, including the mix of products sold, sales volume,
and the amount of products sold under volume purchase arrangements, which tend
to have lower selling prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Accordingly, past performance
may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT
During the Company's last two fiscal years, net sales in the first fiscal
quarter, ended August 31, have declined compared with the fourth fiscal quarter,
ended May 31, of the preceding fiscal year, primarily due to additional emphasis
being placed on shipping products prior to the end of the fiscal year. The
Company expects that fluctuations of this type may occur in the future. 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 $100,000 to over $1.5 million. As a result, the loss or deferral
of a limited number of system sales could have a material adverse effect on the
Company's net sales and operating results in a particular period. All customer
purchase orders are subject to cancellation or rescheduling by the customer with
limited penalties, and, therefore, backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period. From time to
time, cancellations and reschedulings of customer orders have occurred, and
delays by the Company's suppliers in providing components or subassemblies to
the Company have caused delays in the Company's shipments of its own products.
Although the Company has not experienced material cancellations or reschedulings
of purchase orders in recent years, there can be no assurance that the Company
will not be materially adversely affected by future cancellations and
reschedulings. A substantial portion of net sales typically are realized near
the end of each quarter. A delay or reduction in shipments near the end of a
particular quarter, due, for example, to unanticipated shipment 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
6
<PAGE>
particular quarter to fall significantly below the Company's expectations. As
the Company is continuing to increase its operating expenses in anticipation of
increasing sales levels, the Company's results of operations will be adversely
affected if such sales levels are not achieved.
RECENT OPERATING LOSSES
The Company incurred operating losses of $2.4, $4.2 and $2.1 million in
fiscal 1993, 1994 and 1995, respectively. Although the Company has operated
profitably during fiscal 1996 and 1997, increased net sales in those years were
substantially the result of sales of new products, particularly sales of MTX
systems to Siemens. During fiscal 1996 and 1997, Siemens accounted for 29.1% and
55.7% of the Company's net sales, respectively. Sales to Siemens, which include
both the MTX and other products, are made pursuant to individual purchase
orders. There is no long term volume purchase commitment. There can be no
assurance that the MTX system will receive broad market acceptance or that the
Company will be able to sustain net sales growth or profitability.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM
A principal element of the Company's strategy is to capture an increasing
share of the memory test equipment market through sales of the MTX massively
parallel test system. The MTX is a new system designed to perform both burn-in
and many of the final test functions currently performed by high-cost memory
testers and the market for MTX systems is in the early stage of development. The
Company's strategy depends, in part, upon its ability to persuade potential
customers that the MTX system can successfully perform a significant portion of
such final test functions and that transferring such tests to MTX systems will
reduce their overall capital and test costs. There can be no assurance that the
Company's strategy will be successful. The failure of the MTX system to achieve
market acceptance would have a material adverse effect on the Company's
business, financial condition and operating results.
Market acceptance of the MTX system is subject to a number of risks. The
Company believes the MTX system has not yet been used in volume production to
perform a significant portion of the test functions performed by memory testers.
To date, several companies have purchased evaluation units of the MTX system;
however, only Siemens has purchased production quantities. During fiscal 1996
and 1997, Siemens accounted for 29.1% and 55.7% of the Company's net sales,
respectively. Sales to Siemens, which include both the MTX and other products,
are made pursuant to individual purchase orders. There is no long term volume
purchase commitment. Although Siemens has taken delivery of production
quantities of MTX systems, has been conducting extensive evaluations and has
placed orders for additional systems, the Company believes Siemens has not yet
completed the evaluations necessary for it to transfer significant test
functions from standard testers to MTX systems. Consequently, there can be no
assurance that the MTX system will be accepted by the market for performing
memory test functions in volume production. Future sales to Siemens and other
customers could be adversely affected if for any reason Siemens does not satisfy
itself that a significant number of test functions can successfully be
transferred to the MTX system.
Since most potential customers have successfully relied on memory testers
for many years and their personnel understand the use and maintenance of such
systems, the Company anticipates that they may be reluctant to change their
procedures in order to transfer test functions to the MTX system. Before a
customer will transfer test functions to the MTX, the test programs must be
translated for use with the MTX and lengthy correlation tests must be performed.
Correlation testing may take up to six months or more. Furthermore, MTX system
sales are expected to be primarily limited to new facilities and to existing
facilities being upgraded to accommodate new product generations, such as the
transition from 16 megabit ("Mb") to 64Mb DRAMs. Other companies have purchased
MTX systems which are being used in quality assurance and engineering
applications, and the Company believes that a number of these companies are
evaluating the MTX for use in production applications. Market acceptance of the
MTX system also may be affected by a reluctance of IC manufacturers to rely on
relatively small suppliers such as the Company.
7
<PAGE>
As is common with new complex and software-intensive products, the Company
encountered reliability, design and manufacturing issues as it began volume
production and initial installations of MTX systems at customer sites. The
Company places a high priority on addressing these issues as they arise. Certain
of these issues have been related to components and subsystems supplied to the
Company by third parties which have in some cases limited the ability of the
Company to address such issues promptly. One customer who purchased an MTX
system in 1995 for use in a quality assurance application subsequently
determined that the MTX system did not meet its particular requirements; the
Company purchased the system from that customer at a reduced price and intends
to refurbish the system for resale. Since the Company is still in the early
stages of the MTX systems' life cycle, there can be no assurance that other
reliability, design and manufacturing issues will not be discovered in the
future or that such issues, if they arise, can be resolved to the customers'
satisfaction or that the resolution of such problems will not cause the Company
to incur significant development costs or warranty expenses or to lose
significant sales opportunities.
The Company's future sales and operating results are also partially
dependent on its sales of performance test boards ("PTBs") for use with the MTX
system. Sales of PTBs by the Company and its licensees will depend upon the
number of MTX systems installed by customers.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF DIEPAK
CARRIER
Another principal element of the Company's strategy is to capture an
increasing share of the bare die burn-in and test product market through sales
of its DiePak carrier products. The Company developed the DiePak carrier to
enable burn-in and test of bare die in order to supply known good die ("KGD")
for use in applications such as multichip modules. The Company's strategy
depends upon increased industry acceptance of bare die as an alternative to
packaged die as well as acceptance of the Company's DiePak products. There can
be no assurance that the Company's strategy will be successful. The failure of
the bare die market to expand or of the DiePak carrier to achieve broad market
acceptance would have a material adverse effect on the Company's business,
financial condition and operating results.
The emergence of the bare die market and broad acceptance of the DiePak
carrier are subject to a number of risks. The Company believes that the growth
of the bare die market depends largely on the relative cost and benefits to the
manufacturers of PCs and other electronics products of using bare die rather
than alternative IC packaging methods. The Company believes that the cost of
producing KGD using DiePak products is currently higher than the cost of
producing most packaged die. There can be no assurance that electronics
manufacturers will perceive that the benefits of KGD justify its potentially
higher cost, and acceptance of KGD for many applications may therefore be
limited. In addition, electronics manufacturers must change their manufacturing
processes in order to use KGD, but electronics manufacturers typically have
substantial investments in existing manufacturing technology and have
historically been slow in transitioning to new technologies.
The adoption of the DiePak products by IC manufacturers and burn-in and test
services companies typically will involve a lengthy qualification. Such
qualification processes could delay high volume sales of DiePak products by the
Company. Motorola is the only customer to have ordered DiePak products in
production quantities. Motorola accounted for approximately 48% of the Company's
net sales of DiePak products in fiscal 1997. Sales to Motorola, which include
both DiePak products and other products, are made pursuant to individual
purchase orders. There is no long term volume purchase commitment. There can be
no assurance that the bare die market will emerge and grow as the Company
anticipates, that the DiePak carrier will achieve commercial acceptance, or that
the Company will not experience difficulties in ramping up production to meet
any increased demand for DiePak products that may develop.
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
8
<PAGE>
purchases of semiconductor equipment. Sales to the Company's five largest
customers accounted for approximately 45.1%, 55.8% and 69.2% of its net sales in
fiscal 1995, 1996 and 1997, respectively. During fiscal 1996 and 1997, Siemens
accounted for 29.1% and 55.7% of the Company's net sales, respectively. During
fiscal 1995, Sony Corporation ("Sony") accounted for 18.2% of net sales. 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, particularly Siemens, will continue to account for a high
percentage of net sales for the foreseeable future. In addition, sales to
particular customers may fluctuate significantly from quarter to quarter. The
loss of or reduction or delay in orders from a significant customer, or a delay
in collecting or failure to collect accounts receivable from a significant
customer could adversely affect the Company's business, financial condition and
operating results. See "Business-- Customers."
LIMITED MARKET FOR BURN-IN SYSTEMS
Historically, a substantial portion of the Company's net sales was derived
from the sale of burn-in systems. Sales of burn-in systems and related products
and equipment exceeded 90% of the Company's total net sales in fiscal 1995,
represented approximately 70% of total net sales in fiscal 1996 and represented
less than 40% of total net sales in fiscal 1997. The market for burn-in systems
is mature and estimated to be less than $100 million per year. In general,
process control improvements in the semiconductor industry have tended to reduce
burn-in times. In addition, as a given IC product generation matures and yields
increase, the required burn-in time may be reduced or eliminated. Some burn-in
system suppliers primarily provide "monitored" burn-in systems optimized for
DRAMs. The sale of monitored burn-in products has reduced the size of the market
segment addressed by the Company's dynamic burn-in systems. IC manufacturers,
the Company's primary historical customer base, increasingly outsource test and
burn-in to independent test labs, who often build their own systems. There can
be no assurance that the market for burn-in systems will grow, and sales of the
Company's burn-in products could decline further.
LENGTHY SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involve
a significant commitment of capital. In view of the significant investment or
strategic issues that may be involved in a decision to purchase MTX systems or
DiePak carriers, the Company may experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. Furthermore, the approval process for MTX sales may require
lengthy qualification and correlation testing. For this and other reasons, the
Company's systems typically have a lengthy sales cycle during which the Company
may expend substantial funds and management effort in securing a sale. Lengthy
sales cycles subject the Company to a number of significant risks, including
inventory obsolescence and fluctuations in operating results, over which the
Company has little or no control. The loss of individual orders due to the
lengthy sales and evaluation cycle, or delays in the sale of even a limited
number of systems could have a material adverse effect on the Company's
business, operating results and financial condition and, in particular, could
contribute to significant fluctuations in operating results on a quarterly
basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS
Approximately 81.5%, 90.4% and 92.5% of the Company's net sales for fiscal
1995, 1996 and 1997, respectively, were attributable to sales to customers for
delivery outside of the United States. The Company maintains a sales, service,
product engineering and assembly operation in Japan and a sales and service
organization in Germany. The Company expects 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
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foreign markets which in turn will depend, in part, upon a continuation of
current trade relations between the United States and foreign countries in which
semiconductor manufacturers or assemblers have operations. A change toward more
protectionist trade legislation in either the United States or such foreign
countries, such as a change in the current tariff structures, export compliance
or other trade policies, could adversely affect the Company's ability to sell
its products in foreign markets. In addition, the Company is subject to other
risks associated with doing business internationally, including longer
receivables 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. See
"Management's Discussion and Analysis of 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, including particularly Germany
and Japan, 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 77.8%, 20.1% and
2.1% of the Company's net sales for fiscal 1997 were denominated in U.S.
Dollars, Japanese Yen and German Marks, respectively. Although most sales to
German customers are denominated in dollars, substantially all sales to Japanese
customers are denominated in Japanese 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-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially offset
to the extent the Company's Japanese subsidiary incurs yen-denominated expenses.
To date, the Company has not invested in instruments designed to hedge currency
risks. In fiscal 1997, the Company experienced a foreign currency loss of
$393,000. In addition, the Company's Japanese subsidiary typically carries debt
owed to the Company and denominated in dollars. Since the subsidiary's financial
statements are based in yen, it recognizes an income gain or loss in any period
in which the value of the yen rises or falls in relation to the dollar.
A substantial portion of the world's manufacturers of memory devices are in
Korea, Japan and Taiwan and growth in the Company's net sales depends in large
part upon its ability to penetrate the Korean and Japanese 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 incurred operating losses in recent
years. Sales into Korea have not been significant in recent years. The Company
formerly served the Korean market through a direct support operation, which was
closed in 1996. The Company subsequently selected a local distributor, but its
sales into Korea remained low and that distribution relationship is being
terminated. The Company intends to select a new distributor. The lack of local
manufacturing may impede the Company's efforts to develop the Korean market.
Taiwan also represents an increasingly important portion of the memory
manufacturer market. The Company relies on an independent distributor in Taiwan
and does not have any direct operations in Taiwan. There can be no assurances
that the Company's efforts in Japan, Korea or Taiwan will be successful or that
the Company will be able to achieve and sustain significant sales to, or be able
to successfully compete in, the Japanese, Korean or Taiwanese test and burn-in
markets.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The semiconductor equipment industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new products
and to introduce these products at competitive prices and on a timely and
cost-effective basis. The Company's success in developing new and enhanced
products depends upon a variety of factors, including product selection, timely
and efficient completion of product design, timely and efficient implementation
of manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the technology that will
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be available to supply that demand. Furthermore, introductions of new and
complex products typically involve a period in which design, engineering and
reliability issues are identified and addressed by the Company and its
suppliers. This process in the past has required and in the future is likely to
require the Company to incur unreimbursed engineering expenses, and from time to
time to experience warranty claims or product returns. There can be no assurance
that the Company will be successful in selecting, developing, manufacturing and
marketing new products that satisfy market demand. Any such failure would
materially adversely affect the Company's business, financial condition and
results of operations.
Because of the complexity of the Company's products, significant delays can
occur between a product's introduction and the commencement of volume production
of such product. The Company has experienced significant delays from time to
time in the introduction of, and technical and manufacturing difficulties with,
certain of its products and may experience delays and technical and
manufacturing difficulties in future introductions or volume production of new
products, and there can be no assurance that the Company will not encounter such
difficulties in the future. The Company's inability to complete product
development, products or to manufacture and ship products in volume and in time
to meet customer requirements would materially adversely affect the Company's
business, financial condition and results of operations.
Future improvements in semiconductor design and manufacturing technology may
reduce or eliminate the need for the Company's products. For example, the
introduction of viable wafer-level burn-in and test systems, improvements in
built-in self test ("BIST") technology, and improvements in conventional test
systems, such as reduced cost or increased throughput, may significantly reduce
or eliminate the market for one or more of the Company's products.
UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT
In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides for
potential payments by DARPA totaling up to $6.5 million. The agreement provides
that (i) the Company shall retain title to all co-funded inventions, (ii) DARPA
will receive a paid-up license to use the inventions for government purposes and
(iii) DARPA can require the Company to license the inventions to third parties
on reasonable terms if the Company fails to adequately commercialize the
inventions. Payments by DARPA depend on satisfaction of development milestones,
and DARPA has the right to terminate project funding at any time. The level of
payments may vary significantly from quarter to quarter. There can be no
assurance that the Company will meet the development milestones or that DARPA
will continue funding the project. If DARPA funding were discontinued and the
Company continued the project, the Company's operating results would be
adversely affected. There also can be no assurance that the development project
will result in any marketable products. The Company has completed certain
development milestones and invoiced $2.9 million through May 31, 1997. The
remaining funding is subject to milestones scheduled to be completed through
January 1999.
INTENSE COMPETITION
In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have greater
financial, engineering, manufacturing and marketing resources than the Company.
The Company expects its competitors to continue to improve the performance of
their current products and to introduce new products with improved price and
performance characteristics. In addition, 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
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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. See "Business--Competition."
The semiconductor equipment industry is intensely competitive. Significant
competitive factors in the semiconductor equipment market include price,
technical capabilities, quality, flexibility, automation, cost of ownership,
reliability, throughput, product availability and customer service. In each of
the markets it serves, the Company faces competition 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 memory testers, the Company expects that the MTX System will
face 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 systems, which typically cost less
than the MTX system, include Ando Corporation, Japan Engineering Company,
Reliability Incorporated and Tabai Espec Corp. Some of the burn-in systems
offered by competing suppliers perform some test functions. In addition,
suppliers of memory test equipment including Advantest Corporation and Teradyne,
Inc. may seek to offer parallel test systems in the future.
The Company's DiePak products face significant competition. Texas
Instruments Incorporated sells a temporary, reusable bare die carrier which is
intended to enable burn-in and test of bare die, and the Company believes that
several other companies have developed or are developing other such products. As
the bare die market develops, the Company expects that other competitors will
emerge. The Company expects that the primary competitive factors in this market
will be performance, reliability, cost and assured supply.
The Company's MAX dynamic and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe competition,
especially from local, low cost manufacturers. Also, the MAX dynamic burn-in
system faces severe competition from manufacturers of monitored burn-in systems
that perform limited functional tests not performed by the Company's dynamic
burn-in systems, including tests designed to ensure the devices receive the
specified voltages and signals.
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 and ATX systems. The Company's strategy is to provide
higher performance BIBs, and the Company generally does not compete to supply
lower cost, low performance BIBs. The Company has granted a royalty-bearing
license to one company to make PTBs for use with its MTX systems, in order to
assure customers of a second source of supply, and the Company may license
others as well. Sales of PTBs by licensees would result in royalties to the
Company but would potentially reduce the Company's own sales of PTBs.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price and
performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss of
market acceptance of the Company's products. Increased competitive pressure
could also lead to intensified price-based competition, resulting in lower
prices which could adversely affect the Company's business, financial condition
and operating results. The Company believes that to remain competitive it must
invest significant financial resources in new product development and expand its
customer service and support worldwide. There can be no assurance that the
Company will be able to compete successfully in the future.
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CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS
The Company's operating results depend primarily upon the capital
expenditures of semiconductor manufacturers, semiconductor contract assemblers
and burn-in and test service companies worldwide, which in turn depend on the
current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor and semiconductor equipment
industries in general, and the market for DRAMs and other memories in
particular, historically have been highly volatile and have experienced periodic
downturns and slowdowns, which have had a severe negative effect on the
semiconductor industry's demand for semiconductor capital equipment, including
test and burn-in systems manufactured and marketed by the Company. These
downturns and slowdowns have also adversely affected the Company's operating
results in the past. In addition, the purchasing patterns of the Company's
customers are also highly cyclical because most customers purchase the Company's
products for use in new production facilities or for upgrading existing test
lines for the introduction of next generation products. A large portion of the
Company's net sales are attributable to a few customers and therefore a
reduction in purchases by one or more customers could materially adversely
affect the Company's financial results. There can be no assurance that the
semiconductor industry will grow in the future at the same rates it has grown
historically. Any future downturn or slowdown in the semiconductor industry
would have a material adverse effect on the Company's business, financial
condition and operating results. In addition, the need to maintain investment in
research and development and to maintain customer service and support will limit
the Company's ability to reduce its expenses in response to any such downturn or
slowdown period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers as
compared to other high technology industry sectors. Manufacturing companies that
are the customers of semiconductor equipment companies frequently revise,
postpone and cancel capital facility expansion plans. In such cases,
semiconductor equipment companies may experience a significant rate of
cancellations and reschedulings of purchase orders, as was the case in the
industry in late 1995 and early 1996. Although the Company has not experienced
material cancellations or reschedulings of purchase orders in recent years,
there can be no assurance that the Company will not be materially adversely
affected by future cancellations and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY
The Company relies on subcontractors to manufacture many of the components
or subassemblies used in its products. The Company's MTX, MAX and ATX systems
contain several components, including environmental chambers, power supplies and
certain ICs, which are currently supplied by only one or a limited number of
suppliers. The DiePak products include an interconnect substrate which is
supplied only by Nitto Denko Corporation, and certain mechanical parts and
sockets which are currently supplied only by Enplas Corporation. Nitto Denko and
the Company developed the interconnect substrate in cooperation with each other
pursuant to a joint development agreement. Enplas cooperated with the Company in
developing the DiePak socket, and Enplas has been a shareholder of the Company
since fiscal 1994. The Company does not have formal written supply agreements
with Nitto Denko or Enplas. There have been no significant interruptions in
supply of components by Nitto Denko or Enplas. 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 were to become unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, the Company would have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could be
lengthy, and no assurance can be given that any additional sources would be
available to the Company on a timely basis. 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. See
"Business--Manufacturing."
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MANAGEMENT OF CHANGING BUSINESS
If the Company is to be successful, it must expand its operations. Such
expansion will place a significant strain on the Company's administrative,
operational and financial resources. Such expansion will result in a continuing
increase in the responsibility placed upon management personnel and will require
development or enhancement of operational, managerial and financial systems and
controls. If the Company is unable to manage the expansion of its operations
effectively, the Company's business, financial condition and operating results
will be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of Rhea Posedel, its President and Chief Executive Officer, as well as
other executive officers and key employees. See "Business--Management." The
Company does not maintain key person life insurance for its benefit on any of
its personnel, and none of the Company's employees is subject to a
noncompetition agreement with the Company. The loss of the services of any of
its executive officers or a group of key employees could have a material adverse
effect on the Company's business, financial condition and operating results. The
Company's future success will depend in significant part upon its ability to
attract and retain highly skilled technical, management, sales and marketing
personnel. There is a limited number of personnel with the requisite skills to
serve in these positions, and it has become increasingly difficult for the
Company to hire such personnel. Competition for such personnel in the
semiconductor equipment industry is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
Company's inability to attract and retain the executive management and other key
personnel it requires could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--Employees."
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. Further, there can be no assurance that claims
allowed on any patent issued to the Company will be sufficiently broad to
protect the Company's technology, that any patent will issue from any pending
application or that foreign intellectual property laws will protect the
Company's intellectual property. Litigation may be necessary to enforce or
determine the validity and scope of the Company's proprietary rights, and there
can be no assurance that the Company's intellectual property rights, if
challenged, will be upheld as valid. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of the
outcome of the litigation. In addition, there can be no assurance that any of
the patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties asserting
intellectual property claims against the Company. Such claims could include
assertions that the Company's products infringe, or may infringe, the
proprietary rights of third parties, requests for indemnification against such
infringement or suggestions that the Company may be interested in acquiring a
license from such third parties. There can be no assurance that any such claim
made in the future will not result in litigation, which could involve
significant expense to the Company, and, if the Company is required or deems it
appropriate to obtain a license relating to one or more products or
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all. See "Business--Proprietary Rights."
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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.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market after the Offering could adversely affect the market price of the Common
Stock. Upon completion of the Offering, the Company will have 6,795,522 shares
of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option. Of such outstanding shares, the 3,600,000 shares offered
hereby (assuming no exercise of the Underwriters' over-allotment option) and
approximately 158,889 additional shares of Common Stock will be eligible for
immediate sale in the public market without restriction or under Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), and the remaining
3,036,633 shares will be subject to lock-up agreements restricting their
transfer until 180 days after the date of the Offering, except with the consent
of Oppenheimer & Co., Inc. After the termination of the 180-day lock-up,
3,195,522 shares will be eligible for sale in the public market pursuant to
Rules 144 and 701 under the Securities Act. The holders of 609,245 shares of
Common Stock are entitled to certain registration rights. In addition, as of May
31, 1997, options to purchase an aggregate of 759,350 shares of Common Stock
were outstanding under the Company's stock plans, all of which are subject to
the 180-day lock-up described above. As of 180 days after the effective date of
the Offering, upon expiration of lock-up agreements with the Company, an
aggregate of approximately 531,529 shares will be eligible for sale upon the
exercise of outstanding and vested stock options. Following the Offering, the
Company intends to file a registration statement covering the shares reserved
for issuance under the Company's stock plans, thus permitting the resale of such
shares in the public market without restriction. See "Description of Capital
Stock--Registration Rights" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering contemplated
hereby. The initial public offering price was determined by negotiations among
the Company, the Selling Shareholders and the representatives of the
Underwriters, and may not be indicative of prices that may prevail in the public
market after the Offering. The trading price for the Company's Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as announcements of developments related to the
Company's business or its competitors' or customers' businesses, fluctuations in
the Company's operating results, general conditions or developments in the
semiconductor and semiconductor equipment industries and the worldwide economy,
sales of the Company's Common Stock into the marketplace, the number of market
makers for the Company's Common Stock, announcements of technological
innovations or new or enhanced products by the Company or its competitors or
customers, a shortfall in revenue, gross profit, earnings or other operating
results from, or changes in, analysts' expectations and developments in the
Company's relationships with its customers and suppliers, or a variety of other
factors, many of which are beyond the Company's control. There can be no
assurance that the market price of the Company's Common Stock will
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not experience significant fluctuations, including fluctuations that are
material, adverse and unrelated to the Company's performance. See
"Underwriting."
FUTURE ACQUISITIONS
The Company may in the future pursue acquisitions of complementary product
lines, technologies or businesses. Future acquisitions by the Company may result
in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. There are currently no negotiations, understandings or
agreements with respect to any acquisition. In the event that such an
acquisition does occur, however, there can be no assurance as to the effect
thereof on the Company's business or operating results.
FUTURE CAPITAL NEEDS
In order to remain competitive, the Company must continue to make
significant investments in capital equipment, facilities, computer systems,
sales, service, training and support capabilities, procedures, controls and
research and development, among other items. The Company's capital requirements
will depend on many factors, including, but not limited to, acceptance of and
demand for the Company's products and the extent to which the Company invests in
research and development. The Company believes that the proceeds from this
offering, together with its cash, short-term investments and anticipated cash
flow from operations and credit facilities will satisfy its anticipated
financing requirements for at least the next 12 months. To the extent that such
financial resources are insufficient to fund the Company's activities,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms, or at all. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
After the Offering, assuming no exercise of the Underwriters' over-allotment
option, the Company's officers and directors and their affiliates will
beneficially own approximately 31% of the Company's Common Stock, including
options held by them that are exercisable on or before July 31, 1997. The
Company's officers and directors hold additional options which will become
exercisable after July 31, 1997 and will entitle them to purchase an additional
175,649 shares of the Company's Common Stock, which represents approximately 3%
of the shares outstanding immediately after the Offering. As a result, such
persons will have the ability to substantially influence the Company and direct
its affairs and business. Such concentration of ownership may also have the
effect of delaying, deferring or preventing a change in control of the Company.
See "Principal and Selling Shareholders."
POTENTIAL ISSUANCE OF UNDESIGNATED PREFERRED STOCK; ANTI-TAKEOVER EFFECTS
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights, preferences, privileges
and restrictions, including voting rights, that could adversely affect the
voting power and other rights of holders of the Company's Common Stock. The
issuance of the Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a person to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights, senior to the Common Stock,
and, as a result, the issuance of such stock could
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have a material adverse effect on the market value of the Common Stock. The
Company has no current plans to issue shares of Preferred Stock. The Company may
in the future adopt other measures that may have the effect of delaying,
deferring or preventing a change in control of the Company, even though at a
premium price or favored by a majority of unaffiliated shareholders. Certain of
such measures may be adopted without any further vote or action by the
shareholders. The Company has no current plans to adopt any such measures. See
"Description of Capital Stock."
BROAD DISCRETION IN ALLOCATION OF NET PROCEEDS
Although the Company expects to use approximately $22,700,000, or 84.1%, of
the net proceeds of the Offering for general corporate purposes, with the
remainder of the proceeds to be used for the repayment of certain short-term
debt and limited capital expenditures, the Company has not identified the
specific amount of the net proceeds to be used for specific purposes. The
Company will retain broad discretion to allocate the net proceeds of the
Offering, and there can be no assurance that the proceeds can or will be
invested to yield a significant return. See "Use of Proceeds."
DILUTION TO NEW INVESTORS; ABSENCE OF DIVIDENDS
Purchasers of the Common Stock offered hereby will incur immediate and
substantial net tangible book value dilution of $6.62 per share, and, to the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution." The Company has never declared
or paid cash dividends on its capital stock. The Company intends to retain any
future earnings to finance the growth and development of its business. See
"Dividend Policy."
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THE COMPANY
The Company was incorporated in California in May 1977. The Company's
principal executive offices are located at 1667 Plymouth Street, Mountain View,
California 94043, and its telephone number at that location is (415) 691-9400.
The Company also maintains offices in Irvine, California, Tokyo and Osaka, Japan
and Utting, Germany. Unless the context other requires, "Aehr Test" and the
"Company," as used in this Prospectus, refer to Aehr Test Systems and its
subsidiaries.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are $27,000,000, after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company will apply approximately $2.8 million of the net proceeds to the
repayment of outstanding indebtedness under the Company's U.S. working capital
lines of credit which bear interest at 0.75% to 1.00% over the prime rate (the
prime rate was 8.5% as of May 31, 1997) and expire in December 1997. See Note 4
of Notes to Consolidated Financial Statements. The Company currently estimates
that it will use approximately $1.5 million of the net proceeds for planned
capital expenditures in fiscal 1998. The remaining net proceeds will be used to
finance inventories and accounts receivable, to fund engineering and product
development expenditures, and for other general corporate purposes.
The Company may also use a portion of the net proceeds for the acquisition
of complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products and technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of
businesses, products or technologies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, high quality, interest-bearing
investments.
The Company will not receive any proceeds from the sale of shares of Common
Stock offered by the Selling Shareholders. See "Principal and Selling
Shareholders."
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on shares of its Common
Stock. The Company presently intends to retain future earnings for its business
and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's current bank credit facilities
currently prohibit the Company from paying cash dividends without prior bank
approval. See Note 4 of Notes to Consolidated Financial Statements.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of May 31, 1997 and as adjusted to reflect the sale of 2,500,000
shares of Common Stock offered by the Company hereby and the receipt and
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
MAY 31, 1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Notes payable and current portion of long-term debt(1)................ $ 4,773 $ 2,014
--------- -----------
--------- -----------
Long-term debt net of current portion................................. 136 136
--------- -----------
Shareholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares authorized; no
shares outstanding................................................ $ -- $ --
Common Stock, $0.01 par value; 75,000,000 shares authorized,
4,295,522 shares outstanding actual; and 6,795,522 shares
outstanding as adjusted(2)........................................ 43 68
Additional paid-in capital.......................................... 8,085 35,060
Accumulated deficit................................................. (130) (130)
Cumulative translation adjustment................................... 2,072 2,072
--------- -----------
Total shareholders' equity.......................................... 10,070 37,070
--------- -----------
Total capitalization.............................................. $ 10,206 $ 37,206
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 1,341,350 shares reserved for issuance under the Company's
stock option plans, of which 759,350 shares were subject to outstanding
options as of May 31, 1997, at a weighted average exercise price of $4.01
per share and (ii) 300,000 shares reserved for issuance under the Company's
1997 Employee Stock Purchase Plan. Subsequent to May 31, 1997, options to
purchase an additional 46,750 shares were granted and are outstanding at an
exercise price of $7.50 per share. See "Management-- Stock Plans" and Note 8
of Notes to Consolidated Financial Statements.
19
<PAGE>
DILUTION
As of May 31, 1997, the net tangible book value of the Company was
$9,585,000, or approximately $2.23 per share of Common Stock. Net tangible book
value per share represents the total tangible assets of the Company reduced by
its total liabilities and divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,500,000 shares of Common
Stock offered by the Company hereby at an initial public offering price of
$12.00 and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company as of May 31, 1997 would have been
approximately $36,585,000, or $5.38 per share. This represents an immediate
increase in net tangible book value of $3.15 per share to existing shareholders
and an immediate dilution of $6.62 per share to the new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $ 12.00
Net tangible book value per share as of May 31, 1997....... $ 2.23
Increase in net tangible book value per share attributable
to new investors......................................... 3.15
---------
Pro forma net tangible book value per share after the
offering................................................... 5.38
---------
Dilution per share to new investors.......................... $ 6.62
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of May 31, 1997, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing shareholders and by the new investors purchasing shares of Common Stock
in this offering based upon an initial public offering price of $12.00 per share
(before the deduction of the underwriting discount and estimated offering
expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)........ 4,295,522 63.2% $ 8,128,000 21.3% $ 1.89
New investors(1)................ 2,500,000 36.8 30,000,000 78.7 12.00
---------- ----- ------------- -----
Total....................... 6,795,522 100.0% $ 38,128,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Sales by the Selling Shareholders in this Offering will reduce the number of
shares held by existing shareholders to 3,195,522, or 47.0% of the total
number of shares of Common Stock outstanding, and will increase the number
of shares held by new investors to 3,600,000, or 53.0% of the total number
of shares of Common Stock outstanding after the Offering. See "Principal and
Selling Shareholders."
The foregoing tables assume no exercise of stock options after May 31, 1997.
As of May 31, 1997, there were outstanding options to purchase an aggregate of
759,350 shares of Common Stock, at a weighted average exercise price of $4.01
per share, under the Company's stock option plans. Subsequent to May 31, 1997,
options to purchase an additional 46,750 shares were granted and are outstanding
at an exercise price of $7.50 per share. Had these options been exercised as of
May 31, 1997, the dilution per share to new investors would have been $6.74. See
"Capitalization," "Management--Stock Plans," and Note 8 of Notes to Consolidated
Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
consolidated statements of operations data set forth below with respect to the
fiscal years ended May 31, 1995, 1996 and 1997 and the consolidated balance
sheets data as of May 31, 1996 and 1997 are derived from, and are qualified by
reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus. The consolidated statements of operations
data with respect to the fiscal years ended May 31, 1993 and 1994 and the
consolidated balance sheets data as of May 31, 1993, 1994 and 1995 are derived
from audited financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales............................................................... $ 24,529 $ 23,204 $ 23,257 $ 33,234 $ 42,020
Cost of sales........................................................... 15,527 15,761 16,192 19,942 25,715
--------- --------- --------- --------- ---------
Gross profit............................................................ 9,002 7,443 7,065 13,292 16,305
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative................................... 7,864 8,077 6,316 7,534 8,878
Research and development.............................................. 3,525 3,825 3,783 4,113 4,536
Research and development cost reimbursement--DARPA(1)................. -- (261) (954) (891) (793)
--------- --------- --------- --------- ---------
Total operating expenses............................................ 11,389 11,641 9,145 10,756 12,621
--------- --------- --------- --------- ---------
Income (loss) from operations........................................... (2,387) (4,198) (2,080) 2,536 3,684
Interest expense........................................................ (295) (347) (341) (446) (577)
Other income (expense), net............................................. (117) 27 255 (559) (565)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority interest in subsidiary... (2,799) (4,518) (2,166) 1,531 2,542
Income tax expense (benefit)............................................ 185 17 10 130 (773)
Minority interest in subsidiary......................................... 175 285 189 (1) --
--------- --------- --------- --------- ---------
Net income (loss)....................................................... $ (2,809) $ (4,250) $ (1,987) $ 1,400 $ 3,315
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share(2).......................................... $ (0.68) $ (1.02) $ (0.45) $ 0.31 $ 0.73
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculations(2)................................ 4,106 4,162 4,442 4,487 4,536
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental net income(3).............................................. $ 3,473
---------
---------
Supplemental net income per share(3).................................... $ 0.73
---------
---------
Shares used in supplemental per share calculation(3).................... 4,766
---------
---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................................................... $ 3,931 $ 2,430 $ 598 $ 535 $ 1,176
Working capital.............................................................. 8,425 5,685 3,564 4,799 7,895
Total assets................................................................. 24,529 20,640 19,890 23,749 24,389
Long-term obligations, less current portion(4)............................... 1,507 1,325 1,004 533 356
Total shareholders' equity................................................... 10,185 7,439 5,544 6,789 10,070
</TABLE>
- ------------------------------
(1) Consists of reimbursements from DARPA for certain research and development
expenses incurred by the Company in connection with its joint research
project with DARPA. See Note 1 of Notes to Consolidated Financial
Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the numbers of shares used in per share calculations
and net income (loss) per share. Net income for fiscal 1997 includes
$1,055,000 of income tax benefit. Without the income tax benefit, net income
per share would have been $0.50 in fiscal 1997.
(3) Supplemental net income, supplemental net income per share and shares used
in supplemental per share calculation for fiscal year 1997 were calculated
assuming that the indebtedness to be repaid with the net proceeds of this
Offering had been repaid at the beginning of fiscal 1997 using the proceeds
from the sale of 229,917 shares at an offering price of $12.00 per share.
(4) Includes long term debt and deferred lease commitments, deferred income
taxes, and minority interest in subsidiary.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. DISCUSSIONS CONTAINING
SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH BELOW AND
UNDER "PROSPECTUS SUMMARY," "RISK FACTORS" AND "BUSINESS," AS WELL AS IN THE
PROSPECTUS GENERALLY. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING WITHOUT LIMITATION THE RISK FACTORS SET FORTH IN THE SECTION ENTITLED
"RISK FACTORS" AND THE MATTERS SET FORTH IN THE PROSPECTUS GENERALLY.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and test
equipment for the semiconductor industry. Since its inception, the Company has
sold more than 2,000 systems to semiconductor manufacturers, semiconductor
contract assemblers and burn-in and test service companies worldwide. The
Company's principal products currently are the MTX massively parallel test
system, the DiePak carrier, the MAX and ATX burn-in systems and test fixtures.
Prior to fiscal 1995, the Company primarily sold burn-in systems and related
products. The Company experienced significant operating losses in fiscal 1993
through fiscal 1995 due to a decline in net sales of burn-in systems and
significant investment in the development of new products. In fiscal 1993, the
Company initiated development of the MTX massively parallel test system and the
DiePak carrier. The Company began shipping the MTX in March 1995. Revenues and
earnings increased in fiscal 1996 and 1997, primarily as a result of increases
in sales of MTX systems and associated test fixtures. The Company began shipping
DiePak carriers in volume in fiscal 1997. The Company has been profitable in
each of the last nine quarters.
In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides for
potential payments by DARPA totaling up to $6.5 million. The agreement provides
that (i) the Company shall retain title to all co-funded inventions, (ii) DARPA
will receive a paid-up license to use the inventions for government purposes and
(iii) DARPA can require the Company to license the inventions to third parties
on reasonable terms if the Company fails to adequately commercialize the
inventions. Payments by DARPA depend on satisfaction of development milestones,
and DARPA has the right to terminate project funding at any time. The level of
payments may vary significantly from quarter to quarter. There can be no
assurance that the Company will meet the development milestones or that DARPA
will continue funding the project. DARPA payments are reflected as credits to
research and development expenses. If DARPA funding were discontinued and the
Company continued the project, the Company's operating results would be
adversely affected. There also can be no assurance that the development project
will result in any marketable products. The Company has completed certain
development milestones and invoiced $2.9 million through May 31, 1997. The
remaining funding is subject to milestones scheduled to be completed through
January 1999.
The Company has a wholly-owned subsidiary in Germany which performs sales
and service and an 86.7% owned subsidiary in Japan, which performs sales,
service, and limited product engineering and manufacturing. The Company's
consolidated financial statements combine the subsidiaries' financial results
with those of the Company but, in order to account for the minority
shareholders' interest in the Japanese subsidiary, the financial statements
include a line item which excludes 13.3% of the total profits or losses of the
Japanese subsidiary, except for periods in which the subsidiary has cumulative
losses in which case no such exclusions are made.
The Company's net sales consist primarily of sales of systems, die carriers,
test fixtures, upgrades and spare parts and revenues from service contracts. The
Company recognizes revenue upon shipment of product and records a provision for
estimated future warranty costs.
22
<PAGE>
A substantial portion of the Company's net sales are derived from the sale
of products for overseas markets, particularly Germany and Japan. Consequently,
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. Although most sales to German customers are
denominated in 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-
dollar exchange rate during the lengthy period from purchase order to ultimate
payment. The exchange rate risk is partially offset to the extent the Company's
Japanese subsidiary incurs yen-denominated expenses. To date, the Company has
not invested in instruments designed to hedge currency risks, but it may do so
in the future. The Company's Japanese subsidiary typically carries debt owed to
the Company and denominated in dollars. Since its financial statements are based
in yen, the Japanese subsidiary recognizes an income or loss in any period in
which the value of the yen rises or falls in relation to the dollar.
In accordance with SFAS 86, the Company capitalizes its systems software
development costs incurred after a system achieves technological feasibility and
before first commercial shipment. Such costs typically represent a small portion
of total research and development costs. Capitalized costs, net of accumulated
amortization, of approximately $323,000, $213,000 and $57,000 were included as
of May 31, 1995, 1996 and 1997, respectively.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's consolidated
statements of operations as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................................... 100.0% 100.0% 100.0%
Cost of sales............................................................... 69.6 60.0 61.2
--------- --------- ---------
Gross profit................................................................ 30.4 40.0 38.8
--------- --------- ---------
Operating expenses:
Sales, general and administrative......................................... 27.1 22.7 21.1
Research and development.................................................. 16.3 12.4 10.8
Research and development cost
reimbursement--DARPA.................................................... (4.1) (2.7) (1.9)
--------- --------- ---------
Total operating expenses................................................ 39.3 32.4 30.0
--------- --------- ---------
Income (loss) from operations............................................... (8.9) 7.6 8.8
Interest expense............................................................ (1.5) (1.3) (1.4)
Other income (expense), net................................................. 1.1 (1.7) (1.3)
--------- --------- ---------
Income (loss) before income taxes and minority interest in subsidiary....... (9.3) 4.6 6.1
Income tax expense (benefit)................................................ -- 0.4 (1.8)
Minority interest in subsidiary............................................. 0.8 -- --
--------- --------- ---------
Net income (loss)........................................................... (8.5)% 4.2% 7.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
NET SALES. Net sales increased to $42.0 million in fiscal 1997 from $33.2
million in fiscal 1996, an increase of 26.4%. The growth in net sales was caused
primarily by increased shipments of MTX products, primarily to Siemens, and to a
lesser extent by increased shipments of DiePak carriers. These increases
23
<PAGE>
were partially offset by a decline in unit sales of burn-in systems,
particularly in the Japanese market. Sales of MTX products represented less than
30% of total net sales in fiscal 1996, increasing to approximately 60% of total
net sales in fiscal 1997. Sales of DiePak products were insignificant in fiscal
1996 and less than 5% of total net sales in fiscal 1997. Sales of the Company's
historical products, which include burn-in systems and related fixtures and
equipment, represented approximately 70% of total net sales in fiscal 1996 and
less than 40% of total net sales in fiscal 1997. Siemens accounted for 55.7 %
and 29.1% of net sales for fiscal 1997 and fiscal 1996, respectively.
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 $16.3 million in fiscal
1997 from $13.3 million in fiscal 1996, an increase of 22.7%. Gross profit
margin decreased to 38.8% in fiscal 1997 from 40.0% in fiscal 1996. The decrease
in gross profit margin of 1.2 percentage points resulted primarily from an
increase in other miscellaneous costs of goods, such as provision for inventory
reserves, representing approximately one-and-one-half times the gross profit
margin percentage decrease, and scrap, representing approximately one-half the
gross profit margin percentage decrease, partially offset by improvement in
production efficiencies due to higher levels of production.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of employees,
customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses increased to $8.9 million in fiscal 1997 from $7.5 million in fiscal
1996, an increase of 17.8%. As a percentage of net sales, SG&A expenses
decreased to 21.1% for fiscal 1997 from 22.7% for fiscal 1996. Approximately
one-half of the increase in SG&A expenses in fiscal 1997 was due to increased
commission expenses to independent sales representatives related to higher
levels of shipments, and approximately one-fourth of the increase was due to
increased employment costs. The decrease in SG&A expenses as a percentage of net
sales was primarily due to the increase in net sales. The Company anticipates
that SG&A expenses will generally continue to increase throughout fiscal 1998,
but may vary as a percentage of 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 $4.5
million in fiscal 1997 from $4.1 million in fiscal 1996, an increase of 10.3%.
Approximately one-half of the increase in R&D expenses was due to an increase in
professional consulting contracts and approximately one-fourth of the increase
was due to increased employment costs. As a percentage of net sales, R&D
expenses decreased to 10.8% for fiscal 1997 from 12.4% for fiscal 1996,
reflecting higher net sales. The Company anticipates that R&D expenses will
increase for fiscal 1998 compared to fiscal 1997, while such expenses may
fluctuate as a percentage of net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT--DARPA. Research and
development cost reimbursement--DARPA ("R&D--DARPA") is a credit representing
reimbursements by DARPA of costs incurred in the Company's wafer-level burn-in
development project. R&D--DARPA credit decreased to $793,000 in fiscal 1997 from
$891,000 in fiscal 1996, a decrease of 11.0%. The decrease was due to delays in
completion of development milestones.
INTEREST EXPENSE. Interest expense increased to $577,000 in fiscal 1997
from $446,000 in fiscal 1996, an increase of 29.4%, primarily because of
increased borrowings to support the Company's increased volume of shipments.
OTHER INCOME (EXPENSE), NET. Other expense, net increased to $565,000 in
fiscal 1997 from $559,000 in fiscal 1996, an increase of 1.1%.
24
<PAGE>
INCOME TAX EXPENSE (BENEFIT). Income tax expense consisted primarily of the
minimum federal and state taxes in the U.S., as operating loss carryforwards
offset other taxable income, and taxes on earnings of the Company's German
subsidiary. Income tax benefit was $773,000 in fiscal 1997 compared with income
tax expense of $130,000 in fiscal 1996. The Company recognizes deferred tax
assets and liabilities for the expected future consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. The Company's Japanese subsidiary experienced significant
cumulative losses since fiscal 1993, and thus generated certain net operating
losses available to offset future taxes payable. As a result of the subsidiary's
cumulative operating losses, a valuation allowance has been established for the
full amount of the subsidiary's net deferred tax assets. The Company has
recorded tax benefits totaling $1.1 million related to recognition of its United
States net deferred tax assets. The Company expects that its effective tax rate
for fiscal 1998 will more closely approximate the statutory tax rates of the
jurisdictions in which the Company operates.
MINORITY INTEREST IN SUBSIDIARY. Minority interest in subsidiary was a
negligible amount in both fiscal 1997 and 1996.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31, 1995
NET SALES. Net sales increased to $33.2 million in fiscal 1996 from $23.3
million in fiscal 1995, an increase of 42.9%. The increase in net sales in
fiscal 1996 was primarily due to increased shipments of MTX products, primarily
to Siemens. Sales of MTX products represented less than 10% of total net sales
in fiscal 1995 and less than 30% of total net sales in fiscal 1996. Sales of the
Company's historical products, which include burn-in systems and related
fixtures and equipment, represented more than 90% of total net sales in fiscal
1995 and approximately 70% of total net sales in fiscal 1996.
GROSS PROFIT. Gross profit increased to $13.3 million in fiscal 1996 from
$7.1 million in fiscal 1995, an increase of 88.1%. Gross profit margin increased
to 40.0% in fiscal 1996 from 30.4% in fiscal 1995. The higher gross profit and
higher gross profit margin in fiscal 1996 as compared with fiscal 1995 were due
to improved production efficiencies associated with increased net sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $7.5
million in fiscal 1996 from $6.3 million in fiscal 1995, an increase of 19.3%.
As a percentage of net sales, SG&A expenses decreased to 22.7% in fiscal 1996
from 27.1% in fiscal 1995. Approximately one-half of the increase in SG&A
expenses in fiscal 1996 compared with fiscal 1995 was due to increased
commission expenses related to higher levels of shipments and approximately
one-tenth of the increase was due to increased employment costs. The decrease in
SG&A expenses as a percentage of net sales in fiscal 1996 compared with fiscal
1995 was primarily due to the increase in net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.1 million in fiscal
1996 from $3.8 million in fiscal 1995, an increase of 8.7%. Approximately
one-half of the increase in R&D expenses in fiscal 1996 compared with fiscal
1995 was primarily due to an increase in professional consulting contracts, and
approximately one-third of the increase was due to increased employment costs in
the United States, partially offset by a decrease in Japan. As a percentage of
net sales, R&D expenses decreased to 12.4% in fiscal 1996 from 16.3% in fiscal
1995, reflecting the increase in net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT--DARPA. R&D--DARPA decreased to
$891,000 in fiscal 1996 from $954,000 in fiscal 1995, a decrease of 6.6%. The
decrease in fiscal 1996 from fiscal 1995 was due to delays in completion of
development milestones.
INTEREST EXPENSE. Interest expense increased to $446,000 in fiscal 1996
from $341,000 in fiscal 1995, an increase of 30.8%, primarily because of
increased borrowings to support the Company's increased volume of shipments.
25
<PAGE>
OTHER INCOME (EXPENSE), NET. Other expense, net was $559,000 in fiscal
1996, compared with other income, net of $255,000 in fiscal 1995. This was
primarily due to foreign currency losses incurred by the Company's Japanese
subsidiary in fiscal 1996 as opposed to foreign currency gains incurred in
fiscal 1995.
INCOME TAX EXPENSE (BENEFIT). Income tax expense increased to $130,000 in
fiscal 1996 from $10,000 in fiscal 1995. Income tax expense in fiscal 1996
primarily consisted of foreign taxes, most of which related to the operations of
the Company's subsidiary in Germany, and United States federal and state
alternative minimum income taxes. Income tax expense in fiscal 1995 primarily
consisted of foreign taxes.
MINORITY INTEREST IN SUBSIDIARY. Minority interest in subsidiary was a loss
of $1,000 in fiscal 1996 compared to a gain of $189,000 in fiscal 1995. This was
due to profits reported by the Company's majority-owned Japanese subsidiary in
fiscal 1996 compared to losses reported in fiscal 1995.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statements of operations
data for each of the past eight quarters as well as the percentage of the
Company's net sales represented by each item. The unaudited financial statements
have been prepared on the same basis as the audited financial statements
contained herein and include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of such information when read in conjunction with the Company's
financial statements and notes thereto appearing elsewhere in this Prospectus.
The operating results for any quarter are not necessarily indicative of results
for any future period. Net income for the quarter ended May 31, 1997 includes
$1,055,000 of income tax benefit. Without the income tax benefit, net income per
share for that quarter would have been $0.19 and the net income as a percentage
of sales for that quarter would have been 7.5%.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
AUG. 31, NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1995 1995 1996 1996 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 7,601 $ 7,783 $ 8,683 $ 9,167 $ 9,071 $ 10,486 $ 10,745
Cost of sales...................... 4,589 4,654 5,355 5,344 5,745 6,494 6,364
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit....................... 3,012 3,129 3,328 3,823 3,326 3,992 4,381
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative................. 1,886 1,609 1,833 2,206 1,849 2,088 2,222
Research and development......... 1,054 1,023 1,061 975 1,016 1,174 1,157
Research and development cost
reimbursement--DARPA........... (236) (219) (197) (239) (176) (117) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 2,704 2,413 2,697 2,942 2,689 3,145 3,379
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations............. 308 716 631 881 637 847 1,002
Interest expense................... (132) (96) (106) (112) (152) (134) (185)
Other income (expense), net........ (1) (131) (48) (379) 9 (113) (246)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes and
minority interest in
subsidiary....................... 175 489 477 390 494 600 571
Income tax expense (benefit)....... 13 107 75 (65) 130 177 (19)
Minority interest in subsidiary.... 9 3 (12) (1) 3 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... $ 171 $ 385 $ 390 $ 454 $ 367 $ 423 $ 590
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income per share............... $ 0.04 $ 0.08 $ 0.09 $ 0.10 $ 0.08 $ 0.10 $ 0.13
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shares used in per share
calculations..................... 4,488 4,505 4,497 4,459 4,478 4,477 4,578
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAY 31,
1997
-----------
<S> <C>
Net sales.......................... $ 11,718
Cost of sales...................... 7,112
-----------
Gross profit....................... 4,606
-----------
Operating expenses:
Selling, general and
administrative................. 2,719
Research and development......... 1,189
Research and development cost
reimbursement--DARPA........... (500)
-----------
Total operating expenses....... 3,408
-----------
Income from operations............. 1,198
Interest expense................... (106)
Other income (expense), net........ (215)
-----------
Income before income taxes and
minority interest in
subsidiary....................... 877
Income tax expense (benefit)....... (1,061)
Minority interest in subsidiary.... (3)
-----------
Net income......................... $ 1,935
-----------
-----------
Net income per share............... $ 0.42
-----------
-----------
Shares used in per share
calculations..................... 4,611
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------------------------------------
AUG. 31, NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1995 1995 1996 1996 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 60.4 59.8 61.7 58.3 63.3 61.9 59.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit....................... 39.6 40.2 38.3 41.7 36.7 38.1 40.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative................. 24.8 20.7 21.1 24.1 20.4 19.9 20.7
Research and development......... 13.8 13.1 12.2 10.6 11.2 11.2 10.8
Research and development cost
reimbursement--DARPA........... (3.1) (2.8) (2.3) (2.6) (1.9) (1.1) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 35.5 31.0 31.0 32.1 29.7 30.0 31.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations............. 4.1 9.2 7.3 9.6 7.0 8.1 9.3
Interest expense................... (1.8) (1.2) (1.2) (1.2) (1.7) (1.3) (1.7)
Other income (expense), net........ -- (1.7) (0.6) (4.1) 0.1 (1.1) (2.3)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes and
minority interest in
subsidiary....................... 2.3 6.3 5.5 4.3 5.4 5.7 5.3
Income tax expense (benefit)....... 0.2 1.4 0.9 (0.7) 1.4 1.7 (0.2)
Minority interest in subsidiary.... 0.1 -- (0.1) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... 2.2% 4.9% 4.5% 5.0% 4.0% 4.0% 5.5%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAY 31,
1997
-----------
<S> <C>
Net sales.......................... 100.0%
Cost of sales...................... 60.7
-----------
Gross profit....................... 39.3
-----------
Operating expenses:
Selling, general and
administrative................. 23.2
Research and development......... 10.1
Research and development cost
reimbursement--DARPA........... (4.2)
-----------
Total operating expenses....... 29.1
-----------
Income from operations............. 10.2
Interest expense................... (0.9)
Other income (expense), net........ (1.8)
-----------
Income before income taxes and
minority interest in
subsidiary....................... 7.5
Income tax expense (benefit)....... (9.0)
Minority interest in subsidiary.... --
-----------
Net income......................... 16.5%
-----------
-----------
</TABLE>
27
<PAGE>
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, the length of
sales cycles for the Company's products, timing of new product announcements and
releases by the Company and its competitors, market acceptance of new products
and enhanced versions of the Company's products, capital spending patterns by
customers, timing of completion of DARPA development milestones, manufacturing
inefficiencies associated with new product introductions by the Company, the
Company's ability to produce systems and products in volume and meet customer
requirements, product returns and customer acceptance of product shipments,
volatility in the Company's targeted markets, political and economic
instability, natural disasters, regulatory changes, possible disruptions caused
by expanding existing facilities or moving into new facilities, expenses
associated with acquisitions and alliances, and various competitive factors,
including price-based competition and competition from vendors employing other
technologies. The Company's gross margins have varied and will continue to vary
based on a variety of factors, including the mix of products sold, sales volume,
and the amount of products sold under volume purchase arrangements, which tend
to have lower selling prices. Due to the uncertainties enumerated above and
other factors, the Company could experience material fluctuations in future
operating results on a quarterly or annual basis.
The Company's net sales have generally trended upward in the last eight
fiscal quarters. The sales growth has been due primarily to increases in MTX
shipments, partially offset by declines in sales of burn-in systems and sales in
Japan. During the Company's last two fiscal years, net sales in the first fiscal
quarter, ended August 31, have declined compared with the fourth fiscal quarter,
ending May 31, of the preceding fiscal year, primarily due to additional
emphasis being placed on shipping products prior to the end of the fiscal year.
The Company expects that fluctuations of this type may occur in the future. With
the exception of the quarter ended August 31, 1996, gross profit has generally
trended upward in the last eight fiscal quarters, although gross profit margin
has fluctuated significantly. The lower gross profit in the quarter ended August
31, 1996 was primarily caused by a change in product mix toward the sale of
products with somewhat higher material costs and an increase in other costs of
sales, such as scrap, packaging costs, inventory reserves, and provision for
warranty. The Company's gross profit and gross profit margin have been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of the products sold, and the costs to manufacture, service and
support new and enhanced products.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private sales of
equity securities totaling approximately $7.2 million, bank debt and lease
financing for capital equipment. As of May 31, 1997, the Company's principal
sources of liquidity included cash and short term investments of $2.8 million,
two U.S. bank lines of credit totaling $7.0 million collateralized by
substantially all of the Company's U.S. assets, of which $2.8 million was
outstanding, and various borrowings in Japan which totaled $2.2 million. Most of
the borrowings in Japan mature within a year and carry interest rates ranging
from 0.5% to 8.0%. The amount outstanding under the U.S. lines of credit, which
carry interest rates ranging from prime plus 0.75% to prime plus 1.00% (as of
May 31, 1997, the prime rate was 8.50%) and expire December 4, 1997, will be
repaid from the net proceeds of this Offering.
Net cash provided by operations was $3.0 million in fiscal 1997, and was
primarily the result of the Company's net income and reductions in accounts
receivable, partially offset by an increase in inventory. Net cash used for
operations was $754,000 in fiscal 1996, primarily the result of increases in
accounts receivable and inventory, partially offset by the Company's net income
and increases in accounts payable and accrued expenses. Financing activities
used cash of $2.1 million in fiscal 1997. Financing activities provided cash of
$1.1 million in fiscal 1996, due primarily to increased borrowing from banks.
Property and equipment purchases were $647,000 and $581,000 in fiscal 1997
and fiscal 1996, respectively. The Company anticipates that its capital
expenditures in fiscal 1998 will be greater than
28
<PAGE>
amounts spent in fiscal 1997 and will be directed primarily to support product
development, as well as requirements for manufacturing, customer support, and
demonstration equipment.
As of May 31, 1997, the Company had working capital of $7.9 million,
compared with $4.8 million as of May 31, 1996. Working capital consists of cash
and cash equivalents, accounts receivable, inventory and other current assets,
less current liabilities. Accounts receivable decreased to $7.5 million as of
May 31, 1997 from $10.6 million as of May 31, 1996 as a result of policies
instituted to encourage earlier payment of outstanding balances. Inventory
increased to $10.5 million as of May 31, 1997 from $7.9 million as of May 31,
1996. The inventory increase in fiscal 1997 related to increased production to
support increasing levels of shipments. The Company expects future inventory
levels to fluctuate with anticipated sales levels, and believes that, because of
the relatively long manufacturing cycle for its systems, its investment in
inventory will continue to represent a significant portion of its working
capital. As a result of increases in inventory, the Company may be subject to an
increasing risk of inventory obsolescence, which could materially and adversely
affect the Company's results of operations.
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 believes that the proceeds from the sale by the Company of the
Common Stock offered hereby, together with existing sources of liquidity and
anticipated funds from operations, will satisfy the Company's anticipated
working capital and capital equipment requirements through fiscal 1998. See "Use
of Proceeds." After fiscal 1998, 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.
29
<PAGE>
BUSINESS
GENERAL
Aehr Test Systems develops, manufactures and sells systems which are
designed to reduce the cost of testing DRAMs and other memory devices, and
products which are designed to enable IC manufacturers to perform test and
burn-in of bare die. Leveraging its expertise as a long-time leading provider of
burn-in equipment, with over 2,000 systems installed world-wide, the Company has
developed and introduced two innovative product families, the MTX system and the
DiePak carrier. The MTX is a massively parallel test system capable of
processing thousands of memory devices simultaneously. The MTX system performs
not only burn-in but also many of the tests traditionally performed in final
test by lower-throughput, higher cost memory testers. Siemens has purchased
production quantities of MTX systems from the Company, and other leading
manufacturers have purchased units for evaluation. The DiePak carrier is a
reusable, temporary package that enables IC manufacturers to perform
cost-effective final test and burn-in of bare die. Motorola is using the DiePak
carrier in volume production, and other leading manufacturers have purchased
DiePak carriers for evaluation. The Company also offers systems that perform
reliability screening, or burn-in, of complex logic and memory devices.
INDUSTRY BACKGROUND
THE INTEGRATED CIRCUIT MARKET
The semiconductor industry has grown significantly over the last five years
due to the continued growth of the personal computer market, the expansion of
the telecommunications industry and the emergence of new market areas such as
consumer electronics products, wireless communication devices, notebook and
handheld computers, and automotive and other applications. Dataquest estimates
that integrated circuit manufacturers produced more than 49 billion ICs in 1996,
resulting in sales of $121.8 billion, and that unit shipments are likely to
increase to more than 83 billion by 2000. While the volume of ICs produced and
sold has increased over the past several years, the industry remains intensely
competitive. IC manufacturers typically compete on the basis of price,
performance and, increasingly for certain applications, size or form factor.
Severe price competition characterizes many sectors of the IC industry.
Average selling prices typically decline substantially as products mature,
volumes increase and new competitors enter the market. In 1996, for example,
prices for 16 megabit ("Mb") DRAMs fell from approximately $50 to approximately
$10 per device. As a result, IC manufacturers face increased pressure to reduce
production costs wherever possible.
Market demand for higher performance has led IC manufacturers to develop
denser, more complex ICs, capable of holding more data or performing more
functions faster. Since 1989, for example, advanced process technologies have
migrated from 0.8 micron to 0.25 micron geometries, and leading edge memory
devices have increased in density from 4Mb to 64Mb. The smaller geometries and
more complex designs have generally increased the need for sophisticated IC
testing and reliability screening, which increases test times and test costs.
Minimizing the amount of space on a printed circuit board assembly used by
one or more ICs (the "form factor") has become increasingly important for many
applications, including notebook and handheld computers, portable phones and
other portable consumer products. By using IC components with smaller form
factors, system manufacturers can build smaller, lighter products or enhance the
performance or features of existing products without increasing size. The demand
for smaller form factors is driving the adoption of new IC packaging and
interconnect technologies, including the use of unpackaged or "bare" die. Bare
die may be mounted directly on a printed circuit board or used in multichip
modules, such as the module for Intel's Pentium Pro microprocessor, which
contain multiple bare die.
30
<PAGE>
THE IC TEST PROCESS
Semiconductor manufacturing is a complex, multi-step process and defects or
weaknesses that may result in the failure of an IC may be introduced at any
process step. Failures may occur immediately or at any time during the operating
life of an IC, sometimes after several months of normal use. Semiconductor
manufacturers rely on testing and reliability screening to detect failures that
occur during the manufacturing process.
Testing and reliability screening involves multiple steps. The first set of
tests is typically performed before the processed semiconductor wafer is cut
into individual die, in order to avoid the cost of packaging defective die into
their plastic or ceramic packages. After the die are packaged and before they
undergo reliability screening, a short test is typically performed in order to
detect packaging defects. Most leading-edge microprocessors, microcontrollers
and memory ICs then undergo an extensive reliability screening and stress
testing procedure known as "burn-in." The burn-in process screens for early
failures by operating the IC at elevated voltages and temperatures, usually at
125 DEG.C (257 DEG.F), for periods typically ranging from 12 to 48 hours.
Burn-in systems can process thousands of ICs simultaneously. After burn-in, the
ICs undergo a final test process using automatic test equipment ("testers").
Testers can test up to 64 ICs simultaneously and perform a variety of tests at
multiple temperatures.
Final test can be time-consuming and costly, particularly for memory ICs.
Final testing of the current generation of 16Mb DRAMs often takes five to ten
minutes per device. A memory tester with a 64 site automated handler can cost
between $2 million and $3 million. A test facility adequate to process the
output of a typical leading-edge memory IC production facility may require 30 or
more such systems. Prime Research Group, a market research firm, estimates that
the market for memory testers exceeded $1.5 billion in 1996. According to
Dataquest, final test costs range from $0.38 per 16Mb DRAM to $4.00 per 64Mb
DRAM. The continuing price competition motivates IC manufacturers to reduce
production costs, including test costs, wherever possible.
TRENDS IN IC PACKAGING AND THE NEED FOR KNOWN GOOD DIE
Consumer market demand for smaller and lighter products has spurred the
emergence of new IC packaging and interconnect technologies. Die have
traditionally been packaged in plastic or ceramic packages which substantially
increase the size of the device. A packaged microprocessor is typically four to
five times the size of the die, and a packaged memory device is typically twice
the size of the die. By using bare die, electronics manufacturers can
substantially reduce size and weight in such products as wireless phones, pagers
and portable PCs. Eliminating packaging also can improve final product
performance because reducing the lengths of the connections between ICs enhances
system operating speeds and reduces power consumption. Moreover, since packaging
can represent a significant cost, particularly for high pin-count
microprocessors, using bare die potentially could save costs associated with
packaging ICs. For these reasons, electronics manufacturers are increasingly
interested in using bare die as well as "chip scale" packages (bare die
partially covered with a thin plastic layer). Electronics manufacturers already
have begun placing multiple bare die in multichip modules ("MCMs") and on
printed circuit board assemblies using "flip-chip," "wire bond" and other
connection technologies.
Dataquest estimates that bare die could account for 12% of worldwide IC
production by 2000. The emergence of a bare die market, however, has been
constrained by the absence of a cost-effective approach to burn-in and final
test of bare die. Until recently, electronics manufacturers using bare die have
been forced to perform burn-in and final test after the die have been mounted on
MCMs or printed circuit boards. If defective die are discovered at this stage,
the MCMs or printed circuit board assemblies must be discarded or reworked
manually, either of which is costly. Using unburned-in die can be prohibitively
expensive because even low defect rates in individual bare die are compounded
and can result in relatively high defect rates in products that contain multiple
bare die. Consequently, IC manufacturers need the
31
<PAGE>
ability to supply "known good die" ("KGD") that have passed burn-in and final
test prior to shipment and that offer their customers the assurance that they
meet the same specifications as packaged ICs.
THE AEHR TEST SOLUTION
Aehr Test provides innovative systems designed to reduce the cost of testing
DRAMs and other memory devices and products designed to enable IC manufacturers
to perform test and burn-in of bare die. The Company has recently introduced two
new product families, the MTX system and the DiePak carrier.
Leveraging its expertise as a long-time leading provider of burn-in systems
that process thousands of ICs in parallel, Aehr Test has developed and
introduced the MTX, a massively parallel test system capable of testing
thousands of memory devices simultaneously. The MTX system performs many of the
time-consuming tests traditionally performed in final test by lower-throughput,
higher-cost memory testers. Using the MTX system, IC manufacturers can optimize
the final test process by transferring many time-consuming tests to the MTX
system and using memory testers to perform only the high-accuracy, short-
duration test functions for which they are most effective. The Company believes
IC manufacturers using this "mix and match" strategy can substantially reduce
the required number of conventional memory testers and, as a result,
substantially reduce capital and operating costs.
Aehr Test also has developed and introduced the DiePak carrier product line.
The DiePak carrier is a reusable, temporary package that enables semiconductor
manufacturers to perform cost-effective final test and burn-in of bare die using
existing burn-in and test equipment with only minimum modifications. The Company
believes that the availability of known good die will help enable bare die to
become a practical alternative to packaged die and will accelerate the expansion
of the bare die market.
STRATEGY
Aehr Test's objective is to strengthen its position as a leading provider of
high-quality, cost-effective systems and products for testing and reliability
screening of both packaged ICs and bare die. The principal elements of the
Company's strategy include:
- REDUCE TEST COSTS FOR MEMORY MANUFACTURERS. The Company seeks to capture
an increasing share of the memory test equipment market by marketing the
MTX massively parallel test system. The Company believes that high volume
manufacturers of memory devices can substantially reduce their test costs
by mixing and matching high-throughput MTX systems with lower-throughput,
higher-cost testers. Siemens has purchased production quantities of the
MTX system, and other leading manufacturers have purchased units for
evaluation.
- PROVIDE ENABLING PRODUCTS FOR THE EMERGING BARE DIE MARKET. The Company
seeks to facilitate the expansion of the bare die market by offering
solutions to enable cost-effective test and burn-in of bare die. The
Company has developed and begun shipping the DiePak carrier, which enables
test and burn-in of bare die using the same burn-in and test systems
currently used for packaged ICs. Motorola has begun using the DiePak
carrier in volume production of known good die and other leading
manufacturers have purchased DiePak carriers for qualification. In
addition, the Company believes that periodic replacement of DiePak
carriers by its customers will generate recurring revenues because new
designs require new carriers and DiePak carriers have a limited life.
- BUILD ON LONG-STANDING CUSTOMER RELATIONSHIPS. The Company has shipped
over 2,000 systems since its inception in 1977 and believes it is one of
the leading suppliers of burn-in systems. The Company's customers include
many of the largest semiconductor manufacturers and contract assemblers
worldwide. The Company believes its reputation and customer relationships
with leading semiconductor manufacturers have assisted and will continue
to assist it in selling new products to its existing as well as new
customers.
32
<PAGE>
- LEVERAGE TECHNOLOGY LEADERSHIP. Aehr Test has nearly 20 years of
experience as a leader in the development and marketing of burn-in and
parallel test systems and has developed and introduced innovative new
products for the industry, including the MTX massively parallel test
system and the DiePak carrier. Building upon the expertise gained in the
development of those products, the Company has embarked upon a long-term
project to develop a system for performing burn-in and test of entire
processed wafers, rather than individual die or packaged parts. This
wafer-level burn-in and test project is being financed by the Company and
by DARPA under a cost-sharing agreement. There is no assurance that the
wafer-level burn-in and test project will be successful.
- CONTINUE TO EXPAND WORLDWIDE PRESENCE. As major semiconductor
manufacturers establish multiple locations worldwide, market factors
increasingly require semiconductor equipment vendors to provide global
support and service to customers in each major region. Aehr Test has sales
and service operations in the United States, Germany and Japan and has
established a network of distributors and sales representatives in other
key parts of the world. The Company believes that this worldwide network
of sales and service operations improves its ability to sell to and
support the world's major IC manufacturers and contract assemblers. The
Company intends to continue to invest in building its international
network of distributors, sales representatives and direct sales and
service operations.
33
<PAGE>
PRODUCTS
The Company manufactures and markets massively parallel test systems, die
carriers, burn-in systems, test fixtures and related accessories.
All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be configured
for use in production applications, where capacity, throughput and price are
most important, or for reliability engineering and quality assurance
applications, where performance and flexibility, such as extended temperature
ranges, are essential.
MASSIVELY PARALLEL TEST SYSTEM
The MTX massively parallel test system is designed to reduce the cost of
memory test by processing thousands of memory devices simultaneously, including
DRAMs, SDRAMs, SRAMs and most application-specific memories. The MTX system can
perform a significant number of tests usually performed by memory testers,
including pattern sensitivity tests, functional tests, data retention tests and
refresh tests. The Company estimates that transferring these tests from memory
testers to the MTX system can reduce the time that a memory device must be
tested by a memory tester by up to 75%, thereby reducing the required number of
memory testers and, as a result, reducing capital and operating costs.
The MTX system shown below consists of several subsystems: pattern
generation and test electronics, control software, network interface,
environmental chamber and automation. The MTX system has an algorithmic test
pattern generator which allows it to duplicate many of the tests performed by a
memory tester. Pin electronics at each performance test board ("PTB") position
are designed to provide accurate signals to the memories being tested and detect
whether a device is failing the test. An optional enhanced fault collection
capability allows the MTX to identify which cells in a memory IC are failing,
resulting in information which can be used to sort partially good devices.
THE MTX SYSTEM
[DIAGRAM OF MTX SYSTEM. Textual descriptions of Refrigeration Unit, Circuit
Breaker and Contactor Enclosure, Driver Boards, Pattern Generator Boards,
Operator Interface, Local Control Computer, Performance Test Board (PTB), Oven
Chamber and Automated PTB Insert/Eject Mechanism.]
The MTX system software is executed on PCs running a UNIX operating system.
The system uses a relational database to store test plans and test results. The
simple point-and-click graphical user interface
34
<PAGE>
supports multiple users and the multiple simultaneous tasks required to run a
network of systems efficiently. The MTX system is also equipped with a
widely-used GEM/SECS network interface which allows easy integration with
customers' factory automation and information systems.
Devices being tested are placed on PTBs and loaded into environmental
chambers which typically operate at temperatures from 25 DEG.C (77 DEG.F) up to
150 DEG.C (302 DEG.F) (optional chambers can produce temperatures as low as
- -55 DEG.C (-67 DEG.F)). A single PTB can hold up to 256 16Mb DRAMs, and a
production chamber holds 30 PTBs, resulting in up to 7,680 devices being tested
in parallel in a single system. For production environments, the systems include
an automatic PTB insertion/ejection mechanism and a docking cart for more
efficient handling of large quantities of PTBs.
List prices for production model MTX systems range from $900,000 to
$1,100,000 depending on configuration and features.
Initial MTX system customers have typically performed up to six months or
more of correlation testing on the MTX system. Correlation testing involves
performing the same tests using both MTX and standard memory testers to
determine if they detect the same defects. The Company expects that customer
correlation testing requirements will decline as the MTX becomes more
established in the marketplace. Because the Company is not able to perform
extensive correlation testing on its own, it has performed testing in
cooperation with early evaluation customers. Siemens conducted initial tests on
the MTX system and subsystems to determine its custom design and purchase
requirements and thereafter performed extensive correlation tests. During this
process the Company and Siemens identified and addressed various reliability,
design and manufacturing issues, including new product features requested by
Siemens. The Company believes Siemens was satisfied with the results of this
process. After extensive testing, Siemens has purchased and confirmed final
acceptance of multiple MTX systems. However, Siemens is still performing
extensive correlation testing. Although the Company believes the results have
been generally satisfactory, there can be no assurance that Siemens will approve
the MTX system for performing substantial memory test functions in volume
production. Motorola also has performed correlation tests and reported to the
Company that test results from the MTX correlated well with test results from a
standard memory tester.
DIEPAK CARRIERS
The Company's DiePak product line includes a family of reusable, temporary
die carriers and associated sockets which enable the test and burn-in of bare
die using the same test and burn-in systems used for packaged ICs. DiePak
carriers offer cost-effective solutions for providing known good die for most
types of ICs, including memory, microcontroller and microprocessor devices. The
DiePak carrier was introduced in fiscal 1995 following a development effort that
included the Company, Nitto Denko, which manufactured the interconnect
substrate, and Motorola which, as the first customer, assisted in defining
requirements and testing the product. In April 1997, Motorola approved the
DiePak carrier for use in production test and burn-in of bare die. In addition,
the Microelectronics and Computer Technology Corporation's ("MCC") High-Value
Electronics Division tested the DiePak carrier and reported that the DiePak
carrier is fully capable of enabling test and burn-in to be performed on bare
die.
35
<PAGE>
The DiePak carrier, shown below in a cross-section view, consists of an
interconnect substrate, which provides electrical connection between the die
pads and the socket contacts, and a mechanical support system. The substrate is
customized for each IC product. The DiePak carrier comes in 108, 172 and 320 pin
versions to handle ICs ranging from low pin-count memories to high pin-count
microprocessors. The DiePak carrier and socket feature a small footprint which
reduces test and burn-in cost because more devices may be processed
simultaneously on a test fixture. The Company believes that the DiePak carrier's
competitive advantages include its small footprint, its one-piece design, which
facilitates the automated loading of die into carriers, and its low contact
resistance, which enables more accurate, high speed testing.
THE DIEPAK CARRIER
[DIAGRAM OF DIEPAK CARRIER. Textual descriptions of Hinged Lid, Pressure Plate,
Bare Die, Latch, Socket Contacts, Base, Substrate and Alignment Plate.]
The Company believes that periodic replacement of DiePak carriers by its
customers will generate recurring revenues because new IC designs require new
carriers and DiePak carriers have a limited life. The Company anticipates that
for most applications the DiePak carrier can be reused approximately 100 times
for test and burn-in, which would typically occur during the course of one year
of normal operation. The list price of DiePak carriers varies from $70 to $300
in production quantities, depending on the number of pins and the volume
purchased.
36
<PAGE>
BURN-IN SYSTEMS
The Company's current burn-in products consist of the MAX and ATX product
families. The Company believes that its burn-in systems provide accurate and
reliable burn-in for complex memory and logic ICs. The current list prices for
the MAX and ATX systems typically range in purchase price from $150,000 to
$500,000 depending on system and configuration.
The MAX system, which was introduced in fiscal 1993, is designed for dynamic
burn-in of memory and low pin-count logic devices. The system is modular in
design and has a subsystem structure similar to that of the MTX system. The
production version holds 64 burn-in boards ("BIBs"), each of which may hold 350
or more devices, resulting in a system capacity of 22,400 or more devices. The
pattern generator is designed to dynamically burn-in memory devices as large as
4 gigabits, which is likely to be sufficient to cover future generations of
memory devices. The MAX system's 48-channel pin electronics and ability to run
stored test patterns also allow it to be used for application-specific memory
devices and many logic devices. The pin electronics are designed to provide
precisely-controlled voltages and signals to the devices on the BIBs and to
protect them from damage during the burn-in process. The latest generation
system, the MAX2, was introduced in July, 1997. The MAX2 features multi-tasking
Windows NT-based software which includes lot tracking and reporting software
that are needed for production and military applications.
The ATX system is designed for dynamic and monitored burn-in of high
pin-count VLSI devices, including microprocessors, microcontrollers,
applications-specific ICs ("ASICs"), and certain memory devices. The ATX system
uses much of the same software as the MAX system and contains additional
features such as an interface to CAE systems for program development and output
monitoring to ensure that the devices receive the specified voltages and
signals. Its 256-channel pin electronics configuration allows it to handle
complex logic devices, and its ability to burn in different device types in each
of the system's 32 BIB positions is useful for quality assurance applications.
TEST FIXTURES
The Company manufactures and sells custom designed test fixtures including
performance test boards for use with the MTX massively parallel test system and
burn-in boards for its burn-in systems. PTBs and BIBs hold the devices
undergoing test or burn-in and electrically connect the devices under test to
the system electronics. The capacity of each PTB or BIB depends on the type of
device being tested or burned-in, ranging from several hundred in memory
production to as few as eight for high pin-count complex ASIC devices. PTBs and
BIBs are sold both with new Aehr Test systems and for use with the Company's
installed base of systems. Due to the advanced test requirements of the MTX
system, PTBs are substantially more complex than BIBs. The Company has patented
certain features of the PTB and to date has licensed one other company to supply
PTBs. See "--Proprietary Rights." The Company primarily sells BIBs in the higher
performance segments of the market where the Company believes its knowledge of
its systems represents a competitive advantage.
The demand for PTBs and BIBs depends upon the volume of devices manufactured
and the number of new device types. Customers typically need new versions of
PTBs and BIBs for each new device type. The list price per board typically
ranges from $1,000 to $5,000 depending on quantity, socket type and number of
sockets per board. A full set of test fixtures for a system typically ranges in
price from approximately $50,000 to $150,000.
37
<PAGE>
CUSTOMERS
The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies. The following is a
representative list of customers who have purchased more than $200,000 in
products and services from the Company since the beginning of fiscal 1995:
<TABLE>
<S> <C>
Asahi Chemical Industry Co. Opti Inc.
Carsem Semiconductor Sdn. Bhd. Philips Electronics N.V.
El-Mos Elektronik in MOS-technologie GmbH Promos Technologies, Inc.
Fuji Photo Film Co., Ltd. Rood Technology Deutschland GmbH
Fujitsu Ltd. Samsung Group
High-Reliability Components Corporation Sanyo Electric Co., Ltd.
Hitachi Ltd. SGS Thomson Microelectronics N.V.
Honeywell Inc. Sharp Corporation
Hyundai Electronics Industries Co., Inc. Siemens AG
International Business Machines Corporation Sony Corporation
Israeli Test House, Ltd. Statsym Sdn. Bhd.
KESM Industries Sdn. Bhd. Symbios Logic, Inc.
Lucent Technologies, Inc. Texas Instruments Incorporated
Matsushita Electric Industrial Co., Ltd. Tokyo IC Co. Ltd.
Microchip Technology Incorporated Toshiba Corporation
Mitsubishi Corporation Yamaha Corporation
Motorola, Inc. Yoshikawa Co. Ltd.
NEC Corporation Zentrum Mikroelektronik Dresden GmbH
Nippon Telegraph and Telephone Company
</TABLE>
Sales to the Company's five largest customers accounted for approximately
45.1%, 55.8% and 69.2% of its net sales in fiscal 1995, 1996 and 1997,
respectively. During fiscal 1996 and 1997, Siemens accounted for 29.1% and 55.7%
of the Company's net sales, respectively. During fiscal 1995, Sony accounted for
18.2% of the Company's net sales. No other customers represented more than 10%
of the Company's net sales for any of such periods. The Company expects that
sales of its products to a limited number of customers will continue to account
for a high percentage of net sales for the foreseeable future. In addition,
sales to particular customers may fluctuate significantly from quarter to
quarter. The loss of or reduction or delay in orders from a significant
customer, or a delay in collecting or failure to collect accounts receivable
from a significant customer could adversely affect the Company's business,
financial condition and operating results. See "Risk Factors--Customer
Concentration."
MARKETING, SALES AND CUSTOMER SUPPORT
The Company focuses its marketing effort on its existing customer base of
large, established semiconductor manufacturers and contract assemblers. The
Company has sales and service operations in the United States, Japan and Germany
and has established a network of distributors and sales representatives in other
key parts of the world. As of June 30, 1997, there were 16 in-house personnel in
the United States, Japan and Germany, collectively, and 19 independent sales
representative organizations marketing the Company's products.
The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training, and documentation. As of June 30, 1997, the
Company had 18 full-time employees providing customer service and support. The
customer support organization has both applications engineering and field
service personnel located at the corporate headquarters in Mountain View,
California and at the Company's subsidiaries in Germany and Japan. The Company's
distributors provide applications and field service support in other parts of
the
38
<PAGE>
world. The Company customarily provides a warranty on its products. The Company
offers service contracts on its systems directly and through its subsidiaries,
distributors, and representatives.
BACKLOG
As of May 31, 1997 and 1996, the Company's backlog was $20.9 million and
$19.1 million, respectively. The Company's backlog consists of product orders
for which confirmed purchase orders have been received and which are scheduled
for shipment within 12 months. Most orders are subject to rescheduling or
cancellation by the customer with limited penalties. Because of the possibility
of customer changes in delivery schedules or cancellations and potential delays
in product shipments, the Company's backlog as of a particular date may not be
indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts. As of June 30, 1997, the
Company had 43 full-time employees engaged in research and development. The
Company's research and development expenses during fiscal 1995, 1996 and 1997
were approximately $3.8 million, $4.1 million and $4.5 million, respectively.
The Company conducts ongoing research and development to develop new
products and to support and enhance existing product lines. The Company
currently is developing capability and performance enhancements to the MTX, MAX
and ATX systems for future generation ICs. The Company also is developing DiePak
carriers to accommodate additional types of devices.
Building upon the expertise gained in the development of its existing
products, the Company has embarked upon a long-term project to develop a system
for performing test and burn-in of entire processed wafers, rather than
individual die or packaged parts. This wafer-level burn-in and test project is
being financed by the Company and DARPA, under a cost-sharing agreement entered
into in 1994. The agreement provides that (i) the Company shall retain title to
all co-funded inventions, (ii) DARPA will receive a paid-up license to use the
inventions for government purposes and (iii) DARPA can require the Company to
license the inventions to third parties on reasonable terms if the Company fails
to adequately commercialize the inventions. However, payments by DARPA depend on
satisfaction of development milestones, and DARPA has the right to terminate
project funding at any time. The level of payments may vary significantly from
quarter to quarter. There is no assurance that the Company will meet the
development milestones or that DARPA will continue funding the project. If DARPA
funding were discontinued and the Company continued the project, the Company's
operating results would be adversely affected. DARPA payments are reflected as a
credit to research and development expenses. The agreement provides for
potential payments by DARPA totaling up to $6.5 million. The Company has
completed certain development milestones and invoiced $2.9 million through May
31, 1997. The remaining funding is subject to milestones scheduled to be
completed through January 1999.
The DiePak carrier was introduced in fiscal 1995, following a development
effort that included the Company, Nitto Denko Corporation, which manufactures
the interconnect substrate, and Motorola which, as the first customer, assisted
in defining requirements and testing the product. Enplas Corporation, a Japanese
manufacturer of advanced plastic products, cooperated with the Company in
developing the DiePak socket. Enplas became a shareholder of the Company in
fiscal 1994, and as of June 30, 1997, owned 320,000 shares of Common Stock. See
"Principal and Selling Shareholders."
MANUFACTURING
The Company assembles its products from components and parts manufactured by
others, including environmental chambers, power supplies, metal fabrications,
printed circuit assemblies, integrated circuits, burn-in sockets and
interconnect substrates. Final assembly and test are performed within the
Company's facilities. The Company's strategy is to use in-house manufacturing
only when necessary to protect a
39
<PAGE>
proprietary process or if a significant improvement in quality, cost or lead
time can be achieved. The Company's principal manufacturing facility is located
in Mountain View, California. The Company's Tokyo, Japan facility provides final
assembly and test and product customization.
The Company relies on subcontractors to manufacture many of the components
or subassemblies used in its products. The Company's MTX, MAX and ATX systems
contain several components, including environmental chambers, power supplies and
certain ICs, which are currently supplied by only one or a limited number of
suppliers. The DiePak products include an interconnect substrate which is
supplied only by Nitto Denko, and certain mechanical parts and sockets which are
currently supplied only by Enplas. 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 were to become unable or unwilling to continue to
manufacture subassemblies, components or parts in required volumes, the Company
would have to identify and qualify acceptable replacements. The process of
qualifying subcontractors and suppliers could be lengthy, and no assurance can
be given that any additional sources would be available to the Company on a
timely basis. 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.
The Company is also pursuing a strategy of designing PTBs in locations near
its customers to more effectively respond to their custom design needs.
Currently the Company designs and manufactures PTBs in the United States and
Japan and intends to establish a design capability in Germany.
COMPETITION
The semiconductor equipment industry is intensely competitive. Significant
competitive factors in the semiconductor equipment market include price,
technical capabilities, quality, flexibility, automation, cost of ownership,
reliability, throughput, product availability and customer service. In each of
the markets it serves, the Company faces competition 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 memory testers, the Company expects that the MTX system will
face 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 systems, which typically cost less
than the MTX system, include Ando Corporation, Japan Engineering Company,
Reliability Incorporated and Tabai Espec Corp. Some of the burn-in systems
offered by competing suppliers perform some test functions. In addition,
suppliers of memory test equipment including Advantest Corporation and Teradyne,
Inc. may seek to offer parallel test systems in the future.
The Company's DiePak products face significant competition. Texas
Instruments Incorporated sells a temporary, reusable bare die carrier which is
intended to enable burn-in and test of bare die, and the Company believes that
several other companies have developed or are developing other such products. As
the bare die market develops, the Company expects that other competitors will
emerge. The Company expects that the primary competitive factors in this market
will be performance, reliability, cost and assured supply.
The Company's MAX dynamic and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe competition,
especially from local, low cost manufacturers. Also, the MAX dynamic burn-in
system faces severe competition from manufacturers of monitored burn-in systems
that perform limited functional tests, including tests designed to ensure the
devices receive the specified voltages and signals.
40
<PAGE>
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many small
companies design and manufacture BIBs, including BIBs for use with the Company's
MAX and ATX systems. The Company's strategy is to provide higher performance
BIBs, and the Company generally does not compete to supply lower cost, low
performance BIBs. The Company has granted a royalty-bearing license to one
company to make PTBs for use with its MTX systems, in order to assure customers
of a second source of supply, and the Company may license others as well. Sales
of PTBs by licensees would result in royalties to the Company but would
potentially reduce the Company's own sales of PTBs.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price and
performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss of
market acceptance of the Company's products. Increased competitive pressure
could also lead to intensified price-based competition, resulting in lower
prices which could adversely affect the Company's business, financial condition
and operating results. The Company believes that to remain competitive it must
invest significant financial resources in new product development and expand its
customer service and support worldwide. There can be no assurance that the
Company will be able to compete successfully in the future.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secret and copyright protection,
rather than on patents, to maintain its competitive position. The Company's
proprietary software is copyrighted and licensed to the Company's customers. The
Company currently holds three issued United States patents and has two
additional United States patent applications and several foreign patent
applications pending. The Company has one United States trademark registration.
One issued patent covers the method used to connect the PTBs with the MTX
system. One patent relating to the MTX that has been allowed but not yet issued
includes claims covering certain details of the electronic implementation used
to obtain high performance in the MTX system and also covering certain testing
methods.
The Company's ability to compete successfully is dependent in part upon its
ability to protect its proprietary technology and information. Although the
Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that
these measures will be adequate or that competitors will not be able to develop
similar technology independently. Further, there can be no assurance that claims
allowed on any patent issued to the Company will be sufficiently broad to
protect the Company's technology, that any patent will issue from any pending
application or that foreign intellectual property laws will protect the
Company's intellectual property. Litigation may be necessary to enforce or
determine the validity and scope of the Company's proprietary rights, and there
can be no assurance that the Company's intellectual property rights, if
challenged, will be upheld as valid. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of the
outcome of the litigation. In addition, there can be no assurance that any of
the patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties asserting
intellectual property claims against the Company. Such claims could include
assertions that the Company's products infringe, or may infringe, the
proprietary rights of third parties, requests for indemnification against such
infringement or suggestions that the Company may be interested in acquiring a
license from such third parties. There can be no assurance that any such claim
made in the future will not result in litigation, which could involve
significant expense to the Company, and, if the Company is required or deems it
appropriate to obtain a license relating to one or more products or
41
<PAGE>
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all.
EMPLOYEES
As of June 30, 1997, the Company and its two foreign subsidiaries employed
155 persons full-time, of whom 43 were engaged in research, development, and
related engineering, 61 in manufacturing, 34 in marketing, sales, and customer
support, and 17 in general administration and finance. 35 persons are employed
by the Company's subsidiary in Japan. In addition, the Company from time to time
employs a number of part-time employees and contractors, particularly in
manufacturing. The Company's success is in part dependent on its ability to
attract and retain highly skilled workers, who are in high demand. None of the
Company's employees is represented by a union and the Company has never
experienced a work stoppage. Management considers its relations with its
employees to be good. See "Risk Factors-- Dependence on Key Personnel."
FACILITIES
The Company's principal administrative and production facilities are located
in Mountain View, California, in a 61,364 square foot building. The lease on
this building expires in September 1999; the Company has an option to extend the
lease of its headquarters building for an additional five year period at rates
to be negotiated. The Company also leases a sales office in Irvine, California
and a sales and support office in Osaka, Japan. The Company's Japan facility is
located in Tokyo in a 15,607 square foot building under a lease which expires in
June 1998. The Company leases a sales and support office in Utting, Germany. The
Company's and its subsidiaries' annual rental payments currently aggregate
approximately $1.4 million. The Company believes that alternate facilities would
be available if needed.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------------- --- ----------------------------------------
<S> <C> <C>
Rhea J. Posedel............................... 55 President, Chief Executive Officer and
Chairman of the Board of Directors
Gary L. Larson................................ 47 Vice President of Finance and Chief
Financial Officer
Michael P. Evon............................... 50 Vice President of Sales
Carl N. Buck.................................. 45 Vice President of Research and
Development Engineering
William D. Barraclough........................ 53 Vice President of Test Systems
Engineering
Richard F. Sette.............................. 59 Vice President of Operations
Takahiro Hatakenaka........................... 62 President, Aehr Test Systems Japan
William W. R. Elder (1)(2).................... 58 Director
Mario M. Rosati (1)........................... 51 Director and Secretary
David Torresdal (2)........................... 58 Director
Katsuji Tsutsumi.............................. 46 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
RHEA J. POSEDEL is a founder of the Company and has served as President,
Chief Executive Officer and Chairman of the Board of Directors since its
inception in 1977. He received a B.S. in Electrical Engineering from the
University of California, Berkeley, an M.S. in Electrical Engineering from San
Jose State University and an M.B.A. from Golden Gate University.
GARY L. LARSON joined the Company in April 1991 as Chief Financial Officer
and was elected Vice President of Finance in February 1992. From 1986 to 1990,
he served as Chief Financial Officer, and from 1988 to 1990 also as President
and Chief Operating Officer, of Nanometrics Incorporated, a manufacturer of
measurement and inspection equipment for the semiconductor industry. Mr. Larson
received a B.S. in Mathematics/Finance from Harvey Mudd College.
MICHAEL P. EVON joined the Company as Vice President of Sales in March 1995.
He was employed at GenRad, Inc., a world market leader in PC board test systems,
from 1968 to 1995, during which time he held various positions, including
serving as Director of Sales for Asia, Pacific and Latin America, Director of
Sales/North America for the Design Automation Division, and Western Regional
Sales Manager. Mr. Evon received a B.S. in Electrical Engineering from Tufts
University.
CARL N. BUCK joined the Company as a Product Marketing Manager in 1983 and
held various positions until he was elected Vice President of Engineering in
November 1992, and Vice President of Research and Development Engineering in
November 1996. From 1978 to 1983, Mr. Buck served as Product Marketing Manager
at Intel Corporation, an integrated circuit and microprocessor company. Mr. Buck
received a B.S.E.E. from Princeton University, an M.S. in Electrical Engineering
from the University of Maryland and an M.B.A. from Stanford University.
43
<PAGE>
WILLIAM D. BARRACLOUGH joined the Company as an Account Manager in February
1989 and held various positions until he was elected Vice President of Test
Systems Engineering in August 1996. From 1984 to 1989, Mr. Barraclough served as
Vice President of Marketing at Thermonics, Inc., a manufacturer of temperature
control equipment for electronics devices. Mr. Barraclough received a B.S.E.E.
from the University of Southern California.
RICHARD F. SETTE rejoined the Company as Vice President of Operations in
January 1996, after serving in that same position from 1984 to 1987. He served
as Senior Director of Operations of Northrop Grumman Corp., a manufacturer of
aircraft and aircraft subsystems, from 1987 to 1993, as Vice President of
Operations of Symtek, Inc., which manufactures handling equipment for the
semiconductor industry, from 1993 to 1994 and as Director of Engineering at
SatCon Technologies Corp., a developer of energy storage systems, from 1994 to
1995. Mr. Sette received a B.S.E.E. and an M.S.E.E. from Northeastern
University.
TAKAHIRO HATAKENAKA is a founder of Aehr Test Systems Japan K.K. the
Company's Japanese subsidiary, and has been President and Chairman of its Board
of Directors since its inception in October 1981. Mr. Hatakenaka attended Waseda
University in Tokyo, Japan, where he majored in Economics.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr. Elder
was the Chief Executive Officer of Genus, Inc. ("Genus"), a semiconductor
company, from his founding of Genus in 1981 to September 1996. Dr. Elder has
been a director of Genus since its inception, and was elected as Chairman of the
Board of Genus in September 1996. Dr. Elder holds a B.S.I.E. and an honorary
Doctorate Degree from the University of Paisley in Scotland.
MARIO M. ROSATI has served as Secretary and a director of the Company since
1977. He is a member of the law firm of Wilson Sonsini Goodrich & Rosati, which
he joined in 1971. Mr. Rosati is a graduate of Boalt Hall, University of
California at Berkeley. Mr. Rosati is a director of C*ATS Software Inc., Genus,
Inc., Meridian Data, Inc., Ross Systems, and Sanmina Corporation, as well as
several private companies.
DAVID TORRESDAL has been a director of the Company since 1977. He has been
President of Davtron, Inc., a manufacturer of aircraft electronic equipment,
since 1970. Mr. Torresdal received an A.A.S. in Engineering from Oregon
Technical Institute.
KATSUJI TSUTSUMI has been a director of the Company since 1994. He has
served as a Vice President of Enplas Tech (U.S.A.), Inc., a subsidiary of Enplas
Corporation, since October, 1993. From 1989 to 1993, Mr. Tsutsumi served as
Overseas Sales Division General Manager for Enplas Corporation in Japan. Mr.
Tsutsumi received a degree in Economics from the University of Aoyama Gakuin in
Japan.
All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Company's
executive officers are approved by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or executive
officers of the Company.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive any cash compensation for their
services as members of the Board of Directors, although they are reimbursed for
certain expenses incurred in attending Board and committee meetings. Directors
are eligible to participate in the Company's option plans. In fiscal 1996, the
Company granted options to purchase 55,000 shares to William Elder at $4.00 per
share, 20,000 shares to Mario Rosati at $4.00 per share, and 20,000 shares to
David Torresdal at $4.00 per share. Directors were granted no options in fiscal
1997.
44
<PAGE>
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, which is comprised of William Elder and Mario
Rosati, makes recommendations to the Board of Directors regarding executive
compensation matters, including decisions relating to salary and bonus and
grants of stock options. The Audit Committee, which is comprised of William
Elder and David Torresdal, approves the Company's independent auditors, reviews
the results and scope of annual audits and other accounting related services,
and reviews and evaluates the Company's internal audit and control functions.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth all compensation received for services
rendered to the Company in all capacities for the fiscal year ended May 31, 1997
by the Company's Chief Executive Officer and for each of the four other most
highly compensated executive officers with annual compensation in excess of
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
PAYOUTS
-------------
ANNUAL COMPENSATION LTIP
------------------------ PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($) COMPENSATION($)
- ----------------------------------------------------- ---------- ------------ ------------- -------------------
<S> <C> <C> <C> <C>
Rhea J. Posedel...................................... $ 185,040 $ 70,500 $ 5,388 $ 2,497
President, Chief Executive Officer and Chairman of
the Board of Directors
Takahiro Hatakenaka (1).............................. $ 177,116 $ -- $ -- $ 3,997
President, Aehr Test Systems Japan
Gary L. Larson....................................... $ 133,449 $ 33,700 $ 5,258 $ 3,313
Vice President of Finance and Chief Financial
Officer
William D. Barraclough............................... $ 123,996 $ 40,584(2) $ 5,388 $ 2,227
Vice President of Test Systems Engineering
Michael P. Evon...................................... $ 113,650 $ 35,794 $ 4,943 $ 2,218
Vice President of Sales
</TABLE>
- ------------------------
(1) Mr. Hatakenaka's salary was converted to U.S. Dollars at a calculated fiscal
1997 average rate of 114.576 yen to the dollar.
(2) Of this amount, $22,584 was related to MTX project milestones completed
prior to Mr. Barraclough's appointment as Vice President of Test Systems
Engineering.
45
<PAGE>
OPTION GRANTS
None of the Named Executive Officers received grants of options to purchase
the Company's Common Stock during fiscal 1997.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning stock options held as
of May 31, 1997 by the Named Executive Officers. There were no option exercises
by any Named Executive Officer during the fiscal year ended May 31, 1997.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUES OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT MAY 31, 1997(1) AT MAY 31, 1997(2)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Rhea J. Posedel........................................... 36,249 33,751 $ 116,955 $ 110,045
Takahiro Hatakenaka....................................... 1,583 417 $ 5,541 $ 1,460
Gary L. Larson............................................ 49,915 18,085 $ 181,421 $ 64,079
William D. Barraclough.................................... 20,832 24,168 $ 78,380 $ 86,620
Michael P. Evon........................................... 23,333 26,667 $ 97,290 $ 107,710
</TABLE>
- ------------------------
(1) All options were granted under the Company's 1986 Incentive Stock Plan. Each
option becomes exercisable according to a vesting schedule, subject to the
applicable Named Executive Officer's continued employment with the Company.
(2) Calculated on the basis of the fair market value of the Common Stock as of
May 31, 1997. The fair market value of the Common Stock as of such date was
$7.50 per share. Assuming the fair market value of the Common Stock as of
May 31, 1997 was the initial public offering price of $12.00 per share, the
total aggregate value of the exercisable and unexercisable options would be
$542,000 in the case of Mr. Posedel, $16,000 in the case of Mr. Hatakenaka,
$551,500 in the case of Mr. Larson, $367,500 in the case of Mr. Barraclough
and $430,000 in the case of Mr. Evon.
STOCK PLANS
1986 INCENTIVE STOCK PLAN
The Company's 1986 Incentive Stock Plan (the "1986 Plan") provides for the
grant of incentive stock options and nonstatutory stock options. As of May 31,
1997, options to purchase an aggregate of 691,350 shares of Common Stock were
outstanding under the 1986 Plan. Options granted under the Plan will remain
outstanding in accordance with their terms, but the Board of Directors has
determined that no further options will be granted under the 1986 Plan.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (as Amended and Restated) (the "1996
Plan") was approved by the Board of Directors and the shareholders on October
23, 1996. The 1996 Plan provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), and for the grant to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights ("SPRs"). In June 1997 the Board of Directors amended and restated the
terms of the 1996 Plan to take effect upon the Company's initial public offering
of Common Stock. Unless terminated sooner, the 1996 Plan will terminate
automatically in 2006. The Board has the authority to amend, suspend or
terminate the 1996 Plan, provided that no such
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<PAGE>
action may affect any share of Common Stock previously issued and sold or any
option previously granted under the 1996 Plan.
As of May 31, 1997, options to purchase an aggregate of 68,000 shares of
Common Stock were outstanding under the 1996 Plan, and options to purchase an
aggregate of 582,000 shares of Common Stock were available for future issuance.
The 1996 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee is required to be constituted to
comply with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and applicable laws. The Committee has the power to determine the terms of the
options or SPRs granted, including the exercise price, the number of shares
subject to each option or SPR and the exercisability thereof, and the form of
consideration payable upon exercise. Options and SPRs granted under the 1996
Plan are not generally transferable by the optionee, and each option and SPR is
exercisable during the lifetime of the optionee only by such optionee. In
general, options granted under the 1996 Plan must be exercised within thirty
days of the end of optionee's status as an employee, director or consultant of
the Company or a parent or subsidiary corporation of the Company, or within
twelve months after such optionee's termination by death or disability, but in
no event later than the expiration of the option's expiration date. In the case
of SPRs, unless the Committee determines otherwise, the Restricted Stock
Purchase Agreement shall grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment or
service with the Company or a parent or subsidiary corporation of the Company
for any reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser. The repurchase option shall lapse at a
rate determined by the Committee. The exercise price of all incentive stock
options granted under the 1996 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options and SPRs granted under the Plan is determined by the
Committee. With respect to any participant who owns stock possessing more than
10% of the voting power of all classes of the outstanding capital stock of the
Company or a parent or subsidiary corporation of the Company, the exercise price
of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option must
not exceed five years. The term of all other incentive stock options granted
under the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each option and SPR shall be assumed
or an equivalent option or right substituted for by the successor corporation.
If the outstanding options and SPRs are not assumed or substituted as described
in the preceding sentence, an optionee will fully vest in and have the right to
exercise the option or SPR as to all or a portion of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or SPR becomes exercisable in full in the event of
a merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of fifteen (15) days from
the date of such notice, and the option or SPR will terminate upon the
expiration of such period.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in June 1997 and by the shareholders in
July 1997. A total of 300,000 shares of Common Stock has been reserved for
issuance under the 1997 Purchase Plan. The 1997 Purchase Plan, which is intended
to qualify under Section 423 of the Internal Revenue Code, has consecutive,
overlapping, twenty-four month offering periods. Each twenty-four month offering
period includes four six month purchase periods. The offering periods generally
begin on the first trading day on or after April 1 and October 1 each year,
except the first such offering period commences with the effectiveness of the
Offering of Common Stock and ends on the last trading day on or before March 31,
1999.
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<PAGE>
The 1997 Purchase Plan is administered by the Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if they
are customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year. However,
any employee (i) who immediately after grant owns stock possessing 5% or more of
the total combined voting power or value of all classes of the capital stock of
the Company or any subsidiary of the Company, or (ii) whose rights to purchase
stock under all employee stock purchase plans of the Company accrues at a rate
which exceeds $25,000 worth of stock for each calendar year may not be granted
an option to purchase stock under the 1997 Purchase Plan. The 1997 Purchase Plan
permits eligible employees to purchase Common Stock through payroll deductions
of up to 10% of an employee's compensation (compensation is defined as the
participant's base straight time gross earnings and commissions, but excludes
payments for overtime, shift premium, incentive compensation, incentive
payments, bonuses and other compensation). The price of stock purchased under
the 1997 Purchase Plan will be 85% of the lower of the fair market value of the
Common Stock on the first day of the offering period or the last day of the
purchase period. The maximum number of shares a participant may purchase during
a single purchase period is determined by dividing $12,500 by the fair market
value of a share of the Company's Common Stock on the first day of the
then-current offering period. Employees may end their participation in the
offering at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically on termination of
employment with the Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each option shall be
assumed or an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted, the Board of Directors shall
shorten the offering period (so that employees' rights to purchase stock under
the 1997 Purchase Plan are exercised prior to the merger or sale of assets). The
1997 Purchase Plan will terminate in 2007. The Board of Directors has the
authority to amend or terminate the 1997 Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock under the
1997 Purchase Plan.
EMPLOYEE STOCK BONUS PLAN
Under Aehr Test Systems Employee Stock Bonus Plan (the "Bonus Plan"), the
Company may, but is not required to, make contributions up to a maximum of 15%
of the Company's payroll (less amounts contributed to the Company's Savings and
Retirement Plan). This contribution is determined annually by the Company and is
allocated among all participants in proportion to their eligible compensation
for the year. Eligible participants are full-time employees who have completed
three consecutive months of service and part time employees who have completed
one year of service and have attained an age of 21. The Company can contribute
either shares of the Company's stock or cash to the plan. Individuals' account
balances vest at a rate of 25% per year commencing upon completion of three
years of service. Nonvested balances, which are forfeited, are allocated to the
remaining employees in the plan. Each participant's share in the Bonus Plan is
credited to the participant's account and held in trust until retirement, death,
disability or termination of service. The Bonus Plan is a discretionary defined
contribution plan under the Employee Retirement Income Security Act. All
employees of Aehr Test Systems are eligible to participate in the Bonus Plan as
of the entry date each year. The Company made a Bonus Plan contribution of
$200,000 and $50,000 in fiscal 1997 and 1996, respectively, and made no
contribution to the Bonus Plan in fiscal 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists of Mario Rosati and
William Elder. No executive officer of the Company serves on the compensation
committee of another entity or on any other
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committee of the board of directors of another entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
LIMITATION ON LIABILITIES AND INDEMNIFICATION
The Company's Restated Articles of Incorporation limit the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the California
Corporations Code. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions which are in some respects
broader than the specific indemnification provisions contained in the California
Corporations Code. The indemnification agreements may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent or the Company in which indemnification by
the Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
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CERTAIN TRANSACTIONS
On August 1, 1994, the Company entered into a strategic consulting
arrangement with William Elder, a director of the Company, whereby the Company
granted Mr. Elder a nonstatutory stock option to purchase 40,000 shares in
exchange for his consulting services. The agreement terminated on January 31,
1995.
Katsuji Tsutsumi represents Enplas Corporation on the Board of Directors.
Enplas Corporation supplies die carrier components and sockets to the Company
for use in the Company's DiePak carrier products. Enplas Corporation purchased
320,000 shares of the Company's Common Stock for a price of $4.50 per share and
a total aggregate price of $1,440,000 in April 1994. In connection with the
financing, the Company agreed to appoint one nominee of Enplas Corporation to
the Company's Board of Directors. That agreement terminates upon completion of
this Offering.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person known by the Company to own more than 5% of the Company's Common Stock,
(ii) each Named Executive Officer, (iii) each of the Company's directors, (iv)
all directors and executive officers as a group, and (v) each Selling
Shareholder holding 1% or more of the Common Stock:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
----------------------- SHARES -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
- -------------------------------------------------------------- --------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Rhea J. Posedel (3)........................................... 977,208 22.7% 0 977,208 14.4%
Katsuji Tsutsumi (4).......................................... 320,000 7.4% 50,000 270,000 4.0%
David Torresdal (5)........................................... 313,633 7.3% 0 313,633 4.6%
Mario M. Rosati (6)........................................... 211,349 4.9% 0 211,349 3.1%
Takahiro Hatakenaka (7)....................................... 75,201 1.8% 0 75,201 1.1%
William W. R. Elder (8)....................................... 64,583 1.5% 0 64,583 1.0%
Gary L. Larson (9)............................................ 54,208 1.3% 0 54,208 *
Michael P. Evon (10).......................................... 25,417 * 0 25,417 *
William D. Barraclough (11)................................... 22,916 * 0 22,916 *
All directors and executive officers as a group (eleven
persons) (4) (12)........................................... 2,138,614 49.8 % 50,000 2,088,614 30.8 %
OTHER 5% HOLDERS:
Enplas Corporation (13)....................................... 320,000 7.4 % 50,000 270,000 4.0 %
Summit Partners (14).......................................... 300,625 7.0 % 257,296 43,329 *
Japan Associated Finance Co., Ltd. (15)....................... 285,715 6.7% 39,158 246,557 3.6%
Mayfield III (16)............................................. 283,824 6.6% 0 283,824 4.2%
OTHER SELLING SHAREHOLDERS:
Verna L. Brame, Trustee,
Verna L. Brame Trust u/d/t
dated May 20, 1983.......................................... 161,775 3.8% 86,637 75,138 1.1%
Louis J. Cartalano............................................ 102,167 2.4% 88,442 13,725 *
Roger D. Bouyea and Lorraine M. Bouyea,
his Wife, as Community Property............................. 100,000 2.3 % 32,494 67,506 1.0 %
Diane R. Pagani............................................... 100,000 2.3 % 20,000 80,000 1.2 %
Alice Wilder Hall............................................. 56,840 1.3 % 45,822 11,018 *
Teruo Kunugi.................................................. 55,410 1.3 % 22,791 32,619 *
Frank J. George and Evelyn E. George, Trustees of the Frank J.
George and Evelyn E. George Trust, u/d/t dated August 7,
1991 ....................................................... 55,000 1.3 % 20,000 35,000 *
John Spencer Morse and Annette Ruth Morse,
Trustees of the John Spencer Morse & Annette Ruth Morse
Trusts, u/d/t dated December 23, 1982....................... 54,643 1.3 % 48,857 5,786 *
The Central Capital Ltd....................................... 50,000 1.2 % 44,989 5,011 *
Nikko Venture Capital Co., Ltd................................ 50,000 1.2 % 44,989 5,011 *
Alan Helgesson................................................ 42,500 1.0 % 10,625 31,875 *
Other Selling Shareholders, each holding less than 1% of the
Common Stock prior to the Offering.......................... 412,592 9.6 % 287,900 124,692 1.8 %
All Selling Shareholders as a group........................... 2,147,267 50.0 % 1,100,000 1,047,267 15.4 %
</TABLE>
- ------------------------
* Represents less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable, or will become exercisable within 60 days after May
31, 1997, are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have
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<PAGE>
represented to the Company that they have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. Unless otherwise indicated, the address of
each of the individuals listed in the table is c/o Aehr Test Systems, 1667
Plymouth Street, Mountain View, California 94043.
(2) This column assumes no exercise of the Underwriters' over-allotment option.
If, however, the Underwriters' over-allotment is exercised in full, certain
shareholders will sell an aggregate of 540,000 shares of Common Stock.
Specifically, in such event, in addition to those share amounts set forth in
the table above, (i) Rhea J. Posedel will sell 40,819 shares, of which
20,000 shares are held by Vivian M. Owen, Mr. Posedel's wife, and will
beneficially own 936,389 shares, which is 13.8% of the Company's outstanding
Common Stock, after completion of the Offering; (ii) Enplas Corporation, of
which Mr. Tsutsumi, a director of the Company, is a vice president of its
wholly-owned subsidiary, Enplas Tech (U.S.A.), Inc., will sell an additional
50,000 shares and will beneficially own 220,000 shares, which is 3.2% of the
Company's outstanding Common Stock and of which Mr. Tsutsumi disclaims
beneficial ownership, after completion of the Offering; (iii) David
Torresdal will sell 25,000 shares held by David and Betty Torresdal, 5,000
held by Barbara Long, Trustee of the Brock Frank Torresdal Trust I U/T/A
dated 5/30/83, 5,000 shares held by Barbara Long, Trustee of the Candice Ann
Torresdal Trust I U/T/A dated 5/30/83, 5,000 shares held by Barbara Long,
Trustee of the Eric Nels Torresdal Trust I U/T/A dated 5/30/83, 5,000 shares
held by Barbara Long, Trustee of the Kevin Allen Torresdal Trust I U/T/A
dated 5/30/83 and 5,000 shares held by Barbara Long, Trustee of the Kyler
David Torresdal Trust I U/T/A dated 5/30/83 and will beneficially own
263,633 shares, which is 3.9% of the Company's outstanding Common Stock,
after completion of the Offering; (iv) Gary Larson will sell 5,000 shares
and will beneficially own 49,208 shares, which is less than one percent of
the Company's outstanding Common Stock, after completion of the Offering;
(v) Richard P. Sette will sell 4,996 shares and will beneficially own 22,458
shares, which is less than one percent of the Company's outstanding Common
Stock, after completion of the Offering; (vi) Summit Partners will sell an
additional 26,803 shares held by Summit Ventures, L.P. and an additional
16,526 shares held by SV Eurofund C.V. and will beneficially own no shares
after completion of the Offering; (vii) Japan Associated Finance Co., Ltd.
will sell an additional 3,842 shares held by JAFCO No. 5 Investment
Enterprise Partnership and will beneficially own 242,715 shares, which
represents 3.6% of the Company's outstanding Common Stock, after completion
of the Offering; (viii) Mayfield III will sell an aggregate of 283,824
shares and will beneficially own no shares after completion of the Offering;
and (ix) Carl Buck will sell 5,000 shares and will benficially own 41,645
shares, which is less than one percent of the Company's outstanding Common
Stock, after completion of the Offering.
(3) Includes 40,000 shares held by Vivian M. Owen, Mr. Posedel's wife, and
40,208 shares issuable upon the exercise of stock options exercisable within
60 days of May 31, 1997.
(4) Includes 320,000 shares held by Enplas Corporation, a Japanese corporation.
Mr. Tsutsumi, a director of the Company, is a vice president of Enplas Tech
(U.S.A.), Inc., a California corporation and wholly owned subsidiary of
Enplas Corporation. Mr. Tsutsumi disclaims beneficial ownership of the
shares held by Enplas Corporation.
(5) Includes 273,800 shares held jointly with Betty Torresdal, 6,800 shares held
by Barbara Long, trustee for the benefit of Brock Frank Torresdal, 6,800
shares held by Barbara Long, trustee for the benefit of Candice Ann
Torresdal, 6,800 shares held by Barbara Long, trustee for the benefit of
Eric Nels Torresdal, 6,800 shares held by Barbara Long, trustee for the
benefit of Kyler David Torresdal, 6,800 shares held by Barbara Long, trustee
for the benefit of Kevin Allen Torresdal, and 5,833 shares issuable upon the
exercise of stock options exercisable within 60 days of May 31, 1997.
(6) Includes 27,000 shares held by Mario Rosati and Douglas Laurice, trustees
for the benefit of Mario M. Rosati, 158,516 shares held by Mario M. Rosati,
Trustee of the Mario M. Rosati Trust, U/D/T dated 1/9/90, 20,000 shares held
by Douglas M. Laurice and Mario M. Rosati TTEE FBO Sally Rosati Banks and
5,833 shares issuable upon the exercise of stock options exercisable within
60 days of May 31, 1997.
(7) Includes 1,750 shares issuable upon the exercise of stock option exercisable
within 60 days of May 31, 1997.
(8) Includes 62,083 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1997 and 2,500 shares held by William
Elder, Trustee of the William W. R. Elder Separate Property Trust, U/D/T
dated April 18, 1983.
(9) Consists of shares issuable upon the exercise of stock options exercisable
within 60 days of May 31, 1997.
(10) Includes 25,417 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1997.
(11) Consists of 22,916 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1997.
(12) Includes 4,996 shares held by Richard F. Sette, 1,000 shares held by Carl
N. Buck, and 286,351 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1997.
(13) The address of this beneficial owner is as follows: Enplas Corporation,
2-30-1, Namiki, Kawaguchi City, Saitama, Pref. 332, Japan.
(14) Includes 1,238 shares held by Summit Investors, L.P., 180,457 shares held
by Summit Ventures, L.P. and 118,930 shares held by SV Eurofund C.V. All of
the shares held by Summit Investors, L.P., 155,971 shares held by Summit
Ventures, L.P. and 103,833
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<PAGE>
shares held by SV Eurofund C.V. are being sold in the Offering. The address
of this beneficial owner is as follows: Summit Ventures, L.P., One Boston
Place, Boston, MA 02108.
(15) Includes 29,000 shares held by JAFCO G-2(A) Investment Enterprise
Partnership, 29,000 shares held by JAFCO G-2(B) Investment Enterprise
Partnership, 84,000 shares held by JAFCO G-3 Investment Enterprise
Partnership, 43,000 shares held by JAFCO No. 5 Investment Enterprise
Partnership, 43,000 shares held by JAFCO No. 6 Investment Enterprise
Partnership and 57,715 shares held by Japan Associated Finance Co., Ltd.
39,490 shares held by JAFCO No. 5 Investment Enterprise Partnership are
being sold in the Offering. The address of this beneficial owner is as
follows: Japan Associated Finance Co., Ltd., Toshiba Bldg., 10th Floor,
1-1-1 Shibaura, Minato-Ku, Tokyo, 105, Japan.
(16) The address of this beneficial owner is as follows: Mayfield III, 2800 Sand
Hill Road, Suite 250, Menlo Park, CA 94025.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 75,000,000 shares of Common Stock, $0.01 par value, and
10,000,000 shares of Preferred Stock, $0.01 par value.
COMMON STOCK
On May 31, 1997, there were 4,295,522 shares of Common Stock outstanding,
held of record by approximately 165 shareholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of shareholders. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of the Company's liabilities and the liquidation
preference, if any, of any outstanding Preferred Stock. Holders of Common Stock
have no preemptive rights and no rights to convert their Common Stock into any
other securities, and there are no redemption provisions with respect to such
shares. All of the outstanding shares of Common Stock are, and the shares to be
sold in the Offering when issued and paid for will be, fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
Effective upon the closing of the Offering, the Board of Directors will have
the authority, without further action by the shareholders, to provide for the
issuance of up to 10,000,000 shares of Preferred Stock from time to time in one
or more series, to establish the number of shares to be included in each such
series, to fix the designations, powers, preferences, privileges and relative
participating, optional or special rights and the qualifications, limitations or
restrictions of the shares of each series, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences of each
such series, any or all of which may be greater than the rights of the Common
Stock. The Board of Directors, without shareholder approval, can issue Preferred
Stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of Common Stock. Preferred Stock
could thus be issued quickly with terms calculated to delay or prevent a change
in control of the Company or make removal of management more difficult. The
issuance of Preferred Stock could also decrease the amount of earnings and
assets available for distribution to holders of Common Stock. The Company has no
current plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
As of the date hereof, the holders of approximately 609,245 shares of Common
Stock are entitled to certain rights with respect to the registration of such
shares under the Securities Act. Under the terms of the registration rights
agreements between the Company and each of such holders, if the Company proposes
to register any of its securities under the Securities Act, either for its own
account or the account of other security holders, the holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein; provided, among other conditions, that the underwriters of any
offering have the right to limit the number of such shares included in such
registration. In addition, certain of the holders benefitting from these rights
may require the Company, beginning 120 days after the effective date of the
registration statement for the Offering, on not more than one occasion, to file
a registration statement under the Securities Act at the Company's expense with
respect to such shares, and
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<PAGE>
the Company is required to use its best efforts to effect such registration,
subject to certain conditions and limitations. Further, holders may require the
Company to register, subject to certain conditions and limitations, all or a
portion of their shares with registration rights on Form S-3, when the Company
qualifies to use such form.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is U.S.
Stock Transfer, whose telephone number is (818) 502-1404.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Offering because of certain contractual and legal restrictions
on resale (as described below), sales of substantial amounts of Common Stock of
the Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon completion of the Offering, based on the outstanding shares of Common
Stock at May 31, 1997, the Company will have 6,795,522 shares of Common Stock
outstanding, assuming no exercise of the Underwriters' over-allotment option and
no exercise of outstanding and vested options to purchase 403,974 shares of
Common Stock. Of the 6,795,522 shares of Common Stock, the 3,600,000 shares of
Common Stock offered hereby will be freely transferable without restriction or
further registration under the Securities Act. The remaining 3,195,522 shares of
Common Stock held by existing shareholders are "restricted shares" as defined in
Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules
are summarized below. As a result of the contractual restrictions described
below and the provisions of Rules 144, 144(k) and 701, shares will be available
for sale in the public market as follows: (i) 158,889 shares will be available
for immediate sale in the public market on the date of this Prospectus, and the
remaining (ii) 3,036,633 shares will be eligible for sale upon expiration of the
lock-up agreements 180 days after the date of this Prospectus.
Upon completion of the Offering, the holders of 431,781 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by "Affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
The Company, its officers and directors, the Selling Shareholders and other
current shareholders have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 180 days after the date
of this Prospectus, except (i) the shares of Common Stock offered hereby, (ii)
with the prior written consent of Oppenheimer & Co., Inc. and (iii) in the case
of the Company, for the issuance of Common Stock upon the exercise of options,
or the grant of options to purchase Common Stock under outstanding stock option
plans or the 1997 Purchase Plan.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding shares of the Company's Common Stock
(approximately 67,956 shares immediately after the Offering) or the average
weekly trading volume of the Company's Common Stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission (the "Commission").
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an Affiliate of the Company at any time during the three months
preceding a sale, and who owns Restricted Shares that were purchased from the
Company (or any Affiliate) at least
56
<PAGE>
two years previously, would be entitled to sell such shares under Rules 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating the compensation of such persons. In
addition, the Commission had indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the share acquired upon exercise of
such options (including exercises after the date of this Prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold by persons other than Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its one-year minimum holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering the 1,641,350 shares subject to outstanding options or
reserved for issuance under the Company's 1986 Plan, the 1996 Plan or the 1997
Purchase Plan. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to Affiliates, be
available for sale in the open market, except to the extent that such shares are
subject to vesting restrictions with the Company or the contractual restrictions
described above. All of the shares issuable upon exercise of outstanding options
are subject to 180-day lock-up agreements with the Company and/or
representatives of the Underwriters. An aggregate of 531,529 shares will be
issuable upon the exercise of the currently outstanding options vested and
exercisable 180 days following the date of this Prospectus. Such shares will be
freely tradeable in the public market upon exercise, pursuant to such
registration statement on Form S-8. See "Management--Stock Plans."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Shareholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Oppenheimer & Co., Inc. and Needham & Company, Inc. are acting as
Representatives (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Shareholders the respective number of shares of
Common Stock set forth opposite the name of each such Underwriter:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Oppenheimer & Co., Inc..................................................... 1,050,000
Needham & Company, Inc..................................................... 1,050,000
Cowen & Company............................................................ 100,000
Deutsche Morgan Grenfell Inc............................................... 100,000
Dillon, Read & Co. Inc..................................................... 100,000
A.G. Edwards & Sons, Inc................................................... 100,000
Hambrecht & Quist LLC...................................................... 100,000
The Nikko Securities Co. International, Inc................................ 100,000
Nomura Securities International, Inc....................................... 100,000
Prudential Securities Incorporated......................................... 100,000
Adams, Harkness & Hill, Inc................................................ 50,000
Brean Murray & Co., Inc.................................................... 50,000
Crowell, Weedon & Co....................................................... 50,000
Fahnestock & Co. Inc....................................................... 50,000
Gruntal & Co., L.L.C....................................................... 50,000
Hoefer & Arnett, Inc....................................................... 50,000
Kaufman Bros., L.P......................................................... 50,000
Ragen MacKenzie Incorporated............................................... 50,000
SoundView Financial Group, Inc............................................. 50,000
Southcoast Capital Corp.................................................... 50,000
Sutro & Co., Incorporated.................................................. 50,000
Unterberg Harris........................................................... 50,000
Van Kasper & Company....................................................... 50,000
H.G. Wellington & Co. Inc.................................................. 50,000
-----------------
Total.................................................................. 3,600,000
-----------------
-----------------
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $0.50 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.05 per share to certain brokers and
dealers. After the shares of Common Stock are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the Representatives. The Underwriters are obligated to take and pay for all of
the shares of Common Stock offered pursuant to this Prospectus (other than those
covered by the over-allotment option described below) if any are taken.
The Selling Shareholders have granted the Underwriters an option,
exercisable for up to 30 days after the date of this Prospectus, to purchase up
to an aggregate of 540,000 additional shares of Common Stock to cover
over-allotments, if any, at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. If the
Underwriters exercise such option to purchase any of the additional 540,000
shares of Common Stock, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be
58
<PAGE>
purchased by each of them represents with respect to the 3,600,000 shares of
Common Stock offered pursuant to this Prospectus. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered pursuant to this Prospectus. The Selling
Shareholders will be obligated, pursuant to the over-allotment option, to sell
shares of Common Stock to the Underwriters to the extent such over-allotment is
exercised.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the shares of Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Exchange Act pursuant to
which such persons may bid for or purchase shares of Common Stock for the
purpose of stabilizing the market price for shares of Common Stock. The
Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with the
Offering than they are committed to purchase from the Company and the Selling
Shareholders, and in such case may purchase shares of Common Stock in the open
market following completion of the Offering to cover all or a portion of the
shares of Common Stock or by exercising the Underwriters' over-allotment options
referred to above. In addition, Oppenheimer & Co., Inc., on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
other Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to shares of Common Stock that are distributed
in the Offering but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the shares of Common Stock at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company and the Selling Shareholders have agreed to indemnify the
Representatives of the Underwriters and the several Underwriters against certain
liabilities, including, without limitation, liabilities under the Securities
Act, and to contribute to certain payments that the Underwriters may be required
to make in respect thereof.
The Representatives of the Underwriters do not intend to confirm sales of
shares of Common Stock in the Offering to any account over which any of the
Representatives exercise discretionary control.
The Company and all of its officers, directors and Selling Shareholders have
agreed not to offer, sell, contract to sell, pledge or grant any option to
purchase or otherwise transfer or dispose of shares of Common Stock of the
Company or any security convertible into or exchangeable or exercisable for, or
warrants, options or rights to acquire any shares of Common Stock (other than
shares issuable upon exercise of outstanding options) for 180 days after the
date of this Prospectus without the prior written consent of Oppenheimer & Co.,
Inc., subject to certain limited exceptions. See "Shares Eligible for Future
Sale."
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in such negotiations will be
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company, the Selling Shareholders and the Representative believe to be
comparable to the Company, estimates of the business potential of the Company,
the history of and prospects for the industry in which the Company competes, the
present state of the Company's development and other factors deemed relevant.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Mario Rosati, a director of the Company, is a member of Wilson
Sonsini Goodrich & Rosati and beneficially owned 203,849 shares of Common Stock
of the Company as of the date of this Prospectus. See "Principal and Selling
Shareholders." As of the date of this Prospectus, an investment partnership of
which certain members of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, are partners beneficially owned 43,707 shares of the Company's
Common Stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Gray Cary Ware & Freidenrich, A Professional
Corporation, Palo Alto, California.
EXPERTS
The consolidated balance sheets of Aehr Test Systems as of May 31, 1996 and
1997 and the consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended May 31, 1997 included
in this Prospectus and the financial statement schedule for the aforementioned
periods included in the registration statement for the Offering have been
included in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules filed
thereto. For further information with respect to the Company, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. A copy of the Registration Statement may be inspected without charge
and may be obtained at prescribed rates at the Commission's principal office,
Public Reference Room of the Securities and Exchange Commission, 450 Fifth
Street, Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission. Such reports and other information may also be inspected without
charge at a web site maintained by the Commission. The address of such site is
"http://www.sec.gov".
The Company intends to furnish to its shareholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
60
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aehr Test Systems:
We have audited the accompanying consolidated balance sheets of Aehr Test
Systems and Subsidiaries as of May 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aehr Test
Systems and Subsidiaries as of May 31, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 30, 1997
F-2
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 535 $ 1,176
Short-term cash deposits .................................................................. 1,946 1,614
Accounts receivable, net of allowance for doubtful accounts of $241 and $270 at May 31,
1996 and 1997, respectively ............................................................. 10,565 7,515
Inventories ............................................................................... 7,921 10,498
Deferred income taxes...................................................................... -- 900
Prepaid expenses and other ................................................................ 259 155
--------- ---------
Total current assets .................................................................. 21,226 21,858
Property and equipment, net ................................................................. 1,382 1,691
Other assets, net ........................................................................... 1,141 685
Deferred income taxes........................................................................ -- 155
--------- ---------
Total assets .......................................................................... $ 23,749 $ 24,389
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- banks .................................................................... $ 6,688 $ 4,656
Current portion of long-term debt ......................................................... 500 117
Accounts payable .......................................................................... 5,590 4,482
Accrued expenses .......................................................................... 3,474 4,495
Deferred revenue .......................................................................... 175 213
--------- ---------
Total current liabilities ............................................................. 16,427 13,963
Long-term debt, net of current portion ...................................................... 146 136
Deferred lease commitment ................................................................... 387 220
--------- ---------
Total liabilities ..................................................................... 16,960 14,319
--------- ---------
Commitments (Note 7).
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none -- --
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 4,298 shares and 4,296 shares at May 31, 1996 and 1997,
respectively............................................................................ 43 43
Additional paid-in capital ................................................................ 8,094 8,085
Accumulated deficit ....................................................................... (3,445) (130)
Cumulative translation adjustment ......................................................... 2,097 2,072
--------- ---------
Total shareholders' equity ............................................................ 6,789 10,070
--------- ---------
Total liabilities and shareholders' equity ............................................ $ 23,749 $ 24,389
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales ....................................................................... $ 23,257 $ 33,234 $ 42,020
Cost of sales ................................................................... 16,192 19,942 25,715
--------- --------- ---------
Gross profit .................................................................... 7,065 13,292 16,305
--------- --------- ---------
Operating expenses:
Selling, general and administrative ........................................... 6,316 7,534 8,878
Research and development ...................................................... 3,783 4,113 4,536
Research and development cost reimbursement--DARPA ............................ (954) (891) (793)
--------- --------- ---------
Total operating expenses .................................................... 9,145 10,756 12,621
--------- --------- ---------
Income (loss) from operations ............................................... (2,080) 2,536 3,684
Interest expense ................................................................ (341) (446) (577)
Other income (expense), net ..................................................... 255 (559) (565)
--------- --------- ---------
Income (loss) before income taxes and minority interest in subsidiary ......... (2,166) 1,531 2,542
Income tax expense (benefit) .................................................... 10 130 (773)
--------- --------- ---------
Income (loss) before minority interest in subsidiary .......................... (2,176) 1,401 3,315
Minority interest in subsidiary ................................................. 189 (1) --
--------- --------- ---------
Net income (loss) ........................................................... $ (1,987) $ 1,400 $ 3,315
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share ..................................................... $ (0.45) $ 0.31 $ 0.73
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculations ........................................... 4,442 4,487 4,536
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
----------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1994....................... 4,320 $ 43 $ 8,175 $ (2,858) $ 2,079 $ 7,439
Repurchase of common stock................. (12) -- (37) -- -- (37)
Net loss................................... -- -- -- (1,987) -- (1,987)
Translation adjustment..................... -- -- -- -- 129 129
----- --- ----------- ------------ ----------- ---------
Balances, May 31, 1995....................... 4,308 43 8,138 (4,845) 2,208 5,544
Issuance of common stock................... 1 -- 3 -- -- 3
Repurchase of common stock................. (11) -- (47) -- -- (47)
Net income................................. -- -- -- 1,400 -- 1,400
Translation adjustment..................... -- -- -- -- (111) (111)
----- --- ----------- ------------ ----------- ---------
Balances, May 31, 1996....................... 4,298 43 8,094 (3,445) 2,097 6,789
Repurchase of common stock................. (2) -- (9) -- -- (9)
Net income................................. -- -- -- 3,315 -- 3,315
Translation adjustment..................... -- -- -- -- (25) (25)
----- --- ----------- ------------ ----------- ---------
Balances, May 31, 1997....................... 4,296 $ 43 $ 8,085 $ (130) $ 2,072 $ 10,070
----- --- ----------- ------------ ----------- ---------
----- --- ----------- ------------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (1,987) $ 1,400 $ 3,315
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in subsidiary................................................ (189) 1 --
Provision for doubtful accounts................................................ 34 71 34
Loss on disposition of fixed assets............................................ 156 34 9
Depreciation and amortization.................................................. 622 622 633
Deferred income taxes.......................................................... -- -- (1,055)
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 1,068 (4,367) 2,608
Inventories.................................................................. 156 (2,631) (2,854)
Accounts payable............................................................. 250 2,092 (795)
Accrued expenses and deferred revenue........................................ (648) 2,043 1,180
Deferred lease commitment.................................................... (91) (143) (167)
Other current assets......................................................... (81) 124 118
--------- --------- ---------
Net cash provided by (used in) operating activities........................ (710) (754) 3,026
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term cash deposits................................ (86) 16 188
Additions to property and equipment............................................ (396) (581) (647)
(Increase) decrease in other assets............................................ (67) 105 246
--------- --------- ---------
Net cash used in investing activities...................................... (549) (460) (213)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in notes payable--banks.................................... (475) 1,914 (1,784)
Borrowings under long-term debt................................................ 947 327 141
Long-term debt and capital lease principal payments............................ (904) (1,069) (488)
Proceeds from issuance of common stock and exercise of stock options........... -- 3 --
Repurchase of common stock..................................................... (37) (47) (9)
--------- --------- ---------
Net cash provided by (used in) financing activities........................ (469) 1,128 (2,140)
--------- --------- ---------
Effect of exchange rates on cash................................................... (104) 23 (32)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................... (1,832) (63) 641
Cash and cash equivalents, beginning of period..................................... 2,430 598 535
--------- --------- ---------
Cash and cash equivalents, end of period........................................... $ 598 $ 535 $ 1,176
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest..................................................................... $ 420 $ 473 $ 522
Income taxes, net............................................................ $ 10 $ 30 $ 155
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems ("Company") was incorporated in California in June 1977
and primarily designs, engineers and manufactures test and burn-in equipment
used in the semiconductor industry. The Company's principal products are the MTX
massively parallel test system, the DiePak carrier and the MAX and ATX burn-in
systems and test fixtures.
CONSOLIDATION:
The financial statements include the accounts of the Company, its wholly
owned foreign sales corporation ("FSC") and both its wholly owned and majority
owned foreign subsidiaries. Intercompany accounts and transactions have been
eliminated.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars using the exchange rate in effect at the balance sheet date.
Additionally, their revenues and expenses are translated using exchange rates
approximating average rates prevailing during the fiscal year. Translation
adjustments that arise from translating their financial statements from their
local currencies to U.S. dollars are accumulated and reflected as a separate
component of shareholders' equity.
Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM CASH DEPOSITS:
All highly liquid instruments purchased with a maturity of three months or
less are considered to be cash equivalents.
Short-term cash deposits represent interest-bearing time deposits with an
original maturity greater than three months.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers in
North America, the Far East, and Europe. As of May 31, 1997, approximately 15%,
28% and 57% of accounts receivable are from customers located in the United
States, Europe and the Far East, respectively. Two customers accounted for 24%
and 17% of accounts receivable at May 31, 1996 and one customer accounted for
44% of accounts receivable at May 31, 1997. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company also maintains allowances for potential credit losses
F-7
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and such losses have been within management's expectations. The Company uses
letter of credit terms for some of its international customers.
Primarily all of the Company's cash, cash equivalents and short-term cash
deposits are deposited with major banks in the United States and Japan. The
Company invests its excess cash in money market funds and short-term cash
deposits. The money market funds and short-term cash deposits bear the risk
associated with each fund. The money market funds have variable interest rates,
and the short-term cash deposits have fixed rates. The Company has not
experienced any losses on its money market funds or short-term cash deposits.
INVENTORIES:
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the term of the
related lease. Furniture, fixtures, machinery and equipment are depreciated on a
straight-line basis over their estimated useful lives. The ranges of estimated
useful lives for furniture, fixtures, machinery and equipment are as follows:
<TABLE>
<S> <C>
2 to 15
Furniture and fixtures........................................ years
4 to 11
Machinery and equipment....................................... years
</TABLE>
GOODWILL:
Cost in excess of the fair value of net assets of acquired companies of
$882,000 is being amortized on a straight-line basis over 24.5 years and is
included in other assets, net of accumulated amortization of $418,000 and
$454,000 at May 31, 1996 and 1997, respectively.
REVENUE RECOGNITION:
Revenue is recognized upon shipment of product and a provision for the
estimated future cost of warranty is recorded. Actual warranty costs incurred
have not materially differed from those provided.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems
are charged to operations as incurred.
Costs incurred in the development of software programs for the Company's
products are charged to operations as incurred until technological feasibility
of the software has been established. Generally, technological feasibility is
established when the software module performs its primary functions described in
its original specifications, contains features required for it to be usable in a
production environment, is completely documented and the related hardware
portion of the product is complete. After technological feasibility is
established, any additional costs are capitalized. Capitalized costs are
amortized over the estimated life of the related software product using the
greater of the units of sales or straight-line
F-8
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
methods over ten years. Capitalized costs, net of accumulated amortization, of
approximately $213,000 and $57,000 are included in other assets at May 31, 1996
and 1997, respectively.
During 1994, the Company entered into a cost-sharing research agreement with
the Defense Advanced Research Projects Agency ("DARPA"), a U.S. government
agency, under which DARPA will provide co-funding up to a maximum amount of $6.5
million during fiscal 1994 through January 1999 for the development of a new
product that will allow for burn-in at the wafer level. Payments from DARPA will
be received upon DARPA's approval of the achievement by the Company of
milestones as outlined in the contract. The Company recognizes such
reimbursements as a reduction to research and development expenses in an amount
equal to actual reimbursable project costs incurred. Amounts due from DARPA are
$153,000 and $500,000 at May 31, 1996 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, short-term cash deposits, accounts receivable,
accounts payable and accrued expenses approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of notes payable approximates fair
value.
CARRYING VALUE OF LONG-TERM ASSETS:
The Company writes off the carrying value of long-term assets to the extent
that projected net operating income is not sufficient to recover the carrying
value of these assets over their remaining useful life.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be realized.
STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," which is effective for the Company's financial
statements beginning in fiscal 1997. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123 or
under the provisions of Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees," but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company accounts for its stock
based compensation in accordance with the provisions of APB No. 25 and presents
disclosures required by SFAS No. 123.
F-9
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number of
common stock and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options (using the
treasury stock method for all periods presented).
The Company has computed the number of common and dilutive common equivalent
shares for all periods presented pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 83. SAB No. 83 requires the
Company to include in its calculation on net income (loss) per share, all common
equivalent shares, whether or not dilutive, issued during the twelve months
preceding the filing date of an initial public offering, as if the shares had
been outstanding for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which specifies the computation, presentation and disclosure
requirements for earning per share. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements issued
for periods ending after December 15, 1997. SFAS No. 128 requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS No. 128 will not have a material impact on the Company's financial
position, results of operations or cash flows.
2. INVENTORIES:
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Raw materials and subassemblies.......................................... $ 3,153 $ 4,376
Work in process.......................................................... 4,162 5,508
Finished product......................................................... 606 614
--------- ---------
$ 7,921 $ 10,498
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Leasehold improvements................................................... $ 389 $ 473
Furniture and fixtures................................................... 3,686 3,617
Machinery and equipment.................................................. 3,107 3,174
Test equipment........................................................... 2,267 2,283
--------- ---------
9,449 9,547
Less accumulated depreciation and amortization........................... (8,067) (7,856)
--------- ---------
$ 1,382 $ 1,691
--------- ---------
--------- ---------
</TABLE>
4. NOTES PAYABLE--BANKS:
At May 31, 1996 and 1997 short-term bank borrowings totaled $6,688,000 and
$4,656,000, respectively. Outstanding borrowings at May 31, 1996 and 1997 were
comprised of borrowings under a domestic line of credit and of short-term bank
loans of the Company's majority owned Japanese subsidiary for $3,415,000 and
$1,897,000 at an interest rate of 4.8% and 3.8%, respectively. These borrowings
are partially collateralized by certain time deposits and accounts receivable.
As of May 31, 1997, the Company's revolving bank line of credit provides for
maximum borrowings of up to the lesser of $2,000,000 or 80% of eligible accounts
receivable. This revolving credit line had a stated interest rate of prime (8.5%
at May 31, 1997) plus 1.0%. Under this agreement, which expires in December
1997, the Company's U.S. operation is required to maintain certain financial
ratios on a monthly basis including tangible net worth of $6,000,000 and a ratio
of debt to tangible net worth of not more than 2.0 to 1. There was no
outstanding balance under this line of credit at May 31, 1996 or at May 31,
1997.
The Company has a second line of credit agreement with a bank which provides
for a maximum borrowing of up to the lesser of $1,150,000 or 90% of eligible
foreign accounts receivable. The credit line has a stated interest rate of prime
(8.5% at May 31, 1997) plus 1.25%. Under this agreement, which expired on August
30, 1996 and has been guaranteed by The California Export Finance Office, the
Company's U.S. operation is required to maintain certain financial ratios on a
monthly basis including tangible net worth of $3,250,000 and a ratio of debt to
tangible net worth of not more than 1.9 to 1. Borrowings outstanding under this
line of credit amounted to $1,110,000 at May 31, 1996, and none at May 31, 1997.
In 1996, the Company entered into a third line of credit agreement with a
bank which provides for maximum borrowings of $5,000,000 or 90% of eligible
foreign accounts receivable and certain inventories. This revolving credit line
has a stated interest rate of prime (8.5% at May 31, 1997) plus .75%. Under this
agreement, which expires on December 4, 1997 and has been guaranteed by The
Export Import Bank, the Company's U.S. operations are required to maintain
certain financial ratios on a monthly basis including tangible net worth of
$6,000,000 and a ratio of debt to tangible net worth of not more than 2.0 to 1.
Borrowings outstanding under this line of credit amounted to $2,163,000 at May
31, 1996 and $2,759,000 at May 31, 1997.
F-11
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE--BANKS: (CONTINUED)
The Company's majority owned Japanese subsidiary has overdraft facilities
with a bank up to a limit of $1,115,000 against which certain time deposits and
accounts receivable are pledged as collateral for the facilities.
5. LONG-TERM DEBT:
Long-term debt comprises (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Various notes payable to Japanese banks, denominated in Japanese Yen, bearing
interest at 0.5% to 4.9% per annum. These notes are payable in monthly
principal installments of $1,000 to $37,000 plus accrued interest, maturing
through October 2002 and are collateralized by certain time deposits and
accounts receivable........................................................ $ 646 $ 253
Less current portion......................................................... (500) (117)
--------- ---------
$ 146 $ 136
--------- ---------
--------- ---------
</TABLE>
The long-term debt agreements contain certain cross-default covenants under
which outstanding borrowings would become payable on demand if the Company were
to be in default of any other debt agreement and any lender were to accelerate
the other debt.
Principal payments under long-term debt obligations for each of the next
five fiscal years as of May 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $ 118
1999................................................................. 77
2000................................................................. 34
2001................................................................. 12
2002................................................................. 12
---------
$ 253
---------
---------
</TABLE>
F-12
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Advances from customer..................................................... $ 1,036 $ --
Payroll related............................................................ 733 993
Commissions and bonuses.................................................... 788 1,882
Warranty................................................................... 119 173
Deferred rent, current..................................................... 141 290
Other...................................................................... 657 1,157
--------- ---------
$ 3,474 $ 4,495
--------- ---------
--------- ---------
</TABLE>
7. COMMITMENTS:
The Company leases most of its manufacturing and office space under
operating leases. The Company has entered into a noncancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in October 1991 and expires in September 1999. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
Minimum annual rentals payable under operating leases in each of the next
five fiscal years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 1,077
1999................................................................ 1,073
2000................................................................ 386
2001................................................................ 11
</TABLE>
Rent expense for the years ended May 31, 1995, 1996 and 1997 was
approximately $1,419,000, $1,425,000 and $1,226,000, respectively.
The Company has a $67,000 certificate of deposit held by a financial
institution representing a security deposit for its United States manufacturing
office and facilities lease.
8. CAPITAL STOCK:
PREFERRED STOCK:
The Board of Directors is authorized to determine the rights of the
preferred shareholders.
STOCK OPTIONS:
The Company has reserved 1,341,350 shares of common stock for issuance to
employees and consultants under its two stock option plans. Both plans provide
that qualified options be granted at an exercise price equal to the fair market
value at the date of grant, as determined by the Board of Directors (85% of fair
market value in the case of nonstatutory options and purchase rights and 110% of
fair market value in certain circumstances). Options generally expire five years
from date of grant. Most options become exercisable in increments over a
four-year period from the date of grant. Options to purchase approximately
409,353 shares were exercisable at May 31, 1997.
F-13
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK (CONTINUED)
Activity under the Company's stock option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------
AVAILABLE NUMBER OF
SHARES SHARES PRICE PER SHARE TOTAL
----------- ----------- ---------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Balances, May 31, 1994....................... 103 361 $3.00--$6.00 $ 1,186
Options granted............................ (112) 112 $3.25 365
Options terminated......................... 66 (66) $3.00--$4.00 (210)
--- --- ---------
Balances, May 31, 1995....................... 57 407 $3.00--$6.00 1,341
Options granted............................ (548) 548 $4.00 2,193
Options exercised.......................... -- (1) $3.00 (3)
Options terminated......................... 222 (222) $3.00--$6.00 (712)
Additional shares reserved................. 335 -- -- --
1978 Plan expiration....................... (27) -- -- --
1983 Plan expiration....................... (37) -- -- --
--- --- ---------
Balances, May 31, 1996....................... 2 732 $3.25--$6.00 2,819
Additional shares reserved................. 650 -- -- --
Options granted............................ (70) 70 $4.25--$6.00 397
Options terminated......................... 43 (43) $3.25--$6.00 (167)
1986 Plan expiration....................... (43) -- -- --
--- --- ---------
Balances, May 31, 1997....................... 582 759 $3.25--$6.00 $ 3,049
--- --- ---------
--- --- ---------
</TABLE>
The following information concerning the Company's stock option and employee
stock purchase plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company accounts for such plans in accordance
with APB No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Risk-free Interest Rates........................................... 6.47% 6.47%
Expected Life...................................................... 5 years 5 years
Volatility......................................................... -- --
Dividend Yield..................................................... -- --
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior. The weighted average fair value of those options granted in 1996 and
1997 was $3.84 and $4.01, respectively.
F-14
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK (CONTINUED)
The following pro forma income information has been prepared following the
provisions of SFAS No. 123:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------
1996 1997
--------- ---------
(AMOUNTS IN
THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income--as reported.................................................. $ 1,400 $ 3,315
Net income--pro forma.................................................... $ 1,339 $ 3,215
Net income per share--as reported........................................ $ 0.31 $ 0.73
Net income per share--pro forma.......................................... $ 0.30 $ 0.71
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
The following table summarizes information with respect to stock options at
May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT MAY 31, CONTRACTUAL EXERCISE AT MAY 31, EXERCISE
EXERCISE PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE
- ---------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$3.25 158,150 2.08 $ 3.25 126,032 $ 3.25
$4.00 508,200 3.40 $ 4.00 259,403 $ 4.00
$4.25 11,500 4.40 $ 4.25 1,674 $ 4.25
$4.40 25,000 3.41 $ 4.40 19,791 $ 4.40
$6.00 56,500 4.79 $ 6.00 2,453 $ 6.00
----------- -----------
$3.25--$6.00 759,350 3.25 $ 4.01 409,353 $ 3.80
</TABLE>
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK BONUS PLAN:
The Company has a noncontributory, trusteed employee stock bonus plan for
full-time employees who have completed three consecutive months of service and
for part time employees who have completed one year of service and have attained
an age of 21. The Company can contribute either shares of the Company's stock or
cash to the plan. The contribution is determined annually by the Company and
cannot exceed 15% of the annual aggregate salaries of those employees eligible
for participation in the plan. Individuals' account balances vest at a rate of
25% per year commencing upon completion of three years of service. Nonvested
balances, which are forfeited, are allocated to the remaining employees in the
plan. Contributions made to the plan during fiscal 1995, 1996 and 1997 were
none, $50,000 and $200,000, respectively.
F-15
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
401(K) PLAN:
The Company maintains a 401(k) profit-sharing plan for its full-time
employees who have completed three consecutive months of service and for
part-time employees who have completed one year of service and have attained an
age of 21. Each participant in the plan may elect to contribute from 1% to 20%
of their annual salary to the plan, subject to certain limitations. The Company,
at its discretion, may make an annual contribution to the plan. No contributions
were made by the Company to the plan during fiscal 1995, 1996 and 1997.
EMPLOYEE STOCK PURCHASE PLAN:
The Company's 1997 Employee Stock Purchase Plan was adopted by the Board of
Directors in June 1997. A total of 300,000 shares of Common Stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. The offering periods generally begin on the
first trading day on or after April 1 and October 1 each year, except that the
first such offering period commences with the effectiveness of the Company's
initial public offering and ends on the last trading day on or before March 31,
1999. Shares are purchased through employee payroll deductions at exercise
prices equal to 85% of the lesser of the fair market value of the Company's
Common Stock at either the first day of an offering period or the last day of
such offering period. If a participant's rights to purchase stock under all
employee stock purchase plans of the Company accrue at a rate which exceeds
$25,000 worth of stock for a calendar year, such participant may not be granted
an option to purchase stock under the 1997 Employee Stock Purchase Plan. To
date, no shares have been issued under the plan.
10. INCOME TAXES:
Domestic and foreign components of pretax income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic....................................................... $ (725) $ 1,283 $ 3,672
Foreign........................................................ (1,441) 248 (1,130)
--------- --------- ---------
$ (2,166) $ 1,531 $ 2,542
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal income taxes:
Current...................................................... $ -- $ 40 $ 150
Deferred..................................................... -- -- (910)
State income taxes:
Current...................................................... -- 5 15
Deferred..................................................... -- -- (145)
Foreign income taxes:
Current...................................................... 10 85 117
Deferred..................................................... -- -- --
--------- --------- ---------
$ 10 $ 130 $ (773)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES: (CONTINUED)
The components of the net deferred tax asset (liability) are as follows (in
thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Noncurrent assets:
Net operating losses................................................... $ 2,996 $ 1,836
Credit carryforwards................................................... 95 24
Depreciation and amortization.......................................... (184) (7)
--------- ---------
2,907 1,853
Less valuation allowance................................................. (2,907) (1,698)
--------- ---------
-- 155
--------- ---------
Current assets:
Inventory and other revenues........................................... 542 1,295
Accrued liabilities.................................................... 1,497 860
--------- ---------
2,039 2,155
Less valuation allowance................................................. (2,039) (1,255)
--------- ---------
-- 900
--------- ---------
Net deferred tax asset................................................... $ -- $ 1,055
--------- ---------
--------- ---------
</TABLE>
The Company's effective tax rate differs from the U.S. federal statutory tax
rate, as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Maximum statutory (benefit) rate.................................. (34.0)% 34.0% 34.0%
Net operating losses without current year income tax
benefit carried forward......................................... 34.0 -- --
Net operating loss utilized....................................... -- (34.0) (34.0)
Foreign taxes..................................................... 0.5 5.4 4.6
State taxes, net of federal tax effect............................ -- 0.3 0.6
Other............................................................. -- 2.8 5.9
Recognition of deferred taxes..................................... -- -- (41.5)
----- ----- ---------
Effective tax rate................................................ 0.5% 8.5 % (30.4)%
----- ----- ---------
----- ----- ---------
</TABLE>
Foreign net operating loss carryforwards of approximately $3,600,000 are
available to reduce future foreign taxable income and expire in 2010 if not
utilized. A valuation allowance has been provided for the deferred tax assets of
the Japanese subsidiary as management does not believe it is more likely than
not the tax assets will be realized, due to the subsidiary's cumulative losses.
F-17
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER INCOME (EXPENSE), NET:
Other Income (Expense), Net comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Foreign exchange gain (loss)......................................... $ 258 $ (573) $ (393)
Other, net........................................................... (3) 14 (172)
--------- --------- ---------
$ 255 $ (559) $ (565)
--------- --------- ---------
--------- --------- ---------
</TABLE>
12. SEGMENT INFORMATION:
FOREIGN OPERATIONS:
The Company develops, manufactures and sells systems to semiconductor
manufacturers and operates in one industry segment. The following presents
information about the Company's operations in different geographic areas (in
thousands):
<TABLE>
<CAPTION>
UNITED
STATES ASIA EUROPE ADJUSTMENTS TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1995:
Net sales.............................................. $ 12,270 $ 12,447 $ 1,917 $ (3,377) $ 23,257
Portion of U.S. net sales from export sales............ 4,931 -- -- -- 4,931
Income (loss) from operations.......................... (1,589) (1,003) (93) 605 (2,080)
Identifiable assets.................................... 12,368 11,912 612 (5,002) 19,890
1996:
Net sales.............................................. $ 21,486 $ 14,204 $ 3,497 $ (5,953) $ 33,234
Portion of U.S. net sales from export sales............ 13,150 -- -- -- 13,150
Income (loss) from operations.......................... 1,330 707 199 300 2,536
Identifiable assets.................................... 18,515 9,453 1,103 (5,322) 23,749
1997:
Net sales.............................................. $ 35,404 $ 8,718 $ 3,986 $ (6,088) $ 42,020
Portion of U.S. net sales from export sales............ 27,102 -- -- -- 27,102
Income (loss) from operations.......................... 3,972 (668) (32) 412 3,684
Identifiable assets.................................... 22,983 5,093 910 (4,597) 24,389
</TABLE>
The Company's foreign operations are primarily those of its Japanese
subsidiary. Substantially all of their sales are made to unaffiliated Japanese
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.
F-18
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION: (CONTINUED)
MAJOR CUSTOMERS:
One customer accounted for 18% of 1995 net sales, and another customer
accounted for 29% of 1996 net sales, and 56% of 1997 net sales.
13. SUBSEQUENT EVENTS:
In June 1997, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
permitting the Company to sell shares of its Common Stock to the public.
F-19
<PAGE>
BACK COVER
<TABLE>
<S> <C>
TITLE: Leading-Edge Test and Burn-in Technology
[PHOTOGRAPH of MAX Burn-in System]
CAPTION: Aehr Test Systems is a leader in the development and marketing of
dynamic burn-in systems, including the MAX and ATX systems, which are
designed for use with memory devices and microprocessors.
[PHOTOGRAPH of prototype wafer test fixture]
CAPTION: Leveraging expertise gained in the development of the MTX Massively
Parallel Test System and the DiePak carrier, Aehr Test Systems is
working on a long-term research project co-funded by DARPA to develop
a system to test and burn-in semiconductor wafers.
</TABLE>
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK REFERRED TO BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION TO SUCH PERSON IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH
OFFER OR SOLICITATION MAY NOT BE LAWFULLY MADE. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 6
The Company................................... 18
Use of Proceeds............................... 18
Dividend Policy............................... 18
Capitalization................................ 19
Dilution...................................... 20
Selected Consolidated Financial Data.......... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 22
Business...................................... 30
Management.................................... 43
Certain Transactions.......................... 50
Principal and Selling Shareholders............ 51
Description of Capital Stock.................. 54
Shares Eligible for Future Sale............... 56
Underwriting.................................. 58
Legal Matters................................. 60
Experts....................................... 60
Additional Information........................ 60
Index to Consolidated Financial Statements.... F-1
</TABLE>
-------------------
UNTIL SEPTEMBER 8, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,600,000 SHARES
[LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
OPPENHEIMER & CO., INC.
NEEDHAM & COMPANY, INC.
AUGUST 14, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
