<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 333-28987.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
- ------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1667 PLYMOUTH STREET 94043
MOUNTAIN VIEW, CA
- ------------------------------------- --------------------------------------
(Address of principal (Zip Code)
executive offices)
(650) 691-9400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES NO X
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding on
August 31, 1997 was 6,828,564.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1997
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of August 31, 1997 and
May 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the three
months ended August 31, 1997 and 1996. . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 1997 and 1996. . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . 6
ITEM 2. Managements's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . 20
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 20
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 25,363 $ 1,176
Short-term cash deposits. . . . . . . . . . . . . . . . 1,493 1,614
Accounts receivable . . . . . . . . . . . . . . . . . . 8,883 7,515
Inventories . . . . . . . . . . . . . . . . . . . . . . 10,488 10,498
Prepaid expenses and other. . . . . . . . . . . . . . . 1,203 1,055
----------- ---------
Total current assets. . . . . . . . . . . . . . . . . 47,430 21,858
Property and equipment, net . . . . . . . . . . . . . . . 1,659 1,691
Other assets, net . . . . . . . . . . . . . . . . . . . . 935 840
----------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $ 50,024 $ 24,389
----------- ---------
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- banks. . . . . . . . . . . . . . . . . $ 1,757 $ 4,656
Current portion of long-term debt . . . . . . . . . . . 99 117
Accounts payable. . . . . . . . . . . . . . . . . . . . 4,623 4,482
Accrued expenses. . . . . . . . . . . . . . . . . . . . 5,292 4,495
Deferred revenue. . . . . . . . . . . . . . . . . . . . 264 213
----------- ---------
Total current liabilities . . . . . . . . . . . . . . 12,035 13,963
Long-term debt, net of current portion. . . . . . . . . . 106 136
Deferred lease commitment . . . . . . . . . . . . . . . . 179 220
----------- ---------
Total liabilities. . . . . . . . . . . . . . . . . 12,320 14,319
----------- ---------
Shareholders' equity:
Common stock, $.01 par value outstanding:
6,829 shares and 4,296 shares at August 31, 1997
and May 31, 1997, respectively. . . . . . . . . . . . 68 43
Additional paid-in capital. . . . . . . . . . . . . . . 35,046 8,085
Retained earnings (accumulated deficit) . . . . . . . . 484 (130)
Cumulative translation adjustment . . . . . . . . . . . 2,106 2,072
----------- ---------
Total shareholders' equity . . . . . . . . . . . . 37,704 10,070
----------- ---------
Total liabilities and shareholders' equity . . . . $ 50,024 $ 24,389
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,665 $ 9,071
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,061 5,745
--------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,604 3,326
--------- --------
Operating expenses:
Selling, general and administrative. . . . . . . . . . . . . . . 2,247 1,849
Research and development . . . . . . . . . . . . . . . . . . . . 1,179 1,016
Research and development cost reimbursement -- DARPA . . . . . . -- (176)
--------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . 3,426 2,689
--------- --------
Income from operations . . . . . . . . . . . . . . . . . . . . . 1,178 637
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (62) (152)
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . 20 9
--------- --------
Income before income taxes and minority interest in subsidiary . 1,136 494
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 522 130
Minority interest in subsidiary. . . . . . . . . . . . . . . . . . -- 3
--------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 367
--------- --------
--------- --------
Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.12 $ 0.08
--------- --------
--------- --------
Shares used in per share calculation . . . . . . . . . . . . . . . 5,143 4,478
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31,
---------------------------------------
1997 1996
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 367
Adjustments to reconcile net income to net cash used in
operating activities:
Minority interest in subsidiary. . . . . . . . . . . . . . . . . . . -- 8
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . (116) (31)
Loss on disposition of fixed assets. . . . . . . . . . . . . . . . . 18 --
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 160 194
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (1,329) 2,355
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (62) (1,067)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 278 (432)
Accrued expenses and deferred revenue. . . . . . . . . . . . . . . 790 (344)
Deferred lease commitment. . . . . . . . . . . . . . . . . . . . . (41) (23)
Other assets and liabilities . . . . . . . . . . . . . . . . . . . (153) (231)
--------- ---------
Net cash provided by operating activities. . . . . . . . . . . 159 796
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term cash deposits . . . . . . . . . . . . . . . . . 63 56
Additions to property and equipment. . . . . . . . . . . . . . . . . . (95) (156)
Decrease (increase) in other assets. . . . . . . . . . . . . . . . . . (152) 67
--------- ---------
Net cash used in investing activities. . . . . . . . . . . . . (184) (33)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable -- banks . . . . . . . . . . . . . . . . . . (2,835) (95)
Borrowings under long-term debt. . . . . . . . . . . . . . . . . . . . 91 94
Long-term debt and capital lease principal payments. . . . . . . . . . (129) (178)
Proceeds from issuance of common stock and exercise of stock options . 27,086 --
--------- ---------
Net cash provided by (used in) financing activities. . . . . . 24,213 (179)
--------- ---------
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . (1) (19)
--------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . 24,187 565
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 1,176 535
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 25,363 $ 1,100
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-5-
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared by
Aehr Test Systems, without audit, in accordance with the instructions to Form
10-Q and therefore does not include all information and footnotes necessary
for a fair presentation of financial position, results of operations and cash
flows in accordance with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Aehr Test Systems and its subsidiaries (collectively, the
"Company"). All significant intercompany balances have been eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the consolidated financial position and results of
operations as of and for such periods indicated. These consolidated financial
statements and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Prospectus
dated August 14, 1997. Results for the interim periods presented herein are not
necessarily indicative of results which may be reported for any other interim
period or for the entire fiscal year.
2. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share is computed based on the weighted
average number of common and common equivalent shares (common stock options and
warrants) outstanding during each period using the treasury stock method.
Primary earnings per share is not significantly different from fully diluted
earnings per share for any of the periods indicated.
3. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, 1997 May 31, 1997
----------------- --------------
Raw materials and subassemblies. . . . . . . $ 5,107 $ 4,376
Work in process. . . . . . . . . . . . . . . 4,774 5,508
Finished product . . . . . . . . . . . . . . 607 614
--------- ---------
$ 10,488 $ 10,498
--------- ---------
--------- ---------
-6-
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1997 (CONTINUED)
(UNAUDITED)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130, which establishes standards of disclosure
and financial statement presentation for reporting total comprehensive income
and its individual components, is effective for fiscal years beginning after
December 15, 1997, and will be effective for the Company's 1999 fiscal year.
The impact of the adoption of SFAS No. 130 on the financial statements of the
Company has not yet been determined.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures
About Segments of an Enterprise and Related Information," which specifies
disclosure requirements for segment reporting. SFAS No. 131, which
supersedes SFAS No. 14 and SFAS No. 18, is effective for fiscal years
beginning after December 15, 1997 and will be effective for the Company's
1999 fiscal year. The impact of the adoption of SFAS No. 131 on the
financial statements of the Company has not yet been determined.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included herein. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors set forth under "Factors That May Affect Future Results of
Operations."
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
August 31, 1997 August 31, 1996
----------------- ----------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.5 63.3
------- -------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.5 36.7
------- -------
Operating expenses:
Sales, general and administrative . . . . . . . . . . . . . . . . 19.3 20.4
Research and development. . . . . . . . . . . . . . . . . . . . . 10.1 11.2
Research and development cost reimbursement -- DARPA. . . . . . . -- (1.9)
------- -------
Total operating expenses. . . . . . . . . . . . . . . . . . . . 29.4 29.7
------- -------
Income from operations. . . . . . . . . . . . . . . . . . . . . . 10.1 7.0
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (0.6) (1.7)
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.1
------- -------
Income before income taxes and minority interest in subsidiary. . 9.7 5.4
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . 4.4 1.4
Minority interest in subsidiary . . . . . . . . . . . . . . . . . . -- --
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3% 4.0%
------- -------
------- -------
</TABLE>
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1996
NET SALES. Net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. The Company recognizes revenue upon shipment of product. Net
sales increased to $11.7 million in the three months ended August 31, 1997
from $9.1 million in the three months ended August 31, 1996, an increase of
28.6%. The growth in net sales was caused primarily by increased shipments of
MTX products, primarily to Siemens, partially offset by decreased net sales
from the Company's Japanese subsidiary.
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 $4.6 million in the
three months ended August 31, 1997 from $3.3 million in the three months ended
August 31, 1996, an increase of 38.4%. Gross profit margin increased to 39.5%
in the three months ended August 31, 1997 from 36.7% in the three months ended
August 31, 1996. The improvement in gross profit margin was primarily due to
lower material costs as a percentage of net sales.
-8-
<PAGE>
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 $2.2 million in the three months ended August 31, 1997
from $1.8 million in the three months ended August 31, 1996, an increase of
21.5%. The increase in SG&A expenses was primarily due to increased employment
costs and increased commission expenses to independent sales representatives
related to higher levels of shipments. As a percentage of net sales, SG&A
expenses decreased to 19.3% in the three months ended August 31, 1997 from 20.4%
in the three months ended August 31, 1996. 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 $1.2 million in the three months ended August 31, 1997 from $1.0
million in the three months ended August 31, 1996, an increase of 16.0%. The
increase in R&D expenses was primarily due to increased employment costs and
engineering project materials. As a percentage of net sales, R&D expenses
decreased to 10.1% in the three months ended August 31, 1997 from 11.2% in
the three months ended August 31, 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 decreased to nil in the three months ended
August 31, 1997 from $176,000 in the three months ended August 31, 1996. The
decrease was due to delay in approval of a development milestone in the three
months ended August 31, 1997.
INTEREST EXPENSE. Interest expense decreased to $62,000 in the three
months ended August 31, 1997 from $152,000 in the three months ended August
31, 1996, a decrease of 59.2%. The decrease in interest expense was
primarily due to the fact that the proceeds from the initial public offering
in August 1997 repaid the short-term domestic debt and earned interest income.
OTHER INCOME, NET. Other income, net increased to $20,000 in the three
months ended August 31, 1997 from $9,000 in the three months ended August 31,
1996, an increase of 122.2%. The increase in other income, net was primarily
due to the recognition of the Company's 25% interest in ESA Electronics Pte
Ltd., a Singapore Corporation, partially offset by increased currency
exchange losses incurred by the Company's Japanese subsidiary and increased
cash discounts allowed in the three months ended August 31, 1997.
INCOME TAX EXPENSE. Income tax expense increased to $522,000 in the
three months ended August 31, 1997 from $130,000 in the three months ended
August 31, 1996. Previous tax expense had consisted primarily of taxes on
earnings of the Company's German subsidiary and, to a lesser extent, the
minimum federal and state taxes in the U.S. as operating loss carryforwards
offset other taxable income. The current tax expense more closely
approximates normal operations, although no tax benefit is recorded for
losses in the Company's Japanese subsidiary.
MINORITY INTEREST IN SUBSIDIARY. Minority interest in subsidiary is a
line item which excludes 13.3% of the total profits or losses of the
Company's Japanese subsidiary in order to account for the minority
shareholder's interest in the subsidiary. Minority interest in subsidiary
decreased to nil in the three months ended August 31, 1997 from $3,000 in the
three months ended August 31, 1996. Since the Company's Japanese subsidiary
has had cumulative losses in recent quarters, no exclusion of the losses
incurred by the subsidiary is made in the three months ended August 31, 1997.
-9-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow
generated from the Company's August 15, 1997 initial public offering,
resulting in net proceeds to the Company of approximately $26.8 million. As
of August 31, 1997, the Company had approximately $26.9 million in cash and
short term investments, and various borrowings in Japan which totaled $2.0
million.
Net cash provided by operating activities was approximately $159,000 for
the three months ended August 31, 1997 and $796,000 for the three months
ended August 31, 1996. For the three months ended August 31, 1997, net cash
provided by operating activities was due primarily to the net income of
$614,000 and increases in accounts payable and accrued expenses of
approximately $1.1 million, partially offset by an increase in accounts
receivable of approximately $1.3 million. For the three months ended August
31, 1996, net cash provided by operating activities was due primarily to the
net income of $367,000 and a decrease in accounts receivable of approximately
$2.4 million, partially offset by an increase in inventory of approximately
$1.1 million and decreases in accounts payable and accrued expenses of
approximately $776,000.
Net cash used in investing activities was approximately $184,000 for the
three months ended August 31, 1997 and $33,000 for the three months ended
August 31, 1996. The increase in cash used in investing activities during the
three months ended August 31, 1997 was primarily due to the acquisition of a
25% interest in Singapore-based ESA Electronics, Ltd. during the period.
Financing activities provided cash of approximately $24.2 million in the
three months ended August 31, 1997, and financing activities used cash of
approximately $0.2 million in the three months ended August 31, 1996. The
increase in cash provided by financing activities was primarily attributable
to the initial public offering when the Company sold 2.5 million shares of
common stock in August 1997.
As of August 31, 1997, the Company had working capital of $35.5 million,
compared with $7.9 million as of May 31, 1997. Working capital consists of
cash and cash equivalents, short term cash deposits, accounts receivable,
inventory and other current assets, less current liabilities. The increase in
working capital as of August 31, 1997 was primarily due to the cash provided
by the initial public offering.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that may complement the Company's
business. Any such transactions, if consummated, may use a portion of the
Company's working capital or require the issuance of equity. The Company has
no present understandings, commitments or agreements with respect to any
material acquisitions.
The Company anticipates that the existing balance of cash and short term
investments is adequate to meet its working capital and capital equipment
requirements through fiscal 1998. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS.
This report on Form 10-Q contains forward looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended. The Company's future results of operations could
vary significantly from the results anticipated by such forward looking
statements as a result of various factors, including those set forth as
follows and elsewhere in this quarterly report on Form 10-Q.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. 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 and approval of
Defense Advanced Research Projects Agency ("DARPA") development milestones,
manufacturing
-10-
<PAGE>
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. 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. 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 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. 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.
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Market acceptance of the MTX system is subject to a number of risks. 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.
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-R- 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
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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 purchases of semiconductor equipment. Sales to the Company's five
largest customers accounted for approximately 55.8%, 69.2%, and 84.9% of its
net sales in fiscal 1996, 1997 and first quarter 1998, respectively. Siemens
accounted for 60.3% of net sales in the first fiscal quarter of 1998. During
fiscal 1996 and 1997, Siemens accounted for 29.1% and 55.7% of the Company's
net sales, respectively. No other customers represented more than 10% of the
Company's net sales for any of such periods. The Company expects that sales
of its products to a limited number of customers, 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.
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 represented
approximately 70% of the Company's 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
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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 90.4%
and 92.5% of the Company's net sales for fiscal 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 that sales of products for delivery outside of the United
States will continue to represent a substantial portion of its future net
sales. The future performance of the Company will depend, in significant
part, upon its ability to continue to compete in foreign markets which in
turn will depend, in part, upon a continuation of current trade relations
between the United States and foreign countries in which semiconductor
manufacturers or assemblers have operations. A change toward more
protectionist trade legislation in either the United States or such foreign
countries, such as a change in the current tariff structures, export
compliance or other trade policies, could adversely affect the Company's
ability to sell its products in foreign markets. In addition, the Company is
subject to other risks associated with doing business 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.
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.
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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 was 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 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
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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 competition, resulting in lower prices which could adversely affect
the Company's business, financial condition and operating results. The Company
believes that to remain competitive it must invest significant financial
resources in new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to compete
successfully in the future.
The semiconductor equipment industry is intensely competitive. Significant
competitive factors in the semiconductor equipment market include price,
technical capabilities, quality, 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.
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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.
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
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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.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed upon
management personnel and will require development or enhancement of operational,
managerial and financial systems and controls. If the Company is unable to
manage the expansion of its operations effectively, the Company's business,
financial condition and operating results will be materially and adversely
affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its President
and Chief Executive Officer, as well as other executive officers and key
employees. The 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.
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
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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.
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.
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<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to Section 603(a) of the California Corporations Code, the Company
submitted to its shareholders a proposed Action By Written Consent of the
Shareholders for the approval of the Company's 1997 Employee Stock Purchase
Plan. This vote took place in July 1997, and the results are as follows:
Proposal One: Approval of the 1997 Employee Stock Purchase Plan
FOR AGAINST ABSTAIN NO VOTE
--- ------- ------- -------
3,961,584 (92.2%) 0 500 (< 0.1%) 333,938 (7.8%)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 Earnings Per Share
(b) Exhibit 27.1 Financial Data Schedule
(c) No reports on Form 8-K were filed by the Company during the
quarter ended August 31, 1997.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: October 14, 1997 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: October 14, 1997 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and Chief Financial Officer
-21-
<PAGE>
EXHIBIT 11.1
AEHR TEST SYSTEMS AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER SHARE
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------
August 31,
1997 1996
---------- ---------
<S> <C> <C>
Weighted average common shares outstanding. . . . . . . . . . 4,730 4,304
Weighted average common equivalent shares assuming
conversion of stock options under the treasury
stock method . . . . . . . . . . . . . . . . . . . . . . . 413 66
Common and common equivalent shares pursuant to Staff
Accounting Bulletin No. 83 . . . . . . . . . . . . . . . . 108
------- -------
Shares used in per share calculations . . . . . . . . . . . . 5,143 4,478
------- -------
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 367
------- -------
------- -------
Net income per share. . . . . . . . . . . . . . . . . . . . . $ 0.12 $ 0.08
------- -------
------- -------
</TABLE>
The difference between primary and fully diluted earnings per share is less
than $0.01 for each period presented.
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 26856000
<SECURITIES> 0
<RECEIVABLES> 9034000
<ALLOWANCES> 151000
<INVENTORY> 10488000
<CURRENT-ASSETS> 47430000
<PP&E> 9667000
<DEPRECIATION> 8008000
<TOTAL-ASSETS> 50024000
<CURRENT-LIABILITIES> 12035000
<BONDS> 285000
0
0
<COMMON> 68000
<OTHER-SE> 37636000
<TOTAL-LIABILITY-AND-EQUITY> 50024000
<SALES> 11665000
<TOTAL-REVENUES> 11665000
<CGS> 7061000
<TOTAL-COSTS> 7061000
<OTHER-EXPENSES> 3381000
<LOSS-PROVISION> 25000
<INTEREST-EXPENSE> 62000
<INCOME-PRETAX> 1136000
<INCOME-TAX> 522000
<INCOME-CONTINUING> 614000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 614000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
