<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 November 30, 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 X NO
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding on November
30, 1997 was 6,831,709.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1997
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
November 30, 1997 and May 31, 1997 . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the three
months and six months ended November 30, 1997
and 1996.. . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
six months ended November 30, 1997 and 1996. . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 23
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
November 30, 1997 May 31, 1997
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $13,742 $ 1,176
Short-term investments. . . . . . . . . . . . . . . . . 10,299 1,614
Accounts receivable . . . . . . . . . . . . . . . . . . 8,721 7,515
Inventories . . . . . . . . . . . . . . . . . . . . . . 9,990 10,498
Prepaid expenses and other. . . . . . . . . . . . . . 1,181 1,055
---------- ---------
Total current assets. . . . . . . . . . . . . . . 43,933 21,858
Property and equipment, net. . . . . . . . . . . . . . . . . 1,602 1,691
Long-term investments. . . . . . . . . . . . . . . . . . . . 3,334 0
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 902 840
----------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $49,771 $24,389
----------- ---------
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- banks. . . . . . . . . . . . . . . . $ 420 $ 4,656
Current portion of long-term debt . . . . . . . . . . . 54 117
Accounts payable. . . . . . . . . . . . . . . . . . . 3,862 4,482
Accrued expenses. . . . . . . . . . . . . . . . . . . 5,886 4,495
Deferred revenue. . . . . . . . . . . . . . . . . . . 736 213
----------- ---------
Total current liabilities. . . . . . . . . . . . . 10,958 13,963
Long-term debt, net of current portion. . . . . . . . . . . 82 136
Deferred lease commitment. . . . . . . . . . . . . . . . . . 138 220
----------- ---------
Total liabilities. . . . . . . . . . . . . . . . 11,178 14,319
----------- ---------
Shareholders' equity:
Common stock, $.01 par value outstanding:
6,832 shares and 4,296 shares at November 30, 1997
and May 31, 1997, respectively. . . . . . . . . . 68 43
Additional paid-in capital. . . . . . . . . . . . . . 35,037 8,085
Retained earnings (accumulated deficit) . . . . . . . . 1,392 (130)
Cumulative translation adjustment . . . . . . . . . . . 2,096 2,072
----------- ---------
Total shareholders' equity . . . . . . . . . . . . 38,593 10,070
---------- ---------
Total liabilities and shareholders' equity . . . . $49,771 $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 Six Months Ended
November 30, November 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $11,748 $10,486 $23,413 $19,557
Cost of sales 7,166 6,494 14,227 12,239
------- ------- ------- -------
Gross profit 4,582 3,992 9,186 7,318
------- ------- ------- -------
Operating expenses:
Sales, general and administrative 2,215 2,088 4,462 3,937
Research and development 1,191 1,174 2,370 2,190
Research and development cost
reimbursement - DARPA (471) (117) (471) (293)
------- ------- ------- -------
Total operating expenses 2,935 3,145 6,361 5,834
------- ------- ------- -------
Income from operations 1,647 847 2,825 1,484
Interest income (expense) 290 (134) 228 (286)
Other expense, net (237) (113) (217) (104)
------- ------- ------- -------
Income before income taxes and
minority interest in subsidiary 1,700 600 2,836 1,094
------- ------- ------- -------
Income tax expense 792 177 1,314 307
Minority interest in subsidiary - - - 3
------- ------- ------- -------
Net income $ 908 $ 423 $ 1,522 $ 790
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ 0.12 $ 0.10 $ 0.24 $ 0.18
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share calculation 7,397 4,477 6,297 4,469
------- ------- ------- -------
------- ------- ------- -------
</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>
For the six months
ended November 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,522 $ 790
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in subsidiary - (43)
Provision for doubtful accounts (51) 10
Loss on disposition of fixed assets 19 -
Depreciation and amortization 273 326
Deferred income taxes - (9)
Changes in operating assets and liabilities:
Accounts receivable (1,298) 1,564
Inventories 386 (2,606)
Accounts payable (339) 397
Accrued expenses and deferred revenue 1,966 (36)
Deferred lease commitment (82) (59)
Other assets and liabilities (134) (178)
------- -------
Net cash provided by operating activities 2,262 156
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments (8,764) 142
Increase in long-term investments (3,334) -
Additions to property and equipment (174) (332)
Decrease (increase) in other assets (128) 53
------- -------
Net cash used in investing activities (12,400) (135)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable -- banks (4,163) 1,055
Borrowings (reductions) under long-term debt (38) 93
Long-term debt and capital lease principal payments (61) (452)
Proceeds from issuance of common stock and exercise of stock
options 26,972 -
------- -------
Net cash provided by financing activities 22,710 695
------- -------
Effect of exchange rates on cash (6) 86
Net increase in cash and cash equivalents 12,566 802
Cash and cash equivalents, beginning of period 1,176 535
------- -------
Cash and cash equivalents, end of period $ 13,742 $ 1,337
------- -------
------- -------
</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 NOVEMBER 30, 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):
November 30, May 31,
1997 1997
---- ----
Raw materials and subassemblies $4,025 $ 4,376
Work in process 4,988 5,508
Finished product 977 614
------ -------
$9,990 $10,498
------ -------
------ -------
6
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 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 Income as percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.0 61.9 60.8 62.6
-------- -------- -------- --------
Gross profit 39.0 38.1 39.2 37.4
-------- -------- -------- --------
Operating expenses:
Sales, general and administrative 18.9 19.9 19.1 20.1
Research and development 10.1 11.2 10.1 11.2
Research and development cost
reimbursement - DARPA (4.0) (1.1) (2.0) (1.5)
-------- -------- -------- --------
Total operating expenses 25.0 30.0 27.2 29.8
-------- -------- -------- --------
Income from operations 14.0 8.1 12.0 7.6
Interest income (expense) 2.5 (1.3) 1.0 (1.5)
Other expense, net (2.0) (1.1) (0.9) (0.5)
-------- -------- -------- --------
Income before income taxes and
minority interest in subsidiary 14.5 5.7 12.1 5.6
Income tax expense 6.8 1.7 5.6 1.6
Minority interest in subisidiary - - - -
-------- -------- -------- --------
Net income 7.7% 4.0% 6.5% 4.0%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
8
<PAGE>
THREE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
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 November 30, 1997 from $10.5 million in
the three months ended November 30, 1996, an increase of 12.0%. The growth in
net sales resulted primarily from increased shipments of MTX products, partially
offset by a decline in net sales in the Company's Japanese subsidiary. The
Company does not expect net sales in the second half of fiscal 1998 to increase
compared to net sales in the first half of fiscal 1998.
GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost
of sales consists primarily of the cost of materials, assembly and test costs,
and overhead from operations. Gross profit increased to $4.6 million in the
three months ended November 30, 1997 from $4.0 million in the three months ended
November 30, 1996, an increase of 14.8%. Gross profit margin increased to 39.0%
in the three months ended November 30, 1997 from 38.1% in the three months ended
November 30, 1996. The improvement in gross profit margin was primarily due to
reduced provisions for inventory reserves and lower material costs as a
percentage of net sales, partially offset by an increase in labor and overhead
costs as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expenses consist primarily of salaries and related
costs of employees, 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
November 30, 1997 from $2.1 million in the three months ended November 30,
1996, an increase of 6.1%. The increase in SG&A expenses was primarily due
to increased commission expenses to independent sales representatives related
to higher levels of shipments. As a percentage of net sales, SG&A expenses
decreased to 18.9% in the three months ended November 30, 1997 from 19.9% in
the three months ended November 30, 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 were approximately
unchanged at $1.2 million in the three months ended November 30, 1997 and in the
three months ended November 30, 1996. As a percentage of net sales, R&D
expenses decreased to 10.1% in the three months ended November 30, 1997 from
11.2% in the three months ended November 30, 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 increased to $471,000 in the three months
ended November 30, 1997 from $117,000 in the three months ended November 30,
1996, an increase of 302.6%. The increase was due to approval of two project
milestones in the three months ended November 30, 1997. The Company anticipates
recording smaller credits in each of the remaining quarters of fiscal 1998 than
in this second quarter of fiscal 1998.
INTEREST INCOME (EXPENSE). Interest income was $290,000 in the three
months ended November 30, 1997, as compared with interest expense of $134,000 in
the three months ended November 30, 1996. The interest income was primarily due
to investment income from the proceeds obtained from the initial public offering
in August 1997, in addition to reduced interest expense resulting primarily from
repayment of the short term domestic debt.
9
<PAGE>
OTHER EXPENSE, NET. Other expense, net increased to $237,000 in the three
months ended November 30, 1997 from $113,000 in the three months ended November
30, 1996, an increase of 109.7%. The increase was primarily due to increased
currency exchange losses incurred by the Company's Japanese subsidiary, and to a
lesser extent, increased cash discounts allowed in the three months ended
November 30, 1997.
INCOME TAX EXPENSE. Income tax expense increased to $792,000 in the three
months ended November 30, 1997 from $177,000 in the three months ended November
30, 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 a percentage, 8.8% as of November 30, 1997 and 13.3% as of
November 30, 1996, of the total profits or losses of the Company's Japanese
subsidiary in order to account for the minority shareholders' interest in the
subsidiary. Minority interest in subsidiary remained at nil for both the three
months ended November 30, 1997 and the three months ended November 30, 1996.
The Company's Japanese subsidiary has had cumulative losses in recent quarters
and no exclusion of the losses incurred by the subsidiary is made in either
period.
SIX MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1996
NET SALES. Net sales increased to $23.4 million in the six months ended
November 30, 1997 from $19.6 million in the six months ended November 30, 1996,
an increase of 19.7%. The growth in net sales was caused primarily by increased
shipments of MTX products, partially offset by a decline in net sales in the
Company's Japanese subsidiary.
GROSS PROFIT. Gross profit increased to $9.2 million in the six months
ended November 30, 1997 from $7.3 million in the six months ended November 30,
1996, an increase of 25.5%. Gross profit margin increased to 39.2% in the six
months ended November 30, 1997 from 37.4% in the six months ended November 30,
1996. The improvement in gross profit margin was primarily due to lower
material costs as a percentage of net sales and reduced provisions for inventory
reserves.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $4.5
million in the six months ended November 30, 1997 from $3.9 million in the six
months ended November 30, 1996, an increase of 13.3%. The increase in SG&A
expenses was primarily due to increased commission expenses to independent sales
representatives related to higher levels of shipments, increased warranty repair
expenses, and increased employment costs. As a percentage of net sales, SG&A
expenses decreased to 19.1% in the six months ended November 30, 1997 from 20.1%
in the six months ended November 30, 1996. The decrease in SG&A expenses as a
percentage of net sales was primarily due to the increase in net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $2.4 million in the
six months ended November 30, 1997 from $2.2 million in the six months ended
November 30, 1996, an increase of 8.2%. The increase in R&D expenses was
primarily due to increased employment costs and engineering project materials,
partially offset by a decrease in professional consulting expenses. As a
percentage of net sales, R&D expenses decreased to 10.1% in the six months ended
November 30, 1997 from 11.2% in the six months ended November 30, 1996,
reflecting higher net sales.
10
<PAGE>
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA increased
to $471,000 in the six months ended November 30, 1997 from $293,000 in the six
months ended November 30, 1996, an increase of 60.8%. The increase was due to
approval of two project milestones in the six months ended November 30, 1997.
INTEREST INCOME (EXPENSE). Interest income was $228,000 in the six months
ended November 30, 1997, as compared with interest expense of $286,000 in the
six months ended November 30, 1996. The interest income was primarily due to
investment income from the proceeds obtained from the initial public offering in
August 1997, in addition to reduced interest expense resulting primarily from
repayment of the short term domestic debt.
OTHER EXPENSE, NET. Other expense, net increased to $217,000 in the six
months ended November 30, 1997 from $104,000 in the six months ended November
30, 1996, an increase of 108.7%. The increase was primarily due to increased
currency exchange losses incurred by the Company's Japanese subsidiary and
increased volume of cash discounts allowed in the six months ended November 30,
1997, partially offset by the recognition of the Company's 25% interest in ESA
Electronics Pte Ltd., a Singapore corporation.
INCOME TAX EXPENSE. Income tax expense increased to $1.3 million in the
six months ended November 30, 1997 from $307,000 in the six months ended
November 30, 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 decreased
to nil in the six months ended November 30, 1997 from $3,000 in the six months
ended November 30, 1996. The Company's Japanese subsidiary has had cumulative
losses in recent quarters and no exclusion of the losses incurred by the
subsidiary is made in the six months ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's August 1997 initial public offering, resulting in net
proceeds to the Company of approximately $26.8 million. As of November 30,
1997, the Company had approximately $24.0 million in cash and short term
investments.
Net cash provided by operating activities was approximately $2.3 million
for the six months ended November 30, 1997, and approximately $156,000 for the
six months ended November 30, 1996. For the six months ended November 30, 1997,
net cash provided by operating activities was due primarily to the net income of
approximately $1.5 million and increases in accrued expenses and deferred
revenue of approximately $2.0 million, partially offset by an increase in
accounts receivable of approximately $1.3 million. For the six months ended
November 30, 1996, net cash provided by operating activities was primarily due
to the net income of $790,000 and a decrease in accounts receivable of
approximately $1.6 million, partially offset by an increase in inventory of
approximately $2.6 million.
Net cash used in investing activities was approximately $12.4 million for
the six months ended November 30, 1997, and approximately $135,000 for the six
months ended November 30, 1996. The increase in cash used in investing
activities during the six months ended November 30, 1997 was primarily due to
the short term and long term investments made with proceeds from the initial
public offering in August 1997.
11
<PAGE>
Financing activities provided cash of approximately $22.7 million in the
six months ended November 30, 1997 and $0.7 million in the six months ended
November 30, 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 November 30, 1997, the Company had working capital of $33.0 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 November 30, 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 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.
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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 result.
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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 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.
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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 81.0% of its net sales
in fiscal 1996, 1997 and the first six months of fiscal 1998, respectively.
Siemens accounted for 61.8% of net sales in the first six months of fiscal 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 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.
15
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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.
A substantial portion of the Company's sales are in Asia. Recent turmoil
in the Asian financial markets has resulted in dramatic currency devaluations,
stock market declines, restriction of available credit and general financial
weakness. In addition, DRAM prices have fallen dramatically and may continue to
do so as some Asian IC manufacturers may be selling DRAMS at less than cost in
order to raise cash. These developments may affect the Company in several ways.
Currency devaluation may make dollar-denominated goods such as the Company's
more expensive for Asian clients. Asian manufacturers may limit capital
spending (including the purchase of MTXs). Furthermore, the uncertainty of the
DRAM market may cause manufacturers everywhere to delay capital spending plans.
These circumstances may also affect the ability of Company customers to meet
their payment obligations, resulting in the cancellations or deferrals of
existing orders and the limitation of additional orders. In addition, some
portion of fab construction has been subsidized by Asian governments. Financial
turmoil may weaken these governments' willingness to continue such subsidies.
Such developments could have a material adverse affect on the Company's
business, financial condition and results of operations.
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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 has recently
selected a new distributor for the Korean market. 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.
17
<PAGE>
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 can also 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 November 30, 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.
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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.
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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.
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 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.
21
<PAGE>
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.
22
<PAGE>
PART II - OTHER INFORMATION
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 November 30, 1997.
23
<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: January 14, 1998 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: January 14, 1998 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
24
<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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding.................. 6,831 4,304 5,780 4,304
Weighted average common equivalent shares assuming
conversion of stock options under the treasury
stock method............................................ 566 65 517 57
Common and common equivalent shares pursuant to Staff
Accounting Bulletin No. 83.............................. - 108 - 108
------- ------- ------- -------
Shares used in per share calculations....................... 7,397 4,477 6,297 4,469
------- ------- ------- -------
------- ------- ------- -------
Net income.................................................. $ 908 $ 423 $ 1,522 $ 790
------- ------- ------- -------
------- ------- ------- -------
Net income per share........................................ $ 0.12 $ 0.10 $ 0.24 $ 0.18
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The difference between primary and fully diluted earnings per share is
less than $0.01 for each period presented.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 24041000
<SECURITIES> 0
<RECEIVABLES> 8932000
<ALLOWANCES> 211000
<INVENTORY> 9990000
<CURRENT-ASSETS> 439333000
<PP&E> 8300000
<DEPRECIATION> 6698000
<TOTAL-ASSETS> 49771000
<CURRENT-LIABILITIES> 10958000
<BONDS> 220000
0
0
<COMMON> 68000
<OTHER-SE> 38525000
<TOTAL-LIABILITY-AND-EQUITY> 49771000
<SALES> 11748000
<TOTAL-REVENUES> 11748000
<CGS> 7166000
<TOTAL-COSTS> 7166000
<OTHER-EXPENSES> 2935000
<LOSS-PROVISION> 237000
<INTEREST-EXPENSE> (290000)
<INCOME-PRETAX> 1700000
<INCOME-TAX> 792000
<INCOME-CONTINUING> 908000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 908000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
