<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 February 28, 1998.
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
MOUNTAIN VIEW, CA 94043
- -------------------------------------- --------------------------------------
(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
February 28, 1998 was 6,868,699.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1998
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 1998 and May 31, 1997 . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the three
months and nine months ended February 28, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 1998 and 1997 . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 27
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2
<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $11,820 $ 1,176
Short-term investments. . . . . . . . . . . . . . 10,844 1,614
Accounts receivable . . . . . . . . . . . . . . . 11,261 7,515
Inventories . . . . . . . . . . . . . . . . . . . 10,626 10,498
Prepaid expenses and other. . . . . . . . . . . . 1,252 1,055
----------- -----------
Total current assets . . . . . . . . . . . . 45,803 21,858
Property and equipment, net. . . . . . . . . . . . . 1,606 1,691
Long-term investments. . . . . . . . . . . . . . . . 2,551 --
Other assets, net. . . . . . . . . . . . . . . . . . 894 840
----------- -----------
Total assets . . . . . . . . . . . . . . . . $50,854 $24,389
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- banks. . . . . . . . . . . . . . $ 234 $ 4,656
Current portion of long-term debt . . . . . . . . 151 117
Accounts payable. . . . . . . . . . . . . . . . . 4,167 4,482
Accrued expenses. . . . . . . . . . . . . . . . . 5,993 4,495
Deferred revenue. . . . . . . . . . . . . . . . . 607 213
----------- -----------
Total current liabilities. . . . . . . . . . 11,152 13,963
Long-term debt, net of current portion. . . . . . . 69 136
Deferred lease commitment. . . . . . . . . . . . . . 97 220
----------- -----------
Total liabilities. . . . . . . . . . . . . . 11,318 14,319
----------- -----------
Shareholders' equity:
Common stock, $.01 par value: outstanding:
6,869 shares and 4,296 shares at February 28,
1998 and May 31, 1997, respectively . . . . . 69 43
Additional paid-in capital . . . . . . . . . . . 35,158 8,085
Retained earnings (accumulated deficit) . . . . . 2,223 (130)
Cumulative translation adjustment . . . . . . . . 2,086 2,072
----------- -----------
Total shareholders' equity . . . . . . . . . 39,536 10,070
----------- -----------
Total liabilities and shareholders' equity . $50,854 $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 Nine Months Ended
February 28, February 28,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . $11,567 $10,745 $34,980 $30,302
Cost of sales. . . . . . . . . . . . 6,907 6,364 21,134 18,603
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 4,660 4,381 13,846 11,699
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative. 2,271 2,222 6,733 6,159
Research and development . . . . . 1,202 1,157 3,572 3,347
Research and development cost
reimbursement - DARPA . . . . . (128) -- (599) (293)
---------- ---------- ---------- ----------
Total operating expenses . 3,345 3,379 9,706 9,213
---------- ---------- ---------- ----------
Income from operations . . . . . . . 1,315 1,002 4,140 2,486
Interest income (expense). . . . . . 349 (185) 577 (471)
Other expense, net . . . . . . . . . (7) (246) (224) (350)
---------- ---------- ---------- ----------
Income before income taxes and
minority interest in subsidiary . 1,657 571 4,493 1,665
Income tax expense (benefit) . . . . 826 (19) 2,140 288
Minority interest in subsidiary. . . -- -- -- 3
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . $ 831 $ 590 $ 2,353 $ 1,380
========== ========== ========== ==========
Net income per share (basic) . . . . $ 0.12 $ 0.14 $ 0.38 $ 0.32
Net income per share (diluted) . . . $ 0.12 $ 0.13 $ 0.36 $ 0.31
Shares used in per share calculation
Basic . . . . . . . . . . . . . . 6,839 4,297 6,134 4,297
Diluted . . . . . . . . . . . . . 7,154 4,491 6,607 4,496
</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>
Nine Months Ended
February 28,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 2,353 $ 1,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in subsidiary. . . . . . . . . . . -- (79)
Provision for doubtful accounts. . . . . . . . . . . 101 13
Loss on disposition of fixed assets. . . . . . . . . 13 --
Depreciation and amortization. . . . . . . . . . . . 372 381
Deferred income taxes. . . . . . . . . . . . . . . . -- (30)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . (3,964) 2,618
Inventories . . . . . . . . . . . . . . . . . . . (264) (3,154)
Accounts payable. . . . . . . . . . . . . . . . . (43) (921)
Accrued expenses and deferred revenue . . . . . . 1,944 885
Deferred lease commitment . . . . . . . . . . . . (123) (100)
Other assets and liabilities. . . . . . . . . . . (202) (562)
---------- ----------
Net cash provided by operating activities. . . . 187 431
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments . . . . . (9,326) 196
Increase in long-term investments . . . . . . . . . . . (2,553) --
Additions to property and equipment . . . . . . . . . . (251) (475)
Decrease (increase) in other assets . . . . . . . . . . (134) 76
---------- ----------
Net cash used in investing activities. . . . . . (12,264) (203)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in notes payable -- banks . . . . . (4,326) 66
Borrowings under long-term debt . . . . . . . . . . . . 71 91
Long-term debt and capital lease principal payments . . (84) (469)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 27,077 --
Repurchase of common stock. . . . . . . . . . . . . . . -- (9)
---------- ----------
Net cash provided by (used in) financing activities . 22,738 (321)
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . (17) 77
---------- ----------
Net (decrease) increase in cash and cash
equivalents. . . .. . . . . . . . . . . . . . 10,644 (16)
Cash and cash equivalents, beginning of period. . . . . 1,176 535
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $11,820 $ 519
========== ==========
</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
NINE MONTHS ENDED FEBRUARY 28, 1998
(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.
6
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS:
Net income . . . . . . . . . . . . . $ 831 $ 590 $2,353 $1,380
========== ========== ========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,839 4,297 6,134 4,297
========== ========== ========== ==========
Net income per share (basic) . . . . $0.12 $0.14 $ 0.38 $ 0.32
========== ========== ========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,839 4,297 6,134 4,297
Options . . . . . . . . . . . . . . 315 194 473 199
---------- ---------- ---------- ----------
Total Shares . . . . . . . . . . . . 7,154 4,491 6,607 4,496
========== ========== ========== ==========
Net income per share (diluted) . . . $0.12 $0.13 $ 0.36 $ 0.31
========== ========== ========== ==========
</TABLE>
7
<PAGE>
3. INVENTORIES:
Inventory balances as of February 28, 1998 and May 31, 1997 were as
follows:
February 28, May 31,
1998 1997
----------- -----------
(unaudited)
Raw materials sub-assemblies $ 4,360 $ 4,376
Work in process 5,389 5,508
Finished goods 877 614
----------- -----------
$10,626 $10,498
=========== ===========
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.
8
<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 a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . 59.7 59.2 60.4 61.4
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 40.3 40.8 39.6 38.6
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative. 19.6 20.7 19.3 20.3
Research and development . . . . . 10.4 10.8 10.2 11.0
Research and development cost
reimbursement - DARPA . . . . . (1.1) -- (1.7) (0.9)
---------- ---------- ---------- ----------
Total operating expenses . 28.9 31.5 27.8 30.4
---------- ---------- ---------- ----------
Income from operations . . . . . . . 11.4 9.3 11.8 8.2
Interest income (expense). . . . . . 3.0 (1.7) 1.6 (1.6)
Other expense, net . . . . . . . . . (0.1) (2.3) (0.6) (1.1)
---------- ---------- ---------- ----------
Income before income taxes and
minority interest in subsidiary . 14.3 5.3 12.8 5.5
Income tax expense (benefit) . . . . 7.1 (0.2) 6.1 0.9
Minority interest in subsidiary. . . -- -- -- --
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . 7.2 % 5.5 % 6.7 % 4.6 %
========== ========== ========== ==========
</TABLE>
9
<PAGE>
THREE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1997
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 $11.6 million in the three months ended February 28, 1998 from $10.7 million
in the three months ended February 28, 1997, an increase of 7.7%. The growth
in net sales resulted primarily from increased shipments of MTX products and
traditional burn-in products. The Company anticipates net sales in the fourth
quarter of fiscal 1998 to decrease compared to net sales in the third quarter
of fiscal 1998, due primarily to current financial difficulties in the Asian
market and their effect on the Company's current and prospective customers,
including the dramatic decline in DRAM prices and lower levels of capital
expenditures.
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 $4.7 million in the
three months ended February 28, 1998 from $4.4 million in the three months
ended February 28, 1997, an increase of 6.4%. Gross profit margin decreased
to 40.3% in the three months ended February 28, 1998 from 40.8% in the three
months ended February 28, 1997. The decrease in gross profit margin was
primarily due to increases in provisions for warranty and inventory reserves,
partially offset by lower material costs as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses increased to $2.3 million in the three months ended February 28, 1998
from $2.2 million in the three months ended February 28, 1997, an increase of
2.2%. The increase in SG&A expenses was primarily due to an increase in the
provision for doubtful accounts and to new expenses related to the Company's
status of being publicly held. As a percentage of net sales, SG&A expenses
decreased to 19.6% in the three months ended February 28, 1998 from 20.7% in
the three months ended February 28, 1997. 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 decrease in the fourth quarter of
fiscal 1998 compared to the third quarter of fiscal 1998.
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
February 28, 1998 and in the three months ended February 28, 1997. As a
percentage of net sales, R&D expenses decreased to 10.4% in the three months
ended February 28, 1998 from 10.8% in the three months ended February 28, 1997,
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.
10
<PAGE>
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 $128,000 in
the three months ended February 28, 1998 from nil in the three months ended
February 28, 1997. Payments by DARPA depend on satisfaction of development
milestones, and the level of payments may vary significantly from quarter to
quarter. R&D - DARPA was nil in the three months ended February 28, 1997
because no DARPA payment had been received to offset the project expenses
incurred in the period. The Company anticipates that R&D - DARPA in the
fourth quarter of fiscal 1998 will increase compared to the amount recorded in
the third quarter of fiscal 1998.
INTEREST INCOME (EXPENSE). Interest income was $349,000 in the three
months ended February 28, 1998, as compared with interest expense of $185,000
in the three months ended February 28, 1997. The interest income was
primarily due to investment income from the proceeds obtained from the initial
public offering in August 1997 and reduced interest expense resulting
primarily from repayment of the short term debt.
OTHER EXPENSE, NET. Other expense, net decreased to $7,000 in the three
months ended February 28, 1998 from $246,000 in the three months ended
February 28, 1997, a decrease of 97.2%. The decrease was primarily due to a
nominal currency exchange gain in the three months ended February 28, 1998
compared to a substantially larger currency exchange loss incurred by the
Company's Japanese subsidiary in the three months ended February 28, 1997.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $826,000 in the three
months ended February 28, 1998, compared to income tax benefit of $19,000 in
the three months ended February 28, 1997. The tax benefit in the three months
ended February 28, 1997 consisted of reduced tax liabilities in the Company's
German subsidiary, partially offset by the minimum federal and state taxes in
the U.S., as operating loss carryforwards offset other taxable income. The
effective tax rate for the three months ended February 28, 1998 more closely
approximates normal operations, although it is higher than the statutory U.S.
rate because no tax benefit is recorded for losses in the Company's Japanese
subsidiary. The Company anticipates that its Japanese subsidiary will record
a loss in the fourth quarter of fiscal 1998.
MINORITY INTEREST IN SUBSIDIARY. Minority interest in subsidiary is a line
item which excludes a percentage, 5.2% as of February 28, 1998 and 13.3% as of
February 28, 1997, 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 February 28, 1998 and the three months ended February 28,
1997. 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.
11
<PAGE>
NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997
NET SALES. Net sales increased to $35.0 million in the nine months ended
February 28, 1998 from $30.3 million in the nine months ended February 28,
1997, an increase of 15.4%. The growth in net sales was caused primarily by
increased shipments of MTX products.
GROSS PROFIT. Gross profit increased to $13.8 million in the nine months
ended February 28, 1998 from $11.7 million in the nine months ended February
28, 1997, an increase of 18.4%. Gross profit margin increased to 39.6% in the
nine months ended February 28, 1998 from 38.6% in the nine months ended
February 28, 1997. The improvement in gross profit margin was primarily due to
lower material costs as a percentage of net sales, partially offset by an
increase in provision for warranty.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $6.7
million in the nine months ended February 28, 1998 from $6.2 million in the
nine months ended February 28, 1997, an increase of 9.3%. The increase in
SG&A expenses was primarily due to an increase in the provision for doubtful
accounts and to new expenses related to the Company's status of being publicly
held. As a percentage of net sales, SG&A expenses decreased to 19.3% in the
nine months ended February 28, 1998 from 20.3% in the nine months ended
February 28, 1997. 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 $3.6 million in the
nine months ended February 28, 1998 from $3.3 million in the nine months ended
February 28, 1997, an increase of 6.7%. The increase in R&D expenses was
primarily due to increased employment costs. As a percentage of net sales, R&D
expenses decreased to 10.2% in the nine months ended February 28, 1998 from
11.0% in the nine months ended February 28, 1997, reflecting higher net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA increased
to $599,000 in the nine months ended February 28, 1998 from $293,000 in the
nine months ended February 28, 1997, an increase of 104.4%. The increase was
due to the timing of completion and approval of the DARPA development
milestones, as no milestone was approved in the three months ended February 28,
1997.
INTEREST INCOME (EXPENSE). Interest income was $577,000 in the nine months
ended February 28, 1998, as compared with interest expense of $471,000 in the
nine months ended February 28, 1997. Interest income in the nine months ended
February 28, 1998 was primarily due to investment income from the proceeds
obtained from the initial public offering in August 1997. Interest expense in
the nine months ended February 28, 1997 was primarily related to short term
debt which was subsequently repaid.
OTHER EXPENSE, NET. Other expense, net decreased to $224,000 in the nine
months ended February 28, 1998 from $350,000 in the nine months ended February
28, 1997, a decrease of 36.0%. The decrease was primarily due to the
recognition of the Company's 25% interest in ESA Electronics Pte Ltd., a
Singapore corporation, in the nine months ended February 28, 1998.
12
<PAGE>
INCOME TAX EXPENSE. Income tax expense increased to $2.1 million in the
nine months ended February 28, 1998 from $288,000 in the nine months ended
February 28, 1997. Tax expense in the nine months ended February 28, 1997
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 effective tax
rate for the nine months ended February 28, 1998 more closely approximates
normal operations, although it is higher than the statutory U.S. rate because
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 nine months ended February 28, 1998 from $3,000 in the nine
months ended February 28, 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 February 28,
1998, the Company had $22.7 million in cash and short term investments.
Net cash provided by operating activities was approximately $187,000 for
the nine months ended February 28, 1998 and was $431,000 for the nine months
ended February 28, 1997. For the nine months ended February 28, 1998, net
cash provided by operating activities was due primarily to net income of $2.4
million and increases in accrued expenses and deferred revenue of $1.9 million,
partially offset by an increase in accounts receivable of $4.0 million. For
the nine months ended February 28, 1997, net cash provided by operating
activities was primarily due to net income of $1.4 million and a decrease in
accounts receivable of $2.6 million, partially offset by an increase in
inventory of $3.2 million.
Net cash used in investing activities was approximately $12.3 million for
the nine months ended February 28, 1998 and was $203,000 for the nine months
ended February 28, 1997. The increase in cash used in investing activities
during the nine months ended February 28, 1998 was primarily due to the short
term and long term investments made with proceeds from the Company's initial
public offering in August 1997.
Financing activities provided cash of approximately $22.7 million in the
nine months ended February 28, 1998 and used cash of approximately $321,000 in
the nine months ended February 28, 1997. The increase in cash provided by
financing activities was primarily attributable to the Company's initial public
offering.
As of February 28, 1998, the Company had working capital of $34.7 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 February 28, 1998 was primarily due to the proceeds from
the Company's initial public offering.
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From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with
anticipated cash provided by operations are adequate to meet its working
capital and capital equipment requirements through fiscal 1999. After fiscal
1999, 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
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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.
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DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element
of the Company's strategy is to capture an increasing share of the
memory test equipment market through sales of the MTX massively parallel
test system. The MTX is a new system designed to perform both burn-in
and many of the final test functions currently performed by high-cost
memory testers and the market for MTX systems is in the early stage of
development. The Company's strategy depends, in part, upon its ability
to persuade potential customers that the MTX system can successfully
perform a significant portion of such final test functions and that
transferring such tests to MTX systems will reduce their overall capital
and test costs. There can be no assurance that the Company's strategy
will be successful. The failure of the MTX system to achieve market
acceptance would have a material adverse effect on the Company's
business, financial condition and operating result.
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.
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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.
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.
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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 77.7% of its net sales in fiscal 1996, 1997 and the
first nine months of fiscal 1998, respectively. Siemens accounted for
54.1% of net sales in the first nine months of fiscal 1998. During
fiscal 1996 and 1997, Siemens accounted for 29.1% and 55.7% of the
Company's net sales, respectively. White Oak Semiconductor represented
10.4% of net sales for the nine months ended February 28, 1998. 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 may 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.
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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.
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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.
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
20
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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 has recently selected 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.
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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 February 28,
1998. 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.
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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
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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.
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.
25
<PAGE>
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
26
<PAGE>
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.
YEAR 2000. The Company and its subsidiaries are taking action to
provide that their computer systems are capable of processing for the periods
of year 2000 and beyond. The costs associated with these actions are not
expected to significantly affect operating cash flows.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company
during the quarter ended February 28, 1998.
27
<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: April 14, 1998 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: April 14, 1998 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1997
<PERIOD-START> DEC-01-1997 DEC-01-1996
<PERIOD-END> FEB-28-1998 FEB-28-1997
<CASH> 11,820 2,079
<SECURITIES> 10,844 0
<RECEIVABLES> 11,629 7,737
<ALLOWANCES> 368 221
<INVENTORY> 10,626 10,821
<CURRENT-ASSETS> 45,803 21,320
<PP&E> 8,060 9,367
<DEPRECIATION> 6,454 7,743
<TOTAL-ASSETS> 50,854 23,887
<CURRENT-LIABILITIES> 11,152 15,224
<BONDS> 0 0
0 0
0 0
<COMMON> 69 43
<OTHER-SE> 39,467 8,304
<TOTAL-LIABILITY-AND-EQUITY> 50,854 23,887
<SALES> 11,567 10,745
<TOTAL-REVENUES> 11,567 10,745
<CGS> 6,907 6,364
<TOTAL-COSTS> 6,907 6,364
<OTHER-EXPENSES> 3,345 3,379
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,657 571
<INCOME-TAX> 826 (19)
<INCOME-CONTINUING> 831 590
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 831 590
<EPS-PRIMARY> $0.12 $0.14
<EPS-DILUTED> $0.12 $0.13
</TABLE>
