<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 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
August 31, 1998 was 6,924,418.
<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
August 31, 1998 and May 31, 1998. . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months ended August 31, 1998 and 1997 . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 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 . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 18
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 18
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $6,885 $6,748
Short-term investments. . . . . . . . . . . . . . 16,287 16,579
Accounts receivable . . . . . . . . . . . . . . . 5,615 7,182
Inventories . . . . . . . . . . . . . . . . . . . 11,835 11,942
Prepaid expenses and other. . . . . . . . . . . . 1,493 1,407
----------- -----------
Total current assets . . . . . . . . . . . . . 42,115 43,858
Property and equipment, net. . . . . . . . . . . . . 1,576 1,541
Long-term investments. . . . . . . . . . . . . . . . 1,134 904
Other assets, net. . . . . . . . . . . . . . . . . . 649 802
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $45,474 $47,105
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . $85 $86
Accounts payable. . . . . . . . . . . . . . . . . 2,141 2,084
Accrued expenses. . . . . . . . . . . . . . . . . 3,406 4,492
Deferred revenue. . . . . . . . . . . . . . . . . 49 311
----------- -----------
Total current liabilities. . . . . . . . . . . 5,681 6,973
Long-term debt, net of current portion. . . . . . . 128 113
Deferred lease commitment. . . . . . . . . . . . . . 14 55
----------- -----------
Total liabilities. . . . . . . . . . . . . . . 5,823 7,141
----------- -----------
Shareholders' equity:
Common stock, $.01 par value outstanding:
6,924 shares and 6,917 shares at August 31,
1998 and May 31, 1998, respectively . . . . . 69 69
Additional paid-in capital . . . . . . . . . . . 35,492 35,467
Retained earnings . . . . . . . . . . . . . . . 1,916 2,275
Net unrealized gain on investments . . . . . . . 6 --
Cumulative translation adjustment . . . . . . . . 2,168 2,153
----------- -----------
Total shareholders' equity . . . . . . . . . . 39,651 39,964
----------- -----------
Total liabilities and shareholders' equity . . $45,474 $47,105
=========== ===========
</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 OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . $5,430 $11,665
Cost of sales. . . . . . . . . . . . . . . 3,286 7,061
---------- ----------
Gross profit . . . . . . . . . . . . . . . 2,144 4,604
---------- ----------
Operating expenses:
Selling, general and administrative. . . 1,822 2,247
Research and development . . . . . . . . 1,189 1,179
Research and development cost
reimbursement - DARPA . . . . . . . . (250) --
---------- ----------
Total operating expenses . . . . 2,761 3,426
---------- ----------
Income (loss) from operations . . . . . . (617) 1,178
Interest income (expense), net . . . . . . 312 (62)
Other income (expense), net . . . . . . . (54) 20
---------- ----------
Income (loss) before income taxes. . . . . (359) 1,136
Income tax expense . . . . . . . . . . . -- 522
---------- ----------
Net income (loss). . . . . . . . . . . . . (359) 614
---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 15 34
Unrealized holding gains arising
during period . . . . . . . . . . . . 6 --
---------- ----------
Other comprehensive income (loss) $(338) $648
========== ==========
Net income (loss) per share (basic) . . . $(0.05) $0.13
Net income (loss) per share (diluted). . . $(0.05) $0.12
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . . . . 6,920 4,730
Diluted . . . . . . . . . . . . . . . . 6,920 5,143
</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)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . $(359) $614
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts. . . . . . . . . . . (126) 25
Loss (gain) on disposition of fixed assets . . . . . (3) 18
Depreciation and amortization. . . . . . . . . . . . 112 160
Deferred income taxes. . . . . . . . . . . . . . . . (14) --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . 1,707 (1,470)
Inventories . . . . . . . . . . . . . . . . . . . 83 (62)
Accounts payable. . . . . . . . . . . . . . . . . 60 278
Accrued expenses and deferred revenue . . . . . . (1,350) 790
Deferred lease commitment . . . . . . . . . . . . (41) (41)
Other assets and liabilities. . . . . . . . . . . (100) (153)
---------- ----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (31) 159
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments. . . . . . . . . . . . . 304 63
Purchase of long-term investments . . . . . . . . . . . (224) --
Acquisition of property and equipment . . . . . . . . . (123) (95)
Decrease (increase) in other assets . . . . . . . . . . 150 (152)
---------- ----------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . 107 (184)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable -- banks. . . . . . . . . . . -- (2,835)
Borrowings under long-term debt . . . . . . . . . . . . 50 91
Long-term debt and capital lease principal payments . . (32) (129)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 25 27,086
---------- ----------
Net cash provided by financing activities. . . . 43 24,213
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . 18 (1)
---------- ----------
Net increase in cash and cash equivalents. . . . 137 24,187
Cash and cash equivalents, beginning of period. . . . . 6,748 1,176
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $6,885 $25,363
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 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 Annual Report on Form 10-K for the fiscal year
ended May 31, 1998. 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
August 31,
---------------------
1998 1997
---------- ----------
(in thousands, except
per share amounts)
<S> <C> <C>
Basic EPS:
Net income (loss). . . . . . . . . . . . . $(359) $614
========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . . . . 6,920 4,730
========== ==========
Net income (loss) per share (basic) . . . $(0.05) $0.13
========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . . . . 6,920 4,730
Options . . . . . . . . . . . . . . . . . -- 413
---------- ----------
Total Shares . . . . . . . . . . . . . . . 6,920 5,143
========== ==========
Net income (loss) per share (diluted). . . $(0.05) $0.12
========== ==========
</TABLE>
For the three months ended August 31, 1998, the Company reported a
net loss. For this period, the effect of stock options has been excluded
from the sharebase used to compute diluted loss per share as the effect
would be anti-dilutive.
3. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, May 31,
1998 1998
----------- -----------
(unaudited)
Raw materials sub-assemblies $5,756 $5,688
Work in process 5,308 5,173
Finished goods 771 1,081
----------- -----------
$11,835 $11,942
=========== ===========
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto included
herein. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results of operations
could differ materially from those anticipated in such forward-looking
statements as a result of certain factors set forth under "Factors That May
Affect Future Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended
August 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 60.5 60.5
---------- ----------
Gross profit . . . . . . . . . . . . . . . 39.5 39.5
---------- ----------
Operating expenses:
Selling, general and administrative. . . 33.6 19.3
Research and development . . . . . . . . 21.9 10.1
Research and development cost
reimbursement - DARPA . . . . . . . . (4.6) --
---------- ----------
Total operating expenses . . . . 50.9 29.4
---------- ----------
Income (loss) from operations . . . . . . (11.4) 10.1
Interest income (expense), net . . . . . . 5.8 (0.6)
Other income (expense), net . . . . . . . (1.0) 0.2
---------- ----------
Income (loss) before income taxes. . . . . (6.6) 9.7
Income tax expense . . . . . . . . . . . -- 4.4
---------- ----------
Net income (loss). . . . . . . . . . . . . (6.6)% 5.3 %
========== ==========
</TABLE>
8
<PAGE>
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
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 decreased to $5.4 million in the three months ended August 31, 1998
from $11.7 million in the three months ended August 31, 1997, a decrease of
53.5%. The decrease in net sales in the three months ended August 31, 1998
resulted primarily from reduced shipments in all major product groups. The
Company anticipates that net sales will decrease in fiscal 1999 compared
with 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 decreased to $2.1 million
in the three months ended August 31, 1998 from $4.6 million in the three
months ended August 31, 1997, a decrease of 53.4%. The decrease in gross
profit was primarily due to the decrease in net sales. Gross profit margin
was unchanged at 39.5% in the three months ended August 31, 1998 and in the
three months ended August 31, 1997. The Company anticipates that gross
profit and gross profit margin will decrease in fiscal 1999 compared with
fiscal 1998.
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 decreased to $1.8 million in the three months ended
August 31, 1998 from $2.2 million in the three months ended August 31, 1997,
a decrease of 18.9%. The decrease in SG&A expenses was primarily due to a
reduction in provision for doubtful accounts, and decreases in employment
related costs and commissions paid to outside sales representatives,
partially offset by an increase in product support expenses. As a
percentage of net sales, SG&A expenses increased to 33.6% in the three
months ended August 31, 1998 from 19.3% in the three months ended August 31,
1997, reflecting lower net sales. The Company anticipates that SG&A
expenses will decrease in fiscal 1999 compared with 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 unchanged at $1.2 million in the three months ended August 31, 1998 and
in the three months ended August 31, 1997. As a percentage of net sales,
R&D expenses increased to 21.9% in the three months ended August 31, 1998
from 10.1% in the three months ended August 31, 1997, reflecting lower net
sales.
9
<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 $250,000
in the three months ended August 31, 1998 from nil in the three months ended
August 31, 1997. Payments by DARPA depend on satisfaction of development
milestones, and the level of payments may vary significantly from quarter to
quarter. As of August 31, 1998, there were no unpaid DARPA invoices.
INTEREST INCOME (EXPENSE). Interest income was $312,000 in the three
months ended August 31, 1998, as compared with interest expense of $62,000
in the three months ended August 31, 1997. Interest income in the three
months ended August 31, 1998 was primarily due to investment income from the
proceeds obtained from the initial public offering in August 1997. Interest
expense in the three months ended August 31, 1997 was primarily related to
short-term debt which was subsequently repaid.
OTHER INCOME (EXPENSE), NET. Other expense, net was $54,000 in the
three months ended August 31, 1998, compared with other income, net of
$20,000 in the three months ended August 31, 1997. Other expense in the
three months ended August 31, 1998 was primarily due to foreign exchange
loss incurred by the Company's Japanese subsidiary. Other income in the
three months ended August 31, 1997 was primarily due to the recognition of
the Company's 25% interest in ESA Electronics Pte Ltd., a Singapore
corporation, partially offset by exchange losses incurred by the Company's
Japanese subsidiary and cash discounts allowed.
INCOME TAX EXPENSE. Income tax expense decreased to nil in the three
months ended August 31, 1998 from $522,000 in the three months ended August
31, 1997. The decrease in income tax expense was primarily due to the
operating loss in the three months ended August 31, 1998 compared with an
operating income in the three months ended August 31, 1997. The income tax
rate did not approximate the statutory tax rates of the jurisdictions in
which the Company operates because no tax benefit is recorded for losses in
the Company's Japanese subsidiary. The Company anticipates that the
Japanese subsidiary will record a loss in the second quarter of fiscal 1999.
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 August
31, 1998, the Company had $23.2 million in cash and short-term investments.
Net cash used in operating activities was approximately $31,000 for the
three months ended August 31, 1998 and net cash provided by operating
activities was $159,000 for the three months ended August 31, 1997. For the
three months ended August 31, 1998, net cash used in operating activities
was due primarily to a decrease in accrued expenses of $1.4 million and a
net loss of $359,000, partially offset by a decrease in accounts receivable
of $1.7 million. For the three months ended August 31, 1997, net cash
provided by operating activities was primarily due to net income of $614,000
and increases in accounts payable and accrued expenses of $1.1 million,
partially offset by an increase in accounts receivable of $1.5 million.
10
<PAGE>
Net cash provided by investing activities was approximately $107,000 for
the three months ended August 31, 1998, and net cash used in investing
activities was $184,000 for the three months ended August 31, 1997.
Financing activities provided cash of approximately $43,000 in the three
months ended August 31, 1998 and $24.2 million in the three months ended
August 31, 1997. The cash provided by financing activities in the three
months ended August 31, 1997 was primarily attributable to the Company's
initial public offering in August 1997.
As of August 31, 1998, the Company had working capital of $36.4 million,
compared with $36.9 million as of May 31, 1998. Working capital consists of
cash and cash equivalents, short term cash deposits, accounts receivable,
inventory and other current assets, less current liabilities. The decrease
in working capital was primarily due to a decrease in accounts receivable,
partially offset by a decrease in accrued expenses.
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. The Company's future operating results will
depend upon a variety of factors, including the timing of significant
orders, market acceptance of new products and enhanced versions of the
Company's products, capital spending patterns by customers, and the
Company's ability to produce systems and products in volume and meet
customer requirements. 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.
11
<PAGE>
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. 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 $1.0 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. 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.
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 operated profitably during fiscal 1996, 1997 and 1998, increased
net sales in those years were substantially the result of sales of new
products, particularly sales of MTX systems to Siemens. In fiscal 1998, the
Company began to feel the industry slowdown due to uncertainties caused
primarily by the financial crisis in Asia and DRAM overcapacity. The
Company incurred an operating loss in the first quarter of fiscal 1999 and
anticipates incurring an operating loss in the second quarter of fiscal 1999.
There can be no assurance that the industry will rebound soon or that the
Company will be able to return to profitability soon.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. 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 final test
functions and that transferring such tests to MTX systems will reduce their
overall capital and test costs. The failure of the MTX system to achieve
market acceptance would have a material adverse effect on the Company's
business, financial condition and operating results.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. The Company's DiePak 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. 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.
CUSTOMER CONCENTRATION. Sales to the Company's five largest customers
accounted for approximately 78.4%, 75.2%, and 69.2% of its net sales in the
first quarter of fiscal 1999, in fiscal 1998 and 1997, respectively.
Siemens accounted for 48.8% of net sales in the first quarter of fiscal
1999. During fiscal 1998 and 1997, Siemens accounted for 47.0% and 55.7% of
the Company's net sales, respectively. During fiscal 1998, Motorola, Inc.
accounted for 12.8% of net sales. No other customers represented more than
10% of the Company's net sales for any of such periods. 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.
12
<PAGE>
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems.
The market for burn-in systems is mature and estimated to be less than $100
million per year. 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, as was the case in 1998.
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. 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 70.5%,
92.5% and 90.4% of the Company's net sales for fiscal 1998, 1997 and 1996,
respectively, were attributable to sales to customers for delivery outside
of the United States. 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 or near cost in order to raise cash.
The Company believes that Asian manufacturers are limiting capital spending
(including the purchase of MTXs), and that the uncertainty of the DRAM
market is causing most manufacturers worldwide to delay capital spending
plans. Such developments could have a material adverse affect on the
Company's business, financial condition and results of operations.
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. 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. 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.
13
<PAGE>
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. If DARPA funding
were discontinued and the Company continued the project, the Company's
operating results would be adversely affected. There also can be no
assurance that the development project will result in any marketable
products.
INTENSE COMPETITION. In each of the markets it serves, the Company
faces competition from established competitors and potential new entrants.
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. Competing suppliers of burn-in and functional
test systems include Ando Corporation, Japan Engineering Company and
Reliability Incorporated. In addition, suppliers of memory test equipment
including Advantest Corporation and Teradyne, Inc. may seek to offer
competitive parallel test systems in the future. 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. The Company's
DiePak products face significant competition. Texas Instruments
Incorporated sells a temporary, reusable bare die carrier, and the Company
believes that several other companies have developed or are developing other
such products. The Company's test fixture products face numerous
competitors. The Company has granted a royalty-bearing license to one
company to make PTBs for use with its MTX systems. Sales of PTBs by
licensees would result in royalties to the Company but would reduce the
Company's own sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. 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. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1998. 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.
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, and as is the case in 1998. There can
be no assurance that the Company will not be materially adversely affected
by future cancellations and reschedulings.
YEAR 2000. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
14
<PAGE>
The Company has recognized the Year 2000 problem and has taken steps to
mitigate the situation. The Company's in-house information technology
system consists primarily of hardware and software purchased from outside
parties. The Company believes that vendor-developed software will be made
Year 2000 compliant before the end of 1999 through vendor-provided updates
or replacements with other Year 2000 compliant hardware and software. The
Company is also testing the internally developed software and hardware which
is included in the products sold to customers. Such assessments and
modifications to existing software and conversion to new software are
expected to be completed by mid-1999. If, however, such modifications and
conversions are not made, or are not completed timely, the Year 2000 issue
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has had limited communications with its suppliers to
determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 issue. The failure of one
or more of these third parties to be Year 2000 compliant could result in a
material adverse effect on the Company's business, operating results and
financial position. The Company plans to make inquiries to certain of the
key third party suppliers to assess their Year 2000 readiness, and expects
that this process will be on-going through the end of 1999. There, however,
can be no assurance that the systems or subsystems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company expects that costs to address the Year 2000 issue, directly
or indirectly, will total approximately $200,000, the majority of which will
be spent in the current fiscal year, with the remainder being spent during
fiscal 2000. Costs include salary and related expenses, hardware and
software costs, consulting and miscellaneous expenses. To date, the Company
has incurred expenses of approximately $20,000 related to the assessment of
and preliminary efforts in dealing with the Year 2000 issue.
A most reasonably likely worst case Year 2000 scenario would be a minor
interruption in production or shipping resulting from unanticipated problems
encountered in the information systems of the Company, or of any of the
significant third parties with whom the Company does business. The
pervasiveness of the Year 2000 issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could
be processed manually while the information system and other systems are
repaired and that such interruptions would have a minor effect on the
Company's operations.
The costs of the planned Year 2000 modifications, and the dates by which
the Company expects to complete them, are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. There can be, however, no assurance
that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
15
<PAGE>
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. 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. The Company does not have formal written supply agreements
with Nitto Denko. While there have been no significant interruptions in
supply of components by Nitto Denko, there can be no assurance that Nitto
Denko will continue to supply components within an acceptable timeframe. 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that factors
such as announcements of developments related to the Company's business,
fluctuations in the Company's operating results, failure to meet securities
analysts' expectations, general conditions in the semiconductor and
semiconductor equipment industries and the worldwide economy could cause the
price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for
small capitalization and high technology stocks in particular, has
experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
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 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.
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.
16
<PAGE>
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. 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.
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. 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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following information is provided as an amendment to the initial
report on Form 10-K "Use of Proceeds from the IPO," regarding the use of
proceeds from the sale of securities under the Company's Registration
Statement Form S-1 (333-28987), which was declared effective on August 18,
1997. From the effective date of the Registration Statement, the net
proceeds have been used for the following purposes:
Purchase and installation of machinery and equipment $ 450,274
Repayment of indebtedness 4,455,179
Working capital 401,844
Temporary investments, including cash and cash equivalents 21,525,000
------------
Total $26,832,297
============
All of the foregoing expenses were direct or indirect payments to
persons other than (i) directors, officers or their associates; (ii)
persons owning ten percent (10%) or more of the Company's Common Stock; or
(iii) affiliates of the Company.
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 August 31, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: October 14, 1998 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: October 14, 1998 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
19
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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