<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 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 at
November 30, 1998 was 6,836,875
<PAGE>
FORM 10-Q/A
FOR THE QUARTER ENDED NOVEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
November 30, 1998 and May 31, 1998. . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
six months ended November 30, 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 . . . . . . . . . . 20
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 20
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 21
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 6,769 $ 6,748
Short-term investments. . . . . . . . . . . . . . 13,020 16,579
Accounts receivable . . . . . . . . . . . . . . . 6,954 7,182
Inventories . . . . . . . . . . . . . . . . . . . 11,738 11,942
Prepaid expenses and other. . . . . . . . . . . . 1,626 1,407
----------- -----------
Total current assets . . . . . . . . . . . . . 40,107 43,858
Property and equipment, net. . . . . . . . . . . . . 1,957 1,541
Long-term investments. . . . . . . . . . . . . . . . 1,661 904
Other assets, net. . . . . . . . . . . . . . . . . . 773 802
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $44,498 $47,105
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 93 $ 86
Accounts payable. . . . . . . . . . . . . . . . . 1,917 2,084
Accrued expenses. . . . . . . . . . . . . . . . . 3,584 4,492
Deferred revenue. . . . . . . . . . . . . . . . . 112 311
----------- -----------
Total current liabilities. . . . . . . . . . . 5,706 6,973
Long-term debt, net of current portion. . . . . . . 126 113
Deferred lease commitment. . . . . . . . . . . . . . -- 55
----------- -----------
Total liabilities. . . . . . . . . . . . . . . 5,832 7,141
----------- -----------
Shareholders' equity:
Common stock, $.01 par value outstanding:
6,837 shares and 6,917 shares at November 30,
1998 and May 31, 1998, respectively . . . . . 68 69
Additional paid-in capital . . . . . . . . . . . 35,147 35,467
Retained earnings . . . . . . . . . . . . . . . 1,424 2,275
Net unrealized gain on investments . . . . . . . 77 --
Cumulative translation adjustment . . . . . . . . 1,950 2,153
----------- -----------
Total shareholders' equity . . . . . . . . . . 38,666 39,964
----------- -----------
Total liabilities and shareholders' equity . . $44,498 $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 Six Months Ended
November 30, November 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . $ 5,186 $11,748 $10,616 $23,413
Cost of sales. . . . . . . . . . . . 3,655 7,166 6,941 14,227
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 1,531 4,582 3,675 9,186
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 1,823 2,215 3,645 4,462
Research and development . . . . . 1,351 1,191 2,540 2,370
Research and development cost
reimbursement - DARPA . . . . . (322) (471) (572) (471)
---------- ---------- ---------- ----------
Total operating expenses . 2,852 2,935 5,613 6,361
---------- ---------- ---------- ----------
Income (loss) from operations . . . (1,321) 1,647 (1,938) 2,825
Interest income, net . . . . . . . . 320 290 632 228
Other income (expense), net . . . . 317 (237) 263 (217)
---------- ---------- ---------- ----------
Income (loss) before income taxes. . (684) 1,700 (1,043) 2,836
Income tax expense (benefit) . . . . (192) 792 (192) 1,314
---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . (492) 908 (851) 1,522
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation
adjustments . . . . . . . . . . (218) (10) (203) 24
Unrealized holding gains arising
during period . . . . . . . . . 71 -- 77 --
---------- ---------- ---------- ----------
Comprehensive income (loss). . . . . $ (639) $ 898 $ (977) $ 1,546
========== ========== ========== ==========
Net income (loss) per share (basic) $(0.07) $ 0.13 $(0.12) $ 0.26
Net income (loss) per share (diluted) $(0.07) $ 0.12 $(0.12) $ 0.24
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . 6,888 6,831 6,904 5,780
Diluted . . . . . . . . . . . . . 6,888 7,397 6,904 6,297
</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>
Six Months Ended
November 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . $ (851) $ 1,522
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts. . . . . . . . . . . (116) 90
Loss (gain) on disposition of fixed assets . . . . . (4) 19
Depreciation and amortization. . . . . . . . . . . . 250 273
Deferred income taxes. . . . . . . . . . . . . . . . (29) --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . 470 (1,439)
Inventories . . . . . . . . . . . . . . . . . . . 220 386
Accounts payable. . . . . . . . . . . . . . . . . (606) (339)
Accrued expenses and deferred revenue . . . . . . (1,144) 1,966
Deferred lease commitment . . . . . . . . . . . . (55) (82)
Other assets and liabilities. . . . . . . . . . . (183) (134)
---------- ----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (2,048) 2,262
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments . . . . . . . 3,559 (8,764)
Purchase of long-term investments . . . . . . . . . . . (680) (3,334)
Acquisition of property and equipment . . . . . . . . . (533) (174)
Decrease (increase) in other assets . . . . . . . . . . 48 (128)
---------- ----------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . 2,394 (12,400)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable -- banks. . . . . . . . . . . -- (4,163)
Borrowings (reductions) under long-term debt . . . . . 52 (38)
Long-term debt and capital lease principal payments . . (56) (61)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 159 26,972
Repurchase of common stock. . . . . . . . . . . . . . . (480) --
---------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . (325) 22,710
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . -- (6)
---------- ----------
Net increase in cash and cash equivalents. . . . 21 12,566
Cash and cash equivalents, beginning of period. . . . . 6,748 1,176
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $ 6,769 $13,742
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 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 Six Months Ended
November 30, November 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic EPS:
Net income (loss). . . . . . . . . . $ (492) $ 908 $ (851) $1,522
========== ========== ========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,888 6,831 6,904 5,780
========== ========== ========== ==========
Net income (loss) per share (basic) $(0.07) $0.13 $(0.12) $0.26
========== ========== ========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,888 6,831 6,904 5,780
Options . . . . . . . . . . . . . . -- 566 -- 517
---------- ---------- ---------- ----------
Total Shares . . . . . . . . . . . . 6,888 7,397 6,904 6,297
========== ========== ========== ==========
Net income (loss) per share (diluted) $(0.07) $0.12 $(0.12) $0.24
========== ========== ========== ==========
</TABLE>
For the three months ended November 30, 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):
November 30, May 31,
1998 1998
----------- -----------
(unaudited)
Raw materials and sub-assemblies $ 5,888 $ 5,688
Work in process 5,004 5,173
Finished goods 846 1,081
----------- -----------
$11,738 $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 Six Months Ended
November 30, November 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . 70.5 61.0 65.4 60.8
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 29.5 39.0 34.6 39.2
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 35.1 18.9 34.4 19.1
Research and development . . . . . 26.1 10.1 23.9 10.1
Research and development cost
reimbursement - DARPA . . . . . (6.2) (4.0) (5.4) (2.0)
---------- ---------- ---------- ----------
Total operating expenses . 55.0 25.0 52.9 27.2
---------- ---------- ---------- ----------
Income (loss) from operations . . . (25.5) 14.0 (18.3) 12.0
Interest income, net . . . . . . . . 6.2 2.5 6.0 1.0
Other income (expense), net . . . . 6.1 (2.0) 2.5 (0.9)
---------- ---------- ---------- ----------
Income (loss) before income taxes. . (13.2) 14.5 (9.8) 12.1
Income tax expense (benefit) . . . . (3.7) 6.7 (1.8) 5.6
---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . (9.5)% 7.8 % (8.0)% 6.5 %
========== ========== ========== ==========
</TABLE>
8
<PAGE>
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 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 $5.2 million in the three months ended November 30, 1998 from $11.7 million
in the three months ended November 30, 1997, a decrease of 55.9%. The
decrease in net sales in the three months ended November 30, 1998 resulted
primarily from reduced shipments of MTX products, partially offset by an
increase in shipments of dynamic burn-in products. The Company anticipates
that net sales in the second half of fiscal 1999 will decrease compared with
the second half of fiscal 1998.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit decreased to $1.5 million
in the three months ended November 30, 1998 from $4.6 million in the three
months ended November 30, 1997, a decrease of 66.6%. The decrease in gross
profit was primarily due to the decrease in net sales. Gross profit margin
decreased to 29.5% in the three months ended November 30, 1998 from 39.0% in
the three months ended November 30, 1997. The decrease in gross profit margin
was primarily due to excess production capacity and manufacturing overhead
expenses spreading over lower shipment levels. The Company anticipates that
gross profit and gross profit margin in the second half of fiscal 1999 will
decrease compared with the second half of 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 November 30, 1998
from $2.2 million in the three months ended November 30, 1997, a decrease of
17.7%. The decrease in SG&A expenses was primarily due to decreases in
commissions paid to outside sales representatives and employment related
expenses, partially offset by an increase in product support expenses. As a
percentage of net sales, SG&A expenses increased to 35.1% in the three months
ended November 30, 1998 from 18.9% in the three months ended November 30,
1997, reflecting lower net sales. The Company anticipates that SG&A expenses
will decrease in fiscal 1999 compared with fiscal 1998.
9
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $1.4 million in the three months ended November 30, 1998 from
$1.2 million in the three months ended November 30, 1997, an increase of
13.4%. The increase in R&D expenses was primarily due to increases in
professional consulting expenses and engineering project materials expenses.
As a percentage of net sales, R&D expenses increased to 26.1% in the three
months ended November 30, 1998 from 10.1% in the three months ended November
30, 1997, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("R&D - DARPA") is a credit
representing reimbursements by Defense Advanced Research Projects Agency
("DARPA"), a U.S. government agency, of costs incurred in the Company's wafer-
level burn-in development project. R&D - DARPA decreased to $322,000 in the
three months ended November 30, 1998 from $471,000 in the three months ended
November 30, 1997, a decrease of 31.6%. Payments by DARPA depend on
satisfaction of development milestones, and the level of payments may vary
significantly from quarter to quarter. As of November 30, 1998, there was one
unpaid DARPA invoice of $400,000.
INTEREST INCOME. Interest income increased to $320,000 in the three
months ended November 30, 1998 from $290,000 in the three months ended
November 30, 1997, an increase of 10.3%. The increase in interest income in
the three months ended November 30, 1998 compared with the three months ended
November 30, 1997 was primarily due to a higher rate of return on investments.
OTHER INCOME (EXPENSE), NET. Other income, net was $317,000 in the three
months ended November 30, 1998, compared with other expense, net of $237,000
in the three months ended November 30, 1997. Other income in the three months
ended November 30, 1998 was primarily due to currency exchange gains recorded
by the Company's Japanese subsidiary. Other expense in the three months ended
November 30, 1997 was primarily due to currency exchange losses incurred by
the Company's Japanese subsidiary and, to a lesser extent, cash discounts
allowed.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $192,000 in the
three months ended November 30, 1998, compared with income tax expense of
$792,000 in the three months ended November 30, 1997. The Company's Japanese
subsidiary experienced significant cumulative losses since fiscal 1993, and
thus generated certain net operating losses available to offset future taxes
payable. As a result of the subsidiary's cumulative operating losses, a
valuation allowance has been established for the full amount of the
subsidiary's net deferred tax assets. No tax provision was recorded for the
operating results of the Company's Japanese subsidiary in either the three
months ended November 30, 1998 or the three months ended November 30, 1997.
10
<PAGE>
SIX MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1997
NET SALES. Net sales decreased to $10.6 million in the six months ended
November 30, 1998 from $23.4 million in the six months ended November 30,
1997, a decrease of 54.7%. The decrease in net sales resulted primarily from
reduced shipments of MTX products.
GROSS PROFIT. Gross profit decreased to $3.7 million in the six months
ended November 30, 1998 from $9.2 million in the six months ended November 30,
1997, a decrease of 60.0%. The decrease in gross profit was primarily due to
the decrease in net sales. Gross profit margin decreased to 34.6% in the six
months ended November 30, 1998 from 39.2% in the six months ended November 30,
1997. The decrease in gross profit margin was primarily due to excess
production capacity and manufacturing overhead expenses spreading over lower
shipment levels.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $3.6
million in the six months ended November 30, 1998 from $4.5 million in the six
months ended November 30, 1997, a decrease of 18.3%. The decrease in SG&A
expenses was primarily due to decreases in commissions paid to outside sales
representatives and employment related expenses, and a reduction in provision
for doubtful accounts, partially offset by an increase in product support
expenses. As a percentage of net sales, SG&A expenses increased to 34.4% in
the six months ended November 30, 1998 from 19.1% in the six months ended
November 30, 1997, reflecting lower net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $2.5 million in the
six months ended November 30, 1998 from $2.4 million in the six months ended
November 30, 1997, an increase of 7.2%. The increase in R&D expenses was
primarily due to increases in professional consulting expenses, employment
related expenses and engineering project materials expenses. As a percentage
of net sales, R&D expenses increased to 23.9% in the six months ended November
30, 1998 from 10.1% in the six months ended November 30, 1997, reflecting
lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA
increased to $572,000 in the six months ended November 30, 1998 from $471,000
in the six months ended November 30, 1997, an increase of 21.4%. Payments by
DARPA depend on satisfaction of development milestones, and the level of
payments may vary significantly from quarter to quarter.
INTEREST INCOME. Interest income increased to $632,000 in the six months
ended November 30, 1998 from $228,000 in the six months ended November 30,
1997, an increase of 177.2%. Interest income in the six months ended November
30, 1998 was primarily due to investment income from the proceeds obtained
from the initial public offering in August 1997. Interest income in the six
months ended November 30, 1997 was also primarily due to investment income
from the proceeds obtained from the initial public offering in August 1997,
partially offset by interest expense of the short term domestic debt which was
subsequently repaid.
11
<PAGE>
OTHER INCOME (EXPENSE), NET. Other income, net was $263,000 in the six
months ended November 30, 1998, compared with other expense, net of $217,000
in the six months ended November 30, 1997. Other income in the six months
ended November 30, 1998 was primarily due to currency exchange gains recorded
by the Company's Japanese subsidiary. Other expense in the six months ended
November 30, 1997 was primarily due to currency exchange losses incurred by
the Company's Japanese subsidiary and cash discounts allowed, partially offset
by the recognition of the Company's 25% interest in ESA Electronics Pte Ltd.,
a Singapore corporation.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $192,000 in the six
months ended November 30, 1998, compared with income tax expense of $1.3
million in the six months ended November 30, 1997. The income tax rate did
not approximate the statutory tax rates of the jurisdictions in which the
Company operates primarily because no tax benefit was recorded for losses in
the Company's Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's August 1997 initial public offering, resulting in net
proceeds to the Company of approximately $26.8 million. As of November 30,
1998, the Company had $19.8 million in cash and short-term investments.
Net cash used in operating activities was approximately $2.0 million for
the six months ended November 30, 1998 and net cash provided by operating
activities was $2.3 million for the six months ended November 30, 1997. For
the six months ended November 30, 1998, net cash used in operating activities
was due primarily to a decrease in accrued expenses and deferred revenue of
$1.1 million, the net loss of $851,000 and a decrease in accounts payable of
$606,000, partially offset by a decrease in accounts receivable of $470,000.
For the six months ended November 30, 1997, net cash provided by operating
activities was due primarily to the net income of $1.5 million and increases
in accrued expenses and deferred revenue of $2.0 million, partially offset by
an increase in accounts receivable of approximately $1.4 million.
Net cash provided by investing activities was approximately $2.4 million
for the six months ended November 30, 1998, and net cash used in investing
activities was $12.4 million for the six months ended November 30, 1997. The
cash used in investing activities during the six months ended November 30,
1997 was primarily due to the short-term and long-term investments made with
proceeds from the initial public offering in August 1997.
Financing activities used cash of approximately $325,000 in the six months
ended November 30, 1998 and provided cash of $22.7 million in the six months
ended November 30, 1997. The cash used in financing activities during the six
months ended November 30, 1998 was primarily due to the Company's repurchase
of 129,500 of its outstanding common shares at an average price of $3.71. The
cash provided by financing activities during the six months ended November 30,
1997 was primarily attributable to the Company's initial public offering in
August 1997.
12
<PAGE>
As of November 30, 1998, the Company had working capital of $34.4 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 short-term investments,
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.
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,
13
<PAGE>
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 operating losses in the first and second quarters of fiscal 1999 and
anticipates incurring an operating loss in the third 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 64.8%, 75.2%, and 69.2% of its net sales in the
first six months of fiscal 1999, in fiscal 1998 and 1997, respectively.
Siemens and Motorola accounted for 31.9% and 10.5% of net sales in the first
six months of fiscal 1999, respectively. 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.
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.
14
<PAGE>
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 have been 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. 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.
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.
15
<PAGE>
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 Performance Test
Boards ("PTBs") for use with its MTX systems. Sales of PTBs by licensees
result in royalties to the Company but 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 the
first half of fiscal 1999. 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, early 1996, and 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.
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.
16
<PAGE>
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 $150,000, 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 $50,000 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.
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
17
<PAGE>
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 market price of the Company's
Common Stock has been, and may continue to be, extremely volatile. 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.
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.
18
<PAGE>
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.
19
<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 $ 860,274
Repayment of indebtedness 4,455,179
Working capital 2,418,844
Temporary investments, including cash and cash equivalents 19,098,000
------------
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on October 28, 1998.
There were issued and outstanding on September 3, 1998, the record date,
6,924,418 shares of Common Stock. There were present at said meeting in
person and by proxy Shareholders of the Company who were holders of 5,118,922
shares of Common Stock entitled to vote thereat, constituting a quorum. At
the Annual Meeting, the following votes were cast for the proposals indicated:
Proposal One: Election of Directors of the Company.
NOMINEE VOTES FOR VOTES WITHHELD
Rhea J. Posedel 5,111,402 7,520
William W.R. Elder 5,110,561 8,361
Mario M. Rosati 5,110,561 8,361
David Torresdal 5,110,561 8,361
Proposal Two: Ratification of Appointment of PricewaterhouseCoopers LLP as
the Company's Independent Public Accountants for fiscal 1999.
VOTES
FOR 5,102,902
AGAINST 7,920
ABSTAIN 8,100
20
<PAGE>
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 November 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: January 14, 1999 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: January 14, 1999 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
21
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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<RECEIVABLES> 7,101 8,932
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<PP&E> 8,406 8,300
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